For years, Oregon has been known as a jurisdiction that generally does not recognize "bad faith" claims against insurers, absent the existence of a "special relationship" outside of the insurance policy. Historically, an insured's remedies against its insurer are limited to contractual remedies, which do not include damages for emotional distress. The recent decision by the Oregon Supreme Court in Moody v. Oregon Community Credit Union, 371 Or. 772 (Or. 2023), marks a notable shift in the legal landscape concerning private rights of action under the Unfair Claims Settlement Practices Act (ORS 746.230). The Moody Court overturned precedent finding that under limited circumstances an insured can assert a common law negligence claim and recover emotional distress damages where an insurer violates ORS 746.230 and undermines public policy. The practical impact of this landmark case is still unfolding, but we know that it will lead to far more litigation involving first party claims that can no longer easily be disposed of via motions to dismiss.
Background of the Case
Christine Moody's husband was accidentally shot and killed while camping. Moody filed a claim for life insurance benefits, which the insurer initially denied based upon a policy exclusion for deaths "caused by or resulting from the decedent being under the influence of any narcotic or other controlled substance." Moody's husband allegedly was under the influence of marijuana at the time of his death.
Moody sued the insurer for breach of contract, breach of an implied contractual covenant of good faith and fair dealing, and negligence. She claimed both economic damages as well as emotional distress damages. The insurer responded by filing motions to dismiss the claims for negligence and the implied covenant of good faith and fair dealing as well as moving to strike the allegations relating to the emotional distress claim, alleging that Moody's sole remedy under Oregon law was contractual, based upon the historical precedent. The trial court granted the motions, leaving only the breach of contract claim.
Court of Appeals
Moody appealed the trial court's dismissal of her negligence and breach of implied contractual covenant of good faith and fair dealing claims along with the striking of her allegations of emotional distress damages. The Court of Appeals acknowledged that "ordinarily, the sole remedy for a party's failure to meet a contractual obligation is an action for breach of the contract"…, in specific circumstances, an injured party also may have a negligence claim, quoting the following passage from Georgetown Realty v. The Home Ins. Co., 313 Or. 97, 106, 831 P.2d 7 (1992):
“ ‘When the relationship involved is between contracting parties, and the gravamen of the complaint is that one party caused damage to the other by negligently performing its obligations under the contract, then, and even though the relationship between the parties arises out of the contract, the injured party may bring a claim for negligence if the other party is subject to a standard of care independent of the terms of the contract.’ ” Moody, 317 Or. App at 237, 505 P.3d 1047 (emphasis added).
The Court of Appeals then observed that an independent standard of care may arise out of a special relationship between the contracting parties, but it also may be expressed in a statute or administrative rule. Id. at 237-38, 505 P.3d 1047.
The Court of Appeals reversed the decision of the trial court and held that Moody could proceed with her claim for negligence per se based upon the insurer's alleged violations of ORS 746.230(1) and seek emotional distress damages.
In so holding, the Court of Appeals distinguished several seminal Oregon cases that, up until that point, had been relied upon by insurers to reject first party claims by policyholders. See Abraham v. T. Henry Construction, 230 Or. App. 564, 217 P.3d 212 (2009), aff’d on other grounds, 350 Or. 29, 249 P.3d 534 (2011); Georgetown Realty v. The Home Insurance Co., 313 Or. 97, 831 P.2d 7 (1992); Farris v. U.S. Fidelity, 284 Or. 453, 587 P.2d 1015 (1978).
By way of background, prior to the Court's holding in Georgetown Realty, the foundation for that decision had seemingly been established. In Farris v. U.S. Fidelity & Guaranty Company, 284 Or. 453 (1978) the Court found that a plaintiff was unable to recover emotional or punitive damages because the proper remedy at law for an insurer's refusal to defend was a contractual claim as opposed to one brought in negligence/tort. The Court of Appeals reiterated that general principal in Employers' Fire Ins. Co. v. Love It Ice Cream Co., 64 Or. App 784 (1983), where it found that a potential action against an insurer's supposed violation of ORS 746.230 could not sound in tort: "…the violation of ORS 746.230(1)(f), which requires insurers to settle claims promptly and in good faith where their liability is reasonably clear, does not give rise to a tort action." 64 Or. App 784 at 790.
Question for the Oregon Supreme Court
The Oregon Supreme Court affirmed the holding of the Court of Appeals but provided a slightly differing and narrow reasoning.
First, the Court noted that ORS 746.230 was not intended to create a statutory tort. A negligence per se claim is "not a separate type of negligence claim with its own elements; rather, negligence per se is “simply shorthand for a negligence claim in which the standard of care is expressed by a statute or rule.” Abraham II, 350 Or. at 35 n 5, 249 P.3d 534. To make out a claim of negligence per se and take advantage of a presumption of negligence arising from a statutory violation, a plaintiff must show not only that the statute sets out an applicable standard of care, but also that the plaintiff has an existing negligence claim. Thus, the Court's first question was whether Plaintiff's negligence claim was "legally cognizable."
Common Law Negligence Claim Requires a Legally Protected Interest
Moody based her emotional distress damage claim on her contention that the insurer's conduct violated her statutorily protected interest "in avoiding the wrongful denial, delay, and evaluation of her insurance claim." To preserve a negligence claim, a plaintiff must show:
- "The defendant's conduct caused a foreseeable risk of harm.
- The risk is to an interest of a kind that the law protects against
- The defendant's conduct was unreasonable in light of the risk.
- The conduct was a cause of the plaintiff's harm, and
- The plaintiff was within the class of persons and plaintiff's injury was within the general type of potential incidents and injuries that made defendant's conduct negligent." Solberg v. Johnson, 306 Or. 484, 490-91, 760 P.2d 867 (1988).
Although freedom from physical harm is a generally recognized legally protected interest in Oregon, Philbert v. Kluser, 360 Or. 698, 703 385 P.3d 1038 (2016), mental distress has not traditionally been characterized in the same fashion. In the past, Oregon courts have only permitted common-law tort claims for emotional distress if one of the following occurs:
- "The defendant also physically injured the plaintiff
- The defendant intentionally caused the emotional distress, or
- The defendant negligently caused foreseeable serious emotional distress and also infringes some other legally protected interest". Id.
In the current case, the Court considered whether Moody had a legally protectable interest that was sufficient to hold the defendant accountable for emotional distress damages. Moody alleged that the insurer entered a contract with her husband to pay $3,000 in the event of his death. She also alleged that after her husband died in an accident, the insurer negligently refused to pay the claim and failed to conduct a reasonable investigation thereby "not attempting in good faith to promptly and equitably settle a claim in which the insurer's liability has become reasonably clear." She then claimed that the insurer knew or should have known that its actions or inactions would create "an unreasonable risk of harm to the beneficiaries of its insured…. And that as a result of this negligence she had fewer financial resources to navigate the loss of a bread-winning spouse." Per her allegations, this in turn caused her extreme anxiety and emotional distress.
Given these allegations, the legally protected interest that Moody claimed was the reasonable investigation and prompt payment of her husband's life insurance benefits. As established in relevant case law, Oregon courts have been reluctant to allow recovery for emotional injury alone but have permitted it in limited circumstances. The insurer argued that recognizing this as a legally protectable interest would create an "indeterminate and potentially unlimited liability and that the interest in question is sufficiently important and circumscribed to support the imposition of liability for emotional distress damages." Philibert, 360 Or at 704, 707.
Moody claimed a legally protected interest was supported by the text and legal obligations in ORS 746.230 to protect insureds from exactly the kind of wrong that confronted her. Defendant countered asserting that the legislature did not intend to permit a common-law negligence claim against a first-party insurer. Farris II, 371 Or at 824.
The Statute and Underlying Public Policy
Here, Moody claims that the legislature intended to prohibit unfair claims processing practices with ORS 746.230. That statute specifically prohibits:
- Refusing to pay claims without conducting a reasonable investigation based on all available information; and
- Not attempting in good faith, to promptly and equitably settle claims in which liability has become reasonably clear.
The court reasoned that Moody's claim aligned with the purpose of ORS 746.230 and intended to prevent unfair claims settlement practices. It determined that permitting common-law negligence claims would further enhance the purpose of the statute rather than interfere with it. In sum, the Court found that reading the statute in this manner worked toward potentially improving fair compliance practices and deterring insurers from engaging in prohibited activities.
Supreme Court Attempted to Limit Undue Burden on Defendants
The Court emphasized the limited scope of its analysis and reiterated that the relationship between the parties alone is not determinative. The Court has also looked to other factors in deciding whether a legally protected interest is sufficient to subject a defendant to liability for emotional distress damages. Using the decision in Philibert as a guide, the Court reasoned, "Life insurance is intended to provide peace of mind and necessary resources for a beneficiary, and a life insurer's unreasonable denial of promised benefits can certainly cause the beneficiary serious emotional injury. There are objective indicators of such injury in that the death of a spouse is a significant loss, and that loss is compounded when the death is sudden and the person who loses the spouse is dependent on the spouse for their financial well-being. The spousal relationship and the need for insurance benefits can objectively be established, as can the unreasonable conduct of the insurer."
Moody was financially dependent on her husband. The insurer's alleged failure to investigate and promptly pay Moody insurance benefits under her husband's life insurance policy was framed as a significant interest to which she was reasonably entitled. The Oregon legislature has made it clear that the public policy of the state is to protect insurance beneficiaries against unfair processing and payment of insurance claims. If a surviving spouse suffers emotional distress due to an insurer's failure under the unfair practices law, the violation is sufficient to merit protection of the beneficiary.
Therefore, the Court concluded that Moody successfully presented a legally protected interest that was sufficient to impose liability on the insurer for emotional distress damages and that insurers not only promise to provide financial recovery to surviving beneficiaries, but also the peace of mind that comes with knowing that those benefits will be promptly paid. It stated, "The insurance claim practices that ORS 746.230 requires and the emotional harm that foreseeably may occur if that statute is violated are sufficiently weighty to merit imposition of liability for common-law negligence and recovery of emotional distress damages." Id. at 805.
On the plus side for insurers, however, the Court did limit the scope of this decision and cautioned that it "does not make every contracting party liable for negligent conduct that causes purely psychological damage, nor does it make every statutory violation the basis for a common-law negligence claim for emotional distress damages." It noted that very few contracting parties promise to protect potential plaintiffs from the type of emotional harm that can be inflicted by failing to properly distribute life insurance proceeds to beneficiaries. Therefore, the Court held that this narrow decision does not unfairly expose insurers or other defendants to liabilities that they may not have expected or had the opportunity to guard against.
Despite acknowledging the narrow scope of its decision, the Court's ruling in Moody has significant implications for bad-faith insurance practices in Oregon. By recognizing the importance of emotional distress claims stemming from unfair denial of insurance benefits, the Court has opened the door to additional potential bad faith litigation. Moody signals a significant shift in the legal landscape providing policyholders with another tool to address unfair claims settlement practices under ORS 746.230.