United States: Changes To The Interpretation Of Excess Insurance Coverage Provisions

In Portland School Dist. v. Great American Insurance Co., 241 Or App 161, 249 P3d 148 (2011), the Oregon Court of Appeals announced two new rules that will have far-reaching application and will upset well established interpretation of excess insurance coverage.

First, the court determined that typical following form language in an excess policy is ambiguous and does not incorporate the underlying policy's anti-assignment clause. Second, the court concluded that an agreement executed before entry of judgment purporting to make a future assignment of claims against the excess insurer after entry of judgment, does not extinguish the insurer's liability as to the assigned claims.

The Facts

The plaintiff school district hired a roofing contractor to replace the roof on a school, but due to the contactor's negligence, the roof caught fire. The contractor had primary liability insurance with CNA Insurance Co., and an excess insurance policy with Great American. Timely claims were made to both carriers, and Great American denied coverage.

CNA, the contractor, and the school district entered into a settlement agreement. Pursuant to that agreement, CNA agreed to pay its policy limit of $1 million and the contractor agreed to pay $50,000. The parties agreed that the school district would file a negligence action against the contractor seeking damages of approximately $2.39 million. CNA and the contractor would then pay the agreed to amounts, the school district would release the contractor from liability up to the amounts paid, while reserving its rights to assert claims for any damages above and beyond $1.05 million. The parties would stipulate to judgment against the contractor for the remaining $1.34 million, and the contractor would then assign its claims and rights against Great American to the school district in exchange for an agreement not to execute on the judgment against the contractor.

Great American denied coverage on the basis of an anti-assignment clause in the underlying policy. The school district contended that this clause was not incorporated into the excess policy. The trial court agreed and granted partial summary judgment for the school district and this appeal followed.

Following Form Provision

The underlying CNA policy contained an anti-assignment clause requiring written consent for any assignment. The excess policy provided that

"We will pay on behalf of the Insured 'loss' in excess of the Underlying Limits of Insurance * * * . Except for the terms, conditions, definitions and exclusions of this policy, the coverage provided by this policy will follow the First Underlying Insurance Policy * * * ."

Under Oregon's methodology for interpreting an insurance policy, the court begins with the wording of the policy. If a particular term is not defined, the court looks to the term's plain meaning. If more than one plausible interpretation is possible, the meaning of that term is ambiguous and the court will try to resolve that ambiguity by examining the context of that term, and if it remains ambiguous, the court will construe that term against the insurer and in favor of the insured. In this case, the Oregon Court of Appeals focused on the term "except" in the excess policy.

Great American argued that "except" means taking out something that would otherwise be included. Accordingly, the excess policy would provide coverage identical to that of the underlying policy except where terms in the excess policy were different than those in the underlying policy, in which case those terms would be supplied by the excess policy. The excess policy here did not contain an anti-assignment clause, so under Great American's interpretation, the underlying policy's anti-assignment clause would be included in the excess policy.

The school district argued that "except" means "otherwise, elsewhere, or for other reason than." Under this interpretation, the excess policy follows the underlying policy only with regard to the coverage section—terms, conditions, definitions and exclusions of the policy are "excepted" or excluded from the excess policy in their entirety. Because the anti-assignment clause was part of the terms, conditions, definitions, and exclusions of the underlying policy, it was not incorporated into the excess policy.

The court found the term ambiguous, reasoning that "except" could indicate either taking out something that would otherwise be included, or "otherwise, elsewhere, or for other reason than." Accordingly, the court construed that term against the Great American, and concluded that the terms, conditions, and exclusions of the underlying policy were omitted in their entirety from excess coverage. Accordingly, the anti-assignment clause of the underlying policy was not incorporated into the excess policy and the contractor was not prevented from assigning his rights to the district.

Settlement Timing

The court also considered the effect of the settlement agreement between the contractor and district.

Great American argued that this case is identical to Stubbelfield v. St. Paul Fire & Marine, 267 Or 397, 517 P2d 262 (1973), and that here, the contractor had no legal liability to the district because the district entered into an agreement to assign with the contractor before a judgment was entered against him. In Stubbelfield, the Oregon Supreme Court held that when a settlement extinguished the liability of the insured it also released the insurer. Accordingly, Great American argued that the agreement between the contractor and the district effectively extinguished the contractor's liability, and therefore Great American's liability, and that the purported assignment was ineffective because, at the time of the assignment, the contractor was no longer legally liable for that judgment.

The school district argued that ORS 31.825, which the Oregon Legislature enacted after Stubbelfield, permits the assignment. ORS 31.825 provides:

"A defendant in a tort action against whom a judgment has been rendered may assign any cause of action that defendant has against the defendant's insurer as a result of the judgment to the plaintiff in whose favor the judgment has been entered. That assignment shall not extinguish the cause of action against the insurer unless the assignment specifically so provides."

Great American argued that the statute is inapplicable because the assignment and release were executed as part of the settlement agreement before any suit was filed against the contractor, and before any judgment had been rendered.

The court of appeals concluded, however, that the assignment was valid because the contractor agreed to a future assignment of its claims against Great American while it still faced legal liability for any judgment, and that assignment did not occur until after the judgment had been entered. Accordingly, the parties complied with the terms of the statute: at the time the contractor executed the assignment of its claims, the contractor was a defendant in a tort action against whom a judgment had been rendered.

Comment

The court's holding that a typical following form provision in an excess insurance policy does not incorporate all of the terms of the underlying policy is disturbing. The court found the term "except" to be ambiguous, even though the following form provision had a previously well-understood meaning—that the excess policy incorporates all terms of the underlying policies unless the excess policy contains conflicting terms or additional terms, and then the terms in the excess policy would apply.

Further, the Court of Appeals paid little attention to the question of the timing of the settlement documents in the context of the policy requirement that the insured be legally obligated to pay. The settlement agreement included an agreement not to execute the judgment against the insured, which begs the question left unanswered by the Court of Appeals: If the insured was not legally obligated to pay that judgment, how was Great American obliged to indemnify its insured for that judgment? The kind of carefully timed settlement allowed in this case may encourage collusion between a plaintiff and an insured and effectively allows an end-run around the Stubbelfield rule.

We expect Great American will seek review in the Oregon Supreme Court. Review is discretionary but both of these issues are important and warrant Supreme Court review.

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