Publication

Oregon has for years been well known as a jurisdiction that generally does not recognize “bad faith” claims against insurers. This is because the Oregon courts have long suggested that such a tort claim by an insured generally exists only where the insurer has a “special relationship” with its insured, beyond the mere existence of an insurance policy. Such a relationship arises, for example, where the insurer agrees to defend its insured in a lawsuit brought by a third party. Unless that special relationship exists between the insured and insurer, the Oregon courts historically have limited an insured’s remedies against its insurer to contractual remedies.

Until now. In what appears to be a dramatic expansion of insurance coverage bad faith law in Oregon, the Oregon Court of Appeals held that an insurer’s alleged violation of Oregon claim handling regulations set forth in ORS 746.230(1) can provide the basis for a negligence per se claim against the insurer. Moody v. Oregon Community Credit Union and Federal Insurance Company, 317 Or. App. 233, ___ P.3d ___ (January 26, 2022). Resolving an issue of first impression in the policyholder’s favor, the Court concluded that the insurer’s breach of those regulations opened the door to tort damages, including the insured’s emotional distress damages caused by the insurer’s conduct.

The Moody case arose out of a claim for accidental death and a $3,000 life insurance policy. The insurer concluded there was no coverage and the insured sued, alleging breach of contract and negligence per se, the elements of which are that (1) defendant violated a statute; (2) plaintiff was injured as a result of the violation; (3) plaintiff was a member of the class of persons meant to be protected by the statute; and (4) the injury plaintiff suffered is of a type that the statute was enacted to prevent. At some point the insurer conceded coverage and paid the $3,000 policy limits.

The insurer moved to dismiss the negligence per se claim and the claim for emotional distress damages, arguing that well-established Oregon common law does not permit a policyholder to assert a negligence claim for what is essentially a breach of contract.

The insured opposed the motion, arguing that the insurer’s failure to conduct a reasonable investigation and settle the claim violated Oregon’s claim handling statute, thus providing the foundation for a negligence per se claim. That statute, ORS 746.230, prohibits the following actions by insurers during the claim handling process:

1. Misrepresenting facts or policy provisions in settling claims;
2. Failing to acknowledge and act promptly upon communications relating to claims;
3. Failing to adopt and implement reasonable standards for the prompt investigation of claims;
4. Refusing to pay claims without conducting a reasonable investigation based on all available information;
5. Failing to affirm or deny coverage of claims within a reasonable time after completed proof of loss statements have been submitted;
6. Not attempting, in good faith, to promptly and equitably settle claims in which liability has become reasonably clear;
7. Compelling claimants to initiate litigation to recover amounts due by offering substantially less than amounts ultimately recovered in actions brought by such claimants;
8. Attempting to settle claims for less than the amount to which a reasonable person would believe a reasonable person was entitled after referring to written or printed advertising material accompanying or made part of an application;
9. Attempting to settle claims on the basis of an application altered without notice to or consent of the applicant;
10. Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made;
11. Delaying investigation or payment of claims by requiring a claimant or the claimant’s physician, naturopathic physician, physician assistant or nurse practitioner to submit a preliminary claim report and then requiring subsequent submission of loss forms when both require essentially the same information;
12. Failing to promptly settle claims under one coverage of a policy where liability has become reasonably clear in order to influence settlements under other coverages of the policy;
13. Failing to promptly provide the proper explanation of the basis relied on in the insurance policy in relation to the facts or applicable law for the denial of a claim…

ORS 746.230(1).

The trial court agreed with the insurer and dismissed the claims regarding negligence per se and emotional distress.

The Court of Appeals reversed, however, thereby opening the door to first-party and third-party “bad faith” claims against insurers in Oregon, even though the Court did not utter the words “bad faith”. Such claims would appear to now be permissible if an insurer violates any of the above claim handling provisions.

In reaching its conclusion the Court first held that an insurer’s violation of Oregon’s claim handling statute could support a claim for negligence per se. Because the plaintiff alleged violations of ORS 746.230(1)(d) and (f), and also alleged the applicability of the other negligence per se elements, the Court held that plaintiff was entitled to proceed against the insurer on her negligence theory.

In its analysis the Court of Appeals expended much effort in attempting to distinguish Oregon case law that, up until that point, had been relied upon by insurers to reject related claims by policyholders. See Abraham v. T. Henry Construction, 230 Or. App. 564, 217 P.3d 212 (2009), aff’d on other grounds, 350 Or. 29, 249 P.3d 534 (2011); Georgetown Realty v. The Home Insurance Co., 313 Or. 97, 831 P.2d 7 (1992); Farris v. U.S. Fidelity, 284 Or. 453, 587 P.2d 1015 (1978). Farris in particular has been cited by insurers in Oregon for years to keep bad faith claims at bay, but the Moody court concluded that the insurers read Farris too narrowly and that Farris did not foreclose the relief sought by the insured.

In addition to holding that the insured’s negligence claim could proceed, the Court of Appeals also held that plaintiff could seek emotional distress damages arising from the statutory violations, another theory that had previously appeared to have been rejected by the Oregon courts.

Given the break with longstanding precedent that appeared to foreclose such causes of action and damages, it seems likely that this case is heading to the Oregon Supreme Court, which will have the last word on this subject.

Please reach out to your Gordon & Rees counsel for more implications of this development, or contact a leader of the Insurance Law practice group here.