Oregon’s Safe-Harbor Provision in the Insurance Fee-Shifting Statute Not as Safe as it Seems

By and on September 30, 2015
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The Oregon insurance fee-shifting statute, ORS 742.061, continues to be a popular topic in the Oregon courts. Our last entry on this subject discussed whether the statute’s reference to “any court of this state” included federal court actions. More recently, the Oregon Court of Appeals strictly construed the safe-harbor provision of ORS 742.061 in holding that an insured could recover attorney’s fees in a UIM arbitration because the insurer had pled – although it did not pursue – other policy-based defenses. Kiryuta v. Country Preferred Insurance Company, 273 Or. App. 469 (2015)

Subsection (3) of the statute states that an insured is not entitled to attorney’s fees under subsection (1) in actions to recover uninsured or underinsured motorist benefits “if, in writing, not later than six months from the date proof of loss is filed with the insurer:

(a) The insurer has accepted coverage and the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured; and

(b) The insurer has consented to submit the case to binding arbitration.”

A letter issued by an insurance company under ORS 742.061(3) is referred to as a “safe-harbor” letter. In Kiryuta, the Court of Appeals addressed whether a safe-harbor letter is effective when an insurance company’s responsive pleading sets forth affirmative defenses that are not litigated but raise issues other than the liability of the uninsured or underinsured driver and the damages to which the insured is entitled. After an injured motorist made a claim for underinsured motorist benefits to Country Preferred, the insurer denied the claim and issued a safe-harbor letter that complied with the requirements of ORS 742.061(3). The insured filed a civil action and the matter was arbitrated. Despite the safe-harbor letter, the arbitrator awarded attorney’s fees to the insured. On review, the trial court reversed the award of attorney’s fees based on the safe-harbor letter.

In its subsequent appeal, the insured argued that Country Preferred’s affirmative defenses of “Contractual Compliance” and “Offset” raised issues other than liability of the driver and the damages due to him, rendering the safe harbor-letter ineffective. Country Preferred argued that because it only litigated the issue of damages owed in the arbitration, the safe-harbor letter was effective. The Court of Appeals agreed with the insured.

In Oregon, a party’s pleadings “declare and control the issues to be determined and the relations that the parties bear to each other.” The Court of Appeals noted that because Country Preferred’s pleading provided a foundation to litigate issues other than the amount of plaintiff’s damages or liability of the underinsured driver, Country Preferred’s litigation strategy was potentially broader than that contemplated by the legislature in ORS 742.061(3). Consequently, the insured had to be prepared at the arbitration to meet any proof that Country Preferred might offer consistent with its pleadings. Therefore, Country Preferred’s conduct was inconsistent with the safe-harbor provision; it was immaterial that Country Preferred did not follow through with its potential litigation strategy. The Court of Appeals reversed the trial court and held that the insured is entitled to reasonable attorney’s fees under ORS 742.061.

In its opinion, the Court of Appeals noted that Country Preferred was in control of its pleading and could have conformed its pleading to the limitations the safe-harbor provision. However, in a footnote, the Court of Appeals sent mixed messages by hinting that insurer could retain the protection of the safe-harbor provision by timely amending its pleading to conform to the requirements of ORS 742.061(3). Accordingly, in uninsured or underinsured claims involving safe-harbor letters in Oregon, insurance companies should consider amending responsive pleadings to reflect only those affirmative defenses that pertain to the liability of the uninsured or underinsured driver and the damages to which the insured is entitled.

Filed under Attorneys’ Fees, Auto

California Appeals Court Rules that Defending Insurer Is Not Bound by Stipulated Judgment to Which It Did Not Consent

By and on September 18, 2015
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In 21st Century Insurance Company v. Superior Court (Tapia), a California appeals court held that an insurance company that is defending its insured cannot be bound by a stipulated judgment entered into by its insured without a trial and judgment after verdict.

The insured, Cy Tapia, was a teenager living with his aunt and grandmother. Tapia was driving with Cory Driscoll in a vehicle owned by Tapia’s grandfather when he was involved in an accident that left Driscoll severely injured. Tapia had $100,000 in liability coverage under an automobile insurance policy issued by defendant 21st Century Insurance Company.

Driscoll and his mother sued Tapia. 21st Century agreed to provide a defense to this suit. Plaintiffs rejected 21st Century’s settlement offer of the $100,000 policy limit as they believed that Tapia might be covered under 21st Century policies issued to Tapia’s aunt and grandmother, each providing $25,000 in coverage.

21st Century offered $150,000 to settle the case against Tapia which plaintiffs declined as they demanded $3 million for Driscoll and $1.15 million for his mother. 21st Century warned Tapia that it would not agree to be bound if Tapia accepted the offer. Tapia ignored this warning, agreed to the entry of a stipulated judgment and assigned any rights he had against 21st Century. Plaintiffs filed a bad faith action against 21st Century, and 21st Century moved for summary judgment which was denied. This denial was reversed on appeal.

The Court of Appeal cited Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 730 for the rule that “a defending insurer cannot be bound be a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” The crucial element in the Hamilton ruling was the lack of a judgment rendered after an adversarial trial given the potential for collusion. The Court stated that if the situation involved an insurer that refused to defend, then the insured was free to enter into a stipulated judgment at any time.

The Court of Appeal rejected plaintiffs’ arguments that 21st Century breached its duty to defend because it did not acknowledge coverage or a duty to defend under the policies issued to Tapia’s aunt and grandmother.  The Court also found that the undisputed evidence demonstrated that 21st Century did not have a duty to defend Tapia under either of the policies issued to his aunt or grandmother.

Filed under Bad Faith, Duty to Defend