Last week, the Oregon Court of Appeals issued an opinion that turns logic and fairness upside down. In Deardorff v. Farnsworth (Feb. 4, 2015), the insured, a horse stable, had purchased a “Business and Commercial Farm” policy from Oregon Mutual Insurance Co. (“OMI”). Because the stable was responsible for other people’s horses, the stable asked its insurance broker whether the policy included liability coverage for damages to “CCC” property; that is, the horses under the insured’s care, custody, or control. The insurer responded to the broker’s question that this coverage was included. Based on this unambiguous representation by the insurer, the insured did not purchase a stand-alone policy to protect itself from potential lawsuits by owners of horses that were hurt while in the stable’s care.
You can see where this is going. While the stable was transporting horses in California, the horse trailer caught fire and killed all of them. The owners’ property insurers paid for the losses and then sued the stable to recover what had been paid to the owners. Despite the fact that OMI had unambiguously represented that its policy provided liability coverage in this situation, OMI now left its insured in the lurch, refusing to defend the stable against the owners’ claims.
The trial-court judge did not suffer these shenanigans gladly. The trial court granted summary judgment in favor of the insured’s claim to recover its defense costs by finding that “estoppel” prevented the insurer’s now-you-see-it, now-you-don’t representation about what its own policy covered. Under the estoppel doctrine, a party, sensibly enough, cannot reverse course about some misrepresentation that it has made with knowledge of the facts, to another party that does not know the facts, with the intention that the listener should rely, and in a situation where the listener actually relies to her detriment. It’s where law and fairness meet.
But in Deardorff, the Oregon Court of Appeals held that there are special “limitations to the application of estoppel in the insurance context.” The court interpreted one of these “limitations” to be that coverage cannot be “expanded” by estoppel, at least where the insurer had misrepresented the effect of some unambiguous policy provision. You read that right: where the insurer misrepresents some aspect of coverage that no reasonable person could possibly get wrong, the insurer cannot be estopped from later relying on the exact opposite position about coverage. But where the insurer misrepresents coverage where it’s at least a close call, then the insurer can be estopped from relying on a new, coverage-defeating interpretation.
This rule is really ugly for insureds. After all, one of the seminal principles of Oregon insurance law is that any reasonable ambiguity in an insurance policy must be interpreted in favor of finding coverage for the insured. See Hoffman Const. Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or. 464, 470-71 (1992) (holding that when there are “two or more competing, plausible interpretations” of a policy, then Oregon law chooses the interpretation favoring the insured because “the ambiguity cannot be permitted to survive”). Under this rule, allowing estoppel to apply where a policy provision is ambiguous really gets the insured nothing more than it already had under Hoffman. It doesn’t matter what the insurer tells you about an ambiguous policy provision.
But under Deardorff, estoppel cannot apply to prevent the insurer from denying coverage when its initial misrepresentation about its own policy was dead wrong. That is, if insurers get it a little wrong, they cannot profit from the mistake; they are estopped from changing course. But when insurers get it really, really wrong, they can deny coverage even though the insured relied on that mistake. Huh?
The apparent injustice in this may have something to do with a case that the Deardorff court relied on, DeJonge v. Mut. of Enumclaw, 315 Or. 237 (1992). In DeJonge, however, the insured had the policy for three years before the loss, at least arguably giving the insured a long opportunity to read the policy and discover the insurer’s obvious mistake about coverage. But in Deardorff, the insured did not get a copy of the policy until after the loss. The Deardorff court does not even attempt to distinguish the facts of these two cases or explain why this fact should have no significance.
That’s a task now left for some future insurance-coverage lawyer. In the meantime, insureds in Oregon now have even less reason to trust an insurer’s interpretation or explanation of its own policy forms, even before the insured can check to see exactly what she is buying. After Deardorff, the safest course, which may be difficult in the rush that is often part of an insurance renewal, is to request a “specimen” copy of the policy and then ask trusted coverage counsel for specific advice about it.