Legal Alerts

Oregon Insurance Coverage Alert - July, 2013

Oregon Legislature and Governor Enact Senate Bill 814

Under the guise of providing landowners with assistance in cleaning up contaminated areas such as those in the Portland Harbor Superfund Site, the Oregon Legislature and Governor enacted Senate Bill 814 which will create new risks, new requirements, and new restrictions for insurers dealing with Oregon environmental claims. The bill was signed into law on June 10, 2013, and became effective on June 13. That bill substantially amended Oregon’s Environmental Cleanup Assistance Act, with the following provisions being of particular interest and concern.

First, the enacted bill creates new risk for insurers by providing insureds with a new cause of action for punitive damages when an insurer engages in “unfair environmental claims settlement practices” as defined by the bill. Such “unfair practices” include a variety of things such as failure to commence investigation of an environmental claim within 15 days, failure to make timely payments for costs reasonably incurred in the defense of environmental claims, and denial of a claim for any “improper purpose.” The bill provides that the insured must provide a 20 day notice of claim to allow the insurer time to cure. After that 20 day period, the insured may file suit against the insurer and may obtain an award of up to three times actual damages if the court finds that the insurer has “acted unreasonably.”

This new private right of action is similar to Washington State’s Insurance Fair Conduct Act (IFCA) which, in regard to all first party claims, provides for potential triple damages when an insurer has unreasonably denied a claim for coverage or payment of benefits. The impact of the IFCA cause of action in Washington has been increased litigation and the transformation of many claims for breach of contract into claims for bad faith. Insurers in Oregon now face a similar risk. On the positive side, the new Oregon cause of action only relates to settlement of environmental claims rather than to all first party claims, as is the case in Washington State.

Second, the bill creates new requirements for insurers by providing for mandatory “nonbinding environmental claim mediation.” Upon a written request from the insured, the insurer must participate in such mediation, and the bill directs the Oregon Attorney General to appoint a mediation service to operate the mediation program. The new mediation program may result in earlier settlement or streamlining of claims, but it is sure to result in additional insurer costs for mediation and related attorney fees.

Third, the bill imposes new restrictions on insurers by (1) restricting when an insurer may prohibit assignment of a claim by an insured, by (2) restricting the insurer in its choice of defense counsel, and by (3) restricting insurers from pursuing contribution against other insurers who enter into settlements with the insured.

In regard to assignment of claims, the bill provides that even when a general liability insurance policy contains a provision that requires the insurer’s consent before the insured can assign its rights, the insurer “may not prohibit the assignment without consent of an environmental claim for payment under the policy for losses or damages that commenced prior to the assignment.”

The impact of this restriction on the insurer’s ability to require consent before assignment will likely be to encourage insureds to settle with claimants in return for an agreed judgment, a covenant not to execute, and the assignment of the insured’s causes of action against the insurer.

In regard to assignment of defense counsel, the bill provides that when an environmental claim is defended under a reservation of rights or when the insured faces excess exposure for an environmental claim, that “the insurer shall provide independent counsel to defend the insured who shall represent only the insured and not the insurer.” The bill further provides that the “independent counsel” retained must be experienced in handling the type and complexity of the environmental claim at issue, and that the insurer will be obligated to pay the “independent counsel” fees based on the “regular and customary rates for the type and complexity of environmental claim at issue.” While the bill still appears to allow the insurer to choose the “independent counsel,” it makes the insurer potentially liable if it retains counsel who are not deemed to have the required level of experience or if it fails to pay what is considered the reasonable and customary rate for such counsel.

The impact of this provision regarding defense counsel will likely be to restrict insurers in their choice of counsel to more established and experienced firms, to put upward pressure on legal fees, to encourage greater involvement of the insured in selection of defense counsel, and to lessen the insurer’s control of the defense.

In regard to contribution for environmental claims, the bill restricts an insurer from pursuing contribution against another insurer who has settled with the insured. It provides that there is a rebuttable presumption that such settlements are in good faith, and insulates settling insurers from contribution claims if the settlement agreement has been approved by a court after 30 days notice has been provided to all other insurers.

In cases where multiple policies may provide coverage, this provision may encourage insurers to make quicker settlements on terms more favorable to insureds. In evaluating potential settlements, insurers will need to weigh the added benefit of being protected from contribution claims and the added risk of being the last insurer to settle.

Enforcement of the bill’s provisions is clouded by the prospect that, because some of its provisions may be contrary to express insurance policy language, such provisions may amount to an  unconstitutional impairment of the right to contract. In regard to that constitutional issue, the bill contains language which could be read to hold that express policy language controls over conflicting language in the bill. That position was set forth in the May 15, 2013 memo from State of Oregon Legislative Counsel  Dexter Johnson regarding “Impairment of contract issues under SB 814.” An insurer contemplating making a challenge to provisions of the bill which contradict its express policy language may consider using that memo in an effort to prevent an unconstitutional application of the bill which would markedly alter the terms of the insurance contract.
 

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