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LLC v. Affiliated FM Insurance Co.

United States District Court, D. Oregon, Portland Division

December 18, 2018

12W RPO, LLC, an Oregon limited liability company; and GED GALLERY, LLC, an Oregon limited liability company, Plaintiffs,
AFFILIATED FM INSURANCE COMPANY, a Rhode Island corporation, and STEADFAST INSURANCE COMPANY, a Delaware corporation, Defendants. AFFILIATED FM INSURANCE COMPANY, a Rhode Island corporation, and STEADFAST INSURANCE COMPANY, a Delaware corporation, Defendants.



          OPINION & ORDER


         Plaintiffs 12W RPO ("12W") and GED Gallery ("GED") bring this breach of contract action against Defendant Affiliated FM Insurance Company.[1] The dispute arises from Defendant's denial of insurance claims made by Plaintiffs related to the failure of plumbing components and certain "spandrel glass" windows used in the construction of a multi-story, mixed-use apartment and office building in Portland.[2] Defendant moves for summary judgment on both the plumbing and spandrel glass claims. Plaintiffs move for partial summary judgment on the spandrel glass claim only. Because I conclude that the insurance policy excludes coverage for both claims, I grant Defendant's motion and deny Plaintiffs' motion.


         GED was the developer of "The Indigo @ Twelve West" ("The Indigo"). First Am. Compl. ¶ 10, ECF 41. 12W is The Indigo's current owner and is landlord to The Indigo's residential and commercial tenants. Id. ¶ 11. Defendant issued a series of first-party property insurance policies to 12W under which GED is also a named insured. Id. ¶ 7.

         According to the allegations in the First Amended Complaint, The Indigo's hot and cold water plumbing systems were constructed with various materials composed of or containing ethylene propylene diene monomer rubber ("EPDM"). Id. ¶ 12. The EPDM components, made by Victaulic Company, included valves, pipe couplings, gaskets, and fittings for piping systems. Id.

         The EPDM materials failed by decomposing, disintegrating, and in some instances dissolving into sludge. Id. ¶ 13. According to Plaintiffs' investigation, the EPDM materials had an "unanticipated chemical reaction" with Portland's water supply. Id. ¶ 14. Chloramine compounds, which Portland adds to its domestic water, caused the EPDM materials to "decompose, disintegrate, and/or dissolve." Id. This disintegration and dissolution of the EPDM materials resulted in damage to The Indigo's potable water supply, to the domestic water plumbing system, and to other property at The Indigo including damage to both residential and commercial units. Id. ¶ 15. After investigating, Plaintiffs concluded that the only viable repair option was to entirely replace The Indigo's plumbing system. Id. ¶ 20. As a result, Plaintiffs have incurred total repair costs of not less than $4, 826, 584. Id. ¶ 21. On or about June 18, 2015, Plaintiffs submitted the EPDM claim to Defendant and requested coverage. Id. ¶ 27. On or about December 22, 2016, Defendant denied the claim. Id.

         As to the spandrel window glass, Plaintiffs allege that "opacifier film," which was adhered to spandrel glass units installed at The Indigo, is separating and peeling away from the spandrel glass units, resulting in property damage. Id. ¶ 40. At the time the First Amended Complaint was filed in November 2017, the investigation into the spandrel glass issue was ongoing, with estimated repair costs to exceed $6 million. Id. ¶¶ 40-42. On or about June 18, 2015, Plaintiffs submitted a separate claim to Defendant regarding The Indigo's spandrel glass units and opacifier film, requesting coverage. Id. ¶ 38. On or about July 20, 2015, Defendant denied coverage. Id. ¶ 39.


         I. Summary Judgment

         Summary judgment is appropriate if there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). The moving party bears the initial responsibility of informing the court of the basis of its motion, and identifying those portions of "'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (quoting former Fed.R.Civ.P. 56(c)).

         Once the moving party meets its initial burden of demonstrating the absence of a genuine issue of material fact, the burden then shifts to the nonmoving party to present "specific facts" showing a "genuine issue for trial." Fed. Trade Comm'n v. Stefanchik, 559 F.3d 924, 927-28 (9th Cir. 2009) (internal quotation marks omitted). The nonmoving party must go beyond the pleadings and designate facts showing an issue for trial. Bias v. Moynihan, 508 F.3d 1212, 1218 (9th Cir. 2007) (citing Celotex, 477 U.S. at 324).

         The substantive law governing a claim determines whether a fact is material. Suever v. Connell, 579 F.3d 1047, 1056 (9th Cir. 2009). The court draws inferences from the facts in the light most favorable to the nonmoving party. Earl v. Nielsen Media Research, Inc., 658 F.3d 1108, 1112 (9th Cir. 2011).

         If the factual context makes the nonmoving party's claim as to the existence of a material issue of fact implausible, that party must come forward with more persuasive evidence to support his claim than would otherwise be necessary. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

         II. Insurance Contract Interpretation

         In this diversity action, Oregon law governs the construction of the policies at issue. Allstate Ins. Co. v. Morgan, 123 F.Supp.3d 1266, 1272-73 (D. Or. 2015). The burden of proving coverage is on the insured, while the insurer bears the burden of proving exclusion from coverage. Id. at 1273 (citing ZRZ Realty Co. v. Beneficial Fire & Cas. Ins. Co., 349 Or. 117, 127, 241 P.3d 710 (2010)).

         The "question of [insurance] policy interpretation is one of law, and [the court's] task is to determine the intent of the parties[.]" Groshong v. Mut. of Enumclaw Ins. Co., 329 Or. 303, 307, 985 P.2d 1284, 1287 (1999) (citation omitted); see also Hoffman Constr. Co. of Alaska v. Fred S. James & Co. of Or., 313 Or. 464, 469, 836 P.2d 703, 706 (1992) ("[T]he primary and governing rule of the construction of insurance contracts is to ascertain the intention of the parties.") (internal quotation marks and brackets omitted). The court determines the parties' intent "from the terms and conditions of the policy." Groshong, 329 Or. at 307, 985 P.2d at 1287.

         Courts first examine the wording of the policy, "applying any definitions supplied by the policy itself and otherwise presuming that words have their plain, ordinary meanings." Tualatin Valley Hous. Partners v. Truck Ins. Exch., 208 Or.App. 155, 159-60, 144 P.3d 991, 993 (2006) (citing Hoffman, 313 Or. at 469-70, 836 P.2d 703). When the policy does not define the terms at issue, the court "resort[s] to various aids of interpretation to discern the parties' intended meaning." Groshong, 329 Or. at 307-08, 985 P.2d at 1287. The court first examines the plain meaning of the term at issue. Id. at 308, 985 P.2d at 1287. If at that point the court determines there is only one plausible interpretation of the disputed terms, the analysis ends there. Id.

         If the meaning of the term or phrase at issue "is not, on its face, plain, [the court] proceed[s] to [its] second aid to interpretation[-] . . . examin[ing] the phrase in light of the particular context in which [it] is used in the policy and the broader context of the policy as a whole." Id. at 312, 985 P.2d at 1289 (internal quotation marks omitted). A term is ambiguous if "two or more plausible interpretations of that term withstand scrutiny, i.e., continues to be reasonable, after the interpretations are examined in the light of, among other things, the particular context in which that term is used in the policy and the broader context of the policy as a whole." Hoffman Constr., 313 Or. at 470, 836 P.2d at 706. If, after the court analyzes the terms in the broader context of the policy, the court determines that the term remains ambiguous, the term is to be construed against the insurer, the party which drafted the policy. Hoffman, 313 Or. at 470-71, 836 P.2d at 706-07. The Hoffman court explained:

[W]hen two or more competing, plausible interpretations prove to be reasonable after all other methods for resolving the dispute over the meaning of particular words fail, then the rule of interpretation against the drafter of the language becomes applicable, because the ambiguity cannot be permitted to survive. It must be resolved.


         On the other hand, where the contract unambiguously expresses the intent to provide coverage or to not provide coverage, the contract language is controlling. See Allstate Ins. Co. v. State Farm Mut. Auto. Ins. Co., 67 Or.App. 623, 627, 679 P.2d 879, 881 (1984) (where contract language is unambiguous, courts will "apply those terms and will not create coverage where none was intended by the contract.").


         Defendant argues that for both the EPDM and spandrel glass claims, policy exclusions preclude coverage and preclude application of the "ensuing" or "resulting" loss provision as an exception to any exclusion. Further, Defendant argues that the EPDM and the spandrel glass claims are untimely because (1) the damage commenced before Defendant issued its first policy to Plaintiffs; and (2) the damage commenced more than two years before Plaintiffs filed suit and the untimely claims are not saved by the parties' tolling agreements.

         In response to Defendant's motion as to the EPDM claim, Plaintiffs argue that the plumbing system was damaged by concurrent, multiple causes and because one of those is a covered loss, the loss is not excluded. Plaintiffs further argue that even if the loss is excluded, it is nonetheless covered under the ensuing/resulting loss provision. Plaintiffs contend that the loss did not commence as to the EPDM material until the entire plumbing system failed which was within a policy period and that at a minimum, certain replacement plumbing parts were damaged within the two-year suit limitations period. In response to Defendant's motion on the spandrel glass claim, as well as in support of their own motion for partial summary judgment, Plaintiffs make similar concurrent cause and ensuing loss arguments. As to the timeliness arguments, they contend that damage to the spandrel glass units commenced within the policy period and that each unit of spandrel glass should be treated separately and thus, the lawsuit was timely filed as to many of the spandrel glass units, some of which have not yet suffered damage.

         After setting forth the relevant policy provisions, I discuss the EPDM coverage arguments, followed by the spandrel glass coverage arguments. Because I agree with Defendant on the coverage arguments, I do not discuss the timeliness arguments.

         I. Policy Language/Provisions

         Beginning in 2009, Defendant and 12W were parties to several successive one-year insurance contracts. Jones Decl. ¶¶ 23-35, ECF 58; id., Exs. 22-33 (pages from annual policies from July 13, 2009 to September 13, 2017). While there appear to be some differences in the policies as time when on, the parties do not suggest that these differences are material or relate to the issues in this case. Thus, I cite to language from the first policy issued July 13, 2009 and found at Exhibit 22 to the August 1, 2018 Jones Declaration.

         In the Declarations page of the policy, under "Insurance Provided," the policy sates: "All risks of direct physical loss or damage, as defined and limited herein, on Real Property, Personal Property, Business Interruption, including the Extensions of Coverage applying at the following described locations: . . . ." Jones Decl., Ex. 22 at 3. Form PRO AR 3100 (1/07) addresses the coverage. Id. at 5. It is entitled "All Risk Property Coverage" and states, under the heading "Perils Insured," that "[t]his policy insures against all risks of direct physical loss or damage to insured property except as excluded under this policy." Id.

         Another section of the policy, under the heading "Group II," addresses exclusions. Id. at 6. It begins with the following statement: "This policy does not insure against loss or damage caused by the following; however, if direct physical loss or damage insured by this policy results, then that resulting direct physical loss or damage is covered." Id. Following that statement is a list of seven exclusions, some of which are at issue here. Id. at 6-7.

         II. EPDM Claim

         Defendant concedes that under the broad grant of coverage in an all-risk policy, damage to the EPDM plumbing components is initially covered. See, e.g., Prudential Prop. & Cas. Ins. Co. v. Lillard-Roberts, No. CV-01-1362-ST, 2002 WL 31495830, at *7 (D. Or. June 8, 20020 (in an all risk policy, "'the insured's burden is limited. The insured need only show that a physical loss occurred to covered property'") (quoting Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civ. 98-434-HU, 1999 WL 619100, at *4 (D. Or. 1999)). Thus, the issues in Defendant's motion as to the EPDM claim are whether an exclusion applies to deny coverage, and if so, whether the ensuing loss provision creates an exception to the exclusion so that coverage is ultimately available to Plaintiffs.

         A. Defendant's Asserted Design Defect Exclusions

         Defendant argues that the following design defect exclusions preclude coverage: latent defect, faulty design, materials defects, and faulty workmanship/construction. Jones Decl., Ex. 22 at 6 (Group II, Exclusion Nos. 1, 2). In their Response Memorandum, Plaintiffs state that the "EPDM plumbing fittings . . . were defective, a fact Plaintiffs do not . . . dispute[.]" Pls.' Resp. 9, ECF 63. They also later note the variety of what they call "defect-oriented" exclusions asserted by Defendant: "latent defect, faulty design, defective materials, faulty workmanship, and deterioration." Id. at 15. Plaintiffs concede that they have pressed "certain of these theories" against the manufacturer and contractors. Id. But, they argue that they stand by those arguments because in the end, their loss is still covered under a concurrent/multiple loss theory or under the ensuing loss provision as an exception to the exclusions. Id.

         The parties' positions establish that there is no dispute regarding the application of at least the faulty design exclusion and possibly other design or product defect exclusions. Thus, at this point, it is undisputed that there is initial coverage which is then excluded.

         B. Plaintiff's Concurrent/Multiple Loss Theory

         Plaintiffs contend that when "a force external to the design defect comes to operate on the material and physically damages it, the coverage question changes: did a non-excluded peril contribute to the loss or damage?" Pls.' Resp. 10. Plaintiffs argue that when a covered cause and excluded cause of loss converge to cause damage, the loss or damage is covered in the first instance. They argue that here, for example, the EPDM would not have decomposed and the plumbing system would not have been lost but for the chloramine-treated water. Because chloramine-treated water is not an excluded cause of loss, Plaintiffs argue that Defendant's design-defect exclusion arguments are incomplete. They assert that three non-excluded/covered perils contributed to the loss: (1) the "unanticipated chemical ...

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