If you Sail Out of the Safe Harbor, Expect to Pay the Price (in Attorney Fees)

From the desk of Cliff Wilson:

In disputes over insurance policies, there is the potential that the insured can recover attorney fees from the insurer. However, when the dispute is over uninsured or underinsured motorist benefits, the insurer can protect itself from paying these attorney fees if it meets certain statutory safe harbor requirements. One of these requirements is that the insurer agrees to binding arbitration.

Claims Pointer:

The Oregon Court of Appeals held that if an insurer takes itself out of the safe harbor by contesting the arbitration award or refusing to pay it, the insured is entitled to reasonable attorney fees. These attorney fees will include not only the fees incurred in later proceedings, but also the fees related to the initial arbitration.

Burns v. American Family Mut. Ins., 310 Or App 431 (April 7, 2021)

Facts:

In this case, Jack Burns, the plaintiff, was in a car accident with an underinsured driver. Following the accident, the plaintiff submitted a claim for underinsured motorist (UIM) benefits with his insurer, American Family Mutual Insurance—the defendant in this case. After filing his claim, the defendant sent the plaintiff a safe harbor letter, agreeing to coverage and to submit the claim to binding arbitration where the only disputed issues would be the liability of the underinsured driver and the amount of damages due. American Family’s letter met all of the requirements of ORS 742.061(3), and therefore, brought the defendant within the protection of the safe harbor, where it would be protected from incurring the insured’s attorney fees.

The parties then participated in arbitration, in which the arbitrators awarded the plaintiff $72,587.98 in damages. After this arbitration award was issued, the defendant refused to pay. The plaintiff then filed a petition with the court, where he sought an entry of a judgment against defendant for the full amount of the arbitration award, plus his attorney fees. The defendant initially raised issues with the court as to why it refused to pay the award. However, the defendant then ultimately decided rather than litigate those issues, the trial court should enter a judgment for the full arbitration award. The plaintiff then requested reasonable attorney fees for the entire process, including those incurred during arbitration. The defendant opposed this and argued that the only attorney fees the plaintiff should be awarded were those incurred after petitioning the court to enter a judgment. The trial court agreed with the defendant and awarded the plaintiff costs and attorney fees incurred in connection with the court proceedings, but not the arbitration. Plaintiff appealed.

Law:

In disputes over an insurance policy, an insured can recover reasonable attorney fees from his or her insurer when the plaintiff recovers more than what the insurer previously tendered and a settlement is not reached within six months. ORS 742.061(1). However, in actions for UIM (or UM) benefits, the insurer can protect itself from having to pay attorney fees if it follows the requirements laid out in ORS 742.061(3). This provision provides a safe harbor if, within six months of receiving the claim the insurer accepts coverage, consents to binding arbitration, and agrees the only remaining issues are the underinsured driver’s liability and the amount of damages.

The purpose of the safe harbor provision is to provide a limited exception to the attorney fees requirement of ORS 742.061(1). Given that this is only a limited exception, an insurer must actually abide by the requirements set out in the safe harbor provision. In this opinion, the Oregon Court of Appeals emphasized that if an insurer is able to first agree to binding arbitration and then later refuse to be bound by it and still escape paying attorney fees, that would substantially undermine the purpose of the safe harbor. Coming within the safe harbor is not just a matter of form, an insurer cannot just issue a safe harbor letter and enjoy the protection. Rather, the insurer must actually commit to what the safe harbor letter requires, which includes accepting coverage being bound by arbitration. The court stated that when an insurer contested the arbitration award, the insurer left the protection of a safe harbor. Thus, an insured should be able to recover attorney fees related to the arbitration proceedings, even though that occurred while the insurer was still operating under the safe harbor.

Analysis:

In this case, the defendant originally availed itself to the statutory safe harbor provision of ORS 742.061(1) by sending an adequate safe harbor letter to the plaintiff. However, the defendant’s later refusal to be bound by the arbitration proceeding cost itself the protection of the safe harbor. Thus, the plaintiff was entitled to recover attorney fees pursuant to ORS 742.061(1), which includes attorney fees related to the arbitration. Ultimately, the Oregon Court of Appeals held that the trial court erred in not awarding the plaintiff attorney fees incurred during the arbitration. The court then remanded the case back to the trial court to determine what would be a reasonable amount of attorney fees, including those associated with the arbitration.

The Big Picture:

Attorney fees can add up and the safe harbor provision of ORS 742.061(3) provides insurers with protection from paying an insured’s attorney fees, as along as certain criteria are met. However, as this Oregon Court of Appeals opinion makes clear, an insurer will not be afforded the protection of the safe harbor provision if it just sends a safe harbor letter.  Rather, the insurer must actually follow through with everything that is promised in the safe harbor letter in order to be afforded the protection. As the Oregon Court of Appeals succinctly put it: “even if a defendant insurer effectively sails into safe harbor, it loses its shelter if, through its own conduct, it sails out.”