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

Wing Enterprises, Inc. manufactures ladders that it sells through vendors. Wing maintained an insurance policy with Liberty International Underwriters that was not for commercial general liability (“CGL”), but included only products-completed operations coverage that covers injuries or property damage taking place away from Wing’s own premises and “arising out of” Wing’s products or work. The Liberty policy also contains a vendor’s endorsement covering injuries or property damage arising from Wing’s products distributed or sold in the regular course of the vendor’s business.

Advanced Ladders sells Wing’s ladders, and maintains a CGL policy with Allstate. Advanced Ladders’ Allstate policy provides coverage for both premises and operations and products-completed operations. James Colton went to Advanced Ladders to buy a Wing ladder. An Advanced Ladders employee offered Colton a “safe operations training” for the ladder. The employee extended the ladder to its full height and Colton climbed to the top; the ladder then collapsed, injuring Colton severely.

After Colton threatened to sue Advanced Ladders, Advanced Ladders tendered the claim to both Allstate and Liberty. Liberty denied the claim. Allstate determined that Colton’s injuries were caused by the apparent negligence of the Advanced Ladders employee who failed to properly set up the ladder. Allstate determined that the claim was covered under the premises and operations portion of the Advanced Ladders policy, and settled the claim for $1 million. Allstate then filed a declaratory judgment against Liberty, alleging that Liberty had a duty to defend and indemnify Advanced Ladders and that Liberty’s coverage was primary.

Allstate contended the Liberty policy covers Colton’s claim because the injury “arose out of Wing’s ladder,” and relied on cases involving CGL polices that broadly interpret the phrase “arising out of” to find that, in the CGL context, an injury need only arise out of an “occurrence” to be potentially covered. The Court of Appeals noted, however, that in the products-completed operations context, the injury must arise out of a defect in the insured’s product or work.

The Court of Appeals found that as the injury at issue was not caused by a defect in the insured’s product, the ladder, but by the negligent operations of the vendor, the injury did not arise out of a defect in the insured’s product or work. The Court acknowledged Allstate’s argument that but for the ladder Colton would not have been injured, but declined to accept the “but for” test, pointing out that ladder was merely the conveyance through which the vendor’s negligence caused the injury. Products-completed operations policies are not designed or intended to protect against such losses. Because Colton’s injury did not arise out of a defect in Wing’s ladder, the Court of Appeals held that Colton’s claims are not covered by Liberty’s products-completed operations policy.
 

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.