Bad Faith in Oregon? The Oregon Court of Appeals Cracks Open the Door…

Oregon has for years been well known as a jurisdiction that generally does not recognize “bad faith” claims against insurers. This is because the Oregon courts have long suggested that such a tort claim by an insured generally exists only where the insurer has a “special relationship” with its insured, beyond the mere existence of an insurance policy. Such a relationship arises, for example, where the insurer agrees to defend its insured in a lawsuit brought by a third party. Unless that special relationship exists between the insured and insurer, the Oregon courts historically have limited an insured’s remedies against its insurer to contractual remedies.

Until now. In what appears to be a dramatic expansion of insurance coverage bad faith law in Oregon, the Oregon Court of Appeals held that an insurer’s alleged violation of Oregon claim handling regulations set forth in ORS 746.230(1) can provide the basis for a negligence per se claim against the insurer. Moody v. Oregon Community Credit Union and Federal Insurance Company, 317 Or. App. 233, ___ P.3d ___ (January 26, 2022). Resolving an issue of first impression in the policyholder’s favor, the Court concluded that the insurer’s breach of those regulations opened the door to tort damages, including the insured’s emotional distress damages caused by the insurer’s conduct.

The Moody case arose out of a claim for accidental death and a $3,000 life insurance policy. The insurer concluded there was no coverage and the insured sued, alleging breach of contract and negligence per se, the elements of which are that (1) defendant violated a statute; (2) plaintiff was injured as a result of the violation; (3) plaintiff was a member of the class of persons meant to be protected by the statute; and (4) the injury plaintiff suffered is of a type that the statute was enacted to prevent. At some point the insurer conceded coverage and paid the $3,000 policy limits.

The insurer moved to dismiss the negligence per se claim and the claim for emotional distress damages, arguing that well-established Oregon common law does not permit a policyholder to assert a negligence claim for what is essentially a breach of contract.

The insured opposed the motion, arguing that the insurer’s failure to conduct a reasonable investigation and settle the claim violated Oregon’s claim handling statute, thus providing the foundation for a negligence per se claim. That statute, ORS 746.230, prohibits the following actions by insurers during the claim handling process:

  1. Misrepresenting facts or policy provisions in settling claims;
  2. Failing to acknowledge and act promptly upon communications relating to claims;
  3. Failing to adopt and implement reasonable standards for the prompt investigation of claims;
  4. Refusing to pay claims without conducting a reasonable investigation based on all available information;
  5. Failing to affirm or deny coverage of claims within a reasonable time after completed proof of loss statements have been submitted;
  6. Not attempting, in good faith, to promptly and equitably settle claims in which liability has become reasonably clear;
  7. Compelling claimants to initiate litigation to recover amounts due by offering substantially less than amounts ultimately recovered in actions brought by such claimants;
  8. Attempting to settle claims for less than the amount to which a reasonable person would believe a reasonable person was entitled after referring to written or printed advertising material accompanying or made part of an application;
  9. Attempting to settle claims on the basis of an application altered without notice to or consent of the applicant;
  10. Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made;
  11. Delaying investigation or payment of claims by requiring a claimant or the claimant’s physician, naturopathic physician, physician assistant or nurse practitioner to submit a preliminary claim report and then requiring subsequent submission of loss forms when both require essentially the same information;
  12. Failing to promptly settle claims under one coverage of a policy where liability has become reasonably clear in order to influence settlements under other coverages of the policy;
  13. Failing to promptly provide the proper explanation of the basis relied on in the insurance policy in relation to the facts or applicable law for the denial of a claim…

ORS 746.230(1).

The trial court agreed with the insurer and dismissed the claims regarding negligence per se and emotional distress.

The Court of Appeals reversed, however, thereby opening the door to first-party and third-party “bad faith” claims against insurers in Oregon, even though the Court did not utter the words “bad faith”. Such claims would appear to now be permissible if an insurer violates any of the above claim handling provisions.

In reaching its conclusion the Court first held that an insurer’s violation of Oregon’s claim handling statute could support a claim for negligence per se. Because the plaintiff alleged violations of ORS 746.230(1)(d) and (f), and also alleged the applicability of the other negligence per se elements, the Court held that plaintiff was entitled to proceed against the insurer on her negligence theory.

In its analysis the Court of Appeals expended much effort in attempting to distinguish Oregon case law that, up until that point, had been relied upon by insurers to reject related claims by policyholders. See Abraham v. T. Henry Construction, 230 Or. App. 564, 217 P.3d 212 (2009), aff’d on other grounds, 350 Or. 29, 249 P.3d 534 (2011); Georgetown Realty v. The Home Insurance Co., 313 Or. 97, 831 P.2d 7 (1992); Farris v. U.S. Fidelity, 284 Or. 453, 587 P.2d 1015 (1978). Farris in particular has been cited by insurers in Oregon for years to keep bad faith claims at bay, but the Moody court concluded that the insurers read Farris too narrowly and that Farris did not foreclose the relief sought by the insured.

In addition to holding that the insured’s negligence claim could proceed, the Court of Appeals also held that plaintiff could seek emotional distress damages arising from the statutory violations, another theory that had previously appeared to have been rejected by the Oregon courts.

Given the break with longstanding precedent that appeared to foreclose such causes of action and damages, it seems likely that this case is heading to the Oregon Supreme Court, which will have the last word on this subject.

Why Insurers and Their Attorneys Need to Pay Close Attention to Their Discovery Burden in Washington

As previously reported in this blog, Washington case law generally affords insureds a broad right to the discovery of claim file materials, including information that should be protected from disclosure by attorney/client privilege or the work product doctrine. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P. 3d 239 (2013). The discovery pitfalls created by Cedell were on full display in a recent Western District of Washington decision that granted an insured’s motion to compel production of work product and attorney/client communications from an insurer’s claims file. Westridge Townhomes Owners Ass’n v. Great American Assur. Co., 2018 U.S. Dist. LEXIS 27960 (W.D. Wash. February 21, 2018)

The background facts are somewhat unclear, but it appears that the insured in this case made a claim for coverage under two insurance policies and there was an allegedly inadequate response from the insurers. The insured sued its insurers for coverage in 2016 before the insurers issued a declination of coverage letter. The two insurers retained the same attorney to represent them, and that attorney subsequently wrote a declination letter on behalf of the insurers, which was sent to the insured on April 12, 2017. The insured ultimately sought production of the entire claim file, which had not been split between the claim investigation and the coverage litigation. The insurers argued, among other things, that the insured was not entitled to anything after the litigation commenced in 2016 on work product grounds, and certainly was not entitled to communications with their attorney.

In ruling on the insured’s motion to compel, the Court concluded that the insurers failed to satisfy their burden of showing that communications with their attorney up to the date of the declination letter were protected, even though the parties were in litigation, because the Court was convinced that their attorney acted as an investigator and evaluator of the claim while the litigation was proceeding. The Court stated that “nothing in Cedell limits the discoverability presumption to pre-litigation evidence…” Furthermore, the insurers failed to show that their communications with their attorney took place because of litigation as opposed to being created in the normal scope of their insurance business. The Court ordered production of all attorney/client communication and work product up to the date the declination letter was sent, ruling that “documents containing [the insurers’ attorney’s] mental impressions regarding the insurers’ quasi-fiduciary duties to the insured, including his liability assessments and coverage advice, are subject to production.”

The Court did not do an in camera review of the documents at issue, as requested by the insurers and authorized by Cedell, writing that the insurers had failed to meet their threshold burden to justify such a review. In this regard, the Court was critical of the insurers’ privilege logs and conclusory explanations in the briefing of why the documents should be protected. “The Court finds that it is insufficient for the parties to rely on a request for in camera review to avoid their responsibility to explain why such documents should be withheld.”

Additionally, one of the insurers moved that if it had to produce such information, the plaintiff should be compelled to produce the same. The Court denied that motion, noting that an insured does not owe a quasi-fiduciary duty to its insurer and that Cedell is not a two-way street.

This ruling should serve as an important reminder to insurers and their counsel about the dangers of discovery in Washington following Cedell. For insurers to chip away at the scope of Cedell, they must take their discovery obligations seriously and lodge specific, well-supported objections in order to protect certain categories of privileged information. Insurers must not only be aware of Cedell, but also be aware that they will often have the burden of convincing the Court that an attorney/client communication or work product document should be protected from discovery. Specifically, insurers should be prepared to argue that the privileged information was not related to the evaluation of the claim, but rather for the specific purpose of rendering legal advice.

What is certainly clear is that an insurer cannot make a blanket assertion that documents are protected and expect the Court to review the documents in camera, which appears to have happened in this case. An insurer should instead be prepared to address each document individually and explain why it is not related to the evaluation of the insured’s claim. Finally, when a claim has been pending and litigation is commenced, the file should always be split so that a new litigation file is created and claim evaluation materials are kept separate from litigation materials.

Texas Supreme Court Interprets “Insured vs. Insured” Exclusion in Insurer’s Favor

The Texas Supreme Court recently reversed a divided Texas appellate court in resolving a dispute over the meaning of an “insured vs. insured” exclusion in a Directors and Officers policy issued by Great American Insurance Company. Great American Insurance Co. v. Primo, 60 Tex. Sup. J. 489 (2017).

The issue was whether an assignee of the insured’s rights under the policy “succeeded to the interest” of the insured for the purposes of triggering the exclusion. The Texas Supreme Court ultimately ruled in favor of Great American, holding that the insured vs. insured exclusion was applicable and that Great American was not required to pay another insured’s defense costs.

The case arose when Named Insured Briar Green, a condominium association, discovered what it believed to be financial improprieties on the part of former Briar Green director and treasurer, Robert Primo. Briar Green claimed Primo misappropriated funds, and it submitted a claim for the loss to its fidelity insurer, Travelers. Travelers paid the claim in exchange for an assignment of Briar Green’s rights and claims against Primo.

Travelers then sued Primo and a litigation explosion ensued. The opinion is somewhat unclear factually, but it appears that Primo may have ultimately been vindicated vis-à-vis the allegation of misappropriation of funds.

Primo, a former director and therefore an insured under the Great American policy, sought defense costs from Great American in the Travelers lawsuit. Because Travelers succeeded to Briar Green’s interest in the lawsuit, Great American denied coverage under the insured vs. insured exclusion, which excluded coverage for claims made by an insured against an insured and those made “by, or for the benefit of, or at the behest of [Briar Green] or . . . any person or entity which succeeds to the interest of [Briar Green].”

Primo sued Great American for breach of contract and bad faith, among other things. The trial court granted summary judgment to Great American, but the appellate court concluded an entity that “succeeds to the interest” of another in the insurance context was equivalent to being a “successor in interest” in the construction context, where a successor in interest is one who inherits the assignor’s liabilities as well as its rights. The court therefore held that the exclusion was inapplicable and that Great American must pay Primo’s defense costs.

The dissenting judge, Judge McCally, pointed out that equating “successor in interest” with an entity that “succeeds to the interest” re-writes the exclusion and narrows it considerably. She also noted that one of the purposes of the insured vs. insured exclusion is to prevent collusive lawsuits by insureds, and that if all an insured had to do to avoid the exclusion was to assign its rights under the policy to a third party, collusive lawsuits would actually be encouraged.

The Texas Supreme Court agreed with Judge McCally and reversed the appellate court. Utilizing the plain meaning rule of insurance policy interpretation, it refused to insert language into the policy that was not there and held that Travelers succeeded to Briar Green’s interest in the lawsuit, making the exclusion applicable.

It also analyzed the context surrounding the purpose of the exclusion, which is generally understood to be intended to preclude coverage for lawsuits between directors, officers, and the companies they serve. As happened in this case, such lawsuits can often become highly emotional and expensive, which is why the intent is usually to exclude them from coverage. The Court also agreed that the appellate court’s decision would have the effect of encouraging collusive lawsuits instead of discouraging them. Accordingly, Great American had no duty to pay for Primo’s defense costs based upon the insured v. insured exclusion.


On February 2, 2016, the Washington Supreme Court provided some much needed guidance on what actions by an insurer will support a claim under Washington’s Insurance Fair Conduct Act (“the IFCA”). Perez-Crisantos v. State Farm Casualty Co., ___ P.3d ___ (No. 92267-5, Feb. 2, 2017). Although the IFCA was enacted in 2007 and is generally focused on preventing unreasonable conduct by insurers, the federal district courts in Washington have disagreed on what a plaintiff must show to maintain a cause of action. See Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. Feb. 24, 2015); Cardenas, et al. v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. 2011).  The Washington Supreme Court has not spoken on the issue until now.

Unlike a Washington common law bad faith action, the IFCA allows attorney fees and treble damages for a violation, one of the few instances in Washington where punitive damages are permitted. Unfortunately the language of the primary statute of the IFCA, RCW 48.30.015, is less than clear and has been kindly referred to as “vexing” by a judge in the Eastern District of Washington. Workland & Witherspoon v. Evanston Ins. Co., 141 F. Supp. 3d 1148, 1155 (E.D. Wash 2015).

The dispute centers on whether a violation of certain state insurance regulations, such as where an insurer does not respond to certain communications within 10 days, is enough to support an IFCA cause of action, or whether an insurer must unreasonably deny a claim for coverage or payment of benefits for an IFCA cause of action to exist. In a somewhat rare victory for insurers in the Washington appellate courts, the Washington Supreme Court sided with the insurer and held that there must actually be an actual denial of coverage for the insured to move forward with an IFCA lawsuit.

The case involved an underinsured motorist claim where State Farm paid PIP benefits but balked at paying the additional amounts the plaintiff demanded; an arbitrator subsequently ruled in favor of the plaintiff. The trial court dismissed plaintiff’s IFCA lawsuit on summary judgment and the Washington Supreme Court accepted direct review.

In ruling in State Farm’s favor, the court held that RCW 48.30.015 is ambiguous and therefore turned to its legislative history, including the ballot title that was put before Washington’s voters in 2007. The court concluded that the IFCA was meant to apply to denials of coverage as opposed to violations of the insurance regulations. In doing so it rejected the position of the Washington Pattern Jury Instruction committee, which had developed a jury instruction that contemplated the situation where the IFCA cause of action was based only upon a violation of the insurance regulations.

After Perez-Crisantos, it is now clear that violations of the Washington insurance regulations are relevant to an insured’s claimed damages under the IFCA, but such alleged violations by themselves are insufficient to pursue an IFCA cause of action. For such a cause of action to exist, the insured must show an actual denial of coverage.

Oregon Supreme Court Bars Plaintiff From Executing on Covenant Judgment Against the Defendant’s Insurer

The Oregon Supreme Court recently answered a question certified to it by the Ninth Circuit Court of Appeals, which asked whether a settlement agreement that released an insured from liability could be amended to revive the liability of the insured so that the plaintiff could seek recovery from the insurer. The Oregon Supreme Court concluded that, based upon the theory presented by the plaintiff, the settlement agreement could not be amended. A&T Siding v. Capitol Specialty Insurance Corp., ___ Or. ___ (Oct. 8, 2015)

The case arose out of a lawsuit by the Brownstone Homes Condominium Association related to construction defects in the condominium complex, which Brownstone alleged were caused in part by A&T Siding. Capitol Specialty and Zurich insured A&T for the relevant time period. Capitol initially defended A&T, but withdrew its defense when it concluded that the damage alleged by Brownstone was not covered.

Brownstone later settled with A&T via a “covenant judgment.” Under the agreement, judgment would be entered against A&T for $2 million and Zurich would pay $900,000 of that judgment. A&T agreed to assign its rights against Capitol to Brownstone, and Brownstone covenanted not to execute the judgment against A&T or its assets. Instead they agreed that Brownstone would be entitled to seek recovery of the unexecuted portion of the judgment from Capitol. The parties also agreed to release each other from “all past, present and future claims” arising out of the dispute.

Brownstone then began garnishment proceedings against Capitol for the unpaid portion of the judgment. Capitol moved for summary judgment, arguing that because the settlement agreement released A&T from all liability, Capitol was likewise released from liability. The trial court agreed and entered judgment in Capitol’s favor. The court relied in part upon its decision in Stubblefield v. St. Paul Fire & Marine, 517 P.2d 262 (1973), which also involved a covenant judgment. The settlement agreement in Stubblefield excused the insured from any obligation to pay the judgment, and the insurance policy limited the insured’s coverage to sums the insured was “legally obligated” to pay. The court therefore held the underlying plaintiff had acquired no enforceable claims or rights against the insurer under the assignment.

Following the entry of judgment, Brownstone and A&T executed an “addendum” to their settlement agreement. Among other things, the addendum eliminated the original assignment to Brownstone of A&T’s claims and required A&T to pursue those claims itself under Brownstone’s direction and at Brownstone’s expense. The addendum also replaced the original unconditional release of all parties with a release only of Zurich.

A&T then sued Capitol and the case eventually found its way to the Ninth Circuit, which certified the following question to the Oregon Supreme Court:

The parties’ original settlement agreement, under which [Brownstone] released A&T from liability and signed a covenant not to execute the stipulated judgment against A&T, was construed pursuant to Stubblefield * * * to also release A&T’s insurer, [Capitol] from liability. The parties to the agreement assert that such a construction is contrary to the parties’ intent. Under Oregon law, may the parties amend their settlement agreement to reflect their original intent, and thereby restore the insurer’s duty to provide coverage for A&T’s resulting liability to the extent its policy provides coverage for the loss alleged by Brownstone?

The Oregon Supreme Court accepted the certified question. Capitol argued that Brownstone originally released A&T from any liability and that the addendum they created could not undo that release in the absence of the trial court rescinding or reforming the settlement agreement. A&T argued that it and Brownstone did not intend for the language in the original settlement agreement to have the legal effect the trial court gave it. It further argued that the parties reformed the original settlement agreement when they created the addendum, even though they did not call on the equitable authority of a court to reform the agreement. A&T therefore argued that the addendum should relate back to the original settlement agreement.

The Oregon Supreme Court rejected A&T’s argument. It did not reach the question of whether A&T and Brownstone could privately reform the contract without court approval. Instead it concluded among other things that A&T and Brownstone were not entitled to the equitable remedy of reformation based on A&T’s “mistake of law” argument that the language in the original agreement had unintended consequences. Accordingly, the insured and plaintiff could not reform the original settlement agreement.

The court left open the possibility that other legal or equitable theories not argued by the parties might justify treating the addendum as relating back to the original settlement agreement, though it did not explain what those theories might be. It is clear, however, that Stubblefield remains the law in Oregon. Insurers faced with a settlement agreement and covenant judgment in Oregon should always examine the settlement documents carefully to determine whether the agreement releases the insured from all liability. In such a case the insurer may have a strong argument that it is not obligated to fund the settlement.

Federal District Court Rejects Insureds’ $40 Million Bad Faith Claim

In Kollman v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 1:04-cv-3106-PA, Judge Owen Panner of the United States District Court for the District of Oregon recently ruled as a matter of law that even though National Union incorrectly denied coverage to its insureds, National Union did not act in bad faith in refusing to defend the underlying case. Therefore, the Court found that National Union was not liable for a $40 million judgment against the insureds.

The coverage litigation stemmed from a lawsuit filed in 2002 by Daryl Kollman against National Union’s insureds. The insureds tendered Kollman’s claims under an Executive and Organization Liability Policy. National Union denied coverage, relying primarily upon the “insured-versus-insured” exclusion, which excluded coverage for claims brought by an insured against another insured. Kollman was a former director of the insured’s subsidiary, and National Union stated that coverage for his claim was excluded. National Union declined to participate in the defense of the insureds and did not attempt to settle the matter within the $5 million policy limits.

The state court trial resulted in a $40 million judgment against the insureds. The insureds sued National Union, alleging they were entitled to coverage and that National Union acted in bad faith by unreasonably denying coverage and by failing to settle with Kollman for policy limits when it purportedly had the opportunity to do so. The insureds sought to hold National liable for the $40 million judgment, plus attorney fees and costs.

On summary judgment, the Court concluded that National Union had incorrectly denied coverage based on the policy’s insured-versus-insured exclusion, and it therefore had a duty to defend. However, the Court granted National Union’s Motion for Summary Judgment on the bad faith claims. Relying upon Georgetown Realty v. Home Ins. Co., 313 Or. 97, 831 P.2d 7 (1992), the Court ruled that Oregon law did not permit a bad faith failure-to-settle claim against an insurer that did not assume the duty to defend in the first instance. The Court also ruled that even though National Union was incorrect in its coverage determination with respect to the insured-versus-insured exclusion, its coverage decision was reasonable. The Court therefore dismissed all bad faith claims.