Oregon Court of Appeals Broadens “Four Corners” Rule in Construction Defect Insurance Coverage Cases

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’ decision in PIH Beaverton LLC v. Red Shield Insurance Co. expands upon the Oregon Supreme Court’s 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 four corners of a plaintiff’s complaint can be “reasonably interpreted” to fall within the coverage of the policy. The Court of Appeals’ decision is music to the ears of contractors because it suggests that Oregon courts will use the four corners doctrine and the “reasonably interpreted” standard to reject common insurer arguments for denying a defense.

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

PIH’s complaint alleged construction defects that “resulted in water intrusion and property damage to, among other things, the siding, sheathing, framing and trim on the [hotel]” and alleged that the negligence of Thompson “caused or contributed to the construction defects.” BHG similarly alleged injury caused by “construction defects, which have resulted in water intrusion and property damage to, among other things, the siding, sheathing, framing, trim and sheetrock.” Unlike PIH, BHG did not specifically identify Thompson; however, BHG did allege that Super One failed to properly supervise subcontractors and “fail[ed] to notify subcontractors of improper means and methods.”

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’s 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’s, and that Thompson was not even identified in BHG’s complaint. The Court of Appeals rejected this argument rather easily, concluding that the allegations related to subcontractor negligence and Super One’s failure to properly supervise subcontractors could “reasonably be interpreted” to result in Super One being held liable for Thompson’s operations.

• Second, Red Shield argued that the complaints did not allege liability for Thompson’s “ongoing operations” as required by policy. According to Red Shield, Thompson’s “ongoing operations” 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’s 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’s “ongoing operations” and thus could be “reasonably interpreted” to lead to Super One being held liable for Thompson’s ongoing operations.

• Third, Red Shield argued that the complaints could not be read to allege property damage that occurred during the policy periods—a requirement under the policies—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—neither complaint alleged when the damage occurred or when BHG and PIH purchased the hotels—the Court determined that Red Shield’s argument impermissibly relied on extrinsic evidence.

It has been just a few months since the Court of Appeals’ 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—even if the basis for coverage is less than clear.

Originally published as “OP-ED: Oregon Court of Appeals broadens ‘four corners’ rule” on April 19, 2018, by the Daily Journal of Commerce.