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Understanding the Impact of OFAC Advisory Notices on Insurance Policies

One of the most unusual notices that exists in many policies is the OFAC Advisory Notice. This notice, which can function to freeze or block an insurance contract, is rarely considered by claims professionals or insureds. So, what is OFAC?

OFAC stands for the Office of Foreign Assets Control, which is a financial intelligence and enforcement agency operating under the U.S. Treasury Department. The Division of Foreign Assets Control (DFAC), the precursor to OFAC, was created in the 1950s, when China entered the Korean War. DFAC blocked Chinese and North Korean assets that were subject to US jurisdiction. Thereafter, following a 1962 Treasury Department Order, DFAC officially became OFAC. Yet, despite OFACs presence as a governmental entity for over 70 years, little is known about it. Even less is known about OFAC’s relationship to the insurance industry.

In 2018, OFAC mandated an advisory notice restricting claims activities and payments when any person or entity benefiting from the subject insurance policy has violated US sanctions law or is a Specially Designated National and Blocked Person under OFAC. Included in the Specially Designated National and Blocked Persons list are various foreign agents, front organizations, terrorists, terrorist organizations, and narcotics traffickers.

In essence, the advisory mandates that insurers are restricted from issuing payments on claims where a designated entity is involved. Per the terms of the advisory this could include entities that are subject to foreign trade embargoes or sanctions.

Based upon our research, the OFAC advisory has been construed only a few times in the insurance industry. However, there has been increased discussions regarding this notice due to heightened worldwide tensions and international sanctions placed on certain countries, such as Russia, as a result of military activity. Further, the advisory notice would apply to any business or entity that is in violation of human rights, is subject to trade embargoes or sanctions, or is engaged in narcotics trafficking.

Although the advisory notice provides that the insured’s policy can be frozen or blocked if they are found to be in violation of OFAC regulations, neither OFAC nor case law provides clear direction as to what those exact ramifications are. This issue, however, should be considered in regard to any claim where such a designated entity may be involved, either as an insured or as the beneficiary of insurance payment.

Insurers who issue cyber coverage likely face the largest impact from the OFAC advisory notice. In fact, in 2020 the OFAC issued an Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments and issued an updated Advisory regarding same on September 21, 2021. That advisory, a copy of which is also linked to this newsletter, provides that facilitating ransomware payments demanded as a result of malicious cyber attacks may violate the OFAC advisory with respect to payments to those who have violated U.S. sanctions law or are Specially Dedicated national and Blocked Persons. The 2021 Advisory further provides as follows:

OFAC may impose civil penalties for sanctions violations based on strict liability, meaning that a person subject to U.S. jurisdiction may be held civilly liable even if such person did not know or have reason to know that it was engaging in a transaction that was prohibited under sanctions laws and regulations administered by OFAC.

In other words, an insurer who issues cyber coverage runs the very real risk of running afoul of OFAC regulations by issuing payment for any cyber ransom attack without first getting permission from the OFAC. As a result of these risks, insurers offering this type of coverage would benefit significantly by putting into place policies and protocols to ensure compliance with OFAC regulations and to ensure that proper reporting and communication with OFAC take place prior to issuing payment for any cyber ransom attack.

The attorneys at Lether Law Group have been providing insurers with coverage advice and recommendations for more than 30 years. Our experience includes addressing cyber claims and coverage issues under cyber policies.  If you’d like to discuss this particular coverage issue or other insurance related issues arising in the ever-changing world of insurance, please feel free to contact our office.

Washington State Supreme Court Clarifies Law on “Reasonable Investigation” and Determination of “Reasonable” Charges for Personal Injury Protection Claims

On February 15, 2024, the Washington State Supreme Court issued its decision in Schiff v. Liberty Mutual Fire Insurance Company, et al., Case No. 101576-3, which examined “… what an insurer must do to meet the ‘reasonable investigation’ requirement and the requirement to pay ‘all reasonable and necessary’ medical expenses” under Washington’s Personal Injury Protection (“PIP”) statutes and Washington law.

The decision arose out of a suit filed by Dr. Stann Schiff alleging that the insurers’ practice of reducing provider bills based on computer-generated calculations violated Washington law.  It was undisputed that Liberty Mutual Fire Insurance Company and Liberty Mutual Insurance Company (collectively “Liberty”), used a third-party database called FAIR Health to determine reasonableness of a medical provides charges when Liberty received medical bills from an insured under either a PIP or a MedPay (supplemental medical payment coverage) claim. [1]

The trial court denied both parties’ attempts at summary judgment and the Court of Appeals accepted discretionary review. The Court of Appeal, relying on its prior holding in Folweiler Chiropractic, P.S. v. American Family Insurance Co, 5 Wn. App. 2d 829, 429 P.3d 813 (2018) reversed the trial court’s denial of Dr. Schiff’s motion. The Court of Appeals reasoned, based on the Folweiler decision, that: 1) it was an unfair practice under the Washington Consumer Protection Act (“CPA”) to not conduct an individualized assessment of a medical bill; and that 2) RCW 48.22.095(1)(a) and RCW 4.22.005(7) required an individualized assessment.

The database provided information for an insurer to compare charges for specific medical treatments in a geographical area and to determine the percentiles of those charges.  Liberty apparently had an established practice of paying 100% of a medical provider’s bill if it was below the 80th percentile for the procedure/treatment in the geographical area. However, if the bill exceeded the 80th percentile, Liberty would reduce the charges to the 80th percentile charge and pay that amount. It was undisputed that Liberty did not conduct individualized investigations with respect to the bills at issue, but instead relied upon 80th percentile information from the database.

The trial court denied both parties’ attempts at summary judgment and the Court of Appeals accepted discretionary review. The Court of Appeal, relying on its prior holding in Folweiler Chiropractic, P.S. v. American Family Insurance Co, 5 Wn. App. 2d 829, 429 P.3d 813 (2018) reversed the trial court’s denial of Dr. Schiff’s motion. The Court of Appeals reasoned, based on the Folweiler decision, that: 1) it was an unfair practice under the Washington Consumer Protection Act (“CPA”) to not conduct an individualized assessment of a medical bill; and that 2) RCW 48.22.095(1)(a) and RCW 4.22.005(7) required an individualized assessment.

The Supreme Court rejected the Court of Appeals’ analysis and overturned the Court of Appeals. In doing so, the Supreme Court effectively also overturned the Folweiler decision’s individualized assessment requirement. In discussing the Folweiler decision, the Supreme Court stated and held as follows:

Though the Court of Appeals cited to the relevant statutes and regulations, it failed to explain how they mandate an inquiry into the qualifications of the medical provider and did not cite any case to bolster its interpretation. The PIP statutes and the insurance code do not have any express requirement that the insurers look specifically at the qualifications of a medical provider to determine the reasonableness of the charge.

Schiff Opinion at 12 (emphasis added).

Instead, the Supreme Court held that the insurance code: 1) places the responsibility on an insurer to determine whether to deny, limit, or terminate medical benefits if the insurer determines the claim is not reasonable or necessary; 2) that the code tasks insurers to conduct their own reasonable investigation; 2) that the code requires insurers to create their own reasonable standards for promptly investigating a claim.

After reviewing the Washington Administrative Code (“WAC”) and the properties of the FAIR Health database, the Supreme Court held that “Comparing charges for the same treatment in the same geographic area is relevant to the determination of reasonableness.” Schiff Opinion at 14.

As a result of this conclusion, and in light of out-of-state authority addressing the same issues, the Supreme Court ultimately held in favor of Liberty as follows:

We hold that the 80th percentile practice and the use of the FAIR Health database is not unfair or unreasonable and does not violate the CPA or the PIP requirements to establish standards under which reasonable charges for medical procedures are determined.

Schiff Opinion at 16.

The Schiff decision effectively overturns the Folweiler decision and provides insurers with further clarity on their investigatory obligations and reasonableness determinations in PIP matters.  Insurers remain responsible for determining whether to deny, limit or terminate medical benefits where the insurer determines treatment was not reasonable or necessary. Insurers are also still required to conduct a reasonable investigation and develop reasonable standards to promptly investigate claims.

As the Schiff decision makes clear, insurers can safely continue to rely on databases such as the FAIR Health database to determine whether a provider’s charges are reasonable and are not required to individually investigate and vet each provider when making that determination as part of that process.

The attorneys at Lether Law Group have in excess of thirty-one years’ experience in defending and advising insurers on the handling of PIP claims. This experience includes handling claims and litigating insurance disputes in the state of Washington. Please do not hesitate to contact our office if you have any questions regarding the Schiff decision or any other insurance matter.

[1] The FAIR Health database was identified as an “independent, nonprofit, medical claim database.”

Oregon Supreme Court Unilaterally Creates “Negligence” Cause of Action Against Insurers

On December 29, 2023, the Oregon Supreme Court effectively created new bad faith liability exposure for insurers doing business in Oregon when it issued its opinion in Moody v. Or. Cmty. Credit Union, 371 Ore. 772, 2023 Ore. LEXIS 692 (2023). In Moody, an insured sued a life insurance company for breach of contract and negligence based on a denial of a claim for life insurance proceeds.

The Plaintiff’s husband was the named insured under a life insurance policy and was accidently shot and killed. At the time of his death, the decedent had marijuana in his system. The Plaintiff filed a claim, and the defendant insurer initially denied the claim because the decedent’s death purportedly fell within an exclusion for deaths caused by or resulting from being under the influence of a narcotic or other drug.

The Plaintiff brought suit alleging that the death was not caused by or resulting from the use of any drug. She alleged claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence. Plaintiff sought both economic and non-economic damages including emotional distress damages. The extra-contractual claims were dismissed by the trial court and proceeded to an appeal. The Court of Appeals reversed the trial court’s dismissal of the negligence claim and the Supreme Court accepted direct review.

On review, the Supreme Court framed the primary question as whether the Plaintiff could pursue a negligence per se claim. The Court clarified that, in Oregon, a negligence per se claim is shorthand for a negligence claim that otherwise exists where the standard of care is set forth in a statute or rule and violation of the statute or rules raises a presumption of negligence.

Under that framework, the Court first examined whether the Plaintiff had a legally protected interest sufficient to subject the Defendant to liability for emotional distress damages. In determining that she did, the Court examined ORS 746.230 (Oregon’s Unfair Claim Settlement Practices statute). While acknowledging that the statute did not create an independent cause of action, the Supreme Court nevertheless found as follows:

We find that the statue provides explicit notice to insurers of the conduct that is required and, in requiring insurers to conduct reasonable investigations and to settle claims when liability becomes reasonably clear, does so in terms that are consistent with the standard of care applicable in common claw negligence cases.

Moody, 2023 Ore. LEXIS 692 at *41.

The Court went on to hold that permitting a common law negligence claim could further the statute’s purpose by deterring insurers from engaging in prohibited conduct. The Court went on to find that allowing emotional distress damages would not place an undue burden on the Defendant because insurers are in a relationship of mutual expectations with insureds and that the insurer could reasonably foresee that failing to exercise reasonable care in the handling of the relationship could result in emotional harm. Finally, the Court held that the claimed harm was of sufficient importance under public policy to justify allowing the claim to proceed. The Court’s ultimate conclusion was stated as follows:

Considering all of those factors, and not relying on any one of them alone, we conclude that the insurance claim practices that ORS 476.230 requires and the emotional harm that may foreseeably occur if that statute is violated are sufficiently weighty to merit imposition of common-law negligence and recovery of emotional distress damages.

Moody, 2023 Ore. LEXIS 692 at *51.

While the Court cautioned that its conclusion would not make every contracting party liable for negligence that causes emotional harm, the holding is extremely concerning and problematic for insurers. In fact, the holding may effectively overturn long-standing Oregon case law holding that insurers are not liable in tort for the handling of an insurance claim. See, e.g., Farris v. U.S. Fid. and Guar. Co., 284 Ore. 453, 587 P.2d 1015 (1978) (Farris II). This issue was recognized in the Moody dissent as follows:

The majority’s analysis creates uncertainty about the remaining precedential effect of Farris II. If the majority means to distinguish Farris II on its facts, then courts may still rely on Farris II as rejecting tort liability for third-party insurers that have denied coverage in bad faith, which were the facts presented in that case. On the Other hand, if the majority is distinguishing Farris II based on the pleadings or based on the legal theory that the plaintiffs asserted in that case, then Farris II might have no precedential effect in any case styled as a negligence claim.

Moody, 2023 Ore. LEXIS 692 at *78 n.7.

The full nature and impact of the Moody decision will likely remain unknown until the Oregon Supreme Court has had the opportunity to further clarify or refine its holding in subsequent cases. As it stands, insurers in Oregon now potentially face liability for general damages (and potentially other alleged consequential damages) in tort as long as those claims are styled as negligence claims. Effectively, the Oregon Supreme Court has created bad faith liability for insurers based on a negligence standard of proof. This reflects a substantial increase in exposure for insurers doing business in Oregon especially when one considers that the majority of jurisdictions require a higher burden of proof for bad faith claims (i.e. unreasonable, frivolous, or unfounded denial of benefits).

The attorneys at Lether Law Group have in excess of thirty-one years’ experience in advising insurers on the handling of extra-contractual claims. This experience includes handling claims and litigating insurance disputes in the state of Oregon. We have several attorneys licensed in Oregon and actively litigating coverage and extra-contractual claims in that jurisdiction. Please do not hesitate to contact our office if you have any questions regarding the Moody decision or any other insurance matter.

 

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Washington Landlords and Tenants: Remaining COVID-19 Eviction Protections Lifted

The National Response to COVID-19: A Brief Overview

In early 2020, the nation was in a state of emergency due to the COVID-19 pandemic. Recognizing the risk of mass evictions as a result of the pandemic, many state and local governments enacted a moratorium on residential evictions. These moratoria effectively denied landlords the right to pursue an unlawful detainer (eviction) action – the only legal means of removing tenants for failure to pay rent.

Washington State’s Eviction Moratorium and the ERPP Initiative

In Washington state, an eviction moratorium was in effect from March 18, 2020, through October 31, 2021. Following the end of the moratorium, the Washington state legislature passed E2SSB 5160 authorizing the establishment of an Eviction Resolution Pilot Program (ERPP) in any county in Washington state. The ERPP was designed to facilitate dispute resolution between landlords and tenants, by connecting them with a dispute resolution specialist and resources such as rental repayment assistance. Once the eviction moratorium ended on November 1, 2022, six counties in Washington state elected to participate in the ERPP: King, Pierce, Snohomish, Clark, Spokane, and Thurston. Each program established a local Dispute Resolution Center (DRC) and operated pursuant to a standing order issued by the local superior court.

Pursuant to the ERPP, landlords in participating counties were required to provide tenants with an ERPP Notice, advising tenants of their rights under the ERPP, and a proposed repayment plan for outstanding rent amounts owed. Upon receiving an ERPP Notice and proposed repayment plan, tenants had 14 days to negotiate a proposed settlement with their landlord via the local DRC. In circumstances where the landlord and tenant failed to come to an agreement during the 14-day period, or the tenant breached the agreement, the landlord was then authorized to send the tenant a 14-day notice to pay or vacate.

The End of ERPP and Its Impact

The ERPP ended by statute on July 1, 2023. Dispute Resolution Centers statewide reported that over 78,000 cases were closed and completed during the life of the program, and 73% of these cases closed because the landlord and tenant reached an agreement. Now that the program has ended, landlords are no longer required to provide tenants with an ERPP Notice or a proposed repayment plan before proceeding with an unlawful detainer for unpaid rent.

The end of the ERPP marks the end of all remaining COVID-19 eviction protections for tenants. However, some counties in Washington state still maintain permanent eviction moratoriums during parts of the year. In Seattle, City Council Ordinance 126041 creates a defense to eviction for tenants who would have to vacate their housing between December 1 through February 28 each year. Additionally, Seattle City Council Ordinance 126369 creates a defense to evictions for anyone in school, with children in school, or working at a school during the City of Seattle Public school year, which is generally the beginning of September through mid-June.

Need Legal Assistance? Contact Lether Law Group

Lether Law Group has attorneys licensed and actively participating in eviction proceedings in Washington state. To the extent that you have any questions about Washington landlord-tenant law or eviction moratoria, please feel free to contact us by phone at (206) 467-5444 or via email at info@letherlaw.com.

Oregon to Permit Substantial Extra-Contractual Claims for Insureds

CAs of January 1, 2024, Oregon insurance law will experience a paradigm shift—for the first time, Oregon will allow insureds to present a meaningful and substantial extra-contractual claim for damages.

After the resolution of a legislative impasse that threatened to derail the entire legislative session, the Oregon State Senate returned to business this week and advanced a series of bills to the governor’s desk. Included amongst them was House Bill 3242, which amends Oregon’s Unfair Claims Settlement Practices Act (ORS 746.230) to allow a private right of action for insureds to recover actual damages, treble damages, attorney fees, and litigation costs for an insurer’s unreasonable conduct in violation of the act.

Oregon Governor Tina Kotek is expected to sign the bill in the coming weeks.

Once signed and in effect, an insured may bring a cause of action under ORS 746.230 for violation of the statute, which identifies familiar unfair claim settlement practices such as the following:

 

(a)        Misrepresenting facts or policy provisions in settling claims;

. . .

(d)        Refusing to pay claims without conducting a reasonable investigation based on all available information;

. . .

(g)        Compelling claimants to initiate litigation to recover amounts due by offering substantially less than  amounts ultimately recovered in actions brought by such claimants;

. . .

The statute does contain two important exceptions. The statute does not allow a suit to be brought on medical malpractice claims. The statute also specifically excludes claims against attorneys, “in the attorney’s personal capacity,” for any acts taken on behalf of an insurer.

The statute also contains a 45-day notice requirement with an opportunity to cure on the part of the insurer.

Regarding treble damages, the statute is explicit in stating that the decision whether to award treble damages rests with the “court”. This would appear to signal that, as a practical matter, trebling would be subject to post-trial motions practice. However, it should be noted that in other jurisdictions, the Federal Courts have held that trebling must be decided by a jury as a matter of United States Constitutional Law. This is an issue certain to be litigated as policyholders and insurers begin confronting the practical impacts of the new statute.

Finally, the statute will carry a two-year statute of limitations. The statute is triggered not on the date of the loss, but on the date of the alleged violation of the statute.

House Bill 3243, which would have amended Oregon’s Unlawful Trade Practices Act (UTPA) to create yet another private cause of action for insureds, died in committee.

Lether Law Group has attorneys licensed and actively practicing in the State of Oregon.  To the extent that you have any questions about Oregon law, please feel free to contact Tom Lether or Eric Neal at (855) 467-5444 .

Washington State Court of Appeals New Decision On Covenant Judgments

On January 30, 2023, Division One of the Washington State Court of Appeals issued a published opinion further addressing covenant judgments in Washington. In Garza v. Perry, No. 83377-4-I, 2023 Wash. App. LEXIS 144, at *8 (Ct. App. Jan. 30, 2023), the Court of Appeals issued a decision primarily holding that an insurer cannot nullify a stipulated settlement based on mutual release language in the agreement because the insurer is not a party to the agreement.

The Garza case arose out of a motor vehicle accident. After failed negotiation attempts with the defendant’s insurer, the plaintiffs and defendant entered into a stipulated settlement with a covenant judgment in the amount of $2.5M and an assignment of rights against the defendant’s insurer. The settlement agreement contained a paragraph that stated the parties would mutually release each other including from the assignment of rights if the insurer provided written proof that it would fully indemnify defendant from any final judgment.  As required, the parties sent a copy of the settlement agreement to the insurer with an email offering to settle for $2.5M if paid within 10 business days.

The insurer did not agree to pay the $2.5M, but instead waived its limits and advised that it would indemnify the defendant for any judgment. Based on that letter, the insurer asserted that Plaintiffs’ and Defendant had therefore mutually released each other. The parties to the agreement disagreed and made a written addendum to their agreement to accurately reflect the actual meeting of the minds. Nevertheless, the insurer intervened and asserted that it had a valid settlement agreement with the parties.

The trial court rejected the argument and the Court of Appeals affirmed on appeal. The Court of Appeals noted that purpose of a covenant judgment is to protect the insured from the bad faith of an insurer. It does not form a contract with the insurer or for the insurer’s benefit. The Court also rejected the insurer’s argument because the agreement as a whole, including the written reformation, evidenced that the agreement was only between Plaintiffs and Defendants and also required that the intent was to only release the covenant judgment if the insurer agreed to pay the $2.5M.

The insurer also attempted to attack the trial court’s reasonableness determination on appeal based upon three arguments: 1) that the trial court had made oral statements regarding a lack of basis for the $2.5M amount at the reasonableness hearing; 2) that the Plaintiffs’ experts were not credible. and 3) that there was no substantial evidence supporting the conclusion that the agreement was not the product of collusion and fraud. All three arguments were rejected on appeal.

With respect to the oral statements of the trial judge, the Court of Appeals reiterated Washington law that a trial court’s oral statements have no binding effect unless explicitly incorporated into the court’s written order. The statements at issue were not incorporated into the order and, as such, were treated as having no import on the case.

The second and third arguments were effectively rejected for the same reason. Specifically, they were rejected because the substantial evidence review standard for review of reasonableness hearings requires the appellate court to view the evidence in the light most favorable to the prevailing party.  

The bad faith evidence argument was rejected because there was evidence that the settlement agreement was subject to review, revisions, and input by independent coverage counsel. The credibility argument was also rejected because a factfinder’s credibility determination are not subject to review under the substantial evidence standard.

The Garza case provides a two main takeaways for any insurer facing a covenant judgment. First, collateral attacks on the language of the covenant judgment settlement agreement are unlikely to prevail because an insurer is not a party to the agreement. Second, the standard of appellate review for reasonableness hearings is a difficult standard to overcome on appeal.

Because of this, an insurer that fails to fully develop the record at a reasonableness hearing runs the significant risk of being unable to successfully challenge a reasonableness finding on appeal. As a result, insurers need to be fully prepared to fully present their case at any reasonableness hearing. Moreover, insurers and insurer counsel should specifically request that the judge explicitly incorporate any helpful oral statements into its final order.

Lether Law Group has been successfully defending insurers against covenant judgments before the trial court and on appeal for more than 30 years. If you would like to discuss covenant judgment defense or any other matter, please do not hesitate to contact us.