On March 13, 2013, the Oregon legislature introduced Senate Bill 814 to create sweeping reforms on environmental claims handling regulations and available remedies for insureds facing liability for cleanup of contaminated property located in the state. The proposed legislation would amend the existing Oregon Environmental Cleanup Assistance Act (OECAA) under ORS 465.479 and ORS 465.465 to impose stricter claims handling regulations, create a statutory cause of action for violations of the regulations, and allow punitive damages to be awarded if the court finds the insurer acted unreasonably. Because the OECAA provides that “Oregon law shall be applied in all cases where the contaminated property to which the action related is located within the State of Oregon,"¹ the legislation has the potential to impact insurers even if the insured is located outside the state.

The bill, referred to as the 2013 Act, passed the Senate by a unanimous vote on April 10, 2013 and is currently with the House Committee on Consumer Protection and Government Efficiency. A public hearing will be held on May 9, 2013.  Every indication is that the 2013 Act will be passed in the House and will be signed into law in the near term. The 2013 Act purports to be retroactive, except in regard to “any environmental claim for which a final judgment, after exhaustion of all appeals, was entered before the effective date of this 2013 Act.” It will be effective upon passage.

The most notable provision of the 2013 Act is that it permits an insured aggrieved by one or more unfair environmental claims settlement practices to file suit to recover “the actual damages sustained, together with the costs of the action, including reasonable attorney fees and litigation costs.” Prior to commencing such an action, the insured must provide written notice of the basis for the cause of action to the insurer and office of the Director of the Department of Consumer and Business Services. The insurer then has 20 days to resolve the dispute. In any such action, the court may award uncapped treble damages if it finds the insurer acted unreasonably. Such an action must be brought within two years from the date the alleged violation is, or should have been, discovered.² Because reasonableness is a subjective determination, insurers have little certainty whether even a technical violation of the unfair environmental claims settlement practices could subject them to punitive damages.

As currently proposed, the 2013 Act also includes the following key provisions:³

• Prevents insurers from enforcing clauses in general liability insurance policies that require the insurer’s consent prior to an assignment of claims if the “losses or damages … commenced prior to the assignment.”
• Specifies that an insurer’s violation of any provision of the existing ORS 465.479 (which outlines the procedure an insurer and insured must follow in the event of a lost policy) is not only an unfair claim settlement practice under ORS 746.230, but also an unfair environmental claims settlement practice under section 6 of the 2013 Act.
• Defines additional “unfair environmental claims settlement practices,” to include:
  • Failure to commence an investigation within 15 working days of receiving notice of an environmental claim,
  • Failure to make “timely” payments for defense or indemnity costs,
  • Denying a claim for an improper purpose such as harassment, unnecessary delay or increased costs of litigation,
  • Requiring answers to repetitive questions and requests for information on matters unnecessary to the resolution of the environmental claim,
  • Failure to pay interest under the rates specified in ORS 82.010, and
  • Failure to participate in good faith in nonbinding mediation “concerning the existence, terms or conditions of a lost policy or regarding coverage for an environmental claim.” An insurer must have a representative “present, or available by telephone, with authority to settle the matter at all mediation sessions.”
• Prevents insurers from enforcing non-cumulation clauses in a “long-tail environmental claim” (defined as an environmental claim covered by multiple general liability insurance policies), although the non-cumulation clause “may be a factor considered in the allocation of contribution claims between insurers.”

This provision, like the provision regarding assignment clauses, discussed above, may effectively rewrite existing policy language in certain circumstances. Although the legislative history states that rules set forth under the 2013 Act “do not apply if they are contrary to the parties’ mutual intent as shown by unambiguous policy terms,”⁴ in practice, insureds and insurers often disagree on whether a term is ambiguous. Thus, insurers may need to seek guidance from the courts in order to enforce policy language that is contrary to the language of the 2013 Act.

• Clarifies that the release of a hazardous substance into Oregon state waters, or onto real property not owned by the insured, constitutes property damage. Also requires insurers to pay remedial actions costs incurred by the insured to “cut off a pathway by which a hazardous substance threatens to, or has, migrated, leached or otherwise been released” into Oregon state waters or real property not owned by the insured.

This provision is significant in that it treats preventative measures as indemnity costs. Although the legislative history indicates the intent is to ensure coverage for the “cost of removing the continuing source of the damage even if that source is on the insured’s property,”⁵ the text of the 2013 Act also refers to threatened releases. There will likely be ongoing debate as to whether a preventative measure was legitimately taken to prevent a release, or if it was simply a cost of doing business.

• Specifies that, when more than one general liability policy is triggered for an environmental claim, an insurer that is obligated to pay may not fail to make payment to the insured on the grounds that another insurer has not yet made payment.
• Creates a rebuttable presumption that all binding settlement agreements between an insurer and insured are made in good faith.
• Specifies that contribution rights as defined in the 2013 Act preempt “all common law contribution rights, if any, by and between insurers for environmental claims.”

The above provisions are to encourage prompt payment and settlement of claims, and could impact an insurer’s ability to seek contribution from a settling insurer. They do not impact an excess insurer’s ability to require exhaustion of the underlying policy.

• Requires an insurer to pay interest to the insured on amounts the insurer is legally obligated to pay as defense or indemnity if the insured is not reimbursed within 30 days of the date it requests reimbursement or makes payment, whichever is later.

This provision does not take into account the fact that an insured’s request for reimbursement may be the insurer’s first notice of the claim. Accordingly, an insurer may legitimately require more than 30 days to investigate the matter and determine whether the amount submitted for reimbursement is reasonable and appropriate — let alone covered under the policy.

• Requires the insurer to provide independent counsel to defend the insured, “who shall represent only the insured and not the insurer,” if the general liability insurer is defending under a reservation of rights, or if the insured has potential liability in excess of the general liability policy limits.

Legislative history shows that this provision is intended “to address the problem of insurance companies hiring … defense counsel and environmental consultants without sufficient experience to defend insureds while at the same time reserving their right to deny coverage."⁶ It does not appear to require appointment of separate counsel, simply experienced and independent counsel.

To facilitate the mediation requirement, the 2013 Act also directs the attorney general to appoint a mediation service provider to operate a mediation program related to environmental claims, and requires an insurer to provide the insured with information concerning a nonbinding environmental claim mediation program upon request. The 2013 Act does not specify who is responsible for the costs of mediation. Complying with this procedure will likely impose additional costs on insurers and insureds alike.

The plain language of the 2013 Act, as well as the testimony presented to the Senate Committee on General Government, Consumer and Small Business Protection on March 22, 2013, shows that the intent of the legislation is to encourage insurers to promptly accept coverage and pay claims, in order to protect businesses that are faced with environmental liability and to facilitate the cleanup effort. In so doing, however, the 2013 Act effectively re-writes insurance policies by rendering certain clauses ineffective, imposes significant burden and expense on insurers by requiring nonbinding mediation, and creates uncertainty as to when punitive damages may be available. Finally, the retroactive application of the 2013 Act raises questions of constitutionality: insurers may be subject to punitive damages for actions taken before the 2013 Act is effective, and therefore before insurers could be on notice that such conduct is prohibited.

To protect themselves from future liability under the 2013 Act, insurers should take care to strictly comply with all claims handling regulations — both existing and proposed — in the state of Oregon. Insurers should be prepared to issue payments on claims immediately when due, regardless of whether other insurers may also have an obligation to contribute. Any contribution issues should be resolved after payment to the insured is made.

The foregoing summary of the 2013 Act is not exhaustive, but represents the most significant changes. Cozen O’Connor will continue to monitor the progress of the legislation and provide further updates as needed.