§ 42.2 First-party Bad-faith Claims
Library | Insurance Law in Oregon (OSBar) (2020 Ed.) |
§ 42.2-1 Introduction
This part of the chapter deals with policyholders' claims for damages over and above those benefits that are directly provided by the insurance contract, and defined by its policy limits. This part discusses the recovery of such damages in "first-party" settings when coverage has been denied, either in whole or in part.
"First-party" claims are those arising from policies in which the insurer contracts to pay benefits directly to the insured. A typical example is an insured's claim for benefits under a property and casualty policy following a fire loss. This situation is contrasted with "third-party" coverage, in which the carrier agrees to indemnify the insured against claims from third parties. However, claims under third-party indemnity contracts may be analyzed similarly to first-party actions when the insurer denies coverage altogether, as opposed to accepting coverage but then mishandling the claim. When a mishandled claim gives rise to a judgment in excess of policy limits, the policyholder is presented with a classic "excess claim." Such excess claims are well recognized in Oregon and are addressed in § 42.3-1 to § 42.3-3(d) (third-party extracontractual liability).
The law in this area is not well developed in Oregon and, to the extent that it is developed, is largely unfavorable to the insured, especially in the area of recovery in tort. Therefore, this part necessarily discusses pertinent authorities not only to determine the apparent state of the law, but also to explore how well settled it is, and whether potential exists for further clarification and expansion.
§ 42.2-2 Breach of Covenant of Good Faith and Fair Dealing
In the first-party setting, an insured generally makes a direct claim for benefits against the insurer, as opposed to seeking protection from the claims of a third party. Most states have found a sufficiently special relationship in a first-party setting to impose potential tort liability. See Ashley, Bad Faith Actions §§ 2:14- 2:15. Courts have generally found liability when an insurer has no reasonable basis for denying a claim, while recognizing an insurer's right to issue a denial when the presence of coverage is "fairly debatable." Ashley, Bad Faith Actions § 5:2. See William T. Barker & Ronald D. Kent, New Appleman Insurance Bad Faith Litigation § 5.03, LEXIS (database updated Nov 2019); Jeffrey W. Stempel, Interpretation of Insurance Contracts: Law and Strategy for Insurers and Policyholders § 19.3 (1994) (citation not verified by publisher). See also Douglas G. Houser, Good Faith as a Matter of Law: The Insurance Company's Right to Be Wrong, 27 Tort & Ins LJ 665 (1992).
Insurers argue that Oregon adheres to a minority position rejecting a first-party cause of action in tort. See § 42.1-2(a)(2) (tortious breach of covenant of good faith and fair dealing). However, the pertinent supreme court decisions are discussed in this section to identify how well established the rule is, and whether there is a reasonable basis for future recognition of such a cause of action in this state.
Insurers frequently cite Santilli v. State Farm Life Ins. Co. , 278 Or 53, 61-62, 562 P2d 965 (1977), and Farris v. U. S. Fid. & Guar. Co., 284 Or 453, 587 P2d 1015 (1978), to support the proposition that Oregon does not recognize first-party bad-faith claims. In Santilli, the plaintiff sought life insurance benefits after her husband died. The insurer denied the claim, and the plaintiff claimed breach of the insurance contract as well as tortious breach of the covenant of good faith and fair dealing. The court noted the then-recent emergence of such claims for breach of the covenant of good faith and fair dealing and discussed the distinction between first-party claims and third-party claims. The court then noted that the special considerations incident to the third-party setting that provide the impetus for claims of breach of the covenant of good faith and fair dealing are not present in a first-party claim. However, the court did not decide whether to recognize such a tort claim even in the third-party setting because, under the facts of that case, "the defendant had just cause for contesting liability." Santilli, 278 Or at 63. Therefore, the specific substantive question—whether such a tort action would be recognized—was arguably left unanswered by Santilli.
Farris presented the issue more directly. After being sued, the insured tendered its defense to the insurer. The insurer denied the claim without any justification. The insured settled the action and then sued the insurer for failure to pay the settlement, seeking benefits under the insurance policy, damages for emotional distress, and punitive damages. The jury awarded the requested damages, and the insurer appealed. The supreme court reversed, rejecting any claim for emotional distress or punitive damages. The court held that such claims were tort-based, and that because the insurer had denied both defense and indemnity, it could have no tort exposure. Farris, 284 Or at 460. According to the supreme court, an insurer's "failure to undertake representation of plaintiffs which required them to represent themselves could only have been a breach of contract, and, in cases of breach, the law is clear that no recovery for mental distress because of threat of pecuniary loss is recoverable." Farris, 284 Or at 465.
The Farris opinion has been followed by Oregon's lower courts. See Employers' Fire Ins. Co. v. Love It Ice Cream Co., 64 Or App 784, 790, 670 P2d 160 (1983); Porter v. Utah Home Fire Ins. Co., 58 Or App 729, 736, 650 P2d 130 (1982), overruled on other grounds as recognized by Anderson v. Farmers Ins. Co. of Oregon, 188 Or App 179, 186, 71 P3d 144 (2003). However, in a case involving a denial of coverage in a third-party setting, the court of appeals has indicated that it might find such a tort if "writing on a clean slate," due to the unintended consequences of Farris, whereby it is safer for insurers to deny a defense entirely than it is to undertake one. Warren v. Farmers Ins. Co. of Oregon, 115 Or App 319, 326, 838 P2d 620 (1992), rev den, 316 Or 529 (1993) ("In all fairness, it is difficult to see why the insurer should be in a better position by refusing to defend and thereby breaching the insurance contract than it would have been had it undertaken the defense but done so negligently.").
More recently, however, Oregon judicial opinions have more thoroughly developed the tort of breach of the covenant of good faith and fair dealing. Several federal district court decisions have allowed insureds to proceed—at least past the motion-to-dismiss stage—with tort-based claims in the first-party context. See, e. g., Thompson v. Allied Mut. Ins. Co., No CIV 99-1076-AS, 2000 WL 264318 at *1 (D Or Mar 3, 2000) (allowing plaintiffs to proceed on a claim for tortious breach of the covenant of good faith and fair dealing based on allegations of outrageous conduct under first-party homeowners' and commercial property policies); Columbia...
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