Or. Fed Court Rejects "Hail Mary" Insurer Argument Against Attorney Fees

The dispute between Schnitzer Steel and its carriers over defense at the Portland Harbor Superfund Site has been addressed many times in this blog, because it has raised many novel and fascinating (to me, anyway!) issues.  Here is the latest: on November 12, 2014 Judge Mosman ruled on Schnitzer's motion for attorney fees after Schnitzer prevailed completely at trial this last April, recovering more than $8 million in defense costs.  Schnitzer then requested nearly $3.5 million in fees under ORS 742.061.  In response, the carriers tried a "hail mary" to zap the fee entitlement entirely: they argued that because the statute applies only to actions brought on an insurance policy "in any court of this state," and because actions brought in federal court are brough in a court in Oregon but not of Oregon, the statute did not apply.

Judge Mosman found the argument worthy of some consideration, but ultimately rejected it.  Judge Mosman held that under Erie and consistent with the purposes of the statute, a federal court in Oregon is a court "of the state."  The court noted that any other result would produce an anomaly: a case in an Oregon state court applying Oregon law would result in a fee award, whereas the same case that was removed as of right by an insurance carrier to federal court would not.

This is another important development in the protection of one of the few levers available to policyholders in Oregon because other than in the environmental arena (as of last year), the conventional wisdom is that there is no "bad faith" remedy where an insurance carrier denies a defense under a liability policy.  However, given the size of the attorney fee award (nearly all of what Schnitzer requested), the carriers certainly have an incentive to raise this issue again on appeal.

Ninth Circuit Asks Alaska Supreme Court Whether Recoupment Available to Insurers

Recoupment is the term most often used to describe the effort by an insurer to get back, from the insured, defense costs paid out where the claim was ultimately not covered.  Some kinds of policies -- principally professional liability and D&O policies -- have policy provisions specifically providing insurers this right.  (And, incredibly, some carriers without such provisions in their policies attempt to assert this right in their reservation of rights letters!)  Recoupment is controversial because if the right is asserted, it is a sword of Damocles hanging over the head of the insured as the underlying litigation progresses, and has in some cases impacted the resolution of an underlying case.

Alaska, by statute, requires insurers to pay for independent counsel where the defense is being conducted under a reservation of rights.  It contains no provision allowing recoupment, but that leaves open the question of whether an insurer may do so if the parties have agreed to recoupment by contract.  The Ninth Circuit, in Attorneys Liability Protection Society v. Ingaldson Fitzgerald, P.C.,, has now asked the Alaska Supreme Court to answer that question, which will no doubt involve not just the intent behind the statute, but also Alaska common law, which provided the genesis for the "independent counsel" requirement in the first place.  See CHI of Alaska, Inc. v. Emp'rs Reinsurance Corp., 844 P.2d 1113 (Alaska 1993).  This is an increasingly important issue for all kinds of policyholders, as the increasing costs of defending almost any sort of claim have increased the incentives for carriers to exercise their recoupment rights.

Wash. Fed. Court Orders Trial on AIG Defense Rates

The long-running federal court litigation between Washington company Coinstar/Redbox and its insurer, AIG, took a turn last week, with good news and bad for the policyholder.  The backstory: Redbox has been sued in several different jurisdictions for collecting information about its customers that it was not permitted to collect; the allegations are, generally, that Redbox used the information for its own marketing purposes or sold it to others.  AIG agreed to defend Redbox under a reservation of rights in all of the actions, but brought this action seeking to be excused from further defending.  Redbox counterclaimed, alleging that AIG had taken too long to reimburse it for defense costs and was trying to impose unreasonable caps on the attorney rates it would pay.  (A few weeks ago we reported on a discovery ruling, allowing discovery of what rates AIG pays defense counsel in other cases, and in coverage cases).

Several months ago the court granted AIG summary judgment on defense of one of those lawsuits; last week, the trial court granted AIG summary judgment on whether AIG had to defend the two other pending lawsuits.  That's the bad news, but somewhat unsurprising given the court's prior ruling and the breadth of the statutory-violation exclusion at issue.  That said, there is some puzzling language in the order about how AIG didn't benefit from delaying payment of defense fees - a strange statement in light of the publicity recently about insurance companies profiting from "the spread."

The good news concerns the rate dispute.  AIG had contended that its insurance policies, which contain standard duty/right to defend language, gave it the absolute right to control the defense and, along with that, set whatever rates it chose.  The problem for AIG is that it had allowed its insured to choose defense counsel, and had not attempted to control the choice of defense counsel.  So the court held that AIG had effectively given up the right to control the defense.  Moreover, the court observed that the insurance contract said nothing about controlling the rates, or what rates it would pay.  The court held, however, that AIG only had to pay "reasonable" rates, and that there was a question of fact about whether the rates that Coinstar had paid its lawyers was reasonable.  So that dispute will remain for trial.  It would not be surprising for this case to settle before that happens, however, as AIG may seek to avoid having any of the information about what it pays defense counsel in other cases from becoming public.

(The exclusion that operated here is typical of the broader trend toward excluding privacy-related risks, including data breach and other "cyber" risks - and is one of the reasons that many companies are looking to add specialized "cyber insurance" to their risk-management programs.  More to come on that point in this blog.)