Oregon Enacts Major Changes to Environmental Insurance Laws

Oregon insurance and environmental contamination law has undergone major and far-reaching changes in favor of policyholders and landowners with the enactment of Senate Bill 814. The bill went into effect on June 10, 2013 after it was signed by Governor Kitzhaber. The bill had overwhelming support from the Oregon Legislature. In fact, it  passed both chambers of the Oregon Legislature with only two votes against. Importantly, SB 814 applies not only to new environmental claims, but to existing and even past claims, as long as no final judgment was entered on the claim before the bill became law.

The key changes from the new law include:

  • It gives policyholders a right to sue insurers for bad faith and to collect up to three times the actual damages for a number of reasons, including failing to quickly investigate or pay a claim, wrongfully denying a claim, delaying payments for policyholders’ lawyers and environmental consultants, refusing to engage in nonbinding mediation and failing to pay interest on money the insurer owes. This is a dramatic change from previous Oregon law, which did not allow bad faith lawsuits against insurers except in very limited circumstances. The right to sue for bad faith is sure to tip the scales to policyholders in many disputes against insurers, as occurred in Washington when its bad faith laws were expanded several years ago.
     
  • Policyholders have the right to retain independent counsel at the insurer’s expense in almost all pollution cases. This overrides the provision found in virtually all liability insurance policies that allows insurers to appoint counsel of their choice, usually without consulting the policyholder. “Independent counsel” means policyholders get to chose their own attorneys and that those attorneys represent only the policyholders’ interests and are not controlled or directed by insurers. The new law does not completely strip insurers of input in the selection of counsel, and policyholders and their attorneys will still have a duty to cooperate with insurers, but the effect of this provision will be a wider range of attorneys available to policyholders and a significant increase in the rates attorneys charge insurers.
     
  •  Provisions in liability policies that bar coverage for pollution on the policyholder’s or landowner’s own property cannot be enforced if that pollution presents any possibility of damaging a neighbor’s property or the state’s waterways and underground water. This “owned property” exclusion is sometimes, but not always, stated as a reason insurers should not pay the entire cost of a clean-up. This part of the new law makes it clear that when the pollution could migrate and cause future damage to wetlands, waterways or neighbors, it is part of the damage that insurers must pay for.
  • Insurers cannot rely on so-called “anti-transfer” clauses to prevent policyholders from settling with claimants and assigning their rights under the policy. In years past, when an insurer refused to provide a paid defense to a policyholder who was sued, policyholder defendants who had limited resources frequently settled with plaintiffs in return for an agreed judgment and rights to sue the defendant’s insurer. This practice almost totally stopped, however, after a 2006 Oregon Supreme Court case said insurers could enforce provisions in policies that voided such transfers and that prevented plaintiffs from being able to sue insurers directly until they had obtained a judgment in court. The new law allows such settlements and assignments of policy rights, even where an insurer is actually providing a defense. This goes beyond the law in most states that allow such assignments – those states usually say the insurer must have first breached the contract by wrongfully failing to provide a defense.

The new law is the latest amendment to several existing Oregon statutes known as the Oregon Environmental Cleanup Assistance Act – Oregon Revised Statutes 465.475 to 465.480. The previous provisions relating to insurance coverage were enacted in 1999 and were much more limited. Because the new law applies mostly to insurance policies that are 30 to 50 years old or more, many anticipate that the law will be challenged as an unconstitutional retroactive impairment of existing contracts. Both the United States and Oregon constitutions contain prohibitions on legislative modification of existing contractual obligations. These constitutional provisions were enacted due to the experience of the fledgling United States under the Articles of Confederation that preceded the national constitution. Under the Articles of Confederation, state governments frequently favored debtors by passing laws that voided contracts after the creditor had performed under the contract.

The proponents of SB 814 said that the bill is constitutional because  it does not take away all value of the insurance policies from insurers, the public policy behind the law is more important than the rights being taken away, and  insurance is a highly regulated field where insurers expect significant oversight and involvement by state regulators and legislators.

Proponents also say the law’s “savings clause” makes it constitutional. That clause says that any part of the law that conflicts with “the intent of the parties” is void. This language, proponents claim, “saves” the law from being unconstitutional because it can never truly bar enforcement of the sections of an insurance contract discussed above if it is clear that the insurance company and the policyholder agreed on the meaning of terms and conditions in the policy. However, insurance policies are standard form contracts where insurers and policyholders seldom negotiate over what is in the policy and what it means. This leads to frequent disputes between insurers and policyholders, and requires courts to interpret what the policy’s terms mean. When Oregon’s Supreme Court says what certain language in a policy means, that settles the issue for others who have exactly the same dispute, because insurance law is governed by state rather than federal law, and the Oregon Supreme Court is the final arbitor of state law. But few disputes are exactly the same as the one in a particular court case, insurance policies and language change over time and often change from insurance company to insurance company. Small changes in language, or the addition of new sections of the policy, mean a court might make a different decision in another case.

Insurers are certain to challenge the new law on many different grounds, but it remains the law until a court rules otherwise. If the new law stands, it will fundamentally alter the relationship of insurers and policyholders for many environmental claims. Remember, however, that the new law applies only to environmental cleanup cases, and not to any other kind of liability claims. 

This is a brief overview of the portions of the new law that will most directly affect policyholders and landowners. The law contains other provisions that will also be significant in many cases, but many of these are more complicated and won’t go into all of them here. Here is a link to the press release from the Oregon Legislature on this new law. The press release is not within its particular spin, of course. 

I testified about this bill in the Oregon House and have analyzed its provisions pretty carefully. This is a very, very significant change for Oregon, a state that essentially had no bad faith law (except for excess verdicts) and where the tripartite relationship has long reigned. It won’t be long before we see this bill come up in environmental matters across the state, and I suspect the boundaries of what environmental contamination consists of will also be tested.  If anyone has any questions about the bill and its effects, feel free to contact me.  

 

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Wait, I’m not covered for that?

I remember when I called my first insurance agent. I was asked a million questions, I had no idea why the information was important, didn’t know all the answers, didn’t understand the terms, and at the end of the day, had NO idea what I had just purchased coverage for. (For the record, I do know now that I should have been asking questions instead of all the mmm hmmms, but it is scary to be on your own for the first time.)

I didn’t just include this story to share my post-college fears, or to tell some uplifting story about how with hard work and dedication that girl became an insurance coverage lawyer (yawn). Really, it was just a vehicle to share why I find risk conversation— a new risk management-oriented online community by Chubb Insurance–to be a really neat, and helpful tool. Clicking around this website you can take quizzes to see where there is risk in your private and business life, read blogs, polls and encounter other user friendly information all available at the click of your mouse. By having some idea of what coverage you need, and what questions you need to ask, you can easily be more productive (and less confused) when you are ready for that first conversation with your agent.

Full Press Release

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‘Tis the season to be politicking

In perusing this article and this article in the Insurance Journal I was struck by the differences between the everyday understanding of an insurance contract and the understanding I have been gaining through working with them in the legal system. Senator Richard Blumenthal of Connecticut, who to his credit wants to save money for his constituents, has in my opinion put State Farm and other insurance companies into a really unfortunate position. The article says:

Blumenthal said State Farm is the largest insurer not to waive the deductible and continues to apply the charge to claims it received because the storm was downgraded less than 24 hours before causing damage in Connecticut.

“I understand that the insurance policies State Farm wrote for Connecticut residents permit the company to charge a full hurricane deductible, as Irene was downgraded to tropical storm status before the 24 hours that your policies require,” Blumenthal said in his letter to State Farm CEO.

“However, I urge you to reconsider this narrow interpretation of your policy documents. The total amount that State Farm would have to waive in deductibles would be negligible, and would represent a significant benefit to your policyholders.”

 

 

 

 

 

 

Reading his comments, I am not sure the senator does in fact understand the insurance policy, or policies in general. Insurance policies do not "permit companies to charge . . . ." They either cover some loss/damage/injury, or they do not — an outcome that is not based on the company’s "permission." In fact, the insurance company that would decide to apply only certain provisions of their policy would be acting incorrectly. The company must strictly follow their contract that was entered into in good faith. The "narrow interpretation" Blumenthal is criticizing is merely proper application of the policy. Says who? Well, says the courts.

Because of his challenges, insurance companies that don’t capitulate are faced with bad publicity by the public who, understandably, are not aware of the applicable legal background. Because the insurance company IS aware of the legal implications of their choices, and because they are aware of other dangers (some of which are noted by the comments to the articles) that could come about if they begin picking and choosing when to apply policy language, they have no choice but to turn the other cheek.  

 

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Goodnight Irene

Chad Hemenway is out with a new piece on PropertyCasualty360.com about Hurricane Irene and whether we will see any wind vs. water or anti-concurrent cause litigation. His verdict: no. The damage is mostly just flood damage. 

Of course, that didn’t stop cases such In Re Katrina Canal Breaches Litigation from happening several years back when New Orleans flooded due to storm surge. The essence of those consolidated cases was the contention that although water damage and even certain causes of water damage were excluded from coverage, policies generally did not explicitly exclude coverage for losses caused  human negligence in construction and maintenance of flood levees. (I wrote about In Re Katrina Canal Breaches here, here and here, among other places).

This human negligence argument has a better chance where an open peril policy excludes causes but does not expressly exclude results, and for some reason it does much better in challenges to earth movement exclusions and some other limitations. However, when it comes to flood or water damage exclusions, human negligence is the Washington Generals to the water damage exclusion’s Harlem Globetrotters. It just gets run off the court, and has its shorts pulled down by Meadowlark Lemon while shooting a free throw. The human negligence argument won out at the District Court level in Canal Breaches, but that was like winning the first quarter —  and it got crushed at the Fifth Circuit. 

Truth is, flood exclusions have been almost always upheld for a long, long time. If you are looking for a reason why flood exclusions fare better than earth movement exclusions, it is because where earth movement exclusions fail, it is generally not in cases of widespread earthquake damage. Instead, the failure usually comes in isolated cases involving mud slides or similar damage. Courts are reluctant to break exclusions that clearly related to low-frequency, high-severity losses, like floods and earthquakes. Depending on the judge, courts are more willing to see ambiguity involving high-frequency, low-severity losses. That’s my explanation, anyway. Maybe someone has a better one.  

OK, enough philosophy for now. Chad writes:

The point here is that any talk about lawyers expecting disputes over wind vs. water is just that—talk…probably from plaintiffs’ attorneys. The case law is plentiful.

As George Simpson, an attorney with North Carolina’s Cranfill Sumner & Hartzog, tells me, “It would be hard to imagine anyone opening a Pandora’s Box of issues that haven’t already been addressed ad nauseum.”

Dude has it right, I think. Read the whole story and see if you agree. Also, thanks to Chad for the shout out.     

Speaking of Irene, this gives me an excuse to talk about Frank Sinatra. Here’s a link to his version of Goodnight Irene. If you can get past the really annoying backup vocals that sound like a mix of drunken cowpokes and coked-up banshees, this song is a good example of what an amazing talent Sinatra was — he could take a song that is otherwise pretty forgettable, or that sucks, and sell it. Sinatra, whose theory of singing was to act the part he was singing, is right at the top of singers who could bring sincerity to their work.    

 

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A quick missing link

In searching for a topic that could wake me up and get my brain flowing this Monday morning I got a bit sidetracked looking at this article on Above the Law. (As a side note, if you never surf that site, Above the Law is always good for some laughs . . . and some tears).

Anyway, looking at the claims of Thomas Jefferson somehow lead to an actual insurance topic. Sallie Mae is now entering the world of tuition insurance. Tuition insurance provides coverage for students’ tuition when they are forced to leave school mid-term for a physical or mental illness. Here is NY Times coverage on the plan. This article sparked some interesting comments, which you can read here due to the plan’s differing payouts for physical/mental health claims (100% payout for physical, 75% for mental health). 

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Made for TV

In April, when I first saw an article about Worker’s Comp, a TV show pilot following the inner-workings of an insurance company, I couldn’t believe there was enough humor to base an entire comedy series on the topic. Today, I stand corrected. After seeing this blog post on InsuranceQuotes, and being incredibly amused by the thought of someone coughing their way to $1 million, I did a little digging. Turns out people have attempted some crazy (read hilarious) things to try to squeeze some money out of their insurance carriers. For instance, Fox Business reported on a person attempting to put a mouse in their soup (but forgetting that there would be no soup in the poor critter’s lungs or alternatively, that they needed to cook the mouse in soup), and a man who attempted to collect on his home and car insurance after throwing flaming cooking pans into his car and on his couch. Then there is this article,  from InsureMe, which, believe it or not, reports on a man who successfully claimed against a homeowner’s insurance policy for undue mental anguish after breaking into the home, locking himself in the garage, and having to live off of dog food and soda until the homeowner returned.

While there seems to be plenty of humor for a television show, there is also an important message in these articles. The insurance company will investigate claims, they have the resources to give mouse autopsies, and insurance fraud is not a smart get rich quick scheme.

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The Missing Links

The Cutting Edge: Whoever said insurance coverage wasn’t on the cutting edge of civil rights (if anyone has ever actually said that . . . or thought about it even) hasn’t been keeping up with Lambda Legal or its most recent lawsuit. The lawsuit, filed on Tuesday, claims that the state of Oregon violated anti-discrimination laws by denying insurance coverage for a hysterectomy to a transgender man clerking for the Oregon Court of Appeals.

Homes, automobiles, and commercial property, OH MY!: Worse than the damage to Auntie Em and Uncle Henry’s house in the Wizard of Oz: insurance companies have already paid over $4.2 million in coverage for the damage caused by the Memorial Day windstorm (that did include tornadoes) in Fargo, North Dakota and the total could rise to $5.8 million.

David adds: There are also big flooding problems in Minot, N.D. The Souris River is going nuts. Lots of the town has been evacuated, including my niece, her husband and their kids, and they are living out on our family farm two hours away. "Souris" is French for mouse, the river originates in Canada, comes down to Minot and loops back up. I don’t like to brag, but Minot is where I went to undergrad, at the prestigious Minot State College — it had a great English department and was an awesome party school (I co-majored in English and Advance Party Studies). When I  was a kid there was a big flood and they called it "The Mouse That Roared," but as I recall I don’t think it was anything like the size of this.  

Insurance, bringing politicians together: One thing that always annoys me during election season is that with both parties so busy pointing out their differences, we miss the chance for politicians to come together. Well, the NY Times has solved this problem (really, solving a problem this big is as simple as publishing an article in the Times) by pointing out 4, count ’em, 4 insurance issues that Republicans and Democrats could possibly, if they try really, really hard agree on.  

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Hit and Run Links

Hey, at least it’s an Ethos: This story reminded me of the classic comedy The Big Lebowski, where Walter Sobchak contrasts nihilism with Naziism: "I mean, say what you want about the tenets of National Socialism, Dude, at least it’s an ethos."  An "insurance" company called Ethos, according to the story, apparently sold dirt cheap auto insurance policies with just one significant  drawback: the policies were bogus. The whole thing was fake, and the people who bought the policies were completely uninsured — which is what they call "self-insurance." Makes me wonder if among the scammers was a Big Lebowski fan and there was some irony in the name Ethos — "say what you want about a company that defrauds you, at least fraud is an ethos."    

Vancouver hockey riot: does insurance cover damage from looting and rioting? The Vancouver riot, like many of these things, was carried out by "anarchists." Walter Sobchak would have no respect for these people, they are just barely above nihilists as far as having an ethos. As Little Bill Daggett said in The Unforgiven, they don’t have any character, not even bad character. Plus, their anarchism is fake anarchism. As has been pointed out by others, if there was an actual state of anarchy, so-called anarchists who wear masks, mob up and destroy property would be machine-gunned or sold into slavery by the private security firms that would rule the streets.   

More on Vancouver hockey riot: anarchist looters to be sued. They would be getting off easy. Being sued is still better than being machine-gunned or sold into slavery during a state of actual anarchy, which is what the anarchists want.

Montana — home births rise, covered by insurance.  This story says they have both insurance and a midwife. I was born at home in North Dakota, delivered by my father (my mother also played a large role), no doctor, no midwife, no insurance. So was one of my sisters. People are so extravagant these days. Midwives and insurance are for wimps.  

 

 

 

 

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Additional Insurance: When “Ongoing Operations” Coverage Extends To Damages After Completion

One of the areas of insurance coverage law that can make a legitimate claim to being the most challenging is the area of problems arising out of additional insured status. Additional insurance is frequently required in the construction industry by general contractors, and additional insurance arrangements are extremely common. This involves the GC requiring a subcontractor to add the GC to the subcontractor’s insurance policy as an insured to the extent the GC becomes liable for the negligence (sometimes it is stated as the subcontractor’s "fault," a broader concept than negligence, or sometimes simply "acts," "omissions," "conduct," "activities," "operations" or similar word). 

Stemming out of the explosion of construction defect litigation in the 1990s, "long tail" liability for construction defect damages became a frequently litigated reality, and insurers responded with a number of measures including exclusions for injuries in progress, multi-unit construction, losses for which pre-policy notice was provided and stacking of multiple policies. Part of this was designed to bring more certainty to indemnity issues under "occurrence" liability policies, but another part was designed to relieve insurers of the duty to defend in many instances — construction defect cases are often massive and expensive to defend, with defense costs exceeding indemnity exposure in a high percentage of cases. 

Insurers also sought to limit AI responsibilities by producing an endorsement form that specified that the coverage applies to "ongoing operations."  More about that in a minute. One of the great challenges of insurance coverage law is that this field is really just out of its infancy.  Widespread commercial liability insurance is a relatively new product — since about the early to mid-1960s — and has been evolving continuously. As a result, in many states, key questions have not even been addressed by the judiciary, or the decisions that do exist aren’t very helpful and are perhaps not the most sophisticated or insightful analysis that could be done. This is why I call insurance coverage The Great Workshop of the Common Law. It’s a work in progress — an "ongoing operation," if you will. 

Now, back to AI endorsements.  In 1993 and 1997 the Insurance Services Office produced additional insured endorsements that were supposed to limit exposure to damage that occurred during ongoing operations. The problem is that, many times, courts said the language of the endorsement didn’t actually say that: for example, ISO form CG 20 10 03 97 (which as the last four numbers of the form indicate was produced in March 1997) says AI coverage is in respect to "liability arising out of your [the subcontractor’s] ongoing operations performed for [the additional insured]." Some courts have said this language actually covers not just damages that occurred during ongoing operations, but damages that occurred after completion. Because the vast majority of construction defect liability stems from water intrusion and related damages that occur after completion of a project, these cases present a problem for insurers. 

I saw a recent Ninth Circuit case that highlights this language: Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co. The case was decided under Arizona law. This case appears to me to involve the 20 10 03 97 form, judging by the language the court analyzed. The Ninth Circuit found that the "arising out of ongoing operations" did not limit the GC’s coverage to just liability for damages that the subcontractor caused before completion, but also for damages that occurred after completion, as long as they happened during the policy period. "During the policy period" isn’t as much of a restriction as you might think, or the Ninth Circuit appeared to believe — in the absence of a continuing loss or other exclusion, damages that begin during a policy period are usually covered by a commercial general liability policy if they continue after the policy period.  

The Ninth Circuit said that damages that occur after completion necessarily must have arisen out of ongoing operations — if the subcontractor didn’t do any ongoing operations, there wouldn’t have been anything completed. The court said it wasn’t going to consider the drafter’s history, which I think is a legitimate call, and was going to hold the insurer to what it actually said. I think there is an argument for what the court said, but there is one aspect of its analysis I think is lacking.  The court examined exclusion (j)(6) in the body of the subcontractor’s policy, it appears, to show that if the endorsement didn’t provide coverage for completed ops damages, there was no coverage at all. Exclusion (j)(6) is the one that precludes coverage for "that particular part of any property that must be restored, repaired or replaced" because the insured’s work "was incorrectly performed on it." There is an exception in the exclusion for damages that occur after completion, meaning it applies only to ongoing operations. I take it the Ninth Circuit’s point is that, if the AI endorsement excludes completed operations and (j)(6) excludes ongoing operations, there is no coverage and that is ridiculous.

If that is what the court is saying, my reaction is this: (j)(6) might indeed limit the subcontractor’s coverage to completed operations only, but as to the additionally insured GC, there is potential coverage for ongoing operations as well as completed ops because the definition of "your work" in a commercial general liability policy has an exception that allows coverage for a GC when work was performed for it by a subcontractor.  In other words, the (j)(6) exclusion will be applied differently to a GC insured as an AI under the policy than to the named insured subcontractor. If this seems weird, don’t forget that there is a Separation of Insureds or Severability of Insureds clause in such policies that instructs you to analyze coverage separately as to each insured. 

Because of case law like this, ISO put out an AI form in 2004 that changes the coverage language and contains an express exclusion for damages that occur after completion. But even seven years after this AI form was produced by ISO, not every insurer uses it. Many still use old forms, or use manuscript forms of their own devising, or modify the ISO form. 

I could go on and on and on about AI insurance, but this is a good place to stop for today. There are something like 28 current ISO AI forms, and many, many old ISO forms, out there. Also, there are dozens if not hundreds of manuscript and adapted forms out there, so this issue is one we will keep seeing being constructed and deconstructed again and again upon our visits to The Great Workshop of the Common Law. 

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Dumbing down analysis with dictionaries

Generally in insurance analysis when I see a court resort to a dictionary definition to interpret a word or phrase in a policy I figure what’s going to follow will be a fairly facile, superficial explanation. Usually that’s the way it works out. 

The New York Times explores what it says is an increasing reliance on dictionary definitions in U.S. Supreme Court opinions. In May alone, justices cited dictionary definitions eight times, and not always for big words.

All of this is, lexicographers say, sort of strange.

“I think that it’s probably wrong, in almost all situations, to use a dictionary in the courtroom,” said Jesse Sheidlower, the editor-at-large of the Oxford English Dictionary. “Dictionary definitions are written with a lot of things in mind, but rigorously circumscribing the exact meanings and connotations of terms is not usually one of them.”

I can’t speak much to opinions of the U.S. Supreme Court, because I seldom read them, but I read a lot of insurance coverage cases from state appellate courts, federal district courts and federal appeals courts, and I agree with the gist of the Times story.

One issue with using a dictionary definition is which dictionary do you use? There are scores and scores of dictionaries, and the variance among them is sufficient to allow a judge to cherry pick a definition that proves a pre-conceived point. 

In addition, the use of dictionaries tends to support an extra-textual method of analysis that renders a much more limited and less insightful analysis. I’m not saying this is done out of bad motives. I’m simply saying it’s non-textual and not the  best method of analysis. 

Words and phrases in a policy should not be viewed in isolation, outside the context of surrounding terms of the policy, and of the policy as a whole. I strongly advocate analyzing policy language by analyzing the entire context of the policy and attempting to discern what underwriting concern or principle of insurance is being addressed. Also, analyzing sentence structure, punctuation and syntax is much more helpful at discerning meaning, or finding ambiguity, than turning to a dictionary. In reality, although some courts purport to cling to notions that insurance terms are supposed to be understood in the common, everyday usage of the word in the absence of a specific definition within the policy, I think this is unrealistic. Most of the time, words, phrases and clauses in insurance policies have at least some degree of specialized meaning, because the concepts they deal with are specialized, and because the words are usually selected in response to previous judicial opinions. 

I would make one final point: extra-textualism, or non-textualism as it also could be called, is heavily reliant on the deductive method of reasoning, which is inferior to the inductive method in insurance coverage analysis. Deductive logic is prone to misuse because it relies on an initial set of premises that are subject to the bias of the person who creates the premises, and is therefore rigid, and you are less likely to catch your own mistakes or recognize your own folly.

UPDATE: Forgot the link to the NYT, fixed it.

 

          

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