Court Opinion

ID: 9543814
Source: CourtListenerOpinion
Date Created: 2023-08-07 16:49:28.651699+00
Date Added: 2024-06-11T15:11:13.388156
License: Public Domain

LEESON, J.,
dissenting.
In Northwest Pump v. American States Ins. Co., 141 Or App 210, 917 P2d 1025 (1996), we held that defendant wrongfully refused to defend plaintiff, its insured, against a claim brought by a third party for environmental cleanup costs associated with gasoline discharged from an underground storage tank that was installed by plaintiff. Plaintiff settled the third-party claim for $10,000 before trial, without admitting liability. We remanded for the trial court to determine “plaintiffs reasonable defense costs and the reasonableness of the amount of settlement.” Id. at 218. On reconsideration, defendant misstates our holding1 and requests that we instruct the trial court to
“refrain from entering summary judgment in favor of [plaintiff] with respect to amounts paid in settlement until it has determined whether those amounts were covered indemnity losses under the policy.”
The majority accedes to that request. It holds that “ [defendant is entitled to assert the applicability of the exclusion provision!,]” 144 Or App at 230, apparently in a full-blown trial on the merits, with unlimited discovery, regarding indemnity. I agree with the majority that the procedure on remand should be clarified but I disagree with the rule it announces. Therefore, I dissent.
The relevant policy provisions in this case are as follows:
“The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of
*232A. bodily injury, or,
B. property damage
to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted by payment of judgments or settlements.” (Boldface in original; emphasis supplied.)
The majority’s starting premise, like defendant’s, is that the duty to defend is wholly independent of the duty to indemnify. Id. at 226.1 believe the majority reads too much into the Supreme Court’s statement in Ledford v. Gutoski, 319 Or 397,403, 877 P2d 80 (1994), that “[t]he duty to indemnify is independent of the duty to defend.” As the court there noted, the duty to indemnify may arise when the facts proved at trial show that the insured’s conduct is covered by the policy, even though the insurer did not have a duty to defend. Id. Similarly, the duty to defend may arise solely from the language of the complaint and the insurance policy, even when there is no duty to indemnify. Id. at 400. The two duties are independent in that one may exist without the other, but that independence does not mean that the obligations imposed by settlement are exclusively part of the duty to indemnify.
In this case, an express provision in the policy gives defendant the right to settle any claim, even one that is groundless, false or fraudulent, “as it deems expedient.” The policy also provides that defendant’s duty to indemnify has a stated limit and that once that limit has been reached by payment of judgments or settlements, its duties both to indemnify and to defend cease. See North Pacific Ins. Co. v. Wilson’s Distributing, 138 Or App 166, 173, 908 P2d 827 (1995), rev den 323 Or 264 (1996) (if duty to indemnify is negated, insurer has no duty to defend). Because the duty to defend is contractual and settlement is a component of defense, settlement is part of the performance of an insurance contract. Georgetown Realty, Inc. v. Home Ins. Co., 102 Or App 611, *233615, 796 P2d 651 (1990), rev’d on other grounds 313 Or 97, 831 P2d 7, on remand 113 Or App 641, 833 P2d 1333 (1992), rev den 316 Or 528 (1993). See Maine Bonding v. Centennial Ins. Co., 298 Or 514, 518-19, 693 P2d 1296 (1985) (discussing insurer’s failure to settle where an opportunity to settle exists). When an insurance company fails to undertake its duty to defend it leaves the insured with less than the bargained-for protection of the insured’s interests against a third party. Id. Consequently, I disagree with the majority’s starting premise — that the duties to defend and indemnify are wholly independent. I also disagree with the rule that it apparently derives from that premise, namely, that when an insurer breaches its duty to defend and its insured settles a third-party claim, the insurer is entitled to a trial on the merits of the third-party claim in an attempt to avoid its duty to indemnify. 144 Or App at 227.
The majority is correct, 144 Or App at 225, that a substantial number of jurisdictions have rejected the rule, that, where an insurer violates its duty to defend, it is completely estopped from denying coverage. However, I have not found any other jurisdiction that has confronted the precise question that we face, namely, whether defendant, having breached its duty to defend, and after its insured has settled the underlying action with the third party, is entitled to unlimited discovery and investigation and to a full-blown trial on the merits of the settled claim to determine whether defendant will pay any or all of the settlement. The cases cited by the majority as standing for the proposition that “an insurer that wrongfully fails to defend is responsible for settlement costs only to the extent that the underlying claim is covered [,]” 144 Or App at 225, are more troubling to the majority’s position than it suggests.
In Polaroid Corp. v. Travelers Indem. Co., 414 Mass 747,610 NE2d 912,921 (1993), for example, the court refused to embrace the majority’s view that no consequences attach to an insurer’s breach of the duty to defend.
“We have not decided which party has the burden of proof as to the sudden and accidental discharge. * * * Here, even if we were to assume that the burden would normally *234be on the insured, we place it on the insurer when the insurer is in breach of its duty to defend.” Id.
Similarly, in Hirst v. St. Paul Fire & Marine Ins. Co., 106 Idaho 792, 683 P2d 440, 447 (1984), although the court held that the duty to defend is “a separate, unrelated and broader obligation than a duty to pay for damages under the insurance policy,” 106 Idaho at 798, 683 P2d at 446, it nonetheless held that an insured was entitled to sanctions (in that case, attorney fees and costs) against an insurer that breached its duty to defend. Those cases are authority, albeit it not from Oregon, for the proposition that insurers face consequences for breaching the duty to defend. It is not surprising that there is no authority on point in Oregon. As the majority acknowledges, “No Oregon decision defines precisely the consequences of an insurer’s wrongful refusahto defend.” 144 Or App at 224.
Appellate courts should adopt rules that encourage parties to adhere to the obligations that they voluntarily undertake when they enter into contracts. Instead, the majority adopts a rule that permits an insurer to breach its duty to defend and then to force the insured to prove that, if the original case had gone to trial, the insured would not have lost on a covered claim, while the insurer takes advantage of whatever information it may have acquired or can acquire after settlement in the subsequent action involving indemnity.
I think the better approach on remand is for the trial court to answer the following questions: If a reasonable insurer had accepted its duty to defend, would it reasonably have settled the claim against plaintiff? If so, when would it have settled? If it had settled, would the amount of a reasonable settlement have been at least as much as the actual settlement? Plaintiff is entitled to recover from defendant the amount for which a reasonable insurer would have settled the case with the third party. A plaintiffs settlement after an insurer breaches its duty to defend is a foreseeable consequence of the breach. It is thus proper to award the plaintiff damages for that consequence.
In making its factual determination regarding the amount, if any, of the settlement that plaintiff is entitled to *235recover from defendant, the trial court should take into account a number of factors that a reasonable insurer would consider. They include, but are not limited to: the projected costs associated with defending the case if it had gone to trial; the likelihood of a judgment against plaintiff that is within the policy’s coverage and the potential amount of that judgment; the likelihood of a judgment against plaintiff that is not within the policy’s coverage and the potential amount of that judgment; and plaintiffs willingness to contribute to the settlement in the light of the risk to plaintiff of noncoverage under the insurance policy. Because plaintiff is entitled to recover what it would have received if defendant had not breached its duty to defend, the court’s findings should be based on evidence that is limited by what defendant knew at the time that it reasonably would have settled the case.
The majority rejects this approach on the grounds that it “punishes an insurer for having failed properly to defend by preventing it to assert the applicability of a policy exclusion,” that it has the effect of expanding the duty to indemnify, and that it extends coverage by estoppel. 144 Or App at 229. In contrast, the majority would punish plaintiff, the party injured by defendant’s breach, for having entered into what it deemed a reasonable settlement after that breach left it without the defense to which it was entitled. That is wrong. The onus should fall on the party that breached the insurance contract, not on the victim of the breach. This approach is the best way to provide plaintiff what it would have received if defendant had undertaken its contractual duty to defend and had acted reasonably in calculating the opportunity to avoid the expense of trial and the risk of being found liable on the underlying claim.
This approach does not, as the majority suggests, extend coverage by estoppel or expand the duty to indemnify in violation of Timberline Equip. That case has no bearing on the issue in this case. In Timberline Equip., the court held as a matter of law that one of the third party’s claims was excluded from coverage but that another claim was within the policy’s coverage. The court held St. Paul liable for all of Timberline’s defense costs and remanded to the trial court “to determine the amount to which [Timberline] is entitled” regarding settlement costs. Timberline Equip., 281 Or at 646. *236In doing so, the court rejected Timberline’s argument that St. Paul had waived, by its breach of the duty to defend, any right to rely on the policy’s exclusion clause, which barred coverage for one of the claims against Timberline as a matter of law. Contrary to the majority’s contention, Timberline Equip, sets no standard to be followed on the facts of this case, where the third-party claim against plaintiff is not excluded from policy coverage as a matter of law. The approach I propose is consistent with the contract damages principle expressed in Timberline Equip.
For the foregoing reasons, I dissent.
Riggs, Haselton and Armstrong, JJ., join in this dissent.

 Defendant’s petition states:
“[Defendant] asks the Court to reconsider that part of the Court’s opinion, beginning at p. 9, which holds plaintiff Northwest Pump & Equipment Co. (‘Northwest Pump’) is entitled to recover from [defendant] the amounts paid in settling an underlying action, based purely upon the allegations of the complaint and without any proof of coverage.”