On September 22, 2016, the Oregon Supreme Court rejected an insurer’s attempt to separately relitigate issues of liability previously decided in an underlying lawsuit. The decision in Fountaincourt Homeowners’ Ass’n v. Fountain Dev., LLC, 360 Or. 341 (2016), reaffirms the settled liability paradigm that “an insurer cannot, in a subsequent proceeding, retry its insured’s liability, or alter the nature of the damages awarded in that proceeding.” Id.

Central to the Court’s decision was the insurance policy’s insuring agreement itself, and its standard language requiring the insurer to pay the policyholder’s legal liabilities arising from “bodily injury” or “property damage.” That agreement, the Court reasoned, must be construed from a contractual perspective in the subsequent coverage action; not from a tort perspective as was liability in the underlying case. As the Court explained:

At the center of this dispute is a provision in the insurance contract stating that [the insurer] “will pay those sums that the insured becomes legally obligated to pay as damages because of * * * ‘property damage’ to which this insurance applies.” What the insured is legally obligated to pay as damages can be determined only by reference to the underlying action, which determined the insured’s legal obligation to pay damages. Thus, in the subsequent proceeding, the insurer is not, as [it] contends, entitled to second-guess or retry “the nature of Sideco’s liability.” That is not, however, because it is “collaterally estopped” from doing so. Rather, that is because the subsequent proceeding requires the court to evaluate—as a matter of contract law—what, precisely, the insured has become legally obligated to pay as damages in the prior proceeding, in order to determine whether the policy covers those damages.

The Court concluded, therefore, that in subsequent coverage proceedings, an insurer is not entitled to “second-guess or retry” the nature of its policyholder’s liability.

The Oregon Supreme Court ruling is a significant reminder that, once liability has been determined, insurers may not relitigate the liability on which a claim for coverage is based. This is particularly important in cases where the insurer does not participate in the underlying defense, or defends under a reservation of rights, where the insurer may contend a lack of knowledge about the underlying liability. Policyholders should be prepared to resist efforts to relitigate liability post-judgment and, likewise, should resist even seemingly benign attempts to discover the underpinnings of any judgment or settlement for which coverage is being sought.