From the desk of Josh Hayward:
Side agreements to insurance policies sometimes occur and can potentially have the effect of shifting responsibility for liability back onto the policyholder. The Oregon Supreme Court just addressed what impact these side agreements can have on an insurer’s duty to defend.
The Oregon Supreme Court ruled that side agreements cannot be considered when the court determines if an insurer has a duty to defend. This is true even for side agreements where the policyholder agrees to indemnify the insurance company for all claims and costs associated with defending those claims. This decision reaffirms Oregon courts’ general commitment to finding a duty to defend.
This case stemmed from a complex series of events. The main crux of the case is that the plaintiff insurance company sought contribution from a number of other insurance companies for claims it had paid out. The plaintiff insurer paid over $24 million for environmental and asbestos related claims against its insured and expected more claims in the future. The plaintiff alleges that the defendant co-insurers declined to defend the insured, refused to pay claims under the applicable policies, and failed to pay any contribution to the plaintiff insurance company. The plaintiff claimed that it was entitled to contribution under a theory of common-law equitable contribution and the Oregon Environmental Clean-up Assistance Act (“OECAA”).
The defendant insurance companies put forth a number of arguments in their defense, with the most significant one being that some of the insurance companies were not responsible for any contribution payments due to side agreements. These defendants claimed that when they entered into insurance policies with the insured, they also entered into side agreements, known as “fronting agreements.” The side agreements provided that the insured’s parent company agreed to indemnify the insurance companies for all claims, defense costs, and other costs arising out of occurrences covered by the policies.
This case went to a jury trial, where the jury found that due to the side agreements, the parent company and the relevant insurance companies did not intend for the insurers to have a duty to defend or indemnify the claims at issue. Given this finding, the trial court entered a limited judgment that the plaintiff was not entitled to contribution from the insurance companies who had entered into the side agreements. The plaintiff appealed this judgment, arguing that the trial court erred in submitting this question of insurance policy interpretation to the jury. The court of appeals did not address this argument but affirmed the trial court’s judgment on other grounds. The plaintiff petitioned the Oregon Supreme Court for review of this issue and others.
An insurance company can seek contribution from other insurance companies who had a duty to defend an insured and failed to do so. Therefore, in determining if contribution should be granted between insurance companies, it is relevant whether or not the insurance company that failed to take part in the insured’s defense actually had a duty to defend. In Oregon, it is well established that the determination of whether an insurance company has a duty to defend is a matter of law that should be decided by the court and not a jury. When a court is determining if an insurance company has a duty to defend a claim, the court can only look to two documents: the insurance policy and the complaint— because the analysis is confined to these two documents. This is sometimes known as the “eight-corners” rule.
In its opinion the Oregon Supreme Court reemphasized the well-established rules of insurance policy interpretation and made very clear that other agreements, such as side agreements, cannot be considered when determining if the insurer has a duty to defend. When an insurance company issues a policy that covers certain claims, that insurance company cannot escape responsibility to an injured third party, or a co-insurer seeking contribution, because of a side agreement with the policyholder.
In this opinion, the Oregon Supreme Court acknowledged that side agreements are common and can serve a legitimate business purpose for the insurer and the insured. Here, the side agreements “plainly intended” that the insured’s parent company would indemnify the insurers for claims and the costs associated with the defense of those claims. However, in its opinion, the supreme court made very clear that the decision of whether an insurance company has a duty to defend or not can only be made using the insurance policy and the complaint—side agreements are irrelevant to this determination. Therefore, the trial court’s decision to submit both the policies and the side agreements to the jury to determine if the parties intended that the insurer would have a duty to defend was in error. Rather, the question of if the defendant insurance companies had a duty to defend should have been decided by the trial court, based on just the insurance policies and the complaint, without any reference to the side agreements. If the trial court finds that the defendant insurance companies did have a duty to defend against the claims at issue in this case, the defendant insurers will be responsible for contribution to the plaintiff insurance company.
Lastly, the Oregon Supreme Court took issue with how the defendants tried to frame the insurance agreements in this case. The defendants tried to argue that the policies, taken together with the side indemnification agreements, were simply a means of “self-insurance.” The Oregon Supreme Court made clear that this view of insurance agreements, as strictly private business transactions, is not in accordance with the regulatory and legal setting where the transaction occurred. In this case, the insured could not have operated its business without meeting certain mandated insurance requirements. Given these regulations, the parent company had no legal authority to “self-insure” and act as an insurer under state or federal law. Rather the insured had the legal requirement to purchase and maintain insurance from insurers authorized to do business in the state of Oregon.
Ultimately, the Oregon Supreme Court reversed the court of appeals decision. On remand, the supreme court stated that the trial court should decide whether there was a duty to defend based solely on the terms in the insurance policy and the complaint, without referring to the side agreements.
The Big Picture:
Oregon courts have consistently held that an insurer’s duty to defend is strong. However, with this recent Oregon Supreme Court opinion, the duty to defend has only been strengthened. Most significantly, the court held that side agreements relating to an insured’s indemnification of the insurer are irrelevant to the duty to defend determination. Given this, an insurance company may still be responsible for contribution to a co-insurer, even if the insured has agreed to indemnify that insurer for such claims. This seems to be particularly true for industries where insurance is mandated by federal or state regulations.