Oregon federal Magistrate Judge Stacie Beckerman gave policyholders an early Christmas present on December 20, 2019, holding that the most commonly-used suit limitation clause in commercial property insurance is ambiguous, and that therefore the policyholder had two years from the discovery of hidden water damage to file suit against the insurer. This ruling provides additional clarity to the interpretation of a widely-used coverage form, in the context of one of the most common property-loss scenarios in the Pacific Northwest: hidden decay over many years due to water infiltration.
The policy language: The standard "Commercial Property Conditions" form attached to most commercial property policies (form ISO CP 00 90 07 88) provides that no "legal action" may be brought against the insurer "unless... the action is brought within 2 years after the date on which the direct physical loss or damage occurred." This was the language at issue in Housing Northwest v. American Insurance Company, decided on December 20. It's the most commonly-used suit-limitation clause in commercial property insurance.
The dispute: Housing Northwest's insurers contended that the limitation clause's use of the word "occurred" meant that suit had to be brought within two years of the property damage beginning. In this case, it was undisputed that water started getting into the structure at least ten years before the lawsuit was brought. The damage caused by the water infiltration had been hidden from view until discovered around 2017. Therefore, if the insurers' interpretation was correct, Housing Northwest's suit would have been barred by the suit-limitation clause.
The insurers also relied on ORS 742.240, which regulates property insurance policies, and requires that property policies state (among other things) that "No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity . . . unless commenced within 24 months next after inception of the loss." Oregon courts have held that the statutory language clearly requires that suit be brought within two years of the beginning of any event.
Housing Northwest, however, contended that the statute did not apply, and that the term "occurred" was at least ambiguous, pointing to dictionary definitions that suggested that one meaning of "occurred" refers to the completion of an event, or its discovery.
The resolution: Judge Beckerman agreed that the term "occurred" was ambiguous in the context of ongoing, hidden property damage and could either mean when the damage began, or when it ended, or when it was discovered. Under Oregon law (as in most states) if an insurance clause is found to be ambiguous, the "tie" goes in favor of the insured, requiring Judge Beckerman to apply Housing Northwest's interpretation. Because the damage had been continuous, and continued to within two years of suit being filed, and because it had not been discovered until within two years of the suit, the court held that the policy's suit-limitation clause did not apply.
Judge Beckerman also held that the statute--ORS 742.240--did not apply, because the statutory language is only a minimum requirement, and if the insurer's policy is more generous to the policyholder (as it was with Housing Northwest's policy) the actual language of the policy, not the statute, will apply.
Judge Beckerman's ruling is an implicit rejection of the 2009 case Malbco Holdings v. AMCO Insurance, in which another Oregon federal judge appeared to hold that the same suit-limitation clause in an insurance policy meant the same thing as the statute, despite the differences in wording. In Malbco the court held that under both the statute and the insurance policy there was no "discovery rule" applicable to long-term water damage, essentially requiring that suit be brought within two years of inception of the damage, despite the fact that the insurance policy used the term "occurred."
Implications for policyholders: By rejecting Malbco, which did not strictly follow Oregon law on the interpretation of insurance policies, Housing Northwest clears the way for policyholders with long-term property damage to bring suit after the damage is discovered. The case also illustrates the importance of carefully parsing each phrase in an insurance policy and not relying on statutes that may not be applicable, or insurance-industry standard interpretations, or even prior court decisions that may be on weak footing. More specifically for this situation, it highlights the need to differentiate between types of loss: in a situation not involving continuous water damage, the result might not be the same. (See, for example, Harrington v. Am. Econ. Ins. Co., 131 Fed. Appx. 573, 574 (9th Cir. 2005), in which employee theft was held to have "occurred" more than two years before suit was filed). In addition, because of the prevalence in Oregon of claims for hidden damage caused by years-long water infiltration, it would not be surprising if the industry increasingly attempted to amend the CP 00 90 07 88 form to match the statutory language.