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

Vision was the general contractor for a new condominium complex being built in Tacoma, Washington. Vision subcontracted with D&D for the concrete work. D&D sub-subcontracted with Berg for shoring equipment to support the poured concrete slabs. The shoring structure collapsed when D&D poured a concrete slab. Vision tendered the claim to Philadelphia, whose investigator determined the collapse was due to faulty design and workmanship, losses expressly excluded under Philadelphia’s policy, so Philadelphia denied. Vision argued the “resulting loss” exception to the policy’s faulty workmanship exclusion applied to restored coverage. Philadelphia maintained its denial.

Vision sued Philadelphia for breach of contract and bad faith. Shortly before trial, Vision settled with Berg, taking a covenant judgment against it and corresponding agreement to execute only against Berg’s insurer, and fully releasing Berg from liability. The trial court approved the settlement as reasonable and rejected Philadelphia’s motion to dismiss Vision’s breach of contract claim against it because Vision had impaired its recovery rights by releasing Berg. The court held: “If Philadelphia prevails on coverage it is not prejudiced by this settlement. If Philadelphia does not prevail, it is in material breach of its insuring obligations and is not entitled to subrogation in light of such breach.” 

The trial court also ruled as a matter of law that the “resulting loss” exception to the faulty work exclusion applied to the claim, and submitted to the jury the issues of causation, bad faith and damages. At trial the jury found Philadelphia breached its insurance contract in bad faith, awarding Vision $1.2 million in breach of contract and bad faith damages and $2 million for attorney’s fees. On appeal, the court affirmed the trial court’s ruling that Philadelphia was estopped from claiming it was released from liability when it denied Vision’s claim and Vision settled with Berg. But it reversed and remanded the trial court’s ruling that the “resulting loss” exception to the faulty workmanship exclusion applied. 

The appellate court found the trial court’s ruling erroneously presupposed faulty workmanship had caused the damage, when the issue should have been a jury question. The appellate court remanded to allow the jury to determine which of the alleged causes – faulty workmanship, faulty design and/or faulty equipment – caused the collapse. For the claim to be covered, the jury must find either that faulty equipment (an independent covered peril under the policy), caused the damage, or that multiple perils, some covered and some excluded, caused the damage, but that faulty equipment was the efficient proximate cause of damage. Because it reversed and remanded for a new jury trial, the court did not reach the issues of damages or attorney’s fees.

The sole question at issue in the parties’ cross-motions for summary judgment was whether the assignment of policy rights was valid in light of the policy’s anti-assignment clause stating: “[a]ssignment of interest under this Policy shall not bind Insurer unless their consent is endorsed hereon.” The district court and the Ninth Circuit both agreed that only three major Oregon Supreme Court cases were relevant to the analysis: Groce v. Fid. Gen. Ins. Co, 252 Or. 296, 448 P.2d 554 (1968); and Holloway v. Republic Indem. Co. of Am., 341 Or. 642, 147 P.3d 329 (2006), which addressed anti-assignment clauses, and Hoffman Const. Co. of Alaska v. Fred S. James & Co., 313 Or. 464, 836 P.2d 703 (1992), which laid out the analytical approach for interpreting insurance contracts.

In Groce, the Oregon Supreme Court held that a virtually identical anti-assignment clause did not prohibit assignment of a cause of action that has accrued under the policy, such as breach of contract. Groce, however, was decided before Hoffman provided the analytical framework for interpreting insurance policies. In Holloway, on the other hand, the Oregon Supreme Court employed the analytical approach set forth in Hoffman to find that an anti-assignment clause that stated: “Your rights or duties under this policy may not be transferred without our written consent,” prevented assignment of both pre- and post-loss rights and duties. Holloway, 341 Or. at 331.

Ultimately, the District Court determined that neither Groce nor Holloway should control, and applied the Hoffman framework to the anti-assignment clause, determining that it was not ambiguous, and applied to bar both pre- and post-loss assignments. The Ninth Circuit reversed, holding that Groce “was not undercut by the Hoffman methodology.” Even if Groce were no longer binding, the Ninth Circuit concluded, the anti-assignment clause at issue was ambiguous under the Hoffman framework because “interest” could plausibly refer to either a purely pre-loss financial stake in the policy, or to both pre- and post-loss rights. The Ninth Circuit observed that the presumption against the drafter applied here “with particular force” in light of the decision in Groce, as Illinois Union “chose a nearly identical anti-assignment clause with constructive knowledge of its meaning.”