Under Oregon law, insurers typically have only limited incentives to treat their policyholders fairly and to handle claims with the utmost good faith. As of now, Oregon has no statutory “bad faith” remedy. The insurance industry is the only industry to get an exemption from Oregon’s Unfair Trade Practices Act. And, despite the general evolution of tort law in the state, Oregon courts have been slow to recognize common-law bad-faith remedies outside of certain limited circumstances. In Oregon, an insurer can, in many instances, wrongfully deny a claim, lose in coverage litigation with its policyholder, and ultimately be forced to pay exactly what it should have paid in the first place, after years of unreasonable delay and expense.
ORS 742.061 has long provided policyholders with a valuable weapon in a state that otherwise does little to incentivize prompt and fair claims handling by insurers. Under ORS 742.061, a policyholder is entitled to an award of reasonable attorneys’ fees where 1) the insurer does not resolve a claim within six months of the filing of a proof of loss; 2) “an action is brought in any court of this state upon any policy of insurance of any kind or nature;” and 3) the policyholder ultimately recovers more than the insurer has offered. In our experience, insurers who lose in court will typically try to dull the sting of this statutory fee provision by arguing that the rates charged were too high or the hours worked were excessive. Whether the coverage claims were litigated in state court or in Oregon’s federal courts, however, insurers have ultimately paid fee awards after the policyholder prevailed.
Faced with a policyholder’s attorney-fee claim that approached $3.5 million, however, Continental Casualty Corp. and Transportation Insurance Co. (collectively “Continental”) decided to get creative in federal district court in Oregon. In Schnitzer Steel Indus., Inc. v. Continental Casualty Corp., Schnitzer Steel sued Continental, its liability insurers, over unpaid defense costs arising from the Portland Harbor Superfund site. The parties litigated for more than three years. Ultimately a jury found for the insured, Schnitzer, on every claim presented, awarding more than $8.6 million in damages. Pursuant to ORS 742.061, Schnitzer then moved for an award of attorneys’ fees incurred in the coverage litigation totaling nearly $3.5 million.
Continental, not surprisingly, raised the usual objections to the rates charged by policyholder counsel and the amount of time spent on certain tasks. Continental also raised a novel argument, however, aimed at eliminating its insured’s fee claim entirely. ORS 742.061 mandates a fee award where the policyholder prevails after bringing coverage litigation “in any court of this state.” Knowing that removal was a certainty, Schnitzer had filed its coverage litigation in the U.S. District Court for the District of Oregon. While doing so avoided the unnecessary delay of filing in state court and then dealing with the insurers’ removal to federal court, it also laid the groundwork for Continental’s “gotcha” argument: according to Continental, federal courts are not “any court of this state,” and ORS 742.061 therefore does not apply.
Judge Michael Mosman rejected Continental’s argument and awarded nearly $3.5 million in attorneys’ fees, concluding that an award of fees “supports the stated purpose of the statute.” But he found Continental’s argument “interesting and compelling,” and did not reach this decision easily. You can read Judge Mosman’s order here. Continental has now appealed the issue to the Ninth Circuit Court of Appeals. You can read Continental’s opening brief in the Ninth Circuit here. Continental’s arguments on appeal rest largely on out-of-state cases addressing “the courts of” language in forum-selection clauses. According to those cases, such language means only courts established by the states, and not the federal courts located in these states.
We believe that the Ninth Circuit will ultimately adhere to the purpose of the statute and find that ORS 742.061 applies to all coverage litigation in Oregon, regardless of whether the case is initially filed in state court or federal court. In the meantime, however, a prudent policyholder should take steps to minimize the impact of Continental’s novel argument when considering coverage litigation. Cases should be filed in state court, even where the defendant insurers are certain to remove the case to federal court. And if an insurer “jumps” its policyholder with a claim for declaratory relief in federal court, the policyholder should not simply file counter-claims for breach of contract and assume that a right to fees will follow. Rather, the insured should file a separate state court action. Such an action will undoubtedly be removed to federal court and consolidated with the insurer’s declaratory relief claim. However, in the unlikely event that the Ninth Circuit agrees with Continental, the insured would still have a good argument for the application of ORS 742.061 and an award of attorneys’ fees.