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."

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.

"Pay and Chase" Jeopardized by Court of Appeals

Policyholders representing general contractors and developers frequently urge defending carriers to "pay and chase" - in other words, settle with the owner ("pay") and then subrogate against the subcontractors or design professionals whose work caused the alleged damage ("chase") to get reimbursed for the settlement with the owners.  Many carriers are increasingly leery of this approach, and unfortunately a new decision from the Court of Appeals is likely to further dampen their enthusiasm.  In Montara Owners Ass'n v. LaNoue Development, the developer's carrier (Zurich) agreed to pay and chase, paying $4 million to resolve the developer's liability.  Zurich settled with almost all subcontractors, but proceeded to trial against one, Advanced Construction ("Advanced") (referred to in the decision as Sharabarin, the name of the "dba" owner).

At trial Advanced succeeded on a directed verdict motion to reduce the total amount that LaNoue could seek in damages by knocking out two chunks from Zurich's subrogation right: 1) amounts that Zurich had been reimbursed by settling subcontractors; 2) an amount that Zurich had paid in settlement out of a policy that pre-dated Advanced's construction work on the project.  Advanced's argument as to #1 was essentially that Zurich could not get a double recovery; its argument on #2 was that because it could not have caused property damage during that early Zurich policy period, there was no subrogation right for that period.  LaNoue (Zurich) argued that subrogation merely puts the carrier in the insured's shoes, and does not impose any additional burdens of proof on a subrogating carrier.

The Court of Appeals reversed the directed verdict on #1, holding that property damage caused by other subcontractors, for which those subcontractors paid to settle, had nothing to do with the claims against Advanced, and since there was no overlap, the trial court should not have pretended that there was a concern about "double recovery."  But the Court of Appeals upheld the #2 reduction, for the policy period prior to Advanced's work, "because Sharabarin could not have been responsible for covered losses during that timeframe."

As all insurance professionals know, carrier allocations of indemnity payments that are made from multiple policies are idiosyncratic and usually have nothing to do with the amount of property damage that actually occurred in any particular policy period.  That issue often comes up in litigation over prior exhaustion of policies: a carrier will claim that a policy was exhausted in prior litigation and that therefore no defense was owed, but policyholder counsel can often establish that the allocation of losses to the policy in question was arbitrary, that the insured was not consulted, and that the policy was in fact no exhausted at all.  Indeed it appears that in this case Zurich put in evidence that the amount that it allocated to the earliest, pre-Advanced policy was arbitrary.  It is unclear why the Court of Appeals ignored this evidence.  If Zurich appeals, policyholders may want to weigh in on the impact of the decision on them.

Wa. Court of Appeals: Exhaustion of Primary Layer Means Actual Payment

In a new decision that has generated some interest nationally, the Washington Court of Appeals held November 12, 2013 that if an excess policy's attachment language is sufficiently restrictive, the excess policy will not be triggered unless the primary carrier actually pays the full amount of its limits.  In this case, Quellos Group LLC v. Federal Insurance and others, the insured financial advisory firm was called on the carpet by federal regulators for shady tax shelter schemes.  As often happens in such regulatory-type cases, involving disgorgement, fines, damages, and injunctive relief, there were many question about what the primary layer policy would actually cover.  Quellos and its primary-layer carriers settled those coverage disputes with the primary carriers paying Quellos less than full policy limits.  So far, so good.  Quellos then paid the difference between what the primary carriers paid and the primary limits, therefore reaching the "attachment point" for the excess layer policies.

Not so fast, said the Court of Appeals.  The Federal excess policy stated that coverage "shall attach only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit." The Indian Harbor policy stated that coverage "will attach only after all of the Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder."  The court read these provisions as literally requiring, as a pre-condition to any coverage, that the primary carrier itself pay the the full limits.  The court rejected Quellos' argument that these provisions should function like many of the other "conditions of coverage" that aren't really conditions at all, but are treated more like exclusions, where the carrier has the burden of showing that it was prejudiced in some way by the insured's failure to comply with the condition.  The court also rejected Quellos' public-policy argument, noting that there are policy forms available that allow the insured to do just what Quellos tried to do in triggering excess coverage.

From the policyholder's perspective this decision is bad news, and it is not in keeping with the general trend (with many exceptions) in Washington law to tackle coverage questions from a practical, policyholder-oriented perspective.  These excess carriers contracted to provide coverage only if a certain amount of liability was assessed and paid out.  What in the world does it matter to them who pays the underlying limit?  Unfortunately this decision is joining a trend in the case law nationally on this issue that is against policyholders.  Hopefully the Washington Supreme Court will accept review and overturn the decision.

Trial Court Rejects Constitutional Challenge to New Provisions of OECAA

Today the trial court judge in the long-running environmental coverage contribution battle between Lloyd's and several other carriers for Zidell Marine rejected a constitutional challenge mounted by Lloyd's to one of the newest provisions of the Oregon Environmental Cleanup Assistance Act (OECAA).  This case has had many zigs and zags but to briefly sum up, Zidell sued its carriers for failing to defend it in a cleanup action brought by the state, both for defense costs and for the cost of the cleanup.  Several of the carriers including Beneficial settled with Zidell.  Lloyd's did not.  Lloyd's later was tagged in the coverage action (which itself has gone on for years with multiple trips up the appellate chain) for millions of dollars; Lloyd's then sued Beneficial and others arguing that those carriers did not contribute to the overall "pie" in proportion to their coverage.  In June of this year new amendments to the OECAA went into effect.  One provision of the amendments provides that a carrier that has settled with a policyholder in "good faith" is protected from a contribution suit by other, non-settling carriers.  Beneficial and the other defendants in the Lloyd's contribution case filed a motion to dismiss arguing that under that new provision, Lloyd's has no cause of action.  Lloyd's in turn argued, among other things, that a) the statute does not apply if there has been a "final judgment" in the underlying coverage case; b) the statute is unconstitutional; c) there are questions of fact about whether the Beneficial et al. settlements were in "good faith."  In today's decision the trial court held that there has been no "final judgment" in the coverage case between Zidell and Lloyd's, meaning that the statute applies, and rejected the constitutional argument.  She held, however, that there are some questions of fact and allowed discovery into whether the settlements were in good faith.  More appeals appear inevitable, so stay tuned.  However, this appears to be the first enforcement by a trial court of the new provisions of the OECAA, and the first rejection of a constitutional challenge to one of the new provisions, and it's certainly notable for that alone.

Oregon Supreme Court Sets Limits on What Constitutes "Proof of Loss" For Attorney Fee Purposes

Today the Oregon Supreme Court held that a policyholder is not entitled to attorney fees under Oregon's fee-recovery statute for insurance coverage disputes (ORS 742.061) until the insured has given the insurance company information that at least suggests that coverage is requested under the policy  The case is Zimmerman v. Allstate.  The facts, briefly: Zimmerman was injured in an accident with a motorist who it turns out was underinsured (UIM), but she didn't seek UIM coverage from Allstate from the outset of her claim, because she didn't know the extend of her injuries and didn't know what the policy limits of the other motorist were.  So at the outset she only made a claim for personal injury (PIP) benefits under her Allstate policy.  Later, after retaining a lawyer, discovering that her injuries exceeded her PIP benefit, and discovery that the other motorist only had the minimum in coverage, she made a demand for UIM benefits.  Allstate paid, and she then sought her attorney fees all the way back to the time that she submitted her first claim.

Oregon's attorney fee statute allows recovery of attorney fees if the carrier does not settle the claim within six months of "proof of loss."  (For UIM claims, a carrier may avoid fee exposure by doing other things as well, but that is specific to UIM claims).  The Oregon courts have interpreted the phrase "proof of loss" very broadly, to encompass virtually any kind of notice provided by the insured about the loss.  However, in this case the Court did not award fees all the way back to the initial notice, because auto coverage comes in two parts (reduced to its essence): PIP coverage, and UIM coverage.  The Court reasoned that because the trigger of coverage between the two forms of benefit are so different, and the initial notice provided by Zimmerman did not contain information directed at the UIM trigger of coverage, attorney fees would only apply based on the timing of the notice from Zimmerman that UIM coverage was being sought.

The Court went to great lengths to emphasize that the general law applicable to "proof of loss" was not changed by the decision, which was driven by the type of coverage involved.  It is, however, a reminder that policyholder counsel should inform carriers as soon as possible of every type of coverage claim that may potentially be implicated by a loss.

Oregon Supreme Court Will Review Landmark Case on Stipulated Judgments

The Oregon Supreme Court has accepted review in the landmark Brownstone Homes Condo Ass'n v. Brownstone Forest Heights LLC case, on the issue of stipulated judgments.  To simplify greatly, the case involves a developer (the LLC) that was sued along with one of its subcontractors, A&T Siding, by the condo association.  A&T was denied coverage by its carrier, and so entered into a stipulated covenant judgment with the association in which it assigned its coverage claim against its carrier, Capitol.  The condo association then attempted to enforce the judgment as a garnishee on Capitol.  The trial court denied recourse, holding that: 1) under the "Stubblefield" rule Capitol had no liability because the covenant did not leave any potential unsatisfied liability; and 2) ORS 31.825 (which permits assignments) did not control because that statute requires that the assignment take place after judgment was entered, and here the assignment and judgment happened at the same time.  The Court of Appeals affirmed, holding that a garnishment proceeding by an injured claimant is subject to Stubblefield because of the Reuter decision, which limited the rights of a garnishee to those held by the primary defendant.  The court also agreed that ORS 31.825 requires a specific sequence in a stipulated judgment with assignment and that unless the proper sequence is followed, the statute has no application.  Finally, the court held that a good-faith-cooperation requirement in the agreement did not make the agreement Stubblefield-compliant with regard to the insured's continued exposure to liability.

The Oregon Supreme Court identified the following issues for appeal (I'm paraphrasing): 1) does Reuter really mean that Stubblefield applies to garnishment proceedings?; 2) does ORS 31.825 require that judgment-covenant proceed in a specific order; and 3) most tantalizingly, if the Court of Appeals were right on #1 and #2, should Stubblefield be abrogated?  The alignment of the parties and interests of the counsel pursuing the appeal are somewhat odd, so amicus participation seems likely.  This will be one to watch in the fall as briefing comes in.

Duty to Cooperate Alive and Well in Oregon

Insurers are celebrating the new decision from Oregon's federal district court in the long-running Charter Oak et al. v. Interstate Mechanical et al. case finding that the policyholder lost all coverage by breaching the duty to cooperate.  In my view, this is a bad-facts-make-bad-law situation involving a fact pattern not likely to be repeated, that will unduly encourage out-of-state insurer lawyers to take an aggressive position in coverage disputes.  In this case the developer and the general contractor on a project in Montana were owned by the same person, and were therefore aligned as opponents in the defect litigation in that state.  The carrier agreed to defend the contractor (as an additional insured) in the underlying case.  The problem was that (according to the decision, at least) they failed to maintain even the appearance of an arms-length relationship in concocting the damages being sought from the contractor, including having the insurance defense lawyer for the contractor submit a declaration from the developer's damages expert using the defense lawyer's letterhead.  Those kind of bad facts make it difficult to survive the "smell test" that all judges employ, no matter what the legal standard is.

The notable points in the decision are these: a prediction that Oregon courts would find that a court can find an insurer to have been prejudiced by a lack of cooperation even before the underlying case is over; and a finding that an insured's giving notice of an intent to stipulate to a judgment needs to be roughly contemporary with the settlement itself - it is not enough to have warned the carrier earlier in the litigation that the insured was contemplating such a move.  While one can take issue with both propositions (and I do), it is somewhat easy to understand how those calls came down when you go back to the "smell test" problem.  And like it or not, these holdings demonstrate why competent policyholder counsel need to keep up to date on developments from every jurisdiction considering new points of Oregon coverage law.