By Kevin Clonts and Allen Eraut
In a May 2017 decision, the Oregon Court of Appeals held (1) that a Multi-Unit New Residential Construction Exclusion in a subcontractor’s insurance
policy did not apply to a multi-unit project that included commercial units, (2) that attorney fees imposed against an insured are potentially covered
under a CGL policy as either “damages” or under the Supplemental Payments provision, and (3) that an insurer has a constitutional right to a jury trial
in a garnishment proceeding when coverage is challenged, thereby finding the garnishment statute unconstitutional to the extent it denies the right
to a jury.
Multi-Unit New Residential Construction Exclusion Ambiguous as to Mixed-Use Projects
In Hunters Ridge Condominium Assoc. v. Sherwood Cross, LLC, a condominium association (“HOA”) filed suit against the GC for a project that contained both residential and commercial condo units. In turn, GC filed against its subcontractors and tendered defense and indemnity. GC also tendered as an additional insured to the subcontractors’ insurers. The carrier for one subcontractor, American
Family (“AmFam”), denied the tender based upon the policy’s Multi-Unit New Residential Construction Exclusion. GC took a default judgment against that
insured subcontractor, settled with the HOA, and assigned its rights against AmFam.
In response to the HOA’s garnishment proceeding against it, AmFam filed for summary judgment, arguing that the Multi-Unit New Residential Construction
Exclusion precluded coverage. The trial court agreed and dismissed the case, but the Court of Appeals reversed.
The Multi-Unit Exclusion precluded coverage for any “multi-unit residential building,” which the exclusion defined as “a condominium, townhouse,
apartment or similar structure, each of which was greater than eight units built or used for the purpose of residential occupancy.”
AmFam argued that the project was subject to the exclusion, because each of the buildings contained more than eight residential units in addition to the ground floor commercial units. The HOA argued that the provision was ambiguous as to whether it included mixed-use projects.
The Court of Appeals held that the exclusion’s use of the term “residential building” was ambiguous, thereby invoking the canon of construction that any ambiguity in an insurance policy must be interpreted against the carrier and in favor of coverage. Therefore, the exclusion did not preclude coverage.
Attorney Fees Potentially Damages Under a CGL Policy
The Court of Appeals also reviewed whether the AmFam policy provided coverage for attorney fees and costs awarded in the underlying judgments. When GC settled with the HOA, it assigned to the HOA all of its rights against the subcontractor and its carrier, AmFam, including the GC’s claimed right to attorney fees under the subcontract’s provisions. During the garnishment proceeding, AmFam moved in the alternative for partial summary judgment against that portion of the writ of garnishment that included attorney fees, arguing that the garnishment writ was improper because it included attorney fees and costs, which it argued were not covered by the policy. The trial court denied that motion and the Court of Appeals agreed.
The Court of Appeals first analyzed the policy’s coverage provision, which obligated AmFam to “pay those sums that the insured becomes legally obligated to pay as damages because of *** ‘property damage’ to which this insurance applies.” The court relied on the Restatement (Second) of Contracts to hold that the GC’s fees expended in defending against alleged defects with the subcontractor’s work could be consequential damages: “even absent a contractual or statutory basis for recovery, when a breach of contract results in claims by third persons against the injured party, the breaching party is liable for the injured party’s reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable result of his breach at the time he made the contract.”
The court also analyzed whether attorney fees might fall within the policy’s “Supplementary Payments” coverage, which provided, “We will pay, with respect to any claim we investigate or settle, or any ‘suit’ against an insured we defend *** All costs taxed against the insured in the ‘suit.’” The policy did not define “costs.” The court reasoned that since “costs” was not defined, it was required to interpret that term with the use of dictionary definitions, and those definitions could be construed either as including or excluding attorney fees. Therefore, the Court held that the term was ambiguous, and ruled in favor of coverage.
Constitutional Right to Jury Trial in Garnishment Proceeding
Finally, the court reviewed the constitutionality of ORS 18.782, which does not provide for a jury trial in a garnishment proceeding. The Court held that an insurer that is challenging coverage in a garnishment proceeding must be given the right to a jury trial. Because ORS 18.782 required that issue to be tried to the court, instead of a jury, it was unconstitutional in that respect.
The published decision can be found here: http://www.publications.ojd.state.or.us/docs/A157014.pdf.