John Bachofner, Shareholder, Bullivant Houser Bailey PC
Anyone involved in uninsured/underinsured motorist ("UM/UIM") claims should carefully review today's Oregon Supreme Court decision in Bonds v. Farmers Insurance Co. of Oregon, which involves the Two-Year Limitation provision for UM/UIM claims. Although the Court affirms the Court of Appeals' conclusion that the insurer's ORS 742.061(3) consent to arbitration letter did not "formally institute arbitration" under ORS 742.504(12)(a)(B), it did so on different grounds, which may have a much broader impact on the availability of attorney fees in UM/UIM cases.
In Bonds, the insurer sent the claimant an ORS 742.061(3) "safe harbor" letter that stated, "Should we disagree on the liability/damages owed by the underinsured motorist, [defendant] consents to submit this matter to binding arbitration." The claimant did not respond by requesting arbitration, and failed to file suit against the insurer, or tortfeasor, within two years after the accident. When the two year period had passed, the insurer informed the claimant's attorney that UIM benefits would no longer be available and denied the claim. The claimant filed an action seeking UIM benefits, and the trial court held that the "safe harbor" letter sent by the insurer qualified as formal institution of arbitration under ORS 742.504(12)(a)(B), making the claim timely. The Court of Appeals disagreed, holding that formal institution of arbitration did not require mutual agreement, but instead required formality consistent with the Uniform Arbitration Act and ORS 36.635(1). It reversed the trial court and held that no UIM claim was available because the Two-Year Limitation period had expired before either party had formally instituted arbitration or otherwise complied with ORS 742.504(12)(a)(B).
The Oregon Supreme Court agreed with the Court of Appeals that formal initiation of arbitration does not require mutual agreement and could be initiated by either party, but rejected application of ORS 36.635 to initiation of UM/UIM arbitration claims. Because an automobile policy cannot constitutionally bind the parties to arbitration, the Uniform Arbitration Act does not apply to the initiation of such arbitration. Instead, the Supreme Court held that formal initiation of arbitration requires an explicit offer or demand to arbitrate from a party that expressly begins that process.
Turning to the "safe harbor" letter sent by Farmers, a majority of the court concluded that Farmers "did not obviously and expressly state that it was offering to arbitrate." It indicated a willingness to arbitrate, depending on whether there was disagreement over the liability and damages. Accordingly, Farmers did not "formally institute" arbitration proceedings within two years from the date of the accident, as required by ORS 742.504(12)(a)(B), and the UIM claim was time-barred.
While the majority decision supports application of the Two-Year Limitation where a contingent type of "safe harbor" letter was sent, it now creates doubt whether such a contingent form of "safe harbor" letter will avoid attorney fee exposure under ORS 742.061(3). To avoid attorney fees, ORS 742.061(3)(b) requires that an insurer consent to submit the case to binding arbitration within six months after proof of loss. As pointed out in a footnote by the dissent, "the standard operating procedure that claims representatives have followed for many years...may be legally insufficient, thus exposing [insurers] to unanticipated claims for attorney fees."
Insurers should anticipate claimants seeking attorney fees by challenging any "safe harbor" letter that contains a contingency. More importantly, insurers should immediately review their form of consent to arbitration for effectiveness to avoid attorney fee exposure. Ultimately, insurers may be forced to decide between unequivocally consenting to arbitration (avoiding attorney fee exposure, but effectively waiving application of the Two-Year Limitation), or making consent to arbitration contingent (preserving application of the Two-Year Limitation, but at the potential risk of attorney fee liability for a filed claim).
Download a free copy of the unenhanced Lexis version of the decision in Bonds v. Farmers Insurance Co. of Oregon.
If you need to revise your "safe harbor" letter, or have any additional questions about attorney fees, UM/UIM claims or other first party insurance coverage matters, please contact John Bachofner in Vancouver at 360.906.6340 or in Portland at 503.499.4637.
John Bachofner's practice focuses on litigation, day-to-day advice, and complex written opinions on insurance coverage, regulatory, products liability, business, bankruptcy, and creditors' rights issues. He has represented individuals and organizations in a variety of arbitration forums, agency hearings, and state and federal courts, as well as a variety of transactions.
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