Oregon Environmental Coverage Mediation Program Launched

In 2013 the Oregon Legislature passed SB 814, which amends the Oregon Environmental Cleanup Assistance Act, a unique law regulating environmental coverage disputes.  Part of SB 814 required the State to set up a mediation program for such claims (and made a carrier's refusal to participate in mediation a prohibited claims practice).  That mediation program is now "live."  Here is the announcement from the State's ADR coordinator.

Mediation Case Manager (MCM) has been selected to manage the Environmental Claims Mediation Program established by SB 814 (2013.)  Under the terms of their contract, MCM begins offering environmental claims mediation services today, November 19, 2014.   MCM has established a program website that includes an initial list of qualified mediators and links to case initiation forms. That website is:  https://ecmp.mediationcasemanager.com/Site/index.html.     Additional program information, including the program rules effective October 31, 2014 , are available on the Department of Justice website at: http://www.doj.state.or.us/adr/pages/environmental_claims.aspx.  

We were honored to participate in drafting the regulations that set up this program and in helping select the vendor to administer this program, and are very pleased to see it up and running!

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.

Ninth Circuit Asks Alaska Supreme Court Whether Recoupment Available to Insurers

Recoupment is the term most often used to describe the effort by an insurer to get back, from the insured, defense costs paid out where the claim was ultimately not covered.  Some kinds of policies -- principally professional liability and D&O policies -- have policy provisions specifically providing insurers this right.  (And, incredibly, some carriers without such provisions in their policies attempt to assert this right in their reservation of rights letters!)  Recoupment is controversial because if the right is asserted, it is a sword of Damocles hanging over the head of the insured as the underlying litigation progresses, and has in some cases impacted the resolution of an underlying case.

Alaska, by statute, requires insurers to pay for independent counsel where the defense is being conducted under a reservation of rights.  It contains no provision allowing recoupment, but that leaves open the question of whether an insurer may do so if the parties have agreed to recoupment by contract.  The Ninth Circuit, in Attorneys Liability Protection Society v. Ingaldson Fitzgerald, P.C.,, has now asked the Alaska Supreme Court to answer that question, which will no doubt involve not just the intent behind the statute, but also Alaska common law, which provided the genesis for the "independent counsel" requirement in the first place.  See CHI of Alaska, Inc. v. Emp'rs Reinsurance Corp., 844 P.2d 1113 (Alaska 1993).  This is an increasingly important issue for all kinds of policyholders, as the increasing costs of defending almost any sort of claim have increased the incentives for carriers to exercise their recoupment rights.

Montana Decision Has Lessons for Drafting Indemnity Provisions

A new decision from the District of Montana, WBI Energy Transmission v. Colony Insurance, illustrates the dangers of a vaguely-worded additional insured requirement in a contract.  In WBI a pipeline worker employed by a mid-tier contractor, "Pro Pipe" was injured; after collecting from worker's comp, he sued both the owner (WBI) and the sub-contractor.  The owner tendered to Pro Pipe's carriers as an additional insured ("AI") on Pro Pipe's general liability policies, which contained a blanket AI endorsement (in other words, the endorsement provided AI coverage to the extent required in any contract that Pro Pipe entered into).  The liability carriers contended that WBI was not an additional insured because the underlying contract was ambiguous about whether Pro Pipe was required to add WBI as an AI.  The contract stated that Pro Pipe was obligated to "maintain . . . minimum insurance coverage[] . . . to protect [WBI] against liability in connection with Pro Pipe's work." (emphasis added).  

The District Court held that that language -- in combination with the fact that Pro Pipe believed it was required to provide AI coverage, and had given WBI a certificate to that effect -- was not ambiguous, and that WBI was an additional insured.  The court's decision is cleanly-reasoned and worth reviewing.  But the larger lesson is that such problems can be avoided by careful contract drafting and occasionally having a lawyer experienced in insurance issues review form contracts and insurance requirements to make sure that the language matches the expectations in then event that something goes wrong.

Wash. Federal Court Broadly Applies "Ongoing Ops" Exclusions

In a decision from mid-summer, Judge Rice of the Eastern District of Washington – a relatively new judge in a jurisdiction without a lot of coverage decisions – broadly applied what are known as the “ongoing operations” or “business risks” exclusions, completely voiding the damaged party’s recovery, demonstrating the devastating impact that subtle coverage issues can have, and emphasizing that pro-insured Washington isn’t always so friendly to creative coverage arguments. 

In Western Heritage Ins. Co v. Cannon, a general contract failed to compact fill soils before laying the foundation on a large custom home, resulting in structural failure of the building – signs of which were observed during the construction – and the home eventually being condemned.  The contractor stipulated to  covenant judgment, and the homeowner and carrier filed cross-motions for summary judgment in the ensuing coverage suit. 

The insurance carrier argued among other things that coverage was barred by the “j(5)” and “j(6)” exclusions, which in simple terms exclude from coverage property damage to “that particular part” of the property on which the insured was working if the damage occurred during ongoing operations (as opposed to a latent defect that causes damage after the project is complete).  The homeowner argued that the “particular part” was the fill that the contract failed to compact, which the property damage was to the foundation, and other parts of the structure.

The court didn't buy the owners’ argument.  The court noted that Washington courts have broadly interpreted the j(5)/j(6) exclusions, and rejected a comparable Arizona case adopting a narrow interpretation in similar loose-fill situation.  Judge Rice held, in essence, that the general contractor was working on the fill, and the house, at the time of the property damage, making all of the project “that particular part.” 

In most situations like this one there would be some property damage after completion of the project, and the contractor would have purchased what is known as “Products-Completed Operations Hazard” coverage.  But here the contractor appears not to have purchased that coverage.  So the court held that the owners were completely out of luck.  This is an excellent object lesson that Washington law is not always favorable to the insured, and that any owner contemplating a stipulated judgment arrangement needs to evaluate the considerable risks that they may come up empty-handed.

Ore. Fed. Ct. Considers Meaning of "Occurrence" for Developer Liability

In a decision handed down earlier this week in litigation between a primary-layer carrier and an umbrella carrier an Oregon federal court held that when a plaintiff brings a claim against a developer for negligence, the term "occurrence" in the developer's policies means the negligent development, globally: in other words, the developer's negligent work is one occurrence, despite the fact that the property damage may take multiple forms.

The case involves a high-rise condominium in Portland's South Waterfront district.  The condo association sued the developer (not the general contractor) over water damage arising from construction deficiencies that led to water problems in the garage, and elsewhere.  The primary layer policy (from American Contractors Insurance Group or "ACIG") had a $2 million per occurrence limit and a $4 million products-completed-operations aggregate limit.  AIG, the umbrella carrier, insured over the same limits (called the "retained limit").  However, the Court noted that the AIG policy had its own definition of "occurrence" and provided coverage independently of the primary layer policy subject only to the retained limit - it was true "umbrella" coverage, not excess coverage.

Both the primary layer carrier and AIG contributed to a settlement.  But AIG contended that the primary layer carrier should have been required to pay its $4 million aggregate before its policy was triggered, and so sued to gets its contribution to the settlement back.

The Court disagreed.  The Court rejected AIG's effort to rely on case law interpretations of "occurrence" and instead examined the AIG policy's definition of "occurrence" on its own terms.  The AIG  provision included some standard language about an occurrence including multiple exposures to the same "conditions."  The Court found that the "condition" implicated by the condo association's allegations, read strictly, was the negligent development overall of the project - not particular construction practices by the general contractor.  The Court found it significant, in this regard, that the condo association had not brought the general contractor into the suit.  The Court determined that there was therefore only one "occurrence" for purposes of the AIG policy's retained limit condition.

Overall, this decision re-emphasizes for insurance professionals the importance of examining policy language on its own, without relying on court decisions that may or may not be applicable, and also carefully examining what is actually alleged in the underlying litigation rather than assuming things based on what is usually alleged in construction defect litigation.