Oregon Hopes ‘Fleming Fix’ Will Clear the Clutter

To the nearly endless list of issues over which trial lawyers and insurance companies have waged legal battles, we can now add…

Point sizes and capitalization?

Fortunately for the insurance industry, Oregon’s nearly two-year experiment with printing etiquette in insurance policies appears to be near an end.

Unless a court says otherwise.
If its consequences weren’t so potentially dire, not to mention annoying, for insurers, the Oregon Supreme Court’s 1999 decision in Fleming v. USAA could have been the source of more than a few belly laughs. It probably was, but not in the insurance industry.

If nothing else, Fleming showed the ingenuity of some plaintiff attorneys and the
occasional fallibility of the reasoning of justices who hold the title of “supreme.”

Fleming involved the denial of a claim by USAA filed by a homeowner whose tenants had operated a methamphetamine lab on the homeowner’s property that had caused damage to the residence. USAA denied the claim, citing the policy’s pollution exclusion, which, USAA contended, precluded payment for damages caused by smoke from the meth lab.

Fleming sued, arguing that the pollution exclusion was not properly highlighted in the policy, namely by a headline with all capital letters and a point size of at least 8. The plaintiff or, more correctly, the plaintiff’s attorney, found a section in the Oregon Insurance Code that requires such headlines preceding exclusionary language.

There was one small problem with that argument, which the Supreme Court believed. The requirement was for fire insurance policies; Fleming had a multi-peril homeowners policy, which, of course, provided coverage for fire losses.

Suddenly, according to Oregon’s highest court, the headline requirement pertained to any exclusion in any property policy, personal or commercial, that included coverage for fire damage.

“Even the plaintiff admitted that the policy wasn’t ambiguous about coverage,” said Jack Munro, lobbyist for the American Insurance Association in Oregon, adding that the Supreme Court’s decision “was contrary to the way the regulator and the Legislature interpreted the law.”

The Fleming ruling forced insurers to file new policy forms for anything that included coverage for fire loss. For the Insurance Services Office, it meant filing 30 new policy forms—for dwelling coverage alone, because the exclusionary language had to be headlined in a different way in the basic policy and the trailing endorsements. ISO wound up filing hundreds of new forms for the various property coverages.

“This was very inconvenient,” Jim Masek, regional director in ISO’s San Francisco office, said dryly.

One of the many ironies of the Fleming decision was that it came at a time when the Oregon Insurance Division was making a push for more readable, consumer-friendly insurance policies. Fleming created the opposite—policies that were significantly longer and loaded with redundancies. Insurers were forced, or chose, to repeat exclusionary language several times in policies.

There were other fallouts besides inconvenience and costs.

“One of the effects of Fleming was that there were companies that weren’t putting new products on the market because they were waiting to see what was going to happen,” Munro said.

Masek said ISO has yet to file its newest homeowners form in Oregon, although it was filed last year in most states.

“We didn’t want to go through the work” while Fleming was still in effect, Masek said. “We knew this was going to be looked at by the Legislature.”

Unfortunately for fans of expediency, the Fleming decision came soon after the Oregon Legislature adjourned in 1999. Because Oregon lawmakers meet every other year, it would be at least 18 months before a Fleming “fix” measure could be introduced in the Legislature.

The fix came in the form of SB 440, now known as SB 440A, which passed out of the Senate by a 24-5 vote and soon after made it to the House floor, where it is expected to pass. There seems little doubt that Gov. John Kitzhaber will sign SB 440A, given that his Insurance Division is a staunch supporter of the measure.

SB 440A would make it clear that fire policies, and only fire policies, are subject to the headline requirement (8-point type, all capital letters) for exclusions. Multi-peril policies that include fire coverage would be exempt.

Assuming SB 440A passes—the trial lawyers appear to be sitting out this fight—will insurers go through the hassle and expense of filing new, post-Fleming property forms?

“I assume that having a much cleaner form will be an incentive to make new filings,” said Michael Harrold, Northwest regional manager for the National Association of Independent Insurers.

In addition, the Oregon Insurance Division, as part of its policy readability initiative, might force insurers to replace their highly redundant, Fleming-inspired forms.

But would SB 440A truly be a fix? After all, Oregon’s highest court found ambiguity in the previous laws.

“Everybody thought they had it covered the first time,” Harrold said.