Oregon Supreme Court Accepts Review of Two Important Insurance Disputes

The Oregon Supreme Court recently accepted for review two cases with potentially lasting implications for insurance coverage disputes in the state.

The first case is a mandamus ruling - the court decided to accept for review a trial court's ruling in Liberty Surplus Insurance v. Seabold Construction on a hot evidence issue important to bad-faith coverage litigation.  In Seabold the company and its liability insurer are locked in a dispute over Liberty's handling of Seabold's defense in a construction-defect matter; Seabold contends that Liberty acted in bad faith in connection with settlement of the dispute.  During the critical time period -- while settlement negotiations were going on in the underlying case -- Liberty was acting through coverage counsel, which is commonplace in such situations.  Once the coverage litigation got underway, however, Seabold demanded to see the communications with and work done by the insurer's "coverage counsel" on the theory that at least part of the time the attorney was acting as a claims adjuster.  Under the reasoning of Cedell v. Farmers, a Washington case (and its progeny, discussed in this blog post from 2013), Seabold argued -- successfully -- that there was no absolute attorney-client privilege when "coverage counsel" is performing some of the business functions of a liability carrier.  The trial court ordered Liberty Mutual to produce counsel's communications (initially directly to Seabold, amended to production for review by the court), and Liberty Mutual sought a writ of mandamus -- essentially, appellate review in the middle of a case -- to block enforcement of the trial court's order.

The issue that the court has identified for resolution is whether attorney-client privilege applies despite counsel's involvement in "investigating and adjusting" the claim.  This is the issue that Cedell and other courts outside of Oregon have decided in favor of policyholders, and one would think that this court would go the same way.  However, in the Crimson Trace discovery dispute (which did not involve insurance) the court proved itself very protective of the attorney-client privilege in an institutional context, so "all bets are off," as they say.

The second case accepted for review (back on March 31) is the 2014 Fountaincourt Homeowners Ass'n v. Fountaincourt Development decision from the Court of Appeals.  In that decision the Court of Appeals confirmed that a claimant who obtains a judgment against an insured after trial may pursue that insured's insurance assets in a garnishment proceeding as a judgment creditor, and that during resolution of the garnishment the insurer has the burden of proving that the judgment was not covered where there is prima facie evidence that at least some of the jury's award was for covered damages.  That decision was very beneficial for claimants concerned about being able to collect on a judgment.

The Supreme Court's statement of the issues on review is rather breathtaking, and will ensure that the case is closely watched.  Rather than try to summarize, set out below are the issues on review from the court's statement:

(1) If a general verdict is returned against an insured entity in a mixed coverage case (i.e., one involving some damage that is payable by an insurer and some damage that is not), and the insurer defended under a reservation of rights, can the insured establish coverage for the awarded damages based on the general verdict? (2) Does defective work by an insured contractor constitute "property damage" if that term is defined as "[p]hysical injury to tangible property"? (3) Can an insured establish a prima facie case for insurance coverage with evidence showing only the possibility that a judgment is for damages within the insuring agreement of a liability policy? (4) If a liability insurer's policy is garnished by a judgment creditor and a disputed question of fact must be resolved to determine if the insurer is obligated to pay the judgment, is the insurer entitled to a jury trial in the garnishment proceeding?

What is surprising here is the Court's indication that it will take up some questions that many had thought were largely settled and were not the most controversial of the Court of Appeals' decisions.  One can hope that the Court's indication that it will review those questions is only intended to settle any doubt.  However because so much is at stake if the Court has decided to revisit those issues, this case promises to attract a lot of attention and amicus participants, and its resolution could shape (or re-shape) Oregon coverage law for a long time.

Twenty Questions to Ask Coverage Counsel In Business Litigation

The American Bar Association's Business Torts committee has posted an excellent article (registration, ABA membership required) on the 20 questions that a business owner should ask coverage counsel about potential coverage issues arising from business litigation.  These are the most critical, and often ignored, issues that must be considered when making decisions about coverage strategy.  Included among these are whether the insurer has the right to "recoup" defense costs that it pays if it is later determined that there is no indemnity coverage, and whether the insurer is entitled to receive attorney-client communications and what impact that might have on waiver issues.  Because the law on almost all of these issues varies state to state, businesses that get involved in litigation in multiple states may need to revisit these issues in each piece of litigation.  (Even where all policies are purchased in the same state, choice-of-law principles may not permit the law of that state to govern all coverage issues).  A very nicely done article!

Former Insurance Defense Counsel's Firm Permitted to Represent Insured Against Carrier

The Portland Harbor Superfund Site continues to generate new coverage-related law on issues beyond environmental contamination.  In a recent ruling from Oregon's federal court, Judge Acosta permitted Stoel Rives to substitute in as coverage counsel for steel company Evraz, Inc. in litigation between Evraz and many of its former carriers over coverage at the Superfund site.  The carriers, led by first named defendant Continental Insurance, contended that Stoel Rives had a conflict because at one point Continental was paying the firm to do the substantive environmental defense work for Evraz.  Continental claimed that under Oregon State Bar ethics opinions, that created a default "tripartite" relationship in which both Evraz and the insurance companies had been Stoel Rives' clients, meaning that there was a "prior client conflict" disqualifying Stoel Rives from prosecuting the coverage claim against Continental.  Judge Acosta held that no default status could be created by the ethics opinions because they have been held to be only "advisory."  The court went on to analyze the conflict issue under Oregon case law, and found that because Stoel Rives' environmental lawyers had not been retained initially by Continental, were not paid directly (but only indirectly) by Continental, and had gone to pains to advise Continental that they did not represent Continental during the prior work, there was no prior client conflict.

Washington Federal Court Permits Deposition of Carrier's Former Coverage Attorney

On October 30, 2013 Judge Martinez of the Western District of Washington permitted the policyholder in a long-running bad faith case to take the deposition of the carrier's former coverage counsel, Joanne Henry, about the coverage analysis that she performed for the carrier leading to the carrier denying the tender of defense.  This decision relied heavily on the landmark 2011 Cedell decision from the Washington Supreme Court which, broadly speaking, abrogated in part the attorney-client privilege where the attorney was acting as an adjuster, taking on one of the "quasi-fiduciary" roles of a potentially defending insurer.  Judge Martinez held that because the policyholder had reason to believe that Ms. Henry did the entire coverage investigation herself, in addition to performing legal analysis of the policy, the policyholder could take her deposition, although the carrier could object if a question that genuinely intruded into the privilege was asked.

Benefits of Involving Counsel In Choosing Your Insurance Program

All companies routinely review their insurance coverage programs, usually through risk management talking to a trusted insurance broker.  Today I came across this excellent "Sound Advice" podcast from Tonya Newman, a colleague at Neal Gerber & Eisenberg in Chicago, about the reasons that companies should involve counsel in discussions at renewal time.  It is of course fairly self-serving to say so, but insurance coverage counsel can provide a perspective on what insurance to buy that brokers often cannot.  If coverage counsel have recently represented the company in coverage disputes they may be more intimately familiar with how standard-form exclusions intersect with the company's products or business practices.  And because insurance procurement decisions should involve a good deal of candid self-assessment, and review of prior claims, it may be worth while to consider doing that kind of assessment inside the attorney-client privilege rather than having the conversations strictly with an insurance broker who may be subject to subpoena in a later claim.  The presentation is very well done and I commend it to other policyholder counsel, brokers, and risk managers.

Washington Supreme Court Confirms that Washington Insurance Defense Counsel Has One Client: Insured

The Washington Supreme Court has confirmed the long-standing rule in Washington that a lawyer hired by an insurance company to defend an insured has only one client -- the insured -- and that the insurance company is not a client in any respect. This case arose out of a mechanic's lien dispute and evolved into a title insurer malpractice claim against a law firm - an interesting enough situation on its own.  The basic facts are these: a lender for purchase of a piece of land, Sterling, hired a title company -- Stewart -- to make sure that it would have a first priority lien.   Stewart messed up:  a general contractor, Mountain West, had already started work, giving it first priority.  Sterling got sued when Mountain West tried to foreclose on its lien.  Stewart was the title company and also, as is usual, issued a title insurance policy providing liability coverage to Sterling.  Stewart agreed to hire Sterling a lawyer, the well-known and well-respected Witherspoon Kelley firm.  A dispute arose between Witherspoon Kelley and the insurer, Stewart, over strategy.  The case ended badly, and the insurer, Stewart, sued the law firm for malpractice.

The problem for the insurer, Stewart, was that under long-settled Washington law, an insurance company is not a client of the lawyer that it hires to defend its insured.  (That is a different rule than in Oregon, where the insurance company and the insured are both clients of the attorney, with the attorney's primary duty and loyalty to the insured.)  Stewart argued that although it was a "nonclient," because its interests were aligned with those of its insured, it was an "intended beneficiary" of the representation of the insured, and could sue.  The Washington Supreme Court said no, that the "intent" is to be viewed from the perspective not of the insurer, but of the insured and its attorney, and that neither the insured nor the attorney intended to benefit the insurer.  The court also rejected the argument that because the lawyer had a duty to keep the insurance company informed about the case, the lawyer owed the carrier a duty; that contractual obligation, the court found, did not create a duty of care running to the carrier.

The court's holding is consistent with Washington's generally protective attitude toward the attorney-client relationship in the insurance-defense context, and the protections that it has extended in the Tank case and after to policyholders being provided a defense by their carriers.  The court acknowledged that its holding is in conflict with the law in other states.  (No published case law on the subject exists in Oregon, but one would expect Oregon to come out differently than Washington - see above.)  But that, of course, is what makes practicing in the Northwest enjoyable - cross a river, and the law is different!

Washington and Now Idaho Limit Attorney-Client Privilege in Bad Faith Cases

My former colleagues at Bullivant Houser Bailey have done a nice job of summarizing two recent decisions, one from Washington and one from Idaho, limiting the application of the attorney-client privilege where outside coverage counsel participates in a fact investigation for coverage purposes.  Both decisions (Idaho's Stewart Title v. Credit Suisse in federal court, Washington's Cedell v. Farmers in state court) made it clear that an insurance company cannot seek to shield a coverage determination made in bad faith behind the privilege by using outside counsel, whether it's a first-party or a third-party coverage issue.  In both cases the insured sought discovery of counsel's work product to support a bad-faith claim.  It is hard enough to prove bad faith in either state; it's nice to see judges recognizing a common carrier tactic for what it is: an effort to make it nearly impossible.



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