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The duty to defend and the duty to indemnify are separate duties, with the duty to defend being broader and, given the cost of litigation, many times more valuable than the duty to indemnify. But on what is the duty based: the factual allegations in the complaint, or legal theories of recovery such as negligence? Can other evidence or facts not in the complaint be considered? What if the complaint includes other allegations obviously not covered by the policy?

On Dec. 8, 2016, in West Hills Development Co. v. Chartis Claims Inc., the Oregon Supreme Court affirmed Oregon鈥檚 broad duty to defend, holding that 鈥渞egardless of ambiguity or lack of clarity (in the complaint), the duty to defend is triggered if the complaint鈥檚 allegations, reasonably interpreted, could result in the insured being held liable for damages covered by the policy.鈥� In reaching its holding, the court reaffirmed the so-called 鈥渇our-corners鈥� rule, wherein the duty to defend is determined by reference to two, and only two, documents: the complaint and the insurance policy.

Typical policy language

A typical insurance policy states that the insurer 鈥渨ill have the right and duty to defend the insured against any 鈥榮uit鈥� seeking those damages. However, we will have no duty to defend the insured against any 鈥榮uit鈥� seeking damages for 鈥榖odily injury鈥� or 鈥榩roperty damage鈥� to which this insurance does not apply.鈥� Under this typical language, the duty to defend turns on the allegations against the insured made in the 鈥渟uit.鈥� West Hills tested the contours of this policy language in the context of a construction defect claim where a homeowners association sued a general contractor for, among other things, the alleged negligence of its subcontractors, without actually naming the subcontractors specifically.

What triggers a duty to defend?

Under Oregon law, as reaffirmed in West Hills, the factual allegations in the complaint, and not the legal theories for recovery, trigger the duty to defend. In the case, West Hills Development Co. served as general contractor for a townhome development in Sherwood. Its subcontractor, L&T Enterprises Inc., installed the porch columns. As typical in construction contracts, West Hills required L&T to procure insurance naming West Hills as an additional insured under the policy. L&T obtained a policy that covered West Hills only for potential liabilities arising out of L&T’s 鈥渙ngoing operations,鈥� and not 鈥渃ompleted operations.鈥�

After construction was complete, the homeowners association sued West Hills, alleging that the townhomes suffered from serious defects resulting in water intrusion damage. The association claimed that West Hills had negligently failed to oversee the work of its subcontractors, although L&T was not explicitly named in the complaint. West Hills tendered the claim to L&T鈥檚 insurer, as a named additional insured under the policy. The insurer refused to defend West Hills on two grounds: 1, the association alleged negligent conduct by only West Hills itself, and 2, the association鈥檚 alleged damages arose from 鈥渃ompleted operations鈥� rather than 鈥渙ngoing operations鈥� of L&T.

The Oregon Supreme Court disagreed with both arguments. As to the insurer鈥檚 first argument, the court observed that the association鈥檚 complaint could reasonably be read as seeking damages from West Hills on account of its subcontractor鈥檚 allegedly defective work. As to the insurer鈥檚 second argument, the court observed that the complaint alleged damages occurred by the time the owners bought their townhomes. As such, according to the court, it was possible the damages occurred during L&T鈥檚 鈥渙ngoing operations.鈥�

In other words, the court broadly interpreted the allegations and found the potential that damages occurred earlier, and thus it did not foreclose the possibility that damage occurred during L&T鈥檚 ongoing operations. Based on this analysis, as long as a complaint does not expressly state facts that explicitly rule out coverage, the insurer has a duty to defend.

In sum, using the four-corners approach, the court held that the insurer had a duty to defend West Hills; the allegations in the association鈥檚 complaint, reasonably interpreted, could result in West Hills being held liable for damages covered by the policy.

Aftermath

Although in and of itself the West Hills decision does not blaze new ground, moving forward, it does raise some salient points. First, a general contractor should review its subcontractor鈥檚 policies to make sure it is getting the additionally insured coverage bargained for under its subcontracts. Assuming the general contractor desired more than 鈥渙ngoing operations鈥� coverage under the additional insured endorsement, much of the legal dispute could have been avoided had the general contractor reviewed L&T鈥檚 additional insured endorsement and confirmed the desired coverage was obtained. Second, ambiguous pleadings may turn 鈥渙ngoing operations鈥� coverage into 鈥渃ompleted operations鈥� coverage. Depending on how broad or ambiguous a plaintiff makes its allegations, an insurer鈥檚 denials based on 鈥渙ngoing operations鈥� may no longer be valid under Oregon law.

Jacob Zahniser is an attorney in Jordan Ramis PC鈥檚 Dirt Law practice group. He focuses on construction and real estate litigation. Contact him at 503-598-7070 or [email protected].