Until recently, Oregon courts did not allow policyholders to bring claims against their insurers under Oregon’s Unfair Claims Settlement Practices Act and only allowed tort-based “bad faith” claims in narrow circumstances. This left Oregon policyholders seeking recovery from their insurers with only contract-based claims and remedies. But the Oregon Supreme Court’s decision in Moody v. Oregon Community Credit Union, 371 Or 772, 542 P3d 24 (2023), which allowed a policyholder to recover on a tort-based theory for violations of Oregon’s Unfair Claim Settlement Practices Act, ORS 746.230, appeared to change the playing field. However, as two recent federal court decisions demonstrate, the Moody’s decision’s scope and application is up for debate.

The facts in Moody are straightforward. Moody, the widowed policyholder, submitted a claim for benefits under a life insurance policy after her husband was accidentally shot and killed during a camping trip. After the insurer, Federal Insurance Company (FIC), denied her claim, Moody sued, asserting a negligence claim against FIC and seeking recovery of emotional distress damages based on FIC’s violations of Oregon’s Unfair Claim Settlement Practices Act. The trial court dismissed Moody’s negligence claim and struck her allegations seeking emotional distress damages.

The Court of Appeals reversed the trial court’s decision, finding that the Unfair Claim Settlement Practices Act established an independent standard of care that could support Moody’s negligence claim, including the potential recovery of emotional distress damages. The Moody decision was therefore a landmark one, seemingly opening the door for policyholders to assert first-party, tort-based “bad faith” claims in Oregon.

In December 2023, the Supreme Court affirmed the Court of Appeals’ decision in Moody, finding that the policyholder established a “legally protected interest” sufficient to subject the insurer to liability for purely emotional damage. The Court concluded that “the insurance claim practices that ORS 746.230 requires and the emotional harm that foreseeably may occur if that statute is violated are sufficiently weighty to merit imposition of liability for common-law negligence and recovery of emotional distress damages.” In doing so, the Court seemingly departed from Oregon’s physical impact rule, which requires a plaintiff seeking emotional distress damages under a negligence per se claim to allege some form of physical impact.

The Supreme Court’s decision came with a caveat. The Court cautioned that its decision “does not make every contracting party liable for negligent conduct that causes purely psychological damages, nor does it make every statutory violation the basis for a common-law negligence claim for emotional distress damages.” In fact, the Court described its decision as “a narrow one that applies and accords with the limiting principles that have guided [its] past decisions” and that “does not unfairly expose defendant to liabilities that it could not have expected and guarded against.” In attempting to limit such a broad ruling, the Supreme Court may have created more confusion than it cured. This was particularly true with respect to whether, after Moody, common-law tort claims for emotional distress damages required allegations of accompanying physical impact or harm.

On March 28, 2024, two federal court decisions out of the District of Oregon demonstrated the confusion surrounding what impact Moody–as articulated by the Oregon Supreme Court–actually had on policyholder claims.

In Butters v. Travelers Indemnity Co., 2024 WL 1328412 (D Or Mar. 28, 2024), a policyholder seeking to recover benefits under a homeowners policy argued that the Moody decision eliminated the requirement for a policyholder to demonstrate physical impact to recover emotional distress damages. The court disagreed, finding that the policyholder overstated Moody’s impact. To the Butters court, the Supreme Court’s Moody decision did not eliminate the need for any plaintiff alleging negligence per se to satisfy Oregon’s physical impact rule. Rather, the Supreme Court merely “recognized a new narrow application of an exception to the physical impact requirement for a plaintiff who brought a negligence per se claim for emotional distress damages,” but the Moody “analysis and holding were tied to the specific facts of that case.”

The exact opposite result was reached in Hinzman v. Foremost Insurance Co., 2024 WL 1329036 (D Or Mar. 28, 2024). There, the policyholders sued their insurer for breach of contract and negligence per se after it failed to pay for damage caused to their vacation home by wildfire smoke, soot, and ash. The insurer moved for summary judgment on the negligence per se claim, arguing that the policyholders failed to allege any physical impact accompanying their emotional distress as required by Oregon law. Contrary to the Butters decision issued on the same day, the Hinzman court found that the Supreme Court’s Moody decision “does not require evidence of a ‘physical impact’ under circumstances like those alleged” in Hinzman. As a result, the policyholders need not demonstrate physical impact, and the insurer’s motion for summary judgment was denied.

These two decisions that attempt to interpret Moody within three months of its publication reflect the uncertainty and confusion surrounding its scope and applicability. Both Butters and Hinzman involved policyholders asserting negligence per se claims seeking recovery of emotional distress damages from their insurers. The cases were decided on the same day by the same court, albeit by different judges. Nevertheless, the Butters court held that Moody was a narrow decision tied to the specific facts of the case, and it therefore did not eliminate the need for a plaintiff seeking emotional distress damages to satisfy Oregon’s physical impact rule. The Hinzman court ruled differently, holding that Moody eliminated the physical impact requirement under the circumstances.

Oregon courts will continue to wrestle with Moody’s impact on “bad faith” insurance claims under Oregon law, including whether Moody constituted a permanent departure from Oregon’s physical impact rule or whether it opened the door for “bad faith” claims from third-party claimants.

In our view, Moody left open the possibility, but did not decide, that [Oregon’s Unfair Claim Settlement Practices Act] imposes a legal obligation designed to protect third-party claimants like [plaintiff] from emotional harm caused by violation of the statute.

- Mayes v. American Hallmark Ins. Co., 2024 WL 3899231 (D Or Aug. 22, 2024)

Policyholders should consult their coverage counsel to evaluate how Moody and its progeny may impact their claims going forward.

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