Oregon Supreme Court Confirms First Party Insurance Bad Faith in Oregon

After decades of dispute by lower courts, the Oregon Supreme Court finally has upheld an insurance policyholder's ability to file litigation against their own insurer for failure to make a good faith offer in an insurance claim.  Oregon was one of only three states in the United States that failed to recognize "first party insurance bad faith" despite passing a version of the insurance industry's Unfair Claims Practice Act into law in the late 1960s and updating it in the 1970s.  For reasons that have remained a mystery for decades, Oregon's lower courts viewed the statute as providing no legal right for an insurance policyholder to bring legal action against their own insurance company for an improper denial, or intentional undervaluation of claims. This has resulted in outright abusive conduct by the insurance industry for decades in Oregon - the exact conduct that resulted in the Oregon Insurance Commissioner to propose adoption of the Unfair Settlement Practices Act by the Oregon legislature as ORS 746.230.

This blog post contains the past history of Oregon statutes pertaining to insurance claim practices, case law surrounding Oregon bad faith litigation, and briefly addresses the outcome of the Oregon Supreme Court's decision in Moody v. Oregon Community Credit Union & Federal Insurance Company, 371 Or 772 (2023). Future posts will focus specifically on the Oregon Supreme Court's decision in the Moody case.

What is Oregon Insurance Bad Faith?  

It is the improper denial of claims, the undervaluation of claims, or other actions by insurance companies (or those companies working with them) that are prohibited by the Unfair Claims Practices Act (ORS 746.230). Historically, Oregon courts have refused to hold insurance companies responsible for an insured person or company's losses when the insurer improperly denies, delays or undervalues insurance claims.

Our Oregon law firm has extensive knowledge and experience in the topic of auto insurance claim practices and the ways insurers intentionally undervalue insurance claims - bad faith. Lawyer Aaron DeShaw wrote the definitive book for lawyers on insurance bodily injury software used to consistently underpay claims - Colossus: What Every Trial Lawyer Needs to Know - and was co-counsel in one of the largest insurance class action cases in U.S. History - Hensley v. CSC, a national class action case against over 580 auto insurance companies. DeShaw's book details how auto insurers throughout the United States use claim software to intentionally underpay auto claims to their own insurance policyholders.  The book also detailed internal meetings between insurance company representatives and insurance software companies cooperatively discussing ways to underpay claims to reap billions of dollars in additional profits. DeShaw also published a book on insurance medical bill review software named Procedure & Billing Denials, used by insurers to undervalue the "economic damages" in claims arising from health care billings by arbitrarily setting maximum caps on treatment regardless of injury severity, thereby cutting payments to injured people and their health care providers by billions of dollars.

Despite clear evidence of these underpayment schemes, Oregon courts have not allowed tort claims to be filed by the damaged policyholders against their insurance companies or the software vendors that intentionally underpaid their claims. The insured could be forced into litigation to battle for years and pay unnecessary costs simply in order to get the insurance policy money that should have been paid all along.  Recognizing that Oregon law would not create financial penalties for a refusal to pay claims fully and fairly, insurers instututed abusive policies to deny, delay and underpay claims. This helped insurers to hold money and profit from investing the money they held for claims, called "float."  Some insurers in particular, have made billions of dollars in delaying claim payments as long as possible, including profiteering during the COVID-19 court closures.

Given the Oregon Supreme Court's decision in Moody v. Oregon Community Credit Union & Federal Insurance Company, 371 Or 772 (2023), we can now use this knowledge to help Oregonians who are improperly denied claims or who experience insurance company abuses.

Our Oregon law firm has over 20 years of experience in insurance bad faith litigation at a national level

Our law firm has been involved in insurance bad faith litigation for approximately 20 years, but almost all of it outside the State of Oregon.  Our office was one of four law firms involved in one of the largest class action cases against insurers ever filed in the United States, Hensley v. CSC et al, against over 580 insurance companies for the intentional underpayment of claims to their policyholders throught the use of bodily injury claim software programs Colossus, Claim Outcome Advisor, and InjuryIQ (now ClaimIQ). Our lawyer Aaron DeShaw wrote the definitive textbook for lawyers, and uses his extensive knowledge of insurance claim practices in his work against insurance companies. If you would like to discuss your insurance bad faith claim with us, please let us know more about your case online or call (503) 227-1233.

Legal Arguments by an Experienced Oregon Insurance Bad Faith Lawyer

The following is part of our past legal briefing going back to the early 2000's on the issue of first-party insurance bad faith (between an insured and their insurance company) in one of our prior lawsuits on behalf of an insurance policyholder who's claim was improperly denied by their insurance company.  The specific facts and insurer are removed to provide readers a general overview of the topic of first party insurance bad faith.

Nearly all insurance companies are registered with the National Association of Insurance Commissioners (“NAIC”). Insurance companies that are members of NAIC agree to the terms of the NAIC Model Act for Unfair Claims Settlement Practices adopted by the NAIC.  This is an external standard of care, independent of the insurance policies issued by an insurer, which are adopted by the insurer as an NAIC member. Plaintiff alleges that the NAIC model act for Unfair Claim Settlement Practices was adopted by Oregon as the standards of care for handling insurance claims, as ORS 746.230.

The legislative intent of ORS 746.230 becomes important in this case and is not addressed in the case law cited by the insurer.  The first version of this statute was enacted in 1967 based on the NAIC model act of that era.  The language in the 1967 version (Section 558a) specifically addresses one of plaintiff’s allegations – the insurer's intentional refusal to pay the Underinsured Motorist coverage sold in multiple separate insurance policies, resulting in multiple lawsuits against the company:

“No insurer shall refuse, without just cause, to pay or settle claims arising under coverages provided by its policies and with such frequency as to indicate a general practice in this state:


(2) A substantial increase in the number of lawsuits filed against the insurer or its insureds by claimants;”

This language remains in the statute today in §2.

Subsequently, legislative history demonstrates that the statute was updated to follow the updated language of the NAIC model act of 1972 and in subsequent sessions including the present NAIC model rules adopted in 1990. The Oregon Legislature amendment of ORS 746.230 in 1973 is the most important session in determining the legislative intent of the present version of ORS 746.230 because all of §1 of the present version of the statute was added at that time.  Only minor changes have been made since that time. 

The audio recordings of the legislative hearings in 1973 demonstrate that the legislative intent for ORS 746.230 was to stop claim practice abuses within the insurance industry, primarily involving the claims of policyholders against their own insurers in “first party” insurance claims.  It is unclear that any prior court in any Oregon case has considered the legislative history when determining the intent of the statute.  

Audio recordings of a session on April 19, 1973 demonstrates that the amendment (HB 2999) was introduced by a Senator Howard after he found out that one of his constituents was unable to get a good faith offer in an insurance claim without involving his office to intervene on the policyholders behalf.  The initial offer was $5,000 on what sounds to be a fire loss claim on the policyholder’s home.  In the audio recordings Senator Howard testifies that the policyholder was “devastated” by the low offer from their insurance company.  The audio recording notes:

“They called me, I called the insurance commissioner’s office and they said that they would look into it.  Well, they wrote a letter to the man that had the loss and said that they recommended he accept the company’s offer. [Inaudible], but we have no authority to do anything else.  And some way the insurance company found out that I had been asking questions about it and they settled that loss for $10,000.  This is just not right.  I know that sometimes, everybody needs a bit of policing and I think that [inaudible] to have the power to check on fire or automobile or whatever it is to see that the companies are doing what they should be.” 

Both this introductory statement in the House Consumer and Business Affairs Committee, and subsequent discussions demonstrate that the legislative intent of HB 2999 (enacted as an amendment to ORS 746.230) was to provide a standard of care for the insurance industry’s operation within Oregon that followed the NAIC rules promulgated by the insurance industry itself. That language was introduced by then Oregon Insurance Commissioner Lester Rawls, and it is noted that by that time other states had already enacted the legislation to provide a cause of action in other states.  Testimony in the 1973 session by Oregon Insurance Commissioner Rawls is particularly telling that the problems this bill was intended to prevent continue to plague Oregon insurance claims in a much more notable way today – notably improper policy coverage denials:

“Some of these [insurance claim practices] are so ludicrous they’d be funny, but, unfortunately some of the insureds suffered great harm and inconvenience in many of these cases. Some of them you’ll notice that that the claims have been denied completely and they have a practice of denying all claims. And under (g) you’ll find that there was a windstorm loss and they flatly denied the claim and after the department was asked to get in and look the file over and talk to the company that was involved, they made a $15,000 settlement.”

The intent of the legislature was not to move all statutory violations of ORS 746.230 to the jurisdiction of the Oregon Insurance Division as has erroneously assumed by some courts in prior cases.  In response to a question by Chair Roberts and a subsequent panel member, Insurance Commissioner Rawls noted “we can’t replace the courts in the Insurance Division.  If there is a legitimate difference of opinion between the company and the beneficiary as to whether or not there was actually [inaudible], then I think that we still have to allow the judiciary to take care of that according to the law.” He goes on to note that while the Insurance Division can revoke an insurers ability to write insurance in Oregon, they cannot require the payment of claims. When asked the question “In other words you don’t have the authority to actually force them to make payment at all.” Rawl’s reponse was “No...So, we do not have the authority, nor do I think we should have the authority to force them to do it because if it's a legal matter involved then properly the courts [inaudible – but it is believed to be ‘must’].” 

The clear legislative intent is that the claim handling requirements set forth by the Oregon Legislature in ORS 746.230 are intended to guide courts in making determinations about when a policyholder needs to be paid in a policy dispute.  The standards of care in the statute are there to guide the courts in determining when an insurer must pay for a violation of the statute.  In the House Committee Report for HB 2999 signed on April 23, 1973, under the heading “Explanation of the Bill” is the following stated objective for the legislation; “Prohibits insurers and other persons from performing certain unfair claim settlement practices.”  Pursuant to ORS 174.020(1) in the construction of a statute, a court shall pursue the intention of the legislature if possible. Plaintiff has offered this court the legislative history of the statute to ensure it is correctly interpreted in this case pursuant to ORS 174.020(1)(b).

The purpose of ORS 746.230 is supported by ORS 731.008, which notes “The Legislative Assembly declares that the Insurance Code is for the protection of the insurance buying public.” Words in a statute are to be interpreted in their ordinary and usual signification. It is axiomatic that when the legislature in adopting an Act makes use of plain, unambiguous and understandable language, it is presumed to have intended precisely what its words imply.” See State v. Buck, 200 Or 87, 118, 262 P2d 495 (1953).

If the Court adopted the insurer's position in this motion, ORS 746.230 would have no effect for the insurance buying public because Oregon law has not to date recognized a direct tort action for violation of ORS 746.230.  Deciding in the insurer's favor is directly contrary to the Oregon Legislature’s stated intent.  Ruling in the insurer's favor would also ignore the plain, unambiguous and understandable language in ORS 746.230 and ORS 731.008.

It is plaintiff’s position that Defendant insurance companies are subject to the ORS 746.230 standards of care for insurance claims handling in Oregon, which are external standards of care independent of the insurance contract. The importance of this in terms of Oregon case law will be addressed in the next section.

The Oregon Supreme Court has also noted that industry standards of care should be considered in determining whether an independent standard of care was violated that a jury must consider."

After a discussion about the insurance industry standards of care for claim handling, we continue in our legal brief on Oregon insurance bad faith, with a discussion of Oregon case law:

In Georgetown Realty, Inc. v. Home Ins. Co., 313 Or 97, 106, 831 P.2d 7 (1992), the Oregon Supreme Court specifically recognized that contracting parties sometimes can bring claims in negligence.  The insurer in that case argued that the claim was purely based on misconduct in performing its contractual obligations and therefore no tort liability could result.  The Court rejected that argument and explained:

“When the relationship involved is between contracting parties, and the gravamen of the complaint is that one party caused damage to the other by negligently performing obligations under the contract, then, and even though the relationship between the parties arises out of the contract, the injured party may bring a claim for negligence if the other party is subject to a standard of care independent of the terms of the contract.

Id. at 106 (emphasis added).

The court more pointedly explained:

“[T]he pivotal question, in deciding whether one party to a contract may sue another party to the contract in tort for negligent performance of a term of the contract, is whether the allegedly negligent party is subject to a standard of care independent of the terms of the contract.”

Id. at 110 (emphasis added).

After announcing that test, the Court identified that the insurer was subject to a standard of care independent of the terms of the contract. Specifically, in that case the insurer assumed a fiduciary-like, “special relationship” with the insured when it accepted the defense of the litigation. That relationship “carries with it a standard of care [to act in the policyholder’s best interest] that exists independent of the contract and without reference to the specific terms of the contract.” Id. at 110-11. Consequently, the insured was entitled to bring a negligence claim against the insurer based on a breach of that independent standard of care. Id. at 111.  

[Note: This is the basis for "third party" bad faith claims when an insurer undertakes the defense of their policyholder when they are the defendant in a lawsuit and then doesn't properly settle the case or otherwise represent the policyholder's best interest.  But, this case did not address when an insurer denied or improperly offered their own policyholder less than the claim is worth. So, our discussion about those "first party" claims continues.] 

Since that ruling, the Oregon Court of Appeals has held that in claims in which an insured alleges that an insurer wrongfully denies insurance benefits to an injured insured, i.e. a first- party insurance claim, there is not a “special relationship” between the contracting parties like the one identified in Georgetown Realty. Richardson, DMD, v. Guardian Life Ins. Co. of America, 161 Or App 615, 984 P2d 917 (1999). However, the mere absence of a special relationship does not preclude that the insurer may be subject to another “standard of care independent of the terms of the contract” when settling a claim for benefits with its insured. After all, Georgetown Realty did not limit the type or source of the standard of care necessary to bring a negligence claim. The court only emphasized that the standard of care must derive from a source  “independent of the terms of the contract.” Id. at 106, 110. Said differently, in Georgetown Realty, the Oregon Supreme Court did not require that the independent standard of care derive only from a special relationship, it just so happened that in that particular case the standard of care did in fact result in a special relationship.

As Oregon courts have understood for a long time, statutes provide standards of care. Laury v. N. Pac. Terminal Co., 55 Or 244, 252, 105 P 881, 883 (1910) (recognizing a duty imposed by statute). Sometimes those statutes govern conduct that falls within the performance of a contract even though the statute exists independent of the terms of the contract. For example, in Abraham v. T. Henry Construction, Inc., 230 Or App 564, 572, 217 P3d 212, 217 (2009) aff'd on other grounds, 350 Or 29, 249 P3d 534 (2011), the plaintiff had a contract with the defendant and the defendant violated a state regulation during its performance of the contract. The plaintiff sued the defendant for negligence under the rule from Georgetown Realty and argued that the negligence claim was appropriate because the defendant’s regulatory violation constituted a violation of a “standard of care independent of the terms of the contract.” Id.  The Oregon Court of Appeals held that even though there was no “special relationship” between the parties, defendant’s violation of the regulation was sufficient to support a claim for negligence as described in Georgetown Realty:

“Plaintiffs have * * * failed to show that they were in a ‘special relationship’ with defendants. Plaintiffs fare better with their argument that ‘[t]he broad rule stating that parties to a contract may be liable to one another in tort does not require the existence of a special relationship;” rather, they read the case law to require only a standard of care independent of the contract, which standard can derive not only from a special relationship but also from rules such as the ones included in [Oregon regulations]. As we have discussed above, we have held that a standard of care expressed in a statute is also a standard that is independent of the terms of the contract. Butterfield [v. State],163 Or App at 235, 987 P2d 569 [(1999).]

“* * * * *

“To state a negligence claim based on ‘negligence per se,’ the plaintiff must ‘allege that (1) defendants violated a statute * * * ; (2) that plaintiff was injured as a result of that violation; (3) that plaintiff was a member of the class of persons meant to be protected by the statute* * *; and (4) that the injury plaintiff suffered is of a type that the statute * * * was enacted to prevent.’

McAlpine v. Multnomah County, 131 Or App 136, 144, 883 P2d 869 (1994), rev den, 320 Or 507, 888 P2d 568 (1995) (emphasis omitted).

[Because those elements are satisfied here,] [p]laintiffs have made the necessary allegations.”

Abraham, 230 Or App at 572-73; see also Simpkins v. Connor, 210 Or App 224, 150 P3d 417 (2006) (holding that the plaintiff could bring a tort claim without any physical injury when the defendants violated a statute intended to protect the plaintiff from losses suffered).

In this case, plaintiff has alleged (1) defendants violated a statute; (2) that plaintiff was injured as a result of that violation; (3) that plaintiff was a member of the class of persons meant to be protected by the statute; and (4) that the injury plaintiff suffered is of a type that the statute was enacted to prevent.

The Oregon Supreme Court has already recognized the violation of ORS 746.230 as a legal basis for bringing a tort claim against an insurer.  See Ivanov v. Farmers Ins. Co. of Oregon, 344 Or 421, 430, 185 P3 417 (2008).  In Ivanov, the Oregon Supreme Court noted:

“In Best v. U. S. National Bank, 303 Or 557, 561, 739 P2d 554 (1987), the court restated the long standing rule in Oregon "that there is an obligation of good faith in the performance and enforcement of every contract." That obligation of good faith performance and enforcement applies equally to the contractual relationship that exists between Farmers and its insureds seeking their contractual and statutory PIP benefits. In determining the manner in which the common-law obligation of good faith imposed on Farmers applies here, we note that the legislature has prohibited insurers from denying payment of claims without conducting a "reasonable investigation" of those claims. In that regard, ORS 746.230(1), provides, in part:

"No insurer or other person shall commit or perform any of the following unfair claim settlement practices:

"* * * * *

"(d) Refusing to pay claims without conducting a reasonable investigation based on all available information[.]"

(Emphasis added.) Under that statute, an insurer is obligated to conduct a "reasonable investigation" sufficient to support a decision to deny a medical expense claim that is statutorily "presumed to be reasonable and necessary." Obedience to that prohibition is a component of Farmers' good faith obligation in this context.” Id.

Ivanov was a first-party class action claim between Farmers Insurance policyholders and Farmers Insurance, which provided tort damages in an insurance bad faith claim for the improper termination of Personal Injury Protection benefits.  It demonstrates the Oregon Supreme Court’s recognition of extra-contractual damages in an insurance contract relationship based on a violation of the independent standard of care set forth in ORS 746.230.  Ivanov did not have the fiduciary “special relationship” of Georgetown because they were first party cases where the insurer could not have tendered a negligent defense.

If you would like to discuss your insurance bad faith claim with us, please let us know more about your case online or call (503) 227-1233.

Similar arguments were made by the Oregon insurance bad faith lawyer in Moody v. Oregon Community Credit Union & Federal Insurance Company, 371 Or 772 (2023).  The facts of the case demonstrate just how abusive insurance companies have been in Oregon because they had no financial consequences for improperly denying legitimate insurance claims, or intentionally undervaluing claims. In Moody, the policyholder Troy Moody had purchased a small life insurance policy.  In a horrible series of events, Moody was shot and killed. The Oregon Supreme Court cited the following facts used to deny the claim; "Plaintiff’s  husband,  decedent, was accidentally shot and killed by a friend during a camping trip. Plaintiff filed a claim for life insurance pol-icy benefits, and defendant initially denied plaintiff’s claim on  the  ground  that  decedent’s  death  fell  within  a  policy  exclusion for deaths “caused by or resulting from [decedent] being under the influence of any narcotic or other controlled substance”—apparently based on the fact that decedent had had marijuana in his system at the time of his death."

Despite the fact the small $3,000 life insurance policy was in effect, and Mr. Moody was dead, the insurance company refused to pay his wife the $3,000 life insurance policy. The Oregon Supreme Court noted "we hold that plaintiff has pleaded facts sufficient to give rise to a legally cognizable common-law negligence claim for emotional distress damages." The case confirms what should have been clear for decades - ORS 746.230 provided a legal remedy for insurance policyholders to be paid for their emotional distress when an insurance company improperly denies, delays, or attempts to offer less than the full value of the claim.  Oregon finally joins the rest of the United States in recognizing that insurance policyholder must have a way to financially disincentivize insurers from abusive claim denials, delays and intentional lowball offers. This is not only applicable in cases involving life insurance, but also applies to auto insurance claims, homeowner claims, wildfire claims, earthquake claims, health insurance claims, disability insurance claims, commercial insurance claims, business insurance claims, and other types of insurance policies.  While our office has significant background with auto insurance bad faith, we will also consider insurance bad faith conduct for other types of policies. For more on our insights on Oregon insurance bad faith in different types of insurance claims, please see our Oregon Insurance Bad Faith Legal Practice page.

If you would like to discuss your insurance bad faith claim with us, please let us know more about your case online or call (503) 227-1233.

About the

Aaron DeShaw is a personal injury lawyer at DeShaw Trial Lawyers, a law firm representing injured people with serious injuries including brain injuries and other catastrophic injuries. He has individually, and in association with other law firms, obtained over $1 Billion for his clients. Learn more about Aaron and the Firm.