On May 10, 2017, the Oregon Court of Appeals made several significant holdings in the appeal of an insurance policy garnishment proceeding. The court of appeals held that a liability insurer's exclusion for multi-unit new residential construction was ambiguous and, when construed against the insurer, did not apply to defeat coverage for construction-defect claims in a mixed-use development. The result was especially gratifying because the insurer had refused to defend its subcontractor insured, against which a default judgment had been entered. The court of appeals also held that attorney fees awarded to an indemnitee for defending a construction-defect claim were covered by a liability insurance policy, either as damages or as costs taxed against the insured. Finally, the court of appeals held that a party is entitled to a jury trial on factual issues in an insurance policy garnishment proceeding and that an Oregon statute allowing a bench trial is unconstitutional.
A. The Coverage Holding
In Hunters Ridge Condo. Assn. v. Sherwood Crossing, 285 Or App 416 (May 10, 2017), American Family Mutual Insurance Company ("AFM") insured WGC, a subcontractor, on a mixed-use condominium project with commercial, office, and retail space on the ground floors, and residential units on the upper floors. The condo association brought a construction-defect claim against the developer, Sherwood, and the general contractor, White. Sherwood brought third-party claims against WGC and other subcontractors. WGC had installed siding and weatherproofing on two of three buildings in the project. In its contract, WGC agreed to indemnify Sherwood and White and hold them harmless from claims, damages, etc., including attorney fees, arising out of or resulting from WGC's work.
WGC tendered its defense of the third-party claim to AFM. Based on its exclusion for multi-unit new residential construction, AFM refused to defend. WGC then allowed two default judgments to be entered in favor of Sherwood and White. In subsequent garnishment proceedings brought by the association against AFM, the interpretation and enforcement of the exclusion was at issue.
AFM's liability insurance policy contained the following:
"Exclusion - Multi-Unit New Residential Construction (Greater Than Eight Units)
* * *
"This insurance does not apply to 'bodily injury' or 'property damage' arising out of:
"1. 'Your work' in connection with pre-construction, construction, post-construction of any 'multi-unit residential building'; or
"2. Any of 'your products' which will or have become a part of the real property of any 'multi-unit residential building.'
* * *
"The following is added to Section V. Definitions, 'Multi-Unit Residential Building' means a condominium, townhouse, apartment or similar structure, each of which has greater than eight units built or used for the purpose of residential occupancy."
AFM contended that the definition of "Multi-Unit Residential Building" included any condominium structure with more than eight residential units, regardless of whether the structure also contained nonresidential units. The association contended that the term meant an exclusively residential structure with more than eight units built or used for residential occupancy. Applying dictionary definitions to the words used in the policy definition of "multi-unit residential building," the court determined that both interpretations were plausible, and that therefore the definition was ambiguous. As a result, the phrase "multi-unit residential building" was construed against AFM, and in favor of coverage.
This was not a complete victory for the condo association. The court of appeals affirmed the trial court's order denying the association's own motion for summary judgment, finding that there were disputed questions of material fact regarding other applicable policy exclusions for faulty work and consequential damages. Because the association had the burden to prove that the judgment awards were for sums that WGC had become legally obligated to pay as damages because of property damage and that there had been a coverage-triggering occurrence, those issues remained for trial. This holding (along with the holding on jury-trial issues discussed below) may discourage plaintiffs from agreeing to judgment/garnishment settlements with contractors and subcontractors.
B. The Attorney-Fee Holding
The two default judgments awarded attorney fees and costs incurred by Sherwood and White, respectively, in litigating the action. The subcontracts between WGC and White provided that WGC was obligated to indemnify both White and Sherwood "from and against any and all claims, damages, losses, and expenses, including attorney's fees arising out of or resulting directly or indirectly from the performance of [WGC's work]." The AFM policy provided that AFM "will pay those sums that the insured becomes legally obligated to pay as damages because of * * * 'property damage' to which this insurance applies." The policy also provided, in the "Supplementary Payments" portion, as follows: "We will pay, with respect to any claim we investigate or settle, or any 'suit' against an insured we defend: * * * e. All costs taxed against the insured in the 'suit.'"
AFM contended that the attorney fees and defense costs awarded in accordance with the judgments were neither damages nor costs taxed against the insured within the meaning of the policy. The trial court concluded that the phrase "costs taxed against the insured" was ambiguous with respect to whether it included attorney fees or other litigation expenses, and held that there was coverage; the court of appeals agreed. First, the court of appeals concluded that attorney fees and costs incurred to defend a claim arising in part from the insured's deficient work potentially qualify as consequential damages, even in the absence of a contractual indemnity provision. The court held that to the extent that attorney fees and costs awarded to Sherwood and White against WGC were properly considered consequential damages, they constituted "damages" within the meaning of the policy. (The court held that such damages, however, did not include the expenses incurred by Sherwood and White in litigating claims against WGC.) Second, the court of appeals also agreed with the trial court that the term "costs" in the "Supplementary Payments" provision was ambiguous, that it would be construed against AFM and that it would be interpreted to include attorney fees and expert expenses incurred to defend the associations claims.
C. The Jury-Trial Holding
The insurance policy garnishment proceeding was governed by ORS 18.782, which provides that in a contested garnishment hearing at which the garnishee's liability is determined, the proceedings against the garnishee are to be tried by the court. The court of appeals agreed with AFM that under Article I, Section 17, of the Oregon Constitution, AFM was entitled to a jury trial on disputed questions of fact in the coverage dispute because the garnishment proceeding was, in essence, a breach-of-contract action.
Major takeaways from this decision:
- In Oregon, contractors and subcontractors on mixed-use condominium projects may now have liability insurance coverage for construction defects causing property damage even if their policies contain an exclusion for multi-unit new residential construction.
- This victory may be short-lived because we can expect insurers to revise their exclusions and definitions to include mixed-use projects within the exclusions.
- In any case involving a mixed-use project in which the insured contractor or subcontractor has had coverage denied because of the exclusion for multi-unit new residential construction, the coverage decision should be challenged.
- Insurers act at their peril when they deny coverage and refuse to defend their insureds when there are plausible interpretations of insurance policy language favorable to the insureds.
- Attorney fees and other costs incurred by an indemnitee in defending claims for which an indemnitor is responsible may be covered by the indemnitor's liability insurance policy.
- The Oregon constitutional right to a jury trial trumps the statutory garnishment scheme for resolution of issues of fact.