This article originally appeared in the January 23, 2017, edition of the Daily Journal of Commerce.
The duty to defend and the duty to indemnify are separate duties, with the duty to defend being broader and, given the cost of litigation, many times more valuable than the duty to indemnify. But on what is the duty based: the factual allegations in the complaint, or legal theories of recovery such as negligence? Can other evidence or facts not in the complaint be considered? What if the complaint includes other allegations obviously not covered by the policy? On December 8, 2016, in West Hills Development Co. v. Chartis Claims, Inc. (“West Hills”), the Oregon Supreme Court affirmed Oregon’s broad duty to defend, holding that “regardless of ambiguity or lack of clarity [in the complaint], the duty to defend is triggered if the complaint’s allegations, reasonably interpreted, could result in the insured being held liable for damages covered by the policy.” In reaching its holding, the West Hills Court re-affirmed the so-called “four-corners” rule, wherein the duty to defend is determined by reference to two, and only two, documents: the complaint and the insurance policy.
Typical Policy Language
A typical insurance policy states that the insurer “will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.” Under this typical language, the duty to defend turns on the allegations against the insured made in the “suit.” West Hills tested the contours of this policy language in the context of a construction defect claim where a homeowners association sued a general contractor for, among other things, the alleged negligence of its subcontractors, without actually naming the subcontractors specifically.
What triggers a duty to defend?
Under Oregon law, as reaffirmed in West Hills, the factual allegations in the complaint, not the legal theories for recovery, trigger the duty to defend. In West Hills, West Hills served as general contractor for a townhome development in Sherwood, Oregon. Its subcontractor, L&T Enterprises, Inc., installed the porch columns. As typical in construction contracts, West Hills required L&T to procure insurance naming West Hills as an additional insured under the policy. L&T obtained a policy that covered West Hills only for potential liabilities arising out of L&T's "ongoing operations," not “completed operations.”
After construction was complete, the homeowners association sued West Hills, alleging that the townhomes suffered from serious defects resulting in water intrusion damage. The association claimed that West Hills had negligently failed to oversee the work of its subcontractors, although L&T was not explicitly named in the complaint. West Hills tendered the claim to L&T’s insurer, as a named additional insured under the policy. The insurer refused to defend West Hills on two grounds: (a) the association only alleged negligent conduct by West Hills itself; and (b) the association’s alleged damages arose from “completed operations” rather than “ongoing operations” of L&T.
The Oregon Supreme Court disagreed with both arguments. As to the insurer’s first argument, the Court observed that the association’s complaint could reasonably be read as seeking damages from West Hills on account of its subcontractor’s allegedly defective work. As to the insurer’s second argument, the Court observed that the complaint alleged damages occurred by the time the owners bought their townhomes. As such, according to the Court, it was possible the damages occurred during L&T’s “ongoing operations.”
In other words, the Court broadly interpreted the allegations and found the potential that damages occurred earlier, and thus it did not foreclose the possibility that damage occurred during L&T’s on-going operations. Based on this analysis, as long as a complaint does not expressly state facts that explicitly rule out coverage, the insurer has a duty to defend.
In sum, using the four-corners approach, the Court held the insurer had a duty to defend West Hills; the allegations in the association’s complaint, reasonably interpreted, could result in West Hills being held liable for damages covered by the policy.
Although in and of itself the decision in West Hills does not blaze new ground, moving forward, West Hills does raise some salient points. First, a general contractor should review their subcontractor’s policies to make sure they are getting the additionally insured coverage bargained for under their subcontracts. Assuming the general contractor desired more than “ongoing operations” coverage under the additional insured endorsement, much of West Hills could have been avoided had the general contractor reviewed L&T’s additional insured endorsement and confirmed the desired coverage was obtained. Second, ambiguous pleadings may turn “ongoing operations” coverage into “completed operations” coverage. Depending on how broad or ambiguous a plaintiff makes its allegations, an insurer’s denials based on “ongoing operations” may no longer be valid under Oregon law.
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