Oregon Insured Not Entitled to Reformation of Policy

Last week, the Oregon Court of Appeals analyzed two commonly litigated issues that arise when a policyholder has inadequate insurance coverage and suffers a loss.  First, the court considered whether reformation of the insurance policy was appropriate.  Second, it assessed whether there was a viable claim for negligent procurement of insurance.  In 5 Star, Inc. v. Atlantic Cas. Ins. Co., 269 Or App 51, ___ P3d ___ (2015), the court determined that the insured was not entitled to statutory or common law reformation of the insurance policy, and that the insured’s claim against the insurance company for “negligent procurement of insurance” failed as a matter of law.

The case concerned an insured that was a general contractor and, as such, was required by Oregon law to meet mandatory minimum insurance requirements.  In 2002, the insured contracted with an insurance agent to obtain the mandatory insurance coverage, which was ultimately purchased from an insurer.  The policy issued to the insured contained multiple exclusions, including an exclusion for claims arising out of the actions of subcontractors.

While the policy was in effect, an individual was injured while working as a subcontractor for Plaintiff.  The injured person sued the insured, who submitted the lawsuit to insurance company and requested a defense.  The insurance company denied coverage for the damages alleged in the lawsuit.  It also denied that it had any duty to defend the insured, based upon the exclusion for subcontractors.   The insured failed to answer or defend the lawsuit on its own, which resulted in the trial court entering a default judgment against the insured and awarding the injured party approximately $18 million dollars in damages.

The insured filed suit against the insurance company alleging (1) the insured was entitled reform the policy to include coverage for subcontractors, and (2) the insurance company was vicariously liable for the insurance agent’s negligent failure to procure adequate insurance.  The trial court granted summary judgment in favor of the insurance company, dismissing with prejudice all of the claims against the insurance company.  (Note: Additional claims against the insurance agent survived the motion for summary judgment.)

On appeal, the insured argued it was entitled to reformation of the policy because it did not satisfy the requirements of former ORS 701.105 (now ORS 701.073), which requires contractors to have at least $500,000 in insurance coverage.  The Court of Appeals noted that there was no dispute that the policy at issue provided $500,000 in coverage to the insured as the general contractor, but emphasized the issue was whether the exclusion for subcontractors violated the intent of the statute and the mandatory minimum insurance requirement.  On this issue, the Court of Appeals noted that the statute does not impose a legal obligation onto insurers, but onto contractors.  The insurance company did not violate the statute by including the subcontractor exclusion in the policy.  Accordingly, the statute did not provide a basis for reformation.

The court further held that the insured’s reformation claim failed for lack of evidence of any antecedent agreement.  A party seeking common law reformation of a contract must prove three elements: (1) there was an antecedent agreement to which the contract can be reformed; (2) there was a mutual mistake by both parties to the contract, or a unilateral mistake by the party seeking reformation plus inequitable conduct by the other party; and (3) the mistake by the party seeking reformation was not the result of gross negligence.  The court held there was no evidence of an antecedent agreement or that insurance company agreed to provide coverage that would cover the actions of subcontractors.

The insured’s negligent failure to procure insurance claim was premised on the theory that the insurance company was vicariously liable for the acts and omissions of the insurance agent pursuant to ORS 744.078(4).  The insured argued that under the statute, any person who solicits or procures an application for insurance as an agent for an insured is the agent of the insurer in all matters relating to that application for insurance.  The Court of Appeals rejected the insured’s argument, holding that ORS 744.078(4) unambiguously applies only in those cases where (1) the insurance producer is an appointed agent for the insurer; or (2) the insurance producer transacts insurance on behalf of another insurance producer who is an appointed agent of the insurer.  The Court of Appeals noted that there was no evidence of either circumstance in this case, and summary judgment was appropriate.

The attorneys at Maloney Lauersdorf Reiner frequently represent clients in disputes involving issues of reformation of insurance policies and procurement of insurance.  Please contact us with any questions you may have regarding 5 Star, Inc. v Atlantic Cas. Ins. Co, 269 Or App 51, ___ P3d ___ (2015) or any other matter addressed on MLR’s Insurance Coverage Blog.

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