Insurers are celebrating the new decision from Oregon’s federal district court in the long-running Charter Oak et al. v. Interstate Mechanical et al. case finding that the policyholder lost all coverage by breaching the duty to cooperate. In my view, this is a bad-facts-make-bad-law situation involving a fact pattern not likely to be repeated, that will unduly encourage out-of-state insurer lawyers to take an aggressive position in coverage disputes. In this case the developer and the general contractor on a project in Montana were owned by the same person, and were therefore aligned as opponents in the defect litigation in that state. The carrier agreed to defend the contractor (as an additional insured) in the underlying case. The problem was that (according to the decision, at least) they failed to maintain even the appearance of an arms-length relationship in concocting the damages being sought from the contractor, including having the insurance defense lawyer for the contractor submit a declaration from the developer’s damages expert using the defense lawyer’s letterhead. Those kind of bad facts make it difficult to survive the “smell test” that all judges employ, no matter what the legal standard is.
The notable points in the decision are these: a prediction that Oregon courts would find that a court can find an insurer to have been prejudiced by a lack of cooperation even before the underlying case is over; and a finding that an insured’s giving notice of an intent to stipulate to a judgment needs to be roughly contemporary with the settlement itself – it is not enough to have warned the carrier earlier in the litigation that the insured was contemplating such a move. While one can take issue with both propositions (and I do), it is somewhat easy to understand how those calls came down when you go back to the “smell test” problem. And like it or not, these holdings demonstrate why competent policyholder counsel need to keep up to date on developments from every jurisdiction considering new points of Oregon coverage law.