Insurer Finds New Way To Commit Bad Faith

Oregon, like many states, has long adhered to the rule that emotional distress damages are generally not recoverable for breaches of contract. Leave it to a recalcitrant insurance company to convince the Oregon Supreme Court that some breaches are sufficiently egregious that the distress they cause can be actionable.

Christine Moody’s husband was accidentally shot and killed during a camping trip. His life was insured for all of $3,000, but the defendant insurer still grasped for any available straw to avoid paying the claim. The policy excluded coverage for death “caused by or resulting from” the decedent being under the influence of a narcotic. Because Mr. Moody had traces of marijuana in his system at the time of the accident, the insurer decided, apparently without any additional evidence or investigation, that the death resulted from the cannabis and denied the claim.

Under Oregon law, first-party claimants have never been allowed to recover for any emotional distress caused by the denial of their claim, in accordance with the general rule that a contract breach is not an independent tort that gives rise to extracontractual liability. Not so any longer. By a 4-3 vote, the Oregon Supreme Court allowed Mrs. Moody the opportunity to pursue her claim.

It remains the case in Oregon that there is no statutory basis for a first-party bad faith tort claim, but if a plaintiff satisfies a three part test, she can potentially recover for her emotional distress. She must satisfy the court that:

The Oregon statute supports the existence of a legally protected interest;
Recovery of damages for emotional distress is consistent with standards applicable in other tort cases and does not create an undue burden; and
Recovery is in accord with public policy.

Will this decision unleash the floodgates for first-party insureds to recover extra-contractually? Stay tuned and watch this space.

The case is Moody v. Oregon Community Credit Union, 371 Or. 772 (Or. 12/292023)