In order to avoid providing a defense to an insured, insurance companies often argue that the complaint or demand does not clearly allege covered damage. I call this the "trained monkey" defense - essentially, the insurance company's position is that it is only required to do what a trained monkey might do, which is read the words printed on the page. No analysis, no thinking, no investigation. Oregon's courts have rejected this type of argument time and again, but insurance companies persist, because of the lack of downside risk to denying a defense under Oregon law. A new decision from the Court of Appeals may help convince insurers that the "trained monkey" defense will simply not work.
In West Hills Development v. Chartis Claims, Inc. & Oregon Automobile Ins. Co., the "trained monkey" argument played itself out in the context of additional insured coverage. West Hills was the general contractor on a residential development, and was an additional insured of one of its subcontractors, L&T. When West Hills was sued by homeowners, it tendered to the defense to L&T's carrier, Oregon Auto. Oregon Auto refused, and West Hills sued to recover a portion of its defense costs. Oregon Auto argued, among other things, that the homeowners' complaint did not identify L&T as a subcontractor on the project. The complaint alleged that West Hills was liable for not supervising subcontractors generally, but didn't identify any subcontractors by name. Therefore, argued the insurer, how were they supposed to know that the tender from West Hills on the L&T policy was legitimate?
The problem for Oregon Auto was that the tender had been done carefully, by West Hills' counsel, and the tender told Oregon Auto that L&T was the subcontractor responsible for some of the deficiencies alleged in the complaint. But Oregon Auto argued that under Oregon's "eight-corners" rule it wasn't required to investigate whether that statement in the tender letter (which Oregon Auto claimed was mere "argument") was true. Instead it could pull the "trained monkey" routine and blithely deny coverage.
Nonsense, said the Court of Appeals. Relying on the long line of Oregon cases requiring insurers to resolve any ambiguity in favor of coverage (including ambiguity about identification of insureds), and also on Fred Shearer & Sons v. Gemini Insurance, a 2010 decision, the court held that Oregon Auto had a duty to investigate the statement in the tender letter about L&T's role. In the Fred Shearer case the court adopted a limited exception to the "eight corners" rule when the identity of a proposed insured is not clearly alleged in the complaint. The West Hills court applied the logic of Fred Shearer to additional insured coverage.
The West Hills decision addressed several coverage issues; the "trained monkey" defense is only one. However, its most lasting impact may be its clear statement that an insurance company has a duty to investigate facts tending to show that coverage is available, and analyze the allegations in a complaint, not just read the complaint for magic words.
