§ 16.2 Duty to Defend
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§ 16.2-1 Scope of the Duty to Defend
§ 16.2-1(a) Contractual Basis for Duty to Defend
Most liability insurance policies provide two fundamental coverage promises: (1) the insurer's agreement to pay for the insured's legal liability up to the stated policy limits, referred to as the duty to indemnify; and (2) the insurer's agreement to hire legal counsel to defend the insured against a potentially covered suit, referred to as the duty to defend. The focus of § 16.2-1(b) to § 16.2-7 is on the duty to defend.
The duty to defend is a contractual obligation and is one of the most important benefits conferred by a liability policy. W. Hills Dev. Co. v. Chartis Claims, Inc. Oregon Auto. Ins. Co., 360 Or 650, 652, 385 P3d 1053 (2016). In addition to the duty to fund the defense of a claim, the duty to defend involves a second independent duty on the insurer to perform as a type of fiduciary when it assumes control of the insured's defense. Georgetown Realty, Inc. v. Home Ins. Co., 313 Or 97, 110-11, 831 P2d 7 (1992). The nature of this relationship is addressed in § 16.2-2.
NOTE: As further discussed in § 16.4-1(a) to § 16.4-3, the duty to defend is independent of the duty to indemnify and must be analyzed separately. Bresee Homes, Inc. v. Farmers Ins. Exch., 353 Or 112, 114, 293 P3d 1036 (2012). As a result, there may be instances when only one duty exists. See ZRZ Realty Co. v. Beneficial Fire & Cas. Ins. Co., 349 Or 117, 150, 241 P3d 710 (2010), adh'd to as modified on recons, 349 Or 657, 249 P3d 111 (2011).
Determination of the duty to defend is a question of law. Drake v. Mut. of Enumclaw Ins. Co., 167 Or App 475, 478, 1 P3d 1065 (2000).
§ 16.2-1(b) Duty to Defend Is Determined by Allegations in the Complaint
Under Oregon law, whether an insurer has a duty to defend is determined by two documents: the insurance policy and the complaint against the insured. W. Hills Dev. Co. v. Chartis Claims, Inc. Oregon Auto. Ins. Co., 360 Or 650, 652, 385 P3d 1053 (2016) (court determines an insurer's duty to defend "by comparing the complaint to the insurance policy"); Bresee Homes, Inc. v. Farmers Ins. Exch., 353 Or 112, 116, 293 P3d 1036 (2012). "If the allegations in the complaint assert a claim covered by the policy, then the insurer has a duty to defend. If the allegations do not assert a claim covered by the policy, then the insurer has no duty to defend." W. Hills Dev. Co., 360 Or at 653 (citation omitted). This rule is often called the four-corners rule, a reference to the four corners of a complaint, or the eight-corners rule, a reference to the four corners of the complaint plus the four corners of the policy. W. Hills Dev. Co., 360 Or at 653.
The Oregon Supreme Court has articulated the following principles to evaluate whether an insurer has a duty to defend:
An insurer has a duty to defend an action against its insured if the claim against the insured stated in the complaint could, without amendment, impose liability for conduct covered by the policy.
In evaluating whether an insurer has a duty to defend, the court looks only at the facts alleged in the complaint to determine whether they provide a basis for recovery that could be covered by the policy[.]
. . . .
An insurer should be able to determine from the face of the complaint whether to accept or reject the tender of the defense of the action.
The insurer has a duty to defend if the complaint provides any basis for which the insurer provides coverage. Even if the complaint alleges some conduct outside the coverage of the policy, the insurer may still have a duty to defend if certain allegations of the complaint, without amendment, could impose liability for conduct covered by the policy. Any ambiguity in the complaint with respect to whether the allegations could be covered is resolved in favor of the insured.
Ledford v. Gutoski, 319 Or 397, 399-400, 877 P2d 80 (1994) (citations omitted). In short, "[t]o trigger the duty to defend, a complaint needs only to make allegations with which a claim covered by the policy may be proven." W. Hills Dev. Co. v. Chartis Claims, Inc., 273 Or App 155, 162, 359 P3d 339 (2015), aff'd, 360 Or 650, 385 P3d 1053 (2016). An insurer's knowledge of facts not alleged in the complaint is irrelevant in determining the existence of a duty to defend. See Marleau v. Truck Ins. Exch., 333 Or 82, 91, 37 P3d 148 (2001). A complaint "need not plead a claim in perfect form to provide notice to the insurer," and even if the complaint is unclear but can be reasonably interpreted to include an incident within the coverage of the policy, there is a duty to defend. Marleau, 333 Or at 91.
The insured bears the initial burden of proving that the allegations in the complaint could potentially result in liability covered by the policy's insuring agreement. Fountaincourt Homeowners' Ass'n v. Fountaincourt Dev., LLC, 360 Or 341, 360, 380 P3d 916 (2016). "If the insured proves that the allegations in the complaint trigger the insurer's duty to defend, the insurer may still avoid liability by meeting its burden to show that one or more exclusions in the insurance policy absolve it of that duty." Bighorn Logging Corp. v. Truck Ins. Exch., 295 Or App 819, 828, 437 P3d 287 (2019).
PRACTICE TIP: Look more to the facts alleged in the complaint and less to the headings, titles, or labels attached to the causes of action in the complaint. See L&D of Oregon, Inc. v. Am. States Ins. Co., 171 Or App 17, 20, 14 P3d 617 (2000). What matters most is what could potentially be proven based on the allegations.
§ 16.2-1(c) Notice to Insurer of Claim or Suit
Liability policies generally obligate the insured to provide timely notice of claims or suits. Unlike a commercial general liability policy, professional liability and malpractice policies are typically claims-made or claims-made-and-reported policies. Under claims-made policies, a claim for injury or damage must be made during the policy period to be covered. A claims-made-and-reported policy generally requires that the claim be both made against the insured and reported to the insurer during the policy period in order to be covered. See § 35.3-1.
PRACTICE TIP: It is critical to immediately identify a policy's notice requirements to avoid potentially forfeiting coverage for failing to notify an insurer of a claim. In fact, it is advisable to first identify and calendar all temporal deadlines prescribed in the policy.
PRACTICE TIP: Because insurers generally contend that no duty to defend exists unless and until a claim or suit is tendered, a lawyer representing a plaintiff or third-party plaintiff should consider tendering the claim directly to a defendant's defunct insurer(s). In addition, do not assume that notice to an insurance broker constitutes notice to the insurer.
To the extent an insured allegedly breaches a policy condition by providing late notice, Oregon courts apply what is known as the prejudice rule to determine whether the insurer is relieved of its coverage obligations. See Lusch v. Aetna Cas. & Sur. Co., 272 Or 593, 597, 538 P2d 902 (1975) (determining that an insured's alleged breach of a policy's notice provision is subject to the prejudice rule).
In Lusch, 272 Or at 595 the insured tendered his defense to the insurer, which refused to defend on the basis that the insured violated the policy's notice provision. The court held that an insurer "cannot escape its policy obligations" based only on a technical breach of the notice provision:
If the insured does not give notice immediately after the accident or if notice is given by a third party, the initial question should be whether the notice is given in time for the insurer to adequately investigate the potential claim and thus protect itself and the insured. This is the purpose of giving notice. Restated, the question is whether the insurer is prejudiced by the failure of the insured to give notice as soon as practicable.
Lusch, 272 Or at 597. In the context of a complete failure to provide notice, the Oregon Court of Appeals has stated that "[w]hen the duty to defend is at issue, the matter of prejudice from an insured's failure to give notice of the claim is irrelevant." Oregon Ins. Guar. Ass'n v. Thompson, 93 Or App 5, 11, 760 P2d 890, rev den, 307 Or 303 (1988). In holding that the insurer did not have a duty to defend, the court reasoned as follows: "An insurer must receive a copy of the pleading so that it may review the allegations to determine whether there is coverage. Notice of the claim is a condition precedent to the duty to defend." Oregon Ins. Guar. Ass'n, 93 Or App at 11.
Although the Oregon Supreme Court has yet to address the issue of pre-tender defense costs, Oregon federal courts have relied on Thompson to hold that such costs are not recoverable. See Century Indem. Co. v. Marine Grp., LLC, No 3:08-CV-1375-AC, 2015 WL 810987 at *7 (D Or Feb 25, 2015) (reasoning that the duty to defend is not triggered until notice is given, and thus defense costs incurred prior to notice are not recoverable); see also Siltronic Corp. v. Employers Ins. Co. of Wausau, No 3:11-CV-1493-ST, 2015 WL 13675133 at *8 (D Or Sept 2, 2015) (coverage is precluded for costs incurred prior to tender). The court in Century declined to apply Oregon's notice-prejudice rule to its analysis of pre-tender defense costs, stating that "there is no coverage for pre-tender defense costs to begin with." Century Indemn. Co., 2015 WL 810987 at *8. As a result, insurers contend that pre-tender defense costs are generally considered not recoverable in Oregon.
QUERY: Is the Oregon Court of Appeals' decision in Thompson inconsistent with the Oregon Supreme Court's decision in Lusch? Under Lusch the only question should be whether, and the extent to which, the insurer was prejudiced by the insured's failure to provide timely notice of the subject complaint. In other words, could the insurer have defended better or for less? A federal judge concluded...
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