Oregon Court Rejects Insurer's "Trained Monkey" Defense

In order to avoid providing a defense to an insured, insurance companies often argue that the complaint or demand does not clearly allege covered damage.  I call this the "trained monkey" defense - essentially, the insurance company's position is that it is only required to do what a trained monkey might do, which is read the words printed on the page.  No analysis, no thinking, no investigation.  Oregon's courts have rejected this type of argument time and again, but insurance companies persist, because of the lack of downside risk to denying a defense under Oregon law.  A new decision from the Court of Appeals may help convince insurers that the "trained monkey" defense will simply not work.

In West Hills Development v. Chartis Claims, Inc. & Oregon Automobile Ins. Co., the "trained monkey" argument played itself out in the context of additional insured coverage.  West Hills was the general contractor on a residential development, and was an additional insured of one of its subcontractors, L&T.  When West Hills was sued by homeowners, it tendered to the defense to L&T's carrier, Oregon Auto.  Oregon Auto refused, and West Hills sued to recover a portion of its defense costs.  Oregon Auto argued, among other things, that the homeowners' complaint did not identify L&T as a subcontractor on the project.  The complaint alleged that West Hills was liable for not supervising subcontractors generally, but didn't identify any subcontractors by name.  Therefore, argued the insurer, how were they supposed to know that the tender from West Hills on the L&T policy was legitimate?

The problem for Oregon Auto was that the tender had been done carefully, by West Hills' counsel, and the tender told Oregon Auto that L&T was the subcontractor responsible for some of the deficiencies alleged in the complaint.  But Oregon Auto argued that under Oregon's "eight-corners" rule it wasn't required to investigate whether that statement in the tender letter (which Oregon Auto claimed was mere "argument") was true.  Instead it could pull the "trained monkey" routine and blithely deny coverage.

Nonsense, said the Court of Appeals.  Relying on the long line of Oregon cases requiring insurers to resolve any ambiguity in favor of coverage (including ambiguity about identification of insureds), and also on Fred Shearer & Sons v. Gemini Insurance, a 2010 decision, the court held that Oregon Auto had a duty to investigate the statement in the tender letter about L&T's role.  In the Fred Shearer case the court adopted a limited exception to the "eight corners" rule when the identity of a proposed insured is not clearly alleged in the complaint.  The West Hills court applied the logic of Fred Shearer to additional insured coverage.

The West Hills decision addressed several coverage issues; the "trained monkey" defense is only one.  However, its most lasting impact may be its clear statement that an insurance company has a duty to investigate facts tending to show that coverage is available, and analyze the allegations in a complaint, not just read the complaint for magic words.

Neiman Marcus Data Breach Decision Portends Greater Risk for NW Companies, Need for Cyber Coverage

Earlier this week the Seventh Circuit Court of Appeals, in Illinois, issued a momentous decision for those of us who keep tabs on data breach litigation nationwide.  The decision in Remijas v. Neiman Marcus reinstated class action claims by thousands of shoppers who had their credit card data stolen.  Reversing a trend in the case law driven by a 2013 Supreme Court decision (the Clapper decision), the Seventh Circuit held in effect that even if some class members had not yet experienced a loss of money due to their personal information being stolen, they still had standing to pursue claims for compensation, including for the time and aggravation of having to obtain replacement credit cards, put in place credit monitoring, and take other steps to protect themselves.  It did not matter, said the court, that all of the consumers who had experienced fraudulent charges on their cards had been reimbursed by their banks, that Neiman Marcus had agreed to pay for credit monitoring, or that the consumers could not conclusively rule out that their credit card account information had been stolen in a different hack (e.g. Target).

This decision is only binding in the federal districts within the Seventh Circuit, but as Kevin LaCroix has pointed out in his blog, as a first-in-the-nation decision from an appellate court in this exact scenario, it is likely to be influential.  That is even more true for claims brought in the Northwest, for two reasons.

First, the Seventh Circuit cited extensively to a decision from the Northern District of California in the Adobe Systems data breach case, In re Adobe Sys., Inc. Privacy Litig., No. 13–CV–05226–LHK, 2014 WL 4379916 (N.D. Cal. Sept. 4, 2014).  (That decision is available here.)  The Adobe decision relied on pre-Clapper case law from the Ninth Circuit, and has already been cited twice this year to support a finding of standing in a data breach/data privacy class action, the first brought by Sony employees, and the second by users of the Google Wallet.  Those cases had already established the Ninth Circuit (and therefore the Northwest) as a favorable venue for data breach class actions.

Second, the Premera Blue Cross class action complaints involving the massive data breach at that company, and involving claims under Oregon and Washington law, have all been consolidated in the federal court in Oregon, and have been assigned to Judge Michael Simon.  Judge Simon, a former Perkins Coie partner, is inclined toward issuing cerebral and thoroughly-reasoned decisions that often have a pro-consumer bent.  I would not be surprised to see a lengthy decision from Judge Simon in the near future along the lines of the Seventh Circuit's decision, giving plaintiff's lawyers a road map for obtaining standing in data breach cases and how to properly bring claims under Oregon and Washington law.

What does any of this have to do with insurance?  Well, if you are a non-Northwest company with operations in the Northwest looking at cyber insurance, and trying to assess company-wide risk, you cannot rely on decisions from courts in your "home" jurisdiction that have made it hard for these types of claims to go forward.  If you are a Northwest business that handles a lot of consumer data, the risk of a class action in the event of a breach just went up a little but.  Even if the claims are absolutely meritless, they will get past the motion to dismiss stage, which means that defense costs will be considerable.  All of that should be fodder for your next conversation with your insurance and legal advisers about your company's cyber-coverage, and particularly defense cost coverage and limits.

Update: As reported by my colleague Brian Sniffen in our blog IP Law Trends, Neiman Marcus has now requested en banc review of this decision.  En banc review is rarely granted.

Certain cases reprinted from WestlawNext with permission of Thomson Reuters.  If you wish to check the currency of this case by using KeyCite on WestlawNext, then you may do so by visiting www.next.westlaw.com.

Oregon Duty to Defend is Very Broad, as Shown in Two New Cases

Two new decisions from federal courts in Oregon demonstrate just how broad an insurance company's contractual duty to defend its insured truly is.  These decisions should be helpful to policyholders in fighting back against denials of coverage.  Wrongful denials of defense are unfortunately common in Oregon, due to the absence of a meaningful bad faith remedy for most breaches of the duty to defend.  But cases like these demonstrate that if an insured goes to court, more often than not the insured will win.  That may dissuade some insurers from making the wrong decision when it comes to defending.

In the first case, Portland General Electric v. Liberty Mutual Ins. Co., the issue was whether it was appropriate for the court to read an underlying complaint as implying a fact, even though the complaint did not allege the fact directly.  The court said "yes."

Portland General hired a contractor to work on some of its equipment.  The contractor was required to add Portland General as an "additional insured" on its liability policy.  When one of the contractor's employees was injured on the job, he sued Portland General.  (He could not sue his employer, the contractor, because of the workers-compensation exclusive-remedy bar).  Portland General demanded that the contractor's insurer, Liberty Mutual, provide it with a defense.  Liberty Mutual refused, citing Oregon's anti-indemnity statute.  To put it in simple terms, because of the anti-indemnity statute Liberty Mutual could not insure Portland General for Portland General's own negligence.  However, Liberty Mutual could provide coverage to the extent that Portland General were being held liable for the contractor's negligence.  But the employee's lawsuit didn't say anything about the contractor being negligent, making it appear (at least to Liberty Mutual) that Portland General was being sued only for its own negligence.

However, there were allegations in the complaint that some of the equipment chosen for the job was improper, and that clothing worn by the employee also contributed to the accident.  The complaint didn't say who provided the equipment or the clothing.  The court found that even though only Portland General was sued, and the complaint never mentioned the contractor, it was reasonable to infer that the contractor could have provided those items, and therefore that the contractor was at least somewhat negligent.  Because the complaint did not allege only negligence by Portland General, and alleged by implication some negligence by the contractor, the insurer had a duty to defend.

In the second case, Norgren v. Mutual of Enumclaw, District Court Judge Michael Simon took the unusual step of rejecting the recommendation of a Magistrate Judge (Judge Stacie Beckerman), who had ruled in favor of the insurer.  Judge Beckerman held that the insurer had no duty to defend a homeowner against a suit alleging that the homeowner's son assaulted another child, finding that the "intentional acts" exclusion applied to all of the claims against the insured, even to a claim entitled "negligent infliction of emotional distress," because the specific facts alleged all included some element of intent to act.  Judge Simon pointed out, however, that the complaint made other allegations that could be interpreted as alleging mere negligence - even though those allegations were conclusory, and more legal contention than statements of fact.  Judge Simon therefore found a duty to defend.

These two decisions take the famous phrase from Ledford v. Gutoski that in Oregon "any ambiguity in the complaint... is resolved in favor of coverage" and put it into action.  They exemplify the correct approach to Oregon duty to defend questions, which is to scour the complaint for potentially covered claims, rather than generalize about the allegations.  In each case the court rigorously analyzed every contention in the complaints, and resolved every ambiguity in favor of a defense obligation.  It can only be hoped that these two new rulings will help insurers understand that they take a considerable chance if they deny a defense, and that the better course, whenever there is any doubt, is to comply with their contractual defense obligations.

Ninth Circuit Hands Oregon Policyholders a Major Win on"Known Loss"

In a June 25, 2015, to-be-published decision in Kaady v. Mid-Continent Casualty Co. the Ninth Circuit adopted a decidedly pro-policyholder interpretation of the oft-contested "known loss" provision that is standard in commercial general liability (CGL) policies, holding that an insured's knowledge of damage to one part of a structure does not allow an insurer to deny coverage for  damage to other parts of the same structure or for a different type of damage to the structure.

Kaady, a masonry subcontractor, installed manufactured stone and masonry caps at a condominium project on Mount Hood.  After the project was complete Kaady was notified that there were cracks in the stone that he had installed.  Later that year Kaady bought a liability policy from Mid-Continent.  Kaady was then sued by the condo association, which alleged that his defective work had contributed to water damage to wood sheathing behind the manufactured stone, and to deck posts on which the masonry caps were sitting.

Mid-Continent denied coverage for those damages under its policy’s "known-loss" provision,  which stated that the policy “applies to . . . property damage only if . . . no insured . . . knew that the . . . property damage had occurred, in whole or in part.”  The policy also excluded coverage for property damage that is a "continuation, change or resumption" of "such [known] property damage."  The policy defined "property damage" in part as "physical injury to tangible property."

In the coverage lawsuit suit the insurer advanced two arguments to justify its denial:  1) that prior knowledge of  any damage to a structure means that any other damage to the same structure is a "known loss;" and 2) that the damage to the sheathing and posts was a "continuation change or resumption" of the cracking that the insured knew about.  The District Court granted summary judgment for Mid-Continent based on the known-loss provision.  The Ninth Circuit reversed.

The insurer argued that the policy's references to "property" and "tangible property" included all portions of that "property," and therefore that knowledge of damage to one portion of "the property" could be attributed to all later damage to that property.  The appeals court disagreed, pointing out that that interpretation conflicts with the way "property" is used throughout CGL policies.  Standard-form policies distinguish between different types of "property" and rely on those distinctions to exclude some kinds of "property" from coverage, such as the insured's own "work" while providing coverage to other kinds of "property."  Therefore, to be consistent, the known-loss provision must operate to allow coverage for damage to some "property" even if the insured knew about damage to other "property" within the same structure.  Moreover, because the known-loss provision talks about knowledge of "the property damage," any damage different in type than the damage about which the insured had knowledge is not excluded by the policy.  In Kaady the damage (deterioration) to the sheathing and deck posts was different in type from the cracking that the insured knew about before buying the policy.

The court also rejected the second argument, holding that Mid-Continent had the burden on summary judgment of proving, through evidence, that the damage to the sheathing and posts was caused by the same cracks that the insured knew about before he bought the policy.  The insurer had failed to put on such evidence, and so summary judgment should not have been granted.

In this decision the Ninth Circuit adopted arguments that have been advanced by policyholders for years, but had not been the subject of a published Oregon state court ruling, creating some uncertainty.  "Known-loss" disputes come up with some frequency, because Oregon law requires property owners to give notice to contractors of alleged defects and an opportunity to cure, and because "punch-list" provisions in standard construction contracts often require owners to give contractors an opportunity to fix problems that occur soon after construction.  This decision will therefore make it difficult for insurers that operate in good faith to deny claims based on "known loss."

Likely Changes to Oregon Data Breach Law Should Prompt Review of Cyber Coverage

This excellent post by my colleague Brian Sniffen in our firm's IP Law Trends blog reports on the efforts by Oregon's attorney to strengthen the state's data breach notification laws.   The proposed amendments to the Oregon Consumer Identity Theft Protection Act (ORS 646A.602 et seq.) are part of Senate Bill 601, which is making its way through the legislature right now.  You can follow the bill's progress here).

As Brian reports, among the proposed changes are a lowering of the threshold for notification to the Attorney General to 100 records; expansion of the definition of confidential data to include medical and biometric information; and giving enforcement power to the Attorney General under the Unfair Trade Practices Act.

As we observed last week in our post about the insurance implications of Washington's effort to toughen its data-breach notification laws, these proposed Oregon changes should prompt every business -- whether it handles loads of consumer data or not -- to review its cyber insurance coverage to get a comfort level with any sub-limits relating to notification costs, and liability coverage for regulatory claims.  Of course, both state-level efforts could be upended if the President's proposed data-breach bill becomes federal law, because the federal law will likely trump all state laws.  All the more reason to review your cyber coverage with an insurance professional today.

Update April 22: The Oregon bill has received a "do pass" recommendation, with some amendments, from the Senate Judiciary Committee, and is awaiting transfer to the floor for passage.

Oregon Environmental Coverage Decision Emphasizes Importance of Early Tender

A new decision from the Oregon federal court emphasizes the need to tender any kind of potentially covered claim as early as possible.  The decision was, by and large, a win for the policyholder, but as noted at the end of this post the court carved out a large chunk of costs based on the timing of notice.

The decision, issued on October 28, 2014, came from Magistrate Judge Stewart in the long-running coverage dispute between Siltronic Corporation and its primary layer and excess carriers over costs for both cleanup of some of Siltronic's property within the Portland Harbor Superfund Site ordered by DEQ, and defense against the EPA claims at the Harbor.  The claims against Siltronic involved both contamination of soil, and river sediment, by TCE and MGP (Manufactured Gas Product).  Siltronic had seven potentially applicable policies, from 1978 through 1986, with Wausau as primary and Granite State as excess.  Wausau initially provided Siltronic with a defense under policies from 1980 through 1986, until Judge Stewart held that Wausau could stop defending the company because the primary insurer had paid to clean up TCE contamination and in so doing exhausted those six years of coverage.  Siltronic's excess layer carrier has been paying to defend the company since then.

The issue presented for Tuesday's ruling was what to do with the 1978 - 1980 policy.  Wausau had not been defending under that policy because Siltronic had not produced TCE until 1980, and Wausau contended that Siltronic had not tendered defense of  the MGP contamination.  Judge Stewart rejected that contention, noting that the DEQ letters and orders relating to the cleanup and included both MGP and TCE, and that therefore under the "eight-corners rule" in which the court only looks to the "four corners" of the policy and the "four corners" of the complaint (or equivalent), the tender had included MGP.  Wausau also contended that it had no duty to defend under the 1978 policy because Siltronic had not actually incurred costs to defend against MGP-related liability, because NW Natural Gas, the successor to the prior owner of the MGP-contaminated site, had agreed to pay for cleanup.  However, the evidence did not clearly establish that Siltronic had no potential future liability for the MGP contamination due to the agreement with NW Natural.   Questions about whether Siltronic had incurred defense costs related to MGP were questions for trial on damages, according to the ruling.

The court did exclude from consideration, however, a seemingly large chunk ($450,000) of defense costs incurred by Siltronic relating to the contamination.  It appears that Siltronic did not tender the DEQ and EPA communications to any carrier until TCE issues came to light, which was a few years after Siltronic had begun incurring costs relating to MGP.  Judge Stewart held that under the "voluntary payments" provision of the policies Wausau was under no obligation to pay any pre-tender defenses costs.  This reading of the voluntary payments provision has become the accepted wisdom among Oregon's federal courts, although policyholders continue to challenge it.

The take-away is this: tender early, and tender everything that could be a claim or suit, and do not equivocate about seeking a defense.

Ore. Fed. Ct. Considers Meaning of "Occurrence" for Developer Liability

In a decision handed down earlier this week in litigation between a primary-layer carrier and an umbrella carrier an Oregon federal court held that when a plaintiff brings a claim against a developer for negligence, the term "occurrence" in the developer's policies means the negligent development, globally: in other words, the developer's negligent work is one occurrence, despite the fact that the property damage may take multiple forms.

The case involves a high-rise condominium in Portland's South Waterfront district.  The condo association sued the developer (not the general contractor) over water damage arising from construction deficiencies that led to water problems in the garage, and elsewhere.  The primary layer policy (from American Contractors Insurance Group or "ACIG") had a $2 million per occurrence limit and a $4 million products-completed-operations aggregate limit.  AIG, the umbrella carrier, insured over the same limits (called the "retained limit").  However, the Court noted that the AIG policy had its own definition of "occurrence" and provided coverage independently of the primary layer policy subject only to the retained limit - it was true "umbrella" coverage, not excess coverage.

Both the primary layer carrier and AIG contributed to a settlement.  But AIG contended that the primary layer carrier should have been required to pay its $4 million aggregate before its policy was triggered, and so sued to gets its contribution to the settlement back.

The Court disagreed.  The Court rejected AIG's effort to rely on case law interpretations of "occurrence" and instead examined the AIG policy's definition of "occurrence" on its own terms.  The AIG  provision included some standard language about an occurrence including multiple exposures to the same "conditions."  The Court found that the "condition" implicated by the condo association's allegations, read strictly, was the negligent development overall of the project - not particular construction practices by the general contractor.  The Court found it significant, in this regard, that the condo association had not brought the general contractor into the suit.  The Court determined that there was therefore only one "occurrence" for purposes of the AIG policy's retained limit condition.

Overall, this decision re-emphasizes for insurance professionals the importance of examining policy language on its own, without relying on court decisions that may or may not be applicable, and also carefully examining what is actually alleged in the underlying litigation rather than assuming things based on what is usually alleged in construction defect litigation.

Oregon Federal Court Affirms Breadth of Duty to Defend

An Oregon federal judge recently reaffirmed a broad approach to the duty to defend in a carrier-on-carrier dispute.  The case is Seneca Insurance v. James River Insurance.  As with many such cases in Oregon, the dispute centered around defective construction, this time on the coast.  Plaintiff insurer, Seneca, agreed to defend its insured, a contractor.  Seneca sued one of the contractor's other insurers, James River, after James River refused to help fund the defense.   James River argued that the property damage alleged in the complaint must have started before its policy kicked in, in mid-September, 2011.  But the complaint did not specify when exactly the property damage happened.  And as we know, the duty to defend is determined only by looking at the complaint and the policy - the "eight corners" rule.

The court lambasted James River for interpreting ambiguities in the complaint to exclude coverage, stating that James River was in most cases "looking through the wrong end of the telescope."  (Love that phrase!)  The complaint alleged that the work was done in the late summer of 2011, and so James River argued that because "rain fell" and "wind blew" in the fall of 2011, property damage must have occurred then.  The court rejected that argument as assuming too much about un-alleged damage.  The court also flatly rejected James River's argument that the reference to "fall 2011" in the complaint referred to the beginning of September as contradicted by meteorological science.  Finally, the court also held that James River was not entitled to rely on the insured's third-party complaint against downstream parties (sub-contractors and others) to deny the defense, strictly applying the "eight-corners" rule.