Advisories & Insights

An Oregon federal district court recently ruled that an insurance company should be responsible only for the share of defense and indemnity costs attributable to the actual damage occurring during that insurer's own policy periods. The court ruled that the insured itself was responsible for property damage or defense costs tied to the years of coverage that were provided by a now-insolvent insurance company.

The insured, Stimson Lumber Company, tendered a series of lawsuits related to its hardboard siding to three insurance companies that provided primary coverage during the years at issue. As the tendered lawsuits increased in size and number, the insurers filed a declaratory judgment action against Stimson and the excess insurers to resolve certain coverage questions. One of the primary carriers, The Home Indemnity Company, became insolvent during the course of the coverage litigation, and the parties were unable to agree on how defense and indemnity should be allocated among the remaining parties. (The Oregon Insurance Guaranty Association had no obligation to step into the shoes of an insolvent insurer because the insured's net worth exceeded $25 million.)

No Oregon appellate court had previously considered how to allocate defense or indemnity obligations after a carrier's insolvency. Stimson took the position that the remaining primary carriers were liable for paying Stimson's entire liability in the underlying cases. The primary insurance companies argued that, under the policy language, the only interpretation consistent with Oregon law would be to find that each insurer is held liable only for the property damage shown to have occurred during its own policy period. If specific damage could not be attributed to a single policy period, pro rata allocation would permit the court to assume that the rate of damage was consistent and to allocate a proportionate share of the damage to each period.

In May 2004, Judge Ancer Haggerty agreed with the primary insurers, finding that pro rata allocation was the most equitable solution, noting that the primary insurers had no say in Stimson's selection of The Home and did not agree to guarantee The Home's obligations. Stimson chose to enter into a contract with The Home, and Stimson bore the risk of its insolvency. California Ins. Co. v. Stimson Lumber Co., 2004 WL 1173185 (D Or 2004).

Following subsequent motions, the court applied the same reasoning with regard to defense obligations. The policies provided for a defense only of covered property damage, and the court's May 2004 ruling made Stimson responsible for losses occurring during The Home's policy period. Again, Stimson argued that the remaining insurance companies should have to share the defense costs that would have been paid by The Home, but in March 2005, Judge Haggerty agreed with the insurance companies and found that defense costs should be prorated to each remaining insurance company for its own policy periods, with Stimson responsible for The Home's share of the defense costs. California Ins. Co. v. Stimson Lumber Co., 2005 WL 627624 (D Or 2005).

The court also considered whether the insurers had a duty to pay the attorney fees recovered by the claimants in a class action suit against Stimson, as "costs taxed against the insured," where Stimson had agreed to pay such fees in settlement of the class action. The court found that there was no such duty, because there was no coverage for the underlying lawsuit, and because the fees were not "taxed against" Stimson, because Stimson had agreed to pay them. In support of its decision, the court looked to the decisions reached in other states, where courts have found that an insured's obligation to pay a claimant's attorney fees and expenses is equivalent to damages, rather than defense costs.

During the course of the case, the court also found no coverage for the following: (1) a claimant's cause of action based solely on breach of warranty; (2) repair or replacement of the insured's own product, including the associated costs (labor, flashing, paint, etc.); or (3) violations of a state Consumer Protection Act or Unfair Trade Practices Act.