Oregon's Court Of Appeals Finds No Duty To Defend Where The Underlying Complaint Does Not Plead Collateral Damages With Specificity
In State Farm Fire and Casualty Co. v. American Family Mutual Ins. Co., A142944 (April 6, 2011), the Oregon Court of Appeals found that an insurer had no duty to defend its insured against a negligence claim where the unambiguous underlying complaint did not specially plead injury to property covered by the insurer’s policy.
This decision concerns a declaratory action brought by State Farm against American Family. Each insurer insured a general contractor that built a home. The homeowners filed an underlying action against the general contractor alleging that they had incurred damages to the home as the result of the general contractor’s breach of contract, breach of implied warranties, including a warranty of habitability, and negligence. State Farm defended the insured general contractor; American Family declined to defend. State Farm sought a declaration that American Family was obligated to defend the insured and obligated to contribute to the costs of defense incurred by State Farm. The parties filed cross-motions for summary judgment and the trial court ruled that American Family had a duty to defend the insured. In reversing the trial court ruling, the Court of Appeals found the underlying complaint alleged damages for defective work but not “property damage” as defined in the American Family policy.
The Court of Appeals engaged in a comparison of the underlying complaint’s allegations and the policy at issue to determine the duty to defend in accordance with Oregon law. State Farm took the position that the allegations would have allowed the submission of evidence that the insured’s negligent work permitted water to intrude into the home and cause wall studs or window frames to rot. American Family countered that, because the complaint did not allege any consequential injury resulting from the allegations of defective workmanship, the homeowners could not have recovered damages for injury to other structures without amending their pleadings.
The Court of Appeals viewed the issue of whether American Family had a duty to defend its insured under the terms of its policy as a pleading issue. To determine the issue, the Court of Appeals applied a collateral damages analysis. Compensatory damages for injury to real property are generally divided into categories of general and special or collateral damages. Under Oregon law, general damages are damages that naturally and necessarily result from the particular type of injury alleged, whereas special or collateral damages are those damages that may flow naturally from the injury but not necessarily. General damages are not required to be pleaded with specificity because the opposing party is on notice as a matter of law that general damages arise from the nature of the injury alleged. The failure to plead the exact nature of collateral damages or their derivation, however, will result in their exclusion from evidence and preclude their recovery.
The Court of Appeals found that although water damage to other components could have been a result of the insured’s alleged negligent work identified in the underlying complaint, such damage was not a necessary result. Because that water damage was not a necessary result of the insured’s alleged negligence but was collateral in nature, the underlying plaintiffs were required to specially plead allegations of such water damage before evidence of it could be properly admitted. Thus, the Court of Appeals found American Family had no duty to defend the insured against the underlying negligence claim because the underlying complaint was unambiguous and did not plead with specificity injury to property covered by American Family’s policy.
