It is commonly thought that Oregon law recognizes an insurance company's tort liability for bad faith in third party claims but not in first party actions. A closer examination of Oregon law reveals that this common understanding is not entirely accurate.

Generally, in Oregon, bad faith liability in third party claims only arises where the liability carrier assumed defense of the insured. Georgetown Realty, Inc. v. Home Ins. Co., 313 Or 97, 106, 831 P2d 7 (1992). The insurer is not liable in tort to its insured for failing to properly defend the insured where the insured did not assume the defense of the third party claim. Farris v. U.S. Fidelity and Guaranty, 273 Or 628,542 P2d 1031 (1975) and Warren v. Farmers Ins. Co. of Oregon, 115 Or Ap 319, 326, 838,P2d 620 (1992).

Oregon has generally limited an insurer's liability to its insured in first party insurance claims to breach of contract damages, even where the insurer violated the Unfair Claims Settlement act, ORS 746.230. Employers Fire Ins. Co. v. Love It Ice Cream Co., 64 Or App 784, 670 P2d 160 (1983). However a first party insurer may be held liable for an independent tort such as interference with perspective economic advantage. Id.

The Oregon Supreme Court summarized the limitations on bad faith liability in Oregon in Farris. 273 Or at 634-637. The court held that the liability insurer had no tort liability to its insured where it had not assumed defense of the claim. The court noted that where a liability insurer does assume responsibility for defense of the claim, it has both a fiduciary duty and a duty of good faith. The insurer may be sued in tort for a violation of either duty. In Employers Fire Ins. Co. v. Love It Ice Cream, the court recognized that a first party insurer could be held liable for a tort independent of the breach of contract. 64 Or App at 792. In that case, the insurer was liable for tortuous interference with perspective economic advantage. Id.

A first party insurer may be held liable for a violation of the implied duty of good faith arising out of the contract without breaching an express provision of the contract. McKenzie v. Pacific Health and Life Ins. Co. 118 Or Ap 377, 380-81 (1983). A first party insurer can be held liable in tort for damages, including noneconomic damages for emotional distress caused by the physical harm resulting from the insurers breach of the insurance contract. Id. at 381. An insurer that wrongfully denies benefits owed under the contract may be held liable for the resulting physical injury and emotional distress. Health insurers, including PIP insurers and UIM carriers, are potentially liable for injuries caused or conditions worsened by their denial or delay of medical treatment.

"Reprinted by permission of the Oregon State Bar. This paper was originally published in 49 Practical Solutions to Real Problems in Insurance Cases (Oregon CLE 1999) Chapter II. Copies of this publication are available from the Oregon State Bar, 5200 SW Meadows Road, Lake Oswego, OR 97035 (503) 684-7413."