Shayna Eagle

We continue to follow the West Hills Dev. Co. v. Chartis Claims, Inc. case.  In February, Chris Parker told you about the Oregon Supreme Court’s holding earlier this year reaffirming insurers’ broad duty to defend an alleged additional insured based on vague allegations in the complaint.[1]  The Supreme Court affirmed the Court of Appeals, holding that the insurer owed a duty to defend, but unlike the Court of Appeals, the Supreme Court found no need to resort to extrinsic evidence, and held that the insurer owed a duty to defend based solely on the allegations of the complaint.  On March 1, 2017, after the case was remanded from the Supreme Court, the Oregon Court of Appeals released another opinion which could also potentially impact insurers, holding that an additional insured’s claims for breach of contract and equitable subrogation may give rise to attorney fees.

West Hills, a general contractor for a townhome construction project, was named as an additional insured under its subcontractors’ general liability policies.  The townhome owners association later brought construction defect claims against West Hills, stemming from the project.  West Hills tendered its defense to various insurers under their additional insured endorsements.  Two insurers, Quanta and RRG, assumed West Hills’ defense.  Oregon Auto, however, refused.  After West Hills settled the owners association’s claims, West Hills initiated a coverage action against Oregon Auto.  West Hills asserted three claims against Oregon Auto: a breach of contract claim based on West Hills’ own contract rights, and claims for equitable contribution and equitable subrogation, which were assigned to West Hills by the insurers that had participated in its defense (Quanta and RRG).

The total cost of defending West Hills was $231,075.  In light of a self-insured retention (“SIR”) provision in one of the defending insurer’s policies, West Hills paid $25,418 of the $231,075 in defense costs.

In its complaint, West Hills alleged $28,884 in damages on its breach of contract claim, which represented a one-eighth share of the total $231,075 in defense costs in the underlying action by the homeowners, and $25,719 for the assigned claims, which represented the portion of Oregon Auto’s one-eighth share that was paid by Quanta and RRG.  Ultimately, the trial court entered a general judgment for West Hills “on it claims,” without differentiating between the three claims asserted, and awarded the full $28,884 alleged in the contract claim.

West Hills sought recovery of the attorney fees incurred in bringing the coverage action, under ORS 742.061.  The statute provides that:

“[I]f settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff’s recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.”

On appeal, Oregon Auto asserted three arguments.  Oregon Auto first argued that West Hills could not collect any attorney’s fees at all.  Alternatively, Oregon Auto raised two arguments why West Hills’ attorney fees award should be reduced.

Oregon Auto argued that West Hills should not be treated as an insured entitled to fees under ORS 742.061 because West Hills was self-insured for the first $25,000 of the claim in light of the SIR, and insurers seeking equitable contribution from other insurers are not entitled to fees under ORS 742.061.[i]   The Court of Appeals rejected this argument.  It concluded that West Hills was entitled to fees under the statute because one of West Hills’ three claims was for breach of contract, brought as an additional insured under the Oregon Auto policy.  The Court stated that the self-insured retention provision (which appeared in Quanta’s policy, but not Oregon Auto’s) was merely a deductible provision and did not transform an insured into a self-insurer or the equivalent of an insurance company.  Accordingly, the Court held that West Hills was entitled to fees under its breach of contract claim.  The Court further stated that, even though West Hills’ action included a claim for equitable contribution (for which there would be no fee claim), asserting the alternative claim for equitable contribution did not justify re-characterizing the breach of contract claim, nor the action as a whole.

Oregon Auto then argued that, even if West Hills were entitled to fees, the fee award should be reduced, providing two potential justifications.  First, Oregon Auto argued that West Hills was only entitled to 11% of its fees accrued during the coverage action because West Hills only paid 11% of the defense costs in the underlying action by the homeowners.  The Court quickly rejected this argument because Oregon Auto did not provide any authority to support it.

Second, Oregon Auto argued that the fee award should have been apportioned:  while West Hills’ breach of contract claim gave rise to fees, the two assigned insurer claims from Quanta and RRG did not.  The well-established apportionment rule provides that, when a party prevails on an action that encompasses both a claim for which attorney fees are authorized and a claim for which they are not, the court must apportion the fees incurred for each claim.  There is an exception when the two claims involve common legal issues such that the same amount of fees would have been incurred irrespective of the additional non-fee claim.  In that situation, fees are not subject to apportionment.

Oregon Auto argued that apportionment was proper in this case, relying on Vertopoulos v. Siskiyou Silicates, Inc., 177 Or App 597 (2001).  In Vertopoulos, one attorney represented two defendants, only one of whom was entitled to recover attorney fees, and so the court apportioned the fees.  However, the Court distinguished this case from Vertopoulos, concluding that a distinction could not be made between West Hills as an insured with a fee claim and West Hills standing in the shoes of insurers without fee claims, because certain claims asserting the subrogated rights of an insured may give rise fees under ORS 742.061.

Further, the Court found this case fit the exception to the apportionment rule because the issue of coverage was a common issue between all three claims, so West Hills would have incurred roughly the same amount of fees even without the non-fee contribution claim.  Finally, the Court noted that the trial court did reduce the fees somewhat, in accordance with the apportionment rule, as there was a slight reduction in light of the number of defendants involved at the outset of the action.

The potential ramifications of the Court’s ruling on claims strictly between insurers are debatable, and we expected to see future litigation over the application of this case in that context.  Defending insurers—or policyholders who have been assigned their claims–may attempt to re-name their equitable contribution claims against non-defending insurers as equitable subrogation claims in an effort to recover fees.  Whether such attempts will be successful is an open question.  If you are an insurer facing such a claim, we would be happy to speak with you regarding the impact this case may have on your matter.

[1] You can find Chris Parker’s full analysis of the Oregon Supreme Court decisions here: http://www.davisrothwell.com/2017/02/07/oregon-supreme-court-reaffirms-broad-duty-to-defend/.

[i] See Certain Underwriters v. Mass. Bonding and Ins. Co., 235 Or App 99 (2010).