The Oregon Supreme Court Again Offers Expansive View of the Fee-Shifting Statute But Provides Clarity to Insurers on Minimizing Fee Awards

In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in an action against an insurer. While there have been several Court of Appeals cases addressing this statute in the UIM context, the Oregon Supreme Court last ruled on ORS 742.061 in 2012, holding that the statute is not limited to actions on policies issued in Oregon, but that it applies broadly, to “any policy of insurance of any kind or nature.” Morgan v. Amex Assurance Co., 287 P.3d 1038 (Or. 2012).

Under a similar analysis, consisting of an examination of the statute’s text and context, along with any useful legislative history, the Oregon Supreme Court addressed another aspect of ORS 742.061 in Long v. Farmers Ins. Co. of Oregon, 360 Or. 791 (2017).  Specifically, the Oregon Supreme Court addressed whether an insurer’s voluntary mid-litigation payments can eliminate the right to attorneys’ fees under the fee-shifting statute.

In Long, Plaintiff discovered a leak under her kitchen sink that caused extensive damage to her home. She filed a claim with Farmers, and on January 17, 2012, and Farmers voluntarily paid $3,300.45 to Plaintiff for the actual cash value of the loss. Around that time, Farmers also paid $2,169.22 to Plaintiff for mitigation expenses. However, the Plaintiff submitted a proof of loss that exceeded the sum that Farmers had paid. The parties had not resolved Plaintiff’s claims a year later, so she commenced a lawsuit against Farmers. After appraisal, Farmers made two additional voluntary payments to Plaintiff – one payment in the amount of $2,467.09 on July 11, 2013 and another payment in the amount of $4,766.80 on August 14, 2013 – for the actual cash value that the appraisers had assigned to certain of Plaintiff’s claimed losses and mitigation costs.

Six months later, in February 2014, shortly before trial, Plaintiff submitted proof of loss for the replacement cost of her losses. Three days later, Farmers voluntarily paid $4,214.18 to Plaintiff for the replacement cost of Plaintiff’s undisputed losses. Farmers subsequently prevailed at trial. Nonetheless, Plaintiff filed a petition for attorney fees under ORS 742.061.

Under ORS 742.061, an insurer must pay the insured’s attorney fees if, in the insured’s action against the insurer, the insured obtains a recovery that exceeds the amount of any tender made by the insurer within six months from the date that the insured first filed proof of a loss. In Long, the issue before the Court was the meaning of the word “recovery.” The insured argued that the word “recovery” means any kind of restoration of a loss, i.e. judgment, settlement, voluntary payment or some other means, after an action on an insurance policy has been filed. Accordingly, any post-complaint payments made by an insurer would support an insured’s claim for fees under the statute. On the other hand, Farmers argued that the word “recovery” means a money judgment in the action in which attorney fees are sought. Farmers argued that attorney fees may be awarded only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after proof of loss.

Because this dispute is a matter of statutory interpretation, the Oregon Supreme Court examined ORS 742.061’s text and context, as well as any useful legislative history. The Court noted that it has repeatedly instructed that the terms of ORS 742.061 and its predecessors should be interpreted in light of their function within the statute’s overall purpose, and if it heeded that instruction in this case, “it becomes evident that the term ’recovery‘ must be read to include mid-litigation payments such as the ones that Farmers made.”

The Oregon Supreme ultimately concluded that the fact that Plaintiff did not obtain a “judgment” memorializing Farmers’ mid-litigation payments did not make ORS 742.061 inapplicable. The Court further clarified that a “declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” Id. at 805.

Based upon that clarification, the Court held that Plaintiff was entitled to attorney fees for the work performed by her attorney up until the time that Farmers made voluntary payments to Plaintiff in July and August of 2013. This is because by then, Plaintiff had brought an action on her insurance policy and, by virtue of Farmers’ July and August payments, Plaintiff had “recovered” more in that action than Farmers had tendered in the first six months after proof of loss.

The Court continued, however, that Plaintiff was not entitled to her attorney fees that accrued after the July and August 2013 payments. First, the voluntary payments made by Farmers in February 2014 were payments for the replacement value of Plaintiff’s loss, for which Plaintiff filed her proof of loss. That proof of loss for replacement value triggered the six-month period for settlement of Plaintiff’s claim for the replacement value of her losses under ORS 742.061, and Farmers made payments for the replacement cost within the six-month period, as mandated by the statute.

Second, except for the two replacement cost payments that Farmers made in February 2014, Plaintiff did not recover, after August 2013, any amount over and above what Farmers had already paid. At trial, Plaintiff sought but was unsuccessful in obtaining any greater sum. Thus, because Plaintiff’s recovery after Farmers’ August 2013 payment did not exceed Farmers’ timely tender, Plaintiff was not entitled to attorney fees under ORS 742.061 for work performed by her attorney after that date.

This case demonstrates how important it is for insurance companies to keep track of when voluntary payments are made and the potential impact of those payments on their ability to minimize an insured’s entitlement to attorney’s fees under ORS 742.061.

Insurance Coverage for Wrongful Incarceration Cases in New Jersey

The third jurisdiction we address pertaining to wrongful incarceration coverage issues is New Jersey, which has three relevant cases. New Jersey courts have held that for purposes of determining the existence of insurance coverage under a general liability policy, in the absence of any applicable exclusion, the triggering event occurs on the date when the underlying criminal complaint is filed against the claimant. However, when determining coverage for a municipal insured’s obligation to indemnify its employee for fees incurred in defending against criminal charges, as required by specific statutes, the triggering event is not the filing of criminal charges against the employee, but rather the acquittal or dismissal of those charges against the employee.

The first of the malicious prosecution cases is Muller Fuel Oil Co. v. Ins. Co. of North America, 232 A.2d 168 (N.J. Super. Ct. App. Div. 1967), in which the insured, Muller Fuel Oil Company (“Muller”), unsuccessfully filed a criminal complaint against Thomas Policastro (“Policastro”) for issuing a worthless check. Policastro was arrested in November 1961 and indicted in May 1962.  In December 1962, Muller purchased a CGL policy from Insurance Company of North America (“INA”). Thereafter, in March 1963, Policastro was acquitted of the criminal charges and quickly filed a malicious prosecution and false arrest suit against Muller.

Muller sought coverage from INA, claiming that Policastro’s lawsuit against it did not fully ripen until his acquittal in March 1963, and thus constituted an “occurrence” during INA’s policy period of December 1, 1962 to December 1, 1965. INA, on the other hand, denied coverage for Muller’s claim, contending that the criminal complaint that was the basis for Policastro’s malicious prosecution suit was filed by Muller prior to inception of the INA policy. Muller then sought a declaratory judgment that coverage existed under the policy.

On appeal from a New Jersey Superior Court ruling dismissing Muller’s complaint against INA, the Appellate Division affirmed the decision, finding that “[i]n a claim based on malicious prosecution the damage begins to flow from the very commencement of the tortious conduct – the making of the criminal complaint.” According to the Appellate Division, the allegedly tortious conduct and injury to the accused as a result of the malicious prosecution (arrest on November 1961) antedated the issuance of the policy (December 1, 1962) by more than year. As a result, there was no coverage under the INA policy.

The second malicious prosecution case is Paterson Tallow Co. v. Royal Globe Ins. Co. 89 N.J. 24, 444 A.2d 579 (1981). In Paterson, the New Jersey Supreme Court affirmed the judgment of the lower court that insurer Royal Globe Insurance Company (“Royal Globe”) was not obligated to defend the insured, Paterson Tallow Company (“Paterson”), because the complaint that resulted in the malicious prosecution action against Paterson was filed before the effective date of Royal Globe’s policy.

In Paterson, Paterson filed criminal charges in June 1969 against a former employee, James Brown (“Brown”), for theft. In October 1970, while the criminal charges were pending, Paterson purchased a CGL policy that provided coverage for bodily injury, property damage, and personal injury, including coverage for malicious prosecution. In March 1971, Brown was acquitted of all charges against him. Brown filed suit against Paterson in January 1977 alleging malicious prosecution, and Paterson tendered the claim to Royal Globe seeking coverage. Royal Globe denied coverage for the claim, in part, because “all the acts that were alleged to constitute malicious prosecution took place before the policy was issued in 1970.” In a subsequent declaratory judgment action, Paterson and Royal filed cross motions for summary judgment and Paterson asserted that it was entitled to coverage for the action because a crucial component of the malicious prosecution offense, specifically, termination of the criminal charges against Brown, occurred during Royal Globe’s policy period.

The trial court found the appellate court’s ruling in Muller (discussed above) dispositive and granted summary judgment in favor of Royal Globe. On appeal, the New Jersey Supreme Court held that “for the purpose of determining the existence of coverage under this type of policy, in the absence of any qualifying exclusion or exception the offense of malicious prosecution occurs on the date when the underlying [criminal] complaint is filed. Inasmuch as the [criminal complaint] in this case was filed before the effective date of the policy, we affirm the judgment of the Appellate Division denying coverage.”

The third case is slightly different in that it addressed coverage for an insured’s obligation to indemnify its employee for fees and costs the employee incurred defending against criminal charges against him that were ultimately found to be meritless. In Board of Education v. Utica Mut. Ins. Co., 798 A.2d 605 (N.J. 2002), the New Jersey Supreme Court was tasked with deciding whether it was the filing of criminal charges against an employee of a board of education, or the acquittal of dismissal of those charges, that triggered coverage under an insurance policy issued to satisfy the board’s statutory obligation to indemnify such employee. The trial court found that the triggering event was the acquittal or dismissal while the appellate court reversed and decided that the triggering event was the filing of criminal charges. On appeal, the New Jersey Supreme Court held that the triggering event is the acquittal or other disposition of the criminal charges in favor of the employee of the board of education.

This case involved a teacher, David Ford (“Ford”), employed by the Borough of Florham Park Board of Education (“Board”), who was arrested and charged with sexual assault and reckless endangerment of four of his students in June 1996. In March 1999, a jury acquitted Ford of all charges. Soon after, he demanded that the Board reimburse him nearly $500,000 in legal fees and expenses for successfully defending the criminal action pursuant to various New Jersey statutes that “…obligate a board of education to defray all costs incurred by an … employee of the board in defending criminal charges filed against the person whose charges: … (2) resulted in a final disposition in favor of such person.” The statute also authorized a board to purchase insurance to cover all such damages, losses and expenses the board may be obligated to pay.

The Board sought coverage from Selective Insurance Company (“Selective”) and Utica Mutual Insurance Company (“Utica”) for its indemnity obligation to Ford. At the time of Ford’s arrest, the Board was insured by Selective under a policy that provided coverage from July 1, 1993 to July 1, 1996. By endorsement, the Selective policy provided that “this Coverage Part shall conform to the terms of the New Jersey compiled statutes” discussed above. Utica insured the Board from July 1, 1996 to July 1, 1999, and contained a nearly identical endorsement provision as the Selective policy, incorporating the pertinent New Jersey statutes. Utica denied coverage to the Board because its policy was not in effect when Ford was criminally charged in June 1996. Selective denied coverage for any legal expenses that were incurred after its policy expired on July 1, 1996, and reserved the right to deny all coverage. The Board filed a declaratory judgment action against Selective and Utica.

The trigger issue was appealed to the New Jersey Supreme Court. The Court noted that both the Selective and Utica policies incorporated by reference the statutory language, which specified that an employee’s right to reimbursement accrues when “the criminal charges result in an acquittal or otherwise are dismissed.” The Court also noted that indemnification obligations generally accrue “only on an event fixing liability, rather than on preliminary events that eventually may lead to liability but have not yet occurred.” The Court held that the triggering event for coverage was the favorable disposition of all criminal charges against Ford. As a result, Utica’s policy was triggered since Ford incurred no reimbursable expenses prior to his acquittal. On the other hand, Selective had no coverage obligation as the Selective policy had expired by the time of Ford’s acquittal.

The Court distinguished its holding in Paterson and explained that when an insured seeks coverage related to its own conduct of initiating criminal charges against its employee, it is reasonable to use the conduct of the insured in filing the criminal charges as the “triggering event” to assess coverage for malicious prosecution. But in a statutory indemnification case, the “essence” of the claim is not the filing of the criminal charges.” Rather, the Board’s liability “is triggered by the event specified in the statutes, namely a final disposition of those charges in favor of the Board’s employee.”

In light of the cases discussed above, the New Jersey courts are fairly clear that the trigger of coverage in malicious prosecution and wrongful arrest cases is the filing of charges against the claimant. However, in cases involving coverage for statutory indemnification of fees and costs incurred in defending against a criminal prosecution case, the trigger of coverage is not filing of charges, but rather, acquittal of such charges. As is always the case, it is important to carefully review the applicable policy and understand the scope of coverage provided.

The next installment will review the law in Georgia. In the meantime, if there are any questions about another jurisdiction, please contact us ( or and we can address your questions directly.

Insurance Coverage for Wrongful Incarceration Cases in California

The second jurisdiction we will discuss pertaining to coverage issues arising out of claims for wrongful incarceration is California, which, like New York, has two pertinent decisions involving coverage for malicious prosecution cases. Unlike New York, however, the case law in California stems from civil cases, not criminal cases. Nonetheless, the Court of Appeal in California held that it makes no difference whether the case is civil or criminal in determining whether a claim for malicious prosecution implicates insurance coverage.

The first case is Harbor Insurance Company v. Central National Insurance Company, 165 Cal. App.3d 1029, 211 Cal. Rptr. 902 (1985), in which the insured, A.J. Industries, Inc. (“A.J.”) unsuccessfully prosecuted an action between 1971 and 1978 against its former president and chairman. When A.J. filed the action, it was insured by Zurich Insurance Company (“Zurich”) for a limit of $300,000 and by Harbor Insurance Company (“Harbor”) for $5,000,000. While the malicious action was pending (and until April 1, 1975), A.J. switched insurers and had primary insurance with Argonaut Insurance Company (“Argonaut”) and excess insurance with Midland Insurance Company (“Midland”).

On April 16, 1976, the former president and chairman filed an action against A.J. for malicious prosecution. By that point in time, A.J. was insured by Central National Insurance Company (“Central National”). A.J. nonetheless tendered its defense to Zurich.  Zurich accepted the tender and turned the matter for handling to Harbor, the concurrent excess carrier. Harbor defended the malicious prosecution action under reservation of rights, and also tendered the claim to Central National, Midland and Argonaut. After those insurers denied coverage, Harbor filed suit.

The issue addressed by the California Court of Appeal, Second Appellate District, was whether Argonaut’s or Midland’s policies provided coverage for the malicious prosecution lawsuit against A.J.

Argonaut’s policy provided coverage for damages because of “personal injury” sustained by any person arising out of an offense committed in the conduct of the named insured’s business.  The term “offense” included false arrest, detention or imprisonment, or malicious prosecution, if such offense is committed during the policy period. The Court of Appeal ruled that the “offense” of malicious prosecution is “committed” upon institution of the malicious action against the defendant. The court noted that the “gist of the tort is committed when the malicious action is commenced and the defendant is subjected to process or other injurious impact by the action.” In other words, “from both the tortfeasor’s and the victim’s standpoint the ‘offense’ is ‘committed’ upon initial prosecution of that action. At that point the tortfeasor has invoked the judicial process against the victim maliciously and without probable cause, and the victim has thereby suffered damage.” Because the malicious action was commenced before the Argonaut policy came into effect, the court held that there was no coverage under the policy.

The court rejected Harbor’s argument that the offense of malicious prosecution is a “continuing occurrence,” which is “committed” throughout the prosecution of the malicious action because it continues to cause damage until the action is terminated. The Court of Appeal noted that such an argument was a theoretical misunderstanding of the elements of the tort in that “[a]lthough continued proceedings after commencement of the action will increase and aggravate the defendant’s damages, the initial wrong and consequent harm have been committed upon commencement of the action and the initial impact thereof on the defendant.”

The Court then addressed the two Midland policies, one of which agreed to indemnify A.J. against such ultimate net loss in excess of the primary limits by reason of liability for damages because of personal injury caused by an occurrence. This excess policy defined “personal injury” as “injury arising out of false arrest, false imprisonment, wrongful eviction, detention, malicious prosecution, … which occurs during the policy period.” The Court of Appeal held that the definition of “personal injury” required the malicious prosecution to “occur” during the policy period. For the reasons discussed pertaining to the Argonaut policy, the Court of Appeal held that malicious prosecution did not “occur” during this Midland policy, so Midland had no obligations under the policy.

The second Midland policy agreed to indemnify A.J. for all sums that it became obligated to pay by reason of liability for damages on account of “personal injuries” caused by an “occurrence.” The term “personal injuries” was defined, in part, as malicious prosecution, and the term “occurrence” was defined as “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the Insured.” In order to avoid a self-defeating construction of the policy that would render “personal injuries” being excluded from coverage, the court deemed as an oversight the use of the term “bodily injury” in the definition of “occurrence” and inserted “personal injuries” in the place of “bodily injury” in the definition.

So construed, however, the policy yet remains limited in coverage to “occurrences” which result in personal injury (here, i.e., malicious prosecution), or property damage, within the policy period. The upshot of this “occurrence” limitation is that the instant incident of malicious prosecution was not subject to this policy. As discussed above, A.J.’s malicious prosecution “occurred” before the policy term began, when the malicious action was commenced against [the former president and chairman] in 1971. The gist of the wrong then was inflicted and complete.

The Court found no coverage under this Midland policy.

The second California case is Zurich Ins. Co. v. Peterson, 188 Cal. App.3d 438, 232 Cal. Rptr. 807 (1986), which involved a lawsuit filed by Tri-Tool against its president to rescind an employment contract. When the complaint was filed, Tri-Tool was insured by Home Insurance Company (“Home”). The Home policy agreed to indemnify Tri-Tool for damages because of injury arising out of the offenses of false arrest, detention, or imprisonment, or malicious prosecution, if such offense is committed during the policy period.

In February of 1980, the Home policy was replaced by a primary policy issued by American Guarantee and Liability Insurance Company (“AGLIC”) and an excess policy issued by Zurich Insurance Company (“Zurich”). The AGLIC policy agreed to pay all sums that the insured becomes legally obligated to pay as damages because of “personal injury,” which, in turn, was defined as an “injury arising out of one or more of the following offenses committed during the policy period” and listed false arrest, detention, imprisonment or malicious prosecution as the offenses. The Zurich policy also provided coverage for personal injury, including “injury resulting from false arrest, detention or imprisonment, … malicious prosecution ….” The policy defined an “occurrence” of malicious prosecution as “an act or series of acts of the same or similar nature, committed during this policy period which causes such personal injury.”

The Court of Appeal, Third Appellate District, noted that a favorable termination of the malicious action might be a prerequisite to the filing a malicious prosecution action, but it was not determinative of coverage because the policies at issue did not contain any reference to a particular date. Rather, to implicate coverage, the policies required the act or offense of malicious prosecution to have been committed during the policy period. The court then reviewed the Harbor Insurance Company case and noted that the Harbor court rejected the continuing occurrence concept and determined that the critical date was the filing of the complaint. The Court ruled,

It makes little difference whether the state or an individual controls the maliciously prosecuted action: an individual is first injured upon the filing of a complaint with malice and without probable cause. While some of the adverse consequences to the injured party will depend on whether a criminal prosecution is begun or a civil suit prosecuted, in each case a party’s reputation is injured and legal expenses are incurred at the initiation of the malicious complaint. The fact that damages increase as the prosecution continues does not transform malicious prosecution into a continuing occurrence. We join the reasoned decisions of the majority in holding that for purposes of an insurance policy which measures coverage by the period within which the “offense is committed,” the tort of malicious prosecution occurs upon the filing of the complaint.

Because the policies issued by Zurich and American came into effect after the date Tri-Tool filed its complaint against the president, neither insurer had an obligation to defend or indemnify Tri-Tool.

The interesting thing about California is the interplay between wrongful incarceration cases and California Insurance Code Section 533 (“Section 533”), which states, in part, that an “insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.” In short, Section 533 precludes insurance coverage, or indemnity, for a “willful act,” but Section 533 does not apply to the duty to defend or to vicarious liability.

In Downey Venture, et al. v. LMI Ins. Co., 66 Cal. App. 4th 478, 78 Cal. Rptr.2d 143 (1998), the California Court of Appeal, Second Appellate District, held that Section 533 precluded coverage for malicious prosecution, even though such coverage was expressly provided in the policy, because malice is an element for establishing a claim for malicious prosecution. The Court of Appeal noted that in California, “the commission of the tort of malicious prosecution requires a showing of an unsuccessful prosecution of a criminal or civil action, which any reasonable attorney would regard as totally and completely without merit, for the intentionally wrongful purpose of injuring another person.” Id. at 154. The Court of Appeal ultimately held that because the commission of the tort of malicious prosecution constitutes a willful act within the meaning of Section 533, LMI was not obligated to indemnify the insured for such claim.

Ultimately, under California law, an insurer may have a defense obligation in wrongful incarceration cases, but there is a good chance that the insurer will not have an indemnity obligation to the extent that the liability of the insured(s) is based on “willful acts” of malicious prosecution.

The next installment will review the law in New Jersey, a jurisdiction that may have the oldest case law pertaining to insurance coverage for malicious prosecution cases. Again, if there are any questions about another jurisdiction, please contact us ( or and we can address your questions directly.

Insurance Coverage for Wrongful Incarceration Cases in New York

Over a decade has gone by since we first reported on an uptick in post-conviction exonerations due to advances in DNA testing, data preservation and electronic record-keeping that led to the discovery of exculpatory evidence. Today, insurance coverage lawsuits for wrongful incarceration cases are becoming more and more frequent. Typically, such cases involve a scenario in which the underlying claimant is arrested, tried and sentenced for a crime and then subsequently, the underlying claimant is either acquitted or released due to new evidence, lack of evidence or procedural mishaps in the initial trial. While more and more states are instituting statutory remedies for wrongful incarceration, the municipality and its law enforcement and prosecutorial entities are still sued for state tort claims and federal civil rights violations. The insured defendants, in turn, tender the matters to their carriers under general liability policies, errors and omissions policies and law enforcement liability policies.

This series of blog posts with discuss the law in various jurisdictions that have addressed coverage issues related to wrongful incarceration under different types of policies. The first jurisdiction we address is New York.

There are two pertinent New York cases that address coverage issues for claims of false arrest, false imprisonment and malicious prosecution. The first is National Cas. Ins. Co. v. City of Mount Vernon, 128 A.D.2d 332 (1987). In City of Mount Vernon, the underlying claimant was arrested in June 1981 and incarcerated until January 7, 1983. Thereafter, the underlying claimant commenced a lawsuit against the City of Mount Vernon (“City”) and the Mount Vernon Police Department to recover damages for, among other things, false arrest and false imprisonment.

National Casualty issued a policy to the City from January 1, 1983 to January 1, 1984, that provided coverage for all sums that the insured becomes legally obligated to pay as damages because of “wrongful acts” which result in “personal injury” caused by an “occurrence.” The term “occurrence” was defined as an event, including continuous or repeated exposure to conditions, which results in “personal injury” during the policy period. The term “personal injury” was defined to include false arrest, detention or imprisonment, or malicious prosecution. Based on the above definitions, the National Casualty policy would be triggered by false arrest, detention or imprisonment during the policy period.

Upon tender, National Casualty denied coverage because the underlying claimant’s arrest in June 1981 occurred prior to the policy’s inception date of January 1, 1983. The Appellate Division disagreed:

Contrary to National’s contentions, the language of the occurrence clause herein ascribes no temporal relevance to the causative event preceding the covered injury, but rather premises coverage exclusively upon the sustaining of specified injuries during the policy period. Thus, the pertinent policy provision provides coverage for an “occurrence”, and thereafter, states that an occurrence “means an event … which results in PERSONAL INJURY … sustained, during the policy period” (emphasis supplied). Indeed, as one commentator has stated in discussing a similar provision, “[t]he policy will not depend upon the causative event of occurrence but will be based upon injuries or damages which result from such an event and which happened during the policy period. It will not be material whether the causative event happened during or before the policy period.” … Accordingly, the operative event triggering exposure, and thus resulting in coverage under the policy, is the sustaining of a specified injury during the policy period. 336-337. The Appellate Division held that damage resulting from false imprisonment represented a category of covered personal injury, and that such damage was allegedly sustained, at least in part, when the policy was in force, i.e. from January 1, 1983 to January 7, 1983. As a result, the City was entitled to coverage under the National Casualty policy.

The second case is Town of Newfane v. General Star National Ins. Co., 14 A.D.3d 72, 784 N.Y.S.2d 787 (2004). Selective Insurance (“Selective”) issued a policy, effective April 26, 2000, that provided coverage for claims for damages because of “personal injury” caused by an offense arising out of the Town of Newfane’s business, but only if the offense was committed during the policy period. The term “personal injury” was defined, in part, as “injury, other than ‘bodily injury’ arising out of one or more of the following offenses: a. [f]alse arrest, detention or imprisonment; [or] b. [m]alicious prosecution.”

The underlying claimant alleged that he was “charged, arrested and jailed under a warrant” on June 7, 1989. He was again jailed for several hours on April 9, 1990. On June 6, 1990, he was convicted of 36 counts of violating Town Law and zoning ordinance. He was sentenced and remanded to jail on July 23, 1990. He was then discharged from custody later that day and the judgment of conviction was reversed on appeal on July 2, 1991, at which time all but one count was dismissed. The criminal prosecution on that one remaining count remained dormant until November 28, 2000, when his motion to dismiss for lack of speedy trial was granted.

The underlying claimant sued the Town of Newfane for malicious prosecution, false arrest, and false imprisonment, among other claims. Initially, the Appellate Division noted that the “offenses” of false imprisonment and false arrest were “committed” outside the Selective policy’s effective date of April 26, 2000. The only issue before the court was whether there was coverage for the malicious prosecution claim “where the criminal prosecution was initiated before the effective date of the policy but terminated in favor of the accused during the policy period.” The Appellate Division concluded, based on the language of the policy, that as a matter of law, there was no coverage for an underlying malicious prosecution cause of action because the date of the commencement of the underlying criminal prosecution was the controlling date for purposes of insurance coverage. The Appellate Division explained that

… the “offense” of malicious prosecution was “committed”, for purposes of determining the issue of insurance coverage, in 1989, more than a decade before the effective date of the Selective policy. That “offense was committed” when the prosecution was instituted, allegedly without probable cause. Such initiation of the criminal prosecution is the essence or gist of the tort of malicious prosecution. Moreover, the legal injury or “offense” incurred by the plaintiff in the underlying action (albeit not necessarily the damages incurred as a result of that “offense”) is the same irrespective of whether the criminal prosecution was known to be baseless when it was initiated or only subsequently demonstrated to be lacking in merit. Therefore, the injury to the accused was contemporaneous with the initiation of the criminal proceeding against him and hence complete long before the inception of coverage and the incidental termination of the criminal prosecution. We thus conclude that, for purposes of determining insurance coverage, malicious prosecution is not a continuing tort. We further conclude that the policy is to be construed as “fixing the point of coverage for malicious prosecution at one readily ascertainable date; the date on which the acts [we]re committed that [might] result in ultimate liability” or “when the alleged tortfeasor t[ook the] action resulting in the application of the [s]tate’s criminal process to the [plaintiff in the underlying action]”.….

Id. at 75-80 (internal citations omitted).

The Appellate Division acknowledged that a malicious prosecution claim may be premised on the initiation or continuation of a criminal proceeding without probable cause, and such claim does not accrue for purposes of the statute of limitations until the ultimate dismissal or favorable termination of the criminal charges. The Appellate Division further recognized that the damages incurred by reason of the continuation of a criminal prosecution might continue. Nevertheless, the court held that none of these considerations were determinative as the policy language focused on when the offense was committed, not when an action could have been brought or damages fully ascertained.

The New York courts emphasize construing and applying the policy language and considering whether false imprisonment, false arrest and malicious prosecution are deemed as “personal injury” or “offense” and whether the injury or the offense is required to happen during the policy period.

The next installment will review the law in California. In the meantime, if there are any questions about another jurisdiction, please contact us and we can address your questions directly.

Oregon Courts Protect Insurers from Attorney’s Fee Awards in Uninsured/Underinsured Motorist Claims in Trio of Recent Cases

The issue of attorney’s fees in cases involving uninsured/underinsured motorist (“UM” or “UIM”) benefits has been a hot topic in Oregon recently, with the Oregon Court of Appeals issuing a decision on this issue once a month for first three months in 2016. In Oregon, an insurer is entitled to a so-called “safe harbor” from the obligation to pay attorney’s fees in UIM cases if “the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured.” ORS 742.061(3). However, if an insurer raises any issues beyond the scope of ORS 742.061(3), the insured is entitled to attorney’s fees.

In January of 2016, the Oregon Court of Appeals addressed what is meant by the phrase “damages due the insured” in ORS 742.061(3). In Spearman v. Progressive Classic Ins. Co., 276 Or. App. 114 (2016), the insured was involved in an accident with an uninsured motorist and sought recovery from his UIM insurer for only “unreimbursed accident-related medical expenses,” i.e. only those expenses for which the insured had not already been reimbursed under other coverage. In its Answer to the Complaint, the insurer admitted that the insured sustained “some” injury in the collision but disputed the “nature and extent” of the insured’s alleged injuries and disputed the “reasonableness and necessity” of some of the insured’s accident-related medical expenses.

The insured argued that he was entitled to attorney’s fees because the phrase “damages due to the insured” meant “the amount of the benefits due the insured,” and a dispute suggesting that the insurer owes no benefit, or that the insured had no unreimbursed accident-related medical expenses, exceeded the scope of the safe harbor in ORS 742.061(3). In other words, the insurer’s challenge to the “reasonableness and necessity” of medical expenses, and the resulting argument that the insured was otherwise fully compensated for his injuries, would allow the fact finder to determine that the insured was not entitled to any award in the UIM action, thereby raising an issue beyond those permitted by ORS 742.061(3).

However, after examining the purpose of UM/UIM benefits and the statutory context of ORS 742.061, the Court of Appeals rejected the insured’s contention and held that the phrase “damages due the insured” refers to what the insured could recover from the uninsured motorist, not from the insurer. Consequently, even though the insurer’s pleadings put at issue the possibility that plaintiff would recover no benefit in the UIM action, such allegations raised issues only as to the damages that the insured would be entitled to recover from the uninsured motorist, as permitted by ORS 742.061(3). As a result, the insured was not entitled to attorney’s fees.

Then, in February of 2016, the Oregon Court of Appeals again held that where an insurer challenged the existence of an insured’s alleged injuries caused by an underinsured motorist, the safe harbor provision applied. Kelley v. State Farm Mutual Automobile Ins. Co., 276 Or. App. 553 (2016). The court noted that in Spearman, it had concluded “that the issues that are within the scope of ORS 742.061(3) are the issues of liability and damages that an insured would have to establish in an action against the uninsured or underinsured motorist.” Therefore, the insurer’s denial that the insured injured his shoulder in the collision raised only an issue “of liability and damages that an insured would have to establish in an action against the uninsured or underinsured motorist.” The Court concluded that the insured was within the safe harbor scope of ORS 742.061(3) and the insured was not entitled to attorney’s fees.

Finally, in March of 2016, the Oregon Court of Appeals issued yet another decision favorable to insurers on the safe harbor provision. Robinson v. Tri-County Metropolitan Transportation Dist. of Oregon, 277 Or. App. 60 (2016). In Robinson, the plaintiff suffered injuries as passenger in a Tri-County Metropolitan Transportation District (“Tri-Met”) vehicle when it stopped suddenly to avoid a collision with a “phantom vehicle.” In her subsequent lawsuit, the plaintiff argued that she was entitled to attorney’s fees from Tri-Met, a self-insurer, because Tri-Met asserted affirmative defenses that went beyond the scope of ORS 742.061(3). Specifically, Tri-Met allegedly went beyond the safe harbor provision by (1) asserting the possibility of the insured recovering nothing based on offset; (2) alleging the collateral source offset issue; and (3) alleging the insured had failed to state a claim for Tri-Met’s negligence.

The Court of Appeals rejected the first argument based on Spearman, holding that “[i]n the determination of damages, a zero recovery can be a permissible outcome in a UM/UIM claim as a simple matter of fact or evidence, and, as such, it is a permissible outcome within the bounds of the fee exemption in ORS 742.061(3).”

With respect to the second issue, plaintiff argued that Tri-Met’s allegation of collateral source offset automatically disqualified Tri-Met from the fee exemption. However, the affirmative defense was pled as a matter of course, as a contingency, and there was no actual dispute about the existence, enforceability, or applicability of an offset. By looking to the dictionary definition of the term “issue,” the court noted that “[b]ecause the word is used here in the adversarial context of arbitration or litigation, an ‘issue’ is a matter of live controversy, active contest, or actual dispute.” The Court of Appeals concluded that “an insurer’s boilerplate reference to such a matter is a nonissue.” Because nothing in the record showed that the collateral source allegation was actually developed, disputed, or decided, Tri-Met’s reference to a “nonissue” did not disqualify it from the fee exemption.

The Court of Appeals dispensed with the insured’s third argument by stating that UIM claims turn on the fault of the uninsured driver, not Tri-Met. As a result, any response by Tri-Met regarding the negligence of its driver was a “non sequitur” in a UIM claim.

The Court of Appeals attempted to reconcile the Robinson decision with its prior decision in Kiryuta v. Country Preferred Insurance Co., 273 Or. App. 469 (2015), where the court ruled that the affirmative defenses of “Offset” and “Contractual Compliance” destroyed the insurer’s safe harbor protection. The court explained that in Kiryuta, the insurer accepted coverage in the safe harbor letter but then reserved the prospect to deny coverage by asserting that UIM benefits “are subject to all terms and conditions of the policy of insurance.” The Robinson court observed that the Kiryuta decision “did not consider the question here involving an insurer’s reference to a particular provision, one which did not develop into an actual dispute and especially one that was potentially necessary to calculate sums ultimately payable, such as a policy limit or an offset against damages.” The court so held, despite the fact that the insurer argued that the affirmative defenses were not in dispute, i.e. the affirmative defenses were not intended to assert that some term in the policy prevented plaintiff from recovering any damages and only the damages due to the insured was raised and litigated in the arbitration.

The Kiryuta decision has been accepted for review by the Oregon Supreme Court.

Alaska Supreme Court Rules that Insurer Have No Right to Reimbursement of Defense Fees and Costs

For many years, the prevailing view of Alaska law was that an insurer could obtain reimbursement of defense costs from an insured if it specifically reserved the right to seek reimbursement and subsequently obtained a determination of no coverage. This understanding was based on Unionamerica Inc. Co., Ltd. v. General Star Indem. Co., 2005 WL 757386 (D. Alaska 2005), in which the Alaska federal district court predicted that the Alaska Supreme Court would allow insurers to recover defense costs. It turns out, however, that the district court’s prediction was incorrect.

In Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C., No. 7095 (March 25, 2016), the Alaska Supreme Court ruled that a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending under a reservation of rights is unenforceable, even if (1) the insurer explicitly reserves the right to seek reimbursement in its offer to provide a defense by an independent counsel, (2) the insured accepts the defense subject to the reservation of rights, and (3) the claims are subsequently determined to be excluded from coverage under the policy.

Attorneys Liability Protection Society, Inc. (“ALPS”) issued a malpractice insurance policy to Ingaldson & Fitzgerald, P.C. (“IF”) from April 29, 2007 to April 29, 2008. The policy contained a provision that entitled ALPS to seek reimbursement for amounts paid by ALPS in defending non-covered claims.

During the policy period, IF reported to ALPS a lawsuit against it alleging, among other things, restitution, disgorgement, and conversion for recovery of a retainer that had been paid to IF. ALPS accepted IF’s tender but reserved rights because the policy excluded coverage for claims arising from conversion or fee disputes. ALPS retained independent counsel to defend IF and paid all defense costs in full, as required by AS 21.96.100.

In the underlying case, summary judgment was rendered against IF on claims of restitution, disgorgement and conversion, all of which were specifically excluded under the malpractice policy. Thereafter, ALPS commenced a declaratory judgment action against IF and moved for partial summary judgment on the reimbursement of defense costs issue. In denying the motion, the district court declined to follow the Unionamerica case and held that Alaska law prohibits the inclusion of a right to reimbursement in insurance policies under AS 21.89.100(d), which states, in part, that in providing independent counsel, an insurer “shall be responsible only for the fees and costs to defend those allegations for which the insurer either reserves its position as to coverage or accepts coverage.”

ALPS appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit noted that while AS 21.96.100(d) requires the insurer to pay defense costs if it either covers the claims against its insured or defends pursuant to a reservation of rights, the statute is not clear as to whether the insurer can later seek reimbursement of fees assumed under a reservation of rights under these circumstances. Therefore, the Ninth Circuit certified two questions to the Alaska Supreme Court:

  1. Does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy?
  2. If the answer to Question 1 is “Yes,” does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) it is later determined that the duty to defend never arose under the policy because there was no possibility of coverage?

In answering both questions with “YES,” the Alaska Supreme Court ruled that AS 21.96.100 renders any defense costs reimbursement provisions in insurance policies unenforceable.

The Alaska Supreme Court first acknowledged that under Alaska case law, an insured has a right to demand an unconditional defense. To meet this right, the insurer has three options: (1) affirm the policy and defend unconditionally; (2) repudiate the policy and withdraw from the defense; or (3) offer its insured the right to retain independent counsel to conduct the defense and agree to pay all the necessary costs of that defense. CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113 (1993); Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281 (1980). The Court continued that AS 21.96.100 is the codification of such requirements.

In examining the statutory text, the Alaska Supreme Court noted that the subsections (a) through (d) focus on the mandatory requirement that insurers pay for the cost of independent counsel. The Court noted that the statute clearly allocates to the insurer the responsibility to pay the fees and costs when an insurer provides independent counsel to the insured. Therefore, any effort to shift such expenses to an insured would violate the allocation that the statute requires and would be invalid. In short, there is nothing in AS 21.96.100 that permits reimbursement, so the Court concluded that the statutory scheme prohibits reimbursement. The Court held that “reimbursement is prohibited, and because there is no evidence of contrary legislative purpose or intent, we conclude that the statute prohibits reimbursement provisions.”

In ruling that reimbursement provisions are unenforceable, the Alaska Supreme Court declined to follow the California case of Buss v. Superior Court, 939 P.2d 766 (1997). First, the Court noted that the California statute does not contain language similar to that in AS 21.96.100(d). Second, the California statute actually provides a section on reimbursement, which states that “[t]his subdivision does not invalidate other different or additional policy provisions pertaining to attorney’s fees or providing for methods of settlement of disputes concerning those fees.”

The Court further noted that the legislative history supports its conclusion that the statute allocates responsibility to pay for independent counsel to the insurer when the insurer defends under a reservation of rights. Finally, the Court acknowledged that even though the Division of Insurance had approved the policies containing the reimbursement provision, the Division’s past practice is not dispositive. More importantly, however, the Division had disavowed its past practice in its amicus brief with a more “considered interpretation” that “under AS 21.96.100, if an insurer has a duty to defend and elects to reserve its rights on an issue, it is obligated to provide and pay for independent counsel.”

So insurers beware – reimbursement of defense costs provisions are prohibited and unenforceable in Alaska.

The Oregon Supreme Court Overrules the Stubblefield Rule Regarding an Insured’s Ability to Assign Insurance Rights

Oregon has long had a very interesting rule called the Stubblefield Rule, derived from the case of Stubblefield v. St. Paul Fire & Marine Ins. Co., 267 Or. 397 (1973). In Stubblefield, the Oregon Supreme Court held that when an insured enters into a stipulated judgment with a covenant not to execute, the insured is no longer “legally obligated to pay” for purposes of triggering coverage under a CGL policy. Under Stubblefield, a stipulated judgment with a covenant not to execute terminates the insurer’s obligations under the policy to the insured, and, in turn, to the assignor/claimant. The Stubblefield Rule has caused parties to a stipulated judgment to be extremely careful to make sure that the insured’s liability was not eliminated.

Earlier this year, in A&T Siding v. Capitol Specialty Ins. Corp., ___ Or. ___ (Oct. 8, 2015), the Oregon Supreme Court also held that parties to a stipulated settlement with an agreement not to execute could not amend the settlement agreement to revive the insured’s liability for purposes of seeking insurance coverage. Our Capitol Specialty discussion can be found here. As we indicated in our A&T Siding blog post, the Stubblefield Rule was alive and well in Oregon, and we recommended that insurers facing a settlement agreement and covenant judgment should examine the settlement documents carefully to determine whether the agreement released the insured from all liability.

Now, however, the Stubblefield Rule is no longer the law in Oregon. In Brownstone Homes Condo. Assoc. v. Brownstone Forest Heights, LLC, et al., the Oregon Supreme Court acknowledged that Stubblefield “was wrongly decided.” The Court noted that its reasoning in Stubblefield was sparse, the decision was “unsupported by any explanation or analysis,” and the Court neglected to examine the policy language. The Court observed that the majority of jurisdictions have held that “when a covenant not to execute is given in the context of a settlement agreement for valuable consideration (specifically, an assignment of claims), it is a contractual promise not to sue the defendant on the judgment, not a release or extinguishment of the defendant’s legal obligation to pay it.” The Oregon Supreme Court concluded that Stubblefield “erred when it concluded that a covenant not to execute obtained in exchange for an assignment of rights, by itself, effects a complete release that extinguishes an insured’s liability and, by extension, the insurer’s liability as well.”

Nevertheless, insurers should remain mindful of ORS 31.825, which sets forth precise timing requirements to effect a proper assignment of rights against an insurer. Under ORS 31.825, the underlying parties must first reach a settlement, then facilitate entry of judgment, and only then can a valid assignment take place. Insurers should take care to confirm the insured’s compliance with the statute when evaluating an assignment of rights to insurance proceeds.

Oregon’s Safe-Harbor Provision in the Insurance Fee-Shifting Statute Not as Safe as it Seems

The Oregon insurance fee-shifting statute, ORS 742.061, continues to be a popular topic in the Oregon courts. Our last entry on this subject discussed whether the statute’s reference to “any court of this state” included federal court actions. More recently, the Oregon Court of Appeals strictly construed the safe-harbor provision of ORS 742.061 in holding that an insured could recover attorney’s fees in a UIM arbitration because the insurer had pled – although it did not pursue – other policy-based defenses. Kiryuta v. Country Preferred Insurance Company, 273 Or. App. 469 (2015)

Subsection (3) of the statute states that an insured is not entitled to attorney’s fees under subsection (1) in actions to recover uninsured or underinsured motorist benefits “if, in writing, not later than six months from the date proof of loss is filed with the insurer:

(a) The insurer has accepted coverage and the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured; and

(b) The insurer has consented to submit the case to binding arbitration.”

A letter issued by an insurance company under ORS 742.061(3) is referred to as a “safe-harbor” letter. In Kiryuta, the Court of Appeals addressed whether a safe-harbor letter is effective when an insurance company’s responsive pleading sets forth affirmative defenses that are not litigated but raise issues other than the liability of the uninsured or underinsured driver and the damages to which the insured is entitled. After an injured motorist made a claim for underinsured motorist benefits to Country Preferred, the insurer denied the claim and issued a safe-harbor letter that complied with the requirements of ORS 742.061(3). The insured filed a civil action and the matter was arbitrated. Despite the safe-harbor letter, the arbitrator awarded attorney’s fees to the insured. On review, the trial court reversed the award of attorney’s fees based on the safe-harbor letter.

In its subsequent appeal, the insured argued that Country Preferred’s affirmative defenses of “Contractual Compliance” and “Offset” raised issues other than liability of the driver and the damages due to him, rendering the safe harbor-letter ineffective. Country Preferred argued that because it only litigated the issue of damages owed in the arbitration, the safe-harbor letter was effective. The Court of Appeals agreed with the insured.

In Oregon, a party’s pleadings “declare and control the issues to be determined and the relations that the parties bear to each other.” The Court of Appeals noted that because Country Preferred’s pleading provided a foundation to litigate issues other than the amount of plaintiff’s damages or liability of the underinsured driver, Country Preferred’s litigation strategy was potentially broader than that contemplated by the legislature in ORS 742.061(3). Consequently, the insured had to be prepared at the arbitration to meet any proof that Country Preferred might offer consistent with its pleadings. Therefore, Country Preferred’s conduct was inconsistent with the safe-harbor provision; it was immaterial that Country Preferred did not follow through with its potential litigation strategy. The Court of Appeals reversed the trial court and held that the insured is entitled to reasonable attorney’s fees under ORS 742.061.

In its opinion, the Court of Appeals noted that Country Preferred was in control of its pleading and could have conformed its pleading to the limitations the safe-harbor provision. However, in a footnote, the Court of Appeals sent mixed messages by hinting that insurer could retain the protection of the safe-harbor provision by timely amending its pleading to conform to the requirements of ORS 742.061(3). Accordingly, in uninsured or underinsured claims involving safe-harbor letters in Oregon, insurance companies should consider amending responsive pleadings to reflect only those affirmative defenses that pertain to the liability of the uninsured or underinsured driver and the damages to which the insured is entitled.

Oregon State and Federal District Courts Interpret Insurance Fee Shifting Statute Broadly

In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in “an action…in any court of this state upon any policy of insurance of any kind or nature…” The Oregon Supreme Court, in Morgan v. Amex Assurance Co., 352 Or. 363, 287 P.3d 1038 (2012), addressed whether this fee shifting statute applies to insurance policies issued outside of Oregon, as a later enacted statute, ORS 742.001, provides that ORS Chapter 742 “appl[ies] to all insurance policies delivered or issued for delivery in this state…” In Morgan, the Oregon Supreme Court concluded, after considering the text, context and the legislative history, that the legislature did not intend for ORS 742.001 to limit the scope of ORS 742.061. The Court held, therefore, that ORS 742.001 permits an award of attorney fees to an insured that prevails in an action in an Oregon court on “any policy of insurance of any kind or nature,” even if the policy was delivered or issued for delivery in another state. The Oregon Supreme Court noted that to hold otherwise would be “to turn an expansion of the state’s authority to impose substantive regulations on insurers transacting business in Oregon into a limitation on the remedial and procedural rules that affect insurers appearing in its courts.”

Now, insureds and insurers in Oregon are looking to the Ninth Circuit Court of Appeals for an answer to whether ORS 742.061 applies only to Oregon state courts, as the statute specifically states that it applies “in an action…in any court of this state…” (emphasis added). Schnitzer Steel Industries, Inc. v. Continental Casualty Corp., 2014 U.S. Dist. LEXIS 160031 (D. Or. November 12, 2014). In Schnitzer Steel, the insured, as the prevailing party in a coverage action, moved for attorneys’ fees in the amount of $3,483,878.00. Continental opposed, arguing that the plain language of ORS § 742.061 does not apply because the statute plainly states that it is limited to an action “brought in any court of this state upon any policy of insurance…” Continental argued that because Schnitzer did not bring its claim in a court of Oregon, but rather a court in Oregon, the statute does not apply. Continental based its argument on Simonoff v. Expedia, Inc., 653 F.3d 1202 (9th Cir. 2011), a decision from the Ninth Circuit Court of Appeals that interpreted the phrase “the courts of” in the context of a forum selection clause. In Simonoff, the Ninth Circuit held:

We conclude[] that the choice of the preposition “of” in the phrase “the courts of Virginia” was determinative — “of” is a term “denoting that from which anything proceeds; indicating origin, source, descent, and the like.”  Thus, the phrase “the courts of” a state refers to courts that derive their power from the state — i.e. only state court — and the forum selection clause, which vested exclusive jurisdiction in the courts “of” Virginia, limited jurisdiction to the Virginia state courts.

Simonoff at 1205-06.

While Judge Mosman found Continental’s argument “very interesting” and rejected all but one of Schnitzer’s arguments in the reply as “very weak,” Judge Mosman adopted Schnitzer’s one argument based on Erie principles and ruled that ORS 742.061 applies to cases commenced in Oregon federal courts. Judge Mosman held that the Erie doctrine together with good public policy dictate that ORS § 742.061 should apply in this case as its holding – that ORS 742.061 applies to both federal and state courts of Oregon – will “avoid the intrastate forum shopping that Erie is intended to prevent and it would support the stated purpose of this statute by not creating an easy backdoor to thwart any impact it might have on encouraging settlements or discouraging unreasonable rejections of insurance claims.”  Id. *11-12.

Continental has appealed to the Ninth Circuit Court of Appeals. It will be interesting to see how the Ninth Circuit will address the issue pertaining to ORS 742.061 in light of its decision in Simonoff. It is possible that because the issue pertains to the construction of an Oregon statute, the Ninth Circuit Court of Appeals may certify the question at issue to the Oregon Supreme Court.

East Versus West: Washington Federal District Courts Offer Differing Views on IFCA Claims

The Washington Insurance Fair Conduct Act (“IFCA”) is generating some interesting divisions in the Washington Federal District Courts. As previously reported, Judge Marsha J. Pechman recently ruled in May, 2015 that an IFCA cause of action is only available to insureds under first party insurance policies, but not third party liability policies. This post discusses how cases brought under the IFCA are being examined differently between the Eastern and Western Federal District Courts of Washington.

As a brief background, IFCA (RCW 48.30.015) states, in part, as follows:

(1) Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs, as set forth in subsection (3) of this section.

(2) The superior court may, after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated a rule in subsection (5) of this section, increase the total award of damages to an amount not to exceed three times the actual damages.

(3) The superior court shall, after a finding of unreasonable denial of a claim for coverage or payment of benefits, or after a finding of a violation of a rule in subsection (5) of this section, award reasonable attorneys’ fees and actual and statutory litigation costs, including expert witness fees, to the first party claimant of an insurance contract who is the prevailing party in such an action.

(5) A violation of any of the following is a violation for the purposes of subsections (2) and (3) of this section:

(a) WAC 284-30-330, captioned “specific unfair claims settlement practices defined”;

(b) WAC 284-30-350, captioned “misrepresentation of policy provisions”;

(c) WAC 284-30-360, captioned “failure to acknowledge pertinent communications”;

(d) WAC 284-30-370, captioned “standards for prompt investigation of claims”;

(e) WAC 284-30-380, captioned “standards for prompt, fair and equitable settlements applicable to all insurers”; or

(f) An unfair claims settlement practice rule adopted under RCW 48.30.010 by the insurance commissioner intending to implement this section. The rule must be codified in chapter 284-30 of the Washington Administrative Code.

The Western Federal District Courts have held that an IFCA cause of action is only available if the insured shows that the insurer unreasonably denied a claim for coverage or that the insurer unreasonably denied payment of benefits, but not if the insurer only violated the Washington Administrative Code (“WAC”) provisions. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2010 U.S. Dist. LEXIS 110866 (W.D. Wash. October 15, 2010); Weinstein & Riley, P.S. v. Westport Ins. Corp., 2011 U.S. Dist. LEXIS 26369 (W.D. Wash. March 14, 2011); Phinney v. American Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 22328 (W.D. Wash. February 22, 2012); Cardenas v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. December 16, 2011).

However, the Eastern Federal District Courts have rejected the precedent set by the Western Federal District Courts and have held that a violation of the enumerated WAC provisions is an independent basis for a cause of action, regardless of coverage or benefits. Merrill v. Crown Life Ins. Co., 22 F. Supp.3d 1137 (E.D. Wash. 2014); Hell Yeah Cycles v. Ohio Sec. Ins. Co., 16 F. Supp.3d 1224 (E.D. Wash. 2014); Hover v. State Farm Mut. Auto. Ins. Co., 2014 U.S. Dist. LEXIS 119162 (E.D. Wash. September 12, 2014).

In Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. February 24, 2015), the Court noted that it is “not persuaded that an IFCA cause of action requires a denial of coverage or benefit… The opinions [from the Western District] do not provide any analysis of the statutory construction they utilized to reach their conclusions, and appear to only be looking for express causes of action without determining whether the IFCA creates an implied cause of action for violation of an enumerated WAC.” The Court in Langley then continued by reviewing the elements for an implied cause of action, i.e. whether the plaintiff is “within the class for whose ‘especial’ benefit the statute was enacted”; whether “legislative intent, explicitly or implicitly, supports creating or denying a remedy”; and “whether implying a remedy is consistent with the underlying purpose of the legislation.” The Court determined that the plaintiff, as first party claimant under an insurance policy, was within the class of those that the legislature sought to protect; that the legislative intent was to create a claim for violating the enumerated WACs in both the language in the statute and the explanation of that language provided to the voters; and that implying a remedy is consistent with the IFCA’s purpose. As a result, the Court concluded that “at a minimum, an independent implied cause of action exists under the IFCA for a first party claimant to bring a suit for a violation of the enumerated WAC provisions.” The Court rejected “the progeny of cases from the Western District of Washington which reached a different conclusion.”

In light of the inconsistencies in the Washington Federal District Courts, it is important for insurers to understand the jurisdictional differences when evaluating an IFCA claim. In addition, insurers should be particularly sensitive to efforts by policyholders to establish jurisdiction in the more favorable Eastern Federal District Courts.