Oregon law mandates a broad duty to defend, requiring insurers to provide legal representation to their policyholders whenever there is a potential for coverage under the policy. The significance of this broad interpretation means that an insurer has a duty to defend an insured even in situations where the alleged facts only imply a covered claim, and even in situations where the underlying claim is ultimately not covered by the policy. The insurer’s duty to defend is triggered if the allegations of the complaint, reasonably interpreted, could result in the insured being held liable for damages covered by the policy. This is referred to as the “four-corners” rule; it is also sometimes referred to as the eight-corners rule (for the four corners of the complaint plus the four corners of the policy). Oregon’s adoption of a broad interpretation of the duty to defend affirmatively places the onus on insurers to err on the side of coverage.
This broad duty to defend is based on the principle that an insured should not have to bear the expense of defending a lawsuit that the insurer may ultimately have to pay for. The duty to defend is also important because it helps ensure that insureds have access to legal representation when faced with a lawsuit.
In the recent case of State of Oregon v. Pacific Indemnity Company[1], the Oregon Court of Appeals reaffirmed the broad scope of Oregon’s duty to defend. The Court held that an insurer has a duty to defend an insured so long as the complaint’s allegations would permit the presentation of evidence that would later establish the necessary facts for coverage. The Court also held that the “complete defense” rule applies to general liability policies–an important ruling in favor of insureds as it forecloses potential attempts by insurance companies to further escape their coverage responsibilities and obligations.
Recent Ruling in State of Oregon v. Pacific Indemnity Company
In this case, Arrowood Indemnity Company (Arrowood) appealed the lower court’s ruling in favor of the Oregon Department of Transportation (ODOT). The Court of Appeals affirmed the trial court’s ruling that Arrowood was obligated to defend ODOT under the insurance policy, and Arrowood could not limit its defense obligations to only those claims it selectively believed were covered under the policy.
ODOT leased property that was utilized as a parking lot, and Arrowood insured the property for damages caused by contamination from automobiles during the specified insurance coverage period. ODOT was listed as an additional insured under Arrowood’s policy.
In 2008, the Environmental Protection Agency issued to ODOT a “104(e) demand,” which authorized the EPA to seek information regarding alleged releases of hazardous substances.[2] In 2011, the EPA issued a General Notice Letter (GNL) to ODOT asserting that the EPA believed ODOT may be a potentially responsible party with respect to the release of hazardous substances and would then be liable as owner or operator of the site.[3] Consequently, ODOT tendered EPA’s GNL to Arrowood, requesting defense of ODOT’s potential liability. Arrowood declined to defend ODOT in any litigation relating to the EPA’s claims.[4]
The crux of Arrowood’s argument on appeal for declining ODOT’s tender of defense was that the EPA’s GNL: 1) did not specifically mention the leased parking lot property, 2) it actually referenced a completely different location, and 3) it did not contain sufficient coverage trigging facts regarding the potential nature of the possible contamination released from ODOT’s property.[5]
The Court of Appeals disagreed with Arrowood and explained that the controlling analysis regarding interpretation of a complaint’s allegations that would affirmatively trigger an insurer’s duty to defend is not negated by lack of specificity in the complaint. Rather, the Court of Appeals agreed that even if a complaint is unclear or devoid of coverage-related facts, an insurer’s duty to defend exists if the complaint’s allegations would permit the presentation of evidence that would establish the uncertain or missing coverage fact.
Clarifying its position to this expansive approach to the insurer’s duty to defend, the Court of Appeals cited the Oregon Supreme Court’s recognition that, in the “real world,” “a complaint may not definitively allege the facts that ultimately will determine whether a claim is covered by the policy.”[6] It further elaborated that, in the face of ambiguity or lack of clarity, a complaint should be interpreted in favor of the insured and require a duty to defend if “the court can reasonably interpret the allegations to include an incident or injury that falls within the coverage of the policy.”[7]
ODOT, and insureds in general, are not saddled with the burden “to come forth with facts beyond those alleged in the complaint” establishing potential coverage. The Court, under this analysis, determined Arrowood did, in fact, have a duty to defend ODOT because it was reasonable to conclude a potential incident could be proven later that would be covered by the policy.
Finally, the Court of Appeals rejected Arrowood’s secondary attempts to escape its duties and obligations to defend ODOT by arguing its scope of defense should be limited to only those specific claims presented by the EPA that are determined to be within the policy’s coverage. In rejecting Arrowood’s incorrect assertions, the Court reaffirmed its previous holdings concerning the “complete defense” rule as controlling.[8] Consequently, an insurer cannot attempt to parse out its defense obligations because “if some of the allegations pertain to conduct that could be covered by the insurance policy, and some that could not, the insurer must defend the entire action.”[9] The benefits of reaffirming the complete defense rule to insureds should not be overlooked as it significantly reduces potential exposure to any additional defense costs by requiring the insurance company to handle defense of all allegations.
Commentary: Implications for Construction Companies and Construction Claims
Construction industry policyholders involved in such claims should be aware of their rights under Oregon’s interpretation of the duty to defend provisions and the coverage terms of their respective insurance policies. Policy holders should seek legal counsel to ensure that their insurers are fulfilling their obligations when presented with any coverage dispute. The holding in State of Oregon v. Pacific Indemnity Company reinforces significant protection to which insureds are entitled, as insurers cannot simply dismiss claims based on technicalities or inconsequential ambiguities that are not infrequently presented in practice.
Oregon statutes seek to prohibit wrongful denials of coverage and refusals to defend claims.[10] The Unfair Claim Settlement Practices Statute declares that wrongfully denying claims or wrongfully denying defense are unfair claim settlement practices. An insurance carrier who is found to have violated the Unfair Claim Settlement Practices Statute can be liable for contract damages, the insured’s attorneys’ fees under ORS 742.061, and potentially non-economic or punitive damages based on another recent Oregon Court of Appeals decision.[11]
[1] 328 Or. App. 64, 536 P.3d 1105, 1109 (2023)
[2] Id. at 68.
[3] Id.
[4] Id.
[5] Id. at 70-71.
[6] West Hills Dev. Co. v. Chartis Claims, Inc., 360 Or. 650, 661, 385 P.3d 1053, 1059 (2016).
[7] State of Oregon Dep’t of State Lands, 328 Or. App. at 72.
[8] citing Timberline Equip. Co. v. St. Paul Fire and Mar. Ins., 281 Or 639, 645, 576 P2d 1244 (1978)
[9] State of Oregon Dep’t of State Lands, 328 Or. App. at 75.
[10] ORS 746.230
[11] See Moody v. Oregon Community Credit Union, 317 Or App 233 (2022).