Charter Oak Fire Insurance Company et al v. Interstate Mechanical, Inc. et al

Filing 376

ORDER: ADOPTING Findings and Recommendation 358 . See order for full text. Signed on 7/23/13 by Judge Michael W. Mosman. (dls)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
PORTLAND DIVISION

THE CHARTER OAK FIRE
INSURANCE COMPANY, et al.,
No. 3:10-cv-01505-PK
Plaintiffs,
OPINION AND ORDER
v.
INTERSTATE MECHANICAL, INC.,
et al.,
Defendants.

MOSMAN, J.,
On May 7, 2013, Magistrate Judge Papak issued his careful and well-reasoned Findings
and Recommendation (“F&R”) [358] in the above-captioned case. He recommended that (1)
Travelers’1 motion for partial summary judgment against Glacier for breach of the cooperation
clause [238] and Continental’s joinder in that motion [281] be granted; (2) Glacier’s motion for
summary judgment regarding certain occurrences [284] be denied; (3) Travelers’ motion for
partial summary judgment regarding the duty to indemnify for the Lake County action [222] and
Continental’s joinder in that motion [279] be denied; (4) Travelers’ motion for partial summary
judgment regarding pre-2007 policies [240] be granted; (5) Travelers’ motion for partial
1

I adopt the designated terms used in the F&R.

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summary judgment concerning “occurrence,” “property damage,” and various exclusions [256]
and Continental’s joinder in that motion [279] be denied; (6) Travelers’ motion for partial
summary judgment based on the pollution exclusion [334] be denied; (7) Travelers’ motion for
partial summary judgment as to the 2009–2011 policies [331] be denied; (8) Glacier’s motions to
stay [211, 273] be denied; (9) Tygart’s motion to stay [263] be granted; (10) Glacier’s motion to
amend [216] be denied; (11) Glacier’s Rule 56(d) motion and supplemental motion to compel
[282] be denied as moot; (12) Continental’s motion to limit scope of deposition [183] be granted;
and (13) the remaining discovery motions be denied as moot [191, 196, 198, 200, 206, 226, 276].
Glacier filed objections [360], and Travelers [361] and Continental [364] responded to those
objections.
Upon review, I agree with Judge Papak’s recommendation, and I ADOPT the F&R [358]
as my own opinion. I write separately only to clarify Judge Papak’s finding that Glacier failed to
assert a claim for bad faith breach and to discuss Glacier’s recent Confession of Judgment in the
Flathead County action.

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LEGAL STANDARD
The magistrate judge makes only recommendations to the court, to which any party may
file written objections. The court is not bound by the recommendations of the magistrate judge,
but retains responsibility for making the final determination. The court is generally required to
make a de novo determination regarding those portions of the report or specified findings or
recommendation as to which an objection is made. 28 U.S.C. § 636(b)(1)(C). However, the
court is not required to review, de novo or under any other standard, the factual or legal
conclusions of the magistrate judge as to those portions of the F&R to which no objections are
addressed. See Thomas v. Arn, 474 U.S. 140, 149 (1985); United States v. Reyna-Tapia, 328
F.3d 1114, 1121 (9th Cir. 2003). While the level of scrutiny under which I am required to
review the F&R depends on whether or not objections have been filed, in either case, I am free to
accept, reject, or modify any part of the F&R. 28 U.S.C. § 636(b)(1)(C).
DISCUSSION
In Judge Papak’s thorough F&R, he laid out the factual background and relevant legal
standards controlling this dispute. I will not rehash them here. Instead, I focus my discussion on
two issues: (1) Glacier’s failure to assert a claim for bad faith breach, and (2) Glacier’s recent
Confession of Judgment in the Flathead County action.
I.

Bad Faith Breach
Glacier’s principal objection to the F&R is that it was error for Judge Papak to rule on the

insurers’ claim for breach of the cooperation clause before resolving Glacier’s properly-asserted
claim for bad faith failure to defend. (Objs. [360] at 20.) I agree with Judge Papak that Glacier
has not properly asserted a claim for bad faith.
To state a claim for relief, a pleading must contain “a short and plain statement of the
claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a). “[A] complaint must
3 – OPINION AND ORDER

contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)). A pleading that offers only “labels and conclusions” or “‘naked
assertion[s]’ devoid of ‘further factual enhancement’” will not suffice. Id. (quoting Twombly,
550 U.S. at 555, 557).
In Glacier’s answer to Travelers’ fourth amended complaint, it asserts the affirmative
defenses of “Estoppel/waiver” and “Unclean hands.” (Answer [173] at 8.) In addition, Glacier’s
counterclaims against Travelers and cross-claims against Continental state only that “Glacier
asserts all contractual and extra contractual claims it has pursuant to Montana and other
applicable law.” (Id. [173] at 13.) In Glacier’s pleadings, it does not allege any factual support
for these naked assertions. Rather, Glacier argues that a bad faith claim is implicit in estoppel
and unclean hands. To satisfy Iqbal and Twombly, however, even implicit claims require
sufficient factual support. Therefore, I find that Glacier has not pleaded a bad faith claim.
The question then becomes whether Glacier may assert a bad faith claim for the first time
at summary judgment. As Judge Papak noted, the law is clear in the Ninth Circuit that “absent
prejudice,” an affirmative defense may be raised for the first time on a motion for summary
judgment. Rivera v. Anaya, 726 F.2d 564, 566 (9th Cir. 1984). Glacier has discussed the issue of
bad faith in briefing on various motions, including a motion for partial summary judgment. (See,
e.g., Mem. [284] at 28 (“CWIC and Charter Oak/Travelers have breached their duty to defend
and breached the implied covenant of good faith and fair dealing. Both are liable as a matter of
law for bad faith and the consequent coverage by estoppel.”).) Specifically, Glacier has argued
that Travelers undermined its defense by retaining a firm to defend Glacier that had inadequate
resources for the job, conditioning the replacement of the inadequate firm on obtaining a release

4 – OPINION AND ORDER

of malpractice liability from Glacier, failing to pay the more capable Datsopolous firm for five
months after it substituted the inadequate firm, and actively resisting discovery in this
declaratory relief action. Absent prejudice, therefore, I should permit Glacier to raise its bad faith
claim.
In my view, however, allowing Glacier to raise a bad faith claim in its motion for partial
summary judgment would prejudice Travelers and Continental. This prejudice is best
demonstrated by comparing the insurers’ conduct with that of Glacier. Travelers pleaded failure
to cooperate as a bar to coverage in all four relevant complaints. (See, e.g., Fourth Amend.
Compl. [154] ¶¶ 36(h), 54.) True, Travelers and Continental did not supply sufficient factual
support in their complaints, but they at least identified the specific issue in their pleadings. As a
result, when Travelers and Continental have repeatedly raised the issue with extensive factual
support in briefing, Glacier has known that it needed to respond to it and has been able to do so
with its own evidence.
In contrast, Glacier has never pleaded bad faith, despite seeking leave to amend its
pleadings in other ways. Indeed, this seems to have been a deliberate sleight of hand to advance
Glacier’s interests. In its unauthorized reply to objections, Glacier states the following:
Travelers’ prior material breach is a defense to Travelers contract claims, and
Glacier pled unclean hands as an affirmative defense against these carriers.
Further Glacier has a fully formed claimed for breach of contract, fraud, and
breach of the Montana Unfair Trade Practices Act against these two carriers in the
Lake County case in which all other necessary parties are presently joined. . . .
For these carriers to say that Glacier has not sued them for breach of contract is
incorrect. Glacier has done so in Lake. Glacier has not done so here because
Glacier could only do so by sacrificing its claim that this Court was the wrong
forum.
(Reply [369] at 27 (emphasis added).) Thus, Glacier concedes that it has chosen not to clearly
assert a bad faith claim in order to pursue what it has viewed as a stronger argument, that this

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Court is the wrong forum.2 Therefore, Glacier has attempted to have it both ways: It has chosen
not to actually plead bad faith to advance its overall strategy, but it has made arguments
regarding bad faith when such arguments have been beneficial. This approach failed to put
Travelers and Continental on notice that Glacier was actually raising a claim for bad faith.
Therefore, allowing Glacier to raise a bad faith claim for the first time at summary judgment
would prejudice Travelers and Continental. As a result, I agree with Judge Papak that Glacier
has not properly asserted a claim for bad faith.
II.

Confession of Judgment
On May 7, 2013, the very day Judge Papak issued his F&R, Glacier signed a Confession

of Judgment in the Flathead County action. According to its terms, Glacier authorized the entry
of judgment against it and in favor of Abbey/Land in the amount of $12,000,000. (Resp. [361]
Ex. 3.) Glacier signed this Confession of Judgment without providing notice to or seeking
consent from either Travelers or Continental. (McCracken Decl. [372] ¶¶ 2–3.) Glacier’s
decision to sign this Confession of Judgment has implications for my analysis of both the
cooperation clause and the voluntary assumption of obligation clause.
A.

Cooperation Clause

Courts draw a distinction between situations in which the insurer unconditionally
assumes liability for coverage and those in which the insurer defends under a reservation of
rights. See 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d, §199:48 (3rd ed.,
2007). If the insurer unconditionally assumes liability for coverage, a cooperation clause
prohibiting settlement without the insurer’s consent forbids such a settlement. If the insurer

2

Glacier has vaguely raised the affirmative defenses of “Estoppel/waiver” and “Unclean hands” in this
action. It is unclear why asserting a bad faith claim as well would jeopardize Glacier’s argument that this is the
incorrect forum.

6 – OPINION AND ORDER

defends under a reservation of rights, however, an insured can enter into a settlement without the
insurer’s consent, so long as the agreement is made fairly, with notice to the insurer, and without
fraud or collusion on the insurer. See United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 119
(1987).
Here, Travelers and Continental are defending under a reservation of rights. As a result,
if Glacier’s Confession of Judgment were made fairly, with notice to the insurers, and without
fraud or collusion, it would not bar coverage. It is incontrovertible, however, that Glacier did not
provide notice to the insurers prior to settling with Abbey/Land on May 7, 2013. (McCracken
Decl. [372] ¶¶ 2–3.)
In an effort to avoid a finding that Glacier breached the cooperation clause, it appears to
argue that notice of any settlement negotiations in the Flathead County action would be
sufficient. To that end, Glacier highlights settlement offers it made to Lemons, Tygart, Interstate,
Travelers, and Continental between August 2012 and December 2012. (Cushman Decl. [373] ¶¶
3–10.) On October 10, 2012, for example, Glacier demanded that Travelers and Continental
settle the Flathead County action for $10,000,000 or it would stipulate to a judgment in favor of
Abbey/Land for $15,000,000. (Id. [373] Ex. F-1.) In anticipation of Judge Papak’s omnibus
hearing on April 3, 2013, Glacier made an additional settlement offer to the same parties on
March 30, 2013. None of these settlement negotiations directly involved Abbey/Land, and none
of the settlement offers was accepted. Furthermore, there is no evidence that Glacier provided
notice regarding settlement negotiations of any kind between March 30, 2013, and May 7, 2013,
the day Judge Papak issued his F&R and Glacier signed the Confession of Judgment. In fact,
Glacier has suggested that signing the Confession of Judgment was a direct response to Judge
Papak’s adverse F&R. (Reply [369] at 12 (“Any general contractor would accept such an offer

7 – OPINION AND ORDER

from an owner, particularly where the insurers . . . are defending under a reservation of rights,
and have gotten an order such as the one at issue here.”).)
In my view, the earlier settlement negotiations between Glacier, Lemons, Tygart,
Interstate, Travelers, and Continental did not provide Travelers and Continental with notice of
Glacier’s Confession of Judgment in favor of Abbey/Land. Therefore, I conclude that Glacier
was not at liberty to enter into settlement with Abbey/Land.
This conclusion reinforces Judge Papak’s finding that Glacier breached its duty to
cooperate. An insured breaches a cooperation clause if the insurer establishes three elements:
“(1) the insurer diligently sought the insured’s cooperation; (2) the insured willfully failed to
cooperate; and (3) the insured’s failure to cooperate prejudiced the insurer.” Assurance Co. of
Am. v. MDF Framing, Inc., 2008 WL 361289, at *3 (D. Or. Feb. 7, 2008) (citing Rosalez v.
Unigard Ins. Co., 283 Or. 63, 581 P.2d 945 (1978); Bailey v. Universal Underwriters Ins. Co.,
258 Or. 201, 474 P.2d 746 (1970)). The Confession of Judgment is conclusive proof both that
Glacier willfully failed to cooperate and that its failure to cooperate has prejudiced Travelers and
Continental. For this additional reason, therefore, I agree with Judge Papak’s finding that Glacier
breached its duty to cooperate.
B.

Voluntary Assumption of Obligation Clause

In the F&R, Judge Papak noted that there appear to be no Oregon cases discussing
voluntary assumption of obligation clauses. As a result, he followed courts from other
jurisdictions, which tend to analyze these clauses under the general rubric of the duty to
cooperate. See Roberts Oil Co. v. Transam. Ins. Co., 113 N.M. 745, 752, 833 P.2d 222, 229
(1992). He therefore applied the same three-part test for determining whether the insured’s
breach of the cooperation clause barred coverage to determine whether the insured’s breach of

8 – OPINION AND ORDER

the voluntary assumption of obligation clause barred coverage. In so doing, Judge Papak
correctly found that the voluntary assumption of obligation clause had not yet been triggered
when he issued his F&R. (F&R [358] at 21–25.)
Taking Judge Papak’s cue, Glacier immediately signed the Confession of Judgment. Now
there is no question that Glacier has willfully and voluntarily assumed an obligation and that, by
so doing, it has prejudiced Travelers and Continental. Therefore, I conclude that Glacier has
breached the voluntary assumption of obligation clause and is thus barred from coverage.

CONCLUSION
Travelers’ motion for partial summary judgment against Glacier for breach of the
cooperation clause [238] and Continental’s joinder in that motion [281] are GRANTED.
Glacier’s motion for summary judgment regarding certain occurrences [284] is DENIED.
Travelers’ motion for partial summary judgment regarding the duty to indemnify for the Lake
County action [222] and Continental’s joinder in that motion [279] are DENIED. Travelers’
motion for partial summary judgment regarding pre-2007 policies [240] is GRANTED.
Travelers’ motion for partial summary judgment concerning “occurrence,” “property damage,”
and various exclusions [256] and Continental’s joinder in that motion [279] are DENIED.
Travelers’ motion for partial summary judgment based on the pollution exclusion [334] is
DENIED. Travelers’ motion for partial summary judgment as to the 2009–2011 policies [331] is
DENIED. Glacier’s motions to stay [211, 273] are DENIED. Tygart’s motion to stay [263] is
GRANTED. Glacier’s motion to amend [216] is DENIED. Glacier’s Rule 56(d) motion and
supplemental motion to compel [282] are DENIED AS MOOT. Continental’s motion to limit

9 – OPINION AND ORDER

scope of deposition [183] is GRANTED. The remaining discovery motions are DENIED AS
MOOT [191, 196, 198, 200, 206, 226, 276]. Finally, Travelers’ motion for leave to file
additional dispositive motion [362] is DENIED AS MOOT.
IT IS SO ORDERED.
DATED this 23 day of July, 2013.

/s/Michael W. Mosman
____
MICHAEL W. MOSMAN
United States District Court

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