Summary analysis of (a few) insurance coverage issues arising in mediation of construction defect cases
July, 2005
1. Time on the Risk
A. How is time on the risk calculated when multiple carriers are involved?
(1) Insured's Position
Time on the risk is generally a question of allocation among triggered policies. The analysis assumes an "actual injury" trigger, which is the coverage trigger adopted by Oregon courts. St. Paul Fire & Marine Ins. Co., Inc. v. McCormick & Baxter Creosoting Co., 324 Or 184, 200-202, 923 P2d 1200 (1996). Under the "actual injury" trigger, so long as some property damage occurs during an insurer's policy period, that policy is triggered.
From the insured's perspective, allocation is an issue only among insurers; it is not an issue between insured and insurer. When a policy is triggered, the insurer agrees to "pay those sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage." Accordingly, once property damage in a particular policy period is established, the insured may pursue that period's insurer to the full extent of its limits without regard to resolution of the allocation issue. The question of "equitable contribution," then, is one the paying carrier may raise with the insured's other carriers. Called the "joint and several liability" rule, it is the rule adopted in a majority of states, Anderson, Stanzler, Masters, Insurance Coverage Litigation § 4:07 (2nd Ed. 2004), including California and Washington. Aerojet-General Corp. v. Transport Indem. Co., 17 Cal 4th 38, 948 P2d 909 (1997); American National Fire Insurance Co. v. B&L Trucking and Construction Co. Inc., 134 Wash2d 413, 951 P2d 250 (1998). The minority rule, on the other hand, prorates the indemnity obligation among all implicated insurers. Although Oregon's appellate courts have not addressed the issue, Judge Haggerty recently adopted the pro rata approach in California Ins. Co. v. Stimson Lumber Co., 2004 WL 1173185 (D. Or. 2004) (Quoting Olin Corp. v. Ins. Co. of Am., 221 F3d 307, 322 (2d Cir. 2000)).
Until the Oregon Supreme Court adopts an allocation model, insureds will advocate for joint and several liability, like the allocation models adopted by California, Washington, and many other jurisdictions.
(2) Insurer's Position
Subject to their terms, conditions, limitations and exclusions, liability insurance policies generally provide that the insurer will "pay those sums that the insured becomes legally obligated to pay as damages because of * * * ‘property damage' to which this insurance applies." Based on this policy language, Oregon courts have applied an "actual injury" trigger for determining what damage is covered by an insurance policy, when property damage occurs over a multiple-year period. St. Paul Fire & Marine Insurance Co. v. McCormick & Baxter Creosoting Co., 324 Or 184, 201, 923 P2d 1200 (1996) ("McCormick & Baxter"); see also California Ins. Co. v. Stimson Lumber Co., 2004 WL 1173185, at *12 (D Or) ("Stimson").. Thus, coverage may be triggered under every policy that was in effect during the periods in which damage to property actually occurred. Stimson at *13. The burden is on the insured to show property damage during each policy period. Id.
Oregon State courts have not directly address the issue of allocation among more than one "triggered" policy year. Policy language would support a requirement that the insured establish the specific damage that occurred in each policy period, before an insurer can be held responsible for indemnifying the insured for that loss. However, some courts outside Oregon, and the Stimson court, have allowed pro-rata allocation over multiple policy periods - based on some equitable, objective basis, such as time on risk - if the insured can establish "that some damage occurred over the period of time covered by the insurers' policies." Id., citing Sentinel Ins. Co., Ltd. V. First Ins. Co. of Hawaii, Ltd., 875 P2d 894, 915 (Hawaii 1994); see also Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F2d 1212 (6th Cir 1980), reh'g granted, in part, clarified, 657 F2d 814 (6th Cir 1981), cert. denied, 454 US 1109, 102 S Ct 686, 70 LEd 2d 650 (1981).
B. How do "Other Insurance" clauses affect allocation?
(1) Insured's Position
Most CGL policies contain some form of "other insurance" clause that is designed to control allocation between or among insurers covering the same loss. These clauses are generally couched as escape clauses, excess clauses, or pro rata clauses. Lamb-Weston, Inc. v. Oregon Automobile Ins. Co., 219 Or 110, 129, 341 P2d 110 (1959). When two insurance policies covering the same loss have repugnant "other insurance" clauses, each clause is rejected in toto. Id. Even when competing "other insurance" clauses are compatible and therefore enforceable, insureds contend that they apply only to the rights of the insurers against each other and do not affect the insurance company's obligations to its insured. Zurich Ins. Co. v. Northbrook Excess and Surplus Ins. Co., 145 IllApp3d 175, 199, 494 NE 2d 634 (1986).
(2) Insurer's Position
"Other insurance" clauses do not come into play very often because they apply only when two insurance policies cover "the same loss." See e.g. Lamb-Weston, Inc. v. Oregon Auto. Ins. Co., 219 Or 110, 114, 341 P2d 110, 112 (1959) ("* * * if the insured has other insurance against a loss covered by this policy * * * .") As discussed above, under Oregon law, a liability policy insuring "property damage" occurring during one policy period does not insure property damage occurring outside of that policy period. See McCormick & Baxter, supra. Thus, if one policy does not provide coverage for the same loss as that covered by the "other" policy, the "other insurance" clause is not applicable.
If two insurance policies apply to the same loss, the court will attempt to apply them according to their terms. However, if the policies' "other insurance" clauses are repugnant, as the Lamb-Weston court used that term, the policies apply on a pro-rata basis, based on limits. Lamb-Weston, Inc. v. Oregon Automobile Ins. Co., 219 Or 130, 346 P2d 643 (1959); see also Cimarron Ins. Co. v. Travelers Ins. Co., 224 Or 57, 64, 355 P2d 742, 745 (1960). The court should hold each insurer liable only for its share of the total loss. Cimarron Ins. Co. supra., 224 Or at 64.
C. Must the insured absorb an allocable share during uninsured periods of continuing property damage?
(1) Insured's Position
This question arises in a number of circumstances, these among them: (1) an insurer becomes insolvent; (2) one or more triggered policies contain applicable exclusions that others do not; (3) a particular policy may be exhausted before fully funding its allocable share; or (4) the insured chooses not to buy insurance during some portion of the time property damage continues.
The insured's first argument in each circumstance is that joint and several liability makes this a problem for the insurers, not the insured. As this approach permits the insured to pursue any or all triggered policies up to their limits, the burden of gaps in coverage falls on the participating insurers, who agreed to pay "those sums which the insured becomes legally obligated to pay."
The insured's second argument in each case is that, contrary to the misstatements of countless insurers and courts, CGL policies do not cover property damage; they cover liability "because of property damage." The question therefore is not how much property damage occurred in each period but rather how much liability arises as a result of property damage in each period. Rest assured the insured's expert will opine that most, if not all, of the liability resulted from property damage occurring during the periods of the participating insurers' policies.
The insured's third argument differentiates purposeful decisions to "go bare" from circumstances where coverage is simply unavailable. Insurer insolvency and non-negotiable exclusions are two examples of the latter. The court in B&L Trucking, supra, made this distinction, 951 P2d at 256, and rejected the insurer's claim of unfairness based in part on the notion that the insurer "agreed to pay ‘all sums' arising out of ‘an occurrence' which, by its own policy definition, may take place over a period of time." B&L, 951 P2d at 257.
Judge Haggerty assigned an allocable share to the insured in Stimson when one of its carriers became insolvent. In support of its ruling, the court indicated that it would be inequitable for the insurer to shoulder the risk of non-participating insurers because the insurer had no involvement in the insured's choice of other carriers. Stimson at *13. However, as the joint and several liability allocation model is based on the language of the parties' contract of insurance, insureds cannot agree that enforcement of the insurer's chosen language is inequitable. Nowhere does the standard form CGL policy reserve to the insurer the right to deny coverage based on the non-performance of another carrier. Moreover, it is interesting to note in this connection that the CGL form currently in use provides that if the insured did not know of the property damage prior to the policy's inception, the insurer will cover liability arising from property damage occurring during the policy period and thereafter. (See, e.g., ISO Endorsement 9S2249, Ed. 6-00, Amendment of Insuring Agreement - Known Injury or Damage - Oregon). Given industry's express acceptance of responsibility for liability because of post-policy property damage, insureds will continue to resist industry claims of unfairness in this regard and will continue to argue that the absence of a subsequent insurer does not diminish the insurer's obligations.
The question of exhaustion, finally, suggests a fourth argument by insureds. In the absence of excess coverage, the insured will make its joint and several argument here as well: any shortfall in indemnity protection from one policy must be absorbed by another policy, the issuer of which agreed to pay "those sums the insured becomes legally obligated to pay because of property damage." If excess coverage exists, however, the insured may want to penetrate the excess layer where the coverage case may be less challenging. The court's choice here is between vertical exhaustion and horizontal exhaustion. The insured (and perhaps its other primary carriers) argue that the excess carrier must pay once the scheduled primary policy has been exhausted (vertical exhaustion). The excess carrier, on the other hand, will maintain that its policy is not triggered until the entire primary layer of insurance is exhausted (horizontal exhaustion). Oregon courts have not clearly spoken on the issue. Compare Maine Bonding & Casualty Co. v. Centennial Insurance Co., 298 Or 514), 693 P2d 1296 (1985) ("[T]he excess carrier's obligation to pay begins where the primary insurer's ends-when the limits of the primary policy are exhausted.") with Hoffman Construction Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or 464, 836 P2d 703 (1992) ("[L]iability insurance policies frequently are arranged in tiers, with each level of policy designed to "kick in" when the coverage provided by the lower level of insurance is exhausted.")
(2) Insurer's Position
Consistent with the insurer's obligation "to pay as damages because of ‘property damage' * * * to which this insurance applies," damages attributable to property damage occurring outside of the policy period are not covered. Thus, damage occurring during periods in which the insured was uninsured, or insured by a now insolvent carrier, are not "reallocated" to solvent carriers. See Stimson at *13. Either the insured or the Oregon Insurance Guarantee Association must respond for those "uninsured" years. Id. The same reasoning applies for policies that are exhausted or that do not apply to the specific loss because they have applicable exclusions. Id.
The application of excess coverage in a certain situation will depend on the exact wording of the relevant policy. See Hoffman Construction Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or 464, 836 P2d 703 (1992).
2. The Timing and Nature of Damages Suffered by Plaintiff
A. Must the owner suffer her damages during the policy period?
(1) Insured's Position
Some insurers argue that because their policies apply only to property damage that occurs during the policy period, and because the plaintiff did not own the property until after the policy period expired, any property damage for which the plaintiff could recover must have occurred after expiration of the policy period. Insureds respond that the policy does not condition coverage on the underlying plaintiff's ownership of the damaged property during the policy period. Damage to property during the policy period – any property – resulting in the insured's potential liability to a third party triggers coverage. See American Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F2d 22, 27 (1st Cir 1986)([t]he plain language of the policy covers consequential damages arising from physical injury to any tangible property, including the property of the insured); Fejes v. Alaska Insurance Company, Inc., 984 P2d 519, 524 (Alaska 1999) (contention that claims were for loss-of-bargain damages does not mean that those claims were not "because of" or resulting from property damage, which is what the policy requires). Again, the pertinent focus is not on property damage during the policy period but rather on liability "because of" property damage during the policy period. If the contractor becomes liable later for property damage that occurred during the insurer's period–irrespective of who owns the property during that period–the insurer must respond.
(2) Insurer's Position
If the policy contains the usual policy language stating that it provides coverage, subject to its terms, conditions, limitations and exclusions, for "‘property damage' * * * occurring during the policy period," the question is whether the insured is being sued for damages arising out of "property damage" occurring during the policy period. It generally does not matter, for coverage purposes, whether the plaintiff owned the property during the term of the policy. Rather, the triggering event is whether there was property damage during the term of the policy. McCormick & Baxter, supra.
Along these same lines, if the plaintiff does not allege property damage occurring during the term of the policy, there should be no coverage and no duties arising out of that insurance policy, with respect to the claim made. However, it is important to remember that the language of the insurance contract controls the scope of coverage. If a policy was obtained that provided coverage for damage occurring prior to the policy period, the policy might provide coverage, subject to its terms, conditions, limitations and exclusions.
B. Does the economic loss doctrine affect coverage?
(1) Insured's Position
With increasing frequency insurers raise the "economic loss" doctrine in the construction defect coverage context, arguing that liability for losses deemed purely economic in the underlying case are not covered. Insureds respond that the "economic loss" doctrine is a common law negligence principle that has no bearing on the interpretation of an insurance contract. The doctrine developed in the negligence context to preclude recovery against a negligent defendant for economic harm unless that harm is accompanied by property damage, bodily injury, or a special relationship. While a buyer's purchase of a damaged building might be deemed economic loss, and not property damage, in the tort context, that context has no relevance to the coverage question, where the insurer promised to indemnify for liability because of property damage, which by definition includes loss of use – a form of economic injury.
(2) Insurer's Position
Oregon courts have long held that purely economic losses are not covered under policies providing coverage for "property damage." General Ins. v. Western Am. Development, 43 Or App 671, 603 P2d 1245 (1979); see also Drake v. Mutual of Enumclaw Ins. Co., 167 Or App 475, 484, 1 P3d 1065, 1071 (2000). The issue generally arises when the claim is made for loss arising not out of damage to tangible property, but for loss associated with the diminished value of the property or loss arising from negligent misrepresentation of the property's value. See id. (insurer did not breach its duty to defend the insured against buyer's claim, because the diminished value of the property did not constitute the "loss of use of tangible property.").
As quoted by the Oregon Supreme Court in Oak Crest Const. Co. v. Austin Mut. Ins. Co., 329 Or 620, 628, 998 P2d 1254, 1257 (2000):
The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained."
Id., quoting Roger C. Henderson, Insurance Protection for Products Liability and Completed Operations--What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441 (1971).
3. Known Loss
A. Under the common law "known loss doctrine," is an insured precluded from coverage under all policies commencing after the date on which the insured learns of property damage at the subject site?
(1) Insured's Position
Oregon courts have neither accepted nor rejected the common law known loss doctrine. From the insured's perspective, however, the doctrine offers insurers very limited utility in the liability context. The first party property context is much better suited to a known loss defense, where the insured plainly cannot collect on insurance purchased while his home is on fire. In the liability context, on the other hand, the risk insured against is not property damage but rather liability to a third party. Accordingly, until liability is established there is no loss to know about. Montrose Chem. Corp. of Cal. v. Admiral Ins. Co., 10 Cal.4th 645, 42 Cal.Rptr.2d 324, 913 P.2d 878, 906 (1995). Even if an insured purchases an insurance policy in the midst of litigation, the insurer would not be able to argue that there was a known loss, as liability is not established until judgment is entered. Peck v. Public Service Mutual Ins. Co., 363 FSupp 2d 137, 146 (D Conn 2005).
(2) Insurer's Position
"[O]ne of the fundamental principles of insurance law is that insurance contracts should only provide coverage for losses that are fortuitous." Fox v. Country Mut. Ins. Co., 327 Or 500, 509 n9, 964 P2d 997 (1998). The principle of fortuity is set forth in the Oregon statutory definition of "insurance," defined as "a contract whereby one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon determinable risk contingencies." ORS 731.102(1). A "known loss" is not fortuitous. Two Pesos v. Gulf Ins. Co., 901 SW2d 495 (Tex Ct App 1995) (fortuity doctrine precludes insurance coverage not only where offending conduct was intentional but also where "known loss" principles are indicated). The known loss doctrine prevents coverage for loss if the insured knew or reasonably should have known of the substantial probability of a loss prior to the policy's effective date. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill2d 90, 607 NE2d 1204, 1210 (1992); 7 Couch on Insurance § 102:8 (recognizing the rule). Whether or not the insured "should reasonably have known of a likely exposure to losses" may be a question of fact. See Stimson at *9.
B. Under the new contractual "known loss" provision, is an insured precluded from coverage under a policy commencing after the date on which the insured learns of property damage at the subject site?
(1) Insured's Position
Most policies now have some version of the "Amendment of Insuring Agreement - Known Injury or Damage" endorsement, which precludes coverage if the insured or its qualified representative knew of the property damage or injury prior to commencement of the policy. By contract, then, the focus is no longer on liability but rather on the property damage potentially giving rise to liability.
The insured's response to this new provision is two-fold. First, coverage is precluded only for the particular damage known by the insured. In other words, the insurer cannot use the insured's awareness of localized damage caused by a leaking window on the front of the building to preclude coverage for unrelated damage caused by an improperly framed deck on the back of the building, which the insured did not discover until after the policy's inception.
Second, known damage is too frequently confused with known causes of damage. Known loss provisions preclude coverage only for damages or injuries known prior to the commencement of the policy period; they do not preclude coverage for known construction defects unaccompanied by knowledge of resulting property damage. Notice of an improperly installed window, for example,(whether pursuant to the Right to Cure Statute or otherwise) is not notice of property damage. An insured, moreover, could receive notice of an improperly constructed deck and thereafter reconstruct it. The insured will contend that the "Known Injury or Damage" provision is not implicated, even if damages are later discovered as a result of the initial improper deck construction. To deny coverage on this basis, insurers must identify known property damage, not improper construction.
(2) Insurer's Position
The language of each specific policy must be reviewed to determine the exact scope of any insuring agreement or exclusion. Hoffman Construction Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or 464, 836 P2d 703 (1992). Some policies have begun incorporating a version of the following into the insuring agreement:
AMENDMENT OF INSURING AGREEMENT – KNOWN INJURY OR DAMAGE
* * *
b. This insurance applies to "bodily injury" and "property damage" only if:
* * *
(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II Who is An Insured and no "employee" authorized by you to give or receive notice of an "occurrence" or claim, knew that the "bodily injury" or "property damage" had occurred, in whole or in part. If such a listed insured or authorized "employee" knew, prior to the policy period, that the "bodily injury" or "property damage" occurred, then any continuation, change or resumption of such "bodily injury" or "property damage" during or after the policy period will be deemed to have been known prior to the policy period.
* * *
d. "Bodily injury" or "property damage" will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II Who is An Insured or any "employee" authorized by you to give or receive notice of an "occurrence" or claim:
(1) Reports all, or any part, of the "bodily injury" or "property damage" to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the "bodily injury" or "property damage"; or
(3) Becomes aware by any other means that "bodily injury" or "property damage" has occurred or has begun to occur.
The author of this section was unable to find any published cases interpreting this provision. However, under Oregon law, the defined terms will be given their defined meanings and other terms will given their plain meaning. Hoffman, 313 Or at 469 - 71. Under these rules of policy interpretation, insurers will argue that a policy containing the quoted provisions does not apply to "property damage" known by the insured, including any "continuation, change or resumption of such * * * ‘property damage' during or after the policy period."
4. Your Work
A. Is there coverage for tearing off the insured's work to repair damage to other components?
(1) Insured's Position
The leading case in Oregon on the issue is Wyoming Sawmills, Inc. v. Transportation Ins. Co., 282 Or 401, 578 P2d 1253 (1978), which is unfortunate because nobody knows what the case means. To the extent anyone claims to know exactly what it means, there is another who claims to know it means exactly the opposite. Reliance on the case by insureds and insurers alike simply reinforces the point. For their part, insureds will argue that once damage to property other than the insured's work is discovered, the insurer must then pay those sums the insured becomes legally obligated to pay because of that damage. If the jury's damage award includes the cost of removing the insured's siding to access damaged insulation and framing, that liability is covered as well.
(2) Insurer's Position
The mere incorporation of the insured's product in a structure does not amount to "actual injury" to property, triggering coverage. Wyoming Sawmills, Inc. v. Transportation Insurance Co., 282 Or 401, 406-07, 578 P2d 1253 (1978). In Wyoming, the Oregon Supreme Court found that, "in the absence of a showing that any physical damage was caused to the rest of the building by the defective studs [the insured's product] and that the labor cost was for the rectification of any such damage," there was no coverage for the labor expenses in replacing the defective studs manufactured by the insured. 282 Or at 406-07 (emphasis added).
Courts following the Wyoming Sawmills rule have held that the costs of repair and replacement are not covered, if diminution in value is not covered. In New Hampshire Insurance Co. v. Vieira, 930 F2d 696 (9th Cir 1991), the Ninth Circuit applied the Oregon Supreme Court's reasoning in Wyoming Sawmills and ruled that diminution in value was not covered. Id. at 698. The court also found no coverage for the separate damage caused by cutting holes in the roof to replace the poorly installed drywall, indicating that the "nature of repairs cannot convert noncovered damage into covered damage." The Court of Appeals reasoned that diminution in property value and the cost of repair and replacement are not two separate harms – "they are two different ways of measuring the same harm." Id. at 701. See also H/C Company v. Zurich-American Ins. Co., 108 F3d 337 (9th Cir 1997) ("cost of repair of defective property, even if it affects non-defective property, is not property damage").
B. What if a tear-off reveals no damage to other components?
(1) Insured's Position
If the tear-off occurred as a result of an investigation undertaken by the insurer in the course of defending the insured, the insured will argue that the costs associated with the tear-off and replacement are covered as part of the insured defense. If the investigation was conducted after the insured tendered the defense to its insurers but prior to the insurers' acceptance of the defense, the insured should be entitled to recover the investigative expenses so long as the investigation was reasonable under the circumstances. If, on the other hand, the insured conducted a tear-off prior to tendering the defense to its insurers, the insured's position is less certain. Although Oregon's appellate courts have not ruled definitively on the subject of pre-tender defense costs, such claims have not been embraced by trial courts. Still, insureds will argue that pre-tender defense costs are recoverable if necessarily and reasonably incurred.
Alternatively, if judgment is entered against the insured for liability because of property damage proved at trial, and if the subsequent tear-off reveals that no consequent property damage in fact exists (an exceedingly unlikely scenario), the insurer might conceivably maintain that it need not pay the judgment or that it is entitled to reimbursement of any payment made. The insured's position, of course, would be that the verdict form in the underlying case settles the issue for purposes of coverage. As a result of the judgment, the insured will be legally obligated to pay damages because of property damage, which is all the policy requires. The actual condition of the property notwithstanding, moreover, the question of property damage is res judicata and would therefore bind the insurer in any subsequent coverage litigation.
(2) Insurer's Position
As discussed above, the cost to repair or replace the insured's work is not covered under most liability policies.
5. Is Plaintiff's Attorney Fee Award Covered?
(1) Insured's Position
Oregon courts have not directly addressed coverage of attorney fee awards under CGL policies. Jurisdictions are split on whether these fees are covered under the Supplementary Payments provision, which provides coverage for "[a]ll costs taxed against the insured in the ‘suit.'" Insureds will rely on those courts finding coverage for such awards, including Prichard v. Liberty Mutual Ins. Co., 84 CalApp4th 890, 912 (2000); R.W. Beck & Assoc. v. Providence Washington Ins. Co., 27 F3d 1475, 1484 n. 13 (9th Cir Alaska 1994); Littlefield v. Mack and Northland General Ins. Co., 789 FSupp 911 (ND Ill. 1992).
Oregon insureds will acknowledge, as they must, that Magistrate Judge Ashmanskas recently determined in MW Builders, Inc. V. Safeco Ins. Co. of America, et al., Civil No. 02-1578-AS (December 15, 2004), that attorney fees are not "costs" and therefore not covered. The court's conclusion, however, was preceded by the conspicuous statement that "neither party cites any legal authority on the point." Slip. Op. at 40. Insureds are consequently unlikely to yield on the issue unless and until an Oregon appellate court settles the matter on well developed briefs.
As a practical matter, however, coverage under the Supplementary Payments provision is, from the insured's perspective, an interesting but unnecessary debate. If an insurer has accepted its duty to defend pursuant to Ledford v. Gutoski, 319 Or 397, 877 P2d 80 (1994), the insurer becomes a fiduciary bound to protect the interests of the insured. The duty to defend includes the duty to attempt settlement if it would be reasonable to do so. "The classification of an insurer as a ‘fiduciary' when deciding whether or not it should settle within the policy limits is so prevalent as to not require citation to authority." Farris v. USF&G, 284 Or 453, 460 n.2 (1978); see also Goddard v. Farmers Insurance Co. of Oregon, 173 Or App 633, 22 P3d 1224 (2001) (citing Maine Bonding & Casualty Co. v. Centennial Ins. Co., 298 Or 514, 519, 693 P2d 1296 (1985) (where "a liability insurer agrees to defend its insured against third-party claims, a failure to defend adequately is actionable at law. The duty to defend includes the duty to settle the case within the policy limits if it would be reasonable to do so."). Accordingly, if the insurer has an opportunity to settle the case against its insured for an amount that is reasonable and within the coverage of the policy, the insured will contend that the insurer's failure to do so constitutes a breach of fiduciary duty, rendering the insurer liable for all damages consequently suffered by the insured, including an award of attorney fees.
(2) Insurer's Position
Insurance policies vary on whether – or how – they treat contractually-available attorneys fees. In some policies, they are included within the definition of damages; in other policies, they are not or are addressed in the supplementary payments provision. The specific language of the policy at issue must be examined
6. Coverage for Additional Insureds
A. Are additional insured endorsements enforceable after Walsh?
(1) Insured's Position
Yes. As all by now know, the Oregon Supreme Court's decision in Walsh Construction Co. v. Mutual of Enumclaw, 338 Or 1, 104 P3d 1146 (2005) (affirming the Court of Appeals' decision at 189 Or App 400 (2003)), undermines provisions in subcontracts requiring the subcontractor to indemnify the general contractor against, and/or to provide coverage for, liability arising from the general contractor's own negligent conduct. Expect insureds to respond to Walsh in at least two ways. First, Walsh dealt with a blanket additional insured provision in the subject policy, meaning the insurer could only ascertain the identity of additional insureds by examining the indemnity/insurance provisions of the subcontracts. Because the court voided the particular subcontract at issue (or at least its provisions relating to indemnity and insurance), the general contractor could not qualify as an additional insured under the policy. Unlike Walsh, if the general contractor is identified by name as an additional insured in the policy itself, the subcontract is irrelevant to the general contractor's coverage entitlement. In that case, a voided subcontract would have no effect on the insurance policy and the general contractor should be free to enforce the insurance contract according to its terms.
Second, insureds will argue that subcontracts and additional insured provisions complying with ORS 30.140(2) remain unaffected by Walsh. To the extent a subcontract contains an overbroad indemnity and/or insurance provision, the additional insured will maintain that the subcontract should only be voided to the extent necessary to achieve compliance with ORS 30.140(1). As it relates to indemnity against and coverage for the additional insured's vicarious liability arising from the subcontractor's negligence, therefore, both the subcontract and the insurance policy may be enforced according to their terms.
(2) Insurer's Position
Historically, it has been common for general contractors to require as one of the conditions on a subcontract that the subcontractor agree to indemnify the general for any damages that may arise out of the subcontractor's work. Moreover, the standard general contract condition also requires the subcontractor to obtain liability insurance and to ensure that general is listed as a "additional insured" on the liability coverage. Because the subcontractor is understandably anxious to be awarded the subcontract, there was rarely any negotiation over to this liability-shifting condition.
In Walsh Construction Co. v. Mutual of Enumclaw, 338 Or 1, 104 P3d 1146 (2005), the subcontractor had signed such a subcontract agreement and had obtained the necessary additional insured endorsement from its liability carrier (Mutual of Enumclaw) in favor of the general contractor, Walsh Construction. When one of the subcontractor's employees was injured on the job and filed suit against Walsh Construction, Walsh tendered the defense and indemnity of the case to Mutual of Enumclaw. Enumclaw rejected the tender based on the strength of ORS 30.140. ORS 30.140 provides:
Except to the extent provided under subsection (2) of this section, any provision in a construction agreement that requires a person or that person's surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property caused in the whole or in part by the negligence of the indemnitee is void.
Walsh Construction then settled the underlying injury case against it and brought a breach of contract action against Enumclaw arguing that Enumclaw had breached the additional insured endorsement in the liability policy. The trial court had ruled in favor of Enumclaw, and the Oregon Court of Appeals affirmed that ruling. The Court of Appeals reasoned that the legislature intended ORS 30.140 to void not only the indemnity requirement in the construction subcontract, but also voided any requirement that the subcontractor must obtain liability coverage in favor of the general contractor. The court also ruled that any subsequently-obtained additional insured coverage for the general contractor as required by the construction subcontract was likewise void and unenforceable. The Oregon Supreme Court affirmed the court of appeals' decision, adopting the language almost verbatim.
Already, legislation has been introduced in the Oregon Legislature that would essentially "overrule" the Supreme Court decision. Senate Bill 154 proposed to amend ORS 30.140 to eliminate references to the indemnitor's "surety or insurer" and to state explicitly that that statute "does not affect any provision in a construction agreement that requires a party to acquire insurance coverage for liability attributable to death, personal injury or property damage arising out of the construction and to name another party to the contract as an additional insured."
The bill was referred to committee on January 14, 2005. That appears to have been the last action taken on it and it is unlikely that it will receive a hearing or other attention during the 2005 legislative session.
B. Are additional insureds afforded the same coverage as the primary insured?
(1) Insured's Position
It is the additional insured's position that the manner in which the standard CGL policy is written may in certain cases afford more coverage to the additional insured. Where, for example, coverage for the subcontractor's liability is denied or limited based on the "your work" exclusion, coverage for the additional named insured general contractor could not be denied or limited on the same basis because of the exception to the "your work" exclusion, which reinstates coverage for work performed on the named insured's behalf by a subcontractor. The policy's "Separation of Insureds" provision requires that the policy be read as if each named insured is the only named insured. An exclusion that might apply to the subcontractor therefore may not apply to the additional insured general contractor.
It may also be the general contractor's position in a particular case that the coverage available as an additional insured on the subcontractor's policy (though not a named additional insured) is actually better than the coverage available on the general's own policy. For example, the policy form defines the terms "you" and "your" used throughout the policy to mean the named insured, which in most additional insured situations is the subcontractor. An additional insured who is not a named insured therefore is not a "you." Accordingly, critical exclusions of coverage for damages to "property you own" or "premises you sell," which might well form the bases of a denial under the general's policy, as the general may be the owning and/or selling "you," could not form the bases of a denial under the subcontractor's policy because the subcontractor, as the relevant "you," is unlikely to be either owner or seller.
(2) Insurer's Position
By its terms, the additional insured endorsement provides coverage for liability arising out of the named insured's ongoing operations performed for the additional insured. In determining whether coverage is available, courts may focus on the named insured's "ongoing operations" or whether liability in fact arose from those ongoing operations. See e.g. Hartford Acc. And Indem. Co. v. U.S. Natural Resources, Inc., 897 F Supp 466 (D Or 1995).
Additionally, coverage is afforded to the additional insured only for liability "arising out of" the named insured's work. Oregon courts have held that the "ordinary meaning of the words ‘arising out of' is very broad." Clinical Research Institute of Southern Oregon, P.C. v. Kemper Ins. Companies, 191 Or App 595, 601, 84 P3d 147 (2004); see also Continental Cas. Co. v. City of Richmond, 763 F2d 1076, 1080 (9th Cir 1985) (Phrase "arising out of" is ordinarily understood to mean "originating from," "having its origin in," "growing out of," or "flowing from" or, in short, "incident to, or having connection with."); Avemco Ins. Co. v. Mock, 44 Wash App 327, 329, 721 P2d 34 (1986) (same).
As with all provisions of the insurance contract, coverage is determined from the wording of the specific insurance contract and provision. Hoffman Construction, supra. Finally, "other insurance" provisions may apply. See Tudor Ins. Co. v. Howard S. Wright Const. Co., 2005 WL 783060, *1 (D Or 2005).
This article was co-authored by Michael Farnell.
1Megge Van Valkenburg is a shareholder in the Insurance Coverage Group at Bullivant Houser Bailey. Megge can be reached at 503-499-4471.
The opinions expressed are those of the authors alone and not necessarily the opinions of the law firms or clients with whom the authors may be associated or the OADC. They are, of course, based on the law existing at the time of the writing of these materials, June 2005.
2The current CGL form substitutes "those sums" for "all sums." Although insurers routinely argue that the new language changes the debate, the phrase is undefined and, from the insured's perspective, does not limit the insurer's obligations in any way. Courts have recognized that the change represents a distinction without a difference. See Fluke Corp. v. The Hartford Accident & Indemnity Co., 102 Wash App 237, 244, n.1, 7 P3d 825 (2000); State Farm Fire and Casualty Co. v. Martinez, 26 KanApp2d 869, 877, 995 P2d 890 (2000); See also Stempel, Domtar Baby: Misplaced Notions of Equitable Apportionment Create Thicket of Potential Unfairness for Insurance Policyholders, 25 WMLR 769, 838 (1999) ("the subsequent change in standard CGL language from "all sums" (the language that prevailed until the 1980s) to "those sums" (the current language found in the standard CGL) does not make a difference in case outcomes"). In Wisconsin, proposed legislation in the environmental damage context preempts the debate by providing that the phrases have identical meanings. S. 137, 97th Legislature, Reg. Session, (Wisconsin 2005).
3This discussion assumes the Oregon Insurance Guaranty Association (OIGA) need not respond or that its "covered claim" cap is insufficient to fund the insolvent carrier's allocable share. Where the OIGA is obligated to respond, it steps into the shoes of the insolvent carrier up to a maximum amount of $300,000 per covered claim.