For many years, conventional wisdom among Oregon lawyers has been that “bad faith” damages are not generally available for an insurer’s breach of its duties to the insured, other than where an insurer has agreed to defend under a liability policy. So, the thinking went, an insured can recover only on a breach-of-contract claim or a quasi-contract claim—but tort claims were out. I say “conventional wisdom” because Oregon’s Supreme Court has never directly held that bad faith damages could never be awarded. But the law seemed settled enough that Oregon’s federal courts predicted that if the question were squarely presented, the Oregon state courts would reject all forms of tort claims brought by policyholders. See, e.g., Foraker v. USAA Casualty, No. 14-87-SI (July 26, 2017) (Simon, J.) (one of several decisions in the case regarding negligence per se and similar claims).
On January 26, 2022, the Oregon Court of Appeals reduced the conventional wisdom to shreds. In Moody v. Federal Insurance Co., No. A172844 (Jan. 26, 2022), the Court of Appeals held that a policyholder may recover emotional distress damages (one variety of “bad faith” damages) on a claim for “negligence per se” based on the insurer violating the Oregon Unfair Claims Settlement Practices Act, ORS 746.230. If not overturned on further appeal, this Court of Appeals decision will have opened the door for policyholders of all kinds—including corporate policyholders—to seek extra-contractual damages when insurance companies fail to adhere to basic standards of reasonable conduct.
Background to the Moody decision. The facts of Moody are straightforward: the policyholder sought to collect on a $3,000 life insurance policy after her husband died in a hunting accident. The policy excluded coverage for death “caused by or resulting” from the insured’s use of intoxicants. The coroner’s report indicated that the deceased had marijuana in his system, and the insurer denied coverage. However, the insured pointed out that her husband’s death was not “caused by” alleged intoxication—the man was accidentally shot by someone else.
So, along with suing the insurer for breach of contract, the insured alleged that the insurer violated a number of provisions of the Unfair Claims Settlement Practices Act, ORS 756.230, including failure to conduct a reasonable investigation and failure to pay when liability had become clear. The insured alleged that the violations of these code provisions could form the basis for a claim of negligence per se—that is, that the code establishes a standard of care for insurers, which was violated. The insured alleged that she had suffered emotional distress as result of the insurers’ failure to investigate and failure to pay the claim, and claimed more than $45,000 as damages.
The trial court’s holding reversed by Court of Appeals. The trial court dismissed the claim for negligence per se, noting that the Oregon Legislature did not intend to create a private right of action for breach of the provisions of the statute and that Farris v. U.S. Fidelity & Guaranty Co., an Oregon Supreme Court decision from 1978, and subsequent cases, precluded reliance on the statute as the basis for any kind of tort claim.
The Court of Appeals in Moody reversed, and adopted the position that policyholders have been arguing for years: that the portions of Farris that talked about negligence per se claims were dicta—that is, not essential to the holding, and therefore not binding. The Moody court pointed to the many decisions since Farris on negligence per se in other contexts, noting that Oregon courts had allowed claims to proceed based on violations of other codes, including (most particularly) the Building Code in Abraham v. T. Henry Construction, Inc., decided in 2009.
The potential impact of Moody. Although the Moody decision does not use the phrase “bad faith,” this decision has the potential to open up common-law bad faith claims across all kinds of insurance coverage.
In order to state a claim for negligence per se, the policyholder must prove (1) that the insurer violated a statute; (2) that the policyholder was injured as a result of that violation; (3) that the policyholder is in the class of people that the statute was meant to protect; and (4) that the injury suffered is of a type that the statute was designed to protect. The Oregon Unfair Claims Settlement Practices Act, ORS 746.230, contains many broad commandments about what insurers may and may not do, and applies to third-party liability and first-party policies alike. Some of the most notable prohibitions in the statute are: (1) misrepresenting facts or policy provisions; (2) failing to act promptly upon communications; (3) refusing to pay claims without a reasonable investigation; and (4) not attempting in good faith to promptly and equitably settle claims where liability has become reasonably clear.
These requirements are broad—and certainly broad enough to encompass a common situation: an insurer refusing to defend under a liability policy, based on an erroneous interpretation of the underlying lawsuit. In most states (including, in particular, Washington) insurers routinely pick up the defense of questionable lawsuits (as they should) because of the fear of bad faith liability. After Moody, insurers should be concerned that if the refusal to defend causes extra-contractual damages (including business failure, loss of customers, damage to reputation, breach of loan covenants, etc.) the insurer will be liable under a negligence per se theory.
Moody is sure to be appealed to the Oregon Supreme Court. All eyes will now be on that court for guidance on this potentially seismic shift in Oregon insurance coverage law. In the meantime, Moody will certainly be used in both state and federal court to up the pressure on insurers to do the right thing.