WA Fed Court: "Spin, Massage, Speculation and Sophistry" Do Not Create Duty to Defend

In Wargacki v. Western National Assurance Co. Judge Leighton of the Western District of Washington held that a homeowner's carrier had no duty to defend a civil suit where the insured shot his pregnant girlfriend, and then shot himself - despite the allegation in the complaint that the boyfriend acted "either negligently, intentionally or recklessly" and that the shooting was "at least negligent."

The court held that the allegation that the shooting was negligent and thus not barred by the intentional acts exclusion was not plausible, and characterized the girlfriend's estate's argument as "spin, massage, speculation or sophistry."  Although this decision appears rooted in common sense, it appears to be inconsistent with Washington law on the burden of proof in the duty-to-defend situation.  The court took the plaintiff to task for failing to allege any facts that would have supported the shooting being negligent, rather than intentional.  But that was not the plaintiff's burden.  Under Washington law, as under the law in most states, the duty to defend is based only on what is pled in the complaint.  If the complaint itself is compliant with court rules on factual pleading, it is simply not up to the judge in a coverage case to fault the plaintiff for not pleading more.  If the complaint could allow the presentation of evidence to support a covered loss (such as proof that the shooting was negligent), then there should be a duty to defend.

That is not to say that the decision was necessarily incorrect.  The plaintiff's complaint alleged not only negligence but also in the same claim the tort of outrage, which (according to the judge) requires intent.  If the decision had relied on that pleading, then the decision might be easier to reconcile with Washington law.  However, the decision only cites that fact as further evidence that there was no duty to defend.

This decision highlights the importance of careful analysis of coverage issues before embarking on any kind of litigation and when crafting an opening pleading, but also the importance of the burden of proof in coverage disputes.  It is not "sophistry" or "spin" to plead in the alternative where the facts are reasonably in dispute and as a result different legal theories may be implicated.  Forensic science and life experience teach us that our gut-level beliefs about such things as motive and causation are often incorrect.  Courts should recognize that and approach duty-to-defend questions accordingly.

Ore. Appeals Court Important Holding on Construction Indemnity Agreements

Just as the ball began to fall in New York to herald the New Year Oregon's Court of Appeals issued an important ruling on contractual indemnity agreements in construction contracts.  The decision isn't directly on insurance coverage, but is important because of the overlap between additional insured issues, contractual indemnity, and Oregon's "anti-indemnity" statute (ORS 30.140).  The progress of the case, Sunset Presbyterian Church v. Andersen Construction, has been closely watched because the trial court issued a written decision, one of the few on this subject.

Here is a bit of background: a  new addition to the church suffered from many problems, involving the work of several subcontractors (including one called "B&B"), as well as the general contractor, Andersen.  Andersen's form subcontract included a broad indemnity provision requiring all subcontractors to defend Andersen if suit was brought on the project.  Therefore, Andersen tendered the suit to its subcontractors.  B&B refused the tender.  Andersen settled with the owner, and assigned to the owner its claims against B&B for breach of the duty to defend.  The owner moved for summary judgment on the duty to defend, and prevailed.  However, the trial court awarded the church (as Andersen's assignee) no damages, because the church could not prove how much time Andersen's lawyers had spent dealing with the claims involving B&B's alleged negligence, as opposed to its own negligence or the negligence of other subcontractors.  The trial court relied on Oregon's anti-indemnity statute (ORS 30.140) -- which only applies to construction contracts -- as the basis for putting the burden on the church /Andersen to allocate the defense costs.  (I analyzed the trial court's ruling in more detail in an article for the June 2013 newsletter of the OSB Construction Law Section, available here,)

The church appealed, arguing that the statute did not require that kind of allocation for various reasons, including that the standard applied in the insurance "duty to defend" context should apply to the duty to defend in a contractual indemnity provision.  As a matter of insurance law, an insurer has a duty to defend all claims -- even claims that are not potentially covered -- if any one claim in a suit triggers the duty to defend.  The insurer may not allocate its defense costs based on covered versus uncovered claims.  The Court of Appeals rejected that argument as to ORS 30.140 (and all of the church's other arguments) based on the court's analysis of the legislative history.  However, the Court of Appeals did not reach many of the practical issues presented by the case, finding them moot because of the church's failure to even try to meet the burden of proof articulated by the trial court.  (See the Construction Law Section newsletter article mentioned above for an explanation of those issues).  The case was sent back to the trial court for additional proceedings including (potentially) an award to B&B of its attorney fees, since the Court of Appeals reversed the trial court as to who was the prevailing party.

The general take away is this: if a general contractor (or the GC's insurer) wants to recover its defense costs from a subcontractor that refuses to pick up the defense, it must require its law firm to write time descriptions in such a way that a court can later determine how much time was spent on the negligence of each subcontractor.  Of interest to readers of this blog, that requirement will likely lead to all kinds of issues between GC's and their insurers about management of the defense, and also may complicate additional insured claims on subcontractors, involving coverage counsel for the subcontractors.  Happy New Year!

Oregon Trial Court Adopts "All-Sums" In Environmental Coverage Case

A great win last month for the Zidell real-estate group (owner of much land in the South Waterfront area of Portland, including a historic ship-repair yard) in the longest-running environmental contamination case in Oregon history: a Multnomah County judge held that Zidell's carriers must pay for environmental remediation based on the "all sums" approach.  (Click here for Zidell's reply brief in support of its motion for summary judgment, and here for the court's order granting Zidell's motion).

The case centers around costs that Zidell paid many, many years ago to clean up contamination portions of the Willamette River in downtown Portland upriver from the Portland Harbor Superfund Site.  The dispute, which is between Zidell (or really its "ZRZ Realty" entity) and numerous carriers including various Lloyd's syndicates, is back in the trial court after its umpteenth trip into the appeals courts.  Recently, the court was asked to decide (among other things) whether the insurance carriers could limit their indemnity obligations based on the so-called "time on the risk" approach, where each carrier only pays in proportion to the number of years that it issued policies to the insured, meaning that if the insured settled with other carriers, or was uninsured for any years, there could be large portions of the costs that are not reimbursed.  The alternative is the "all sums" approach, in which the carrier is liable to pay for all of the property damage if there was property damage during any of its policy years, up the limit of its policies.

The Oregon Environmental Cleanup Assistance Act (OECAA) specifically wrote the "all sums" approach into law for certain policies, and, separately, there is Oregon case law endorsing the "all sums" approach.  Zidell's carriers, however, argued that the OECAA's provisions could not apply to them, and that the "all sums" approach is unfair.  The arguments on both sides are complex and detailed.  Fortunately, the Multnomah County Circuit Court saw the light and rejected the carrier-side arguments, holding that the indemnity obligations will be resolved based on "all sums."  This appears to be the first of hopefully many trial-court decisions adopting the "all-sums" approach in connection with indemnification for environmental liabilities in Oregon.  As the date for issuance of the ROD in the Portland Harbor comes nearer (although several years away), decisions like this one (which will hopefully be affirmed on appeal) will help shape the resolution of hundreds of coverage disputes over paying the billion-plus tab to clean up the downstream portions of the Willamette.

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.