The Oregon Supreme Court, in Long v. Farmers Insurance Company of Oregon, ruled that “when an insured files an action against an insurer to recover sums owing on an insurance policy and the insurer subsequently pays the insured more than the amount of any tender made within six months from the insured’s proof of loss, the insured obtains a ‘recovery’ that entitles the insured to an award of reasonable attorney fees” under ORS 742.61. 360 Or. 791, 793 (2017). This ruling potentially exposes an insurer to an attorney fee award even where the insurer settles the claim before trial.

The court interpreted ORS 742.061, which provides, in part:

[I]f settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff’s recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.

The courts have previously held that proof of loss can include the complaint. Dockins v. State Farm Mut. Ins. Co., 329 Or. 20, 27, 985 P.2d 796 (1999) (“statutory meaning of the term ‘proof of loss’ encompasses a range of events or submissions, including a complaint that commences an action against the insurer”).

In Long, the insured homeowner suffered extensive damage from a water loss on December 20, 2011. Farmers voluntarily paid the amounts it determined were due for the actual cash value of the insured’s losses and her mitigation expenses. The insured submitted a proof of loss that included estimates that “far exceeded” the sum paid by Farmers.

By January 2013, the parties had not resolved the insured’s claim, and the plaintiff-insured filed suit. The plaintiff alleged that “Farmers had not paid the sums due under her policy of insurance and had failed to submit to an appraisal process that she had demanded.” Id. The trial court ordered the parties to submit to and complete the appraisal process. After the appraisal, Farmers made two additional payments to the insured for the actual cash value and mitigation costs that appraisers had assigned.

Shortly before trial, in February 2014, the plaintiff submitted a proof of loss for the replacement cost of her losses. Farmers voluntarily paid the sum it determined constituted the replacement cost of plaintiff’s losses. The case proceeded to trial, and judgment was entered for Farmers.

Nonetheless, plaintiff filed a petition for attorney fees under ORS 742.061. Plaintiff argued that she had filed an action against Farmers and thereafter obtained a greater sum from Farmers than it had tendered within six months after she had submitted her initial proof of loss. She argued that the payments Farmers made after she had filed this action constituted a “recovery” as that term is used in the statute. Farmers argued that recovery, as used in the statute, was limited to a monetary judgment, which the plaintiff-insured did not get in this case.

The Oregon Supreme Court determined that the statute must be interpreted in light of its function, and recovery must be read to include mid-litigation payments such as the ones made by Farmers in this case. The court stated the purpose of the statute was to discourage expensive and lengthy litigation, to encourage settlement, and to ensure that the benefit of an insurance policy is not diminished or entirely lost to attorney fees when an insurer wrongly contests its obligations. The court held that the plaintiff was entitled to attorney fees up until Farmers made the actual cash value payments following arbitration. Because Farmers promptly paid the replacement cost after receiving the insured’s proof of loss and the insured recovered nothing further thereafter, the insured was not entitled to attorney fees incurred in obtaining the replacement cost. In other words, plaintiff was not entitled to attorney fees for Farmers’ normal adjusting of the loss.

For insurers, this ruling increases the potential exposure to attorney fee awards by expanding the circumstances in which fee awards are available to include out of court settlements and/or mid-litigation payments. Insurers should consider whether to include an attorney fee waiver with such payments.