Continuing Developments with Business Interruption Claims

While we all continue to strive for a sense of normalcy in the midst of the ever-changing COVID-19 crisis, new arguments in support of purported coverage for COVID-19 related Business Interruption claims continue to emerge.  One such recent argument is based on the April 13, 2020, ruling by the Supreme Court of Pennsylvania in Friends of Devito v. Wolf, No. 68 MM 2020, 2020 Pa. LEXIS 1987, (Apr. 13, 2020).  In Friends of Devito, several businesses and one individual sought extraordinary relief from the Pennsylvania Governor’s Executive Order, which compelled closure of physical operations for non-life-sustaining businesses to reduce the spread of COVID-19.

The Petitioners argued that the order was invalid for a number of reasons including lack of constitutional authority.  The Pennsylvania Supreme Court disagreed and found that the Governor did have authority for the Executive Order.  In reaching its conclusion, the Court noted that the Governor had authority under the Pennsylvania Emergency Code to protect the public from natural disasters.  Under the Emergency Code, the term “natural disaster” is defined to include catastrophes that result in “substantial damage to property, hardship, suffering or possible loss of life.”  The Court held that the COVID-19 pandemic qualified as a “natural disaster” and fell within the same general class of disasters as the specifically enumerated “natural disasters” because they all involve “substantial damage to property, hardship, suffering or possible loss of life.”

The Friends of Devito Court went on to note that the Petitioners’ arguments ignored the nature of the virus including the way in which it is transmitted.  Because the virus is transmitted by person-to-person contact, has an incubation period of up to fourteen days, can live on surfaces for several days, and carriers can be asymptomatic, the Court concluded that “any location (including Petitioners’ businesses) where two or more people can congregate is within the disaster area.”  Thus, the Court rejected the argument that there had “been no disasters in the areas in which [the Petitioners’ businesses] are located.”

Based on Friends of Devito, attorneys are now raising the argument all properties are damaged just by the manner in which COVID-19 spreads.  In other words, they are asserting that coverage would exist even in the absence of the actual presence of the disease at a specific location.  In the same vein, policy-holder counsel are now arguing that property damage is not a necessary prerequisite to Business Interruption coverage where the policies provide coverage for Business Interruption caused by “direct physical loss of or damage to property.”  They argue that businesses that were forced to close due to stay-at-home orders have suffered loss of property, regardless of whether there is actual contamination or other property damage at the business location, because the property is not available for their business use.

On the surface, both arguments are concerning for insurers faced with COVID-19 related Business Interruption claims.  However, both arguments appear to conflate “loss of use of property” with “physical loss of” property.  As such, they ignore the term “physical.”  These types of arguments have already been rejected by several courts.  These courts have held that the “physical loss” is not the same as “loss” in general because actual physical change to the condition of the insured property is required to qualify as “physical loss.”  See, e.g., Ward Gen. Ins. Servs., Inc. v. Emp’rs Fire Ins. Co., 114 Cal. App. 4th 548, 556-57, 7 Cal. Rptr. 3d 844, 850-51 (2003); MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 778-80, 115 Cal. Rptr. 3d 27, 37-38 (2010); Se. Mental Health Ctr., Inc. v. Pac. Ins. Co., 439 F. Supp. 2d 831, 837 (W.D. Tenn. 2006);  and Phx. Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, 825 (S.D. Iowa 2015).

While unpublished, a 2006 Washington State Court of Appeals case is instructive on the flaw in the newest COVID-19 arguments.  In Washington Mutual Bank v. Commonwealth Ins. Co., the bank argued that “direct physical loss of” and “damage to” property have two separate meanings and were separated by the word “or”, such that the trial court erred in requiring actual physical damage to trigger coverage.  The bank further argued that the term “loss” was broader than the term “physical damage.”  The Washington State Court of Appeals rejected that argument and stated:

The language of this clause specifies that the loss must be “direct physical loss.”  The clause does not use the word “loss” in the abstract. … When NWPT recommended evacuation, there was no actual physical loss to the property and no actual damage to the property.  See Wolstein v. Yorkshire Ins. Co., 97 Wn. App. 201, 211-12, 985 P.2d 400 (1999) (noting that language in a similar “all risks” policy required the insured property to sustain actual damage or physical loss to invoke coverage).

Wash. Mut. Bank v. Commonwealth Ins. Co., No. 56396-3-I, 2006 Wash. App. LEXIS 1316, at *7-8 (Ct. App. June 26, 2006).

While the actual COVID-19 coverage arguments have largely yet to be formally briefed, it seems likely that courts across the country will continue to apply the well-settled rules of interpretation for insurance policies and apply meaning to each word used in a policy instead of rendering certain language superfluous.  We at Lether Law Group will continue to monitor the COVID-19 arguments and cases as they develop.

Lether Law Group is already actively defending insurers in multiple class action lawsuits filed by policyholders seeking Business Interruption coverage.  We are open and available to assist in the defense of any individual or class action lawsuits that may be brought seeking this coverage.

If you would like any assistance in navigating the coverage issues involved in COVID-19 related claims, please feel free to contact us for a free discussion regarding your issues and how we can be of assistance.

No Coverage for Breach of Contract Claims Involving Faulty Construction or for Resulting Delay Claims in Oregon

Although not as liberal as the Washington courts, the Oregon courts have not necessarily been kind to liability insurers in coverage disputes arising out of construction defect claims. In a recent federal court ruling, however, the court has clearly held that construction defect claims resulting in breach of contract are not covered occurrences in Oregon. Moreover, the court held as a matter of law that claims for delay damage did not constitute property damage. The H.D.D. Company, Inc. v. Navigators Specialty Insurance Company, United States District Court for the District of Oregon, Case number 3:19-cv-00115-BR.

In the H.D.D. matter, H.D.D. was the subcontractor retained by SNC Lavalin Constructors to work on a natural transmission pipeline as part of the expansion of the underground natural gas reservoir. During the course of the project, a dispute arose as between H.D.D. and SNC. This dispute involved a retention of payments allegedly owed by SNC to H.D.D. and claims of alleged delay in completion of the subject work. As part of this dispute SNC demanded arbitration under the construction contract with H.D.D. H.D.D. then tendered the defense of the arbitration to Navigators who denied coverage on the basis that the claim did not involve an occurrence, that the claims did not involve property damage and that there were additional exclusionary exclusions which precluded coverage. H.D.D. subsequently sued Navigators. All parties to the action brought Cross-Motions for Summary Judgment for coverage issues.

The United States District Court for the District of Oregon denied H.D.D.’s Motion for Summary Judgment and found in favor of Navigators on its Motion. The court relied upon a long line of Oregon cases involving insurance coverage in the construction defect arena. The court concluded that Navigators had no duty to defend or indemnify H.D.D. H.D.D.’s primary arguments were that based upon the four corners of the Complaint there was a potential for coverage because the allegations could be read in such a way as to create a potential or plausible claim against H.D.D. Navigators argued that the claims set forth in the Complaint only asserted claims for breach of contract and delay which did not constitute an occurrence or property damage. The court agreed.

The court specifically held:

“A commercial general liability policy is not a warranty or performance bond for a contractor’s workmanship…. The risk being insured by such policies is the risk of tort liability for physical damages to others, and not contractual liability because the insured’s product is not at the quality for which the damaged person bargained…. When a Plaintiff alleges only breach of contract, there is not an “accident” within the meaning of the liability policy, and, therefore, there is not coverage under the policy.” (Internal citations omitted).

As a result, the court found that the alleged breach of contract in this case did not constitute an occurrence. In regard to the delay claims, the court also expressly held that such claims did not meet the definition of property damage. Despite the definition of property damage that includes loss of use language, the court still found that the loss of use has to arise from resulting covered property damage and not simply the insured’s defective work. The court expressly held that delay and increased construction costs that are the result of the defective component of the work performed by the insured does not constitute physical injury to, or loss of use of, tangible property.

The H.D.D. decision is a milestone decision in the Oregon courts in regard to both the issues of what constitutes an occurrence and what constitutes property damage under a liability policy.

Lether & Associates represented Navigators in the H.D.D.decision. We were pleased to be able to obtain this result and resolve this claim. If you would like to discuss this claim or other insurance disputes in the Northwest please feel free to contact our offices.

Defense Cost Recovery: The Federal Court Changes the Landscape in Washington

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

In 2013, the Washington State Supreme Court handed down the decision in National Surety Corp. v. Immunex that expanded defense cost exposure in Washington for liability insurers. Specifically, the Immunex court found that Washington liability insurers were not entitled to recovery of defense costs and fees which were incurred and paid for by a liability insurer even though there was no coverage for the loss. The court expressly found that even if the insurer reserved its rights as to reimbursement, there still is no right to recovery unless the liability policy expressly allowed for the recovery. National Surety Corp. v. Immunex, 176 Wn.2d 872, 888-889, 297 P.3d 688 (2013).

The Immunex decision caused significant concerns for liability insurers. It also provided a green light for insureds to tender claims where there was clearly no coverage with the expectation that the liability insurer would pay for the defense, (given Washington’s harsh penalties for denying a defense obligation), without any downside risk. Liability insurers, on the other hand, were forced to defend claims which were clearly not covered without any right to seek reimbursement even if it turned out that the claim was not covered. As a result, many insurers made it a practice to file declaratory judgment actions to have their defense obligations decided early on before the defense fees turned out to be more than the indemnity arguably owed under the policy. That option worked well, except of course when the insured files a motion for stay. If the stay is granted, the insurer could be stuck paying hundreds of thousands of dollars, if not more, in defense costs or be forced to try to settle out early and pay an uncovered claim in order to avoid the fees.

On April 17, 2019, the Honorable U.S. Federal Judge James Robart issued a decision in the case of Mass. Bay Ins. Co. v. Walflor Indus. There are several interesting components in regard to Judge Robart’s decision. First, the court addressed coverage under the Advertising Injury portion of a liability policy in a claim involving, in essence, a trademark/trade dress business dispute. These types of intellectual property claims have become more and more frequent in the highly competitive and sophisticated business environment of the Northwest. These claims are routinely tendered to liability insurers by insureds who look for coverage under the Coverage B section of the policy involving Advertising Injury. In states such as Washington, where the rules in regard to defense obligations are broad and the penalties are high, liability insurers have often picked up the defense of these claims.

Based upon the specific allegations and facts of the Massachusetts Bay case, the court found that there was no coverage under the policy in regard to defense or indemnity.

That is when the decision got very interesting. Massachusetts Bay Insurance Company had added an endorsement to their Washington insurance policies allowing for defense cost reimbursement. This Washington endorsement has been adopted by a number of insurers in a direct response to the Immunex decision. In Cross Motions for Summary Judgment, the policyholder requested that Judge Robart certify this specific question to the Washington Supreme Court. Judge Robart, who is never shy about making a tough decision, refused to certify the question. Rather, in a very clear and well written opinion, he addressed the issue of whether the policy language was void as against public policy or enforceable. Judge Robart found the language was not void and enforced the language as written. The court granted the insurer’s motion and held that the insurer was entitled to reimbursement of defense costs. A link to a copy of the decision is below.

Judge Robart’s decision was based primarily on the fact that the Immunex court clearly stated that the only reason it did not allow for reimbursement is because the policy in that case did not provide for such reimbursement. Since the policy in this Massachusetts Bay claim provided clear and unambiguous language allowing for reimbursement, the court enforced the policy language. What is unclear in the decision is whether the issue of ambiguity was ever clearly argued to the court. For example, it does not appear that there was any discussion in regard to whether costs and defense fees are in essence the same thing under Washington law in regard to this endorsement. What is clear, however, is that the court will allow insurers to potentially enforce their right to seek recovery of defense fees and costs. The decision also seems to suggest that there may have been a different result had the insurer not reserved its rights as to this issue.

From a practical standpoint, it is clear that insurers who do not have this Washington specific endorsement will in all likelihood consider adding this endorsement to their policies. Also, insurers who do have the language will need to be careful in reserving their rights as to this issue. They also should consider filing early declaratory judgment actions and have the courts review whether or not the insurer is entitled to reimbursement based upon their policy language and the Massachusetts Bay case. At this point, it is unclear whether the decision will be appealed to the Ninth Circuit. Regardless, this decision may have a chilling effect on insureds who are seeking coverage for defense where they know there is a potential that they may have to pay the money back.

Lether & Associates has addressed the Washington endorsement in a number of separate legal opinions provided to its clients. If you would like to discuss this endorsement with our office, please let us know.

Mass. Bay Ins. Co. v. Walflor Indus.

Case Law Update – Washington

Several of our recent updates have involved the Washington State Supreme Court’s ruling in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 188 Wn.2d 171, 393 P.3d 748 (2017). In Xia, the Supreme Court held that a pollution exclusion did not bar coverage for injuries due to carbon monoxide emissions because the efficient proximate cause of the loss was an underlying act of negligence. The Xiadecision was the first Washington appellate decision applying the efficient proximate cause rule to a third party liability claim. Our updates relating to the Xia decision have expressed concern as to how lower Courts might apply that decision in future matters.

A new decision issued out of the Eastern District of Washington, The Dolsen Companies, et al. v. Bedivere Ins. Co., et al., 1:16-cv-03141 (E.D. Wash. Sept. 11, 2017), sheds light on how Courts may handle the Xia ruling and efficient proximate cause issues going forward.

In Dolsen, several insureds (“The Dolsen Companies”) operated a farming operation that produced large amounts of manure as byproduct. The Dolsen Companies stored the manure in holding ponds and spread it on crops as fertilizer. The holding ponds leaked and caused seepage into the groundwater. In addition, The Dolsen Companies applied far too much manure on their land, which also resulted in seepage.

The Dolsen Companies were sued for the resulting groundwater contamination, and tendered a claim to their insurance carriers (collectively, the “Insurance Carriers”). The Insurance Carriers denied coverage based on their policies’ absolute pollution exclusion, and The Dolsen Companies sued the Insurance Carriers for breach of contract.

On summary judgment, the District Court held that the absolute pollution exclusion barred coverage, and that the Insurance Carriers’ denials were proper.  The Court found that the absolute pollution exclusion applied because the seepage of manure into groundwater was a contaminate that met the policies’ definition of “pollution.” Moreover, the manure was “acting as a pollutant” because its contaminating attributes directly polluted the groundwater.

More interesting was the Dolsen Court’s treatment of the efficient proximate cause rule. The Court addressed the rule by applying the following analytical framework:

The distinguishing feature … is the relation between the initial act and the pollutant causing harm—viz., whether the initial peril was the polluting act (i.e., whether the incident involved pollutants in the first place) or whether the initial peril was some other act that incidentally led to a polluting harm. Although subtle, this framework is workable and leads to a clear result in this case: the initial act was intimately tied to the pollutant and thus the initial peril was the polluting act.

Applying this framework, the Dolsen Court found that the absolute pollution exclusion applied because “the initial act giving rise to the peril was an excluded harm and there is no other covered occurrence that otherwise led to the harm.” Specifically, with respect to the excess manure that was applied as fertilizer, only one relevant event led to the contamination; namely, the dispersal of manure directly onto the land. This dispersal was the polluting event and was the sole cause of the harm. Therefore, the pollution exclusion applied.

With respect to the seepage from the holding pond, the Court reasoned that the inadequate storage of the manure directly caused the seepage. The inadequate storage of manure was a polluting event and was the efficient proximate cause of the harm. There was also no other negligent act which preceded this polluting event. In contrast, in Xia the negligent installation of the water heater had preceded the polluting event of carbon monoxide emissions.

The Dolsen case presents an interesting example of how the Courts may handle the Xia decision and apply the efficient proximate cause rule going forward. It will interesting to see if other Courts adopt the analysis set forth in Dolsen when addressing the efficient proximate cause rule in the context of liability insurance coverage analysis.

For additional information regarding this or other insurance coverage issues, please feel free to contact the attorneys at Lether & Associates, PLLC.

Oregon Supreme Court Expands Availability of Attorney Fee Awards under ORS 742.061

For years, Oregon’s primary legislative device for compelling prompt settlement of insurance claims has been the availability of an attorney fee award for insureds who recover more than the amount tendered by an insurer within six months of the proof of loss in a lawsuit seeking coverage under ORS 742.061. Prior to the decision in Long v. Farmers Ins. Co. of Oregon, 360 Or 791 (2017), most believed that an insured had to actually obtain a judgment awarding monetary damages in the suit seeking coverage to be entitled attorney fees.  However, in Long, the Oregon Supreme Court identified a new way that an insured can obtain an attorney fee award under ORS 742.061, which can apply even if the insured does not prevail in the suit seeking additional coverage.

In Long, the insured submitted a claim under a homeowner’s policy due to a water leak. Farmers promptly paid about $3,000 to the insured for the actual cash value of the claim. Shortly thereafter, the insured submitted estimates indicating that his ACV claim was worth more than $3,000.  However, no further payments were made at that time.

About two years later, the insured filed suit against Farmers seeking additional ACV coverage. Farmers subsequently issued two voluntary ACV claim payments following a court-ordered appraisal. On the eve of trial, the insured submitted a proof of loss for his replacement cost claims. Farmers adjusted and paid the RCV claim three days later.

The verdict rendered by the court after trial found that the insured was owed less for his claim than what he received from Farmers before the suit was filed. Accordingly, judgment in favor of Farmers was entered. Nevertheless, the insured filed a petition seeking an award of attorney fees under ORS 742.061. In that petition, the insured argued that he was entitled to an attorney fee award because he “recovered” more than was timely tendered by Farmers based on the voluntary payments issued after the suit was filed. The trial court denied the insured’s petition because it believed that the insured had to obtain a judgment awarding monetary damages to be entitled to attorney fees under ORS 742.061.

On review, the Oregon Supreme Court decided that the “recovery” which must exceed the amount of any timely tenders made by an insurer does not need to be based on a judgment entered in favor of the insured. Accordingly, the Court held that voluntary payments given during litigation can qualify as a “recovery” which triggers entitlement to an attorney fee award under ORS 742.061.

In this case, the Court held that the insured was entitled to an attorney fee award for the work performed by his attorneys up until the time he received the additional ACV claim payments. However, the Court also ruled that the insured was not entitled to any further attorney fees because Farmers paid the RCV claim just days after that claim was submitted and the insured did not recover any more at trial than was timely tendered by Farmers.

The Long case reiterates the importance of determining and paying the full value of a claim within six months of the claim submission because it establishes that subsequent claim payments made during litigation will result in at least some attorney fee exposure. See also Jones v. Nava, 264 Or App 235, 240-241 (2014) (confirming that tenders must be made within six months of proof of loss to avoid attorney fee exposure, even if untimely tender exceeding ultimate recovery is given prior to filing of action). However, the decision is not completely adverse to insurers because it also confirms that the requirements for an attorney fee award must be separately met for each claim submitted, even if claims arise from the same loss.

If you have any questions about this case or how it may affect any of your pending or future claims, do not hesitate to contact our office.

New Oregon Decision Will Affect Insurers in Many Ways

The Court of Appeals of the State of Oregon issued a decision on May 10, 2017 in the matter titled Hunters Ridge Condominium Assoc. v. Sherwood Cross, LLC, et al. that could potentially impact future Construction Defect cases in Oregon.

The Hunters Ridge appeal arose out of construction defect lawsuit.  The Plaintiff Condo Association filed suit against the developer and general contractor.  The general contractor then filed third-party claims against several subcontractors.

One subcontractor, Walter George Construction (“WGC”), was insured by American Family (“AmFam”).  WGC tendered the claim to AmFam, who denied coverage based upon a Multi-Unit New Residential Construction Exclusion. Thereafter, WGC failed to appear or answer the Complaint.

Default Judgments were entered against WGC by the developer and general contractor, which included damages, attorneys’ fees, and costs.  The remaining parties settled.  The developer and general contractor, as part of their settlements, assigned claims against WGC to the Plaintiff Condo Association.

A Garnishment Proceeding followed, during which the Condo Association sought to obtain the proceeds of the applicable AmFam policy. Several Motions for Summary Judgment were filed.  Those orders formed the basis of the appeal.

The Trial Court had granted AmFam’s Motion for Summary Judgment on the application of the Multi-Unit New Residential Construction Exclusion.  On appeal, the Condo Association argued the exclusion was ambiguous and therefore could not be construed in favor of coverage.

The subject condo was mixed use – each of the three buildings had dedicated commercial space on the ground floor with residential units above them.  The exclusion defined “multi-unit residential building” as “a condominium, townhouse, apartment or similar structure, each of which was greater than eight units built or used for the purpose of residential occupancy.”

AmFam argued that the condos, which contained more than eight residential units, were subject to the exclusion.  On appeal, the Condo Association argued the exclusion was unenforceable for ambiguity.  It claimed the exclusion could be read to either include or exclude multi-purpose buildings. The Court of Appeals agreed. Specifically, the Court determined the term “residential building” could be interpreted as either a multi-use building, or one that is purely residential.  In light of the ambiguity, the Court reversed the Trial Court’s grant of summary judgment on that issue.

The Court of Appeals also reviewed the Trial Court’s denial of AmFam’s Motion which argued there was no coverage for attorneys’ fees and costs awarded in the underlying judgments.

The awards of fees were based upon the contractual indemnity provisions in the subcontracts, which obligated WGC to indemnify both developer and general contractor.  The Trial Court held that the term “costs taxed against the insured” was ambiguous with respect to whether it included attorneys’ fees.  AmFam appealed.

The Court of Appeals reviewed the fees in two ways.  First, whether the fees were part of the “obligation to pay damages because of ‘property damage’ which the insurance applie[d].”  Second, whether the fees constitute “costs” under the “Supplementary Payments” provision.

The Court determined that attorneys’ fees and costs can potentially constitute covered damages.  The Court recognized that, under Oregon common law, when attorneys’ fees are claimed as consequential damages as a result of tortious or wrongful conduct by a defendant which causes a plaintiff to litigate with a third party, the standard American Rule does not apply.

The Court found that since the claims against the developer and general contractor arose in part from the WGC’s defective work, the insured was therefore liable for some portion of the fees incurred in defending those claims by the Condo Association. The Court concluded that such fees could qualify as consequential damages recoverable against the insured, even in the absence of a contractual indemnity provision.  As consequential damages, the Court reasons, they could be considered “damages because of property damage” within the meaning of the policy.

The Court notes, however, that fees incurred by the developer and general contractor in litigating claims directly against the insured would not qualify as such “damages.” Such fees are not subject to the third-party litigation rule set forth above.

The Court did, however, determine that the fees incurred by the developer and general contractor in pursuing the insured directly may qualify as “costs” under the “Supplementary Payments” provision.  The Court reasoned that since “costs” was not defined, it was required to interpret that term with the use of dictionary definitions.  The Court found that the common definitions of the term “costs” could be construed to either include or exclude attorneys’ fees.  Therefore, the Court held that the term was ambiguous, and ruled in favor of coverage. As a result, the term “costs” was construed to include attorneys’ fees, as well as expert expends, and the Trial Court’s denial of AFM’s Motion for Summary Judgment was upheld.

In addition the issues discussed above, the Court of Appeals reviewed the constitutionality of denying an insurer the right to a jury trial in the context of a Garnishment Proceeding. ORS 18.782 provides that, in a contested garnishment hearing at which the garnishee’s liability is determined, “[t]he proceedings against a garnishee shall be tried by the court as upon the trial of an issue of law between a plaintiff and defendant.” AmFam contended that this statute violated its constitutional right to a jury trial, pursuant to Article 1, Section 17 of the Oregon Constitution.

The Court agreed, and held that the insurer must be given the right to a jury trial as part of a full opportunity to litigate any coverage issues. As a result, the Court found that ORS 18.782 is unconstitutional to the extent it compels parties to a garnishment action to litigate coverage issues to the Court without the ability to elect a jury trial.

This decision obviously impacts several areas of law concerning insurance in the State of Oregon.  If you have any questions or concerns about how this decision may impact any pending or future claims, please feel free to contact our office at any time.