Are You Covered? You Might Be Pleasantly Surprised

On November 4, the Oregon Supreme Court dealt a blow to insurance companies attempting to limit the extent of coverage afforded by their policies. The decision is important because the Court applied an oft-ignored Oregon statute to find coverage even though the policy language excluding coverage was clear.

In Fleming v. United Services Automobile Association (SC S44805), the Oregon Supreme Court clarified and strictly enforced ORS 742.246(2), which applies to any insurance policy that covers a loss due to fire. The statute declares that any attempt to restrict or abridge the right of an insured under such a policy must be preceded by a "sufficiently explanatory title." In effect, a policy exclusion must be separately identified and labeled as such in order to be enforceable. That insurance contracts should be clearly written and easy to understand seems an easy concept. But, anyone who has tried to read and interpret the "clear" language of even the most basic of insurance policies knows, insurers rarely succeed.

Mr. Fleming purchased a "Dwelling Policy" of insurance from USAA for a house that he rented to tenants, who were later discovered to have operated an illegal methamphetamine lab. Such activity is not only illegal, the chemicals used are very dangerous. Chemical releases contaminated the residence with high levels of lead and mercury. After law enforcement had finished with the "evidence" of the crime, Mr. Fleming was faced with the cost of cleaning up the environmental releases. He submitted a claim to USAA, which denied the claim, contending that Mr. Fleming's loss was not covered due to policy language contained in the section of the policy titled, "PERILS INSURED AGAINST." Mr. Fleming sued to obtain coverage and asserted that the policy violated Oregon law because the pollution exclusion did not appear under a title that identified it as such. Oregon's Supreme Court agreed.

The Court concluded that a policy section labeled "PERILS INSURED AGAINST" creates an assumption that the section discusses only those events that are covered by the policy. Such a title does not indicate that there are provisions in that section that exclude the right of coverage. Therefore, the policy violated Oregon law and the limiting provisions within that section are void.

A reaction from the insurance industry is certain. Prior to the Court's ruling, amicus curiae briefs were filed by United Policyholders, the Insurance Environmental Litigation Association, the Oregon Trial Lawyers Association, and the National Association of Independent Insurers. The ruling potentially affects the most common household and first-party property insurance policies, and commercial liability policies that also cover losses due to fire.

Moreover, the ruling is not limited to environmental claims previously thought to be excluded. Other exclusions in Mr. Fleming's policy that were located in the same policy section included: freeze damage while the building was vacant; building collapse; freeze damage to pavement and foundation; property theft during construction; wind, hail, sleet, and snow damage; vandalism while the building is vacant; water damage from a persistent seep or source; wear and tear; building settling, shrinking, bulging, or expansion; birds, vermin, rodents, or insects; and more. The Court's analysis would void each of these exclusions.

The final import of the Court's opinion remains to be seen. However, it is certain to make finding coverage for a loss under some property and liability insurance policies easier. If the policy insures a structure or other property for loss due to fire, the location of the coverage and exclusion language in the policy is now as important as its meaning. Our recommendation? Keep all insurance policies, regardless of age. What you thought you knew about your coverage can change overnight.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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