Silence Isn’t Always Golden: When do Insurers Have a Duty to Remind Their Insured of Their Subrogation Rights?

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From the Desk of Josh Hayward:

It is not often the case that a person or entity can gain or lose rights by simply remaining silent. There are, however, times when a party has a duty to speak, and the failure to speak may bar a party from asserting a defense or a claim. In this case, the Oregon Court of Appeals examined whether Liberty Mutual had a duty to remind their insured that the insured had a duty to protect Liberty Mutual’s subrogation rights if they settled their claim with the at-fault party. 

Claims Pointer:

The Oregon Court of Appeals held that a genuine issue of material fact existed regarding whether Liberty Mutual had a duty to continue to remind their insured that they needed to protect Liberty Mutual’s subrogation rights. The duty to speak does not arise until the party against whom estoppel is urged knows or should know that the failure to speak will likely mislead the other party to act (or not act) to their detriment. In this case that was a question of fact for the jury. 

 Nelson v. Liberty Insurance Corporation, 314 Or App 350 (2021). 

Facts: 

In August of 2015, a fire broke out at Rough and Ready Lumber Company (“R&R”) and spread to the Nelson’s (“Plaintiffs”) property. The fire damaged Plaintiffs’ home, personal property, and business property. Plaintiffs brought a claim through their homeowner’s insurance policy with Liberty Insurance Corporation (“Liberty”), for damages to their property. In September of 2015, Liberty made a partial payment on Plaintiffs’ insurance claim. While Liberty was adjusting the claim, Plaintiffs withdrew the claim, returned the partial payment, and told Liberty that R&R accepted responsibility and would pay for the damage.

Nearly a year and a half later, Plaintiffs filed two separate lawsuits, one against R&R and the other against Liberty. Liberty sent a letter to Plaintiffs in March of 2017 stating that they would treat Plaintiffs’ lawsuit as a renewal of their withdrawn insurance claim and start adjusting the claim. Liberty requested documentation of any payment made by R&R, as well as “any restitution documents, including possible releases of the lumber company.” In the letter, Liberty pointed out the subrogation condition and quoted it in full. The case against Liberty was stayed while Liberty adjusted Plaintiffs’ claim. 

Six months later, Plaintiffs requested a global mediation. Liberty declined to participate in the mediation so no mediation occurred. Then between January of 2018 and July of 2018, during its ongoing claim investigation, Liberty learned that Plaintiffs had settled their claim against R&R and released all of their claims against R&R. Liberty then asserted as an affirmative defense that Plaintiffs voided any coverage under their insurance policy when they released all of their claims against R&R because the release also effectively precluded Liberty from bringing subrogation claims against R&R.

Both parties moved for summary judgment on the estoppel issue. The trial court concluded that Liberty was estopped from asserting the affirmative defense because Liberty’s silence regarding their subrogation and reservation of rights during the final negotiation phase led Plaintiffs to reasonably believe that Liberty would not pursue its subrogation rights and that Plaintiffs reasonably relied on Liberty’s inaction. Liberty appealed.

Law:  

Subrogation enables a secondarily liable party who has been compelled to pay a debt to be made whole by collecting that debt from the primarily liable party. Koch v. Spann, 193 Or App 608, 612 (2004). In the insurance context, subrogation permits an insurer in certain instances to recover what it has paid to its insured by, in effect, standing in the shoes of the insured and pursuing a claim against the wrongdoer. An insurer’s subrogation rights arise only when the insurer makes an outright payment to the insured. Furrer v. Yew Creek Logging Co., 206 Or 382, 388 (1956). Generally, an insured’s settlement with the tortfeasor—particularly one that releases the tortfeasor from further claims—”results in the insurer’s loss of its right to subrogation against the tortfeasor.” Armintrout v. Transportation Ins. Co., 137 Or App 86, 90 (1995) 

Estoppel is also an equitable doctrine that precludes a person, based on the person’s acts, conduct, or silence where there was a duty to speak, from asserting a right that otherwise would have been available. Derardorff v. Fransworth, 268 Or App 844,849 (2015). To establish an equitable estoppel or estoppel by conduct defense, a party must prove the following elements: (1) there must be a false representation; (2) it must be made with knowledge of the facts; (3) the other party must have been ignorant of the truth; (4) it must have been made with the intention that it should be acted upon by the other party; and (5) the other party must have been induced to act upon it.” Guardian Mgmt., LLC v.  Zamiello, 194 Or App 524, 530 (2004). A false representation may be made by silence but only if the party is silent when they have “a duty to speak.” Id. 

Analysis: 

The Oregon Court of Appeals considered whether Liberty had an affirmative duty to speak. The question came down to whether Liberty’s conduct from September 2017, and January 2018 gave rise to estoppel by silence. In this case, Liberty reminded Plaintiffs of their subrogation rights in March of 2017. “The duty to speak does not arise until the party against whom estoppel is urged knows or should know that the failure to speak will likely mislead the other party to act to his or her detriment.” Pfaendler v. Bruce, 195 Or App 561, 570 (2004). The Court reasoned that while Liberty could have reminded Plaintiff of their subrogation rights when Plaintiff suggested the global mediation, it was not required to do so as a matter of law. A reasonable juror could find that because Liberty already pointed out the subrogation condition to Plaintiff and because Liberty was still adjusting the claim, Liberty could reasonably expect Plaintiffs to consider Liberty’s subrogation rights in any settlement negotiations with R&R. Because a reasonable juror could conclude that Liberty did not have a duty to speak, the trial court erred in granting Plaintiffs’ motion for summary judgment. 

The Big Picture: 

Liberty won at the Court of Appeals but they still need to convince a jury that they should not be estopped from asserting their affirmative defense because of their failure to remind their insured of the insured’s duties. If an insurer knows that their insured is negotiating a settlement with the at fault tortfeasor, it is best to remind them early and often about their duty to protect the insurer’s subrogation interest.