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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.

The undisputed facts revealed that the insured had removed a portion of his home’s roof in order to make repairs, exposing a plywood sublayer.  To protect the home during the repairs, the insured installed plastic sheeting over the plywood sublayer.  However, a storm blew some of the sheeting loose, and when the insured attempted repairs he ended up falling off the roof and bringing down more of the sheeting with him.  As a result, rain water penetrated the plywood sublayer and damaged the home’s interior and contents.

Because the policy did not define “roof,” the question posed to the Courts was whether the plastic sheeting qualified as a “roof” such that the exception to the water damage exclusion applied.  The Court of Appeals held that a “roof” involved some degree of permanence, writing:  “If someone attempted to sell a house that was covered by such a plastic sheet, we doubt that any reasonable buyer would believe that he or she was buying a house that had a ‘roof.’  Most likely, the buyer would say, ‘Where’s the roof?’”

The Supreme Court reversed, noting that the common dictionary definitions for “roof” did not include a permanence requirement.  Rather, the Court applied a functional test, holding that a “roof” only needs to “be sufficiently durable to meet its intended purpose: to cover and protect a building against weather-related risks that reasonably may be anticipated.”  Because the insured had presented expert testimony that the plastic sheeting “would have been adequate to protect the home for one or two years if necessary,” the Court found a fact question as to whether or not the plastic sheeting qualified as a “roof.” 

It is important to note what Dewsnup does not hold.  At least one insured’s attorney is already citing Dewsnup for the proposition that the presence of an undefined policy term, e.g., “roof,” creates a factual issue which precludes summary judgment.  This is not true.  The Dewsnup Court did not depart from the long-standing rule that insurance policies are construed as a matter of law in Oregon.  The factual question which precluded summary judgment was not the meaning of the term “roof” (indeed, the Court applied its own definition as a matter of law), but, rather, whether the plastic sheeting at issue in the case met that definition.  Genuine disputes over the material facts which comprise an insured’s claim (e.g., when certain property damage occurred) have always been sufficient to defeat summary judgment.  In contrast, disputes over the meaning of undefined policy terms are resolved as a matter of law and, therefore, do not preclude summary judgment.  Dewsnup does not change that dynamic.

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.

Risely sued Turner for negligence and false imprisonment, among other claims. Turner tendered to his insurer under two policies: homeowners (with a $300,000 limit) and auto (with a $50,000 limit). The insurer agreed to defend the entire claim under the auto policy but denied defense and indemnity under the homeowners policy. (There is no mention of any auto exclusion in the homeowners or provision that only one of the company’s policies would apply to a claim.)

A settlement demand was made for $300,000 (the limits of the homeowners’ policy). The insurer declined the settlement demand on the grounds that it was in excess of the auto policy limits and there was no other applicable coverage. Thereafter, Turner (even though defended) entered into a stipulated judgment with Risely for $434,000 on the false imprisonment claim, and assigned his rights to Risely. Risely alleged the insurer refused to pay the judgment. (The insurer did pay its auto limits to Risely and other victims of the car accident.) Risely sued the insurer as judgment creditor and assignee of Turner’s rights under the homeowner’s policy.

The trial court granted summary judgment in the insurer’s favor on the basis that there could not be any damage for refusal to settle because, under Hamilton v. Maryland Cas. Co., 27 Cal.4th 718 (2002), an insured cannot settle behind its insurer’s back when the insurer is providing a defense. The trial court found that because the insurer provided a full defense, the failure to defend under the homeowner’s policy “was of no consequence.” 

The appellate court disagreed, focusing on whether a claim could be made by the insured (and in his shoes, Risely) that the insured had not been fully protected from the expense of the litigation (through the defense provided) and the liability