First-Party Bad Faith in Oregon? Are the Floodgates About to Open? Violations of the Oregon Insurance Code Held to Give Rise to the Pursuit of Emotional Distress Damages

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From the Desk of Cliff Wilson:

In the past, Oregon Courts have been reluctant to recognize first-party bad faith claims against insurers, and only allowed tort claims against an insurer in limited circumstances where a special relationship between insured and insurer exists. As such, Oregon Courts have generally limited first-party claims against insurers to contract damages and not allowed the recovery of extra-contractual damages. Recently, however, the Oregon Court of Appeals has changed that long-standing limitation and allowed the pursuit of emotional distress damages against an insurer for alleged violations of certain Oregon claims handling regulations. This change could dramatically alter insurance bad faith litigation in the state. 

Claims Pointer:  

The Oregon Court of Appeals has recently held that a negligence per se claim brought by an insured based on alleged violations of Oregon’s Unfair Claims Settlement Practices Statute (ORS 746.230) can give rise to emotional distress damages against an insurer who denied coverage. Specifically, the Court held (1) that a first-party negligence per se claim can proceed against an insurer without having to first allege a common-law negligence claim and, (2) damages for emotional distress can be pursued against an insurance company that violates the Oregon Insurance Code.

Moody v. Oregon Community Credit Union, 317 Or App 233 (2022).

Facts:

Steven “Troy” Moody was accidentally shot and killed by a friend while on a camping trip. At the time of his death, Troy was insured under a life insurance policy issued by Federal Insurance Company (Defendant) that provided $3,000 in benefits to be paid on his death. Troy’s wife, who was the personal representative of his estate (Plaintiff), timely filed a claim for the life insurance benefits. Defendant Federal Insurance denied coverage under the policy, citing to an exclusion for accidents caused by or resulting from the insured being under the influence. The Defendant argued that the exclusion applied because a toxicology report stated that there was evidence that Troy had marijuana in his system when he died.

Plaintiff filed a lawsuit against Defendant for several claims for relief, including a claim for breach of contract, and another for negligence per se, based on Defendant’s alleged violations of Oregon’s Unfair Claims Settlement Practices Statute (ORS 746.230(1)). Specifically, Plaintiff alleged that Defendant failed to reasonably investigate Troy’s death, and that it failed to settle the claim in good faith. Plaintiff sued for economic damages in the amount of the policy benefits of $3,000, as well as extra-contractual, non-economic damages of $47,001 for emotional distress. As has been the norm historically in Oregon first-party lawsuits against insurers, Defendant moved to dismiss the negligence per se claim and to strike the allegation of damages for emotional distress. The trial court granted the motions and dismissed those claims. Plaintiff appealed.

Law:

Historically, although Oregon Courts have allowed the pursuit of contract damages in first-party insurance cases, they have largely rejected tort claims in first-party insurance cases absent a special relationship between the parties that was separate and distinct from the contract itself. 

A negligence per se claim (a negligence claim based on a statutorily established standard of care) requires that a plaintiff plead and prove that “(1) defendants violated a statute; (2) that plaintiff was injured as a result of that violation; (3) that plaintiff was a member of the class of persons meant to be protected by the statute; and (4) that the injury plaintiff suffered is of a type that the statute was enacted to prevent.” McAlpine v. Multnomah County, 131 Or App 136, 144, 883 P2d 869 (1994), rev den, 320 Or 507 (1995). The available remedies in negligence and negligence per se cases include non-economic damages for emotional distress.

Oregon’s Unfair Claim Settlement Practices Statute (ORS 746.230), in relevant part, provides that an insurer may not deny a claim without first conducting a reasonable investigation and that an insurer must attempt, in good faith, to promptly and equitably settle claims in which liability has become reasonably clear. 

Analysis:

On appeal, the Court of Appeals looked at Defendant’s argument that a plaintiff must first be able to allege a common-law negligence claim before alleging a negligence per se claim. The Court disagreed with that argument and relied on Deckard v. Bunch, 358 Or 754, 370 P3d 478 (2016), and stated that Deckard did not require a common-law claim to exist in order to state a claim for negligence per se. Rather, the Court said, Deckard held that if all the other elements of a negligence claim exist, a statute or rule may supply the necessary standard of care for a negligence per se claim to exist on its own.

The Court then looked at whether the Plaintiff had satisfied the four requirements required to pursue a negligence per se claim. The Court had no problem finding that Plaintiff had satisfied the first three requirements. Plaintiff (1) alleged that the Defendant violated ORS 746.230(1) by failing to pay her claim without conducting a reasonable investigation and in failing to settle her claim in good faith after liability became reasonably clear; (2) alleged she was injured as a result of Defendant’s violation; and (3) as an insurance-buyer, is a member of the class of persons meant to be protected by the statute.   

The Court then discussed whether the last requirement of a negligence per se claim was satisfied in the case. Specifically, the Court looked at whether emotional distress damages are the sort of harm that the Oregon Unfair Claims Settlement Practices statute was intended to prevent. The Court noted that a basic principle of insurance law is not just ensuring that policies provide payment in case of a loss, but also to provide the policyholder peace of mind. The Court held that the Oregon legislature enacted the Insurance Code, which includes ORS 746.230, for the protection of insurance-buyers and that it intended to ensure that insurance-buyers get what they pay for, including peace of mind. The Court of Appeals stated that it was hard to imagine that the legislature did not intend the Insurance Code, at least in part, to prevent policyholders from experiencing the stress of dealing with unfair insurance claim settlement practices.

Having concluded that the Plaintiff had met the pleading requirements to pursue a negligence per se claim against Defendant, and that there was no specific authority prohibiting it, the Court of Appeals held that it was error for the trial court to dismiss Plaintiff’s negligence per se claim and to strike her emotional distress damages allegations. The case was reversed and remanded to the trial court. 

The Big Picture:

The Oregon Court of Appeals appears to have opened the door to first-party bad faith litigation in Oregon by holding that negligence per se claims can be pursued based on allegations of violating regulatory claims handling procedures. Additionally, the Court has held that claims for emotional distress damages can be pursued against a carrier under those circumstances. Accordingly, it is now more important than ever for insurance carriers to be familiar with and comply with the regulatory requirements of the Oregon Insurance Code, that it refrains from unreasonably denying claims, and that its claims settlement practices do not run afoul of those articulated in ORS 746.230.