Oregon Courts Again Limit Applicability of “Ongoing Operations” Exclusion
In West Hills Development Company v. Chartis Claims, Inc., et al., 273 Or App 155 (2015), the Oregon Court of Appeals significantly limited an insurer’s ability to deny an “additional insured” tender based on a contention that damages did not arise during “ongoing operations,” even if the additional insured endorsement specifies that AI coverage is limited to “ongoing operations.”
When general contractor West Hills Development Company (GC) was sued in a construction defect matter, it tendered its defense to Oregon Automobile Insurance Company (OAIC) as an additional insured under an OAIC insurance policy issued to GC’s subcontractor. OAIC denied the AI tender based on the AI endorsement’s language limiting coverage to “liability arising out of [the subcontractor’s] ongoing operations performed for” GC. In addition, OAIC cited the AI endorsement’s exclusion for “property damage occurring after … [a]ll work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed.” OAIC argued that, because the complaint did not allege that damages arose during the subcontractor’s “ongoing operations,” there was no duty to defend.
The Oregon Court of Appeals rejected OAIC’s arguments and held that it had a duty to defend. In reaching this conclusion, the court first reiterated Oregon’s four-corners rule (referred to in some states as the “eight-corners” rule), which limits the duty to defend analysis to an examination of just two documents, the complaint and the insurance policy. Id. at 161. “Considering those two documents, if the injured claimant can recover under the allegations of the complaint upon any basis for which the insurer affords coverage, we conclude that the insurer is obligated to defend the insured.” Id. Further, “[a]ny ambiguity in the complaint with respect to whether the allegations could be covered is resolved in favor of the insured,” therefore resulting in a duty to defend.
Applying the principles of the four-corners rule, the court held that that there was a possibility of coverage under the complaint, and therefore OAIC had a duty to defend. In doing so, the court rejected OAIC’s “ongoing operations” arguments. The complaint alleged that when the homeowners purchased their units, “they did not know that the deficiencies in the building envelope and other components existed and had already started to cause property damage.” This allegation was sufficiently broad and ambiguous to permit the conclusion that damage may have existed and may have begun before the subcontractor finished its work, thereby arising during “ongoing operations.” Because any ambiguity in a pleading must be resolved in favor of the insured, the complaint’s allegations triggered the duty to defend under the AI endorsement.
This decision is in line with other Oregon cases, such as Bresee Homes, Inc. v. Farmers Insurance Exchange, which have broadly interpreted the duty to defend and narrowly construed ongoing operations arguments against the defense duty.