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.

Washington Court Affirms Bad Faith Verdict In Excess of Stipulated Judgment

Clarifying Washington law, Division I of the Washington Court of Appeals has held that a jury is not limited in what it awards on a bad faith claim to the amount that the policyholder and the claimant had agreed to as the judgment in the underlying dispute.  The set up: in Miller v. Kenny a young driver crashed his car injuring himself and three passengers (the car actually belonged to one of the passengers).  Driver's insurer, Safeco, played games with policy limits and its evaluation of the case, putting the insured at risk of a significant judgment against him well in excess of policy limits.  The insured driver and one of the passengers agreed to a stipulated judgment against the insured that was over policy limits, with an assignment of the insured's claims against Safeco to the passenger, and a covenant that the passenger would not seek to enforce the judgment except to the extent of the passenger's rights against Safeco.  The parties followed Washington's procedures for a reasonableness hearing, and it appears that Safeco did not contest the reasonableness of the covenant judgment.  The judgment was for $4.15 million (exclusive of the policy limits, which Safeco paid).

But at the bad faith hearing the passenger, as assignee of  the policyholder's bad faith claim, put on evidence of damage to the driver caused by Safeco's bad faith that went well beyond the amount of the covenant judgment.  The jury ended up awarding the passenger/assignee $13 million, inclusive of the covenant judgment amount.  Post-trial the court added prejudgment interest, postjudgment interest, and attorney fees, and some of the damages award was trebled under the Consumer Protection Act. The final judgment was for $21,837,286.73.


On appeal, Safeco argued that under Besel v. Viking Ins. Co. of Wisc., 146 Wn.2d 730, 736, 49 P.3d 887 (2002), which held that the amount of a covenant judgment, when found to be reasonable, is the “presumptive measure of the insured's harm,” the jury cannot award more than the amount of the covenant judgment.  Not so, said the Court of Appeals in Miller; the covenant judgment is the presumptive floor to the insured's harm, but not a ceiling.  The Miller court went on to describe the different kinds of harm that the insured can suffer which may be provenin a bad faith action, above and beyond the covenant judgment amount:  damage to "credit rating, damage to reputation, loss of business opportunities, loss of control of the case..., loss of interest, attorney fees and costs, financial penalties for delayed payments, and emotional distress, anxiety, and fear."

Miller is an important milepost in Washington's evolving judicial recognition of the extraordinary power that liability insurers have over the lives of  their insureds, and the catastrophic harm that insurers can cause when they try to play things close to the vest in order to save themselves some money.  Miller may have the unfortunate effect of motivating carriers to contest reasonableness hearings, in order to get an early shot at reducing the net recovery on  a bad faith claim.  In the end, that will be a small price to pay for the benefits of this case (assuming that Miller is upheld by the Washington Supreme Court). 

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.

Policyholder Counsel Should Welcome Changes to Proposed Revisions to FRCPs - But Still Push For Rejection

The Advisory Committee on Civil Rules recommends changes to the Federal Rules of Civil Procedure to the federal Judicial Conference.  For several years that body has been debating proposals to curb perceived discovery abuses (particularly in the area of e-discovery sanctions) and to bring down the cost of discovery in civil litigation overall.  On the discovery side, initial drafts of the proposed amendments included changes to the presumptive number of interrogatories, requests for admission, number of depositions, and the length of depositions.

As reported in various places incuding the K&L Gates' e-discovery blog the committee, which is having a final meeting on these rules here in Portland starting tomorrow, has largely dropped these proposals following significant opposition from many quarters including comments by law professors and various segments of the bar.  However, the committee is still promoting a dramatic change to Rule 26's foundational rule on the scope of discovery which would put the burden on the requesting party to justify discovery requests as being "proportional" to the case.  As articulated in comments  by policyholder counsel, this change will disadvantage businesses (and individuals) in litigation with insurance companies, where it is usually the "little guy" (the policyholder) who is trying to penetrate layer upon layer of insurance company bureaucracy to find the truth.  This often requires multiple rounds of discovery requests, multiple depositions and a lot of other types of digging.

So while it is good news that the committee has withdrawn the changes on discovery tools, the overall proposed change to Rule 26 is still cause for concern.  Unfortunately, opportunities for public input are limited after this point - the issue may become fodder for an unusual public fight in the Congress over the federal rules.

Twenty Questions to Ask Coverage Counsel In Business Litigation

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

Oregon Federal Court Rules on Characterization of Environmental Cleanup Costs

Last week Magistrate Judge Stewart issued an order on the thorny issue of how to characterize some of the costs associated with a complex environmental cleanup.  Are they indemnity costs that deplete the insured's insurance policies, or are they defense costs, which do not?  The decision resolves yet more issues in the Siltronic litigation between Siltronic, a major player at the Portland Harbor Superfund Site, its primary layer carriers (principally Wausau), and excess carrier AIG.  Siltronic has had to perform some cleanup-type work and extensive studies and monitoring at its facilities, well in advance of any cleanup of the contaminated sediment in the Willamette River that is the focus of the site.

Under the Oregon Environmental Cleanup Assistance Act's 2003 amendments certain investigatory costs are presumptively deemed "defense" costs, whereas some types of remedial costs are presumptively deemed "indemnity" costs.  But environmental sites are notoriously complex and what seems like remediation to some can look like further investigation to others.  In Siltronic the company and its primary-layer carriers reached an agreement on an allocation of the costs in such a way that the primary policy was exhausted, meaning that the excess carrier (AIG) would be on the hook.  AIG challenged the allocation, arguing that the primary carrier had designated many costs as indemnity that should have been defense.

Judge Stewart's decision is quite nuanced and deserves a close read.  Overall, her approach was to go behind the labels applied by the agencies, vendors, or attorneys to look at what was actually going on when a particular cost was incurred and its purpose, to see whether the statutory presumptions had been overcome (or whether they applied at all).  This decision is something of a harbinger for what will likely be significant disputes between policyholders, their primary carriers, and excess carriers when the "big" remediation at the Portland Harbor begins in earnest.