Oregon District Court Addresses a "Multi-Unit Residential Building" Exclusion
In FountainCourt Homeowners’ Assn. v. American Family Mutual Ins. Co., 2009 U.S. Dist. LEXIS 107403, filed on November 16, 2009, District Court Judge Ann Aiken, employed Oregon law to examine the application of a “multi-unit residential building” exclusion in a commercial general liability policy. In FountainCourt, the plaintiffs were two owners’ associations representing condominium and townhome unit owners at FountainCourt, a development containing both condominiums and townhomes. American Family insured the siding contractor involved in the construction of FountainCourt, and the general contractor was an additional named insured under the siding contractor’s American Family polices. After plaintiffs sued the general and siding contractors for construction defects at FountainCourt, the general contractor tendered the defense and indemnity of the plaintiffs’ claims to American Family. American Family denied the tender, relying in large part on the policies’ exclusion for multi-unit new residential construction. The plaintiffs then filed a breach of contract action against American Family alleging bad faith.
The exclusion on which American Family relied provided that the insurance does not apply to “property damage” arising out of “your work” or “your product” in connection with any “multi-unit residential building.” The policies at issue defined “multi-use residential building” as “a condominium, townhouse, apartment or similar structure, each of which has greater than eight units built for the purpose of residential occupancy.” While there was no dispute whether the exclusion did or did not apply to certain of the buildings at FountainCourt, the plaintiffs took the position that the exclusion did not apply to certain of the remaining buildings because they were “mixed use,” meaning the buildings contained condominiums and townhomes. The plaintiffs asserted that the exclusion’s phrase “similar structure” did not include the mixed-use buildings at issue, and also argued that the exclusion was ambiguous because it was as reasonable to include mixed-use buildings in the definition of “multi-unit residential building” as it would be to include them.
The court found that the exclusion precluded coverage for any building having greater than eight units regardless of which type of unit it contains. Important to the court’s finding was the exclusion’s requirement that the structure be “built or used for the purpose of residential occupancy.” As each unit was built to be used as a residence, the fact that the units were “mixed ownership,” that is, some being townhomes and some condominiums, did not affect the application of the multi-unit exclusion.
The court also rejected the plaintiffs’ argument that the exclusion’s application depended on whether the owners of at least nine residential units in a building have the same rights, or incidents of ownership. The court pointed out that, if such an interpretation were correct, it would be possible for owners of units within a multi-unit structure to avoid the application of the exclusion simply by changing the incidents of ownership to reduce the total number of residential units that share common incidents of ownership in order to fall below the nine unit threshold of the multi-unit exclusion. The court found that the exclusion unambiguously applied to units that are “built or used for residential occupancy” and a that structure that contained more than eight residential units when built triggers the exclusion even if some units are later converted to other uses or modes of ownership. Thus, the court found that the exclusion applies to any building that is similar in structure to a condominium, townhouse or apartment that is built to include more than eight residential units no matter how the individual units in the structure are legally owned.
