By: Brian Weeks, Partner

For nearly 50 years, the law in Oregon State was clear: insureds were precluded from bringing tort or negligence claims for an insurer’s violation of the standard of care expressed by the Oregon Unfair Claims Settlement Practices Act, ORS 746.230. In December 2023, the Oregon Supreme Court decided Moody v. Oregon Community Credit Union, 371 Ore. 772, 542 P.3d 24 (2023), and deviated from that precedent by allowing a beneficiary of a life insurance policy to bring a negligence claim for emotional distress damages against the insurer. In that decision, the Oregon Supreme Court implied that its ruling was limited in scope, but rulings since Moody have clearly established that negligence claims and extra-contractual damages in non-ERISA cases are the new norm in Oregon. This article outlines the expansion of the Moody decision by recent rulings and provides takeaways for life, health and disability insurers to help limit the impact of Moody and their exposure.

Case Law Leading to Moody

The Moody decision represents a significant shift in Oregon’s legal understanding of the relationship between insurers and insureds, particularly regarding the availability of tort-based remedies for mishandling claims. To fully understand the impact of Moody, it’s helpful to review the evolution of the relevant case law.

Before Moody, the case that formed the cornerstone of Oregon’s prior restrictive approach to insurance claim litigation was Farris v. U.S. Fidelity & Guaranty Co., 284 Ore. 453, 587 P.2d 1015 (1978) (Farris II). In Farris II, the Oregon Supreme Court addressed a situation where an insurer allegedly acted in bad faith in refusing to defend the insured against a third-party claim. The Court held that such bad-faith conduct constituted only a breach of contract, not a separate tort, and therefore did not permit recovery for emotional distress damages. The court emphasized the distinction between contract and tort and expressed reluctance to create new grounds for emotional distress damages, which it viewed as potentially opening the floodgates to indeterminate liability. The court further pointed out that the Oregon Unfair Claims Settlement Practices Act did not specifically allow for the recovery of emotional distress damages.  Decades of cases following Farris II followed and embraced this approach.

The Moody Decision

In Moody, the plaintiff was the beneficiary of a life insurance policy and surviving spouse of the deceased insured. She alleged that the insurer had negligently failed to properly investigate her claim for life insurance benefits and had violated ORS 746.230 when it denied the claim simply because marijuana was found in her husband’s system. She sought to recover damages for her emotional distress. The court held that Farris II did not apply and only precluded tort claims when the plaintiff had not alleged a tort distinct and separate from non-payment under the terms of the contract. The Court then, in short, ruled that Moody could pursue a negligence per se claim against the insurer for emotional distress damages without needing to establish a physical impact based on the alleged violations of ORS 746.230.

When closing its ruling, the Moody court attempted to limit its scope and cautioned that the ruling “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.” The opinion repeatedly pointed out that the plaintiff was the wife of the deceased insured and 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 indicated its “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.

Subsequent Case Law Establishes Moody’s Scope Is Not Limited

Based on the Moody Court’s representation that its opinion was limited, many may have hoped that the Court’s ruling would only extend to similarly situated life insurance claims. Subsequent case law interpreting Moody, however, has proven this hope to be misplaced and has significantly transformed the types of extra-contractual damages insurers will now face in Oregon on non-ERISA claims. Several federal and state court cases have invoked Moody to validate negligence per se claims against insurers based on ORS 746.230, but two U.S. District Court of Oregon rulings issued on the same day in late 2024 by Magistrate Judge Clarke highlight how the Supreme Court’s attempts to limit its ruling have failed and they have instead dramatically changed the legal landscape in Oregon.

• Mohammad v. Liberty Insurance Corporation No., 1:23-CV-000691-CL, 2024 U.S. Dist. LEXIS 197067, 2024 WL 4627462 (D. Or. Oct. 30, 2024)- Here, the court extended the Moodyruling and analysis to cases outside of life claims. Specifically, the Plaintiff alleged Liberty acted negligently by failing to properly investigate her property loss claim, causing emotional distress. Beyond extending the Moody analysis beyond life claims, the court also noted that the alleged emotional distress suffered by the plaintiff does not need to be as significant as that experienced by Moody to support a valid claim under Oregon law.
• LiquidAgents Healthcare, LLC v. Evanston Ins. Co., 2024 U.S. Dist. LEXIS 216655, 1:20-CV-02225-CL, 2024 WL 4874288 (D. Or. Oct. 30, 2024)- Here, the court expanded the types of damages recoverable under Moodybeyond emotional distress to include all types of extra-contractual damages recoverable in negligence claims. Specifically, the court allowed a healthcare staffing company plaintiff suing its insurer for refusing to defend or indemnify it in litigation over alleged sexual abuse to seek the recovery of lost profits caused by the insured’s failures.

Practical Takeaways to Minimize Moody’s Impact

Though Oregon courts are still grappling with the Moody ruling, plaintiffs will likely attempt to recover extra-contractual damages in nearly all non-ERISA claims litigation against life, health, and disability insurers. Insurers should take the following steps to limit arguments they violated ORS 746.230 and minimize their exposure to extra-contractual damages and other impacts of Moody:

1. Maintain a robust claims intake and documentation process: It is essential that insurers have a detailed, standardized process for receiving and documenting all claims. The process should result in the claimant being informed what is required for submitting a claim, how to submit the required information, and how the claim will be reviewed once submitted. Maintaining meticulous records of all communications, investigation steps, decisions, and justifications is also vital.
2. Conduct thorough, objective, and fair investigations: Insurers must conduct prompt, thorough, objective, and fair investigations. Steps should be taken to gather all relevant information, including medical records, police reports, and other documentation. Insurers should actively follow up on leads, verify information, and resolve inconsistencies. If an independent medical exam (IME) or medical records review is required, select qualified and unbiased physicians. When conducting an IME, clearly communicate the scope and purpose of the IME to the claimant.
3. Have proactive and transparent communication with the claimant: Insurers need to provide regular, proactive updates to claimants on the status of their claim. Reasons for any delay or need for additional information should be clearly explained. When a claimant raises questions or concerns, the insurer should address them promptly.
4. Make consistent and fair claims decisions: Insurers should consistently and fairly apply their policy language. If legal questions arise during a claim, claims personnel should have the ability to address those questions with a manager or someone in the legal department. Communications should clearly document the reasons for any claim denial or partial payment. It’s not uncommon for a claimant or his medical provider to fail to respond to some requests for records. If a claim is denied without obtaining all requested medical records, the communication should outline the fact that the decision is based solely on the records the insurer is able to obtain and outline the reasonable efforts undertaken to obtain the missing records.
5. Provide regular training to claims personnel: Insurers should provide comprehensive training to all claims personnel on proper claims handling procedures, relevant laws and regulations, and ethical considerations.
6. Prepare for increased litigation costs in Oregon: The cost of litigating and resolving non-ERISA matters in Oregon is likely to increase because of Moody. Additional discovery into negligence allegations and extra-contractual damages will be necessary. Dispositive motions attacking negligence claims may be possible. Finally, plaintiffs will likely expect some settlement value to be attributed to their negligence claim, increasing the total cost of resolving matters in Oregon.
7. Engage outside counsel with experience handling Oregon matters: Insurers should engage outside counsel that have extensive experience handling the legal issues faced by life, health and disability companies litigating cases in Oregon. Partnering with experienced outside counsel who tracks and provides updates on important legal and regulatory changes will also help the insurer satisfy the above recommendations. Additionally, experienced outside counsel are often more efficient and cost-effective, helping offset the increased litigation costs caused by Moody.

About the author:

Brian Weeks is a partner in the Portland and Seattle offices of O’Hagan Meyer who uses a breadth of in-house and law firm experience to help his clients obtain outstanding results. Prior to joining O’Hagan Meyer, Brian worked in-house for a national provider of employee benefits managing the company’s enterprise litigation and labor & employment law compliance. He has extensive experience handling employee benefit litigation matters under ERISA and state laws alleging failure to pay benefits, breaches of fiduciary duty and prohibited transactions, excessive fees, misrepresentation claims, and ERISA interference/retaliation matters. He has also represented clients and insurance carriers in audits and market conduct exams.