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In a ruling that is good news for contractors, the Oregon Court of Appeals likely eased the burden for contractors seeking a defense under insurance policies in which they have been named as an additional insured. The Court of Appeals鈥� decision in PIH Beaverton LLC v. Red Shield Insurance Co. expands upon the Oregon Supreme Court鈥檚 2016 ruling in West Hills Development Company v. Chartis Claims Inc., in which that court held that the duty to defend arises when the allegations contained within the 鈥渇our corners鈥� of a plaintiff鈥檚 complaint can be 鈥渞easonably interpreted鈥� to fall within the coverage of the policy. The Court of Appeals鈥� decision is music to the ears of contractors because it suggests that Oregon courts will use the four corners doctrine and the 鈥渞easonably interpreted鈥� standard to reject common insurer arguments for denying a defense.

PIH Beaverton LLC v. Red Shield Insurance Co. concerned underlying construction defect claims for water intrusion and related damage by PIH Beaverton LLC and BHG GAH PDX LLC, the owners of two hotels, against Super One Inc., the general contractor for both hotel projects. Super One had subcontracted installation of the exterior insulation and finish system to Gary Thompson dba Portland Plastering. Pursuant to the subcontract, Thompson named Super One as an additional insured under its insurance policy issued by Red Shield Insurance Co.

PIH鈥檚 complaint alleged construction defects that 鈥渞esulted in water intrusion and property damage to, among other things, the siding, sheathing, framing and trim on the (hotel)鈥� and alleged that the negligence of Thompson 鈥渃aused or contributed to the construction defects.鈥� BHG similarly alleged injury caused by 鈥渃onstruction defects, which have resulted in water intrusion and property damage to, among other things, the siding, sheathing, framing, trim and sheetrock.鈥� Unlike PIH, BHG did not specifically identify Thompson; however, BHG did allege that Super One failed to properly supervise subcontractors and 鈥渇ail(ed) to notify subcontractors of improper means and methods.鈥�

Super One tendered the defense of the PIH and BHG claims to Red Shield pursuant to the additional insured endorsement. After Red Shield denied the tenders, Super One鈥檚 other insurers brought suit against Red Shield seeking contribution for a share of the defense costs.

The trial court concluded that Red Shield had a duty to defend Super One. On appeal, Red Shield raised three arguments commonly used by insurers to deny coverage in construction defect cases.

• First, Red Shield argued that the complaints alleged Super One was liable for its own negligence, but not Thompson鈥檚, and that Thompson was not even identified in BHG鈥檚 complaint. The Court of Appeals rejected this argument rather easily, concluding that the allegations related to subcontractor negligence and Super One鈥檚 failure to properly supervise subcontractors could 鈥渞easonably be interpreted鈥� to result in Super One being held liable for Thompson鈥檚 operations.
• Second, Red Shield argued that the complaints did not allege liability for Thompson鈥檚 鈥渙ngoing operations鈥� as required by policy. According to Red Shield, Thompson鈥檚 鈥渙ngoing operations鈥� meant its operations while they were still in progress and not after they were completed. The court noted that neither complaint alleged any specific dates and contained little information at all as to when the damages allegedly incurred. However, the court determined that allegations related to Super One鈥檚 failure to warn PIH and BHG (and their predecessors) of defects in and damage to the hotels leave open the possibility that the damage occurred during Thompson鈥檚 鈥渙ngoing operations鈥� and thus could be 鈥渞easonably interpreted鈥� to lead to Super One being held liable for Thompson鈥檚 ongoing operations.
• Third, Red Shield argued that the complaints could not be read to allege property damage that occurred during the policy periods 鈥� a requirement under the policies 鈥� because the policy periods ended in 2000, and BHG and PIH did not purchase their respective hotels until 2005 and 2006. However, because the four corners of the complaints were silent on these issues 鈥� neither complaint alleged when the damage occurred or when BHG and PIH purchased the hotels 鈥� the court determined that Red Shield鈥檚 argument impermissibly relied on extrinsic evidence.

Only a few months have passed since the Court of Appeals鈥� decision, but it seems that the case further clarifies the obligation of insurance carriers to provide a defense based on pleadings that raise the possibility of coverage. Of course, insurance carriers will most certainly provide any such defense under a reservation of rights that seeks to allow for withdrawal if discovery results in a later determination that the claims are not covered under the policy. Nonetheless, contractors should now be better armed to obtain an initial defense under additional insured endorsements 鈥� even if the basis for coverage is less than clear.

Zachary Davis is an attorney in Stoel Rives鈥� construction and design practice group. Contact him at 503-294-9410 or [email protected].