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OREGON MOLD LITIGATION (cont'd)
A. Insurance issues affecting Oregon mold claims.
Many other cases arise in the context of first party insurance claims, where a homeowner has suffered a loss from a roof leak or a burst water pipe which may or may not be covered by their homeowner’s policy. Their insure may investigate the problem, then send them a letter saying the loss is not covered. Many homeowners receiving such a denial letter are shocked. Like many of us, they probably did not read their policy thoroughly and expected almost any damage to their house to be covered. Even when a claim against a contractor is involved, the contractor who is sued may tender the defense to his insurer, only to find out that his insurer says that mold claims are not covered.
Most homeowners policies contain “all risk” coverage for damage to the dwelling itself and “named perils” coverage for damage to personal property or contents. Typically the coverage for the dwelling is found in the “Coverage A” part of the policy and the contents coverage is found in the “Coverage C” part of the policy. Where a loss is to the dwelling itself, the loss is presumed covered unless specifically excluded somewhere in the policy. This is the definition of “all risk” coverage. Therefore, the “default setting” (for all you computer users), is coverage and a policy has to have a specific exclusion to defeat coverage for damage to the structure. However, where the loss relates to personal property in the house, the property must usually be specifically named as a covered item or category of items to be covered under the policy’s personal property coverage. This is “named perils coverage.” Personal property loss is presumed to be excluded unless specifically listed as one of the “named perils.”
Oregon law has not traditionally recognized third party bad faith at all. It has recognized first party bad faith against the insurer only in the narrowest of circumstance, such as the situation where an insurer has undertaken to defend its insured in a liability action and then puts its interests ahead of its insured. That is a conflict of interest. Most often that arises where it rejects an offer to settle a claim within policy limits and then a verdict exposes the policyholder to liability above his coverage limits. But there are other situations where an insurer can have a conflict of interest and act on its own behalf, while ignoring its obligations to its insured. For example, when a claim is made against a liability policyholder, the insurer sometimes denies its customer the protection of a defense, even though the policy says that the insurer will defend the insured against any claim that arguably might be covered under the policy. If the policy supporting a bad faith claim in a “failure to settle” contest is that the insurer wrongly exposes its insured to personal expense, then would not that same policy consideration also apply where the insured has to spend thousands to defend himself against a claim when his insurer should have stepped up and provided a defense free of charge? Unfortunately, Oregon cases seem to view this later example as merely a breach of contract. It is unquestionably that. But there are cases where the breach is so egregious that the Oregon Appellate Courts will hopefully be presented with an opportunity to revisit this issue in a context where they can broaden the rule. Perhaps the increase in personal injury mold claims Oregon courts may present the occasion to expand this strict view of insurance bad faith.
Oregon has adopted the “efficient proximate cause” doctrine. An “efficient proximate cause” is “an action that sets in motion a train of events and which brings about a result without the intervention of any force, starting and working actively and efficiently from a new and independent source." Couch on Insurance 2d, § 74:711 (Rev ed. 1983). In Gowans v. N.W. Pac. Indem. Co., 260 Or. 618, 621, 489 P.2d 947, 491 P.2d 1178 (1971), the court said:
"It is an established rule of insurance law that where a peril specifically insured against sets other causes in motion which, in an unbroken sequence and connection between the act and final loss, produces the result for which recovery is sought, the insured peril is regarded as the proximate cause of the entire loss."
Oregon courts have also adopted the “substantial factor” causation standard in cases where there are multiple defendants. See, e.g, Dewey v. A. F. Klaveness & Co., 233 Or 515, 541, 379 P2d 560 (1963) (causation standard was whether the defendant's conduct was a “substantial factor” in physically producing the injury). In McEwen v. Ortho Pharmaceutical, 270 Or 375, 407-21, 528 P2d 522 (1974), the court held that "[t]he respective liability of multiple defendants depends on whether the negligence of each was a substantial factor in producing the complained of harm." Id. at 418. The court also explained that the plaintiff need not show that each defendant's negligence was "sufficient to bring about plaintiff's harm by itself; it is enough that [each defendant] substantially contributed to the injuries eventually suffered by [the plaintiff.]" Id. This issue can crop up where a number of defendants are sued or where a general contractor is sued and he then joins one or more subcontractors as third party defendants.
The issue of insurance coverage for mold claims is a hotbed of litigation nationally. Insurers began writing mold exclusions to their policies around 2002, after the celebrated Texas verdict in the Ballard case against Farmers Insurance. But a few courts held that policies which excluded coverage for damage caused by mold would still cover damage caused by a covered peril, even though mold was the result of the loss. In those cases, mold was both the damage and a cause, and at least some courts held that the policy covered the loss. In the wake of these rulings, some insurers have changed their policies to say that they cover mold, but only up to some small amount, such as $ 10,0000. Other insurers have revised their mold exclusions to say that they exclude any coverage for mold, regardless of cause. I have not seen reported decisions nationwide showing whether that change in the exclusion will be enforced. But theoretically, such exclusions could render the policy ambiguous if it purports to cover one kind of loss while excluding it if mold is involved. We attorneys representing homeowners and mold victims watch for future rulings on the issue. I am sure the other side does as well.
There is a generation of Oregon insurance policies that were in effect in the early 2000s which still might be relevant in currently undecided litigation. Therefore, I will mention a ruling here that may still have some impact.
Fleming v. United Service Automobile Association, 329 Or. 449, 988 P2d 378 (2000)
This case was, strictly speaking, not really a mold case, but it deserves mention here because of the way it impacted, or at least had a potential to impact, mold coverage cases in Oregon. It was a case seeking to apply a statutory remedy that the legislature created, ORS 742.246(2), which responded to a practice by insurers conducting business in Oregon, where they employed misleading policy lanuage. The statute provides:
(2) Any provision restricting or abridging the rights of the insured under the policy must be preceded by a sufficiently explanatory title printed or written in type not smaller than eight-point capital letters.
The case involved a pollution exclusion clause which appeared under a title--- "PERILS INSURED AGAINST." In this case, the policy contained a section under a bold heading entitled "PERILS INSURED AGAINST" which consisted of two statements that the policy insures against "risk of direct loss to property described in Coverages A and B," and "direct physical loss to the property described in Coverage C.” Those statements were followed by a list -- almost two pages long -- of losses that were not covered. A person who did not read the policy carefully would assume that the list of items under that heading would be a list of covered items, not excluded items. The title "PERILS INSURED AGAINST" in this policy did not explain that there are provisions appearing under that title that restrict or abridge an insured's right to coverage. Therefore, the policy violated ORS 742.246(2).
ORS 742.038(2) provides:
"Any insurance policy issued and otherwise valid which contains any condition, omission or provision not in compliance with the Insurance Code, shall not be thereby rendered invalid but shall be construed and applied in accordance with such conditions and provisions as would have applied had such policy been in full compliance with the Insurance Code.
That statute required courts to construe an otherwise valid policy to bring the invalid part of the policy into full compliance with the Code. The pollution exclusion clause in this case limited the right to coverage, but appeared under that title, "PERILS INSURED AGAINST." The insurer relied on that clause in denying coverage for plaintiff's loss. In this circumstance, construing the policy as though it did not contain the pollution exclusion clause was the remedy imposed by the Oregon Supreme Court. In other words, the policy was applied as if the pollution exclusion did not exist.
Interestingly, despite the seemingly clear mandate of the statute, the plaintiffs lost at every step of the case, including at the trial court level, before the Court of Appeals and even the Supreme Court. Plaintiff’s counsel, after receiving an adverse decision at the Supreme Court filed a motion for reconsideration, which almost never succeeds in reversing a decision. Here it did. Insurers have been forced to re-write their policies to comply with the statute or risk having their exclusions being held unenforceable.
Practice tip: Read any relevant homeowner’s insurance policies fully when you get them, if you are a consumer. If you are an attorney, always analyze the client’s homeowner’s policy before asserting any claim in court if time permits. In the Cippolone case mentioned below, I was able to negotiate an insurance payment to my client who then used it to finance the construction defect litigation against his builder. If you are not well versed on insurance coverage issues, consult someone who is. If you are pursuing a third party claim against a contractor or landlord, always serve requests for production under ORCP 36 for all insurance policies and reservation of rights letters or coverage denial letters. Conduct your own analysis of whether or not the claim is covered by some policy. As shown in the Cippolone, Prudential and Lillard v Red Shield cases mentioned below, a settlement can be made or coverage can be found even though the insurer initially denies coverage.
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