Oregon Federal Court Holds No Duty to Pay Insured’s Appellate Costs

In its recent decision in City of Medford v. Argonaut Ins. Group, 2012 U.S. Dist. LEXIS 86114 (D. Ore. June 21, 2012), the United States District Court for the District of Oregon had occasion to consider whether an insurer’s duty to defend includes an obligation to pay for appellate costs involving non-covered claims.

The insured, City of Medford, was named as a defendant in two underlying suits brought by retired and current employees, all of whom alleged that the City failed to provide health care insurance to retired employees.  In the first suit, brought by four retired employees, the City was sued for age discrimination, statutory violations and breach of contract.  The second suit, brought by current employees, alleged similar causes of action and also sought injunctive relief.  The City’s employment practices liability insurer, Northland Insurance Company, provided the City with a defense in both suits.  Both suits resulted in partial verdicts in favor of the plaintiffs, although for relief not covered under the Northland policy.  The suit brought by the former employees resulted in an award only for breach of contract.  The suit brought by the current employees resulted only in an award of injunctive relief, requiring the City to purchase health care insurance that would continue after an employee’s retirement.

Northland contended that it had no duty to indemnify the City for the verdicts in both matters, and the court agreed, observing that the Northland policy had specific exclusions with respect to breach of contract damages and injunctive relief.  The more complicated issue for the court was whether Northland had a duty to defend the City in connection with its own appeal of the two underlying suits.  The court acknowledged that there was little case law guidance on the issue from Oregon courts, although at least one Oregon court had concluded that the duty to defend can include the duty to defend an appeal.  Goddard ex rel. Estate of Goddard v. Farmers Ins. Co., 22 P.3d 1224  (Ore. App. 2004).  The court noted, however, that as a general proposition, when a complaint is amended and the only potentially covered causes of action are no longer included in the amended pleading, then the duty to defend is terminated.  National Union Fire Ins. Co. v. Starplex Corp., 188 P.3d 332 (Ore. App. 2008).  The court further cited to a case from a Utah federal district court holding that “when a judgment eliminates all covered claims against the insured, and the dismissal of the covered claims is not appealed, the insurer no longer has a duty to defend.” Crist v. Insurance Co. of North America, 529 F. Supp. 601 (D. Utah 1982).

From these lines of cases, the Oregon court concluded that in the absence of covered or even potentially covered claims, the duty to defend is necessarily eliminated.  Because the only successful counts against the City – for breach of contract and injunctive relief – fell outside of the policy’s coverage, Northland could have no continuing obligation to defend the City in connection with further litigation on those particular counts.  As such, and because plaintiffs did not cross-appeal with respect to any of the potentially covered claims on which they were unsuccessful, the court concluded that Northland had no duty to pay the City’s costs associated with the appeals.  Notably, the court did not take into consideration which party initiated the appeal, but rather only the substance of the issues on appeal.