With a new spin on a tired argument, a subcontractor’s insurer denied the duty to defend by relying on “the laws of nature” (read: rain) as evidence that damage allegedly caused by the insured’s defective construction occurred prior to the effective date of the policy. This was an attempt by the insurer to avoid the rule that a duty to defend is determined by reviewing only the complaint and the policy — known as the “eight-corners rule.” The court rejected the insurer’s arguments, holding that they were “inconsistent with Oregon law, and often are looking through the wrong end of the telescope.”
In Seneca Ins. Co. v. James Rivers Ins. Co (D. Or, July 16, 2014), the subcontractor performed allegedly defective work in a 60-unit condominium in Seaside, Oregon. The underlying complaint filed by the general contractor did not allege when the subcontractor performed the work or when the damages occurred. The subcontractor filed third-party claims (that is, claims by the subcontractor defendant against other parties) alleging that it was a subcontractor in 2011, performed work in the summer of 2011, and that alleged remedial work was performed in the fall of 2011 and spring of 2012. The subcontractor’s policy was in effect from September 2011 to September 2012. The subcontractor’s insurer denied the duty to defend, arguing that “the laws of nature dictate that at least some alleged damage in the form of air and water intrusion occurred before the effective date” of the policy and that allegations in the subcontractor’s pleadings constituted a “judicial admission” that the damage occurred prior to the policy period.
Judge Hubel flatly rejected the insurer’s arguments, holding that the insurer was not permitted to base its denial on evidence extrinsic to the original complaint filed by the general contractor — here, either rain or allegations in the subcontractor’s third-party complaint. It has long been the general rule in Oregon that the duty to defend is determined solely by examining two documents: the complaint and the policy. Ledford v. Gutoski (Or S Ct 1994). That duty arises “if the complaint provides any basis for which the insurer provides coverage.” As such, any evidence outside the “eight corners” of these two documents suggesting when the damage occurred was irrelevant for purposes of triggering the insurer’s duty to defend.
In reaching its decision that the insured was entitled to a defense, the court also rejected the insurer’s last argument that the second, third-party complaint contained allegations suggesting the damage occurred before the policy period. The insurer’s argument, again, was contrary to established Oregon law. Judge Hubel wrote that, in Bresee Homes, Inc. v. Farmers Ins. Exch.(2012) the Oregon Supreme Court “rejected the notion that a complaint must allege the specific time when a covered event occurred.” Because the complaint contained allegations that could trigger liability for the subcontractor arising the policy period, the insurer was obligated to defend the subcontractor in the underlying litigation.
Construction-defect litigation often involves high stakes and can be extremely expensive to defend. It is no wonder that insurers will resort to creative arguments to avoid their obligations to provide a defense, even when those arguments are contrary to clearly-established law. Experienced coverage counsel should be involved early to remind insurers and their attorneys that a creative argument contrary to Oregon law is, although creative, still nothing more than an argument contrary to Oregon law. You can put lipstick on a pig, but it’s still a pig.
Opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.