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.
Showing posts with label defense v indemnity. Show all posts
Showing posts with label defense v indemnity. Show all posts
Tuesday, July 14, 2015
Thursday, October 30, 2014
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.
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.
Wednesday, July 2, 2014
Insurers Trying to Have It Both Ways on 'First Party' v 'Third Party'
Insurance carrier-side lawyers are celebrating the result in Cox v. Continental Casualty Company, a decision out of the Western District of Washington in which Judge Pechman held that Washington's Insurance Fair Conduct Act (IFCA) does not apply to claims under liability policies because the policyholder there is not a "first-party claimant," and IFCA specifically refers to "first-party claimants" as the class the statute is intended to protect. The Cox lawsuit was brought by a group of allegedly injured patients of a dentist who sued the dentist and then took an assignment of the dentists claims against his malpractice carriers as partial satisfaction of their malpractice claims. Malpractice insurance is simply one variety of liability insurance, sometimes referred to as "third-party insurance" because it is designed to protect the policyholder against claims brought by "third-party" others (that is, a party other than the two parties to the insurance contract: a "third" party).
In Cox the court took it upon itself to consider whether IFCA's purported limitation to "first-party claimants" means that all claims other than those by policyholders under traditional "first-party" insurance (such as fire insurance, or inland marine insurance) are outside the scope of the statute. Judge Pechman held that IFCA only encompasses traditional "first party coverage" insurance relationships, and not liability policies in which policy proceeds are paid to others. In denying reconsideration of that initial ruling, the court ignored evidence presented by the policyholder that this is not the proper interpretation, including ambiguities in the language of the statute, the fact that liability coverage is often referred to as "indemnity" coverage, and that cases from Washington federal and state courts have applied IFCA to "third-party coverage" situations. The trial court's decision is wrong, is in the minority, and is likely to be overturned if appealed.
But for a contrasting view from the insurance industry itself, consider NW Pipe v. RLI Insurance. NW Pipe is an environmental coverage case from Oregon involving a dispute between one of the larger corporate targets at the Portland Harbor Superfund Site and its primary-layer liability ("third-party") insurer. The crux of the dispute is whether the limits of the primary-layer policies have been exhausted, meaning that the insurer is off the hook for defense costs. In NW Pipe the insurer paid for a lot of cleanup-type work on the insured's property, the payment of which clearly eroded some of the limits of the policies. But those limits were not fully eroded, and it appears that the insured intentionally did not have the insurance company pay for some items to prevent the policies from being exhausted. Still, the carrier wanted out of its defense obligation, so it sent the insured a check for the balance of the limits (which the insured wisely refused to cash). The insurer then argued to the court that it could force the insured to take the insurance company's money to pay for things that the insured had not asked to be paid for, so that the policies would be exhausted. You can see where I'm going here: the insurance company in NW Pipe was clearly unconcerned with the "third-party" aspect of this insurance policy (that is, protecting its insured against claims by others) and was completely focused on paying out small benefits to its policyholder in order to further the insurer's larger financial goals.
The insurance industry knows full well that the distinction relied on by Judge Pechman in Cox is only semantic, that liability coverage is fully as much for the benefit of the policyholder as fire insurance, and that policy proceeds in liability coverage are frequently paid directly to the insured. NW Pipe is but one example. Hopefully an appeals court will get a crack at the Cox decision and turn it around.
In Cox the court took it upon itself to consider whether IFCA's purported limitation to "first-party claimants" means that all claims other than those by policyholders under traditional "first-party" insurance (such as fire insurance, or inland marine insurance) are outside the scope of the statute. Judge Pechman held that IFCA only encompasses traditional "first party coverage" insurance relationships, and not liability policies in which policy proceeds are paid to others. In denying reconsideration of that initial ruling, the court ignored evidence presented by the policyholder that this is not the proper interpretation, including ambiguities in the language of the statute, the fact that liability coverage is often referred to as "indemnity" coverage, and that cases from Washington federal and state courts have applied IFCA to "third-party coverage" situations. The trial court's decision is wrong, is in the minority, and is likely to be overturned if appealed.
But for a contrasting view from the insurance industry itself, consider NW Pipe v. RLI Insurance. NW Pipe is an environmental coverage case from Oregon involving a dispute between one of the larger corporate targets at the Portland Harbor Superfund Site and its primary-layer liability ("third-party") insurer. The crux of the dispute is whether the limits of the primary-layer policies have been exhausted, meaning that the insurer is off the hook for defense costs. In NW Pipe the insurer paid for a lot of cleanup-type work on the insured's property, the payment of which clearly eroded some of the limits of the policies. But those limits were not fully eroded, and it appears that the insured intentionally did not have the insurance company pay for some items to prevent the policies from being exhausted. Still, the carrier wanted out of its defense obligation, so it sent the insured a check for the balance of the limits (which the insured wisely refused to cash). The insurer then argued to the court that it could force the insured to take the insurance company's money to pay for things that the insured had not asked to be paid for, so that the policies would be exhausted. You can see where I'm going here: the insurance company in NW Pipe was clearly unconcerned with the "third-party" aspect of this insurance policy (that is, protecting its insured against claims by others) and was completely focused on paying out small benefits to its policyholder in order to further the insurer's larger financial goals.
The insurance industry knows full well that the distinction relied on by Judge Pechman in Cox is only semantic, that liability coverage is fully as much for the benefit of the policyholder as fire insurance, and that policy proceeds in liability coverage are frequently paid directly to the insured. NW Pipe is but one example. Hopefully an appeals court will get a crack at the Cox decision and turn it around.
Thursday, March 27, 2014
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!
Thursday, March 13, 2014
Oregon Federal Court Rules on Characterization of Environmental Cleanup Costs
Last week Magistrate Judge Stewart issued an order on the thorny issue of how to characterize some of the costs associated with a complex environmental cleanup. Are they indemnity costs that deplete the insured's insurance policies, or are they defense costs, which do not? The decision resolves yet more issues in the Siltronic litigation between Siltronic, a major player at the Portland Harbor Superfund Site, its primary layer carriers (principally Wausau), and excess carrier AIG. Siltronic has had to perform some cleanup-type work and extensive studies and monitoring at its facilities, well in advance of any cleanup of the contaminated sediment in the Willamette River that is the focus of the site.
Under the Oregon Environmental Cleanup Assistance Act's 2003 amendments certain investigatory costs are presumptively deemed "defense" costs, whereas some types of remedial costs are presumptively deemed "indemnity" costs. But environmental sites are notoriously complex and what seems like remediation to some can look like further investigation to others. In Siltronic the company and its primary-layer carriers reached an agreement on an allocation of the costs in such a way that the primary policy was exhausted, meaning that the excess carrier (AIG) would be on the hook. AIG challenged the allocation, arguing that the primary carrier had designated many costs as indemnity that should have been defense.
Judge Stewart's decision is quite nuanced and deserves a close read. Overall, her approach was to go behind the labels applied by the agencies, vendors, or attorneys to look at what was actually going on when a particular cost was incurred and its purpose, to see whether the statutory presumptions had been overcome (or whether they applied at all). This decision is something of a harbinger for what will likely be significant disputes between policyholders, their primary carriers, and excess carriers when the "big" remediation at the Portland Harbor begins in earnest.
Under the Oregon Environmental Cleanup Assistance Act's 2003 amendments certain investigatory costs are presumptively deemed "defense" costs, whereas some types of remedial costs are presumptively deemed "indemnity" costs. But environmental sites are notoriously complex and what seems like remediation to some can look like further investigation to others. In Siltronic the company and its primary-layer carriers reached an agreement on an allocation of the costs in such a way that the primary policy was exhausted, meaning that the excess carrier (AIG) would be on the hook. AIG challenged the allocation, arguing that the primary carrier had designated many costs as indemnity that should have been defense.
Judge Stewart's decision is quite nuanced and deserves a close read. Overall, her approach was to go behind the labels applied by the agencies, vendors, or attorneys to look at what was actually going on when a particular cost was incurred and its purpose, to see whether the statutory presumptions had been overcome (or whether they applied at all). This decision is something of a harbinger for what will likely be significant disputes between policyholders, their primary carriers, and excess carriers when the "big" remediation at the Portland Harbor begins in earnest.
Subscribe to:
Comments (Atom)