Oregon and Washington are often viewed as sister states, similar in their climates, policies and attitudes. Yet, while the two states share a border and a uniquely Pacific Northwest culture, their approaches to insurance law differ greatly. In particular, the legal protections to prevent insurers from wrongfully refusing to defend a policyholder against a covered claim differ greatly, creating divergent incentives for insurers. Where Oregon offers a veritable paradise for the insurer, Washington provides strong protections for the policyholder. Insurers are therefore much more likely to refuse to defend a claim in Oregon than in Washington.
Washington: Power to the Policyholder
In Washington, an insurer’s duty to defend a claim is triggered any time a liberal construction of the facts alleged in a complaint could, if proven, subject the policyholder to a covered form of liability. This is determined, in most cases, entirely by comparing the underlying complaint and the insurance contract. Even in cases where there is a strong argument that a claim would not be covered by the policy, an insurer is required to defend until it is clear that the claim is actually not covered.
Furthermore, per the Washington Supreme Court’s ruling in Expedia, Inc. v. Steadfast Ins. Co., absent a showing of actual prejudice, an insurer cannot halt the underlying proceedings to seek discovery prior to a determination of whether a duty to defend is owed. Rather, if a claim could potentially be covered by the policy, the duty to defend is triggered and an insurer has an obligation to defend against the underlying claims until it is able to definitively prove that coverage does not apply.
Washington creates strong disincentives against denials of coverage and refusals to defend. If an insurer wrongfully fails to defend, not only is it subject to excess "bad faith" damages, it may also be bound by any settlement the policyholder enters into in the underlying case.
Washington's Insurance Fair Conduct Act, RCW 48.30.015, permits a policyholder injured by an insurance company’s unfair practices, including unreasonable denial of coverage, to sue for actual damages, litigation costs, and treble damages. Some of the most common unfair practices, as defined by WAC 284-30-330, are as follows:
- Misrepresentation of pertinent facts or policy provisions;
- Failure to acknowledge and respond promptly to communications regarding claims;
- Failure to establish reasonable standards for the prompt investigation of claims;
- Refusal to pay claims without a reasonable investigation;
- Failure to affirm or deny coverage of claims within a reasonable time;
- Failure to make a good faith attempt to settle clear claims promptly, fairly and equitably; and
- Failure to provide a reasonable amount under the policy such that a claimant is compelled to initiated to litigation, arbitration or appraisal to recover amounts due.
A policyholder can also bring a claim for common-law bad faith and violation of the Consumer Protection Act. If the policyholder is successful, attorney fees are recoverable under a case known as Olympic Steamship. Washington law therefore creates a strong incentive for insurers to defend claims. The protections afforded to policyholders are broad. Insurers are on the hook for any claim that may, on its face, be covered by the insurance policy, and are required to pay defense costs until they can prove that the claim is not covered. As noted in our recent post, failure to do so, even in cases where there is a very strong argument that the claim is not covered by the policy, can result in extraordinary damages.
Oregon: Power to the Insurer
Like Washington, Oregon’s duty to defend standard is broad. As discussed in a prior post, a duty to defend is triggered whenever it appears from the facial language of the complaint and the insurance contract that a covered claim has been alleged. Such a duty will trigger even where facts that would support a covered claim are only implied rather than alleged outright. Where it is unclear whether a complaint alleges a covered claim, the insurer is to err on the side of coverage. And as in Washington, Oregon statutes seek to prohibit wrongful denial of coverage and refusal to defend claims. ORS 746.230 declares that wrongfully denying claims or failing to defend are unfair claim settlement practices. Oregon’s law is very similar to that of Washington and also names all the actions discussed above as unfair claim settlement practices.
Nonetheless, Oregon insurance law favors the insurer because the claims handling statute (ORS 746.230) has no teeth. Oregon law provides no meaningful method for a private party to enforce its standards of fairness. The Oregon Supreme Court has ruled that a policy holder has no private right of action against an insurer for unfair claim settlement practices. Further, although a wronged policyholder may seek contract damages (specifically, defense costs for defense of the underlying suit), and if successful may recover attorney fees under ORS 742.061, Oregon courts have held that bad faith damages (that is, punitive damages or any kind of extra-contractual damages) are not available if the insurer wrongfully fails to defend. (The exception being in coverage cases arising out of environmental liabilities – for such claims a specific statute allows treble damages).
Therefore, the policyholder has to pay defense costs out of pocket initially, and then engage in costly litigation against the insurer to recoup the amounts it was entitled to all along, without recovering any enhanced damages to compensate for the burden and aggravation of the insurer refusing to defend. (In a very recent case emphasizing this very point, a federal court found that an insurer had to pay contribution to its coinsurer where a complaint alleged claims that could have been within the terms of the insurer’s contract; though this was undoubtedly a win for the co-insurer, the insurer in question was only required to pay one-half the defense costs in the underlying suit.)
The practical effect is that in Oregon an insurer has little incentive to defend a policyholder, because the worst that will happen is that it will have to reimburse defense costs and pay the policyholder's attorney fees. The incentive instead is to deny the tender of defense, see if the policyholder has the wherewithal to sue, and then try to a force the policyholder to settle for partial payment of defense costs or endure the uncertainty and costs of further litigation. Without the threat of any kind of bad-faith damages, insurers have less to lose in wrongfully refusing to defend a covered claim than they have to gain by withholding a defense.
The Take-Away
While Washington and Oregon both have interpreted an insurer's duty to defend broadly, defined almost solely by the underlying complaint against the policyholder and the insurance contract itself, they diverge widely on the incentives for insurers to defend potentially covered claims. In Washington, the risks associated with wrongfully refusing to defend encourage insurers to shoulder a policyholder’s defense costs until it becomes clear they are not contractually obligated to do so. Conversely, in Oregon, an insurer’s primary incentives are to avoid paying defense costs, even for obviously covered claims, because the policyholder will have to shoulder the defense of the underlying claims and sue the insurer to even receive its due. This means that if a policyholder that has received a denial of defense has a colorable claim to have Washington law apply to the coverage dispute, rather than Oregon law, it should explore that option in consultation with counsel.
