FIRST MERCURY INSURANCE COMPANY, an Illinois corporation Plaintiff,
WATERSIDE CONDOMINIUM ASSOCIATION, an Oregon non-profit corporation; and MORRISON BUILDING CORP., an Oregon corporation, dba MORRISON CONSTRUCTION, INC. OF OREGON Defendants.
OPINION AND ORDER
JANICE M. STEWART, Magistrate Judge.
Plaintiff, First Mercury Insurance Company ("First Mercury"), filed this action against defendants, Waterside Condominium Association ("Association") and Morrison Building Corporation, dba Morrison Construction, Inc. of Oregon ("Morrison"), seeking a declaratory judgment that it has no indemnity obligation under three insurance policies issued by First Mercury to Morrison.
This court has diversity jurisdiction pursuant to 28 USC § 1332. All parties have consented to allow a Magistrate Judge to enter final orders and judgment in this case in accordance with FRCP 73 and 28 USC § 636(c) (docket #21).
First Mercury has filed a Motion for Summary Judgment (docket #36). For the reasons set forth below, that motion is granted as to all three policies.
FRCP 56(c) authorizes summary judgment if "no genuine issue" exists regarding any material fact and "the moving party is entitled to judgment as a matter of law." The moving party must show an absence of an issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party does so, the nonmoving party must "go beyond the pleadings" and designate specific facts showing a "genuine issue for trial." Id at 324, citing FRCP 56(e). The court must "not weigh the evidence or determine the truth of the matter, but only determine whether there is a genuine issue for trial." Balint v. Carson City, Nev., 180 F.3d 1047, 1054 (9th Cir 1999). A " scintilla of evidence, ' or evidence that is merely colorable' or not significantly probative, '" does not present a genuine issue of material fact. United Steelworkers of Am. v. Phelps Dodge Corp., 865 F.2d 1539, 1542 (9th Cir 1989). The substantive law governing a claim or defense determines whether a fact is material. Addisu v. Fred Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir 2000). The court must view the inferences drawn from the facts "in the light most favorable to the non-moving party." Bravo v. City of Santa Maria, 665 F.3d 1076, 1083 (9th Cir 2011).
Around January 25, 2005, Morrison entered into an agreement with Hayden Island Condos, Inc. ("Hayden") to construct Waterside Condominiums, consisting of 84 units. Green Decl., Ex. 4, p. 3. That contract was later amended to specify that Hayden had obtained Comprehensive General Liability insurance coverage ("CGL") for the period from March 4, 2005, to June 4, 2006. Id, pp. 3-5. The CGL policy was placed with underwriters at Lloyd's, London to cover ongoing operations, but did not cover completed operations ("Completed Ops Coverage"). Id, pp. 3-5. In lieu of purchasing Completed Ops Coverage, Hayden set aside $1, 000, 000 in an account ("Set Aside") "to pay potential Completed Ops Coverage claims, suits or actions against, and attorney fees and costs incurred by, [Hayden], Morrison and any subcontractor of Morrison approved by [Hayden]... arising out of or related to the Project." Id, p. 3. The Set Aside covers "any amount that [Hayden, Morrison, or an approved subcontractor] is legally obligated to pay to another person by way of settlement, judgment, or award, including, but not limited to, any legally recoverable costs and attorney fees related to any Set Aside Claims." Id, p. 4.
Hayden turned over control of the Association to the individual unit owners on October 13, 2010. Thorpe Decl., Ex. 2, ¶ 8. On March 16, 2012, the Association filed suit in Multnomah County Circuit Court, alleging that Morrison and others were liable for faulty workmanship in the construction of the Waterside Condominiums resulting in water intrusion and extensive property damage. Id, Ex. 2. The faulty workmanship included "improper or defective materials; improper design; or noncompliance with applicable building codes, industry standards, or manufacturer specifications and guidelines" in the following general categories: "Exterior Wall Assemblies, " "Roof Assemblies, " "Deck Assemblies, " and "Miscellaneous." Id, ¶ 18, pp. 7-15.
First Mercury issued three one-year commercial general liability policies to Morrison beginning February 1, 2005, and ending February 1, 2008. Green Decl., Exs. 6-7; Green Suppl. Decl., Ex. 2. Each policy contains an exclusion from coverage for certain residential construction ("Specific Operations Exclusion"), but the language of that exclusion varies slightly in each policy. The 2006-07 and 2007-08 policies also exclude operations covered by a "consolidated (wrap-up) insurance program" ("Wrap-up Exclusion"). Based on these exclusions, First Mercury denied coverage to Morrison for the alleged property damage suffered by the Association.
On June 18, 2012, before trial, Morrison and the Association settled the state court case. Thorpe Decl., Ex. 3. According to that settlement, Morrison entered into a stipulated judgment for $5, 200, 000 in favor of the Association and assigned its claims against First Mercury to the Association. First Mercury seeks a declaratory judgment that it has no obligation under its three insurance policies to indemnify Morrison or otherwise satisfy the $5, 200, 000 judgment. In response, the Association and Morrison have filed a counterclaim for breach of contract based on First Mercury's refusal to defend Morrison in state court or pay the resulting judgment.
First Mercury asserts that the property damage at the Waterside Condominiums alleged in the state court case falls outside the time period covered by the 2005-06 policy and also falls within both the Wrap-Up Exclusion in the 2006-07 and 2007-08 policies and the Specific Operations Exclusion in all three policies.
I. Evidentiary Objections
As a preliminary matter, the Association objects to four exhibits submitted in support of First Mercury's motion based on lack of authentication and inadmissibility under ORS 742.016. Three of these exhibits contain excerpts from Morrison's applications for renewal of First Mercury's policies submitted in 2005, 2006, and 2007. Green Decl., ¶¶ 2-4, Exs. 1-3. The fourth exhibit consists of the declarations page for the policy placed by Hayden with Lloyds, London and Exhibit B to Morrison's construction contract with Hayden. Id, ¶ 5, Ex. 4.
The Association's objection based on lack of authentication is unfounded. The three applications are authenticated as either signed by Morrison's president, Steven A. Barstaad, or by Swett & Crawford, or both. Swett & Crawford is Morrison's insurance broker. Green Decl., ¶ 2. "An insurance broker is the agent of the insured in negotiating for a policy, and owes a duty of his principal to exercise reasonable skill, care, and diligence in effecting insurance." Joseph Forest Prods., Inc. v. Pratt, 278 Or 477, 480, 564 P.2d 1027, 1029 (1977), quoting 16 J. APPLEMAN, INSURANCE LAW AND PRACTICE 510-514 (1968). The fourth exhibit contains documents that Cover X Specialty, a surplus lines insurance producer, kept in its underwriting files in the course of its regularly conducted business activities. Green Suppl. Decl., ¶ 4. Thus, authentication is not a barrier to the admissibility of these four exhibits.
However, ORS 742.016(1) renders inadmissible the three exhibits containing excerpts from Morrison's applications for insurance. "ORS 742.016 functions as a parol evidence rule in actions based on or involving insurance policies." Progressive Ins. v. Nat'l Am. Ins. Co. of Cal., 201 Or.App. 301, 307, 118 P.3d 836, 839 (2005), citing DeJonge v. Mut. of Enumclaw, 315 Or 237, 242, 843 P.2d 914, 917 (1992). In particular, it restricts the admissibility of applications for insurance coverage:
When the contract is made pursuant to a written application therefor, if the insurer delivers a copy of such application with the policy to the insured, thereupon such application shall become a part of the insurance policy. Any application that is not so delivered to the insured shall not be a part of the insurance policy and the insurer shall be precluded from introducing such application as evidence in any action based upon or involving the policy.
The record contains no evidence that First Mercury delivered to Morrison copies of the applications with the policies as required by this statute. Thus, these applications are not "part of the insurance polic[ies]" and cannot be introduced "as evidence in any action based upon or involving the polic[ies]." Id.
First Mercury argues that ORS 742.016 does not apply because it offers the applications only as evidence of the existence of Morrison's wrap-up insurance program, and not as evidence of any supplemental policy terms. Without citing supporting authority, First Mercury argues the statute's purpose is to prevent an insurer from adding policy terms that were not fairly disclosed to the insured. However, the language of the statute does not mention the intended use of the application. Instead, it broadly bars the use of the application "as evidence in any action based upon or involving the policy." This is such an "action based upon or involving the policy" for each application.
Oregon courts have recognized certain exceptions to this statute, but the intended use of the application by the insurer is not one of those exceptions. Progressive, 201 Or.App. at 307 n2, 118 P.3d at 839, citing DeJonge, 315 Or at 242, 843 P.2d at 917 (insurer may be estopped to deny the existence of coverage notwithstanding the policy's terms and conditions), Bennett v. Farmers Ins. Co., 332 Or 138, 158, 26 P.3d 785, 797 (2001) (applying estoppel when insured has been led to rely on a perceived waiver of a policy provision), and Collver v. Salem Ins. Agency, Inc., 132 Or.App. 52, 60-61, 887 P.2d 836, 842 (1994) (claim for insurance coverage based on an oral agreement which did not include a written application).
According to the Oregon courts, the purpose for requiring "that a copy of the application be attached to the issued policy" is to ensure that "the policyholder is provided with everything that the insurer relies on in issuing the policy, i.e., the entire agreement of the parties." Ives v. INA Life Ins. Co., 101 Or.App. 429, 433, 790 P.2d 1206, 1208 (1990) (internal quotation marks and citations omitted). Morrison arguably understood the application to be part of the policy because its president indorsed on each that "[t]he undersigned, therefore warrants... [t]he Supplemental Questionnaire, and the application to which it is appended shall be the basis of any insurance policy that may be issued and will be part of such policy." Green Decl., Exs. 1-3, p. 8. However, ORS 742.016(1) only allows the application to be admitted as part of the policy if the insurer "delivers a copy of such application with the policy." This language does not create an exception when the application purports to be incorporated into the policy, and the Oregon courts have not interpreted the statute in that way. Because there is no evidence of delivery, the applications are not part of the policies and, thus, are inadmissible as evidence in this action based upon those policies.
The fourth exhibit contains two documents concerning Morrison's wrap-up insurance program. Id, ¶ 5 & Ex. 4. ORS 742.016(1) is not a barrier to admissibility because it only implicates evidence contained in the application to the policy at issue in the action. The declarations page is for Policy No. LSP0312, placed by Hayden with underwriters at Lloyd's, London. The other document, Exhibit B to the General Contract between Morrison and Hayden, explains the Set-Aside for completed operations. In contrast to the other three exhibits, neither document has been shown to be part of any renewal application for the policies at issue here. Id, Exs. 1-3, p. 1 ("Attached please find a narrative, Acord [ sic ] Application, Questionnaire, Subcontract Agreement and loss runs."). Thus, these documents are admissible.
II. Coverage Under 2005-06 Policy
The 2005-06 policy provides coverage for property damage to the Waterside Condominiums that occurred during the policy period from February 1, 2005, through February 1, 2006. The state court complaint does not specify when the alleged property damage occurred or even when construction began and ended. However, First Mercury contends that all of the alleged property damage occurred after the 2005-06 policy expired.
The record contains some evidence that construction began on the Waterside Condominiums about the same time as the 2005-06 policy began coverage because the construction contract between Morrison and Hayden is dated January 25, 2005. Green Decl., Ex. 4, p. 3. First Mercury places the initial date of the property damage no earlier than February 17, 2006, based on the defects alleged in the state court complaint which arise only from post-slab and concrete construction. As proof of when the slab and concrete construction was completed and the alleged defects first occurred, it has submitted a copy of the City of Portland's inspection and permit summary for the Waterside Condominiums showing that the inspectors partially approved the concrete on February 17, 2006, and the slab work on March 22, 2007. Thorpe Decl., Ex. 1.
The Association has submitted other evidence as proof to the contrary. That evidence is an invoice produced during discovery in the state court lawsuit from the project file of Time Frame, Inc., dated December 31, 2005, stating that the "percentage completed to date" was 40.17%. Guse Decl., Ex. B. The Association argues that this evidence proves that the allegedly defective construction was completed within the 2005-06 policy period.
Both pieces of evidence are inconclusive as when the alleged water intrusion and property damage occurred. As for First Mercury's evidence, when permits were issued or when inspections occurred does not necessarily prove when construction was completed. Furthermore, the Association alleged that the property damage was caused in part by improper design and noncompliance with codes and standards which, although unlikely, could have caused damage during the earliest stages of construction. As for Morrison's invoice, the record does not reveal what Time Frame, Inc., did, who was paid for particular work, or the nature of the work completed by December 31, 2005. Because a genuine issue of material fact exists as to when the property damage occurred, First Mercury is not entitled to summary judgment on the 2005-06 policy on this basis.
III. Policy Exclusions
A. Insurance Contract Interpretation
In Oregon, the interpretation of an insurance policy is a question of law. Hoffman Constr. Co. v. Fred S. James & Co., 313 Or 464, 469, 836 P.2d 703, 706 (1992). The initial burden of proving coverage is on the insured, but the insurer bears the burden of proving that a particular claim falls within an exclusion in the policy. Employers Ins. of Wausau v. Tektronix, Inc., 211 Or.App. 485, 509, 156 P.3d 105, 119 (2007) (citations omitted).
When analyzing an insurance contract, "[t]he primary and governing rule of construction is to ascertain the intention of the parties." Hoffman, 313 Or at 469, 836 P.2d at 706. In order to determine the intent of the parties, the court looks to the terms and conditions of the insurance policy itself. ORS 742.016. Under Hoffman, the parties' intent is determined in three steps.
"The first step is to examine the text of the policy to determine whether it is ambiguous, that is, whether it is susceptible to more than one plausible interpretation." Andres v. Am. Standard Ins. Co. of Wis., 205 Or.App. 419, 423, 134 P.3d 1061, 1063 (2006), citing Hoffman, 313 Or at 469-70, 836 P.2d at 706. "The text of the policy includes any definitions of disputed terms included in the policy; we must, in fact, construe the policy in accordance with any such definitions." Id (citations omitted). "Only if the policy does not define the terms in dispute do we invoke assumptions about ordinary meaning' and other aids to construction." Id at 424, 134 P.3d at 1063. "The first aid to interpretation is determining whether the term at issue has a plain meaning. The meaning of a term is plain' - that is, unambiguous - if the term is susceptible to only one plausible interpretation. If so, the parties' intent conclusively is established, and our interpretive inquiry is at an end." Groshong v. Mut. of Enumclaw Ins. Co., 329 Or 303, 308, 985 P.2d 1284, 1287 (1999), citing Hoffman, 313 Or at 469-71, 836 P.2d at 706-07. If not, the term is ambiguous, and the court proceeds to the second step and examines the disputed terms "in the light of, among other things, the particular context in which the term is used in the policy and the broader context of the policy as a whole." Hoffman, 313 Or at 470, 836 P.2d at 707.
The parties dispute the standard for analysis under the third step. The Association argues that if an ambiguity remains, the final step is to construe the policy against the drafter. Id at 470-71, 836 P.2d at 706-07; see also Andres, 205 Or.App. at 424, 134 P.3d at 1063. First Mercury disagrees and asserts that when construing an ambiguity in non-standard policy language, the court may consider extrinsic evidence of the parties' intent.
It is well-established in Oregon that extrinsic evidence may be considered to determine the parties' intent in a non-insurance contract. Yogman v. Parrott, 325 Or 358, 363, 937 P.2d 1019, 1022 (1997). However, as recognized by Judge Mosman, Oregon applies a different rule when interpreting an insurance policy and bars the court from considering extrinsic evidence of the parties' intent. In re Helicopter Crash Near Weaverville, Cal., 714 F Supp2d 1098, 1104-08 (D Or 2010) (analyzing Oregon law). Why this distinction is made between insurance and non-insurance contracts is unclear since the analysis in Hoffman is designed to determine the parties' intent. As aptly noted by the Oregon Court of Appeals, "[t]he Supreme Court has not explained precisely why, if such ambiguity persists, we are required to resort to a maxim of construction and are not instead directed to extrinsic ...