An amendment to ORCP 36 dealing with reservations of rights became effective January 1, 2012.  The amendment overlays a rule requiring disclosure of the existence and contents of an insurance policy.  The amendment states that, upon the request of an adverse party, a party shall disclose:  “[t]he existence of any coverage denial or reservation of rights, and identify the provisions in any insurance agreement or policy upon which such coverage denial or reservation of rights is based.”  ORCP 36B (2)(a)(ii).  The new rule is different than ORCP 36B(2)(a)(i), which requires disclosure of the “existence and contents” of any insurance agreement or policy that could apply to liability owed.  Thus, while the text of ORCP 36B(2) requires a party to disclose the contents of an insurance policy, there is no corresponding obligation to produce the contents of a coverage denial or reservation of rights.  This distinction was not unintentional.

The “legislative history” of the amendment shows it was a response to complaints that parties were moving forward with expensive litigation – even though there was no hope of recovery – because plaintiffs had no procedural means to learn if insurance was available.   In considering a solution to this problem, a Committee of the Council on Court Procedures looked to Washington rules.

Washington’s CR 26(b)(2)(ii) requires production of any denial or reservation of rights letters.  However, the Committee was concerned that production of actual letters (and at times, even the insurance provisions themselves) could require production of information protected from disclosure by the work product doctrine or privilege.  The Committee noted that whether a party has coverage is likely not protected from disclosure, but the investigation undertaken by the insurer to determine the reasons that coverage does not exist might indeed be so protected.  Therefore, as the Committee’s minutes indicate, if a party felt a letter contained privileged information, the party could state its objection and reveal only the existence of a reservation or denial letter, a compromise approach that would allow plaintiffs to learn of the existence of a coverage issue so they could conduct their own investigation and determine whether pursuing litigation was worthwhile.  In this respect, ORCP 36B(2)(a)(ii) may now function like a limited interrogatory:  a respondent may simply state that a denial or reservation of rights letter exists and list the applicable provisions of the policy.

The Committee was especially concerned about the disclosure of the potential application of an “intentional act” or “intentionally caused harm” exclusion. The Committee thought this might fall under an aspect of coverage, rather than a specific exclusion, because if an intentional act is committed, or harm is intentionally caused, there may not be an “occurrence,” defined as an “accident,” which is necessary to establish coverage under most liability insurance policies.  The Committee’s minutes noted that defense counsel could simply refer to the policy provision discussing the need for an “occurrence” (the coverage grant) if the insurer was relying on the lack of an occurrence and the intentional acts exclusion.  The Committee acknowledged that part of the role of defense counsel is protecting the insured’s best interests, which might make it appropriate to craft an “obfuscatory” response when necessary – as indicated in the Committee’s minutes.  (Of course, counsel defending under an acts, errors and omissions policy cannot simply refer to the coverage grant since this type of policy does not require an “occurrence.”  They are left solely with an exclusion and will need to be more creative).

The Committee appropriately identified the major red flag potentially presented by the amendment – being forced to reveal when the insured acted intentionally.  That said, are there circumstances where even revealing the existence of a reservation of rights or denial might compromise the insured’s defense?  Consider the following example:  A woman in a bar decides to intentionally run over another patron with her car.  The subsequent collision leads to a lawsuit under the insured’s automobile policy.  When this insurer conducts an investigation of the “accident,” it learns about the woman’s intent to run over the patron.  The insurer subsequently issues a reservation of rights letter citing the lack of an occurrence and the intentional acts exclusion.  Plaintiff’s counsel, thinking this is a run of the mill auto case involving negligent driving, nonetheless issues a request for production under ORCP 36B(2)(a)(ii).  Arguably, the insurer’s investigation is work product and therefore the basis for the reservation of rights may be protected.  Nevertheless, under the rule, the existence of the reservation must be disclosed.  Under these circumstances, merely revealing the existence of the reservation of rights letter under an automobile policy case may clue plaintiff into the fact that there is more than meets the eye with this “accident.”  This could lead to the insured’s exposure to civil liability of a much broader and more severe nature, punitive damages, and potential criminal liability.

Under this hypothetical, would defense counsel need to object to any ORCP 36B(2)(a)(ii) request in its entirety?  The objection itself may be enough to alert plaintiff’s counsel to the need for further investigation.  Arguably, the facts of the hypothetical might be discovered anyway.  But defense counsel will want to be careful that he or she is not in some way responsible for the discovery.

Defense counsel are not the only ones who need to be wary of inadvertently harming their client by complying with a request under ORCP 36B(2)(a)(ii).  Insurers may also want to consider this risk when drafting denial and reservation of rights letters, to protect their insureds and comply with disclosure requirements under the Ferguson line of cases and applicable statutory law.