In Construction Defect Coverage Case, Oregon Supreme Court Finds Duty to Defend Where Complaint’s Allegations, “Reasonably Interpreted,” Could Lead to Insured’s Liability

January 24, 2017 | Insurance Coverage

The Oregon Supreme Court, affirming a lower court’s decision, has ruled that an insurer had a duty to defend an additional insured against a complaint that contained allegations that, reasonably interpreted, could result in the insured being held liable for damages covered by the policy.

The Case

West Hills Development Company was the general contractor for a townhome development in Sherwood, Oregon. West Hills hired L&T Enterprises, Inc., as a subcontractor on the project. The subcontract required L&T to indemnify West Hills against any liability that West Hills might incur for L&T’s work. It also required L&T to obtain a liability insurance policy and to name West Hills as an additional insured on that policy.

L&T obtained a commercial general liability insurance that provided that West Hills was an insured “only with respect to liability arising out of [L&T’s] ongoing operations performed for [West Hills].”

Thereafter, the homeowners association for the townhome development sued West Hills for negligence, alleging that the townhomes had defects that led to damage from water intrusion. The alleged defects included, among other things, improperly installed siding and trim, improper or insufficient flashing, insufficient weatherproofing, and improper sealants.

West Hills sought a defense under the policy that L&T had obtained. The insurer, however, refused to defend West Hills.

West Hills sued and the trial court granted judgment in its favor, an appellate court affirmed, and the dispute reached the Oregon Supreme Court.

The Oregon Supreme Court’s Decision

The court affirmed.

In its decision, it explained that the homeowners association’s complaint “expressly alleged” that West Hills was liable for subcontractor operations that had been performed for West Hills: specifically, that West Hills’ subcontractors had used “improper construction means and methods” in their operations, and that West Hills was liable in negligence for not preventing the subcontractors from doing so.

In the court’s view, the allegations of the complaint “reasonably could be interpreted to result in West Hills being held liable for conduct covered by the policy: L&T’s operations for West Hills.”

Examining the “four corners” of the homeowners association’s complaint, the court ruled, the insurer had a duty to defend West Hills, as an additional insured, because the complaint’s allegations, reasonably interpreted, “could result in West Hills being held liable for damages covered by the policy.”

The case is West Hills Development Co. v. Chartis Claims, Inc., No. SC S063823 (Ore. Dec. 8, 2016).

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