Oregon Supreme Court Affirms that Policyholders May Sue Insurance Companies for Emotional Distress

Oregon Supreme Court Affirms that Policyholders May Sue Insurance Companies for Emotional Distress (and Likely Other Extra-Contractual Consequential Damages) Where the Insurer Engages in Unfair Practices Such as Unreasonable Delay, Inadequate Investigation, and Underpayment of Claims

On December 29, 2023, the Oregon Supreme Court issued its long-awaited opinion in Moody v. Oregon Community Credit Union, SC Case No. S069409. View opinion here. The new opinion affirms the Oregon Court of Appeals’ groundbreaking January 26, 2022 opinion, which for the first time recognized a private cause of action to remedy an insurer’s violation of the standard of care every insurer owes to every Oregon policyholder under ORS 746.230.

In his January 26, 2022 Moody opinion, Judge Landau of the Oregon Court of Appeals found that, because ORS 746.230 creates a duty of care that insurers owe to their Oregon policyholders, an insurer’s negligent breach of that duty gives rise to a cause of action for money damages independent and distinct from any cause of action arising out of the insurer’s breach of the insurance policy itself. Moreover, Judge Landau specifically found that where the insurer’s violation of the statutory standard of care deprives the policyholder of the “peace of mind” that is the principal reason insurance consumers purchase insurance policies, the aggrieved policyholder may seek emotional distress damages from the insurer.

The Moody defendant appealed Judge Landau’s decision, and the insurance industry spilled considerable ink on amicus briefs roundly condemning Judge Landau’s legal reasoning. The Oregon Supreme Court heard oral argument on the appeal in November 2022.

More than 14 months later, the Oregon Supreme Court rejected the insurer’s appeal and affirmed Judge Landau’s decision. Although the Oregon Supreme Court agreed entirely with the result reached by the Court of Appeals in recognizing the availability of emotional distress damages in connection with a cause of action arising out of an insurer’s violation of the ORS 746.230 standard of care, its reasoning differed in one significant respect from Judge Landau’s.

Specifically, whereas Judge Landau characterized the newly recognized cause of action as a claim of “negligence per se” distinct from garden variety negligence, expressly rejecting the argument that such a cause may only lie in connection with a separate and independent common-law negligence claim against the insurer, the Oregon Supreme Court found that the newly recognized cause is simply a special case of an ordinary negligence claim and does, in fact, require that a common-law negligence claim “otherwise exist.” However, the Oregon Supreme Court determined that, in light of the nature of the relationship between policyholder and insurer, it is reasonably foreseeable that an insurer’s violation of the statutory standard of care will create a risk of harm to a legally protected interest of the policyholder of sufficient importance to give rise to a claim of negligence. The Oregon Supreme Court further found the policyholder’s legally protected interest in freedom from the unfair practices proscribed by ORS 746.230 to be both of a kind and of sufficient importance to warrant subjecting insurance companies to liability for the policyholder’s consequential emotional distress damages.

As the Oregon Supreme Court observed, its decision brings Oregon in line with the majority of jurisdictions which have recognized for years that where an insurer engages in unfair claims settlement practices, its conduct can cause policyholders significant harm beyond or apart from deprivation of the benefits of the insurance contract itself. To seek damages for such harm, policyholders need not prove that their insurers acted in bad faith in unreasonably delaying payments, failing to perform adequate investigation of claims, or deliberately underpaying valid claims, but rather need only show that the insurer’s conduct was in violation of the statutory standard of care.

In Moody, the only extra-contractual damages at issue were emotional distress damages. However, it is well worth noting that the court expressly left open the question whether other extra-contractual consequential damages could be available in connection with the newly-recognized cause of action. Indeed, given the court’s clear instruction that the claim sounds in negligence and is co-extensive with a common-law negligence claim, the new opinion provides no reason to doubt that the entire range of damages ordinarily available in connection with a negligence claim is likewise available in connection with a so-called Moody claim premised on violation of ORS 746.230.

As a result, the newly issued Moody opinion represents a significant victory for Oregon’s insurance consumers. Prior to Moody, policyholders who suffered financial catastrophe caused by their insurers’ unreasonably delayed payment (or significant underpayment) of insurance benefits had no recourse beyond recovery of the amounts owed under the policy, and no way to repair the damage caused by the delay in paying the full amount owed. Now, under Moody, the Oregon courts have a mechanism for holding insurers accountable for the harms caused by their unfair claims settlement practices.