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.

Ore. Appeals Court Important Holding on Construction Indemnity Agreements

Just as the ball began to fall in New York to herald the New Year Oregon's Court of Appeals issued an important ruling on contractual indemnity agreements in construction contracts.  The decision isn't directly on insurance coverage, but is important because of the overlap between additional insured issues, contractual indemnity, and Oregon's "anti-indemnity" statute (ORS 30.140).  The progress of the case, Sunset Presbyterian Church v. Andersen Construction, has been closely watched because the trial court issued a written decision, one of the few on this subject.

Here is a bit of background: a  new addition to the church suffered from many problems, involving the work of several subcontractors (including one called "B&B"), as well as the general contractor, Andersen.  Andersen's form subcontract included a broad indemnity provision requiring all subcontractors to defend Andersen if suit was brought on the project.  Therefore, Andersen tendered the suit to its subcontractors.  B&B refused the tender.  Andersen settled with the owner, and assigned to the owner its claims against B&B for breach of the duty to defend.  The owner moved for summary judgment on the duty to defend, and prevailed.  However, the trial court awarded the church (as Andersen's assignee) no damages, because the church could not prove how much time Andersen's lawyers had spent dealing with the claims involving B&B's alleged negligence, as opposed to its own negligence or the negligence of other subcontractors.  The trial court relied on Oregon's anti-indemnity statute (ORS 30.140) -- which only applies to construction contracts -- as the basis for putting the burden on the church /Andersen to allocate the defense costs.  (I analyzed the trial court's ruling in more detail in an article for the June 2013 newsletter of the OSB Construction Law Section, available here,)

The church appealed, arguing that the statute did not require that kind of allocation for various reasons, including that the standard applied in the insurance "duty to defend" context should apply to the duty to defend in a contractual indemnity provision.  As a matter of insurance law, an insurer has a duty to defend all claims -- even claims that are not potentially covered -- if any one claim in a suit triggers the duty to defend.  The insurer may not allocate its defense costs based on covered versus uncovered claims.  The Court of Appeals rejected that argument as to ORS 30.140 (and all of the church's other arguments) based on the court's analysis of the legislative history.  However, the Court of Appeals did not reach many of the practical issues presented by the case, finding them moot because of the church's failure to even try to meet the burden of proof articulated by the trial court.  (See the Construction Law Section newsletter article mentioned above for an explanation of those issues).  The case was sent back to the trial court for additional proceedings including (potentially) an award to B&B of its attorney fees, since the Court of Appeals reversed the trial court as to who was the prevailing party.

The general take away is this: if a general contractor (or the GC's insurer) wants to recover its defense costs from a subcontractor that refuses to pick up the defense, it must require its law firm to write time descriptions in such a way that a court can later determine how much time was spent on the negligence of each subcontractor.  Of interest to readers of this blog, that requirement will likely lead to all kinds of issues between GC's and their insurers about management of the defense, and also may complicate additional insured claims on subcontractors, involving coverage counsel for the subcontractors.  Happy New Year!

Montana Decision Has Lessons for Drafting Indemnity Provisions

A new decision from the District of Montana, WBI Energy Transmission v. Colony Insurance, illustrates the dangers of a vaguely-worded additional insured requirement in a contract.  In WBI a pipeline worker employed by a mid-tier contractor, "Pro Pipe" was injured; after collecting from worker's comp, he sued both the owner (WBI) and the sub-contractor.  The owner tendered to Pro Pipe's carriers as an additional insured ("AI") on Pro Pipe's general liability policies, which contained a blanket AI endorsement (in other words, the endorsement provided AI coverage to the extent required in any contract that Pro Pipe entered into).  The liability carriers contended that WBI was not an additional insured because the underlying contract was ambiguous about whether Pro Pipe was required to add WBI as an AI.  The contract stated that Pro Pipe was obligated to "maintain . . . minimum insurance coverage[] . . . to protect [WBI] against liability in connection with Pro Pipe's work." (emphasis added).  

The District Court held that that language -- in combination with the fact that Pro Pipe believed it was required to provide AI coverage, and had given WBI a certificate to that effect -- was not ambiguous, and that WBI was an additional insured.  The court's decision is cleanly-reasoned and worth reviewing.  But the larger lesson is that such problems can be avoided by careful contract drafting and occasionally having a lawyer experienced in insurance issues review form contracts and insurance requirements to make sure that the language matches the expectations in then event that something goes wrong.

Washington Court Smacks Down Lloyd's Effort to "Cook the Books"

Subcontractors on construction projects are commonly required to provide "additional insured" liability coverage to the general contractor.  The coverage is available to the extent that the general is liable because of the subcontractor's negligence - which is the case most of the time.  In Oregon it is rare for a subcontractor's carrier to actually agree to defend a general contractor because of a lack of bad faith exposure.  However, in Washington it is much more common, thanks to Washington's pro-policyholder coverage law.  That makes it much more expensive for the subcontractor's carrier, who has to defend two entities.  In this case the carrier for the subcontractor, Lloyd's, tried to terminate its obligation to defend the general contractor by paying for the subcontractor to settle with the underlying claimant, and including language in the settlement agreement "stipulating" that the subcontractor actually had no liability (obviously a subterfuge, because if that were true Lloyd's would not have settled the case).  Then Lloyd's stopped paying to defend the general contractor.  In a coverage action between the general's carrier (Zurich) and Lloyd's, Judge Bryan saw clear through Lloyd's breach of its duties to its additional insured, the general, denying summary judgment to Lloyd's for breaching a contractual duty to defend, and suggested that there may be a claim for bad faith in there as well.

We see these kinds of aggressive carrier tactics every day.  It is nice to see a judge calling a carrier out on it.


ZURICH AMERICAN INSURANCE COMPANY v. CERTAIN UNDERWRITERS AT LLOYD'S LONDON, Dist. Court, WD Washington 2013 - Google Scholar:

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