Oregon Supreme Court Confirms Broad Duty to Defend

Theresa A. Guertin and Tiffany Casanova | Saxe Doernberger & Vita PC

The Supreme Court of Oregon issued a decision at the end of last year which perfectly illustrates the lengths to which a court may go to grant a contractor’s claim for defense from its insurer in a construction defect suit. In West Hills Development Co. v. Chartis Claims, Inc.,1 the Court held that a subcontractor’s insurer had a duty to defend a general contractor as an additional insured because the allegations of a homeowner’s association’s complaint could be interpreted to fall within the ambit of coverage provided under the policy—despite the fact that the policy only provided ongoing operations coverage, and despite the fact that the subcontractor was never mentioned in the complaint. The decision is favorable to policyholders but also provides an important lesson: that contractors may avoid additional insured disputes if those contractors have solid contractual insurance requirements for both ongoing and completed operations risks.

An insurer’s duty to defend is typically determined by the allegations of a complaint as compared with the language of the policy. This principle is often referred to as the “four-corners rule” in reference to the four corners of the paper the policy is written on. Some states have relaxed this rule and allow parties to introduce “extrinsic evidence”—that is, facts which are not set forth in the complaint—to establish the duty to defend.2 Oregon, however, has consistently followed the “four-corners rule,”3 with one notable exception: a party claiming additional insured status may introduce extrinsic evidence to prove that they are an insured on the policy.4 In West Hills, the Court reiterated Oregon’s stance on these issues.

West Hills Development Company (“West Hills”) was a general contractor for a townhouse development in Oregon. West Hills contracted with L&T Enterprises (“L&T”) as subcontractor and required that L&T obtain insurance coverage naming West Hills as an additional insured. L&T’s commercial general liability policy with Oregon Automobile Insurance Company (“Oregon Auto”) named West Hills as an additional insured on a standard additional insured endorsement, which insured West Hills “only with respect to liability arising out of [L&T’s] ongoing operations performed for [West Hills].” There was no contractual requirement that L&T provide completed operations additional insured coverage for West Hills, nor did the Oregon Auto policy include such coverage.

Following the completion of the project, the development’s homeowner’s association sued West Hills for construction defects. According to the complaint, West Hills’ subcontractors had negligently used improper means and methods in their construction work that resulted in defects. The association also alleged that West Hills was liable for negligence in hiring, supervising, and failing to oversee and inspect the subcontractors and their work. The Court noted that the “complaint contained very little information regarding the time when the damages allegedly occurred,” although the complaint did allege that the defects already existed and had started to cause damage when the owners purchased their townhomes. Moreover, as is often the case in suits brought by project owners, the complaint did not specifically identify the allegedly negligent subcontractors by name.

West Hills tendered a claim for additional insured coverage to Oregon Auto. Oregon Auto refused to defend West Hills, arguing that: (1) the homeowner’s association only alleged claims against West Hills as general contractor, not the named insured, L&T, and; (2) the claims did not arise from covered ongoing operations. Before the Oregon Supreme Court, Oregon Auto argued that the duty to defend could not be triggered merely because a complaint failed to “rule out” the possibility of coverage. Instead, it asserted that the duty to defend arises only when the complaint explicitly articulates a covered claim.

The Court rejected Oregon Auto’s argument and confirmed that the legal standard was whether the allegations in the complaint, reasonably interpreted, could result in liability for an incident or injury that was covered under the four corners of the policy, regardless of any ambiguity or lack of clarity in the complaint. Specifically, the Court found that the complaint alleged claims against West Hills from which West Hills may incur liability that could be reasonably interpreted to “aris[e] out of [L&T’s] ongoing operations performed for [West Hills],” as required under the additional insured endorsement. The complaint alleged that West Hills’ subcontractors had used “improper construction means and methods” and that West Hills was negligent in preventing them from doing so. Thus, although L&T was not specifically named in the complaint, the Court held that the complaint could reasonably be interpreted as alleging liability for conduct covered by the policy, i.e. L&T’s operations for West Hills. The Court further stated that the complaint alleged damages that occurred by the time the owners purchased their homes, making it possible that the damages occurred during L&T’s “ongoing operations.” In light of this analysis, the Court ruled that Oregon Auto had a duty to defend West Hills.

Thus, the West Hills decision confirmed Oregon’s broad duty to defend standard, a favorable outcome for policyholders. It is interesting to note, however, that the case might never have come about if West Hills had required that its subcontractors provide completed-operations additional insured coverage; if L&T had both ongoing and completed operations additional insured endorsements on its policy, then Oregon Auto’s duty to defend West Hills would have likely been more obvious. Upstream and downstream parties alike must consider case law such as this when developing effective risk management plans suitably tailored to their needs, and should remember to require appropriate additional insured coverage for both ongoing and completed operations from their subcontractors.

1. 360 Or. 650 (2016).

2. For a state-by-state breakdown on the use of extrinsic evidence in the determination of the duty to defend, see SDV Law, Extrinsic Evidence State by State Survey, http://www.sdvlaw.com/wp-content/uploads/2015/11/Extrinsic-Evidence-State-by-State-Survey. pdf.

3. Ledford v. Gutoski, 877 P.2d 80, 82 (Or. 1994); Insenhart v. Gen. Cas. Co., 377 P.2d 26, 28-29 (Or. 1962).

4. Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 240 P.3d 67 (Or. 2010).

Do Defect Notice Letters Trigger The Duty To Defend?

Elliotte Quinn IV | Law 360 | October 17,2017

A developing area in the law of insurance coverage for construction defects is whether a contractor’s commercial general liability (“CGL”) carrier is obligated to defend the contractor when the contractor receives a notice of alleged construction defects under a notice and opportunity to repair statute. Over the past few decades, the majority of American states enacted what are known as notice and opportunity to repair statutes. The statutes provide that prior to filing an action in court, a homeowner must provide notice of the claimed defects to the contractor, permit the contractor to inspect the property and engage in negotiations. While there are some variations among the statutes, they generally all have these requirements.


Following the passage of these statutes, insurers and insureds began litigating whether a CGL insurer must provide an insured contractor with a legal defense when the contractor receives a statutory notice and opportunity to repair letter. Insured contractors argue that the receipt of the notice letter begins the construction defect “suit” and thus triggers the insurer’s duty to provide a legal defense when a suit is filed. Insurers argue that a “suit” does not exist until an action is filed in court, and thus, insurers are not obligated to provide a defense until an action is filed in court.


The Florida Supreme Court is set to decide this issue following recent oral arguments on a certified question from the U.S. Court of Appeals for the Eleventh Circuit in Altman Contractors Inc. v. Crum & Forster Specialty Insurance Co. Florida is one of the six states where construction defect claims are most prevalent, and therefore, what the Florida Supreme Court does with the question will have a large impact on insurance carriers and will influence how the issue is handled in other states.


The Altman litigation arose from a contractor receiving a defect notice letter from condominium owners. Upon receiving the notice, the contractor tendered its defense and indemnity to its insurer, and its insurer denied the tender. The insurer’s basis for denying tender was that the dispute was not yet a “suit” and thus the duty to defend had not yet been triggered. The contractor filed a declaratory judgment action against the insurer in the U.S. District Court for the Southern District of Florida, and the parties proceeded to cross motions for summary judgment on whether the notice letter triggered the insurer’s duty to defend.


The district court found the CGL policy’s use of the term “suit” was not ambiguous and a statutory defect notice letter does not fit within the definition of “suit.” The policy defined “suit” as a “civil proceeding,” and the district court examined the Black’s Law Dictionary definition of “civil proceeding” and concluded a “civil proceeding” requires there “be some sort of forum and some sort of decision maker involved.” Reasoning that there is no forum and no decision maker following a notice letter and that a notice letter is just a “mechanism to guide the parties to enter into discussions,” the district court held that the notice letter is not a “civil proceeding,” and therefore, is not a “suit” and does not trigger the duty to defend.


The insured appealed, and the Eleventh Circuit issued a decision certifying the question to the Florida Supreme Court. While certifying the questions means that the Florida Supreme Court will provide the ultimate answer on whether a notice letter triggers a CGL insurer’s duty to defend under Florida law, in certifying the question the Eleventh Circuit gave a strong indication of its view. Considering the district court’s conclusion that the terms “suit” and “civil proceeding” in the CGL policy were not ambiguous, the Eleventh Circuit stated that it is “not as sure,” and that there were “reasonable arguments presented by both sides” on the issue. The indication that those policy terms may be ambiguous is significant, because ambiguous policy terms are to be construed in favor of the insured. If the terms were ambiguous, courts would construe them to include a defect notice letter as a “suit” triggering the insurer’s duty to defend.


The Eleventh Circuit also suggested that Florida Supreme Court precedent relied on by the district court is inapplicable. The Florida Supreme Court held in an earlier decision interpreting a statute using the term “proceeding” that arbitration was a proceeding, because it occurs in a tribunal before a person who renders a decision, and the district court in Altman relied on that holding to conclude that a “civil proceeding” exists only where there is a forum and a decision-maker. The Eleventh Circuit suggested that decision does not apply because the Florida Supreme Court was interpreting a statute, whereas in Altman, the court must interpret an insurance policy, and different interpretive rules apply in those two situations.


The Eleventh Circuit also highlighted the practical and policy implications for resolving the issue. If insurers are not obligated to defend an insured upon receipt of a notice letter, the insured likely will ignore the process and wait for the claimant to file an action in court. The insured purchased insurance for the benefits of having the insurer defend and indemnify it, and the insured has no incentive to undertake its own defense during the notice period. On the other side, insurers say that requiring them to defend insureds upon receipt of a notice letter would increase the cost of insurance. Insurers also say that requiring a defense would undermine the purpose of the notice and opportunity to repair statutes, because claimants would be more likely to hire counsel during the notice period — and would then have sunk costs that would make it more difficult to settle the dispute prior to filing an action in court.


When the Florida Supreme Court issues its decision later this year or early next year, Florida will be the seventh state to have addressed the issue. To date, five states enacted statutes that potentially address whether an insurer must defend an insured upon receipt of a notice letter, and two state appellate decisions address the issue. Additionally, the U.S. Court of Appeals for the Tenth Circuit addressed the issue under the Nevada notice and repair statute. Of the five statutes, only two — the Colorado and Hawaii statutes — appear to explicitly address the issue, with the Colorado statute providing the duty to defend is triggered but this “does not require the insurer to retain legal counsel for the insured.” The Hawaii statute provides that a notice letter “shall not give rise to a duty of any insurer to provide a defense.”


In California, one of the other states most notorious for construction defect claims, the Court of Appeal held that a notice letter under the California statute is a “suit” because it is the first step in the statutory construction defect litigation process. The court also relied on the fact that under the California statute the insurer’s actions during the notice period impact the insured in any resulting litigation.


In Colorado, the Court of Appeals addressed the issue, but that opinion is no longer good law due to a subsequent amendment to the Colorado statute to address the issue. While the precise holding of the Colorado Court of Appeals is difficult to discern and the opinion may be of less value to other jurisdictions for that reason, the opinion does present an alternative route to finding that a notice letter triggers an insurer’s duty to defend. The policy included “alternative dispute resolution proceedings” within its definition of the term “suit,” but only if the insurer consented to the insured submitting to the proceeding. The Court of Appeals found that the notice letter constituted an alternative dispute resolution proceeding, but that whether the insurer consented was a factual matter properly submitted to the jury.


Applying the Nevada notice and repair statute, the Tenth Circuit held that a notice letter does not create a “suit” triggering the insurer’s duty to defend. The Tenth Circuit reasoned that an insured’s failure to comply with the notice and repair process does not create adverse consequences for the insured like those resulting from failure to comply with a judicial action or arbitration.


As is apparent from the array of treatments the issue has received across the limited number of jurisdictions that have addressed the issue, whether a statutory defect notice letter triggers an insurer’s duty to defend an insured is an unresolved issue that will continue to result in litigation and divide courts. While the decision expected from the Florida Supreme Court will be significant both because so few courts have yet to address the issue and because of Florida’s outsize role in construction defect litigation in the United States, insurers and insureds in at least 27 of the 32 states with notice and repair statutes will still be left to litigate whether a statutory defect notice letter triggers the duty to defend.

Privity and Additional Insured Coverage

Larry P. Schiffer and Suman Chakraborty | Squire Patton Boggs | October 5, 2017

When a worker is injured on a construction job and sues the relevant parties, a side battle often ensues over which carrier has the duty to defend and indemnify the owner, general contractor or subcontractor based on the language in the various construction contracts requiring some or all of those parties to be named as additional insureds. When there are multiple subcontracts cascading down

to the injured worker’s employer, determining whether the employer’s policy must defend and indemnify other parties as additional insureds can be confusing. In a recent Summary Order, which does not have precedential effect, the Second Circuit Court of Appeals weighed in on this issue under New York law.

In Cincinnati Ins. Co. v. Harleysville Ins. Co., an employee of a sub-subcontractor was injured and sued the building owner, general contractor and subcontractor. The sub-subcontractor’s construction contract with the subcontractor required the sub-subcontractor to add the subcontractor, general contractor and owner as additional insureds to the sub-subcontractor’s insurance policy. The subcontractor’s carrier sued the sub-subcontractor’s carrier arguing that the latter carrier had to defend and indemnify the additional insureds. The district court granted the subcontractor’s carrier’s summary judgment motion in part by finding that the sub-subcontractor had a duty to defend and indemnify the building owner as an additional insured, but not the general contractor. On appeal, the Second Circuit reversed in part and held that the sub-subcontractor’s carrier had no duty as neither the building owner nor the general contractor were additional insureds under the policy.

According to the court, the sub-subcontractor’s policy had 2 endorsements that addressed additional insureds. The first was the “Privity Endorsement,” which grants additional insured coverage “when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” The second was the “Declaration Endorsement,” which refers to the declarations section of the policy for a schedule of additional insureds.

In reversing, the court held that the Privity Endorsement did not confer additional insured status on the building owner or general contractor because there was no contractual privity between them and the sub-subcontractor. Simply put, the sub-subcontractor had no direct construction contract with the owner or the general contractor. The court noted that the law in New York was clear on this point and that New York courts had interpreted the identical provision to require contractual privity. The court stated that it did not matter if the sub-subcontractor’s construction contract required the owner and general contractor to be named as additional insureds (this was a matter for breach of contract), that contract could not modify the insurance policy because the Privity Endorsement was clear on its face that the construction contract had to be between the insured and the purported additional insureds. Because the insured had no construction contract with the owner or the general contractor there was no contractual privity and no coverage.

As to the Declaration Endorsement, the court noted that neither party were listed on the schedule as additional insureds. The court also found that a reference to a heading on the Declaration Endorsement that was the same as the Privity Endorsement did not expand the additional insured coverage grant automatically to every party when required in any construction agreement with the insured. Essentially, the court refused to write the Privity Endorsement out of the insurance policy. The court held that the Privity Endorsement modified the automatic status heading language in the declarations, not the other way around. In essence, the court held under New York law that in insurance contracts that require privity for additional insured coverage, the lack of a direct contract between the insured and the party seeking the additional insured coverage precludes extending additional insured coverage.

Insurance Co. Not Liable For Theoretical Claims, Judge Says

Rick Archer | Law 360 | August 25, 2017

A Nevada federal judge Thursday found an insurance company had no duty to defend construction companies against theoretical future claims, saying the argument stretched the duty to defend “to the breaking point.”

U.S. District Judge Jennifer A. Dorsey issued a summary judgment rejecting three insurance companies’ attempt to force Ironshore Speciality Insurance Co. to join them in defending against a defective construction suit, saying their argument was based on the theoretical possibility of future liability.

“Although the duty to defend is broad, it is not limitless. A possibility that there could later be a potential for coverage is not the same as an existing potential for coverage — and the latter is needed to trigger the duty to defend,” she said.

Ironshore was sued by American Guarantee & Liability Insurance Co., Assurance Co. of America and Northern Insurance Co. of New York, all of which had written policies to a number of Nevada construction contractors who were sued for allegedly defective construction work.

Ironshore had also written policies for the companies but had refused to defend them, saying the allegedly defective work was done before the policy period and that coverage for prior work could only be triggered by “sudden and accidental” damages caused by the work, which were not being claimed in the suits.

The insurers, however, argued the suits did not expressly state that no accidental damage occurred, therefore making a future claim for accidental possible and triggering the duty to defend.

Judge Dorsey disagreed, saying the underlying suits both do not allege a sudden accident and make no suggestion any sudden accidents occurred.

“The plaintiffs’ argument would expand the duty to defend to the breaking point. Before the duty is triggered, there must be some allegation or evidence to create a current potential for coverage. And an allegation that is so vague that it could possibly encompass covered allegations in the future is not enough,” she said.

In a prior case involving construction defect claims the same parties the court found the exclusion did not apply and awarded the insurance plaintiffs more than $988,000 following an April bench trial.

Counsel for the insurance companies declined comment. Counsel for Ironshore did not immediately respond to requests for comment Friday.

The insurance companies are represented by William C. Reeves of Morales Fierro & Reeves.

Ironshore is represented by William C. Morison of Morison & Prough LLP.

The case is Assurance Co. of America et. al. v. Ironshore Specialty Insurance Co., case number 2:15-cv-00460 in the United States District Court for the District of Nevada.

No Duty To Defend Additional Insured When Bodily Injury Not Caused by Insured

Tred Eyerly | Insurance Law Hawaii | July 19, 2017

The court found there was no duty to defend a suit for bodily injury against the additional insured where the injury was not caused by the insured. Consigli Constr. Co. v. Travelers Indem. Co., 2017 U.S. Dist. LEXIS 95339 (D. Mass. June 21, 2017).

Consigli was the general contractor for a renovation project at a high school. Among the subcontractors was American Environmental, Inc., who was responsible for demolishing concrete floors within the existing structures, and Costa Brothers, who did the masonry work. Wellington M. Ely was an employee of Costa Brothers and worked as a mason on the project.

Costa Brothers had a CGL policy with Travelers. As a subcontractor, Costa Brothers agreed to name Consigli as an additional insured on its policy.

Ely was injured when he tripped and fell over exposed wire where where the concrete floor had been broken up. American Environmental had demolished the concrete floor, allegedly without removing protruding wires or warning workers of the potential tripping hazard. Ely alleged that American Environmental and Consigli were both responsible for his injuries because American Environmental performed its demolition work negligently and Consigli failed to maintain a safe working environment.

Ely sued American Environmental and Consigli. Consigli tendered its defense to Travelers. The tender was denied because Travelers contended that Costa Brothers was not the cause of the loss.

Consigli settled with Ely and sued Travelers. Travelers moved for summary judgment. The court noted that Costa Brothers agreed to name Consigli as an additional insured, but only as to some injuries. Consigli qualified as an additional insured “[o]nly with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal injury'” and “[i]f and only to the extent that, the injury or damage is caused by acts or omissions of [Costa Brothers] . . .”

There was no possibility, based on the allegations of the underlying complaint, that Costa Brothers caused the injury to Ely. American Environmental caused the wire to be exposed by demolishing the floors negligently. Costa Brothers was not alleged to have undertaken work in the area where the accident occurred. Therefore, there was no act or omission by Costa Brothers identified in the complaint that would make Costa Brothers the proximate cause of Ely’s injury or would show that Costa Brothers brought about or provoked Ely’s injury.

Travelers had no duty to defend and was granted summary judgment.