The Oregon Court of Appeals yesterday issued an opinion confirming that Oregon law remains faithful to the bedrock principle in coverage disputes that ambiguities in a policy must be resolved in favor of the insured.
In Patton v. Mutual of Enumclaw Ins. Co. (Oct. 8, 2014), an insured seeking coverage under his homeowner’s policy found himself between a rock and hard place, at least under the insurer’s erroneous attempt to link two unconnected policy provisions to deny coverage. Lowell Patton’s house burned down on November 8, 2001 and he sought the full value to rebuild under the “replacement cost” coverage written by Enumclaw.
First, the rock. Enumclaw’s policy included a very common requirement that the insured must first actually rebuild the damaged property before the insurer will pay — simply intending to rebuild is not enough. Patton’s estimates for rebuilding ran from $3.6 million to nearly $3.9 million. Enumclaw’s adjuster, in a move that would not surprise any coverage lawyer, predicted a risibly low cost to rebuild of less than $1.6 million. Aside from this dispute, rebuilding was delayed by permitting issues.
Second, the hard place. Enumclaw’s policy included an entirely separate “no action” clause, providing that the insured cannot file a lawsuit against the insurer “unless the policy provisions have been complied with and the action [the lawsuit] is started within two years after the date of loss.” Linking these two provisions, Enumclaw refused to cover the full cost that Powell eventually paid to rebuild his home, $3.23 million, because he was unable to complete the rebuilding within two years.
Enumclaw’s proposed Catch-22 would impress any Joseph Heller fan: an insured cannot sue for replacement cost earlier than two years after a loss if rebuilding is not complete, but if rebuilding takes longer than two years (even through no fault of the insured), then the insured cannot sue when the insurer refuses to pay.
The trial court granted summary judgment in Enumclaw’s favor, but the Oregon Court of Appeals refused to let this “gotcha” stand. As interpreted by Enumclaw, the two policy provisions effectively operate to create an unstated two-year limit on the time that an insured has to rebuild a home. The Court of Appeals focused on this ambiguity-by-omission, holding that the limitation suggested by Enumclaw failed because the policy was not clear and specific in the replacement-cost clause itself. Under Patton, insurers cannot rely on unrelated policy provisions to create hidden, ambiguous limitations that are not directly and simply stated.
Finally, let me pull up the soapbox for a moment. Aside from the manifest unfairness of the pinch that Enumclaw tried to pull off, this case illustrates why Oregon courts should join the majority of other states in unambiguously recognizing first-party bad-faith claims against insurers. Reading between the lines of the opinion, it is apparent that Patton has managed to pay for the difference between what Enumclaw paid as the “actual cost” for the loss (only $1.7 million) and the $3.23 million that it took to rebuild his home. Many insureds, of course, could not sustain this burden over the thirteen years that this loss and ensuing coverage dispute has been wending its way through Oregon’s courts. As insurers know, the financial pressure to get payment to rebuild and move on, for many insureds, will be too great, coercing a settlement favoring the insurer. Oregon insureds deserve better. For my thoughts on the status of first-party bad-faith in Oregon, please see my recent post, Choice-of-Law Analysis Makes All the Difference in “First Party” Bad-Faith Case.
— Dwain Clifford