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

In Fred Shearer & Sons, a product vendor was sued for negligence in applying stucco to the exterior of a building and the vendor in turn sought a defense from the product distributor’s insurer on the theory that the vendor was an additional insured under the policy’s “vendors endorsement.” Id. The language of the endorsement provided coverage for vendors as additional insureds only if the vendor sells the distributor’s product in the “regular course of [the vendor’s] business.” Id. The court reasoned that a determination of whether the vendor qualified an additional insured would require the court to analyze whether the vendor sold the product “in the regular course of business.” Id.   The court was concerned that a plaintiff, such as the one in this case, would have had no reason to allege facts in the complaint relevant to this endorsement; moreover facts related to whether the vendor was selling or distributing its product in the regular course of business likely would be irrelevant at trial. Id. The court was concerned that in many cases, facts establishing who is an insured or an additional insured “may or may not be relevant to the merits of the plaintiff’s case in the underlying litigation” and therefore those facts may or may not be plead in the complaint.  Id.  Thus, the court concluded that in order to determine whether a party is an “insured” as a threshold matter, it is permissible to examine extrinsic evidence.

The court rejected the insurer’s argument that no defense was owed to the vendor since the four-corners of the complaint exclusively govern the duty to defend and the complaint was insufficient to trigger coverage under the policy. Id. The court acknowledged that under the seminal case on point, Ledford v. Gutoski, courts are required to look only at the complaint and the policy to evaluate the insurer’s duty to defend. 319 Or. 397, 877 P.2d 80 (1994). The court distinguished Ledford from the present case and concluded that reliance only on the policy and the complaint is appropriate to determine whether alleged conduct triggers the policy – which was at issue in Ledford.  In Ledford, unlike in this case, “the court was not concerned with the preliminary question: whether the party seeking coverage was actually an insured within the meaning of the policy.” Id. (emphasis in original). When the threshold matter is determining who is covered by the policy, reviewing extrinsic evidence is appropriate. Id.

After finding that the additional insured endorsement applied, the court found two exclusions inapplicable. The court found both exclusions ambiguous and the complaint could be read to allege damage outside the scope of the exclusions.

"For that reason, we conclude that defendants' settlements with Zidell did not operate to extinguish plaintiffs' right to equitable contribution for defense costs paid prior to the settlement. If plaintiffs and defendants had the same obligation to defend Zidell, and plaintiffs discharged a disproportionate share of that obligation, then their right to equitable contribution arose at that point in time. Although Zidell was able to release its own claims against defendants for defense costs, Zidell was not in a position to release plaintiffs' claims against defendants."

The court noted that its decision only applied to defense costs incurred before the date of a settlement between a carrier and the insured. The court expressed no opinion as to the fate of any underlying defense costs incurred after a carrier settles with its insured. The court held that the Oregon statute governing contribution among carriers for an environmental claim does not preclude a contribution action against a settling carrier because it allowed a carrier to at least seek contribution from another carrier who is "liable or potentially liable."

The court also held that because the insurer may only seek contribution based on equity, not contractual obligations, London was not entitled to statutory attorney fees in pursuing the contribution claim. With respect to what constitutes a suit, the court ruled that a letter from the Oregon Department of Environmental Quality that is the equivalent of an "agency ultimatum," asserting that the insured must investigate and remediate its site, qualifies as a "lawsuit." The court held that since the letter from the agency satisfied this requirement. The court held there was a duty to defend because the letter required investigation into the "extent" of third party property damage, rather than "whether" third party property damage had occurred.

-Submitted by Andrew Moses, Gordon & Polscer LLC

The case arose after the insureds noticed a musty odor and a “mushy” floor in a bathroom of their home. The insureds hired a contractor to remodel the bathroom who later testified at trial that a leak had occurred in the bathroom shower that permitted water to penetrate the area under the shower, causing the sub-floor to sustain dry rot. The insureds made a claim under their homeowners’ policy to recover the cost of repairs to the bathroom; the insurer denied the claim on the basis that the damage was not covered under the terms of the policy. The insureds then filed an action against the insurer for breach of the policy.

Relying on evidence that the structure under the shower membrane had deteriorated to the point that it did not provide structural support, the trial court concluded that the damage caused to the structure was so severe that it constituted a “collapse” covered under the terms of the Supplementary Coverages – Section I of the policy. Having made that finding, the trial court then determined that a provision of the “Losses Not Covered” section for “continuous or repeated seepage or leakage of water” excluded coverage. However, the trial court determined that there was coverage under an endorsement regarding fungi, wet or dry rot, or bacteria that was not subject to any exclusion, but limited the insureds’ recovery under the coverage to $5,000 in accordance with the supplemental coverage limits.

After addressing the relevant policy terms, and employing Oregon’s rules to interpret the terms of an insurance contract, the appellate court held that the trial court, based on the circumstances that it found, correctly ruled that the exclusion for “continuous or repeated seepage or leakage of water” excluded coverage under Section I of the policy. The appellate court also held, however, that the trial court had ruled incorrectly in finding coverage under the endorsement.

The appellate court found that language in the Endorsement - Supplemental Coverage section of the policy predicates coverage on whether the loss covered by the supplemental coverage is a “covered cause of loss.” The appellate court held that the cause of loss in this case was not a covered cause but an excluded cause, and reversed the trial court’s ruling by holding that the endorsement regarding fungi, etc., was also subject to the exclusion for “continuous or repeated seepage or leakage of water.”