Violation of the Oregon Insurance Code Sufficient to Give Rise to First-Party Claim for Emotional Distress Damages

From the Desk of Melanie Rose:

Historically, Oregon courts have limited first-party insurance cases to claims sounding in contract, largely rejecting tort claims in first-party cases absent a special relationship between the carrier and insured that was separate and distinct from the insurance contract itself. Last year, however, the Oregon Supreme Court affirmed the Oregon Court of Appeals’s departure from that long-standing limitation, allowing a claim for emotional distress damages to proceed against an insurer for alleged violations of the Oregon Insurance Code.

Claims Pointer:

The Oregon Supreme Court held that a negligence per se claim could proceed based on alleged violations of Oregon’s Unfair Claims Settlement Practices Statute, ORS § 746.230, including a claim for emotional distress damages.

Moody v. Oregon Community Credit Union, 371 Or. 772, 542 P.3d 24 (2023).

Facts:

Steven “Troy” Moody was accidentally shot and killed by a friend while on a camping trip. Troy was insured under a Federal Insurance Company (“FIC”) life insurance policy for $3,000, to be paid on his death. Troy’s wife and personal representative of his estate (“Plaintiff”) timely filed a claim for the life insurance benefits. FIC denied the claim because Troy had marijuana in his system when he died, and the policy contained an exclusion for accidents caused by or resulting from the insured being under the influence.

Plaintiff filed a lawsuit against FIC claiming breach of contract and negligence per se based on FIC’s alleged violations of ORS § 746.230(1). Specifically, Plaintiff alleged that FIC failed to reasonably investigate Troy’s death and settle the claim in good faith. Plaintiff claimed economic damages in the amount of the policy benefits of $3,000, and extra-contractual, non-economic damages of $47,001 for emotional distress. FIC, consistent with the historical norm in Oregon first-party lawsuits, moved to dismiss the negligence per se claim and to strike the allegation of damages for emotional distress, which the trial court granted.

The Oregon Court of Appeals reversed, concluding that Plaintiff had satisfied the requirements of a negligence per se claim and that such a claim based on statute could exist on its own, absent a recognized common law negligence claim.

FIC petitioned the Oregon Supreme Court for review, which was granted.

Law:

In a common law negligence claim, a plaintiff must allege and prove that a defendant’s conduct caused an unreasonable and foreseeable risk of harm to a protected interest of the plaintiff. Fazzolari v. Portland School Dist. No. 1J, 303 Or. 1, 17, 734 P.2d 1326 (1987); Son v. Ashland Community Healthcare Services, 239 Or. App. 495, 506, 244 P.3d 835 (2010).

Negligence per se is a negligence claim “in which the standard of care is expressed by a statute or rule.” Abraham v. T. Henry Const., Inc., 350 Or. 29, 35 n.5, 249 P.3d 534 (2011) (citing Shahtout v. Emco Garbage Co., 298 Or. 598, 601, 695 P.2d 897 (1985)).

Generally, there is no protected interest in being free from emotional distress, but Oregon courts have allowed claims for emotional distress damages when a defendant “negligently causes foreseeable, serious emotional distress and also infringes on some other legally protected interest.” Pilibert v. Kluser, 360 Or. 698, 702, 385 P.3d 1038 (2016) (emphasis added) (citing Norwest v. Presbyterian Intercommunity Hosp., 293 Or. 543, 559, 652 P.2d 318 (1982)).

Oregon’s Unfair Claim Settlement Practices Statute, in relevant part, prohibits an insurer from denying a claim without first conducting a reasonable investigation and requires an insurer to attempt, in good faith, to promptly and equitably settle claims in which liability has become reasonably clear. ORS § 746.230(1)(d), (f).

Analysis:

The Oregon Supreme Court concluded that Plaintiff had a viable tort claim against FIC and could seek emotional distress damages.

The court began its analysis with the premise that, because of the differences between tort and contract claims and the sources of their respective duties, parties to a contract may assert viable tort claims in addition to contract claims, to the extent both types of claims exist under these circumstances.

The Supreme Court disagreed with the Court of Appeals’s underlying reasoning for its ruling and reaffirmed the rule that a negligence per se claim requires an underlying common law negligence claim as a foundation. Therefore, to survive the motion to dismiss, the Supreme Court held Plaintiff must plead “facts sufficient to give rise to a legally cognizable common-law negligence claim for emotional distress damages” in order for the claim to proceed. In other words, Plaintiff must have alleged a foreseeable risk to a protected interest sufficient to subject FIC to liability for emotional distress damages.

The court decided that Plaintiff’s interest in having FIC conduct a reasonable investigation of her claim for the promised benefits and to promptly pay the benefit amount after liability had become reasonably clear was a protected interest of the type that could give rise to tort liability.

In reaching that decision, the court reasoned that: (1) permitting such claims would be consistent with the legislature’s intent in passing ORS § 746.230; (2) permitting recovery of emotional distress damages would not place an undue burden on insurance carriers; and (3) Plaintiffs’ interests, in having claims reasonably investigated and promptly paid, is sufficiently important as a matter of public policy.

Based on this analysis the Oregon Supreme Court affirmed the decision of the Court of Appeals to allow the negligence per se claim seeking emotional distress damages to proceed and reversed the judgment of the trial court.

Big Picture:

Although attempting to use language to limit the broad application of its decision, the court’s rationale seems to apply to other first-party claims against insurance companies, e.g., UM/UIM and PIP claims. Insurance companies operating in Oregon are now more exposed to claims for extracontractual emotional distress damages. Accordingly, it is important for carriers to carefully comply with the requirements of the Oregon Insurance Code, ensuring their claims settlement practices do not violate ORS § 746.230.