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.

Id.at 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.

Washington Supreme Court Defines Collapse in a Property Policy

Until recently, Washington law on what constitutes “collapse” in a first-party property insurance policy has been unsettled. But that issue has now been resolved with the Washington Supreme Court’s answer to the Ninth Circuit Court of Appeals certified question on the definition of “collapse” as “substantial impairment of structural integrity.”

The Queen Anne Park Condominium in Seattle, Washington, was originally constructed in the 1980’s. In 2009, the Queen Anne Park Homeowners Association (“HOA”) discovered that the siding on the buildings was leaking, which caused hidden decay. The building was insured by State Farm Fire and Casualty Company (“State Farm”) from October 18, 1992 to October 18, 1998 (“Policy”). The Policy included a collapse coverage form, which provided coverage for “any accidental direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: …(2) hidden decay.” The collapse coverage form further stated that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” The term “collapse” was not defined in the State Farm Policy.

5-25The Washington Supreme Court held that the undefined term “collapse” is ambiguous because it is susceptible to more than one reasonable interpretation. In support of its holding, the Court noted that in Sprague v. Safeco Ins. Co. of America, 174 Wn.2d 524, 276 P.3d 1270 (2012), different definitions of “collapse” were proposed by the dissent (“to break down completely: fall apart in confused disorganization: crumble into insignificance or nothingness…fall into a jumbled or flattened mass”) and by the concurrence (“a breakdown of vital energy, strength, or stamina”). The Court also noted that courts throughout the country have adopted different but reasonable definitions of “collapse” in insurance policies, i.e. Olmstead v. Lumbermens Mut. Ins. Co., 22 Ohio St. 2d 212,259 N.E.2d 123, 126 (1970) (“collapse” defined as “a falling down, falling together, or caving into an unorganized mass”); Am. Concept Ins. Co. v. Jones, 935 F. Supp. 1220, 1227 (D. Utah 1996) (collapse” defined as substantial impairment of structural integrity); Buczek v. Cont’l Cas. Ins. Co., 378 F.3d 284, 290 (3d Cir. 2004) (“collapse” defined as substantial impairment of structural integrity that “’connotes imminent collapse threatening the preservation of the building as a structure or…health and safety”). In particular, the Court observed that in at least one other case, State Farm had agreed with the insured that the term “collapse” meant “substantial impairment of structural integrity.” Mercer Place Condominium Assoc. v. State Farm Fire & Cas. Co., 104 Wn. App. 597, 17 P.3d 626 (2000).

Because the term “collapse” was ambiguous, the Court adopted a definition that is reasonable and most favorable to the insured, i.e. “substantial impairment of structural integrity.” The Court explained that the “structural integrity” of a building means a building’s ability to remain upright and that “substantial impairment” means a severe impairment. The Court stated that, “[t]aken together, ‘substantial impairment’ of ‘structural integrity’ means an impairment so severe as to materially impair a building’s ability to remain upright. Considering the Policy as a whole, we conclude that ‘substantial impairment of structural integrity’ means the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe and, in this case, means more than mere settling, cracking, shrinkage, bulging, or expansion.”

Because the newer collapse coverage forms usually define the term “collapse” as an actual falling down or caving in of a building or any part of a building, the Washington Supreme Court’s clarification on the definition of “collapse” will not be an issue. However, when the term “collapse” is undefined, the parties will likely engage in an expensive and prolonged battle of the experts as to what constitutes a building or part of a building to be “unfit for its function or unsafe,” and when such condition occurred.

 

Image courtesy of Flickr by Paul Sableman

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.

Through the Magnifying Glass: What an Insured May Recover Beyond Damages against its Insurer under Washington Law

Earlier this year, the United States District Court for the Western District of Washington provided a detailed analysis of the categories of damages available to a prevailing insured in a breach of contract action against an insurer, including prejudgment interest, costs and attorneys’ fees. MKB Constructors v. Am. Zurich Ins. Co., 2015 U.S. Dist. LEXIS 9325 (W.D. Wash. Jan. 27, 2015). In MKB, the insured was awarded more than $2.35 million in damages, comprised of (1) $1,083,424.24 for breach of contract, (2) $274,482.47 for violation of Washington’s Insurance Fair Conduct Act (“IFCA”), (3) $862,000 in enhanced damages under IFCA, and (4) $138,000 for failure to act in good faith (later overturned as duplicative of the IFCA damages). Following the verdict, the insured moved for prejudgment interest, nontaxable costs, and attorneys’ fees.

Prejudgment Interest

The parties did not dispute that the insured was entitled to prejudgment interest on the liquidated portions of its award. Rather, the issues were which rate to apply and when the interest began to accrue. Under Washington law, a twelve percent prejudgment interest rate is applied to contract disputes, but a lower rate of two percentage points above prime is applied to tort claims. RCW 4.56.110. The parties agreed that only one rate should apply, but disagreed as to whether the judgment was primarily based in tort or in contract. The insured asserted that the judgment was based primarily in contract because the majority of the liquidated portion of the award was for breach of contract. The insurer argued that the Court must consider the judgment as a whole and not just its liquidated components. The Court agreed with the insurer, citing Unigard Ins. Co.v. Mutual of Enumclaw Ins. Co., 160 Wn.App. 912 (Wash. Ct. App. 2011). The Court then compared the amount awarded for breach of contract to the greater total amount awarded for the tort claims based on bad faith and IFCA and concluded that the judgment was primarily based in tort. Accordingly, the Court applied the lower pre-judgment interest rate.

For the prejudgment interest accrual date, the parties agreed that under Washington law prejudgment interest should run from the date each particular invoice was paid. The insured argued, however, that the volume of invoices would make such a calculation an unreasonable burden. The Court agreed to two dates proposed by the insured for the commencement of prejudgment interest, one with respect to the invoices related to the breach of contract and another for its attorney’s invoices, based on the insured’s confirmation that these dates would not prejudice the insurer, and in fact would result in a net benefit to the insurer.

Attorney’s Fees

The insured sought a 33% increase of the total award to account for the contingent fee paid to its counsel. The Court rejected this request as unprecedented. Rather, Washington law presumes that a properly calculated lodestar figure represents reasonable compensation for counsel. A “lodestar” fee is determined by multiplying a reasonable hourly rate by the number of hours reasonably expended in the lawsuit.

The insurer disputed the reasonableness of the attorneys’ hours based on improper block-billing, unnecessary participation by a third attorney added just before trial, and for time spent on unsuccessful claims. Based on its review of the invoices, the Court reduced the block-billed entries by 20%. The Court did not deduct time for the third attorney added just before trial, because the addition of the attorney for trial was neither unusual nor excessive. The Court found that certain work related to discovery and dispositive motions were unnecessary and insufficiently related to the overall success of the litigation to warrant an award of fees. Rather than undertake an hour-by-hour analysis of the attorneys’ fees in order to excise the precise number of hours attributable to these items, the Court estimated, based on its experience with the case that an overall 20% reduction in the claimed fees would sufficiently account for the hours spent on these items.

Litigation Costs

Lastly, the insured sought reimbursement of litigation costs, totaling $160,580.50, which consisted of (1) expert witness fees; (2) travel expenses; (3) the insured’s labor costs; and (4) litigation costs advanced by counsel. The expert fees and travel expenses were uncontested.  In dispute were the labor costs and litigation costs advanced by counsel.

The Court held that the insured’s recovery of wages for employees who testified or otherwise participated in the lawsuit would be an unprecedented stretch of both IFCA and case authority permitting an award of costs. On the same basis, the Court denied recovery for fees paid to secure the attendance at trial of its former employees that were in excess of the statutory amount for fact witnesses provided by RCW 2.40.010. The Court rejected the insured’s argument that the payment of these witnesses was “akin” to an expert witness fee, since Washington courts have expressly disallowed such fees to fact or occurrence witnesses.

The Court also trimmed the insured’s request for over $52,000 in costs advanced by counsel.  “Actual and statutory litigation costs, including expert witness fees” may be awarded under IFCA.  Additionally, Washington case authority permits the court to award “all of the expenses necessary to establish coverage” in order to make the insured “whole.” Panorama Village Condo. Owners Ass’n Bd. Of Dirs. v. Allstate Ins. Co., 26 P.3d 910, 917 (Wash. 2001) (bolding in original). The Court ruled that the following costs should be reimbursed: (1) costs associated with electronic legal research; (2) photocopying; (3) messenger and Federal Express fees; (4) court reporter and videographer fees; (5) travel to depositions; (6) telephone conference fees; (7) PACER fees; and (8) hotel rooms near the courthouse for witnesses.

However, the Court declined to award certain costs that were not “litigation costs” such as a mediation fee; costs that were part of routine daily life and would have been incurred without trial such as costs for local attorneys’ commuting, lodging and meals during trial; and costs that were excessive, such as daily trial transcriptions.

The MKB decision should serve as a useful guide in future fee award cases and as a warning that courts in Washington should not “rubber stamp” an award in favor of the insured but should carefully scrutinize all components of the insured’s demand.