Colony Specialty Insurance Company v. Mutual of Enumclaw Insurance Company

Filing 32

ORDER: Plaintiff's Motion for Summary Judgment 21 is Granted and Defendant's Motion for Summary Judgment 23 is Denied. Moe must tender one-half of the defense paid costs paid by Colony in the underlying lawsuit, to be determined by the parties upon conferral. Signed on 3/29/2016 by Judge Michael J. McShane. (cp)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
COLONY SPECIALTY
INSURANCE COMPANY,
Plaintiff,

v.

Civ. No. 6:15-cv-00783-MC
OPINION AND ORDER

MUTUAL OF ENUMCLAW
INSURANCE COMPANY,
Defendant.

MCSHANE, Judge:
The issue before this Court is whether Defendant Mutual of Enumclaw Insurance
Company ("MOE") owed a duty to defend to its insured, Laurel Crossing, in a dispute in which
Plaintiff Colony Mutual ("Colony"), a separate insurer of Laurel Crossing, tendered that duty
under its own policy. Colony now seeks contribution from MOE because it contends, based on
the allegations of the underlying complaint, that MOE owed the duty as well. Colony and MOE
have accordingly filed cross-motions for summary judgment. ECF Nos. 21, 23.
The parties' cross-motions turn on one question: Does a claim in the underlying
complaint 1 for "Fraud/Misrepresentation/Failure to Disclose Construction Defects" that alleges
continuing damage arising from construction defects give rise to a duty to defend where the
relevant policy covers only propetiy damage arising out of an accident? Because I find that the
complaint's allegations of continuing property damage qualify as covered damages under the
relevant policy language and that the misrepresentation claim at issue in this case can give rise to

1

The complete list of claims from the underlying complaint follows: (1) Violations of the Oregon Condominiums
Act, ORS 100 et seq.; (2) Misrepresentation/Fraud/Failure to Disclose; (3) Breach of Contract (Implied and Express
Warranties); (4) Breach of Fiduciary Duties; (5) Negligence and Negligence per se. See LauersdorfDecl., Ex. 1, 1016, ECFNo. 22-1.

1 - OPINION AND ORDER

a claim for negligent, rather than intentional, misrepresentation, MOE owed Colony a duty to
defend. I therefore GRANT Plaintiff Colony's Motion for Summary Judgment, ECF No. 21, and
DENY Defendant MOE's Cross-motion for Summary Judgment, ECF No. 23.
BACKGROUND

I.

The Underlying Action
Laurel Crossing is a developer that was insured at relevant times by both Colony and MOE. 2

Laurel Crossing purchased and developed Stillwater Condominiums in Florence, Oregon. Laurel
Crossing hired independent contractor Thomas Hornback to perform construction and development
of the condominiums. It then sold the condominiums to individual owners, and then operated the
Stillwater Condominium Unit Owners' Association (the "Association"). LauersdorfDecl., Ex. 1
("Underlying

Complaint"),~~

1, 6, ECF No. 22-1. Laurel Crossing later transferred control of the

Association to the individual Stillwater Condominium owners. Id.

~

7.

After the transfer of control, the Association sued Laurel Crossing alleging, among other
things, failure to properly supervise construction, which allegedly resulted in construction defects
and related property damage. The Association separately alleged that Laurel Crossing fraudulently
misrepresented the state of the propeiiy and failed to investigate and disclose the various defects,
which led to delays in their discovery by the Association and additional property damage from
continuing unwanted water infiltration and other similar problems.
Pursuant to its policies with Colony and MOE, Laurel Crossing sought defense and
indemnity coverage from both insurers. Colony proceeded to defend under its policy with Laurel
Crossing. MOE refused to defend based on alleged lack of coverage pursuant to MOE's
interpretation of its policy and the allegations in the Underlying Complaint. This action followed.
2

The Colony Policy provides liability coverage for suits against Laurel Crossing, and has an effective period of
September 15, 2006, through Janumy 31, 2008. LauersdorfDecl., Ex. 5 ("Colony Policy"), ECF No. 22-5. The
MOE Policy includes liability coverage for suits against Laurel Crossing, and has an effective period of December
27, 2007 to December 27, 2008. Comp!., Ex. A ("MOE Policy"), ECF No. 1-1.

2 - OPINION AND ORDER

II.

The MOE Policy
The MOE Policy provides that MOE will "pay those smns of money that [Laurel Crossing]

becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to
which this insurance applies." MOE Pol., 77, ECF No. 1-2. "Prope1iy damage" is defined in the
MOE Policy as "physical injury to tangible property, including all resulting loss of use of that
property." Id. at 94. Under the MOE Policy, MOE must "defend [Laurel Crossing] against any 'suit'
seeking those damages." Id. at 77.
The MOE Policy expressly applies to property damage "only if' the damage is caused by an
"occurrence," id., which is defined in the policy as "an accident." Id. at 90. The MOE Policy
includes three relevant endorsements which limit the categories of property damage to which it
applies. The first endorsement excludes "Designated Construction" ("DC endorsement") and reads
as follows:
This insurance does not apply to "bodily injury" or "prope1iy
damage" arising out of the ongoing operations described in the
Schedule of this endorsement, regardless of whether such
operations are conducted by you or on your behalf or whether the
operations are conduct for yourself or for others.
MOE Pol., 96, ECF No. 1-2. 3 The second endorsement excludes "Designated Work" ("DW
endorsement") and reads as follows:
This insurance does not apply to "bodily injury" or "prope1iy
damage" included in the "products - completed operations hazard"
and arising out of "your work" in the Schedule.
MOE Pol., 93, ECF No. 1-2.4 The third endorsement excludes coverage occurring outside of the
"Designated Premises or Project" ("DPP endorsement") and reads as follows:

3

4

"You'' and "your," in these endorsements, refers to Laurel Crossing. MOE Pol., 91, ECF No. 1-2.
'

Your ,vork,,, in this endorsement, refers to operations either performed by Laurel Crossing itself or other\vise

1

perfonned on its behalf, thus including independent contractor Hornback. MOE Pol., 91, ECF No. 1-2. "Products completed operations hazard" refers to bodily injury or property damage arising out of"your work" save for work
"that has not yet been completed." Id at 90.

3 - OPINION AND ORDER

This insurance applies only to ... "prope1ty damage" ... arising
out of ... [t]he ownership, maintenance or use of the premises
shown in the Schedule and operations necessary or incidental to
those premises; ... or [t]he project shown in the Schedule.
MOE Pol., 94, ECF No. 1-2.
STANDARD
This Comt must grant summary judgment if there is no genuine issue of material fact and the
moving party is entitled to judgment as a matter oflaw. Fed. R. Civ. P. 56(a). An issue is "genuine"
if a reasonable jury could return a verdict in favor of the non-moving party. Rivera v. Phillip Morris,
Inc., 395 F.3d 1142, 1146 (9th Cir. 2005) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986)). A fact is "material" if it could affect the outcome of the case. Id The court reviews
evidence and draws inferences in the light most favorable to the non-moving party. 1Vliller v. Glenn
Miller Prods., Inc., 454 F.3d 975, 988 (9th Cir. 2006) (quoting Hunt v. Cromartie, 526 U.S. 541, 552

(1999)). When the moving party has met its burden, the non-moving pmty must present "specific
facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio
Co1p., 475 U.S. 574, 586-87 (1986) (quoting Fed. R. Civ. P. 56(e)) (emphasis in original).

Where patties file cross-motions for summary judgment, the court must "evaluate each
motion separately, giving the nonmoving party in each instance the benefit of all reasonable
inferences." ACLU ofNev. v. City ofLas Vegas, 466 F.3d 784, 790-91 (9th Cir. 2006) (quotation
marks and citation omitted); see also Pintos v. Pac. Creditors Ass'n, 605 F.3d 665, 674 (9th Cir.
2010) ("Cross-motions for summary judgment are evaluated separately under [the] same standard.").
DISCUSSION
Colony argues that it and MOE are legal "co-insurers" for the purposes of the underlying
action, as the claims brought in that action invoked coverage under the MOE Policy, and each
insurer thus owed Laurel Crossing a duty to defend. Colony's Mot., 9, ECF No. 21. Because MOE

4 - OPINION AND ORDER

owed that duty, Colony asserts, the Court must detem1ine and award to Colony the proportionate
share of expenses owed to it by MOE under the doctrine of equitable contribution. Id.
MOE reto1ts that the claims against Laurel Crossing in the underlying action were not claims
for "damages because of 'bodily injury' or 'property damage,"' per the MOE Policy. MOE further
argues that ifthe claims indeed sought covered damages, they fell within three relevant exclusions:
the DW endorsement, the DPP endorsement, and the common law exclusion of intentional acts.
The seminal Oregon case regarding the duty to defend is Ledford v. Gutoski, 319 Or. 397,
877 P .2d 80 (1994), in which the Oregon Supreme Court explained:
Whether an insurer has a duty to defend an action against its
insured depends on two documents: the complaint and the
insurance policy. An insurer has a duty to defend an action against
its insured if the claim against the insured stated in the complaint
could, without amendment, impose liability for conduct covered by
the policy.
In evaluating whether an insurer has a duty to defend, the comt
looks only at the facts alleged in the complaint to determine
whether they provide a basis for recovery that could be covered by
the policy ...
Ledforcl, 319 Or. at 399-400, 877 P .2d 80 (internal citations omitted).

Further, any doubt arising from an inquiry into the allegations is resolved in favor of the
insured. Schnitzer Inv. Corp. v. Certain Underwriters at Lloyd's ofLondon, 197 Or. App. 147, 155,
104 P.3d 1162, 1167-68 (2005).

A.

Property Damage Allegations

The allegations in the Underlying Complaint include the following categories of what Colony
argues to be "prope1ty damage" suffered by the Stillwater Condominiums: (1) "water intrusion and
prope1ty damage"; (2) "damage to wood structural framing components"; (3) damaged "sheathing at
roof surfaces and parapets"; (4) "failed welds at seams of PVC roof membranes"; and (5) certain

5 - OPINION AND ORDER

damages that "threaten the strnctural integrity and livability of the Stillwater Condominiums."
Underlying Comp!., ~~ 14, 17, 18, 44, ECF No. 22-1.
Colony points to the DPP endorsement as the basis for coverage of damages contained within
these allegations. While the patiies discuss the various claims in the Underlying Complaint at length,
Colony refers patiicularly to the Second Claim for Misrepresentation/Fraud/Failure to Disclose,
which alleges that the Laurel Crossing's misrepresentation caused a delay in discovery of defects,
"thereby increasing the damages and costs of repairing or remedying them..... " Underlying
Comp!.,~

44, ECF No. 22-1. Colony extends this 'exacerbation by way of omission' theme to its

analysis of the Fourth Claim in the Underlying Complaint for Breach ofFiduciaty Duty, which
alleges that Laurel Crossing's concealment of the various construction defects plaguing Stillwater
Condominiums "would result in ... substantial loss to the Association, including prope1iy damage."
Id.~

70.
With this in mind, I turn to the Underlying Complaint to determine ifthe allegations therein

are sufficient to give rise to a duty to defend. As a preliminary matter, I note that Colony appears to
concede that the Third Claim for Breach of Contract and the Fomih Claim for Breach of Fiduciary
Duties do not alone give rise to MOE's duty to defend based on the DC endorsement and the DW
endorsement. See Colony's Resp., 8-9, ECF No. 25. My analysis therefore focuses on the first and
second claims in the Underlying Complaint.
B.

Misrepresentation Claims and the Duty to Defend

With respect to the Underlying Complaint's First Claim for Violation of the Oregon
Condominiums Act and Second Claim for Misrepresentation/Fraud/Failure to Disclose, MOE argues
that all allegations of failure to disclose defects of the Stillwater Condominiums are not covered
because: "Under Oregon law, standard liability policies-like [MOE]'s-<lo not cover claims for
misrepresenting the condition of property to unsuspecting buyers." Def.' s Resp. to Pl.' s Mot., 5,

6 - OPINION AND ORDER

ECF No. 24. This is because the MOE Policy, which covers damages because of prope1ty damage,
"covers claims for damaging prope1ty, not merely for representing that damaged propelty is
undamaged." Id. MOE cites several Oregon cases in an attempt to support this distinction, including

Martin v. State Farm Fire and Cas. Co., 146 Or. App. 270, 932 P.2d 1207 (1997). 5
i.

Continuing Damage

Martin v. State Farm considered the concept of 'continuing damage' arising from
misrepresentations as potentially giving rise to a duty to defend. 932 P.2d at 1212. The Oregon Comt
of Appeals, in Martin, analyzed allegations in the underlying complaint which alleged that
petroleum products from damaged underground storage tanks on a prope1ty "continued to release to
and migrate in the soils at the Property." Id. The cou1i found that those releases did not invoke policy
coverage, and therefore did not give rise to a duty to defend, because the soils were paii of propeity
owned by the policy-holder, and therefore fell under a relevant policy exemption. Id. at 1212. The

l\lfartin court, however, alluded to possible coverage for releases that resulted in damages caused by
groundwater contamination, which would not have fallen under the same exemption. Id.
Nonetheless, the court and policy-holder specified that such damages were not alleged in the
underlying complaint and the duty to defend was therefore not invoked.
In light of 1'1fartin, I agree with MOE's arguments only to the extent that they contend that
purely misrepresenting the state of property, when sold, does not invoke the policy coverage for
property damage. Beyond that, I disagree with MOE's arguments in light of the allegations in the
Underlying Complaint that the delay of discovery of defects due to the misrepresentations resulted in
additional prope1iy damage. Here, unlike l\lfartin, the Underlying Complaint alleges continuing

5

The remaining cases cited by MOE analyzing the duty to defend underlying misrepresentation claims are
inapposite in that they contain factually and legally dissimilar underlying allegations. See, e.g., General Ins. Co. of
Am. v. Western Am. Dev. Co., 43 Or. App. 671 (1979) (undisclosed easements held by third-party burdening
purchased property constituted legal rather than property damage); see also State Bd. of Higher Ed V. Northwestem
Pac. lndem. Co., 69 Or. App. 456 (1984) (recove1y of the difference of agreed upon value from the sale of
contaminated wheat seed did not invoke duty to defend accidental property damage coverage).

7 - OPINION AND ORDER

covered property damage arising out of and in addition to damages arising solely from the
misrepresentations. In both the First and Second Claim of the Underlying Complaint, as well as the
general allegations re-alleged and incorporated tlu·oughout, allegations of continuing property
damage are clearly enumerated. See Underlying Comp!., ~ 14, ECF No. 22-1 (defects were
"continuing to cause ... extensive prope1iy damage to both the common elements and unit
interiors."). The plaintiff in the underlying action even stated that the misrepresentations resulted in a
delay of investigations of the actual stat~ of the property and caused delays in "making arrangements
for needed maintenance, repairs, and preventive measures ...." Id ~3l(b) (emphasis added). The
express need for preventive measures clearly alleges continuing prope1iy damage.
At oral argument, MOE contended that any damages arising from the allegations of
continuing damage in the Underlying Complaint simply constitute economic loss, rather than
covered property damage. In determining whether the underlying allegations incur covered damages,
I find persuasive FountainCourt Homeowners' Ass 'n v. FountainCourt Development, LLC et al., 264
Or. App. 468 (2014). In that case, the Oregon Comi of Appeals considered a factually similar
underlying action on an appeal of a post-judgment garnislunent proceeding. Id. at 4 71. In a strikingly
similar legal dispute, an insurer attempted to argue that "physical damage" from water intrusion was
not "prope1iy damage" under its policy. Id. at 481. The homeowners' association that was seeking
coverage did not deny that damage arising solely from construction defects was excluded from
policy coverage, but contended that the jury in the underlying action had been clearly instructed it
may separately award for physical damage from water intrusion, as here, and that the jury did just
that. Id. 481-82. The Oregon Comi of Appeals agreed. Id. at 482. After a thorough analysis oflegal
burdens and the ambit of broad policy coverage in the sorts of insurance contracts at issue in this
case, the comi agreed with the homeowners' association that the jury award included covered
damages and did not constitute an award for purely economic loss. Id. at 484-85.

8 - OPINION AND ORDER

Based on the above analysis and the Oregon Comi of Appeals' analysis and holding in
FountainCourt that recognized allegations such as those in the Underlying Complaint may fall under

"prope1iy damage," I disagree with MOE and find that the Underlying Complaint contains
allegations that go beyond merely representing that damaged prope1iy is undamaged. The
Underlying Complaint extended to covered property damage, therefore invoking policy coverage.

ii.

Intentional Acts Exception and Negligent Misrepresentation

Moving beyond the dispute over covered damages, MOE next argues that the intentionality
of a fraud claim necessarily nullifies coverage because the MOE Policy covers only "occurrences"
which are defined as "accidents." MOE Pol., 90, ECF No. 1-2. MOE cites Cunningham & Walsh v.
Atlantic Mut. Ins. Co, 88 Or. App. 251, 744 P.2d 1317 (1987), a case in which the Oregon Comi of

Appeals found that "when fraud or deceit is committed, its natural and intended consequence is to do
hmm and, whatever the harm might be, the conduct which brought it about is not an 'occurrence'
under the policy." Id. at 255. Given that rule, an insurer is still "required to defend an action if any of
the allegations of the complaint would entitle the insured to coverage, even if the complaint also
includes allegations of conduct that would not be covered." Farmers In. Co. v. Limbocker, 109 Or.
App. 130, 133, 818 P.2d 527 (1991). The Limbocker court, overturning an award of summary
judgment, analyzed a fraud claim pied alongside a negligence claim and dete1mined that the latter
was enough to invoke the duty to defend. Id.
Colony presents no clear response to MOE's salient argument regarding the intentional acts
exclusion-that a fraud claim in the underlying complaint, without more, does not entitle the insured
to coverage based on the inherent intentionality of fraud. Colony instead states:
The Underlying Complaint leaves open the possibility that Laurel
Crossing was liable for negligently failing to disclose information,
which resulted in worsening property damage. If, for example,
Laurel Crossing knew about defects but mistakenly believed the
defects would not cause property damage and thus failed to
disclose them, it could be liable for negligence. If that negligence
9 - OPINION AND ORDER

results in worsening property damage, there is coverage under the
MOE Policy.
Colony's Reply, 5, ECF No. 26. This position, on its face, appears to conflict with the clear rule of
Oregon law that the duty to defend is activated "if the claim against the insured stated in the
complaint could, without amendment, impose liability for conduct covered by the policy." Leijord,
319 Or. at 400, 877 P.2d at 83. However, courts in this District have declined to find in similar
disputes that "the pleading of a negligent misrepresentation claim (or the pleading of facts that could
give rise to such a claim), falls within an intentional acts exclusion." Allstate Ins. Co. v. Hudler, No.
CV-09-544-HU, 2011 WL 1498370 at *9 (D. Or. Feb. 25, 2011) (Hubel, M.J.), citing Wagner v.

Home Depot USA, Inc., No. CV-10-901-KI, 2010 WL 4670533, at *2 (D. Or. Nov. 9, 2010) (King,
J.).
In Allstate v. Hudler, Judge Hubel accepted an argument similar to that of Colony's
regarding allegations in the underlying complaint that were "capable of raising a claim based on
negligent misrepresentation .... " 2011 WL 1498370 at *9. The court did so based on allegations
that the misrepresentor "knew or should have known" that he was preparing documents containing
false misrepresentations. Id at *8. Judge Hubel found that this was enough to potentially give rise to
an ultimate finding of negligent misrepresentation, even if the allegations were included in a claim of
intentional fraud. Id at *10.
The Underlying Complaint in this case contains similar language to that of Allstate. It alleges
that Laurel Crossing "knew, or in the exercise of reasonable care, should have known ... [t]hat the
construction defects ... existed," and that the Stillwater Condominiums were suffering or would
foreseeably suffer the resulting continuing damages described elsewhere in the complaint.
Underlying Comp!., il 44(a)-(d), ECF No. 22-1. The allegations similarly give rise to the possibility
that Laurel Crossing was not necessarily aware of the construction defects or their likelihood to
cause continuing property damage. This is supported by the fact that Laurel Crossing used an
10- OPINION AND ORDER

independent contractor to carry out the construction itself. Short of a complete investigation, which
the complaint alleges was not performed, Laurel Crossing could reasonably have been unaware of
the continuing damage to the Stillwater Condominiums. If given the opportunity, a fact-finder could
have reasonably detetmined that Laurel Crossing negligently failed to disclose the construction
defects, leading to the resulting continuing property damage.
I cannot conclude on summary judgment that the intentional acts exclusion applies to the
Underlying Complaint and forecloses a duty to defend under the MOE Policy, as the allegations give
rise to a potentially covered claim.
CONCLUSION

Based on the foregoing, Plaintiff Colony's Motion for Summary Judgment, ECF No. 21,
is GRANTED and Defendant MOE's Cross-motion for Summary Judgment, ECF No. 23, is
DENIED. MOE must tender one-half of the defense costs paid by Colony in the underlying
lawsuit, to be determined by the parties upon conferral.
IT IS SO ORDERED.
Dated this

day of March, 2016.

Michael McSl!anc
United States District Judge

11 - OPINION AND ORDER