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.

Absolute Pollution Exclusions Are Not Absolute

Insurance is a crucial source of funding for most environmental cleanups. For the past 30 years, comprehensive general liability insurance policies have uniformly included an "absolute pollution exclusion" in some form or another. The earliest such exclusions appeared in the 1950's, but they became ubiquitous boilerplate in the mid-1980s. As a result, most applicable environmental coverage is found in policies pre-1985, and many policyholders incorrectly assume that their post-1985 policies provide no such coverage. This assumption stems from a string of court decisions finding that absolute pollution exclusions eliminate coverage for traditional industrial pollution under Oregon law. Martin v. State Farm Fire & Cas. Co., 146 Or. App. 270, 275-80, 932 P.2d 1207 (1997); Ind. Lumbermens Mut. Ins. Co. v. W. Or. Wood Prod., Inc., 268 F.3d 639 (9th Cir. 2001). While absolute pollution exclusions are broad, and often do exclude pollution from traditional sources, they do not eliminate all coverage for environmental claims, and policyholders should thoroughly review each of their policies to determine whether coverage exists.

Most absolute pollution exclusions are incorporated into standardized forms and use language originally written by the Insurance Services Office (the "ISO"). The ISO's pollution exclusion, which is widely referred to as the "absolute pollution exclusion," actually expressly creates coverage in certain circumstances. For example, the ISO's exclusion does not apply if contamination results from a "hostile fire" or from a failure of equipment used to heat, cool, or dehumidify a building. While the factual scenarios in which express coverage is created are limited, a policyholder should determine whether any such scenarios apply. Even if only part of the environmental claim falls within the scope of express coverage, the insurer may be required to provide a full defense under Oregon law. While the scenarios where coverage is expressly not excluded are few, it is important to review each such scenario at the outset to ensure that no coverage is missed.

Another important analysis is whether the environmental claim involves a pollutant as defined by the policy. If the contamination does not result from the release of a "pollutant," the exclusion typically will not bar coverage. The ISO exclusion includes a very broad definition of what constitutes a pollutant. While many courts have given the term "pollutant" a very broad interpretation, other courts have interpreted "pollutant" to include only traditional or inherently dangerous contaminants. MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 73 P.3d 1205, 3 Cal Rptr. 3d 228 (2003); In re Hub Recycling, Inc., 106 B.R. 372 (D.N.J. 1989). Determining whether a released substance is a pollutant often requires a review of how the substance was used and how it has impacted the property. While many courts have addressed whether commonly applied products, such as pesticides, can be considered pollutants, many of these questions remain unanswered under Oregon law. If contamination has resulted from something other than the accidental release of a regulated substance, a policyholder may have coverage despite the inclusion of an absolute pollution exclusion by showing that the substance is not a "pollutant."

Policyholders also need to be on the lookout for policies that include purported absolute pollution exclusions that do not utilize standardized ISO language. While most policies include standardized ISO exclusions, some insurers have used individualized exclusions that apply less broadly. For example, some of the early insurer-specific absolute pollution exclusions apply only to releases into waterbodies or to claims brought by government authorities. In these cases, coverage remains in place for releases onto land or claims brought by corporations. Insurer-specific absolute pollution exclusions are most commonly found in policies from the 1980s, but a policyholder may run into them at any time.

While absolute pollution exclusions often leave an insured without coverage, they are not as ironclad as their name suggests. The policyholder facing an environmental claim should retain coverage experts as soon as possible to determine which policies create coverage, including those policies that include purported absolute pollution exclusions.
           

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."

Oregon District Court Provides Clarification on Environmental Coverage Issues

In the most recent opinion in the ongoing Marine Group litigation, Judge Acosta clarified two issues that recur in complex environmental insurance litigation: first, which party has the burden of proving that incurred defense costs were reasonable and necessary; and second, whether an insured can recover pre-tender defense costs.

Burden of Proving Reasonableness and Necessity

The issue of which party has the burden of proving, or disproving, that incurred defense costs were reasonable and necessary was addressed in Ash Grove Cement Co. v. Liberty Mut. Ins. Co. In that case, Judge Hernandez endorsed California's rule by holding that when" the insurer has breached its duty to defend, it is the insured that must carry the burden of proof on the existence and amount of the site investigation expenses, which are then presumed to be reasonable and necessary as defense costs, and it is the insurer that must carry the burden of proof that they are in fact unreasonable or unnecessary." Under the clear language of the Ash Grove opinion, a breaching insurer must prove the defense costs to be unreasonable and unnecessary, after the insured proves their existence and amount. Despite holding that this burden-shifting rule applies, Judge Hernandez's application of the rule was unclear, and several breaching insurers have questioned whether they do indeed have the burden of proving defense costs to be unreasonable and not necessary.

This question arose in Marine Group through a complicated motion to compel in which the relevancy of various documents was in question. In ruling on relevancy, Judge Acosta found that it was necessary to establish who has the burden on the issues of reasonableness and necessity. Judge Acosta endorsed the position taken by Judge Hernandez: that when a carrier has breached its duty to defend, the burden of proving the reasonableness and necessity of the fees shifts from the insured to the insurer. Thus, the insured's fees are presumed to be reasonable and necessary when an insurer has improperly breached its duty to defend. This is a win for policyholders, and should make it easier for insureds to recover fees when insurers have wrongfully refused to participate in a defense.

Another wrinkle in the Marine Group litigation is the presence of a paying insurer, Argonaut. Since early on in the defense, Argonaut has paid Marine Group's defense costs. Thus, most of the damages being sought are through a contribution action between insurers, and not a direct coverage claim. Marine Group, along with Argonaut, made the argument that since the claim is primarily a contribution action between insurers, the reasonableness and necessity of the fees was not at issue, but instead the issue is whether Argonaut acted as a reasonable insurer. Similarly, both parties made arguments under ORS 465.480(4)(d) that the common law of contribution was preempted and that the breaching insurers should be prohibited from questioning the defense costs incurred. Judge Acosta rejected this line of reasoning in holding that St. Paul could question the defense costs, but that it bore the burden of proving the fees to be unreasonable and not necessary.

Pre-Tender Defense Costs

While the Marine Group litigation primarily involves a contribution action between Argonaut and other insurers, Marine Group also has a direct contractual claim against its insurers for certain sums not paid by Argonaut. Some of these unpaid defense costs are pre-tender. In other words, they were incurred by Marine Group before it formally sent a letter to its insurers that detailed the claims faced and requested that a defense be provided.

Most states follow the rule that pre-tender defense costs cannot be recovered by an insurer; this underlines the importance of identifying, and tendering to, insurers at the earliest point of any litigation. Marine Group attempted to escape the strict application of the pre-tender rule by invoking the notice-prejudice rule, which does not allow an insurer to deny defense costs because of delayed notice, unless it can show that the delay caused prejudice to the insurer. Judge Acosta found the notice-prejudice rule to be inapplicable because the duty to defend did not arise until the tender occurred. Thus the court held that the notice-prejudice rule does not apply to pre-tender defense costs, because it applies only to covered claims.

Ultimately, Judge Acosta ruled that under Oregon law, pre-tender defense costs are not recoverable. This presents a particularly difficult situation for companies facing historic environmental liabilities. Typically, the only policies that cover historic pollution events were written before 1986. Many companies do not have readily available copies of these insurance contracts. Indeed, historic insurance archaeologists must often be retained to identify these policies. Judge Acosta's decision reinforces the rule that defense costs incurred while a party is looking for its insurance coverage are not recoverable, even to the extent that the delay does not meaningfully prejudice the insurers.

Did the Ore Sup Ct Abolish Common Law Indemnity for Defense Costs?

"Frequent-fliers" in the world of construction-defect litigation know that defense costs are often the biggest exposure, particularly for subcontractors.  That is why securing a paid-for defense from an insurance carrier is such a hot topic on this blog (and elsewhere).  And whether there is insurance to cover defense costs or not, defendants in complex disputes (including insurers) often threaten to sue other co-defendants to recover part of their defense costs, which can drive settlement discussions.  So any development in the law relating to defense cost recovery has an impact on policyholders - and that's why I'm writing about this new case, which on its face has nothing to do with insurance.

On March 19, 2015 the Oregon Supreme Court issued a somewhat surprising decision in Eclectic Investment v. Patterson & Jackson County et al., in which the court appears to have changed some fundamental assumptions about whether one defendant can recover defense costs from another defendant.  In Eclectic a landowner sued a contractor that had done excavating work for him and the county that inspected and permitted the excavation, after the excavated hillside eroded and damaged commercial buildings on owner's property.  A jury found that the landowner was more than 50% at fault, meaning that under Oregon's comparative fault law neither the county nor the contractor had to pay any damages (both the county and the contractor were found to be slightly at fault).  The county had asserted a common-law indemnity claim against the contractor, and after the trial pursued that claim to recover its defense costs.

Common-law indemnity is an equitable theory used when there is no contractual relationship between the parties or the contract does not contain an indemnity provision.  Under one formulation of the legal standard for the claim, Defendant A will owe Defendant B indemnity if Defendant A's negligence was "active" or "primary" while Defendant B's negligence was "passive" or "secondary."  Another way of phrasing the test is whether in fairness, Defendant A "should" pay for Defendant B's costs in the suit.

The issue before the Oregon Supreme Court in Eclectic Investment was how to determine if the county was entitled to indemnity, since neither the county nor the contractor were liable for damages, and each was found to have played a minor role in the incident.  The court recounted the rather vague legal tests that Oregon courts had developed over the years to determine whether in equity one party owes another indemnity (see above).  The court observed, however, that Oregon law changed after common-law indemnity was adopted, replacing the older "joint liability" regime with the current comparative-fault regime in which each defendant is assessed only its percentage share of any damages by the jury using a questionnaire.  Therefore, according to the court, the rationale for common-law indemnity has disappeared, because under the new scheme one party will never be made to pay damages that were in fact attributable to the "active" fault of another party.

The problem, of course, is that the defense costs incurred by the defendants are not part of the jury's consideration.  (In reality, those costs can only be determined once the litigation is done.)  But the court made it clear, in a final footnote, that where the comparative fault rules apply, common-law indemnity cannot be used as the theory on which to recover even defense costs.  The court stated that it would countenance recovery of defense costs on some other theory, citing cases from other states that allowed such claims under a quasi-contract theory - but that such claims could only lie where the indemnitee incurred defense costs only because of the indemnitor's negligence.  Applying that concept to the facts of the case, the court stated that because plaintiff had sued the county and the contractor, it was clear that the county's involvement in the litigation was not solely because of the contractor's negligence, so the county would have been out of luck in recovering defense costs under an alternative theory.

The court's decision will change some of the leverage points in multi-defendant litigation where not all players have contractual indemnity claims.  It also emphasizes the importance of having Oregon courts enforce insurance contracts providing a paid-for defense.   If defendants cannot rely on common-law indemnity to recover defense costs when they are dragged into lawsuits in which they play a minor part, it is critical that insurers understand and heed their contractual obligation to cover those defense costs.

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.

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.

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.)

WA Fed. Court Broadens When Insurer May Go Beyond Complaint to Deny Defense

In Allstate v. A.R., a late-July decision from a federal court -- the Western District of Washington -- the court held that an insurer may rely on facts outside the "four corners" of the complaint to deny the duty to defend if the issue is whether the plaintiff is an "insured" under the policy and therefore subject to an "insured-versus-insured" type exclusion.  In the underlying case a minor sued her mother for negligently permitting her to be alone with her grandfather, who abused the minor.  The mother's homeowner's insurance policy with Allstate had an exclusion for claims brought by another "insured" and defined "insured" to include any relative who "resided" with the insured defendant.  The underlying complaint did not specify whether the minor lived with her mother, although in fact the minor apparently did live with her mother most of the time, but also lived sometimes with her father, and with her grandparents.  Allstate investigated where the minor resided, and came to the conclusion that the exclusion applied.



In the coverage case the minor protested that Allstate was not permitted to go outside the "four corners" of the complaint and that doing so was bad faith.  The court noted that in Woo v. Fireman's Fund the Washington Supreme Court had held that an insurer can investigate facts relating to whether a defendant is an insured and rely on those facts in its defense coverage determination.  The court then extended the Woo reasoning to coverage Allstate's investigation into the minor's living situation, reasoning that the question Allstate was trying to answer was whether the minor was an "insured," and held that the exclusion did apply, and that Allstate had not acted in bad faith.



The problem with the court's reasoning, of course, is that Woo did not concern a policy exclusion, and Washington courts have held that an exclusion may not be the basis for a denial of defense based on extrinsic evidence.  The court's characterization in this case of Allstate's investigation as involving "insured status" is facile - what Allstate was really investigating was an exclusion.  And the court's extension of Woo to this situation is not supported by Woo's reasoning, which has everything to do with helping defendants get coverage.  Because of this flaw this case may be the subject of an appeal, so stay tuned.

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.

Washington Federal Court Orders Broad Discovery of AIG Defense Rates

A significant win for policyholders in a discovery dispute over internal carrier records.  AIG and Coinstar/Redbox have been locked in coverage litigation in the Western District of Washington for some time over AIG's obligation to defend Redbox in several class actions alleging that Redbox has violated privacy laws in its handling of consumer information.  Redbox lost a critical motion in February, when the court granted AIG summary judgment on the duty to defend some of those claims because of a broadly-worded statutory violation exclusion.

But another aspect of the dispute is the rates that AIG has been paying Redbox's defense counsel.  It appears that Redbox chose counsel that it thought would do the best job, but that AIG has refused to pay those lawyers' full rate, instead only agreeing to pay "panel" rates.  Redbox, apparently, is paying its lawyers the difference between what AIG will reimburse and the full rate, and that differential is now over $2 million.  These kinds of disputes are, unfortunately, quite common in high-stakes litigation where companies want to choose highly-qualified counsel for themselves.

In an effort to show that AIG acted in bad faith in setting its rates, Redbox demanded information on the rates that AIG has paid to defend insureds in other similar cases, and what rates AIG pays counsel in coverage cases where it has to defend itself.  AIG naturally refused (what else would you expect?) asserting that the information is not relevant, that it is proprietary, and that compiling the information would be unduly burdensome.  AIG also attempted to limit the disclosure to the rates that the specific AIG unit that provided insurance to Redbox (National Union) pays, rather than AIG as a whole.

The court rejected all of these arguments.  First, the court held that AIG had opened the door to discovery of rates paid by AIG and all of its subsidiaries by admitting that there is an AIG-wide committee that evaluates law-firm qualifications and sets panel rates.  Second, the court held that nothing in the policy permitted AIG to unilaterally or unreasonably set rates paid to defense counsel, invoking not only Washington law that circumscribes insurer control of defense counsel, but also the duty of good faith and fair dealing (the subject of a recent post on this blog).  Third, the court held that AIG had failed to put in competent evidence that disclosure of the rate information would assist its competitors, and that an existing protective order would be sufficient to shield the information from public disclosure.  Overall, the court showed little patience with the insurance companies' bob-and-weave approach to disclosing critical information.

This decision is an important strike in the ongoing campaign by policyholder advocates to pull back the curtain on insurance company internal business practices that disadvantage insureds and allow insurers to profit.

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.

Ninth Circuit Certifies Notice-Prejudice Question to Montana Supremes

One of the perennial issues in insurance coverage is what happens if a policyholder provides notice to its insurance company late - in the case of liability coverage, that usually means after the underlying case has been litigated for a long time, and sometimes gone to verdict, or been settled.  Most states have adopted the "notice-prejudice" rule for those situations.  The basic concept is this: if the insurance company wants to get completely off the hook for any obligation to pay defense costs or indemnity, based on language in the policy obligating the policyholder to provide notice "as soon as practicable" or similar, the insurance company has to show that it suffered in some way by the late notice, e.g. that it could have negotiated a better deal, litigated the case differently, paid less for defense costs.

Montana's lead case on this subject, according to the Ninth Circuit, contains language that both suggests that notice-prejudice is the standard and also that timely notice is a condition precedent to coverage, meaning that late notice bars coverage with no showing of prejudice needed.  The case, Atlantic Casualty v. Greytak, appears to have been  a fairly typical construction defect suit at the outset, but with a twist: the insurance company was not notified until almost a year after the defect claims were made and after the parties had entered into a covenant-judgment type lawsuit.  Those are not very sympathetic facts on which to argue for the notice-prejudice rule.  It will be interesting to see if Montana's Supreme Court takes the case.

Fifth Circuit Certifies Whether "PRP" Letter Is a "Suit" to Texas Supreme Court

A new development, of sorts, in development of state law on whether a PRP letter constitutes a "suit" under legacy long-tail CGL policies: the Fifth Circuit has certified the question over to the Texas Supreme Court in McGinnes v. Phoenix Insurance.  Texas remains as one of the few states not to have addressed the question.  Most states have answered in the affirmative; a few have said "no."  Indeed the federal district court in McGinnes appears to have sided with the minority, holding that because CERCLA did not exist when the policies were issued, the parties could not have intended that the definition of "suit" would be broad enough to encompass administrative actions like a PRP letter.  That approach begs the question whether a policy should be interpreted based on modern "lay" understandings of terms, or based on lay understanding at the time of the policy.  Most courts (including Oregon) interpret GL policies -- which, after all, never "expire" -- based on current versions of the dictionary.  But the way the Fifth Circuit phrased the insurer's view on Texas law suggests that Texas law may be different, or at least may be open on that point.  As a very large state with a lot of industrial activity, Texas cases tend to get cited a lot and can have an outsized impact on insurance industry litigation strategy nationally.  The Texas Supreme Court is not required to accept the referral, so we will follow this to see what develops.

Update: The Texas Supreme Court has accepted the certified questions.

Nevada Supreme Court Knocks It Out of the Park on Pollution Exclusion

We are venturing a little afield from the Pacific Northwest today to acknowledge a big win for policyholders in Nevada.  The Nevada Supreme Court in CENTURY SURETY COMPANY v. CASINO WEST INC, answering questions certified to it in 2012 by the Ninth Circuit (after oral argument was held back in 2011), held that the so-called "absolute" pollution exclusion is not in fact "absolute" when it comes to non-"traditional" pollutants.

The facts of this case are very sad: four people died in a hotel room situated over a pool heater room when carbon monoxide filled the room, due to a blocked fresh-air intake.  The carrier denied coverage based on the pollution exclusion and an "indoor air quality" exclusion.  (That "indoor-air" exclusion is not typical, and therefore I won't discuss it here).  The federal trial court denied the carrier's motion for summary judgment, finding that both exclusions were ambiguous.  However, the trial court (and then the Ninth Circuit) noted that there is a considerable split among the states on whether the modern pollution exclusion applies only to traditional pollutants or covers all substances arguably within the broad scope of its wording, but that the courts could not determine how the Nevada courts would come down in that debate.

The Nevada Supreme Court put itself firmly in the pro-policyholder camp, using an analysis that could have been lifted from some of the best Oregon case law on policy interpretation.  The court first emphasized that insurance policies are interpreted from the perspective of the ordinary purchaser of insurance, not a lawyer or insurance professional.  Second, the court emphasized that any ambiguity in a policy -- whether on its face or when applied to a factual situation -- is resolved against the drafter (the insurer) and that exclusions are read very narrowly, with the burden on the insurer to establish application.

With that, the court observed that although it would be reasonable to read the pollution exclusion as broadly applying, and including carbon monoxide, it would also be reasonable to take the policyholder's view that it only covers "traditional," outdoor, pollutants.  The court noted that the exclusion is worded so broadly (using, for example, the term "irritants") that it could potentially apply to any substance including soap or shampoo, barring coverage for any accident involving such common, and usually innocuous, items.  The court also noted that dictionary definitions of "pollutant" are narrower than the exclusion and implicitly refer only to "traditional" pollution.  Finally, the court looked to the exclusion's drafting history, noting that it was put in place largely in reaction to the proliferation of environmental contamination statutes (like CERCLA).  The court therefore found the exclusion ambiguous and adopted the policyholder's proposed interpretation, meaning that the carrier cannot rely on the exclusion.

The Nevada court's decision is similar in many ways to the seminal Oregon case on the subject, A-1 Sandblasting & Steamcleaning Co., Inc. v. Baiden, 53 Or. App. 890, 894, 632 P.2d 1377 (1981), aff’d, 643 P.2d 1260 (Or. 1982), in which the Oregon Court of Appeals held that paint was not within the ambit of the exclusion, and found the exclusion ambiguous.  Nevertheless, insurers in Oregon continue to deny indemnity coverage -- and sometimes even a defense -- based on a broad interpretation of the pollution exclusion, perhaps because the exclusion is written so broadly and because so many other courts have applied the exclusion broadly.  (Which again points to the need for additional disincentives in Oregon law for carriers to deny claims first to see if the insured will complain.)  This new decision will make it more dangerous for carriers to take that approach, at least in Nevada.

Wash. Court of Appeals Gets It Dead Wrong on What Is a "Suit"

Earlier this week Division One of the Washington Court of Appeals issued its much-anticipated decision in the Gull Industries v. State Farm litigation.  The issue was whether a letter from the state equivalent of the EPA constitutes a "suit" under a standard-form legacy GL policy (that is, a policy issued before the ISO form defined "suit").  Only if something constitutes a "suit" does the insurer have a duty to defend, which in the environmental context often means paying for very expensive investigations and studies of contamination and remediation options.  So there is potentially a lot at stake.

One word describes this Court of Appeals decision: wrong.  Confusingly enough, the decision starts off in the right direction, finding that the term "suit," undefined, is ambiguous.  That's in keeping with that other courts have found, including Oregon's courts.  That's where the decision falls apart: having found an ambiguity, the court should have applied the maxim that ambiguous terms are applied against the drafter (the insurer).  But without any discussion of that standard, rather than adopting a broad, policyholder-friendly interpretation, the court imposed a definition not drawn from any source reflecting the view of an ordinary purchaser of insurance (like the dictionary); rather, the court looked to what other courts had adopted as an interpretation, and picked and chose among aspects of those decisions that it preferred.  The interpretation adopted by the Court of Appeals for "suit" is this: something that "communicate[s] an explicit or implicit threat of immediate and severe consequences" if not responded to and is "adversarial or coercive in nature."

The letter sent by Ecology (the Washington state equivalent of EPA) was in response to a voluntary notification by the policyholder that pollution had been discovered and would be cleaned up.  Ecology told the insured, in response, that it was placing the site on a list of contaminated sites awaiting cleanup.  The letter did not explicitly tell the insured to do anything.  But, as noted by the court, the letter advised the insured that there were specific requirements in state law that cleanup efforts must adhere to.  Implied in that statement is the threat, drawn from the cleanup-requirements statute, that if those standards were not complied with, there will be enforcement action.  But the Court of Appeals completely ignored that reality, simply saying that the letter "did not advise" the insured of those consequences.

The approach taken by Division One has been rejected by many courts, including the Ninth Circuit in Anderson Bros. v. St. Paul Fire & Marine.  In Anderson Brothers the Ninth Circuit affirmed its observation in Aetna Cas. & Sur. v. Pintlar, that the realities of environmental statutes must be considered in deciding whether a communication from a regulatory agency that does not spell out every potential liability or ramification is a "suit."  In Gull Industries the reality was that the the insured, after self-reporting the contamination, was going to constantly be looking over its shoulder to see what Ecology thought of what it was doing.  That makes Ecology's letter a "suit."

The practical effect of decisions like this one is to discourage policyholders from voluntarily entering into agreements with regulators or self-reporting contamination and cleanup efforts.  Instead, policyholders are encouraged to bait regulators into taking explicitly "adversarial or coercive" steps.  That's bad for the environment and bad for the public.  It may be that the Court of Appeals was trying to goad Ecology into changing the wording of its letters, but there's no reason that the burden of solving this problem should be put in the hands of environmental regulators.  This may be a rare circumstance where Washington legislators and policyholder advocates can take a page from Oregon, and enact a Washington version of the Oregon Environmental Cleanup Assistance Act, which (as some of my colleagues have noted) contains a definition of the term "suit" that much broader than the standard adopted by the Washington court.

Another Strong Ruling on Prejudgment Interest From Oregon's Federal Courts

Oregon's federal court has struck another blow against the insurance industry's attempts to limit prejudgment interest in duty-to-defend disputes.  Somewhat ironically, this ruling comes a case that has turned into a carrier v. carrier fight over contribution.

In the latest ruling in the long-running Northwest Pipe v. RLI coverage litigation, the court held that a non-defending carrier had to pay prejudgment interest to the defending carriers based on when the defense costs were paid, irrespective of when demand was made for reimbursement.  The non-defending carrier argued that it did not know, until demand was made on it, what the defense costs were.  The court rejected that argument, reasoning that if the carrier had not breached its contract and had agreed to defend, it would have been aware of the defense costs as they were being paid.

This new decision echoes Judge Hernandez' ruling in the Ash Grove litigation, which awarded prejudgment interest from when the policyholder paid the defense costs, without regard for when the insurance companies learned of the defense costs.

Schnitzer Verdict In Defense Cost Dispute Good News for All Policyholders

Late last month a jury awarded Schnitzer Steel all of the damages that it sought -- over $8 million -- in a coverage dispute with its liability carriers that centered on the rate being paid the environmental lawyers defending Schnitzer at the Portland Harbor Superfund Site.  This is a very unusual case, but it is likely to have a ripple effect on the insurer-insured dynamic when it comes to selection of defense counsel.  At the heart of the dispute was whether Schnitzer's defending carriers had the right to choose defense counsel, even if the insured believed those lawyers did not have the experience or ability to properly handle the case. Schnitzer's insurers, like most insurers, asserted that they had a nearly unfettered right to choose counsel, and took the position that if the insured insisted on another lawyer the carrier did not need to pay any more than the "panel counsel" rate.  The jury in Schnitzer rejected that argument.  The company recovered the difference between what it has been paying its California-based counsel (at rates nearing $900 per hour) and what its carriers had agreed to pay (roughly $250 per hour) for several years worth of intensive work.

As is usually the case one of the biggest fights was over the jury instructions, which embody the judge's conclusions about the governing law.  I have posted the jury instructions here.  Although the court ruled before trial that the recent amendments to the Oregon Environmental Cleanup Assistance Act (OECAA) relating to standards for "independent counsel" did not apply, the court nevertheless gave the jury an instruction on an insurer's obligations regarding defense counsel that is nearly identical to the statutory standard.  This instruction will give insured's ammunition to use with carriers attempting to foist "panel counsel" on the insured.  In most cases appointed panel counsel are excellent specialists in their fields, but on occasion a carrier will attempt to appoint someone who does not have the requisite experience, or has a particular conflict of interest (such as having represented the carrier on coverage matters).

More generally, the verdict should make carriers particularly leery about going in front of a jury in state or federal court.  The simple fact is that although Schnitzer had very excellent representation, many did not believe that they could convince a jury that a lawyer is worth $900 an hour, under any circumstances.  The fact that they were able to do so certainly speaks to their skill as advocates, but probably also speaks volumes about how juries view insurance companies that try to skirt their coverage obligations.

Oregon Federal Court Confirms Availability of Prejudgment Interest on Disputed Defense Costs

In an as-yet-unpublished decision in the long-running Ash Grove v. Liberty Mutual case the court recently granted the policyholder's request for prejudgment interest on defense costs recovered at trial.  Ash Grove (Case No. 09-239-HZ) involves reimbursement of legal fees and costs incurred in defense of claims associated with the Portland Harbor Superfund Site.  After pretrial rulings established that Ash Grove's carriers had a duty to defend, the case went to trial nearly a year ago on some remaining issues about the scope of the duty to defend, and damages.  Following a bench trial, the court held that the carriers' duty to defend began in January, 2008, when notice was initially given.  The court awarded Ash Grove over $1.8 million in defense costs from that point through the end of 2012.

In a post-trial motion, Ash Grove asked the court to award prejudgment interest at the statutory rate (9%) running from the date that the company paid each of the monthly invoices.  This was an issue of first impression in Oregon, at least on these facts.  Nationally, some courts had held  that where an insurance carrier contests the reasonableness of defense costs, the amount is not "readily ascertainable" (which is the near-universal test for awarding prejudgment interest) until the court has resolved those disputed issues, and thus prejudgment interest cannot be awarded.  That was the situation in Ash Grove - the carriers hotly contested nearly all of the company's defense costs.  The Ash Grove trial court rejected the carriers' view, instead siding with a contrary line of cases holding that a carrier's contentions about reasonableness of defense costs does not make the amount not "reasonably ascertainable."  The Ash Grove court also noted that without an award of prejudgment interest the policyholder would not be made whole.

Previously, the only cases in Oregon in which the court had awarded prejudgment interest on defense costs occurred in cases in which the reasonableness of  defense costs was not disputed.  This new ruling should increase the pressure on carriers to settle disputes over defense costs before trial.

Note: We have been privileged to act as local counsel for Ash Grove in this case.  Past results in any particular are no guarantee of future performance or result in any other case.  Neither this posting nor any other posting in this blog should be taken as legal advice.  See other disclaimers at bottom.