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

In affirming the trial court’s order granting summary judgment in favor of Farmers, the Oregon Court of Appeals addressed the meaning of the products-completed operations hazard in the context of a claim for water intrusion arising from defective construction, in turn affirming a number of key legal concepts in Oregon relating to insurance coverage. As to the exclusion, the court held that the “products-completed operations” hazard unambiguously includes all damages arising away from premises owned or rented by the insured and arising out of the insured’s work, unless one of the exceptions relating to ongoing operations applies. “Your work”, defined to include work done on the insured’s behalf, was interpreted as plainly including work performed on the insured’s behalf by subcontractors. Significantly, the Court of Appeals rejected an argument that the subcontractor exception in the separate “your work” exclusion expressed an intent for the policy as a whole to cover damages caused by the work of subcontractors, holding that an exception to one exclusion does not modify other aspects of the policy. Because the insured presented no evidence as to the timing of the water damage, the insured failed to meets its burden of proof to present any evidence indicating the applicability of the exception for damages taking place during ongoing operations.

In so holding, the Court of Appeals affirmed a number of key concepts. The court confirmed that, under Oregon’s rules for interpretation of insurance contracts, extrinsic evidence is irrelevant to determining the rights and obligations of the parties to an insurance contract, which is based solely on the terms of the policy. The Court further confirmed that the insured bears the burden of proving the applicability of an exception to an exclusion. Perhaps more significantly, the Court of Appeals held that the insured had the burden to submit proof that the property damage took place during ongoing operations. Although determined in the context of an exception to an exclusion, this holding will likely be useful in asserting that the insured also bears the burden of affirmatively submitting evidence as to the timing of the property damage for purposes of triggering the coverage grant, which is often a significant issue in water intrusion cases. Finally, the Court of Appeals confirmed that insureds cannot attempt to create ambiguity in an insurance contract by presenting evidence of an insurer’s claims handling practices and that the doctrine of waiver does not apply to exclusions in insurance contracts.

Thorpe Insulation Company was a distributor and installer of asbestos insulation products. Thorpe was sued in thousands of personal injury lawsuits. Thorpe’s insurance policies covered both products/completed operations claims (“products claims”) and non-products claims (“operations claims”). All of its policies’ aggregate limits applied to products claims, but not to operations claims.

In 1978, Thorpe began tendering the asbestos lawsuits to its primary insurers. In 1984, Thorpe and ten of its primary insurers entered into a Claim Handling and Settlement Agreement (the “1984 Agreement”). The stated purpose of the 1984 Agreement was to “clarify among” the parties to the agreement “the apportionment of defense and indemnification of Thorpe[.]” The 1984 Agreement provided, among other things, that it should not be construed “as a policy interpretation, and shall not be used in any Court … to interpret the obligations under general liability or other policies” and was “without prejudice to later assertion by any such parties of claims against each other … pursuant to the several reservations of rights … contained in this Agreement.” 

Thorpe’s primary insurers charged all settlement payments against the policies’ aggregate limits, treating the claims as products claims. As the primary policies exhausted, Thorpe began tendering claims to its first level excess insurers. In 1998, seven of Thorpe’s first level excess insurers entered into an Interim Excess Insurance Claims Handling Agreement (the “1998 Agreement”). The stated purpose and terms of the 1998 Agreement were similar to those of the 1984 Agreement. The 1998 Agreement also considered an excess insurer’s policy to be implicated when the underlying primary policy is “contend[ed to] have been exhausted.” Thorpe was not a party to the 1998 Agreement, but received a copy and advised its first level excess layer insurers that it reserved all rights under their policies.  

Thorpe’s first level (and upper level) excess insurers charged payments under their policies against aggregate limits, again treating all claims as products claims. When Thorpe had nearly exhausted all of its $180 million in aggregate limits, it sued its insurers seeking a declaration that the insurers still owed defense and indemnity in connection with claims that Thorpe now contended were operations claims and not subject to aggregate limits.

The insurers argued that by accepting payment of the policies’ aggregate limits on a layer-by-layer basis over several decades, Thorpe understood that all of the underlying claims were products claims under the terms of the policies. Thorpe filed a motion in limine to exclude evidence of the parties’ post-policy course of performance. The trial court granted the motion on two grounds: (1) course of performance evidence is only relevant if it predates a controversy and the 1984 Agreement indicated the existence of a controversy, and (2) such evidence is relevant only if it sheds light on the intent of the parties at the time of contracting and the individuals who negotiated the subject policies were not the same as those who performed under the policies.

The insurers filed a petition for writ of mandate. The court of appeal issued an order to show cause to consider whether the trial court erred in concluding the policies’ claims handling history was irrelevant to the issue of policy interpretation.  

Preliminarily, the appellate court concluded that course of performance evidence is generally admissible to interpret insurance policies, even standard form insurance policies. The court also concluded the admissibility of course of performance evidence does not require the individual performing under the contract to be the individual who negotiated the contract. 

However, the appellate court held course of performance evidence is only relevant to the issue of contract interpretation when the performance is attributable to the parties’ understanding of the contract. The court determined that in the case before it, the 1984 and 1998 Agreements, not the policies, governed the bulk of the parties’ performance. Among other things, the court found particularly relevant the fact that Thorpe obtained excess coverage proceeds because the insurers to the 1998 Agreement had agreed among themselves to make those payments while reserving rights to subsequently contend the payments were not, in fact, due under their policies. 

The court concluded the trial court did not err in excluding evidence of performance following the 1984 Agreement. But the court left open the possibility that pre-1984 course of performance evidence and course of performance evidence as to excess insurers not parties to the 1998 Agreement could still be admissible.