The start of 2024 marked the end of an insurance era in Oregon. On December 29, 2023—the last Friday before the new year—the Oregon Supreme Court issued its much-anticipated decision in Moody v. Oregon Community Credit Union, et al., 371 Or 772 (2023). Before Moody, Oregon had long been a jurisdiction declining to recognize first-party negligence claims against insurers, along with the damages associated with those tort-based negligence claims. With Moody, the Oregon Supreme Court changed this status quo, allowing for the first time a policyholder’s ability to recover extra-contractual damages stemming from alleged negligent claims handling.
Oregon’s Pre-Moody Approach to Claims Against Insurance Companies
Oregon courts generally examine negligence through the lens of a “special relationship” between a plaintiff and tortfeasor. In the specific context of insurance, that “special relationship” attached when an insurer accepted and undertook its insured’s defense. Georgetown Realty, Inc. v. Home Ins. Co., 313 Or 97, 111 (1992). So, Oregon policyholders traditionally could only recover tort damages if an insurer first assumed an insured’s defense and then breached the standard of care, resulting in harm. Conversely, Oregon policyholders could recover only contract damages based on an insurer’s pre-defense or non-defense conduct. And although Oregon’s Fair Claims Settlement Practices Act, ORS 746.230(1), codifies standards by which insurance companies must conduct themselves, it was long assumed that those statutes did not provide an independent cause of action against carriers found violating them.
Moody: The Facts, Law and Reasoning
Moody ushered in a significant change to this understanding, and insurance claims handling and litigation in Oregon have accordingly entered uncharted waters. The facts were straightforward, yet unfortunate: a man was accidentally shot and killed by a friend, while the two were on a camping trip. A toxicology report later revealed trace amounts of marijuana in the decedent’s system. Later, his wife attempted to recover a $3,000 “accidental death” payout on the man’s life insurance policy. However, the insurer denied coverage, citing to an exclusion for deaths “caused by or resulting from a decedent being under the influence of any narcotic or other controlled substance.” The wife brought suit against the insurer, alleging wrongful denial of benefits, and asserted claims for both breach of contract and negligence per se for its violation of the standards set forth in Oregon’s Fair Claims Settlement Practices Act. The wife sought recovery for contract damages, in addition to damages for “emotional distress” stemming from the claim’s denial.
Citing to Oregon’s long standing position that emotional distress damages are not available for claims stemming from pure breach of an insurance policy, the defendants successfully moved to dismiss the wife’s negligence per se claim and her request for emotional distress damages. However, the Oregon Court of Appeals reversed the trial court, permitting a negligent per se violation of ORS 746.230 to proceed. As a result, the Oregon Court of Appeals provided a new path for recovery of tort-based, noneconomic, “emotional distress” damages stemming from an insurer’s denial of a first-party claim.
The Oregon Supreme Court affirmed the Court of Appeals’ decision, albeit on grounds differing from the appellate court. The Court of Appeals’ decision suggested that an insured could bring an independent claim for negligence per se against an insurer who violated Oregon’s Fair Claims Settlement Practices Act. In contrast, the Oregon Supreme Court held that an insurer’s violation of Oregon’s Fair Claims Settlement Practices Act does not on its own give rise to liability for negligence per se. Rather, it is the relationship between an insurer and its insured that is sufficiently “special” to permit a negligence claim for fair claims standards violations. The Oregon Supreme Court clarified that it is the nature of that relationship that creates a reasonably foreseeable harm when the statutory standards are violated. Finally, and attempting to cap the impact of its ruling, the high court clarified that its holding was limited to the Moody case’s unique circumstances: the nature of life insurance and the public policy interest in payment of those benefits. The Court noted the importance of an insurer knowing both the identity of the person contracting, as well as the reliance of the person seeking the benefit.
Litigation Considerations Moving Forward
Moody does not expressly introduce first-party bad faith into Oregon. However, the decision marks a stark change to the status quo and is being viewed by the policyholder bar as opening the door to extracontractual damages typically permitted only in tort-based and bad faith-type actions.
Following Moody, policyholders are claiming new types of noneconomic damages for first-party insurer negligence, including emotional distress and punitive damages. The policyholder bar is arguing these types of damages were not expressly excluded by the Oregon Supreme Court, and are thus now recoverable. Accordingly, careful claims handling in Oregon has become even more important, as have bad faith discovery and motions practice. Recall Oregon’s unique approach to civil practice, which requires strict fact pleading standards, and does not permit interrogatories or expert discovery. Given these procedural considerations, additional importance should be placed on assessing the viability of pre-answer motions to dismiss, and on carefully crafting discovery requests and deposition questions to understand the nature of a policyholder’s breach allegations and resulting damages claim.
Despite the Oregon Supreme Court’s attempt to limit the application of Moody, it remains that insurance companies providing coverage in Oregon now face more exposure to extracontractual claims. This exposure underscores the importance of reviewing and closely complying with Oregon’s Fair Claims Settlement Practices Act, ORS 746.230.
