From the desk of Jeff Eberhard: Last year, the Oregon Court of Appeals upheld an $18 million dollar verdict in Rains v. Stayton Builders Mart, Inc., 264 Or App 636, 639 (2014). Despite such a high verdict, the Rainses had difficulty obtaining the funds from some of the defendants. After settling with one of the defendants, the Rainses attempted to sue the defendant’s insurer in the defendant’s place. Read on to see how the Court of Appeals addressed this issue.
Claims Pointer: Insurance policies always have conditions and exclusions. This case involves a policy obtained by a contractor that excluded acts by a subcontractor. ORS 710.105 required contractors to be covered for “public liability, personal injury and property damage,” but did not provide for any exclusion. In Oregon, an insured may reform a policy if the policy does not comply with statutory requirements. A statutory requirement on a contractor to procure adequate insurance places a duty on the contractor, not the insurer, to get coverage that complies with the statute.
5 Star, Inc. v. Atlantic Cas. Ins. Co., 269 Or App 51 (2015).
Kevin and Mitzi Rains sued Stayton Builders and 5 Star when Kevin fell and was paralyzed while working for 5 Star, Inc. on a construction project. In the prior case, 5 Star’s insurer, Atlantic Casualty Insurance Company denied coverage under the subcontractor exclusion and refused to defend 5 Star. 5 Star did not defend itself against the suit and the court entered a default judgment.
When 5 Star was unable to satisfy the judgment against it, 5 Star settled with the Rainses to preserve any right of action that 5 Star had against Atlantic. The Rainses sued 5 Star’s insurer under ORS 742.031, which allows for a judgment creditor (in this case the Rainses) to directly sue the insurer. The Rainses sued for reformation of the insurance policy and for negligent procurement. The Rainses alleged that the insurance agent, Bradley Parham, negligently assisted 5 Star with purchasing insurance by purchasing a policy with a subcontractor exclusion. Atlantic moved for summary judgment, the trial court dismissed the Rainses’ claims, and the Rainses appealed.
The Rainses argued that 5 Star was entitled to have its insurance policy reformed to include coverage for subcontractors because the statutory requirement that contractors must be adequately insured under former ORS 701.105 did not allow for exclusions. Under a statutory reformation claim, the party seeking reformation has to not only show that the policy violates the statute, but also that the insurer had a statutory obligation to provide insurance. The Court of Appeals rejected the Rainses’ argument, because the statute did not prohibit exclusions and the statute created an obligation on the contractor to acquire adequate insurance, not on the insurer to provide adequate coverage. The Rainses conceded that while the statute itself does not create an obligation, an administrative rule did. The court also refuted that argument, pointing out that the rule still placed the burden on the contractor.
The court also rejected the Rainses’ common law reformation argument because there was no prior agreement, mistake, or inequitable conduct as to the subcontractor exclusion in 5 Star’s policy.
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