The Oregon Supreme Court released its opinion in West Hills Dev. Co. v. Chartis Claims, Inc., 360 Or 650 (2016). As reported in our May 2, 2016 blog post, this is an insurance coverage case in which the Court of Appeals recognized a broad duty to defend an alleged additional insured based on vague allegations in the complaint and extrinsic evidence (i.e., evidence beyond the four corners of the complaint). The Supreme Court affirmed the Court of appeals, holding the insurer owed a duty to defend, but unlike the Court of Appeals, the Supreme Court found no need to resort to extrinsic evidence, and held the insurer owed a duty to defend based solely on the allegations of the complaint.
West Hills was the general contractor for a construction project. The named insured, L&T, was a subcontractor hired to install porch columns. The Chartis policy contained an endorsement naming West Hills as an additional insured. The coverage dispute arose after Chartis denied West Hills’ tender of defense under the additional insured provision. Chartis argued it had no duty to defend because the complaint did not mention L&T, did not mention improperly constructed porch columns, and did not allege that damage occurred during L&T’s ongoing operations (a requirement under the policy). The trial court held Chartis breached its duty to defend.
The Court of Appeals affirmed, holding Chartis could not rely on the lack of a reference to L&T in the complaint as a reason not to defend because extrinsic evidence permitted Chartis to identify L&T as a subcontractor on the project. The Court also held the complaint’s references to “columns” and “other components of each building” were sufficient to implicate L&T’s work on the project. On the timing issue, the Court of Appeals held that because the complaint was ambiguous as to when the damage occurred, it must be assumed for purposes of the duty to defend that covered damage occurred during the insured’s ongoing operations. The Supreme Court accepted Chartis’ petition for review.
The primary issues addressed in the Supreme Court opinion were:
1. Does an insurer have a duty to investigate facts outside the pleadings, and under what circumstances may an insurer point to facts beyond the pleadings in denying a duty to defend?
2. Must an insurer defend as long as a complaint does not definitively rule out coverage?
3. Were the complaint allegations sufficient to establish West Hills might be found liable for L&T’s ongoing operations?
Four Corners Rule and the Fred Shearer Exception
On the first issue, the Supreme Court, unlike the Court of Appeals, decided not to look beyond the allegations of the complaint in determining whether the insurer owed a duty to defend. The Court cited the familiar “four corners rule” (sometimes referred to as the “eight corners rule”), under which an insurer’s duty to defend is based solely on two documents: the complaint and the insurance policy. The Supreme Court noted that the four corners rule was mandated by the terms of the Chartis insurance policy itself, so the Court limited its analysis to the allegations in the complaint, without resort to extrinsic evidence.
One issue raised by the parties was whether Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 237 Or App 468, 240 P3d 67 (2010), was correctly decided and whether the exception set forth in that case applied to the facts at issue. In Fred Shearer, the Court of Appeals utilized an exception to the “four corners” rule if the extrinsic facts go solely to a fundamental issue of coverage and are not relevant to the merits of the underlying case.
The Supreme Court did not address whether Fred Shearer was correctly decided, but instead distinguished it. The Court noted that Fred Shearer involved an insurance policy creating an open class of “additional insureds,” such that an insurer receiving a tender of defense from such a person, unknown to the insurer and unnamed on the policy, would have no way of knowing whether the alleged insured had any relationship to the insurance contract. That issue was not presented in the present case, since West Hills was expressly designated as an additional insured in the applicable insurance policy. Thus, the Court held the Fred Shearer exception to the “four corners” rule was not applicable, without deciding whether Fred Shearer was correctly decided.
Complaint Need Not “Rule In” Coverage
On the second issue, Chartis argued there is no duty to defend unless the complaint “rules in” coverage. The Supreme Court rejected this argument, holding that the question is whether, regardless of the presence of ambiguity or unclarity in the complaint, the Court “can reasonably interpret the allegations to include an incident or injury that falls within the coverage of the policy.” Under this rule, there is a duty to defend so long as the complaint could reasonably be interpreted as affording coverage, which is arguably another way of saying the carrier must defend unless the complaint definitively “rules out” the possibility of coverage.
Complaint Allegations Sufficient to Trigger Chartis’ Duty to Defend
On the third issue, the Supreme Court found the complaint allegations were sufficient to trigger a duty to defend, even though the complaint did not expressly reference L&T or its work on the project. This was because L&T was clearly an additional insured under the policy, and the complaint referenced “improper construction means and methods” used by subcontractors on the project. The Court held that allegation could be reasonably interpreted as potentially causing West Hills to be liable for L&T’s operations, even though L&T was not expressly referenced.
The final issue was whether the complaint allegations were sufficient to establish covered damages potentially occurred during L&T’s “ongoing operations,” or in other words, whether damage occurred during a time in which L&T was still performing its work. The Court ultimately found the complaint allegations were sufficient, since they alleged only that the damages had begun by the time the owners purchased their townhomes, which did not rule out the possibility that some damage previously occurred during a time in which L&T was still performing its work on the project.
Impact of Decision
The West Hills decision doesn’t really change Oregon law, but it reaffirms the broad duty to defend in the context of vague complaints not expressly referencing the insured’s work, nor expressly referencing when the alleged damages occurred. Under West Hills, a carrier for a painting subcontractor may arguably be required to defend a general contractor based on a vague complaint and tender that neither rules in nor rules out the possibility that the painter’s work might have been involved. Similarly, a complaint that does not specify when the damages began occurring may be interpreted as alleging damages that occurred within an insured’s ongoing operations, such that a duty to defend is owed.
The upshot for insurance companies is that the Supreme Court did not adopt a rule requiring a duty to investigate facts outside the complaint when presented with a tender of defense based on vague complaint allegations. Unlike Washington, Oregon duty to defend law has never recognized a duty to investigate, and the Supreme Court’s opinion in West Hills reaffirms that there is no duty to investigate in Oregon.
Another takeaway from the West Hills decision is that Fred Shearer is still good law. The West Hills Court found that all of the issues necessary for the carrier to determine the duty to defend were pled in the complaint, so the Fred Shearer exception was not applicable. The exception should arguably still apply in a case in which some fundamental issue related to coverage is not pled in the complaint. A classic example would be if a policy insured a Chevy but not a Ford that was in an accident, the insurer of the Chevy need not defend even though the complaint did not allege the make or model of the car. West Hills does not appear to address that situation, since again, in West Hills the Supreme Court held that all of the information necessary to determine the duty to defend was pled in the complaint.