National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

Criminal Acts Exclusion and Joint Obligations Clauses Bar Coverage for Claims Arising from Insured’s Criminal Act

Posted in Personal and Advertising Injury, Property Insurance, Recent Cases

Criminal Acts Exclusion and Joint Obligations Clauses Bar Coverage for Claims Arising from Insured’s Criminal Act

In Allstate Insurance Company v. Morgan, 123 F. Supp. 3d 1266 (D. Or. 2015), the District of Oregon held an insurer was not obligated to defend their insured’s son against tort claims arising out of the son’s assault on a party guest.

The underlying case arose out of an incident that occurred during a party hosted by the insured’s son at the insured’s home. The insured’s son and three other attendees assaulted another guest, causing serious injury. The insured’s son pled guilty to assault.

The injured guest then filed a complaint against the Morgans for negligence as well as additional claims against others. Allstate denied any duty to defend or indemnify the Morgans. Allstate argued (1) the Criminal Acts Exclusion Clause barred coverage, (2) the Joint Obligations Clause barred coverage, and (3) there was no “occurrence” under the Policy. Allstate also requested the court stay the coverage case pending the resolution of the underlying case.

The magistrate judge declined to stay the case, reasoning that Allstate’s coverage obligation could be determined by considering only the terms of the Policy and the fact that the insured’s son committed a criminal act, as evidenced by his guilty plea.

The Court then concluded the Criminal Acts Exclusion Clause barred coverage of both the insured and her son. The Morgans argued that Allstate’s duty to defend was established by looking only at the complaint, which alleged negligence. Further, the guilty plea did not establish that the insured’s son’s criminal acts actually caused the bodily injuries alleged in the complaint. The Court rejected these arguments, explaining that “[a] guilty plea resulting in a criminal conviction can have a preclusive effect in a subsequent civil proceeding,” and, accordingly, Allstate had no duty to defend the insured’s son. Then, reaching an issue of first impression in Oregon, the court held Allstate had no duty to defend the insured herself, even though she played no role in the assault. Based on the Policy language and out-of-state cases, the Court concluded that the Criminal Acts Exclusion Clause barred coverage for bodily injury that was caused by any insured’s criminal acts.

The district judge adopted the magistrate judge’s recommendation over objection, adding that the Joint Obligations Clause also supported the magistrate’s recommendation. The Court noted that “numerous other courts have interpreted identical joint obligation clauses and have held that the language renders the criminal acts exclusion applicable to claims for negligence against other insureds.” Having decided the case based on the Criminal Acts Exclusion Clause and the Joint Obligations Clause, the Court did not reach the occurrence question.

2016: A Year of Anniversaries

Posted in Continuous or Progressive Property Damage, News, Uncategorized

Even as this annus horribilus passes into oblivion, we note several important anniversaries in 2016.

Fifty years ago saw a confluence of legal theory, case law and insurance industry developments that  led ineluctably to the storm of mass tort litigation that crashed upon the insurance industry within a few years and that continues to plague us fifty years later.

In 1966, the National Bureau of Casualty Underwriters (predecessor to ISO) responded to pressure from the London Market to broaden CGL coverage by abandoning the “caused by accident” language that insurers had relied on up to that point to restrict their policies to “big bang” events.  In its place, the NBCU substitute the modern conception of an “occurrence” that covered not only abrupt happenings but losses due to “exposure to conditions.”   The adoption of “occurrence” language coincided with the American Law Institute’s adoption of a new Section 402A in the Restatement of Torts that pioneered the imposition of strict liability for product manufacturers that, coupled with 1966 amendments to Rule 23 of the Federal Rules of Civil Procedure that liberalized the filing of class actions, pioneered the waves of mass tort litigation and products liability claims that ensued in the following decades:  asbestos, Benedictin, Dalkon Shield, DES, breast implants and so on.

Thirty years ago saw the adoption of largest change to the CGL form since 1973 and the widespread implementation of mandatory exclusions for asbestos and environmental liabilities.   What is often forgotten is the failed effort of ISO and a large segment of the casualty industry to jettison “occurrence” coverage altogether in favor of “claims made” CGL coverage, an effort that resulted in a massive antitrust challenge by nineteen states attorneys general that ended up in the United States Supreme Court in 1993.

Fifteen years ago was, of course, the tragedy of the World Trade Center, a seminal event in our political and cultural history and also the source of an extraordinary number of insurance coverage dispute ranging from the famous two towers/two “occurrences” controversy to innumerable smaller fights over business interruption losses around the country.

Will we remember 2016 in the years to come?

Second Circuit Reconsiders Bellefonte Re Reinsurance Doctrine

Posted in Reinsurance

The fate of the so-called Bellefonte Re doctrine is now up to the New York Court of Appeals.  On December 8, the Second Circuit issued an opinion in Global Reinsurance Corp. v. Century Ind. Co., No. 15-2164 (2d Cir. Dec. 8, 2016) asking New York’s highest state court to answer whether a District Court erred in declaring that the dollar amount stated in the “Reinsurance Accepted” section of certain reinsurance certificates unambiguously caps the maximum amount that a reinsurer can be obligated to pay a cedent for “losses” and “expenses” combined.

In the underlying case, a court ruled that Century Indemnity was obliged to pay defense costs to Caterpillar in addition to the indemnity limits of its policies for the underlying asbestos suits.  Global Re contended (and the District Court agreed), however, that its obligations under these reinsurance certificates were capped by the limits of coverage, whereas Century Indemnity has argued that its reinsurer must also pay expenses in light of language in the certificates stating “the liability of [Global] specified in Item 4 above shall follow that of [Century] and, except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [the underlying liability insurance policy].”

Whereas Global Re argued that the amount stated in the “Reinsurance Accepted” section caps the maximum amount that it can be obligated to pay for both loss and expenses combined and that the maximum amount that it can be required to pay under a particular certificate was the “occurrence” limit exceeding Century’s retention ($250,000), Century contended that the amount stated in the “Reinsurance Accepted” provision applies only to “loss” and that Global must pay all expenses that exceed that amount.

Although it would appear that the District Court’s analysis was consistent with the Second Circuit’s opinion in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), which has been a cornerstone of reinsurance litigation for nearly three decades now, the Second Circuit expressed uncertainty with respect to whether it had correctly decided Bellefonte or had taken industry custom and usage into account in its analysis.  Accordingly, it agreed to certify the following question to the New York Court of Appeals:

Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), impose either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?

In agreeing to reconsider Bellefonte, the Second Circuit was clearly influenced by amicus briefs filed by several large reinsurance brokers warning that continuing to follow Bellefonte could have “disastrous economic consequences” for the insurance industry and that “potentially massive exposures to insurance companies throughout the industry would be unexpectedly unreinsured.” creating a “gaping hole in reinsurance for many companies, and potentially threaten some with insolvency.”

Unsigned Purchase Order Deemed Written Contract under AI Endorsement

Posted in Additional Insured, Liability Coverage

The written contract requirement in an additional insured endorsement does not require that the contract be signed unless the endorsement so provides, holds New York’s Appellate Division, First Department in Zurich American Insurance Company v. Endurance American Specialty Insurance Company.

The endorsement provided that additional insureds included “[a]ny entity required by written contract … to be named as an insured.” The purchase order, which required the contractor to obtain additional insured coverage for the owner and its property manager, contained no signature lines and was unsigned, but stated: “THIS PURCHASE ORDER AND AGREEMENT IS A LEGAL AGREEMENT BETWEEN [owner and vendor]. BY ACCEPTING THE ORDER, VENDOR HEREBY AGREES TO BECOME BOUND BY THE TERMS OF THIS AGREEMENT.” The purchase order was accepted by performance of the work.

The insurer argued that the parties were not additional insureds, because the unsigned purchase order was not a written contract. The court disagreed, finding that the endorsement required only a “written” contract, not a “signed” one (in contrast with endorsements that also require that the contract be executed), and that, by its terms, the purchase order became binding upon its acceptance, not upon signing the document.

Georgia’s Uninsured Motorist Statute Does Not Supersede Excess Policies’ Vertical Exhaustion Requirements

Posted in Additional Insured, Auto Liability Coverage, Bad Faith/Extra Contractual, Excess and Umbrella Insurance

In Coker v. American Guarantee & Liability Insurance Company, 825 F.3d 1287 (11th Cir. 2016), the Eleventh Circuit held that Georgia’s uninsured motorist (UM) statute did not supersede the vertical exhaustion requirements contained in the defendants’ excess policies.

In this case, plaintiff Gary Coker was driving a truck owned by his employer, Ansco & Associates (Ansco), when he was seriously injured in a head-on collision caused by the other driver. The Cokers obtained a $5.5 million consent judgment against the other driver but could only recover $25,000 from him, as he was underinsured. The Cokers pursued the remainder of the consent judgment under five policies held by Ansco, as Coker had been driving the truck in the course and scope of his employment when he was injured.

Ansco had five policies, which were vertically structured. Ansco held a primary automobile policy with Liberty Mutual Insurance Company (Liberty Mutual) with a $5 million limit. Ansco also had a $10 million policy issued by Westchester Fire Insurance Company (Westchester) that provided second-layer umbrella coverage, a $10 million policy issued by Great American Insurance Company (Great American) that provided third-layer excess coverage, a $25 million excess policy issued by American Guarantee & Liability Insurance Company (American Guarantee) that provided fourth-layer excess coverage, and a $25 million policy issued by Endurance American Specialty Insurance Company (Endurance) that provided fifth-layer excess coverage.

The Cokers made written demands of all five companies. The Cokers entered into confidential settlements with Liberty Mutual and Westchester for substantially less than the respective policy limits. The three other insurers did not tender payment. A portion of the $5.5 million judgment still unsatisfied, the Cokers filed a complaint against Great American, American Guarantee, and Endurance (collectively, Defendants) for breach of contract and bad faith. The district court concluded Defendants were required to provide UM coverage by operation of Georgia’s UM statute, finding “that enforcing the vertical exhaustion requirements in the Defendants’ excess policies ‘would place a limit on the amount [the Cokers] are able to recover under the statute and not be in accordance with the remedial purpose of the [UM] statute.’”

The Eleventh Circuit reversed, holding that Georgia’s UM statute did not supersede the vertical exhaustion requirements contained in Defendants’ excess policies. Georgia’s UM statute requires that, absent a written waiver, all automobile policies, including umbrella and excess policies, must provide UM coverage up to the policies’ overall liability limits. See Ga. Code Ann. § 33-7-11. But although Defendants had a statutory obligation to provide UM coverage, “each of the Defendants’ excess liability policies contain[ed] unambiguous language limiting recovery to only those amounts exceeding the policy limits of an underlying insurance policy or policies.” See also Garmany v. Mission Ins. Co., 785 F.2d 941, 945-46 (11th Cir. 1986) (“[U]nder Georgia law, when an excess policy clearly sets a threshold starting point for payment, the contract is unambiguous and must be enforced.”).

The Court drew a distinction between “other insurance” provisions that may be voided by section 33-7-11. The Court observed that interpreting section 33-7-11 to void vertical exhaustion requirements would in effect “convert all excess policies into primary policies” and would eliminate the market for excess UM coverage in Georgia. The Eleventh Circuit did not believe the Georgia courts would favor such a result, as they had “implicitly recognized the validity of” excess UM coverage in, for example, Progressive Classic Ins. Co. v. Nationwide Mut. Fire Ins. Co., 670 S.E.2d 497 (Ga. Ct. App. 2008). Finally, the court explained that vertical exhaustion requirements do not undermine the purpose of section 33-7-11, noting that “[t]he only way an insured might not recover for the full amount of his injures—and therefore realize the harm section 33-7-11 was designed to prevent—is if, as is the case here, he settles with an underlying insurer for less than the policy limits. But in that case, the insured voluntarily settled for less than the policy limits and, therefore, is undercompensated of his own volition.”

In Oregon, excess and umbrella policies are not considered motor vehicle liability policies for the purpose of statutes mandating the type or amount of coverage motor vehicle policies must contain, such as the uninsured motorist statute. See ORS 742.468(2), (3). Similarly, in Washington, uninsured motorist coverage requirements do not apply to umbrella and excess policies. See WRS 48.22.030(2). In states where the uninsured motorist statute does not so specify, practitioners should be familiar with the recent appellate decision in Coker.

Is It A Flash Or A Trend? “Disparagement” limited to Communications that Assert or Imply the Inferiority of a Competitor’s Products.

Posted in Duty to Defend, Personal and Advertising Injury, Recent Cases

The “personal and advertising injury” coverage applies to injury arising out of “oral or written publication of material that…disparages a person’s or organization’s goods, products or services.”  The term “disparages” is not defined.   Accordingly, it provides fertile ground for creative arguments by policyholders seeking to broaden the meaning to cover trademark infringement,   false advertising and “passing off” claims.     Recently, courts have rejected the invitation to broaden the definition to include any claim that involves merely a competitive injury or reputational harm.   Rather, to qualify as “disparagement,” there must be publication of material to a third party that asserts or implies the inferiority of a competitor’s product or services.

For example, in Vitamin Health, Inc. v. Hartford Casualty Ins. Co., Dist. Court, Case No. 15-10071, (ED Mich., May 9, 2016), the insured was sued for false advertising.   It argued that the allegations fell within the disparagement offense. The court held that disparagement is ordinarily defined as “to discredit or bring reproach upon by comparing with something inferior.” The Court found there can be no disparagement where the policyholder is alleged to have misrepresented the content of its own product, and not its competitor’s, even though such action may have caused consumer confusion or caused the competitor to lose sales.

In E.S.Y., Inc. v. Scottsdale Ins. Co., 139 F.Supp.3d 1341, 1353 (S.D. Fla. 2015), the insured, E.S.Y., was sued by an entity that made, marketed and sold garments and used multiple trademarks and copyrighted designs.   The underlying complaint alleged that E.S.Y. “began using an identical or substantially similar mark (the “Liquid Energy Shield Mark) … in connection with their own competing garments” as well as using labels and hang tags “in such a manner that its use causes and is causing actual confusion in the marketplace, or is likely to cause such customer confusion, whereby consumers mistakenly assume that E.S.Y.’s products offered under the claimant’s Shield Mark are associated with or sponsored or approved by the claimant.

E.S.Y. argued that those allegations triggered the disparagement offense. The Court rejected that argument.  It embraced the holding and rationale of the Seventh Circuit in Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed. Appx. 596 (7th Cir. 2007), where the court stated:

Disparage means “to discredit or bring reproach upon by comparing with something inferior.” Webster’s Third New International Dictionary (unabridged) 653 (1981); see also Black’s Law Dictionary 483 (7th ed.1999) (defining disparage as “[t]o dishonor (something or someone) by comparison” or “[t]o unjustly discredit or detract from the reputation of (another’s property, product, or business)”). Further, as we have noted in previous cases, “disparagement [could] result[] from false comparisons” between products in which the comparison dishonors the product being compared. See, e.g., Skylink Techs., Inc. v. Assurance Co. of Am., 400 F.3d 982, 985 (7th Cir.2005).

The E.S.Y. court determined that the crux of disparagement is a comparison suggesting another brand is inferior.    It noted that in the complaint before it, while the Liquid Energy Shield Mark and E.S.Y.’s hang tags allegedly looked like those of the claimant, E.S.Y.’s conduct was not alleged to make any express comparison to the claimant.   To the extent the visual similarity between the marks and tags could be construed as E.S.Y.’s implicit reference to the claimant, the court held that nothing about that reference was alleged to dishonor or denigrate the claimant.  While the claimant may not have liked that E.S.Y. allegedly copied them, “imitation is not disparagement as there was no comparison suggesting [that the claimant’s] brand was inferior to [E.S.Y.s].”

Moreover, while the claimant alleged it suffered harm to its reputation by being associated with E.S.Y., the court found that allegation merely implied that the claimant believed its brand was superior to E.S.Y.’s.  The court again reiterated that for disparagement to be alleged, “[E.S.Y.’s] alleged misconduct must have suggested [its] brand was superior to [the claimant’s].”   Accordingly the court held that the disparagement offense was not implicated.

In Uretek (USA), Inc. v. Continental Cas. Co., 92 F. Supp. 3d 589, 592 (SD Tex. 2015 Civil Action No. 4:13-cv-3746), Uretek, the insured, was in the business of performing roadway repair and maintenance for various state and municipal agencies. Uretek sued a competitor for infringement of a patent on which Uretek held the exclusive license.   That party counterclaimed, alleging that Uretek attempted to mislead competitors and contracting bodies as to the scope of the patent in order to discourage competitors from bidding on pavement-lifting projects and to coerce contracting bodies into believing that Uretek was their sole legal choice for service provider.   The court held that, as alleged, those “false and misleading” statements concerned Uretek’s own services and patent and that deceptive statements regarding the scope of the patent cannot be construed as disparagement of the claimant’s services.  In support, the court cited Nationwide Mut. Ins. Co. v. Gum Tree Prop. Mgmt., L.L.C., 597 Fed.Appx. 241, 246-47, No. 14-60302, 2015 WL 170244, at *5-6 (5th Cir. Jan. 14, 2015) (court refused to infer disparagement from allegation that one party “`induced … third parties not to enter into or continue their’ relationship” with another party because the complaint “never claimed that the inducement resulted from disparagement, as opposed to other strategies such as price cuts, personal service, or any other aspects of the services offered by the inducer”).

Whether the recent rulings demonstrate a trend or a flash in the pan remains to be seen. Several of the cases are up on appeal.

Additional Insured Status

Posted in Additional Insured, Duty to Defend, Recent Cases

In Homeland Insurance Company of New York v. AAM, Inc., 2016 U.S. Dist. LEXIS 633033 (D. Or. May 13, 2016), the District Court for the District of Oregon held that a construction subcontract and accompanying additional insured endorsements were partially enforceable for purposes of the insurer’s duty to defend, despite the subcontract’s noncompliance with Oregon’s anti-indemnity act.

In this case, Del Monte Foods, Inc. (Del Monte) hired CentiMark Corporation (CentiMark) to undertake repairs of its Yakima, Washington warehouse. CentiMark subcontracted part of the project to AAM, Inc. (AAM), an asbestos maintenance and removal company. The subcontract required AAM to add CentiMark and Del Monte to its insurance policy as additional insureds. AAM was insured under a commercial general liability policy issued by Homeland Insurance Company of New York (Homeland), which contained two endorsements that extended coverage to additional insureds. AAM obtained a certificate of insurance verifying that CentiMark and Del Monte were additional insureds under the Policy endorsements.

When an AAM employee was injured while working on the project, he sued CentiMark and Del Monte in Yakima County Superior Court. Homeland agreed to defend CentiMark and Del Monte under a full reservation of rights, and then sought in federal court in Oregon a declaratory judgment that it did not have a duty to defend or indemnify CentiMark or Del Monte in the underlying proceeding.

The liability alleged clearly arose out of AAM’s work for the additional insureds, but Homeland argued the subcontract was nonetheless voided by Oregon’s anti-indemnity statute, thus relieving Homeland of its duty to defend under the additional insured endorsements. Oregon Revised Statute §30.140 prohibits construction agreements from requiring a subcontractor or its insurer to defend or indemnify another party against liability caused by the other party’s own negligence. The statute also applies to additional insured endorsements procured through defense and indemnity agreements.

The Court agreed that the subcontract and resulting endorsements did not comport with the anti-indemnity statute because the subcontract “required AAM to obtain insurance coverage that would protect CentiMark and Del Monte from ‘all risks of injury’ to AAM employees, regardless of any ‘negligence or fault’ on the part of CentiMark or Del Monte.” However, the Court continued, the subcontract and additional insured endorsements were still “enforceable to the extent they require Homeland to defend CentiMark and Del Monte against damages caused by AAM’s negligence.” The court further explained that while AAM was not named in the complaint (due to the exclusivity of Oregon’s workers’ compensation law), “it [wa]s reasonable to infer that AAM provided the instructions that lead to [the employee’s] injury.” See Portland Gen. Elec. Co. v. Liberty Mut. Ins. Co., 112 F. Supp. 3d 1160, 1165-67 (D. Or. 2015).

The Court granted summary judgment in favor of the insureds as to Homeland’s duty to defend, and deferred ruling on Homeland’s duty to indemnify because the facts were not yet sufficiently developed.

Arden v. Forsberg & Umlauf

Posted in Appeals, Recent Cases

Washington’s Supreme Court Grants Review of Court of Appeals’ Decision Finding No Conflict of Interest for Law Firms that Represent Insurers and Defend Insurers’ Policyholders

 

We previously reported here on the Court of Appeals’ decision in Arden v. Forsberg & Umlauf, 193 Wn. App. 731, 373 P.3d (2016) on May 5, 2015. On September 28, 2016, the Washington Supreme Court granted a Petition for Review of the Court of Appeals’ decision in Arden.

In that decision, as a matter of first impression in Washington, the Court of Appeals held as a matter of law that a law firm with an insurer for a client may defend that insurer’s policyholder in an unrelated matter without creating a conflict of interest, or even disclosing that it also regularly represents the insurer in coverage matters.  The Court of Appeals also held that a lawyer defending an insured under reservation of rights does not breach its fiduciary duties to its insured client or commit legal malpractice by (1) not persuading the insurer to accept the claimants’ first demand to the insureds; (2) not engaging in settlement discussions with the claimants until receiving the claimants’ written discovery responses, notwithstanding the insureds’ request for prompt resolution;  or (3) failing to consult with the insureds before rejecting the claimants’ first and second demands when there was no evidence the insureds were harmed by same.

 

Exhausting Policy Limits

Posted in Duty to Indemnify, Excess and Umbrella Insurance, Liability Coverage, Recent Cases

As insurance is depleted for ongoing claims like asbestos bodily injury and long-term environmental pollution, how an insured is to use its layers of insurance is an issue.  The California Supreme Court has been asked to weigh in on the question of whether “horizontal exhaustion” or “vertical exhaustion” principles should apply to excess and umbrella layers of insurance in Montrose Chemical Corporation of California v. Superior Court of the State of California (Case No. S236148). California courts endorse the requirement of horizontal exhaustion of insurance at the primary level before any excess and umbrella policies attach, unless the excess/umbrella policies expressly require otherwise.  Community Redevelopment Agency v. Aetna Casualty & Surety Co., 50 Cal. App. 4th 329 (1996). However, California’s appellate courts have not directly addressed whether to extend this presumption to other levels of insurance.

In Montrose, a case potentially implicating over $100 million in insurance for decades of environmental contamination, Montrose’s upper-level excess insurers argue that horizontal exhaustion principles should apply to all lower-level excess policies because the higher level excess policies are excess to all “other insurance.”  Montrose, in response, argues that such a finding would be inconsistent with an “all sums” requirement, i.e., that once triggered, a policy has to pay all sums for which the insured is liable. The trial court agreed with the excess insurers, finding that horizontal exhaustion principles applied to levels of excess policies. Montrose lodged a Petition for Writ of Mandate in the Second Court of Appeal, which the Court of Appeal summarily denied.

Montrose appealed the denial of its Writ through a Petition for Review in the California Supreme Court. Under the stringent criteria of C.R.C. 8.500(b), the California Supreme Court accepts review in less than 5% of cases, including where it finds review necessary to secure uniformity or to address an important question of law. Montrose claims this case “demands immediate review” because the trial court order created a “momentus” “mandatory horizontal exhaustion” scheme in conflict with prior precedent. Numerous amici also urge the Court to take the opportunity to provide guidance on this issue. Because this trial court ruling only disposed of one of a many legal issues in the case, California’s highest court could well deem the issue premature.

This activity in California follows in the wake of other recent cases confronting the sequencing of coverage issue.  See e.g., John Crane, Inc. v. Admiral Ins. Co., No. 04-CH-8266 (Ill. Cir. Ct. July 21, 2016) (finding insureds facing long-tail exposure must horizontally exhaust all primary policies before triggering umbrella coverage, but application of horizontal exhaustion requirement to umbrella and excess policies depends on the excess policies’ language); In re Viking Pump, Inc., 27 N.Y.3d 244, 265 (2016) (applying “vertical exhaustion” approach in that case in light of primary policies having “anti-stacking” provisions).

FountainCourt

Posted in Liability Coverage, News, Recent Cases

The Oregon Supreme Court held yesterday that an insurer may be liable for a full jury award for property damages against its insured if the insurer fails to refute the insured’s factual position that it was impossible to determine what portion of the damage occurred during the policy period, if some damage took place during the policy period.

FountainCourt Homeowners’ Association v. FountainCourt Development, LLC, et al., 360 Or 341 (2016), arose from a construction defect lawsuit concerning water damage to FountainCourt, a condominium and townhouse development in Beaverton, Oregon.  The FountainCourt homeowners’ associations sued the developers, the contractor, and some of the subcontractors responsible for FountainCourt’s construction.  Sideco, Inc. was alleged to have installed siding and windows that failed to protect against water intrusion.  A jury awarded plaintiffs over $2 million, apportioning $485,877.84 in damages to Sideco.  FountainCourt, standing in the shoes of Sideco, then instituted a garnishment proceeding against Sideco’s insurers, including American Family Mutual Insurance Company (AFM).

AFM answered that it was not required to pay the Sideco judgment because some or all of the damages did not arise from “property damage” or an “occurrence” as defined in the insurance policy, because some or all of the damage fell outside the policy period, or because exclusions applied.  The trial court, concluding FountainCourt had met its burden to prove coverage under the policy and AFM had failed to prove an exclusion applied, entered judgment for FountainCourt.  (The trial court found the other insurer had proven an exclusion applied, so it was not liable.)   The Oregon Court of Appeals affirmed.

The Oregon Supreme Court accepted AFM’s petition for review, and affirmed.  The Court agreed FountainCourt had made a prima facie case that coverage under the policy was triggered and that AFM had failed to offer evidence in rebuttal.  But the Court declined to review the prior rulings concerning exclusions, reasoning that AFM failed to preserve any alleged error for review.  See id. at 352, 361-65.  The Court rejected AFM’s assertion that the damages awarded by the jury in the underlying case were not necessarily for “property damage” as defined by the insurance policy, but also could have included the cost to repair Sideco’s “defective work.”  See id. at 361.  The Court rejected this concern, reasoning that the jury was instructed FountainCourt was required to “prove physical damage to their property,” and “was not instructed that it could award damages for ‘defective work.’”  Id.  The Court explained AFM had failed to persuade “that actual physical damage to property is not covered under an insurance policy merely because it may be associated with defective workmanship by an insured.”  Id. 

The Court decided FountainCourt had proven an “occurrence” within the meaning of the policy because there was no genuine dispute that “at least some property damage occurred when the AFM policies were in effect.”  Id. at 365.  Accordingly, when exactly portions of the damage occurred was not relevant to whether coverage under the AFM policy was triggered in the first place.  See id.  The timing of the damage was relevant, however, to allocation among multiple insurers.  Because AFM had argued on appeal that it was not liable at all, not that liability was allocated incorrectly, the Court affirmed the trial “court[’s] implicit[] conclu[sion] that AFM was responsible for the entire amount and not a prorated amount, although some of the damage necessarily had occurred when the [other insurer’s] policy was in effect, given the court’s conclusion that that policy was triggered.”  Id. at 367.  The Court did not address how the timing of the damage might relate to exclusions, as it did not reach AMF’s exclusion arguments.

In the future, insurers should be mindful of the need to provide evidence of what portion of property damage fell within and outside the policy period in situations where the insurer is liable because at least some damage happened during the policy period.