A new decision in the long running Siltronic insurance coverage litigation at the Portland Harbor Superfund Site gives new guidance on determining whether a cost should be categorized as a “defense cost” or an “indemnity payment.” The decision also fleshed out some parameters for the independent counsel provision of Oregon’s environmental insurance claims law (“OECAA”).
Classification of Payments
Siltronic’s primary insurer, Wausau, defended the company at the Harbor from 2003 until 2009, at which point it declared its policy limits exhausted and stopped providing a defense. Siltronic’s excess carrier then began paying Siltronic’s defense costs, but it disputed whether the Wausau policies were actually exhausted. Specifically, the excess carrier claimed that it was not required to pick up the defense because Wausau incorrectly coded defense costs as indemnity payments so as to prematurely, and improperly, claim exhaustion. The classification of costs as either “defense” or “indemnity” is critical, because a primary policy typically has a limitless defense obligation; meaning coverage can only be terminated by payment of “indemnity” dollars in the full amount of the carrier’s policy limits. Siltronic’s excess carrier contended that Wausau had incorrectly coded defense costs as indemnity payments to prematurely exhaust the Wausau policies, and trigger the excess policies.
OECAA creates “a rebuttable presumption that the costs of preliminary assessments, remedial investigations, risk assessments or other necessary investigation… are defense costs.” It also includes a “rebuttable presumption that payment of the costs of removal actions or feasibility studies… are indemnity costs.” Wausau took the position that any payments made to an opposing party, such as the EPA or Natural Resource Trustees, was automatically an indemnity payment because it resolved the insured’s liability.
The Court rejected this argument, applying the Endicott approach to determining whether a cost is defense or indemnity. This approach requires analysis of the “substance of the underlying work by governmental agencies, attorneys, and environmental consultant, and not by the posture of the party performing the work.” It does not matter whether payments are made to compensate another party, so long as the costs arose from a defense activity. As a result, process cost payments made to the Portland Harbor Natural Resource Trustees and costs paid to settle claims with the Oregon DEQ, were defense costs, according to the Court, because they arose from investigation, and not cleanup. If an insurer makes a payment to the EPA for remedial investigation costs on behalf on an insured, it is not an indemnity payment simply because it went to an adverse party. So long as the services paid for are defense related, an insurer cannot apply them toward exhaustion.
Undoubtedly, the question of whether an insurer payment is a defense cost or indemnity payment can be tricky, particularly at the transition point between remedial investigations and feasibility studies. Correct classification is extremely important to ensure that a policy is not prematurely exhausted to the detriment of the insured. Improper exhaustion might deprive a policyholder of defensive coverage, result in an excess carrier denying coverage, or deprive an insured of needed indemnity dollars. This new decision will help policyholders properly identify costs so as to maximize coverage and prevent carriers from prematurely claiming exhaustion.
OECAA’s Independent Counsel Requirement
In 2013 OECAA was amended to require insurers to “provide independent counsel to defend the insured who shall represent only the insured and not the insurer.” ORS 465.483(1). This rule was necessary because insurer-retained counsel often feels an obligation to the insurer as well as the insured, which creates a conflict of interest with a high likelihood of harming the policyholder. There has been significant debate within Oregon about the parameters of this new requirement, but Siltronic is the first case to interpret the clause directly.
Siltronic’s defense began years before OECAA was amended to require independent counsel. Wausau originally declined to retain Siltronic’s preferred defense counsel, and on its own initiative retained defense counsel for Siltronic. While the insurer’s defense counsel took the lead, Siltronic continued to retain independent counsel, who represented them in both the coverage matter and in the underlying Superfund action.
Following the 2013 amendment of OECAA, Siltronic informed its insurers that its preferred counsel was now acting as its statutory “independent counsel.” Siltronic then sought reimbursement of its independent counsel’s fees incurred after 2013. The insurers argued that they were required to only provide one set of defense counsel, and that Siltronic had waived its right to independent counsel by not objecting to the representation provided by Wausau’s appointed counsel. The Court rejected this waiver argument, and found that Wausau was obligated to pay independent counsel “to protect Siltronic’s interest adverse to Wausau on coverage issues.” The court found Siltronic was entitled to recover independent counsel costs, despite the fact that there was already qualified insurer-retained counsel in place.
This decision is a strong reinforcement of OECAA’s independent counsel requirement. Given the high levels of liability associated with environmental cleanups, Oregon policyholders should resist any attempt by insurers to appoint panel counsel to defend them. In Oregon, a policyholder should never feel forced to accept a defense from an attorney hired by its insurer. Given the divergent interests of insurers and policyholders, it is strongly advised that policyholders facing environmental liabilities always exercise their right to independent counsel.