The Duty to Indemnify When The Insured Settles: Who Has The Burden of Proof?

When an insured’s liability is established at trial, the duty to indemnify is based on the facts proven at trial.  Ledford v. Gutoski, 319 Or. 397, 403, 877 P.2d 80, 84 (1994).  However, when the insured enters a settlement, the duty to indemnify is determined on the facts that form the basis for the settlement.  Bresee Homes, Inc. v. Farmers Ins. Exch., 353 Or. 112, 126, 293 P.3d 1036, 1044 (2012).  Unlike a trial, a settlement agreement may not be documented by a transcript of proceedings or pleadings.  Accordingly, determining coverage for liability incurred in a settlement can present a unique challenge, which raises the question of whose challenge it is.

Oregon law courts have long placed the initial burden of proving coverage on the insured.  Lewis v. Aetna Insurance Co., 264 Or. 314, 316, 505 P.2d 914 (1973).  Nevertheless, insureds in Oregon have attempted to shift this burden to insurers where coverage is sought for a settlement.  See, e.g., American Medical Response Northwest., Inc. v. ACE Am. Ins. Co., 31 F.Supp.3d 1087, 1097 (D. Or. July 10, 2014).  In American Medical, the federal district court observed that “Oregon courts have not addressed which party bears the burden of proof to apportion a settlement that encompasses both covered and non-covered claims.”  Id.

Some jurisdictions place the burden of this apportionment on the insurer if it wrongfully denies the duty to defend.  See, e.g., Sentinel Ins. Co. v. First Ins. Co. of Hawai’i, 76 Haw. 277, 297, 875 P.2d 894, 914 (1994) (“[W]here the insured seeks indemnification after the insurer has breached its duty to defend, (1) coverage is rebuttably presumed, (2) the insurer bears the burden of proof to negate coverage, and (3) where relevant, the insurer carries its traditional burden of proof that an exclusionary clause applies.”).  However, the basis for the reallocation of this burden may not be consistent with Oregon law, under which “the duty to defend is different from the duty to indemnify, and the breach of one does not, in and of itself, establish the breach of the other,” and “the duty to indemnify cannot be extended by estoppel.”  Nw. Pump & Equip. Co. v. Am. States Ins. Co., 144 Or. App. 222, 227, 925 P.2d 1241, 1243 (1996).

Ultimately, the district court in American Medical concluded that the insured had the burden to prove that the underlying settlements were for covered claims.  31 F. Supp.3d at 1098.  The district court found that “[t]here appears to be no reason to assign the burden to defendants to prove which claims were covered and which were not,” as the insurer’s contractual obligation was to indemnify the insured “for covered claims,” and, as a party to the settlements, the insured was “in the best position to know the bases for the settlements in the underlying cases.”  Id.

For insurers, the initial burden of proof can be significant in coverage litigation, especially where coverage is sought for a settlement agreement to which the insurer was not a party.  As the American Medical court observed, the insured may be in the best position to know the basis for the settlement.  It will be interesting to see whether or not Oregon courts will follow this same approach.