Implementation of Environmental Coverage Claims Mediation Program Underway

The recent amendments to Oregon's Environmental Cleanup Assistance Act (OECAA) included a potentially useful tool in the policyholder toolbox - one that could benefit all sides and the environment as well.  The amendments provided that an insured could demand that an insurer participate in a mediation over a broad range of environmental coverage disputes, and if the insurer refuses, that is a per se bad faith claims handling practice subjecting the carrier to increased damages.  The Oregon Department of Justice was given the responsibility for creating an environmental coverage mediation program including hiring a mediation service provider (MSP) to administer the program and writing regulations governing issues like qualifications and rates.  DOJ convened a public meeting of stakeholders this past Monday, December 2, in Salem, which was attended by insurers, policyholder advocates, and many representatives of the mediation community.  DOJ has also set up a website for the program which will track its progress.  There are a number of issues under discussion.  Let me know if you have thoughts that you'd like conveyed through the Advisory Committee that is being set up, and stay tuned.

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.

Benefits of Involving Counsel In Choosing Your Insurance Program

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

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.

Presentation on Anderson Brothers Decision

For those of you who missed the OSB Environment and Natural Resources Committee's CLE on the Anderson Brothers decision yesterday, click here for the presentation visuals (via Prezi) and here for a short article that I wrote for ENR on the decision.  Thanks to everyone who came and for the great questions.

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.

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

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

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

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