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September 2012

Oregon Mutual Insurance Company v. Hartford Fire Insurance Company ? General Allegations of Property Damage and Water Intrusion Do Not Implicate All Contractors and Subcontractors

Washington Court of Appeals Decides in Favor of Insurer in Construction Defect Coverage Action: General Allegations of Property Damage and Water Intrusion Are Not Sufficient to Implicate Elevator Subcontractor's Insurer

(September 17, 2012) ___ Wn. App. ___

Oregon Mutual appealed a trial court’s summary dismissal of its lawsuit against Hartford, which involved Hartford’s refusal to defend two underlying lawsuits.

Oregon Mutual is the assignee of Wellman & Zuck Inc. (‘Wellman”), which acted as the general contractor on the construction of a condominium project. Wellman subcontracted with Otis Elevator Company (“Otis”) to install an elevator. At Otis's request Hartford issued a specialized owners and contractors protective (“OCP”) policy to Wellman as the named insured. The OCP policy applied to claims for "property damages" caused by an "occurrence" arising from operations performed by Otis for Wellman.

The condominium developer filed a lawsuit against Wellman alleging breach of contract by failing to provide defect-free work, with water damage as a result of the defects.  Exterior Research & Design (ERD) investigated the condominiums for construction defects and associated damages. ERD's report described no defect allegations, damages, or repair recommendations related to the elevator installation.

Wellman tendered its defense to Hartford and Hartford declined the tender on the basis that the claims involved were not "property damage" or "bodily injury," nor were the damages the result of an "occurrence" as defined by the policy.

Wellman’s insurer, Oregon Mutual, defended Wellman and paid to settle the claims against it.  Then, Oregon Mutual, acting on its own behalf and as Wellman's assignee, sued Hartford, alleging claims for breach of contract, bad faith, negligence, statutory violations, a Consumer Protection Act (CPA)  violation, attorney fees, estoppel, contribution, and subrogation.  After significant motion practice, the trial court ultimately dismissed Oregon Mutual’s claims against Hartford but found that Hartford breached its duty to defend the suit against Wellman.  Oregon Mutual appealed and Hartford cross appealed.

The Court of Appeals concluded that Hartford had no duty to defend because no facts alleged in the complaint, if proven, would have imposed liability under the OCP policy.

The OCP policy only provided coverage for “bodily injury” or “property damage” caused by Otis’s operations at the condominiums that occurred during the policy period.  The Court found the developer’s complaint generally alleged breach of the construction contract, water damage, damage for the installation of siding, vinyl covering applied to decks, roofing and flashing, failure to install window coverings, and failure to install landscaping, but made no reference to any act or omission of Otis or the elevator generally.

The Court held that even a liberal construction of the complaint could not support Oregon Mutual's contention that it pleaded sufficient allegations to trigger the OCP policy's provision providing coverage for "property damage" arising out of Otis's work. The Court held that general allegations of water damage and construction defects did not implicate Otis's elevator installation. Additionally, if the Court adopted Oregon Mutual's broad reading, the complaints would implicate the work of every contractor involved in the condominiums' construction and any complaint alleging defective performance of a construction contract, without more, would implicate the insurer for every entity providing labor or materials to the project.

Therefore the Court held the complaints did not trigger Hartford's duty to defend. As such, Hartford did not breach its duty by rejecting the tenders. The Court held that the trial court erred by ruling that Hartford breached its duty to defend the developer’s suit, but because the trial court ultimately dismissed Oregon Mutual's claims for Hartford's alleged breaches of the duty to defend, reversal was unnecessary.

Click here for the opinion. 

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the Washington Supreme Court.  These events would render the opinion unavailable for use as legal authority in Washington state courts.

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