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

In Harris, the plaintiff brought an action for breach of contract and for declaratory relief against its insurer for the insurer’s failure to undertake Harris’ defense in a claim against it under a claims-made and claims-reported policy. The parties filed cross-motions for summary judgment on the coverage issue, which resulted in Judge Papak’s opinion.  After determining that Oregon law applied to the dispute, the District Court determined that Oregon’s appellate courts have not considered whether the “eight-corners” rule must be properly applied to a claims-made, as opposed to occurrence-based, policy.  The District Court noted that with claims-made policies, but not occurrence-based policies, the date that a claimant advises the insured that a claim is being made is material to determining whether there is coverage for the claim.  The District Court found persuasive analysis on this issue from an opinion from the First Circuit, and quoted from that opinion: “the [eight-corners] rule cannot be rigidly applied in the context of claims-made policies where the determinative event is the timing of the claim, a fact that likely will be . . . irrelevant to the merits of the underlying tort suit, and therefore absent from the pleadings.” Edwards v. Lexington Ins. Co., 507 F3d 35, 40-41 (1st Cir 2007).

The District Court held that to bar extrinsic evidence of the date a claim was noticed to an insured when analyzing an insurer’s duty to defend under a claims-made policy would improperly subvert the purpose and terms of the agreement between the insured and its claims-made insurer by requiring the insurer to undertake the insured’s defense under circumstances where it did not agree to do so and where the insured had no contractual right to expect it. The District Court went on to state that the rigid application of the broadest formulation of the “eight-corners” rule to claims-made policies would create circumstances in which the party alleging claims against the insured could, by choosing whether or not to allege the date a claim was first made against the insured, control whether the claims-made insurer would be required to undertake its insured’s defense.  As Oregon acknowledges that “[t]he primary and governing rule of the construction of insurance contracts is to ascertain the intention of the parties,” Totten v. New York Life Ins. Co., 298 Or 765, 770 (1985), and because rigid application of the “eight-corners” rule would systematically subvert intentions of the parties to a claims-made insurance contract and distort the terms of their agreement, the District Court predicted that, if presented with the issue, the Oregon Supreme Court would not apply the “eight-corners” rule to bar consideration of extrinsic evidence of the date a claim was noticed to an insured when analyzing an insurer’s duty to defend under a claims-made policy.

The insurer argued that there could be no “collapse” because the building was still standing even though there was evidence of “a downward movement of several inches in the hotel caused by an abrupt snapping of the trusses.”  The insured responded that the incorporation of a habitability requirement in the definition of “collapse” (“… with the result that the building … cannot be occupied…”) necessarily suggested that something short of a complete falling to the ground could qualify as a collapse.  Because the alleged “collapse” had rendered some rooms unsafe and unusable, the insured argued that there was sufficient evidence for a jury to find that a covered “collapse” had occurred.  The Court agreed with the insured, noting that the habitability requirement “stands as a proxy for a substantial impairment of integrity by adding a life and/or safety element to the definition.”

The Malbco Court distinguished a prior “collapse” decision by the Oregon District Court, Association of Unit Owners of Nestani v. State Farm, 670 F. Supp. 2d 1156 (D Or 2009), wherein summary judgment was granted for the insurer.  The policy at issue in Nestani defined “collapse” as “actually fallen down or fallen into pieces” and, importantly, did not include any habitability requirement.  The dichotomy between these two decisions – Malbco and Nestani – re-affirms the importance, especially in Oregon, of focusing on the particular policy language at issue rather than relying upon general standards for general categories of alleged losses.

The policy at issue contains a “Designated Work Exclusion” that bars coverage for “A. Condominiums, multi-unit homes, townhouses, or apartment buildings which contain 5 or more single family units. B. Any building or structure in excess of three (3) stories or any building or structure in excess of forty (40) feet in height.” The plaintiff contended that the undefined term “condominium” is ambiguous because the term is susceptible to more than one meaning, and when properly interpreted does not exclude coverage for plaintiff’s claims.

Employing Oregon’s rules to interpret the terms of an insurance contract, the court first determined whether the term has a plain meaning. Oregon courts may look to dictionary definitions to determine whether a term has a plain meaning. The plaintiff had provided a dictionary definition that “condominium” means either a building or complex containing a number of individually owned units, or the individual units. The court concluded that the dictionary definition established that “condominium” has more than one plausible meaning, and so the court examined the term in light of the context in which the term is used in the policy.

After examining the policy, the court rejected the plaintiff’s argument that the “Designated Work Exclusion” excludes only condominiums that “contain 5 or more single family units,” which the plaintiff argued demonstrates the insurer’s intent to exclude coverage of condominiums that are comparatively large buildings containing more than five single family units. The court also rejected plaintiff’s argument to apply the ejusdem generis principle of contract interpretation to the “Designated Work Exclusion.” In agreeing with the insurer, the court found that while the exclusion contains an enumeration of specific things (i.e., condominiums, multi-family homes, townhouses, and apartment buildings), that enumeration is followed by an even more specific description (i.e., “which contain 5 or more single family units.”). The court found that the application of the ejusdem generis doctrine does not establish either ambiguity in the “Designated Work Exclusion” nor indicate that the “Designated Work Exclusion” does not apply.

By applying Oregon’s rules to interpret the terms of an insurance contract, the district court concluded that both the plain meaning of “condominium” in the policy’s “Designated Work Exclusion,” and its meaning within the policy as a whole indicate that the “Designated Work Exclusion” applies to the project at issue, and the particular policy excludes coverage for the project.