On Aug. 6, the Oregon Court of Appeals in FountainCourt Homeowners’ Association v. FountainCourt Development LLC, handed down a decision making clear that standard-form liability insurance policies cover construction defect claims as long as any “property damage” for which the insured is responsible took place during the policy period.

In a widely anticipated decision in which the Associated General Contractors, the Home Builders Association and others submitted friend-of-the-court briefs, the Court of Appeals held that it is up to the insurance company to try to prove how much, if any, of the damages and repair costs typically sought in construction defect cases are subject to policy exclusions or happened solely outside the insurance company’s policy period.

This showing will be difficult or impossible for an insurance company to make. As a result, the FountainCourt decision should make it easier for construction industry policyholders to obtain construction defect coverage without resorting to expensive and time-consuming litigation.

The FountainCourt case arose in a fairly unusual context – a “writ of garnishment” proceeding in which townhouse and condominium owners sued a contractor’s insurance company to collect as judgment creditors on a contractor’s insurance policy. The contractor allegedly was responsible for defective siding, windows, caulking and flashing that led to water intrusion.

As is typically the case, the units’ owners claimed that the water intrusion required repair of the contractor’s work, but that it caused damage not only to the contractor’s work, but also to other parts of the structures.

The owners in Washington County Circuit Court won a $3.8 million jury award for negligent construction against the contractor, based on a repair estimate in that amount. The award did not segregate the repair costs between those necessary to fix the contractor’s work and those necessary to fix other water-damaged components of the structures. The jury’s verdict also did not specify how much of the damage occurred during the insurance company’s policy period.

Oregon law allows judgment creditors such as the FountainCourt unit owners to garnish assets of the debtor, including the debtor’s insurance assets. A garnishment action is a summary proceeding before a trial judge in which the judge determines whether the debtor’s property is subject to collection by the creditor. In the insurance context, this means deciding whether the creditor “standing in the shoes” of the debtor policyholder is entitled to coverage.

In the FountainCourt case, well-respected trial court Judge Marco Hernandez (now with the U.S. District Court), held that the owners were entitled to collect on the insurance policy because they had proved that property damage for which the contractor was held liable occurred during the policy period. Judge Hernandez did not require the owners to prove how much of the repair costs were to fix the insured contractor’s work as opposed to other damage, and did not require the owners to prove how much of it occurred during the policy period.

The Oregon Court of Appeals affirmed these aspects of the trial court’s ruling, allowing the owners to collect up to the policy limits.

The insurance company made two principal arguments. First, it argued that the “your work” exclusion requires the policyholder to prove how much of the repair costs are for damage to parts of the structure other than its work. Second, the insurance company argued that the policyholder had to prove how much of the repair costs were for damage during its policy period as opposed to other years.

The Court of Appeals rejected both arguments. It held that because the “your work” exclusion was just that – an exclusion – the insurance company had the burden of showing how much of the repair estimate was due to fixing the insured contractor’s work. The court also held that because some of the damage occurred during the insurance company’s policy period, the insurance company had to pay for all of it unless it could prove that specific costs were for damage occurring solely outside its year of coverage.

For a continuing loss such as progressive water damage, it is usually difficult or impossible to isolate a specific repair cost as resulting solely from damage during a particular insurance policy year. As a result, the FountainCourt decision should allow Oregon construction industry policyholders to get what they pay for when they buy liability insurance: coverage in full, rather than piecemeal coverage obtained only after costly litigation.

The FountainCourt decision is consistent with those of the Oregon courts in other contexts – for example, for environmental insurance claims. Although the insurance company in FountainCourt might seek further appellate review, there is no reason to believe that the result will change.

Scott Kaplan is a partner in Stoel Rives LLP. His practice focuses on insurance coverage litigation and counseling. Contact him at 503-294-9186 or sjkaplan@stoel.com. The views expressed herein do not necessarily reflect those of Stoel Rives LLP or any of its clients.

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