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

The exclusion on which American Family relied provided that the insurance does not apply to “property damage” arising out of “your work” or “your product” in connection with any “multi-unit residential building.” The policies at issue defined “multi-use residential building” as “a condominium, townhouse, apartment or similar structure, each of which has greater than eight units built for the purpose of residential occupancy.” While there was no dispute whether the exclusion did or did not apply to certain of the buildings at FountainCourt, the plaintiffs took the position that the exclusion did not apply to certain of the remaining buildings because they were “mixed use,” meaning the buildings contained condominiums and townhomes. The plaintiffs asserted that the exclusion’s phrase “similar structure” did not include the mixed-use buildings at issue, and also argued that the exclusion was ambiguous because it was as reasonable to include mixed-use buildings in the definition of “multi-unit residential building” as it would be to include them.

The court found that the exclusion precluded coverage for any building having greater than eight units regardless of which type of unit it contains. Important to the court’s finding was the exclusion’s requirement that the structure be “built or used for the purpose of residential occupancy.” As each unit was built to be used as a residence, the fact that the units were “mixed ownership,” that is, some being townhomes and some condominiums, did not affect the application of the multi-unit exclusion.

The court also rejected the plaintiffs’ argument that the exclusion’s application depended on whether the owners of at least nine residential units in a building have the same rights, or incidents of ownership. The court pointed out that, if such an interpretation were correct, it would be possible for owners of units within a multi-unit structure to avoid the application of the exclusion simply by changing the incidents of ownership to reduce the total number of residential units that share common incidents of ownership in order to fall below the nine unit threshold of the multi-unit exclusion. The court found that the exclusion unambiguously applied to units that are “built or used for residential occupancy” and a that structure that contained more than eight residential units when built triggers the exclusion even if some units are later converted to other uses or modes of ownership. Thus, the court found that the exclusion applies to any building that is similar in structure to a condominium, townhouse or apartment that is built to include more than eight residential units no matter how the individual units in the structure are legally owned.
 

MOE responded with a declaratory judgment action arguing, among other things, that no indemnity obligation existed because, as a result of the statute of limitations, the insured was not “legally obligated” to pay anything. Id. at 6. Following a judgment for the insured, the Court of Appeals reversed, holding that in the absence of any showing of bad faith, the insurer “should be allowed to litigate to finality whether the statute of limitations had run on the underlying claims.” Id. at 7. The Supreme Court disagreed, reasoning that MOE already had a sufficient opportunity to be heard on the statute of limitations defense in the underlying case through an unsuccessful motion for summary judgment, the settlement negotiations and the reasonableness hearing. Id. at 12. The Court wrote that “[w]hen an insurer had an opportunity to be involved in a settlement fixing its insured’s liability, and that settlement is judged reasonable by a judge, then it is appropriate to use the fact of the settlement to establish liability and the amount of the settlement as the presumptive damage award for purposes of coverage.” Id. at 16. The Court held that, regardless of whether or not an insurer acts in good faith, the insurer “is not entitled to litigate factual questions that were resolved in the liability case by judgment or arm’s length settlement.” Id. at 18.

However, that determination did not resolve the extent of MOE’s indemnity obligation because the policy only covered “property damage” as defined and limited by the policy. As the Court correctly noted, “the coverage issue is different from the global damages issue.” Id. at 25. MOE argued that since the majority of the siding was not damaged, it should not be responsible for the cost to remove and replace the siding. Id. at 21. The Court rejected this argument, reasoning that “[r]emoving and repairing the siding is simply part of the cost of repairing the damage to the interior walls.” Id. at 22. Similarly, the Court rejected MOE’s argument that it should not be responsible for the cost of replacing siding because such costs fell within the “impaired property” and “your work” exclusions, concluding that “if the siding must be removed to repair damage” to other components of the building “then there is coverage for the cost of the removal and replacement of the siding.” Id. at 27. On the other hand, the Court found that the record was insufficient to determine the total amount of “property damage” covered by the policy because the settlement could have included amounts attributable to the diminution in value of the entire development “even if there had been no actual property damage to a particular wall.” Id. at 26. In other words, the Court could not tell whether the trial court’s ruling in the coverage action was based on an actual coverage determination or, rather, “merely” upon “the findings of the liability judge that the settlement was reasonable.” Id. at 26. Accordingly, the Court remanded for a closer examination of what damage had actually occurred.

At the trial court level, the insurer successfully moved for summary judgment, contending that “the plain and ordinary meaning of the word ‘repair’ in the policy did not incorporate a duty to pay diminished value.”  Id. at 5.  At issue was the policy provision limiting the insurer’s liability to “[t]he amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality…”  Id. at 6.  Naturally, the parties offered competing definitions for the term ‘repair.’  The insured argued that the term “includes restoration of the preloss condition and value of the insured property,” but the insurer argued that the term “refers only to the restoration of the function and appearance of the insured property.”  Id. at 8.  The Supreme Court found that the sixty-seven year old case of Dunmire Co. v. Ore. Mut. Fire Ins. Co., 166 Or 690 (1941) controlled – and dictated a decision in favor of the insured – because Dunmire interpreted the word “repair” in a “virtually identical” policy provision. Gonzales, 2008 Ore. LEXIS at 17.

The Gonzales Court held: “[U]nder the policy at issue, if an attempted ‘repair’ does not or cannot result in a complete restoration of the vehicle’s preloss condition, the vehicles is not ‘repair[ed],’ and the resulting diminution of value of the vehicle remains a ‘loss to [the] insured car caused by collision’ for which defendants are liable under their policy.”  Id. at 18.  However, the Supreme Court limited its holding by noting that the decision was based on the subject policy’s terms rather than upon “principles applicable generally to diminished value claims in property damage disputes of all kinds.”  Id. at 6.  In fact, the Court explicitly stated that nothing in the current decision or in Dunmire “prevents insurers from including a definition of repair in automobile policies that excludes diminished value from coverage.”  Id. at 18-19.

The Gonzales decision sets the stage for further litigation over what qualifies as a compensable diminution in value.  In Gonzales, the insurer asserted that the insured’s argument “reduced to its essence” would require an insurer “to pay for diminished value that results only from stigma attached to that vehicle because the vehicle has been involved in a collision.”  Id. at 20-21.  The Court declined to address that argument because the insured had asserted more than just stigma but actual physical problems that did not exist prior to the collision.  The Court wrote: “[W]e need not decide whether the policy requires payment for a claim based solely on ‘stigma.’”  Id. at 21. Accordingly, a decision on that issue will have to await another day.