Dockins v. State Farm Ins. Co.

• Decision Date: 09 July 1999
• Citation: 329 Or. 20,985 P.2d 796
• Parties: Troy DOCKINS and Donna Dockins, Petitioners on Review, v. STATE FARM INSURANCE COMPANY, a corporation, Respondent on Review.
• Court: Oregon Supreme Court

985 P.2d 796

329 Or. 20

Troy DOCKINS and Donna Dockins, Petitioners on Review, v. STATE FARM INSURANCE COMPANY, a corporation, Respondent on Review.

(CC 9605-03556; CA A98608; SC S45747).

Supreme Court of Oregon.

Argued and Submitted January 7, 1999.

Decided July 9, 1999.

William A. Drew, Portland, argued the cause and filed the petition for petitioners on review. With him on the petition were Robert E.L. Bonaparte, and Bonaparte, Elliott, Ostrander & Preston, P.C., Portland.

Michael A. Lehner, of Lehner, Mitchell, Rodrigues & Sears, Portland, argued the cause and filed the brief for respondent on review.

Dean Heiling, Portland, filed a brief for amicus curiae Oregon Trial Lawyers Association.

Before CARSON, Chief Justice, and GILLETTE, VAN HOOMISSEN, DURHAM, KULONGOSKI, and LEESON, Justices.¹

GILLETTE, J.

As this insurance coverage dispute comes to this court, the sole issue concerns plaintiffs' right to collect attorney fees from defendant insurer. Before trial, the parties settled the substance of the action in plaintiffs' favor for $15,000. The parties left open the question of attorney fees to be resolved by the trial court if and when plaintiffs petitioned the court for such fees. After the parties had entered into a stipulated judgment reflecting their agreement, plaintiffs petitioned for attorney fees. Defendant objected. The trial court concluded that plaintiffs were not entitled to fees. The Court of Appeals affirmed. Dockins v. State Farm Ins. Co., 155 Or.App. 377, 963 P.2d 119 (1998). Plaintiffs petitioned for review. We allowed the petition and now conclude that plaintiffs are entitled to attorney fees. Accordingly, we reverse the decision of the Court of Appeals and the judgment of the trial court, and remand the case to the trial court for further proceedings.

In January 1996, plaintiffs discovered oil seeping into their home through the basement floor. They immediately contacted their homeowner's insurance carrier, defendant State Farm Insurance Company. After examining the property, a State Farm adjuster informed plaintiffs that, although their policy included coverage for accidental, direct damage to their home, it did not cover contaminated soil or damage to their home arising from contamination or natural water seeping through the foundation. The notice explained that State Farm had decided to deny coverage with the understanding that the groundwater on the property had not been affected and concluded: "We ask that you notify us immediately if you discover the groundwater is involved with the clean-up operation." The notice did not explain how or why such a discovery would be relevant.

On February 27, 1996, the Oregon Department of Environmental Quality (DEQ) sent a letter to plaintiffs informing them that DEQ had received notice of a petroleum release from a tank on their property and that, as the parties responsible for the property, they were required to clean up the release. The letter made no specific reference to groundwater contamination, and nothing in the record indicates that plaintiffs contacted State Farm about the letter.

On May 9, 1996, plaintiffs filed the present action against State Farm for breach of contract and declaratory relief. The contract claim alleged that DEQ had brought an administrative action against plaintiffs, based on petroleum residue on their property, that DEQ claimed that the petroleum had damaged the public groundwater, that plaintiffs would incur reasonable and necessary costs of not less than $6,000 to clean up the property, that the homeowner's policy issued by State Farm provided both general liability and property coverage for the losses alleged, and that, "although demand was made upon [State Farm], no defense to the DEQ's claim was provided, and no part of the sums owing have been paid." Plaintiffs also sought attorney fees under ORS 742.061, set out post, their costs of remedial action "in an amount to be proved at trial," and a declaration that State Farm was liable for those costs.

State Farm requested an extension of time to file its answer. In a letter to plaintiffs' lawyer, State Farm indicated that the complaint was its "first notice of there being a third party claim in this matter, as well as any ground water contamination."² On July 30, 1996, plaintiffs provided State Farm with a copy of DEQ's cleanup letter, together with copies of a number of cleanup bids. On August 16, 1996, State Farm filed an answer denying most of plaintiff's allegations and raising seven affirmative defenses. Those defenses included that the policy excluded liability coverage to property owned by the insured, that plaintiffs had failed to comply with policy conditions, that plaintiffs had failed to state a claim for damage to covered property, and that the policy excluded property damage coverage for damage caused by contamination, corrosion, and the like.

Plaintiffs moved for summary judgment on the issue of State Farm's duty to defend the DEQ action against plaintiffs. In response, State Farm argued, among other things, that plaintiffs had failed to submit any evidence that they had tendered defense of the DEQ action to State Farm or that State Farm had denied coverage. In reply, plaintiffs submitted the affidavit of plaintiff Donna Dockins, which stated that she had advised State Farm by telephone in March or April of 1996 that there appeared to be groundwater contamination at the site. Plaintiffs also argued that the complaint itself constituted a tender of defense of the DEQ action. The trial court denied plaintiffs' motion for summary judgment, ruling that, "at a minimum, there is a question of fact as to whether plaintiffs have satisfied the conditions precedent to their claim." The next day, on November 14, 1996, plaintiffs formally tendered defense of the DEQ action to State Farm, enclosing DEQ's February 27, 1996, letter. Several months later, in February 1997, plaintiffs reiterated their formal tender of defense, this time including a letter from DEQ that clarified that plaintiff's cleanup responsibilities extended to groundwater.

Shortly thereafter, the parties settled the action on the policy for $15,000 and reserved the question of attorney fees. A stipulated order and judgment to that effect followed. More than six months had elapsed between the date that plaintiffs filed their complaint and the date of the settlement.

Plaintiffs then petitioned for $18,725 in attorney fees under ORS 742.061, which provides:

"If 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 cost of the action and any appeal thereon."

State Farm opposed the petition, arguing that ORS 742.061 requires that an insurer be given six months to evaluate any claim before an action is commenced. State Farm contended that it was denied any opportunity to evaluate the claim in this case before plaintiffs filed their complaint, because plaintiffs never filed a proof of loss with respect to the DEQ action or otherwise gave sufficient notice of that claim (which State Farm styled as one for third-party liability coverage) until long after plaintiffs had filed their action. The trial court denied the petition for attorney fees for "failure to comply with ORS 742.061."

Plaintiffs appealed, arguing that they had complied with ORS 742.061—in particular, that they had submitted the equivalent of a proof of loss (thereby triggering the six-month settlement deadline in the statute) either by filing their action against State Farm on May 9, 1996, or by providing State Farm with cleanup bids on July 30, 1996. Plaintiffs also suggested that State Farm's argument that plaintiffs had failed properly to tender defense of DEQ's third-party claim was a "red herring," because their complaint contained both a first-party claim and a third-party claim. The Court of Appeals affirmed the trial court on the ground that the stipulated judgment for plaintiffs in the amount of $15,000 did not exceed defendant's $15,000 tender. The court held that "ORS 742.061 applies when a plaintiff obtains a money judgment in excess of an unaccepted tender * * *. Defendant offered $15,000, plaintiff[s] accepted the tender, and judgment was entered for that amount." Dockins, 155 Or.App. at 379, 963 P.2d 119.

In petitioning this court for review of the Court of Appeals' decision, plaintiffs focus their attention on the issue decided by the Court of Appeals and give less attention to the proof-of-loss issue on which the trial court relied. We are persuaded, however, that the proof-of-loss issue requires analysis, and we turn to it now.

State Farm notes that ORS 742.061 requires that there be no settlement within six months after filing a proof of loss. State Farm maintains that, when the third-party liability provisions of a policy are at issue, the six-month settlement period is triggered only when the insured formally tenders defense of the third-party action to the insurer, i.e., tender of defense of the third-party claim to the insurer is the "proof of loss." State Farm further contends that, because plaintiffs' action sought third-party coverage for DEQ's cleanup action against plaintiffs, it falls within that rule. State Farm contends that plaintiffs did not tender the defense of the DEQ action, i.e., file their proof of loss, until November 14, 1996, long after they had filed their action against State Farm, and that State Farm had accepted the defense of the DEQ claim and settled plaintiffs' policy claims within six months of that tender of defense. Given those facts, State Farm concludes that plaintiffs did not fulfill the first requirement for collecting attorney...