Case Briefs

Finally, the court declined to reach the allocation issue and certain attorneys' fees issues raised by the parties. The court did, however, address whether the policyholder's initial submission of the matter to the insurer was a sufficient proof of loss to entitle the policyholder to attorneys' fees under an Oregon statute. It found the fact that the policyholder did not provide the insurers “with the specifics of the claim ' or, for that matter, the amount of defense costs it was seeking ' did not render the proof of loss inadequate for purposes of” the statute.

Laura A. Foggan, Paul A. Dame, and Gregory J. Langlois, of Wiley Rein LLP, contributed this month's case brief.

OR Court Clarifies Expected or Intended Standards and Burdens of Proof

The Court of Appeals of Oregon, applying Oregon law, has held that: 1) where an “unexpected and unintended” requirement expressly appears in a liability policy as part of the definition of the policy's triggering event, that requirement is part of the policy's general grant of coverage and therefore the policyholder bears the burden of proving that the triggering event was unexpected and unintended; 2) where an “unexpected and unintended” requirement does not expressly appear in a policy, the burden falls on the insurer to prove that the an implied fortuity doctrine excludes coverage; and 3) the burden of proof does not depend on which party brings a declaratory judgment action. ZRZ Realty Co., et al. v. Beneficial Fire & Cas. Insurance Co., et al., Nos. 970806226 & A121145 (Or. Ct. App. Oct. 1, 2008).

The policyholder in this case owned property on the bank of an Oregon river at which a scrap metal business dismantled decommissioned navy and merchant marine ships. The ships contained a variety of hazardous substances that, when the ships were being dismantled, entered the river, soil, and groundwater in and around the property. The insurers in this case had issued various types of policies to the policyholder between 1956 and 1983, covering the majority of the scrapping operation. The CGL policies issued prior to 1967 did not expressly require that property damage be neither expected nor intended. Nor did the bumbershoot policies, which provided excess maritime liability coverage and certain non-marine exposures. The CGL policies issued after 1967 did contain such a requirement, defining a coverage-triggering “occurrence” as “an accident ' which results in property damage neither expected nor intended from the standpoint of the insured.”

In 1994, Oregon's Department of Environmental Quality issued a potentially responsible party notice to the policyholder ordering it to investigate and clean up certain damaged property. The policyholder sought coverage from its insurers, which the insurers denied. The policyholder then filed an action alleging breach of contract and seeking a declaratory judgment. Before trial, the trial court issued a number of rulings concerning the unexpected or unintended requirement. Among them, the court held that most of the polices contained either an express or implied requirement that the harm be unexpected and unintended. However, the trial court also held that the insurers bore the burden of proving that the damages were expected or intended under all of the policies, reasoning that Oregon courts treat the “expected or intended” language as a policy exclusion, regardless of whether it appears in a policy's grant of coverage section or in an exclusion section. The court admitted that if the policyholder did have the burden of proof, it could not have shown that the damage was neither expected nor intended. Regarding the bumbershoot policies, the trial court ruled that those policies did cover expected losses, as long as the losses were also unintended.

On appeal, the court first addressed whether the fortuity or “unexpected and unintended” requirement should be characterized as part of the grant of coverage or an exclusion, noting that, if the former, the burden of proving coverage is on the policyholder and, if the latter, the burden of proving that the policy excludes coverage (because the loss was intentionally caused) is on the insurer. The court disagreed with the trial court's determination that Oregon appellate courts have consistently treated the fortuity requirement as an exclusion, regardless of whether the “unexpected and unintended” language actually appears in an exclusion section. The court distinguished the cases the trial court cited in support of this conclusion on the grounds that those cases did not address whether an unexpected or unintended requirement contained in an “occurrence” definition should be considered as part of the grant of coverage or as an exclusion for purposes of allocating the burden of proof. Therefore, the court considered the issue as one of first impression.

The court then determined that when an unexpected and unintended requirement expressly appears in a policy as part of the definition of a triggering event (in this case, an “occurrence”), that requirement should be considered part of the grant of coverage. In this case, the court noted, the triggering event, an “occurrence,” is an accident that results in unexpected and unintended property damage. Because the only covered claims are those that are accidental events, the court held, the policyholder ' the party seeking the benefit of the contract provision providing coverage ' must allege and prove that such an unexpected and unintended event occurred. The court therefore held that the trial court erred in allocating the burden of proof to the insurers on those policies expressly defining an “occurrence” as “an accident ' which results in property damage neither expected nor intended from the standpoint of the insured.”

On the other hand, where a policyholder can show that a loss otherwise falls within the plain language of the policy, the court held, an insurer's attempt to limit coverage based on an unwritten, unexpected, or unintended requirement is “entirely defensive in character” and thus requires the burden of demonstrating that such a limit be imposed should fall on the insurer. The court also declined to hold that the burden of proof should fall on a policyholder that files a declaratory judgment action seeking a coverage determination.

The court next addressed whether the damage for which the policyholder sought coverage was expected or intended as a matter of law, as the insurers had unsuccessfully argued in a motion to dismiss. The court noted that under Oregon Supreme Court precedent, the standard for determining expected or intended harm is whether a policyholder had a subjective intent to cause injury and harm and that an intent to injure has only been found as a matter of law when such an intent was inherent in the policyholder's conduct. Although, as the insurer argued, the policyholder must have known that some environmental harm would result from the way it carried out its dismantling activities, the court held that the record did not show that the only permissible inference was that the policyholder purposefully caused damage or that it engaged in acts so certain to cause harm that intent to injure was required to be inferred as a matter of law.

The court also addressed certain umbrella marine insurance or “bumbershoot” policies. It held that no established admiralty rule applied to limit coverage under them solely to unexpected damage. Nor, the court held, did any Oregon legal sources ' including its statutory definition of “insurance” ' require that the bumbershoot policies be limited to coverage for unexpected losses. The court therefore considered whether such a requirement should be imposed as a matter of public policy. Citing an Oregon Supreme Court decision determining that public policies questions regarding whether coverage for “unexpected, though undesired, negligently caused injuries” should be permitted in liability policies should be left to the legislature, the court concluded that “the allocation of risks for expected but unintended damage is a matter best left to the parties and to the legislature.” The court then held that the coverage grant in the bumbershoot policies for “[a]ll other sums which the Assured shall become liable to pay in respect of claims ' on account of ' Property Damage,” covered the policyholder's cleanup obligations with respect to its own property. The court stated: “Given that DEQ is authorized to enforce its own right to damages as a third-party on account of 'property damage,' we conclude that the language of the bumbershoot policies unambiguously covers cleanup costs resulting from damage to soil” on the policyholder's property.

Finally, the court declined to reach the allocation issue and certain attorneys' fees issues raised by the parties. The court did, however, address whether the policyholder's initial submission of the matter to the insurer was a sufficient proof of loss to entitle the policyholder to attorneys' fees under an Oregon statute. It found the fact that the policyholder did not provide the insurers “with the specifics of the claim ' or, for that matter, the amount of defense costs it was seeking ' did not render the proof of loss inadequate for purposes of” the statute.

Laura A. Foggan, Paul A. Dame, and Gregory J. Langlois, of Wiley Rein LLP, contributed this month's case brief.