Hospitality Management, Inc. v. Preferred Contractors Insurance Co.

Full title: HOSPITALITY MANAGEMENT, INC., an Oregon corporation, Plaintiff, v…

Court: United States District Court, District of Oregon

Date published: Mar 17, 2021

3:18-cv-00452-YY (D. Or. Mar. 17, 2021)

Opinion

3:18-cv-00452-YY

03-17-2021

HOSPITALITY MANAGEMENT, INC., an Oregon corporation, Plaintiff, v. PREFERRED CONTRACTORS INSURANCE COMPANY, a Montana corporation, Defendant.

Youlee Yim You, United States Magistrate Judge

FINDINGS AND RECOMMENDATIONS

Youlee Yim You, United States Magistrate Judge

FINDINGS

Plaintiff Hospitality Management, Inc. (“HMI”), a construction subcontractor, brings claims for breach of contract and bad-faith breach of the duty to settle against its insurer, defendant Preferred Contractors Insurance Company (“PCIC”). This court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §§ 1332 and 1441, and specific personal jurisdiction over PCIC.

PCIC has filed two motions for summary judgment (ECF 36, 47), which are largely duplicative, and HMI has moved for summary judgment (ECF 48) and for additional sanctions (ECF 64). Whereas HMI moves for full summary judgment on both claims, PCIC only moves for summary judgment on two coverage defenses. For the reasons set forth below, PCIC's first motion for summary judgment should be denied as moot, PCIC's second motion should be denied, HMI's motion for summary judgment should be granted, HMI's motion for additional sanctions should be denied, and judgment should be entered in favor of HMI for a total of $2.5 million.

I. Background

This lawsuit arises out of PCIC's alleged failure to adequately defend HMI against a third-party complaint filed in Washington County Circuit Court. The underlying suit arose out of renovations that Commons at Cedar Mill, LLC (“Commons”) performed on its 52-building, 608-unit apartment complex in Portland, Oregon between 2007 and 2010. Am. Compl., Ex. A, at 3, ECF 17-1; Decl. Kristopher Kolta, Ex. 1, at 31, ECF 49-1; Decl. Jeremy Schulz, Ex. 1, at 13, ECF 55-2.¹ In September 2015, Commons sued its general contractor, KeyWay Corp. (“KeyWay”), and a roofing contractor for construction defects sustained during the renovations. Am. Compl., Ex. A, ECF 17-1. Commons first demanded $9 million in damages, id. at 9-10, but later sought over $43 million. Kolta Decl., Ex. 4, at 6, ECF 49-4.

1 Citations to the record reference page numbers assigned by the electronic court filing (“ECF”) system (and not the page number in the underlying document).

KeyWay brought third-party claims against subcontractor HMI and five other subcontractors. Am. Compl., Ex. B, ECF 17-2. HMI had performed “the installation and/or repair of windows, siding, roof vents and related components.” Id. ¶ 7. KeyWay alleged a claim of contribution against HMI and the subcontractors, and alleged claims for breach of contract, contractual indemnity, and declaratory judgment against the other subcontractors only. See Id. at 4, 6-8.

In early 2016, HMI tendered KeyWay's third-party complaint to PCIC, its insurer, who agreed to defend under a reservation of rights. Am. Answer. ¶ 12, ECF 18. PCIC had issued four commercial general liability policies to HMI, two of which are at issue here: Policy No. PC2751 covering the period of February 20, 2009, to February 20, 2010, Schulze Decl., Ex. 1, ECF 36-2 (“2009-10 Policy”), and Policy No. PC2751-02 covering the period of February 20, 2010, to February 20, 2011, id., Ex. 3, ECF 36-3 (“2010-11 Policy”). PCIC retained attorney Todd Baran as defense counsel for HMI. As explained in detail below, PCIC rebuffed Commons' and KeyWay's settlement offers and HMI's demands to accept them. All parties except HMI reached a global settlement in the weeks leading up to trial.

Twelve days before trial, HMI stipulated to a $2.5 million judgment without PCIC's consent in an agreement explicitly predicated on Brownstone Homes Condo. Ass'n v. Brownstone Forest Heights, LLC, 358 Or. 223 (2015) (en banc). Am. Compl., Ex. C, at 3, ECF 17-3. HMI assigned its claims against PCIC to KeyWay in exchange for KeyWay's entry of a covenant not to execute on any of HMI's assets except for insurance coverage, and HMI gave KeyWay the “right to litigate in its name.” Id., Ex. D, at 1, 2, ECF 17-4. The Washington County Circuit Court entered a limited judgment by stipulation as to HMI. Id., Ex. E, ECF 17-5. HMI then brought this coverage action against PCIC.

II. Motion for Additional Sanctions (ECF 64)

HMI has filed a Motion to Compel Compliance with Order on Motion for Sanctions and Request for Additional Sanctions (hereafter “Mot. Add'l Sanctions”). ECF 64. By separate order, this court previously granted the first component of this motion, i.e., the motion to compel compliance with the court's prior sanctions orders. See Order, ECF 73. In its request for additional sanctions, HMI seeks either entry of a default judgment or that the court deem the allegation in its complaint that “PCIC, its agents, and employees have breached the duties owed to HMI in bad faith” to be true under Rule 37(b)(2)(A). Mot. Add'l Sanctions 1, ECF 64; Am. Compl. ¶ 31, ECF 17.

Case-terminating sanctions-”the most severe penalty that can be imposed”-are justified only in “extreme circumstances.” U.S. for Use & Ben. of Wiltec Guam, Inc. v. Kahaluu Const. Co., Inc., 857 F.2d 600, 603 n.5, 603 (9th Cir. 1988) (citations omitted). “To warrant imposition of these severe sanctions, the violation(s) must be ‘due to willfulness, bad faith, or fault of the party.'” Id. (quoting Wyle v. R.J. Reynolds Industries, Inc., 709 F.2d 585, 589 (9th Cir. 1983)). The court weighs five factors in determining whether to dismiss a case as a punitive measure: “(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the defendants; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” Id. (quoting Malone v. United States Postal Service, 833 F.2d 128, 130 (9th Cir. 1987)).

HMI argues that four incidents, which occurred after the September 2019 award of sanctions (ECF 33), warrant case-terminating sanctions. Mot. Add'l Sanctions 5-10, ECF 64. First, PCIC did not pay for the deposition of its Rule 30(b)(6) corporate representative despite volunteering to do so during oral argument on the initial motion for sanctions (ECF 31). Kolta Decl. ¶ 6, ECF 65; id., Ex. 4, ECF 65-4. Second, PCIC did not produce its full claim file until the deposition of the corporate representative nearly five months after the close of discovery and only several weeks before the deadline for summary judgment motions. Id. ¶ 7, ECF 65. Third, PCIC failed to comply with the court's order awarding sanctions by paying within a reasonable period, ignored HMI's counsel's repeated requests to pay the award for nearly three months, asserted the award was not due without relying on legal authority, and then held its position despite HMI's provision of persuasive authorities to the contrary. Id. ¶¶ 10-18; id., Exs. 7-15. Fourth, PCIC did not file a reply in support of its original motion for summary judgment and filed a duplicative motion for summary judgment (ECF 54), but then did not file a reply in support of that duplicative motion.

Additionally, after the motions were filed, HMI advised the court by letter that PCIC had failed to pay $38,413.01 in sanctions that the court had ordered on October 5, 2020, be paid within 30 days. The court set a hearing to discuss the matter, and at the hearing, learned that PCIC made payment to HMI a day before the hearing, without providing any explanation for the delay.

HMI contends all this misconduct was within PCIC's control and suffices to establish willfulness, bad faith, and fault. Mot. Add'l Sanctions 12, ECF 64. PCIC has only addressed the third incident, and contends that because the order awarding sanctions did not order payment by a date certain, payment was not due for 150 days. Resp. 3, ECF 66.

Even assuming the violations are willful and made in bad faith, PCIC is correct that the Malone factors counsel against imposition of such a severe sanction under these circumstances. Although the claim file was produced late, it was produced before the summary judgment deadline. Moreover, the violations as a whole have not affected the public's interest in expeditious resolution of litigation or the court's need to manage its docket. Public policy favors the disposition of cases on their merits and less drastic sanctions have already been effectively deployed. This court has already sanctioned PCIC by ordering it to pay $104,722.65 in fees and costs related to deposing PCIC. See Order, ECF 61 ($30,437); Order, ECF 73 ($35,872.64), Order, ECF 77 ($38,413.01). While the frustrations of HMI and its counsel are certainly warranted, these violations do not constitute extreme circumstances that merit case-terminating sanctions.

III. Summary Judgment Standard

Under Federal Rule of Civil Procedure 56(a), “the court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” The party moving for summary judgment bears the initial responsibility of informing the court of the basis for the motion and identifying portions of the pleadings, depositions, answers to interrogatories, admissions, or affidavits that demonstrate the absence of a triable issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party does so, the nonmoving party must “go beyond the pleadings” and “designate ‘specific facts showing that there is a genuine issue for trial.'” Id. at 342 (citing Fed.R.Civ.P. 56(e)).

In determining what facts are material, the court considers the underlying substantive law regarding the claims. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). Otherwise stated, only disputes over facts that might affect the outcome of the suit preclude the entry of summary judgment. Id. A dispute about a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the non-moving party. Id. at 248-49. A “scintilla of evidence” or “evidence that is merely colorable or not significantly probative” is insufficient to create a genuine issue of material fact. Addisu v. Fred Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir. 2000). The Ninth Circuit “has refused to find a ‘genuine issue' where the only evidence presented is ‘uncorroborated and self-serving' testimony.” Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002) (quoting Kennedy v. Applause, Inc., 90 F.3d 1477, 1481 (9th Cir. 1996). “Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quotations and citations omitted). The court “does not weigh the evidence or determine the truth of the matter, but only determines whether there is a genuine issue for trial.” Balint v. Cason City, Nev., 180 F.3d 1047, 1054 (9th Cir. 1999). “Reasonable doubts as to the existence of material factual issue are resolved against the moving parties and inferences are drawn in the light most favorable to the non-moving party.” Addisu, 198 F.3d at 1134.

IV. Insurance Policy Interpretation in Oregon

A. Choice of Law

A federal court, sitting in diversity, applies state law to interpret an insurance policy. Travelers Prop. Cas. Co. of Am. v. ConocoPhillips Co., 546 F.3d 1142, 1145 (9th Cir. 2008). Whereas HMI relies on and argues that Oregon law applies, PCIC invokes Montana law in its discussion of the policies' undisclosed operations exclusion.

Oregon law invalidates “any condition, stipulation or agreement” requiring an insurance policy to “be construed according to the laws of any other state or country, ” O.R.S. 742.018, if the policy is “delivered or issued for delivery” in Oregon with exceptions that are not relevant here. O.R.S. 742.001. The policies contain a choice-of-law selection clause, which states the policies “shall be governed and construed in accordance with the laws of the State of Montana.” 2009-10 Policy 52, ECF 36-2; 2010-11 Policy 53, ECF 36-3. However, HMI is incorporated in and had its principal place of business in Oregon when the policies were issued. 2009-10 Policy 1, ECF 36-2; 2010-11 Policy 1, ECF 36-3. Thus, the policies were “delivered or issued for delivery” to HMI in Oregon, and O.R.S. 742.018 invalidates the policies' choice-of-law selection clause. Oregon law applies.

B. Standards

Under Oregon law, insurance policy interpretation is a question of law. Cain Petroleum Inc. v. Zurich Am. Ins. Co., 224 Or.App. 235, 241 (2008). “The overriding goal in construing an insurance policy is to ‘ascertain the intention of the parties.'” Hunters Ridge Condo. Ass'n v. Sherwood Crossing, LLC, 285 Or.App. 416, 422 (2017) (quoting Dewsnup v. Farmers Ins. Co., 349 Or. 33, 39-40 (2010)). The court determines “the intention of the parties by analyzing the policy's express terms and conditions.” Id. (citing Hoffman Const. Co. v. Fred S. James & Co., 313 Or. 464, 469 (1992); O.R.S. 742.016(1) (providing that, with some exceptions, “every contract of insurance shall be construed according to the terms and conditions of the policy”)). To determine the parties' intent, Oregon law requires the court to follow the analytical framework set out in Hoffman. Cain Petroleum, 244 Or.App. at 241 (citing Hoffman, 313 Or. at 470-71). The court interprets the terms of the policy from the perspective of an “ordinary purchaser of insurance.” Id. (quoting Congdon v. Berg, 256 Or.App. 73, 87 (2013)) (quotation marks omitted). “The language used in a contract of insurance is entitled to a construction as favorable to the insured as in good conscience will be permitted, and every reasonable intendment will be allowed to support a view that will protect the insured and prevent forfeiture.” Schweigert v. Beneficial Standard Life Ins. Co., 204 Or. 294, 301 (1955) (citations omitted).

The Hoffman framework first requires that the court determine whether the insurance policy defines the provision, term, or phrase at issue. If expressly defined, the court must apply the provided definition. Holloway v. Republic Indem. Co. of Am., 341 Or. 642, 650 (2006) (citing Groshong v. Mut. of Enumclaw Ins. Co., 329 Or 303, 307-08 (1999)). If the policy does not define the phrase, the court must look to its plain meaning. Id. A phrase has a plain meaning if it is susceptible to only one plausible interpretation. Id.; Clinical Research Inst. of S. Oregon, P.C. v. Kemper Ins. Cos., 191 Or.App. 595, 600 (2004) (citing American Hardware Ins. Group, 167 Or.App. 244, 248 (2000)). If the court determines that there are two or more plausible interpretations of the phrase, the court must determine whether the interpretations “withstand scrutiny.” Holloway, 341 Or. at 650 (citing Hoffman, 313 Or. at 470).

A phrase withstands scrutiny if it continues to be reasonable after the interpretations are examined in light of, inter alia, the particular context in which the phrase is used in the policy and the broader context of the policy as a whole. Id.; see also Bresee Homes, Inc. v. Farmers Ins. Exch., 353 Or. 112, 122 (2012) (“[the court must] construe the text of the policy as a whole, rather than view particular parts of the policy in isolation.”). When examining the policy, the court “assume[s] that parties to an insurance contract do not create meaningless provisions. Hoffman, 313 Or. at 472. If a single interpretation withstands scrutiny, the court must apply that interpretation. Id. If more than one interpretation withstands scrutiny, the court must conclude that the phrase is ambiguous. Cain Petroleum Inc., 244 Or.App. at 241 (explaining that “‘ambiguity' is a term of art . . . referring to multiple, reasonable interpretations of the policy”). Only after concluding that a term or phrase is ambiguous by following this framework should the court construe the phrase against the drafter. Holloway, 341 Or. at 650 (citing Hoffman, 313 Or. at 470).

“The general rule in Oregon is that the insured, rather than the insurer, bears the initial burden of proving coverage.” QBE Ins. Corp. v. Creston Court Condo., Inc., 58 F.Supp.3d 1137, 1144 (D. Or. 2014) (citation omitted). “Conversely, the insurer has the burden of proving that the policy excludes coverage.” Employers Ins. of Wausau, A Mut. Co. v. Tektronix, Inc., 211 Or.App. 485, 509 (2007) (citing Stanford v. American Guaranty Life Ins. Co., 280 Or. 525, 527 (1977)).

V. PCIC's Motions for Summary Judgment (ECF 36, 47)

A. Procedural Defects

PCIC's second motion for summary judgment is a duplicate of the first, except for the addition of a single argument referencing Charter Oak Fire Ins. Co. v. Interstate Mech., Inc., 958 F.Supp.2d 1188, 1208 (D. Or. 2013), vacated, 3:10-CV-01505-PK, 2014 WL 9849553 (D. Or. Jan. 6, 2014).² Compare Def.'s Mot. Summ. J., ECF 36 with Def.'s Mot. Summ. J., ECF 47. The first motion should therefore be denied as moot.

2 Charter Oak was only vacated because the parties subsequently settled.

PCIC also has failed to comply with Local Rule 7-1(a)(1), which provides that “[e]xcept for motions for temporary restraining orders, the first paragraph of every motion must certify that: (A) In compliance with this Rule, the parties made a good faith effort through personal or telephone conferences to resolve the dispute and have been unable to do so; or (B) The opposing party willfully refused to confer. . . .” Def.'s Mot. Summ. J. 1, ECF 47. In addition to the conferral requirement, PCIC failed to comply with Federal Rule of Civil Procedure 7(b)(1), which provides that the “motion must . . . (B) state with particularity the grounds for seeking the order; and (C) state the relief sought.” Local Rule 7-1(b) likewise requires that “[e]very motion must concisely state the relief sought and be stated in a separate section under the heading ‘Motion.'”

The purpose of these rules should be obvious. Where a motion does not state the relief sought, no result flows from the granting or denying of the motion. Because PCIC does not explicitly seek any relief at all, opposing counsel and the court are left to extrapolate from PCIC's argument what it seeks to accomplish by its motion. While not inherently problematic, the task is complicated here because the argument section is sparse and PCIC forfeited its opportunity to clarify its position when it did not file a reply in support of its motion.

Further complicating matters, PCIC's motion fails to identify the “claim or defense-or the part of each claim or defense-on which summary judgment is sought, ” as required by Federal Rule of Civil Procedure 56(a). PCIC's argument concerning the policies' anti-assignment clauses appears directed toward both the bad-faith claim and the breach-of-contract claim. Its argument concerning the voluntary assumption of obligation clause appears to only apply to the breach of contract claim. This may not have been PCIC's intention. Suffice to say, Rule 56(a) serves a purpose here as well.

The presence of these procedural defects alone justifies denying PCIC's motion for summary judgment. See Rhodes v. Robinson, 399 F. App'x. 160, 164 (9th Cir. 2010) (affirming denial of motion for summary judgment for failure to comply with Rule 7(b)(1)(B)) (cited pursuant to 9th Cir. Rule 36-3). PCIC also failed to submit a reply in support of its motion, thus forfeiting its opportunity to address these deficiencies. A party's failure to address an issue or argument either in response to a motion for summary judgment or in reply to a response in opposition of the party's own motion for summary judgment may constitute waiver. See Chang v. Straub Clinic & Hosp., Inc., 670 Fed.Appx. 591, 592 (9th Cir. 2016) (finding waiver where response to motion for summary judgment did not address argument) (cited pursuant to 9th Cir. Rule 36-3); Abogados v. AT&T, Inc., 223 F.3d 932, 937 (9th Cir. 2000) (holding failure to raise argument in response to motion for summary judgment constitutes waiver); e.g., Steger v. Peters, No. 6:16-cv-02093-YY, 2018 WL 3430671, *3 (D. Or. July 16, 2018) (collecting cases and construing party's failure to respond to a motion for summary judgment as “a concession on the merits”).

Thus, the court would be acting well within its authority if it denied PCIC's motion for summary judgment for failure to comply with LR 7-1(a)(1), LR 7-1(b), Rule 7(b)(1), and Rule 56(a), and for failure to submit a reply in support of its motion.

B. Merits

Even if PCIC's motion is not denied based on procedural defects, it otherwise lacks merit. PCIC appears to move for summary judgment on two defenses, arguing coverage is forfeited because HMI violated the policies' anti-assignment clauses and voluntary assumption of obligation clause.³

3 PCIC also reproduces a provision of the policy that provides: “No person or organization has the right under this Coverage part: . . . To sue us on this Coverage Part unless all of its terms have been fully complied with.” 2009-10 Policy 23, ECF 36-2; 2010-11 Policy 23, ECF 36-3. However, PCIC does not incorporate this provision into any analysis. Def.'s Mot. Summ. J. 3, ECF 47. “The Court will not attempt to flesh out legal arguments that [PCIC] failed to make.” Leupold & Stevens, Inc. v. Lightforce USA, Inc., 434 F.Supp.3d 886, 897 (D. Or. 2020). This court has already stretched out PCIC's arguments on other issues where it failed to elaborate.

1. Anti-Assignment Clauses

As part of the stipulated judgment, HMI assigned KeyWay all its rights against any insurer. Am. Compl., Ex. D, ECF 17-4 (Assignment of Claims and Limited and Conditional Covenant Not to Execute). The assignment also provides that “KeyWay shall have the right to litigate . . . in the name of HMI as insured.” Id. at 2.

The policies contain the following anti-assignment clauses: “Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured, ” and, “This Policy, including the rights and obligations hereunder, may not be transferred or assigned unless consented to in writing by [PCIC].” 2009-10 Policy 30, 51, ECF 36-2; 2010-11 Policy 31, 52, ECF 36-3. PCIC first asserts these “[a]nti-assignment clauses are enforceable in Oregon except to the extent they conflict with O.R.S. 31.825.” Def.'s Mot. Summ. J. 4, ECF 47 (citing Holloway v. Republic Indem. Co. of Am., 341 Or. 642, 652 (2006). PCIC then contends that coverage is forfeited because the anti-assignment clauses invalidate HMI's assignment. See Def.'s Mot. Summ. J. 4, ECF 47; Transcript 9, 13, ECF 76.

HMI counters that it is the proper plaintiff, whether the assignment is valid or not- specifically, if the assignment is invalid, HMI retains its rights against PCIC, in which case HMI is the proper plaintiff, and if the assignment is valid, then KeyWay has the right to pursue this action in HMI's name, in which case HMI is still the proper plaintiff. Pl.'s Resp. 3-5, ECF 43. Indeed, the Oregon Supreme Court in Holloway construed a nearly identical clause and held that it “prohibited the assignment of rights from the insured to [the assignee] because the insured had not obtained [the insurer's] written consent.” 341 Or. at 653. “Because the assignment was not valid, [the assignee] obtained no rights against [the insurer].” Id. (emphasis added). Thus, the implication from Holloway is that the insured retains its rights even if the assignment is invalid. See also Clinton Condos. Owners Ass'n v. Truck Ins. Exch., 282 Or.App. 484, 485-86 (2016) (affirming trial court's grant of summary judgment to insurer for assignee's lack of standing on the basis that an enforceable anti-assignment clause invalidated the assignment).

Here, plaintiff HMI is not the assignee of the insured's rights-HMI is the insured. Therefore, even assuming PCIC is correct that the anti-assignment clauses are enforceable and invalidate the assignment, HMI retains its rights against PCIC and may assert them here.

For the first time in its supplemental brief, PCIC asserts that HMI's underlying liability was extinguished irrespective of any anti-assignment clauses because HMI and KeyWay entered the covenant not to execute before HMI stipulated to judgment. Def.'s Suppl. Br. 3, ECF 89. PCIC's argument exceeds the scope of the supplemental briefing authorized by the court, which was limited to HMI's motion for summary judgment. Nevertheless, in Oregon, there is no “general requirement that a judgment be entered before a covenant not to execute in order for the insured to be ‘legally obligated.'” Lancaster v. Royal Ins. Co. of Am., 302 Or. 62, 66 (1986). “Whether the assignment was made of a judgment in existence or a judgment to come into existence is not determinative of whether or not the insured's assignee may maintain an action against the insurance company. Rather, the language of the covenant is determinative.” Id. ⁴Here, the language of the covenant and settlement agreement that HMI and KeyWay entered did not release HMI's claims against its insurers. Am. Compl. Ex. C ¶ 6(a), ECF 17-3 (so providing); id., Ex. D ¶ 1, ECF 17-4 (same). Accordingly, PCIC's argument fails.

4 Brownstone Homes validated Lancaster and overruled Stubblefield v. St. Paul Fire & Marine Ins. Co., 267 Or. 397 (1973), not vice versa. See Brownstone Homes, 358 Or. 223, 243-47 (2015).

2. Voluntary Assumption of Obligation Clause

The policies provide, “No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” 2009-10 Policy 23, ECF 36-2; 2010-11 Policy 23, ECF 36-3. PCIC invokes Charter Oak to argue that HMI forfeited coverage when it signed a confession of judgment while receiving a defense under a reservation of rights, and that this conduct is “conclusive proof” that HMI “failed to cooperate and that its failure to cooperate has prejudiced” PCIC. Def.'s Mot. Summ. J. 5, ECF 47 (quoting Charter Oak, 958 F.Supp.2d. at 1197).

There is no question that HMI voluntarily assumed an obligation by confessing to a judgment and that this prejudiced PCIC. By stipulating to the judgment, HMI precluded PCIC from trying the underlying action. But this is only the beginning of the inquiry because PCIC defended HMI under a reservation of rights. See Charter Oak, 958 F.Supp. 2d. at 1196, 1209. When the insurer defends under a reservation of rights, “an insured can enter into a settlement without the insurer's consent, so long as the agreement is made fairly, with notice to the insurer, and without fraud or collusion on the insurer.” Id. at 1209. HMI pointed this out in its response brief, Pl.'s Resp. 3, ECF 56, but PCIC submitted no reply. PCIC's motion for summary judgment does not even acknowledge these factors, let alone attempt to meet the burden of showing there are no genuine issues of disputed fact and that it should prevail as a matter of law. Accordingly, PCIC's motion regarding the voluntary assumption of obligation clause fails for this reason as well.

VI. HMI's Motion for Summary Judgment (ECF 48)

HMI alleges two claims for relief-breach of contract and bad-faith breach of the duty to settle. The claims present alternative legal theories to recover for the same injury. HMI's motion for summary judgment should be granted on both claims.

A. Breach of Contract (First Claim)

HMI contends that its stipulated judgment with KeyWay triggered PCIC's indemnity obligations under the policies in the amount of $2.5 million, and PCIC breached the policies by refusing to indemnify those damages. Am. Compl. ¶¶ 20-22, ECF 17. PCIC makes several arguments in response and asserts that three exclusions preclude coverage. Def.'s Resp., ECF 55.

The court addresses coverage first and then the exclusions.

1. Coverage

The policies provide, “We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage' to which this insurance applies.” 2009-10 Policy 12, ECF 36-2; 2010-11 Policy 12, ECF 36-3. “[W]hat the insured had become obligated to pay as damages and whether the insurer ultimately was liable under its policy present[s] questions of law for the court to determine by reference to (a) the contract and (b) the judgment and record in the underlying proceeding.” Fountaincourt Homeowners' Assoc. v. Fountaincourt Development, LLC, 360 Or. 341, 358 (2016). When the insured settles with the underlying plaintiff, the court must look to the “allegations in the underlying lawsuit and any evidence developed in defending or supporting those allegations.” Probuilders Specialty Ins. Co., RRG v. Phoenix Contracting, Inc., 6:16-CV-00601-AA, 2017 WL 11536056, at *2 (D. Or. Jan 2, 2017) (alterations omitted) (quoting Chartis Specialty Ins. Co. v. Am. Contractors Ins. Co. Risk Retention Grp., 2014 WL 3943722, *5 (D. Or. Aug. 12, 2014). Whether PCIC “has a duty to pay must be determined on the basis of the ultimate facts . . . that formed the basis for the settlement.” Bresee Homes, 353 Or. at 125-26; Northwest Pump & Equip. Co. v. Am. States Ins. Co., 144 Or.App. 222, 227 (1996) (“the duty to indemnify is established by proof of actual facts demonstrating a right to coverage.”). “[A]n insurer cannot, in a subsequent proceeding, retry its insured's liability, or alter the nature of the damages awarded in that proceeding.” Fountaincourt, 360 Or. at 357.

Here, Commons alleged breach of contract and tort claims against KeyWay and a roofing contractor in the underlying complaint. See Am. Compl., Ex. 1, ECF 17-1. KeyWay's third-party complaint alleged breach of contract and tort claims against several subcontractors, and a claim for contribution against HMI:

KeyWay denies liability for [Common's] claims. However, to the extent KeyWay is found liable in tort to [Commons] and is found liable for more than its proportionate share of liability, then KeyWay is entitled to contribution from each of the Subcontractors and from HMI under ORS 31.800 et seq., for each of their proportionate shares of liability.

Am. Compl., Ex. B ¶ 26, ECF 17-2. Commons, KeyWay, and the roofing contractor settled the underlying litigation, and KeyWay settled with the subcontractors named in its third-party complaint.

PCIC argues that HMI cannot establish it is entitled to coverage because “HMI has provided no evidence in discovery that KeyWay was found liable in tort to Commons, no evidence of what the total amount of that tort liability was, and no evidence of the proportionate share of that liability as distributed among the various other subcontractors engaged on the project.” Pl.'s Resp. 11, ECF 55. However, “[a] stipulated judgment has the same effect as a judgment that is entered after a trial on the merits of a claim.” Webber v. Olsen, 330 Or. 189, 196, (2000) (en banc) (citation omitted); see also Matter of Comp. of Fleming, 302 Or.App. 543, 561 (2020) (DeVore, J., dissenting) (citing Webber for this proposition and considering whether a workers' compensation “disputed claim settlement” was the functional equivalent of a stipulated judgment). HMI's underlying liability was resolved by the stipulated judgment obligating HMI to pay $2.5 million. The question here is whether that adjudicated liability is covered by the PCIC policies.

a. Policy Language

Both the 2009-10 and 2010-11 policies define “property damage” to mean “[p]hysical injury to tangible property, including all resulting loss of use of that property, ” among other things. 2009-10 Policy 28, ECF 36-2; 2010-11 Policy 28, ECF 36-3. The policies define occurrence to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” 2009-10 Policy 27, ECF 36-2; 2010-11 Policy 27, ECF 36-3. They further provide that the insurance applies only if the property damage is caused by an occurrence that takes place in the coverage territory. 2009-10 Policy 12, ECF 36-2; 2010-11 Policy 12, ECF 36-3. The 2009-10 policy also requires that the property damage “first manifests and appears during the policy term.” 2009-10 Policy 7, ECF 36-2. It continues,

This coverage does not apply to any . . . ‘property damage' that is continuous in nature, progressively deteriorating, results from repeated exposure to the same causal agent, and/or that first manifests prior to the Inception Date, even if such . . . ‘property damage' continues into the Term whether or not it is known to any insured. . . .

Id. The 2010-11 policy similarly requires that the

‘property damage' first takes place in fact or manifests during the policy period and is caused by an accident that takes place during the policy period. This coverage does not apply to any . . . ‘property damage' that first takes place in fact or manifest prior to the Inception Date, even if it is presumed in law or fact to be continuous in nature, progressively deteriorating, to result from continuous or repeated exposure to substantially the same harmful conditions, and even if such . . . “property damage” continues into the policy period, or is presumed by law to continue into the policy period.

2010-11 Policy 7, ECF 36-3. Both policies each have $1 million per occurrence limits and $2 million aggregate limits, providing for a total of $4 million in available coverage. 2009-10 Policy 2, ECF 36-2; 2010-11 Policy 2, ECF 36-3.

b. Record in Underlying Proceeding

HMI offers evidence from the record developed in the underlying litigation that it performed two separate scopes of work on the Commons project, one on windows and siding and another on attic vents and related components. HMI then argues that each scope of work constitutes a separate occurrence and that each occurrence resulted in property damage manifesting during the periods of both the 2009-10 and 2010-11 policies. See Pl's Mot. Summ. J. 11-20, ECF 48. This property damage is covered under the policies, as discussed below.

i. Windows and Siding

Relying on a repair bid from a third-party, Commons sought over $26 million to “repair the property damage and construction-related defects involving HMI's siding work.” Kolta Decl., Ex 4, at 3, ECF 49-4 (March 16, 2017 settlement demand letter). Common's demand letter, which cites deposition testimony and exhibits, indicates “HMI installed over 90% of the windows at the project.” Id., Ex. 4, at 7, ECF 49-4. HMI defense counsel Todd Baran's pre-trial report concurred:

It is not possible to determine exactly how many windows the HMI crew installed, or how much siding it replaced. However, it appears that HMI installed most (approximated 90%) of the new windows. HMI would have been responsible for repairing rot revealed during the window installation work.

Kolta Decl., Ex. 3, at 2, 49-3. HMI's expert found HMI performed window and siding work on all the apartment buildings. Id., Ex. 2, at 3, ECF 49-2.

Common's demand letter alleges, based on testimony of an HMI employee, that HMI replaced critical fire-resistant construction elements in violation of the building code and that HMI failed to adequately install building paper. Id., Ex. 4, at 7, ECF 49-4. The demand letter further alleges “the negligent work of HMI has caused extensive property damages [that] requires the replacement and removal of all of the windows at the project.” Id. at 11. HMI's expert found the defective window, sliding glass door, and siding installation was performed and completed by HMI between February of 2009 and August 2010. Id., Ex. 2, at 2, ECF 49-2. “Property damage began soon after the window, sliding glass door, and siding work was completed and put to its intended use. While this damage was initially masked by replacement siding, it would have been readily discoverable upon reasonable inspection.” Id. He opined that the “improper installation resulted in water intrusion into the exterior wall assembly” that “would have manifested soon after the installation, . . . developing the first winter after installation at each building.” Id. at 4.

ii. Attic Venting

Common's demand letter seeks over $5 million for roofing repair costs. The letter states “HMI's negligent installation of ducting and mechanical venting was a major cause of property damage to the roofs and attics.” Id., Ex 4, at 4, ECF 49-4. Relying on deposition testimony, the letter continues, “HMI installed many of the vents in the attic spaces and the related mechanical venting and ducting components on the roof. . . . [V]irtually all of that venting work was performed negligently . . . [and] recent destructive testing has revealed that 70% of the vents leak and we believe that every single vent installed by HMI was done so improperly. . . .” Id. at 11.

HMI's expert found HMI performed venting work on all the apartment buildings. Id., Ex. 2, at 3, ECF 49-2. He found that the “defective/improper bath fan, dryer vent, and kitchen hood exhaust work was performed and completed by HMI between February of 2009 and October of 2010.” Id. at 1. He found that water damage began to occur the first winter after the completion of the vent work. Id. at 3. “While this damage was initially contained within the buildings' uninhabited attic spaces, it would have been readily observable upon entering the attics.” Id. at 1. HMI's expert further found that the defective vents either leaked moisture directly into the attic spaces and blocked duct terminations from removing humidity. Id. at 3. “Cold temperatures caused severe condensation at the underside of the roof sheathing within the buildings' attics due to high humidity.” He opined that this humidity caused “widespread damage to the roof sheathing.” Id.

HMI's expert opined the damage resulting from HMI's defective work would cost “far in excess” of $2.5 million, even “in excess of $10 million.” Id. at 4. Commons put HMI's liability at $8 million. Id., Ex. 4, at 6, 12, ECF 49-4.

c. Analysis

The record that was developed at the time HMI settled establishes coverage. HMI's defective work on windows, siding, and attic venting are accidents that caused physical injury to tangible property, as there was property damage to the apartment buildings apart from the defective workmanship. See Houston Specialty Ins. Co. v. Rodriguez Corp., No. 3:18-CV-01886-YY, 2019 WL 7630791, at *8 (D. Or. Oct. 25, 2019), report and recommendation adopted, 2020 WL 362641 (D. Or. Jan. 22, 2020) (collecting cases). The separate scopes of work are separate occurrences because the injuries to tangible property were not caused by exposure to substantially the same general harmful conditions. The harmful condition to the windows and siding was water intrusion penetrating the building exteriors. See Kolta Decl., Ex. 2, at 2, 4, ECF 49-2; Id., Ex 4, at 7, 11, ECF 49-4. The harmful condition in the attics was condensation from excessive humidity interacting with the roofs during cold weather. See id., Ex. 2, at 1, 3, ECF 49-2; Id., Ex 4, at 4, ECF 49-4.

Further, the property damage first manifested during both policy periods. “Manifest” means “to show plainly;” “to make palpably evident or certain by showing or displaying;” “capable of being readily and instantly perceived by the senses and especially by sight;” “capable of being easily understood or recognized: clearly evident, obvious, and indisputable.” Manifest, Merriam-Webster, https://www.merriam-webster.com/dictionary/manifest (last visited March 12, 2021).

‘[M]anifest,' in all of its forms, connotes the self-revelation of the manifesting phenomenon and its ability to be perceived-that is, something manifests itself by becoming sufficiently susceptible to apprehension or comprehension. The term inquires into whether a phenomenon is of a sufficiently external nature as to be “readily perceived, ” and it is not necessary under any variation of the term's meaning that the manifesting phenomenon actually be perceived or discovered. . . . ‘[M]anifest,' in this sense, means discoverable or subject to being discovered by reasonable means, not actually discovered or perceived.

Morrow Corp. v. Harleysville Mut. Ins. Co., 110 F.Supp.2d 441, 449-50 (E.D. Va. 2001) (emphasis in original).

The 2009-10 policy covered the period February 20, 2009, to February 20, 2010, while the 2010-11 policy covered the period February 20, 2010, to February 20, 2011. Schulze Decl., Exs. 1, 3, ECF 36-2, 36-3. HMI performed both scopes of work on all the apartment buildings during both policy periods, from February 2009 until mid-to-late 2010. See Kolta Decl., Ex. 2, at 2-3, ECF 49-2. HMI's expert opined that the property damage began shortly after HMI completed its work on each building. See Id. Thus, at least some property damage first manifested during each policy period, even though some other property damage to other buildings first manifested prior to either policy period.

Having made this showing, the burden shifts to PCIC to “establish that some portion of the damages included in the judgment did not reflect property damage occurring during its policy period.” FountainCourt Homeowners' Ass'n v. FountainCourt Dev., LLC, 264 Or.App. 468, 488 (2014), aff'd, 360 Or. 341 (2016). HMI is not “required to prove the precise amount of damages that occurred during the policy period in order to demonstrate that there had been an ‘occurrence' that triggered coverage under the policies.” Id., 360 Or. at 365. PCIC does not even attempt to meet its burden to allocate damages. Further, PCIC's corporate representative, Dana Keir, admitted during the Rule 30(b)(6) deposition that a manifestation had occurred in 2010 and could not state how much of HMI's liability arose out of that damage. See Kolta Decl., Ex. 5, at 36-38, ECF 49-5.

HMI has established the PCIC policies provide up to $4 million in liability coverage. The court now turns to the exclusions.

2. Exclusions

As an initial matter, HMI asserts that PCIC has conceded there are no genuine issues of material fact as to all but one of its policy exclusions because, at the Rule 30(b)(6) deposition, Keir testified he knew of no factual basis upon which to apply the exclusions. Pl.'s Mot. Summ. J. 13, ECF 48. However, whether a defense or exclusion precludes coverage is a legal conclusion. “[A] Rule 30(b)(6) deponent's own interpretation of the facts or legal conclusions do not bind the entity.” Snapp, 889 F.3d at 1104 (quoting 7 James Wm. Moore, et al., Moore's Federal Practice § 30.25[3] (3d ed. 2016)); Neponset Landing Corp. v. Nw. Mut. Life Ins. Co., 279 FRD 59, 61 (D. Mass. 2011) (“While asking a 30(b)(6) witness about facts is entirely appropriate, the lay witness should not be expected to testify as to how any such facts form the basis of a legal affirmative defense. Depositions, including 30(b)(6) depositions, are designed to discover facts, not legal theories.”) (simplified). Although Keir's deposition testimony that he knew of no factual basis for a given exclusion is probative of the diligence PCIC exercised in its claims-handling process for the purpose of the bad-faith claim, that testimony does not preclude PCIC's counsel from making legal arguments now. It is therefore necessary to consider the exclusions PCIC raises in response to HMI's motion for summary judgment.

a. “Asserted By a Third Party” Exclusion

The policies contain the following “coverage afforded” manuscript policy provision:

Notwithstanding any other provisions contained in this Policy, the coverages set forth are limited to: . . .

(B) A claim asserted by a third party (i.e. a party who is neither an insured, nor related by ownership or management to the Member) where such claim directly substantially relates to an insured's project.

2009-10 Policy 10, ECF 36-2 (emphasis omitted); 2010-11 Policy 10, ECF 36-3.

PCIC argues Section B precludes coverage because the claim asserted against HMI was not asserted by a third party. Commons and HMI are related by ownership-they are both owned by [XXXXX]. Schulze Decl., Ex. 1, at 6-7, ECF 55-2. And KeyWay and HMI are related by ownership and management-KeyWay is owned and operated by Brian Frank, who was also listed as the “Responsible Managing Individual” on HMI's contractor's license from 2009 through the end of the renovations project. Schulze Decl., Ex. 1, at 7, 9, ECF 55-2, id., Ex. 1, at 1-4, ECF 59-2. PCIC asserts the “asserted by a third party” exclusion applies “regardless of whether the underlying claims are considered to be made by Commons, KeyWay, or both, ” but does not invoke any Oregon rules of insurance policy interpretation to support this argument. Def.'s Resp. 10, ECF 55. In its supplemental brief, PCIC argues the purpose of this exclusion is to prevent collusion and that “Commons [sic] settlement activity with HMI was collusive.” Def.'s Suppl. Brief 3, ECF 89. As discussed below, see Sect. IV.B.4.c, common ownership and control creates an “exceptionally high” potential for collusion. See Charter Oak, 958 F.Supp.2d at 1203. However, PCIC has not identified a single piece of evidence that any collusive activity occurred.

HMI counters that PCIC waived its right to invoke this exclusion, and the exclusion does not apply even if PCIC's interpretation is the only plausible one. HMI also offers an alternative interpretation of the provision and argues that applying the exclusion here would be contrary to its purpose, which is to prevent fraud or collusion. Pl.'s Reply 19, ECF 57. The last three arguments need not be reached because PCIC has waived its right to invoke this exclusion.

“Waiver is the intentional relinquishment or abandonment of a known right.” Wood v. Milyard, 566 U.S. 463, 474 (2012) (quoting Kontrick v. Ryan, 540 U.S. 443, 458 n.13 (2004)) (alterations omitted). Rule 8(c) provides that “a party must affirmatively state any avoidance or affirmative defense.” Fed.R.Civ.P. 8(c)(1). “It is a frequently stated proposition of virtually universal acceptance by the federal courts that a failure to plead an affirmative defense as required by Federal Rule 8(c) results in the waiver of that defense and its exclusion from the case.” 5 Fed. Prac. & Proc. Civ. § 1278 (3d ed.). However, “the waiver rule that has developed in the practice under Rule 8(c) is not applied automatically with regard to omitted affirmative defenses and as a practical matter there are numerous exceptions to it based on the circumstances of particular cases.” Id. In the Ninth Circuit, “[a]s long as the plaintiff is not prejudiced, affirmative defenses that were not pleaded in an answer may be raised for the first time on summary judgment.” McGinest v. GTE Serv. Corp., 247 F. App'x. 72, 75 (9th Cir. 2007) (collecting cases and citing Camarillo v. McCarthy, 998 F.2d 638, 639 (9th Cir. 1993)) (cited pursuant to Ninth Circuit Rule 36-3). But there is a difference between asserting an affirmative defense on summary judgment that was never pleaded and asserting an affirmative defense on summary judgment that was dropped from the pleadings. Compare Sharer v. Oregon, 481 F.Supp.2d 1156, 1164-65 (D. Or. 2007), adhered to on reconsideration, 04-CV-1690-BR, 2007 WL 9718957 (D. Or. Apr. 18, 2007) (finding affirmative defense raised for the first time on summary judgment was not waived without showing of prejudice) with Kollman v. National Union Fire Ins. Co. of Pittsburgh, Civ. No. 04-3106-CO, 2007 WL 865679, *21 (D. Or. Mar. 15, 2007) (deeming moot motions for summary judgment in part because insurer “dropped the affirmative defenses associated with these motions in its answer to the amended complaint”).

Here, in its answer to the original complaint, PCIC pleaded several affirmative defenses and 20 exclusions. Answer 4, 5, ECF 6. The answer did not refer to either the “asserted by third party” clause or “coverage afforded” policy provision by name. However, the answer contained the following allegation: “On information and belief, Plaintiff, KeyWay, and Commons at Cedar Mill share common management and ownership and the settlement among them was not an arms-length settlement.” Id. ¶ 6. HMI then amended its complaint. See Am. Compl., ECF 17. Importantly, in its answer to the amended complaint, PCIC dropped the allegation referring to common management and ownership, i.e., the allegation that would have pertained to the Section B exclusion regarding a claim asserted by a third party. Compare Answer, 4, 5, ECF 6 with Am. Answer, ECF 18. HMI further argues it has been prejudiced because PCIC did not raise this policy limitation in its reservation of rights letter or during discovery. Tellingly, PCIC did not contest HMI's waiver argument in its briefing or during oral argument. All of this shows an intentional abandonment of the right to rely on this exclusion and to contest coverage on the basis that the claim was not asserted by a third party.

b. Undisclosed Operations Exclusion

The undisclosed operations exclusion does not bar coverage because its application contravenes Oregon law. The policies provide:

[T]he Risk Retention Group will not pay, is not liable for, and the Policy will not provide coverage for any claim related to or in any way involving: . . . .

Any claim arising from an insured's project where the . . . Insured has not reported a change as required by Section VII (J), unless all acts which give rise and/or relate to the claim or ‘Covered Loss' occurred prior to the date of the change. . . .”

2009-10 Policy 44, 47, ECF 36-2 (emphasis omitted); 2010-11 Policy 45, 49, ECF 36-3 (emphasis omitted). Section VII(J) provides, “As a condition of this insurance, all material matters in the application and any supplements or addendum must remain true, correct, and complete throughout the entire Policy period. Any changes must be reported to the Risk Retention Group. . . .” 2009-10 Policy 44, ECF 36-2 (emphasis omitted); 2010-11 Policy 45, ECF 36-3 (emphasis omitted).

PCIC argues these provisions bar coverage because HMI never disclosed the operations at issue here. Def.'s Resp. 7, ECF 55. Indeed, HMI's application for the 2009-10 policy disclosed only minor remodeling, including 20% electrical, of apartment interiors at another location. Schultz Decl. Ex. 2, at 14, ECF 55-3. HMI's application for 2010-11 policy also disclosed no new operations. Id., Ex. 3, at 2, ECF 55-4 (indicating “no changes to Insured's Information since last year's application”).

However, under Oregon law, an insured's “misrepresentations, omissions, concealments of fact and incorrect statements” on insurance-policy applications “shall not prevent a recovery under the policy” unless they

(a) Are contained in a written application for the insurance policy, and a copy of the application is indorsed upon or attached to the insurance policy when issued;

(b) Are shown by the insurer to be material, and the insurer also shows reliance thereon; and

(c) Are either:

(A) Fraudulent; or

(B) Material either to the acceptance of the risk or to the hazard assumed by the insurer.

O.R.S. 742.013(1). PCIC's only response to the application of O.R.S. 742.013(1) is to invoke Montana law, which does not apply.

Subsection (a) requires the insurer “to reproduce information concurrently with the issuance of the policy so that the policyholder is fully and precisely apprised of the information ‘that the insurer relies on in issuing the policy.'” Brock v. State Farm Mut. Auto. Ins. Co., 195 Or.App. 519, 529 (2004) (quoting Ives v. INA Life Ins. Co., 101 Or.App. 429, 433 (1990)). Here, it is undisputed that HMI's applications were not attached to the policies when issued. Decl. Thomas Bauer 2, ECF 50 (“None of HMI's policy applications were attached to, delivered with, or otherwise issued with the [PCIC] policies.”). HMI also asserts PCIC has not shown the nondisclosures were material or that it relied on them, but the court need not reach these arguments. The undisclosed operations exclusion does not preclude coverage under O.R.S. 742.013(1)(a).

c. Ongoing Operations Exclusion

The ongoing operations exclusion provides that “[t]his insurance does not apply to . . . ‘property damage' arising out of the ongoing operations described in the Schedule of this endorsement.” 2009-10 Policy 83, ECF 36-2; 2010-11 Policy 88, ECF 36-3. The Schedule, which appears on the same page of the policies as the exclusion, describes ongoing operations as “[a]ny and all locations and operations.” 2009-10 Policy 83, ECF 36-2; 2010-11 Policy 88, ECF 36-3. The policies define location to mean “premises involving the same or connecting lots, or premises whose connection is interrupted only by a street [or] roadway.” 2009-10 Policy 83, ECF 36-2; 2010-11 Policy 88, ECF 36-3. A plain reading of this exclusion bars coverage for property damage on one area of the premises while the insured is working on another area of the same premises.

PCIC argues this exclusion precludes all coverage because, assuming property damage manifested during the policy periods, it is undisputed that HMI's operations at the Common's project were ongoing “through the end of the 2009-10 policy period.” Def.'s Resp. 11, ECF 55. PCIC does not cite to the record for this undisputed fact, but HMI does not contest this assertion, and the record reflects that “the job took place between 2007 and 2010.” Schulze Decl., Ex. 1, at 5, ECF 55-2 (expert's damage assessment); Kolta Decl., Ex. 1, at 31, ECF 49-1 (PCIC testimony); id., Ex. 3, at 1, ECF 49-3 (defense counsel's pre-trial report). Indeed, HMI testified that “the exterior repairs . . . [were] conducted roughly between summer 2007 and October[] 2010, with most of the work done in 2008 onwards.” Schulz Decl., Ex. 1, at 13, ECF 55-2 (interrogatory response). The parties also do not appear to dispute that the site of the Common's project, a 52-building apartment complex, Am. Compl., Ex. 1, ECF 17-1, is a premises involving the same or connecting lots, or premises whose connection is interrupted only by a street or roadway.

Thus, this exclusion precludes coverage under the 2009-10 policy because work on the apartment complex was ongoing during the time that policy was in effect. However, it does not preclude coverage under the 2010-11 policy because all of the renovation work was completed by October 2010. As PCIC cannot establish otherwise, and it carries the burden of persuasion to allocate damages outside the policy period, the ongoing operations exclusion does not preclude coverage under the 2010-11 policy.⁵

5 HMI makes a series of arguments focusing on the apparent confusion of PCIC's 30(b)(6) corporate representative, Keir, who testified about the applicability of the ongoing operations exclusion. Pl.'s Reply 13-15, ECF 57. Again, “a Rule 30(b)(6) deponent's own interpretation of the facts or legal conclusions do not bind the entity.” Snapp, 889 F.3d at 1104 (quoting 7 James Wm. Moore, et al., Moore's Federal Practice § 30.25[3] (3d ed. 2016)). That testimony does not preclude PCIC from making additional legal arguments on summary judgment.

In sum, HMI has established that there is $4 million in liability coverage under the 2009-10 and 2010-11 policies, but PCIC has established that the ongoing operations exclusion applies, making only $2 million available. Because PCIC has not even attempted to “establish that some portion of the damages included in the judgment did not reflect property damage occurring during its policy period, ” FountainCourt, 264 Or.App. at 488, HMI is entitled to summary judgment in the amount of $2 million on its breach of contract claim.

B. Bad-Faith Breach of the Duty to Settle (Second Claim)

HMI also moves for summary judgment on its claim for bad-faith breach of duty to settle. Pl.'s Mot. Summ. J. 1, ECF 48. PCIC submitted a perfunctory response, ⁶ and did not move for summary judgment on its own. See Def.'s Resp. 12, ECF 55. And despite being provided with an additional opportunity to submit argument on the elements of causation and damages, PCIC's supplemental brief is silent on these issues.

6 The response is also remarkable in that it does not invoke any case law.

The policies impose “the right and duty to defend the insured, ” 2009-10 Policy 12, ECF 36-2; 2010-11 Policy 12, ECF 36-3, and PCIC agreed to defend HMI against KeyWay's third-party complaint under a reservation of rights. Am. Answer. ¶ 12, ECF 18. Thus, PCIC had “both a contractual duty to defend and employ good faith in that defense as well as a common law duty to exercise due care in conducting the defense of its insured.” Alexander Mfg., Inc. v. Illinois Union Ins. Co., 666 F.Supp.2d 1185, 1206 (D. Or. 2009); see Ivanov v. Farmers Ins. Co. of Oregon, 344 Or. 421, 430 (2008) (reaffirming the long-standing rule “that there is an obligation of good faith in the performance and enforcement of every contract”); Maine Bonding & Cas. Co. v. Centennial Ins. Co., 298 Or. 514, 517 (1985) (“The right of the insurer to control the defense of the litigation carries with it the duty to exercise diligence and care toward the insured.”). The duty to exercise due care in conducting the defense of the insured is a fiduciary duty. Farris v. U.S. Fid. & Guar. Co., 284 Or. 453, 460 (1978). Fiduciary duties are characterized by “undivided loyalty” and marked by a “punctilio of an honor the most sensitive.” Klinicki v. Lundgren, 298 Or. 662, 684 (1985) (quoting Meinhard v. Salmon, 249 N.Y. 458, 463-64 (1928) (J. Cardozo)).

Whereas a claim for breach of the duty to defend and employ good faith in that defense sounds in contract, a claim for breach of the common law duty to exercise due care in conducting the defense sounds in tort. See Warren v. Farmers Ins. Co., 115 Or.App. 319, 324-26 (1992). This distinction matters because, among other reasons, damages recoverable under claims for breach of the common law duty to exercise due care may exceed the amount covered under the policy's indemnity provisions and the tortfeasor may be subject to punitive damages. See Alexander, 666 F.Supp.2d at 1206 (citing Northwest Pump, 144 Or.App. at 230); Georgetown Realty, Inc. v. Home Ins. Co., 313 Or. 97, 110-11 (1992) (holding an insured's excess claim can be brought under theory of negligence thus permitting award of punitive damages); Farris, 284 Or. at 460 n.2 (“If the insurer is derelict in this [fiduciary] duty, [a]s where it negligently investigates the claim or unreasonably refuses an offer of settlement, it may be liable regardless of the limits of the policy for the entire amount of the judgment secured against the insured.”).

The complaint alleges a claim for “bad faith breach of duty to settle, ” Am. Compl. 5, ECF 17, and includes references to both “contractual” and “fiduciary” duties. Id. ¶ 32. While HMI does not seek more damages than alleged under its breach of contract claim or punitive damages, it repeatedly refers to PCIC's “fiduciary duties” and to Alexander for the elements of its claim. Pl.'s Mot. Summ. J. 26, 38, ECF 48. HMI's claim therefore sounds in tort. Alexander, 666 F.Supp.2d at 1206.

For HMI to prevail on this claim, it must prove: (1) that the insurer breached its duty of care to the insured, (2) causation, and (3) damages. Alexander, 666 F.Supp.2d at 1207 (citing Goddard ex rel. Estate of Goddard v. Farmers Ins. Co. of Oregon, 173 Or.App. 633, 638 (2001), rev den, 332 Or. 631 (2001). PCIC does not dispute that this statement of law controls.

1. Scope of Duty

HMI premises its claim for bad-faith breach of duty to settle on two aspects of the fiduciary duty under Oregon law:

1. “[O]nly a [settlement] decision made by an insurer who exercises due diligence in apprising itself of the material facts is entitled to be considered as made in good faith.” Maine Bonding, 298 Or. at 518.

2. “An insurer has an affirmative duty of care to its insured, which in an appropriate case requires the insurer to initiate settlement efforts.” Goddard, 173 Or.App. at 638.

Pl.'s Mot. Summ. J. 27, ECF 48.

PCIC argues an insurer's duty to settle “does not extend to cases ‘where the underlying critical question of liability was hotly contested.'” Def.'s Resp. 12, ECF 55 (quoting Couch on Insurance § 203:12). During oral argument, PCIC emphasized that HMI's underlying defense counsel, Todd Baran, did not recommend that PCIC settle the case on HMI's behalf, and if anything, thought the case should go to trial. Transcript 33, ECF 76.⁷ PCIC relies on Baron's opinion that because “HMI risked less than a one in three chance of incurring any liability if the case were taken to trial, ” there was no duty to settle this case. See Def.'s Resp. 12, ECF 55.

7 PCIC made two additional points during oral argument. Both are unavailing. PCIC asserted it satisfied its duty to defend by hiring counsel to defend HMI, and HMI admittedly had no problem with defense counsel. Transcript 33, ECF 76. And second, PCIC argued there can be no bad faith in refusing to pay a non-covered claim. Id. These arguments are incorrect, as “there can be a breach of this fiduciary duty without a breach of either the covenant to indemnify or the covenant to defend.” Farris, 284 Or. at 460 n.2 (quoting Gedeon v. State Farm Mut. Auto. Ins. Co., 410 Pa 55, 59-60 (1963)). That PCIC fulfilled some aspect of its fiduciary duties to HMI does not mean it cannot have failed to fulfill others.

In support of its argument, PCIC cites Couch § 203:12, which relies on Ortega-Maldonado v. Allstate Ins. Co., 519 F.Supp.2d 981, 992 (D. Minn. 2007), for the proposition that no duty to settle exists when liability is “hotly contested.” However, this proposition was derived from that court's discussion of a claim for breach of contract under Minnesota law, not for breach of the fiduciary duty. Id. Under Minnesota law, “[a]n insurer may breach its duty of good faith if the insured is ‘clearly liable, the insurer refuses to settle within the policy limits, and the decision not to settle within the policy limits is made in bad faith and is not based on reasonable grounds to believe that the amount demanded is excessive.'” Id. at 991 (emphasis added) (citation omitted). Unlike Oregon law, “Minnesota law does not recognize a separate cause of action for breach of the implied covenant of good faith when it arises from the same conduct as a breach-of-contract claim.” Id. at 992-93. Nor does it recognize “a separate cause of action, based on the same alleged facts, for a breach of fiduciary duty to defend claim.” Id. at 993.

Thus, Ortega-Maldonado, and the statement in Couch by extension, stand for the proposition that an insurer does not have a contractual obligation to settle when the question of liability is “hotly contested.” Id. This is not determinative here, where the question concerns the breach of fiduciary duty, a tort, under Oregon law. See Employers' Fire Ins. Co. v. Love It Ice Cream Co., 64 Or.App. 784, 790 (1983) (distinguishing first-party bad-faith claims from third-party bad-faith claims and recognizing that “the tort of bad faith refusal to settle with a third party within the limits of a liability policy . . . [is] a tort that is recognized in Oregon”). PCIC also does not address the components of the fiduciary duty outlined in Maine Bonding and Goddard, or O.R.S. 746.230(1)(f), referenced in Goddard, which provides that an insurer may not engage in the “unfair claim settlement practice” of “[n]ot attempting, in good faith, to promptly and equitably settle claims in which liability has become reasonably clear.” 173 Or.App. at 638 (quoting O.R.S. 746.230(1)(f)) (emphasis added).

2. Breach of Duty

HMI has established breach of as a matter of law. PCIC does not contest this element, and although there are facts in the record and arguments that could have been marshalled to create a genuine issue for trial, PCIC does not invoke either and therefore has waived any of those arguments.

a. Background Facts

In early January 2016, PCIC assumed HMI's defense under a reservation of rights and retained Baran. Kolta Decl., Ex. 5, at 1, ECF 49-5; id., Ex. 7, at 17, ECF 49-7. A six-week trial was scheduled to begin April 11, 2017. Id., Ex. 1, at 17, ECF 59-1. Baran attended mediations on January 14, 2017, and March 13, 2017. Id., Ex. 7, at 5, ECF 49-7; id., Ex. 8, at 1, ECF 49-8. PCIC's corporate representative, Dana Keir, did not know whether PCIC attended either mediation, but PCIC may have attended the second mediation by telephone. Id., Ex. 1, at 4, ECF 59-1. After the second mediation, Baran reported that “[Commons] was considering entering a stipulated judgment with HMI[] or settling around HMI so that it would be the only remaining defendant at trial.” Id., Ex. 8, at 1, ECF 49-8. HMI retained its own coverage counsel, Richard Senders, the next day. Id., Ex. 9, at 1, ECF 49-9.

On March 16, 2017, Commons offered to settle with HMI for $3 million. Id., Ex. 4, at 12, ECF 49-4. Commons wrote:

Please be advised that when this matter proceeds to trial on April 11, 2017, we will seek a verdict which exceeds $43,000,000. Of that sum, we have no doubt that HMI's portion will easily exceed 20% based upon HMI's unique role in both the negligent installation of the siding and negligent installation of the venting of the roofs. Indeed, the only other defendant in the case besides HMI that was involved in both the siding and roofing defects is the general contractor.

Id. at 6. Commons indicated its settlement offer would expire a week later, on March 23, 2017. Id. at 12.

On March 21, 2017, Baran sent a pre-trial report to PCIC. Id., Ex. 3, at 1-6, ECF 49-3. Baran planned to assert a “loaned servant” defense at trial on the theory that HMI provided labor to KeyWay. Id. at 4. Baran also opined that Common's scope of repair and estimated repair costs were both “patently unreasonable.” Id. at 5. He wrote, “I understand that KeyWay is prepared to offer an alternative repair bid in the range of $4-5MM.” Id. Baran concluded that “the risk of an adverse verdict as to HMI does not exceed 30 percent. If HMI is found to be at fault, its share of fault will likely range between 5 and 10 percent.” Id. at 6.

Thus, according to Commons' assessment of damages and liability, HMI faced exposure of more than $8.6 million, i.e., 20% of $43 million. But applying Baran's assessment of liability, i.e., 5 to 10 percent, HMI's exposure ranged between $ 2.2 million and $4.3 million. Moreover, Baron estimated that HMI had only a 30% chance of suffering an adverse verdict, in which case the expected settlement values would range between $0.7 million and $1.3 million, i.e., 30% of $2.2 million and $4.3 million.

However, applying Baran's expectation that damages would be in the range of $4 to $5 million (rather than $43 million)⁸ and his assessment of liability, HMI's exposure ranged between only $200,000 and $500,000, i.e., 5 percent of $4 million and 10 percent of $5 million. And based on Baran' estimate that HMI had only a 30% chance of suffering an adverse verdict, the settlement value was arguably between $60,000 and $150,000.

8 The following figures are approximate as Commons demanded various amounts over time. Compare Kolta Decl., Ex. 3., at 5, ECF 49-3 (demanding $43,303,962) with id., Ex. 4, at 6, ECF 49-4 (demanding $43,399,340).

Senders, HMI's retained coverage counsel, estimated HMI's potential liability to be “much greater” than Baran's estimate, “in excess of $10 million.” Id., Ex. 10, at 1, ECF 49-10; id., Ex. 2 at 4, ECF 44-2. Senders noted that Baran had not moved for summary judgment on any legal defenses, or retained an expert-forcing HMI to rely on KeyWay to challenge the amount of Commons' damages. Id., Ex. 10, at 1, ECF 49-10. Thus, he demanded that PCIC accept and pay Common's $3 million settlement demand. Id. at 2.

PCIC's counsel, Dan Syhre, responded that “PCIC does not plan to fund acceptance of the offer because it is not consistent with the liability analysis.” Id., Ex. 11, at 1, ECF 49-11. Syhre further indicated that even if it were consistent with the liability analysis, “no more than one policy could be triggered subject to the $1,000,000 limit for products-completed operations.” Id. He concluded, “PCIC is actively evaluating the coverage for and merits of this case and we will be in touch with you shortly regarding our position with respect to a possible counteroffer.” Id.

Commons rescinded its settlement offer on March 24, 2017. Commons' attorney wrote that HMI “has never extended any offer to settle the case or even indicated a willingness to do so at any time over the past 6 months. My client can only assume that HMI has no interest in ever discussing any possible settlement of this matter.” Id., Ex. 4, at 1, ECF 49-4. Commons thereafter terminated settlement discussions. Id.

On March 30, 2017, KeyWay made a settlement offer to HMI for a single, per-occurrence limit of $1 million in exchange for a full release, to expire within 24 hours. Id., Ex. 12, at 1-2, ECF 49-12. HMI demanded that PCIC “agree to the amount of the settlement demand or some other mutually agreeable negotiated sum.” Id., Ex. 15, at 1, ECF 49-15. HMI also represented that if PCIC did not accept the $1 million settlement offer, it would protect its interests by stipulating to a “confession judgment with a covenant not to execute on its assets except for insurance proceeds.” Id. PCIC's counsel, Syhre, responded that “PCIC will not be able to respond substantively within the 24 hour deadline you set.” Id., Ex. 13, ECF 49-13. PCIC did not accept KeyWay's settlement offer, and HMI “agreed to stipulate to a judgment with a covenant not to execute” the next day. Id., Ex. 7, at 2, ECF 49-7.

b. Analysis

HMI argues that, although PCIC had been defending HMI for 16 months and trial was just 12 days away, PCIC dilly-dallied in its evaluation of the case and failed to “respond substantively” to a demand for a single, per-occurrence limit, and thereby breached its fiduciary duty. Pl.'s Mot. Summ. J. 30, ECF 48. “[T]he cornerstone of [HMI's] bad faith claim is whether it was reasonable for PCIC to reject Keyway's $1 million settlement offer, an offer that came on the eve of the underlying trial, and an offer well within [Baran's] estimate of HMI's liability.” Pl.'s Reply 25, ECF 57.

At the Rule 30(b)(6) deposition, PCIC's corporate representative, Keir, testified that PCIC bases its settlement decisions on three factors: coverage, liability, and damages. Kolta Decl., Ex. 1, at 4, 5, ECF 49-1. HMI argues that evidence of PCIC's consideration of these factors conclusively shows PCIC did not exercise due diligence when considering Commons' and KeyWay's settlement offers and HMI's demands to accept them. Each of these factors is addressed in turn.

i. Coverage

HMI contends PCIC failed to investigate HMI's coverage for indemnity under the policies. Indeed, the testimony of Keir, the corporate representative, is that on March 30, 2017, the day KeyWay offered to settle for $1 million, there was “no decision made relative to indemnity.” Kolta Decl., Ex. 1, at 1, ECF 49-1. Otherwise stated, on that date, it was not clear to PCIC what the policies covered and what they did not. Id. at 4. Keir testified it was “safe to say” PCIC did not consider the presence or absence of indemnity coverage when declining to settle because it did not know if there was indemnity coverage, despite also testifying that “the coverage defenses are . . . what's driving the [settlement] value of this case.” Id. at 7-9.

Keir further testified that PCIC could not identify which of HMI's potential damages were barred by the several exclusions raised in its affirmative defenses, including the impaired property exclusion, the prior completed or random work exclusion, deleterious substances exclusion, and prior knowledge or known loss exclusions. Id. at 17-18, 24, 27.⁹ Keir provided two bases for invoking the ongoing operations exclusions, id. at 22, one of which is invalid under Oregon law. PCIC admits this, despite the Oregon Insurance Code's requirement that PCIC “promptly provide the proper explanation of the basis relied on in the insurance policy in relation to the facts or applicable law for the denial of a claim.” O.R.S. 746.230(m) (emphasis added).

9 To the extent PCIC argues the testimony of its corporate designee is being misused because a 30(b)(6) deposition is not “like a pop quiz, ” Transcript 26, ECF 76, here, HMI is not invoking this testimony in support of invalidating these exclusions. Instead, HMI invokes this testimony to show PCIC did not exercise due diligence when making a settlement decision.

HMI also argues that to the extent PCIC did consider coverage, PCIC comingled its coverage file with HMI's defense file-what HMI terms “a textbook breach of fiduciary duty.” Pl.'s Mot. Summ. J. 32, ECF 48. HMI asserts that the proper claims handling practice is for the insurer to separate defense work from coverage work. Id. (citing Cedell v. Farmers Ins. Co. of Washington, 176 Wash.2d 686, 699 n.5 (2013) (“Where an attorney is acting in more than one role, insurers may wish to set up and maintain separate files so as not to co-mingle different functions.”)). HMI argues PCIC violated this practice when PCIC's coverage counsel, presumably Syhre, reviewed documents Baran obtained through discovery to evaluate coverage exclusions. Kolta Decl., Ex. 1, at 20, ECF 49-1 (showing Keir answered “correct” to the question, “So coverage counsel reviewed the documents PCIC obtained through Todd Baran in the discovery of the Commons lawsuit?”).

An insurer defending under a reservation of rights must provide independent defense counsel for its insured. Richard L. Neumeier, Serving Two Masters: Problems Facing Insurance Defense Counsel and Some Proposed Solutions, 77 Mass. L. Rev. 66, 68-69 (1992) (“It is now well-established that when an attorney is retained by an insurance company to represent its insured, the insured is the client.”). Although an insurer and its insured share a common interest in defeating liability, their interests become antagonistic if the insured is found liable and the insurer contests coverage. Thus, some courts have held that the “insurer must not be allowed to use against its insured any information whatsoever gained by reason of the insurer-insured relationship.” Lima v. Chambers, 657 P.2d 279, 285 (Utah 1982), superseded by rule on other grounds as stated in Supernova Media, Inc. v. Pia Anderson Dorius Reynard & Moss, LLC, 297 P.3d 599, 609 (Utah 2013). An insurer's misappropriation of the defense file may support a claim for bad-faith breach of fiduciary duty. See Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 389 (1986) (finding no material issue of fact on bad faith claim where insurer hired separate defense and coverage counsel, which remained separate); Carolina Cas. Ins. Co. v. Ott, No. C09-5540 RJB, 2010 WL 1849230, at *9 (W.D. Wash. May 7, 2010) (finding no material issue of fact on bad faith claim where insurer hired separate defense and coverage counsel where there was not “sufficient, specific allegations of commingling”).¹⁰

10 See also Ellwein v. Hartford Acc. & Indem. Co., 142 Wash.2d 766, 781 (2001), as amended (Jan. 18, 2001), and overruled by Smith v. Safeco Ins. Co., 150 Wash.2d 478 (2003) (citing Tank, 105 Wash 2d. at 388 and Lima, 657 P.2d at 285 with approval). Ellwein was only overruled to the extent it misstated the summary judgment standard. Smith, 150 Wash.2d at 486.

Here, PCIC admits it “had coverage counsel review [the discovery obtained by defense counsel] to glean what it could as well.” Kolta Decl., Ex. 1, at 20, ECF 49-1. Moreover, PCIC has not otherwise responded to this problematic issue either in its briefing or during oral argument.

ii. Liability

Regarding liability, Keir testified it was “absolutely a possibility” that Commons' demand for damages for up to $43 million could have been awarded and that HMI “of course” could have faced greater exposure because other parties were settling around it. Id. at 13-14. Keir also acknowledged that HMI could have been found liable at trial for up to 10% of the total damages awarded. Id. at 12. Relying on HMI's own expert's analysis, HMI's attorney, Senders, put liability “far in excess of the $2.5 million stipulated judgement” and even “in excess of $10 million.” Id., Ex. 2 at 7, ECF 44-2; id., Ex. 2, at 4, ECF 49-2.

Kier also admitted that $2.5 million in damages was within the range of potential liability according to HMI's defense counsel, Baran:

Q: And so does PCIC believe 2.5 million was not a reasonable settlement because Mr. Baran opined there was a 30 percent chance of liability?

A: It certainly falls within that range.

Q: $2.5 million is within the range of the insured's potential liability at trial, according to Mr. Baran; correct?

A: Correct.

Id., Ex. 1, at 16, ECF 49-1.

iii. Damages

Regarding damages, Keir admitted PCIC did not know whether HMI would have been able to rebut Commons' $43 million demand for damages if the case gone to trial as scheduled. Kolta Decl., Ex. 1, at 14-15, ECF 49-1 (answering “that would be accurate” to the question, “So PCIC does not know whether, had the case gone to trial, the insured would have had an expert to opine on damages?”). Keir also testified that PCIC considered the possibility the other parties would settle around HMI and HMI would be precluded from using other parties' expert testimony. Id. at 13.

In sum, PCIC concedes it had everything in its possession to evaluate settlement on March 30, 2017: coverage, liability, and damages. Id. at 5-6. Yet, the only action PCIC took to settle the case was maybe attend a mediation by telephone. Id. at 2-3. PCIC claims “there was no opportunity to discuss settlement”; however, there were mediations, settlement offers, and demands, and all parties to the underlying litigation were reaching a global settlement around HMI. See Id. at 1. PCIC admits that it did not conduct virtually any claim investigation and that, to the extent it did, it misappropriated defense counsel's file. PCIC further admitted HMI faced up to $4.3 million in liability at trial and that it was unlikely HMI would have an expert witness to rebut Commons' damages. Even construing this evidence in the light most favorably to PCIC, it failed to exercise due diligence in handling these settlement negotiations. Breach has been established as a matter of law.¹¹

11 Although not determinative, it is worth noting that HMI does not rely on a single case where a court granted summary judgment to an insured on a claim for bad-faith breach of the duty to settle. E.g., Goddard, 173 Or.App. at 633 (reversing trial court's grant of summary judgment to insurer finding genuine issue of material fact whether excess judgment resulted from insurer's failure to seek settlement of action for policy limits to avoid excess judgment); Maine Bonding, 298 Or. 514 (1985) (affirming trial court's denial of directed verdict to insurer on claim for bad faith failure to settle where jury returned verdict for insured); Kriz v. Gov't Employees Ins. Co., 42 Or.App. 339 (1979) (reversing trial court's grant of summary judgment to insurer on claim for bad faith failure to settle finding genuine issue of material fact); Eastham v. Oregon Auto Ins. Co., 273 Or. 600 (1975) (overturning insured's jury verdict on claim for bad faith failure to settle arising from excess judgment in underlying jury trial because “the circumstances do not permit an inference of bad faith”); Alexander, 666 F.Supp.2d at 1185 (denying cross motions for summary judgment on claim for bad faith failure to settle finding genuine issues of material fact as to causation and damages); La Noue Dev., LLC v. Assurance Co. of America, No. 04-1527-KI, 2005 WL 1475599 (D. Or. 2005) (denying insurer's motion to dismiss claim for bad faith failure to settle even though claim was not in excess of policy limits). The outcomes in these cases align with the Oregon Court of Appeal's observation that it is not the court's role “to decide issues which are basically factual, like negligence or bad faith.” Kriz, 42 Or.App. at 350. Even so, on this record, HMI has established breach as a matter of law.

3. Causation

“The insured must prove that its damages were caused by the insurer's breach of its duty.” Alexander, 666 F.Supp.2d at 1207 (citing Goddard, 173 Or.App. at 639). Causation in bad-faith duty-to-settle claims is typically established after the insurer rejects a firm settlement offer within policy limits, proceeds to trial, loses, and a jury verdict is entered against the insured in excess of policy limits. See Maine Bonding, 298 Or. at 518-19; Georgetown Realty, 313 Or. at 109-110; Alexander, 666 F.Supp.2d at 1207 (“An insurer that, through bad faith or negligence, breaches its duty to the insured, may be liable to the insured for the amount of any excess verdict.”) (citing Goddard, 173 Or.App. at 637). Under those circumstances, the insured would not have become legally obligated to pay damages “but for” the insurer's bad faith failure to settle. See Alexander, 666 F.Supp.2d at 1207 (citing Goddard, 173 Or.App. at 639) (“An insured may prove causation through evidence that the injured party would have accepted a settlement within policy limits had one been offered.”).

However, courts also have recognized that an insured should be able to “shift[] the risk to the breaching insurer without first subjecting itself to potential financial ruin.” Nunn v. Mid-Century Ins. Co., 244 P.3d 116, 122 (Colo. 2010), as modified on denial of reh'g (Jan. 10, 2011) (citation omitted). “[T]he insured need not wait for the sword to fall and financial disaster to overtake.” Arizona Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 138 (1987). When the insured enters a stipulated judgment in response to the insurer's bad faith failure to settle, the question becomes whether the insurer's bad faith caused the insured to stipulate to liability. See Mut. of Enumclaw Ins. Co. v. Dan Paulson Const., Inc., 161 Wash.2d 903, 921 (2007) (en banc) (“[A]n insured should not be required to prove what might have happened had the insurer not breached its duty to defend in bad faith; that obligation rightfully belongs to the insurer who caused the breach.”). In this context, courts presume causation and ask whether the settlement amount was reasonable. See, e.g., Miller v. Kenny, 180 Wash.App. 772, 801-02 (2014) (“Once it is determined that the insurer acted in bad faith by failing to settle, typically the chief component of the insured's damage caused by that failure will be the insured's liability to the third party.”); United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 120 (1987) (en banc) (observing on a contract claim that “[t]he indemnitee need not establish that he would have lost the case; he need only establish that given the circumstances affecting liability, defense and coverage, the settlement was reasonable.”). This approach prevents forcing the insured into the “conflictive position” of advocating for its own liability, which is against public policy. Cf. N. Pac. Ins. Co. v. Wilson's Distrib. Serv., Inc., 138 Or.App. 166, 175 (1995); see also Fireman's Fund Ins. Co. v. Sec. Nat. Ins. Co., 44 Fed.Appx. 161, 162 (9th Cir. 2002) (“no court requires the insured to establish its own liability”) (cited pursuant to 9th Cir. Rule 36-3).

HMI further argues that even if causation were not presumed, it has established causation as a matter of law. HMI asserts “PCIC's breach on the eve of trial coupled with HMI's exposure in excess of $10 million compelled HMI to stipulate to judgment in the Underlying Lawsuit.” Pl.'s Mot. Summ. J. 42, ECF 48. At the time of the settlement, PCIC had not paid its expert witness and Baran had asked to bring on co-counsel because he had a family medical issue that would “seriously impact [his] availability” at trial. Kolta Decl., Ex. 3, at 1, ECF 59-3; id., Ex. 14, at 5, ECF 49-14. Senders, HMI's attorney, warned PCIC that failure to undertake settlement efforts would “expose HMI to an uncovered judgment which would be ruinous to HMI.” Kolta Decl., Ex. 10, at 2, ECF 49-10 (letter dated March 22, 2017); id., Ex. 14, at 4, ECF 49-14 (writing to PCIC that “HMI will suffer extreme financial harm” if PCIC fails to settle by letter dated March 27, 2017). Although 12 days remained before trial, HMI was not obligated to wait and hope that PCIC would suddenly rectify many months of claims-handling neglect.

PCIC raises no argument as to causation. As such, whether presumed or not, causation has been established as a matter of law.

4. Damages

“Most cases involving an insurer's breach of the duty to exercise due care when it undertakes to defend its insured concern a situation where ‘judgment is returned against the insured in excess of the policy limits.'” Alexander, 666 F.Supp.2d at 1208 (quoting Maine Bonding, 298 Or. at 518). There, damages are the “amount in excess of the coverage limit.” Id. However, when the insured settles and stipulates to judgment, the question becomes whether the settlement is a reasonable resolution of the underlying liability. See id.; Brownstone Homes, 358 Or. at 244 n.7 (discussing approaches taken to address reasonableness); Nunn., 244 P.3d at 123 (citing Miller v. Shugart, 316 N.W.2d 729, 735 (Minn. 1982)); Morris, 154 Ariz. at 120. “[A]lthough the standard to measure the reasonableness of the settlement has not been definitively settled in Oregon, this court, interpreting Oregon law, concluded that a settlement that is the process of good-faith, arms-length negotiations creates a rebuttable presumption of reasonableness.” Alexander, 666 F.Supp.2d at 1201 (citing Fireman's Fund Ins. Co. v. Sec. Nat. Ins. Co., No. CIV. 99-6274-TC, 2003 WL 26086177, at *4-*5 (D. Or. Mar. 21, 2003).

HMI asserts its damages are $2.5 million, the amount of the stipulated judgment, and argues it has established damages as a matter of law under Fireman's Fund-or by any other applicable standard. PCIC does not advocate for any particular standard, but asserts the settlement was unreasonable and the product of collusion.

In Fireman's Fund, the court held that “a settlement that is the process of good-faith, arms-length negotiations creates a rebuttable presumption of reasonableness.” Alexander, 666 F.Supp.2d at 1201 (citing Fireman's Fund, 2003 WL 26086177, at *4). Fireman's Fund was an indemnity action between two insurers arising out of a settlement agreement concerning their insureds' liability to the family of a man killed on a job site. There, a contractor cut a hole in a roof but did not cover it. The building owner constructed a makeshift cover, which proved inadequate when the man fell through hole. The man's family sued the contractor and the building owner, whose insurers settled the underlying lawsuit. The building owner's insurer paid more than the contractor's insurer to fund the settlement. The owner's insurer then sued for a declaratory judgment that the contractor's insurer should have funded the entire settlement. Fireman's Fund, 2003 WL 26086177, at *1-*2.

The court noted that “the standard by which the reasonableness of the settlement is to be measured has not been definitely settled by caselaw in this jurisdiction, ” but proceeded to conduct a two-step inquiry. Id. at *4. First, the court evaluated “the process involved in achieving the settlement, ” and after finding that process was “about as unassailable as one could hope to find, ” held that the settlement was “presumptively reasonable.” Id. The court also noted that another acceptable standard would be whether “the settlement is objectively fair and reasonable under the circumstances.” Id. at *4 n.7.

Second, the court asked, “whether any of the issues raised by defendant regarding the substance of the settlement are sufficient to rebut the presumption of reasonableness.” Id. at *4. Specifically, the court found the settlement was entitled to the presumption of reasonableness because the process employed to reach settlement included three full days of settlement negotiations involving a private mediator and a federal district judge with considerable experience in mediation, approval by the state probate court, and involvement of experienced trial attorneys on both sides who “both testified that the settlement was reasonable and the result of good-faith, arms-length negotiations.” Id. The court also found “no indication of collusion or fraud.” Id.

The court then rejected the defendant's argument that liability was highly questionable, which entailed essentially arguing the merits of the underlying case. The court acknowledged the possibility the defendant would have prevailed at trial, but found the defendant's “argument that liability was not definitively established does not detract from the objective reasonableness of the settlement.” Id. The court also rejected the defendant's argument that the plaintiffs insurer was “loose with the pursestrings [sic]” because it was unclear whether the plaintiffs insurer would have been able to recover at the time of settlement. Id. The court reiterated that there was no evidence of collusion or fraud to support the implication that the settlement amount was inflated. See Id. Ultimately, the court found the settlement was reasonable as a matter of law.

a. Presumption of Reasonableness

HMI argues the stipulated judgment is entitled to the presumption of reasonableness articulated in Fireman's Fund because the process involved in achieving the settlement was legitimate and the settlement itself is objectively reasonable. Indeed, the process employed to reach the settlement between HMI and KeyWay is sufficient to garner the presumption. The settlement was negotiated through a well-regarded construction law mediator. [XXXXX] Kolta Decl., Ex. 2, at 3, ECF 49-2 (assessing HMI was responsible for more than $10 million in damages). Commons' and HMI's expert testimony was the only expert testimony in the underlying record. Further still, PCIC's corporate representative acknowledged that “$2.5 million is within the range of the insured's potential liability at trial, according to Mr. Baran.” Kolta Decl., Ex. 1, at 16, ECF 49-1.

PCIC relies on Baran's pre-trial report to argue that the average total damages were substantially less than $1 million, and that the underlying claim was worth, and the range of HMI's exposure, was substantially less than policy limits. Def's Resp. 2, 5, 12, ECF 55. This argument boils down to the assertion that HMI would have prevailed at trial because HMI defense counsel Baran predicted only a 30% chance of an adverse verdict. However, this “argument that liability was not definitively established does not detract from the objective reasonableness of the settlement.” Fireman's Fund, 2003 WL 26086177, at *4. The settlement is entitled to a presumption of reasonableness.

b. No. Evidence of Collusion

PCIC has identified the potential for collusion but provides no actual evidence of collusion. Collusion is a “secret agreement or cooperation especially for an illegal or deceitful purpose.” Collusion, Merriam-Webster, https://www.merriam-webster.com/dictionary/ collusion (last visited March 12, 2021).

All that PCIC offers is the fact that HMI and Commons are owned and operated by [XXXXX]. Setting the fact that KeyWay (which is owned and operated by Brian Frank, not the [XXXXX] brought HMI into the underlying litigation, this common ownership and control gives rise to an “exceptionally high” potential for collusion. See Charter Oak, 958 F.Supp.2d at 1203. But PCIC does not rely on a single deposition transcript, declaration, phone call, email, or anything else-even the presence of a questionable litigation strategy-as evidence of any sort of illicit coordination for a deceitful purpose.

Take Charter Oak, for example. There, a developer hired a contractor to build a luxury residence. 958 F.Supp.2d at 1198-99. The developer and contractor were separate legal entities, but they were owned and controlled by the same individual. The contractor hired a HVAC and plumbing subcontractor, who named the contractor as an additional insured on its insurance policies. After problems developed during construction, the developer and contractor sued the subcontractor and others for negligence and other claims. Several other parallel actions were commenced. In response to some of that activity, the developer amended its complaint in the negligence action, turning the contractor from a plaintiff into a defendant. See id.

The court first noted that the situation had an “exceptionally high” potential for collusion because the parties were owned and controlled by the same individual. Id. 1203. The court then found the contractor colluded with the developer by engaging in three types of conduct. First, the contractor had allowed itself to be made a defendant in the negligence action. Second, the contractor worked directly with the developer and its attorneys and experts to create evidence favorable to the developer. Third, the contractor invoked a joint privilege for communications between itself and the developer. The court's analysis of this conduct incorporated a summary judgment record consisting of extensive declarations and deposition testimony. The court addressed specific litigation strategies, calculations, coordination in the construction of expert testimony, and specific telephone calls, conferences, and emails. See Id. at 1203-04. Taken together, the court found the contractor had “actively colluded” with the developer. Id. at 1203.

Here, again, all that PCIC has identified is the potential for collusion. That is not enough to overcome the presumption of reasonableness. For all these reasons, HMI has established the elements of its claim for bad-faith breach of the duty to settle as a matter of law.

HMI is entitled to $2.5 million on this claim. As noted above, HMI is entitled to $2 million on its claim for breach of contract. Because HMI's claims present alternative legal theories to recover for the same injury, HMI is entitled to a total of $2.5 million in damages. See Howard v. City of Coos Bay, No. 6:12-CV-01372-MC, 2014 WL 1917941, at *10 (D. Or. May 13, 2014), aff'd, 871 F.3d 1032 (9th Cir. 2017) (quoting Diversified Graphics, Ltd. v. Groves, 868 F.2d 293, 295 (8th Cir. 1989)) (stating rule against double recovery).

RECOMMENDATIONS

PCIC's first motion for summary judgment (ECF 36) should be denied as moot, its second motion for summary judgment (ECF 47) should be denied, HMI's motion for summary judgment (ECF 48) should be granted, and its motion for additional sanctions (ECF 64) should be denied. Judgment should be entered in HMI's favor for $2 million on the claim for breach of contract and $2.5 million on the claim for bad-faith breach of duty to settle, for a total of $2.5 million.

SCHEDULING ORDER

These Findings and Recommendations will be referred to a district judge. Objections, if any, are due Wednesday, March 31, 2021. If no objections are filed, then the Findings and Recommendations will go under advisement on that date.

If objections are filed, then a response is due within 14 days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendations will go under advisement.

NOTICE

These Findings and Recommendations are not an order that is immediately appealable to the Ninth Circuit Court of Appeals. Any Notice of Appeal pursuant to Rule 4(a)(1), Federal Rules of Appellate Procedure, should not be filed until entry of a judgment.