Oregon High Court Clarifies How To Read the Four Corners of a Complaint

December 22, 2016

On December 8, 2016, the Oregon Supreme Court issued a decision, West Hills Development Co. v. Chartis Claims, Inc., 360 Or. 650 (2016), clarifying what allegations in a construction defect suit will implicate coverage under an "ongoing operations" additional insured endorsement.  In West Hills, the complaint at issue regarded damages suffered by the plaintiff HOA, which were necessarily experienced after completion of the named insured subcontractor's work.  Specifically, the HOA complained that defects in the subject townhomes led to damage from water intrusion.  While the court found a duty to defend under such "ongoing operations" coverage, it explicitly refrained from addressing whether such coverage applies only to damages taking place while a named insured subcontractor is working on a project.  Rather, the case found a duty to defend under that coverage because the allegations of the complaint at bar sufficiently alleged such damage.  Recall that Oregon is a four-corners state – that is, the duty to defend is assessed by comparing the terms of the policy with solely the allegations in the "four corners" of the complaint (with one exception not applicable here).

In particular, the court pointed out that the underlying complaint:

contained very little information regarding the time when the damages allegedly occurred.  The complaint did allege, however, that when the owners purchased the townhomes, the defects in the townhomes already "existed and had already started to cause property damage."

Id. at 657.  The court cited this allegation more than once in justification of the holding, and it seems clear the case is limited by these circumstances.

As to the duty to defend, the court reiterated the existing Oregon standard: the duty arises when allegations can be "reasonably interpret[ed]" to include damage covered by the policy.  Insurers will need to apply this standard on a case-by-case basis, but a complaint which discusses only post-completion damage would apparently fail to trigger a defense under ongoing operations coverage.

In a subsidiary holding, the court also found that allegations were sufficient to implicate the policy even though they made no reference to the named insured subcontractor.  As the general contractor was being charged with liability for subcontractor operations, liability covered by the policy was alleged.

No Effect On Scope of Ongoing Operations Coverage

Importantly, the West Hills court did not use language expanding the scope of what falls within "ongoing operations" coverage.  In fact, it specifically identified the conduct covered by the policy as the named insured subcontractor's operations for the general contractor, and it cited allegations that the general contractor was liable for "subcontractor operations" that were performed with "'improper construction means and methods' in their operations."  Id. at 665.  This language reflects recognition of the requirement that damage occur during operations.

Even more importantly, the court explicitly did not address whether "'ongoing operations' requires that any covered damages must have occurred before [the named insured subcontractor] completed its work on the project."  Id. at 666.  Rather, the court found the underlying complaint did contemplate such liability, because the pleading alleged:

that damages had occurred by the time the owners purchased their townhomes.  It is possible that the damages occurred earlier.  Reasonably interpreted, then, the complaint could result in [the general contractor] being held liable for conduct covered by the policy.

Id. at 666. 

At the trial court, the insured had argued that the additional insured coverage was broader, applying to consequential damages resulting from the named insured's work, as those would be damages "arising out of ongoing operations," as provided by the policy.  Id. at 658 (emphasis in original).  Although the trial court agreed that the clause was at least ambiguous, both appellate courts found it unnecessary to address this argument.  Id. at 666.

The trial court had actually found the "ongoing operations" provision ambiguous, but neither the Court of Appeals nor the Supreme Court echoed that finding.  Rather, the appellate courts found that the language of the complaint was broad enough to potentially encompass claims for damages that occurred while the named insured subcontractor was working on the project, again with reference to the allegation that damage had already started to occur at the time of purchase.  The Court of Appeals stated that the allegation "does not rule out the possibility that damage occurred before [the named insured subcontractor] finished."  (Id. at 659-60, emphasis in original.)

Focus On the Duty to Defend an Indefinite Complaint

The insurer in the case latched onto the Court of Appeal's holding, arguing to the Supreme Court that "the duty to defend is not triggered merely because a complaint fails to 'rule out' the possibility of coverage.  Instead, it assert[ed] that the duty to defend applies only if the complaint 'rules in' coverage."  Id. at 660. 

This led the court to discuss at length the scope of the duty to defend, referring back to a 1949 case by Judge Learned Hand.  In short, where a complaint fails to allege "determinative facts," doubt should be resolved in favor of the insured.  The court described as falling within this rule complaints which are "indefinite," "ambiguous," or "unclear."  See id. at 661-62.  Stating the rule of the case, the court cited its own recent holding that "the key question is whether the court can reasonably interpret the allegations to include an incident or injury that falls within the coverage."  Id. at 663, citing Bresee Homes, Inc. v. Farmers Ins. Exch., 353 Or. 112, 117 (2012); see also, West Hills at 665.

Non-Specific Allegations Supporting General Contractor's Tender

The court found it irrelevant to what degree the complaint alleged defects in the specific work performed by the named insured subcontractor.  Id. at 657.  The policy identified West Hills as an additional insured by name, and the complaint "expressly alleged that West Hills was liable for subcontractor operations" in that the subcontractors "used 'improper construction means and methods' in their operations," such that "the complaint reasonably could be interpreted to result in West Hills being held liable for conduct covered by the policy: [the named insured subcontractor's] operations for West Hills."  Id. at 665.

Impact of West Hills

The West Hills court relied on the subject complaint's specific allegation as to the time of damage.  As discussed above, the court pointed out repeatedly that the underlying complaint "did allege … that when the owners purchased the townhomes, the defects in the townhomes already 'existed and had already started to cause property damage.'"  Id. at 657.  In the absence of such an allegation, the question is whether the complaint may reasonably be understood to allege such early damage.  A complaint which mentions only post-purchase damage would seem to fall outside the ambit of the West Hills decision.