National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The insured had worked as a real estate broker since 1971. In 2000 or 2001, the insured purchased real property. In 2004 the insured contracted with Water Brother Construction to build a duplex on the property and the construction for the project was completed in 2005. That same year, without ever having rented out the duplex, the insured sold the duplex. Three years later, a duplex tenant had a visitor who tripped down the stairs and fell sustaining bodily injury. The owners of the property, through a third-party complaint, alleged the insured was negligent and had breached the implied warranty of habitability. Initially the complaint alleged the insured was a “developer of commercial and investment real estate” however after discovery and depositions, the property owners amended the third-party complaint and removed all allegations referencing the insured’s occupation or business.

The insurer had issued three policies to the insured: a Landlord Insurance Policy, a Homeowner’s Policy and a Personal Umbrella Insurance Policy. The landlord policy provided coverage during the building of the duplex but ended at some time after the sale of the duplex. The homeowner’s policy and personal umbrella policy were in effect at the time of the alleged accident. Both policies had exclusions for an injury or property damage arising out of the insured’s “business activities.” Specifically coverage was excluded for “any occurrence arising out of any act or failure to act by any person in performing function’s of that person’s business” or “any occurrence arising out of a business or business property.” Further “Business” is defined as “any full or part-time activity of any kind: (1) arising out of or relating to an occupation, trade or profession of an insured person; and (2) engaged in by an insured person for economic gain, including the use of any part of any premises for such purpose.” The issue before the court on the Motion for Summary Judgment was whether the business exclusion of the policies applied and whether, in turn, the insurer had a duty to defend the insured. 

The insured advanced the argument that “the construction and sale of the duplex constitutes ‘business’ as defined by the policy because it was at least a part-time activity, it arose out of [the insured’s] occupation, trade or profession, and it was engaged in for economic gain.” The Court, under Oregon law, determines the duty to defend by examining the four corners of the policy and the complaint. The Amended Third-Party complaint did not allege the insured was a builder or developer, and so while even though the facts tend to show the development of the duplex arose out of the insured’s business, the Court found those “facts do not extinguish the [insurer’s] duty to defend.” Therefore the court rejected the insurer’s argument and held the insurer had a duty to defend the insured.

The underlying complaint alleged that the retaining wall was damaged by sewage and effluent that built up behind it.  The court found that the exclusion was ambiguous because “it is unclear whether the overflow/leak from the sewage pipe constitutes” waste materials.  The court noted that although raw sewage can constitute a health hazard, since the sewer line could also include rainwater and other sources, it was an issue of fact as to whether the discharge was “waste materials.”  The court noted that if a storm sewer overflowed and flooded a house, the water that flooded the house could include antifreeze and oil, but that did not mean that the water would constitute “waste materials or other irritants, contaminants or pollutants.”  The court went on to hold that even if the discharge was “waste material” the complaint did not limit its allegations to property damage caused by waste material, but also included property damage resulting from the buildup of pressure from the liquid.  Since the damage could have been caused by the pressure, and not “the hazardous or dangerous nature of what the liquid contained,” the pollution exclusion did not apply to the duty to defend.

Wing Enterprises, Inc. manufactures ladders that it sells through vendors. Wing maintained an insurance policy with Liberty International Underwriters that was not for commercial general liability (“CGL”), but included only products-completed operations coverage that covers injuries or property damage taking place away from Wing’s own premises and “arising out of” Wing’s products or work. The Liberty policy also contains a vendor’s endorsement covering injuries or property damage arising from Wing’s products distributed or sold in the regular course of the vendor’s business.

Advanced Ladders sells Wing’s ladders, and maintains a CGL policy with Allstate. Advanced Ladders’ Allstate policy provides coverage for both premises and operations and products-completed operations. James Colton went to Advanced Ladders to buy a Wing ladder. An Advanced Ladders employee offered Colton a “safe operations training” for the ladder. The employee extended the ladder to its full height and Colton climbed to the top; the ladder then collapsed, injuring Colton severely.

After Colton threatened to sue Advanced Ladders, Advanced Ladders tendered the claim to both Allstate and Liberty. Liberty denied the claim. Allstate determined that Colton’s injuries were caused by the apparent negligence of the Advanced Ladders employee who failed to properly set up the ladder. Allstate determined that the claim was covered under the premises and operations portion of the Advanced Ladders policy, and settled the claim for $1 million. Allstate then filed a declaratory judgment against Liberty, alleging that Liberty had a duty to defend and indemnify Advanced Ladders and that Liberty’s coverage was primary.

Allstate contended the Liberty policy covers Colton’s claim because the injury “arose out of Wing’s ladder,” and relied on cases involving CGL polices that broadly interpret the phrase “arising out of” to find that, in the CGL context, an injury need only arise out of an “occurrence” to be potentially covered. The Court of Appeals noted, however, that in the products-completed operations context, the injury must arise out of a defect in the insured’s product or work.

The Court of Appeals found that as the injury at issue was not caused by a defect in the insured’s product, the ladder, but by the negligent operations of the vendor, the injury did not arise out of a defect in the insured’s product or work. The Court acknowledged Allstate’s argument that but for the ladder Colton would not have been injured, but declined to accept the “but for” test, pointing out that ladder was merely the conveyance through which the vendor’s negligence caused the injury. Products-completed operations policies are not designed or intended to protect against such losses. Because Colton’s injury did not arise out of a defect in Wing’s ladder, the Court of Appeals held that Colton’s claims are not covered by Liberty’s products-completed operations policy.