The Court of Appeals of the State of Oregon issued a decision on May 10, 2017 in the matter titled Hunters Ridge Condominium Assoc. v. Sherwood Cross, LLC, et al. that could potentially impact future Construction Defect cases in Oregon.

The Hunters Ridge appeal arose out of construction defect lawsuit.  The Plaintiff Condo Association filed suit against the developer and general contractor.  The general contractor then filed third-party claims against several subcontractors.

One subcontractor, Walter George Construction (“WGC”), was insured by American Family (“AmFam”).  WGC tendered the claim to AmFam, who denied coverage based upon a Multi-Unit New Residential Construction Exclusion. Thereafter, WGC failed to appear or answer the Complaint.

Default Judgments were entered against WGC by the developer and general contractor, which included damages, attorneys’ fees, and costs.  The remaining parties settled.  The developer and general contractor, as part of their settlements, assigned claims against WGC to the Plaintiff Condo Association.

A Garnishment Proceeding followed, during which the Condo Association sought to obtain the proceeds of the applicable AmFam policy. Several Motions for Summary Judgment were filed.  Those orders formed the basis of the appeal.

The Trial Court had granted AmFam’s Motion for Summary Judgment on the application of the Multi-Unit New Residential Construction Exclusion.  On appeal, the Condo Association argued the exclusion was ambiguous and therefore could not be construed in favor of coverage.

The subject condo was mixed use – each of the three buildings had dedicated commercial space on the ground floor with residential units above them.  The exclusion defined “multi-unit residential building” as “a condominium, townhouse, apartment or similar structure, each of which was greater than eight units built or used for the purpose of residential occupancy.”

AmFam argued that the condos, which contained more than eight residential units, were subject to the exclusion.  On appeal, the Condo Association argued the exclusion was unenforceable for ambiguity.  It claimed the exclusion could be read to either include or exclude multi-purpose buildings. The Court of Appeals agreed. Specifically, the Court determined the term “residential building” could be interpreted as either a multi-use building, or one that is purely residential.  In light of the ambiguity, the Court reversed the Trial Court’s grant of summary judgment on that issue.

The Court of Appeals also reviewed the Trial Court’s denial of AmFam’s Motion which argued there was no coverage for attorneys’ fees and costs awarded in the underlying judgments.

The awards of fees were based upon the contractual indemnity provisions in the subcontracts, which obligated WGC to indemnify both developer and general contractor.  The Trial Court held that the term “costs taxed against the insured” was ambiguous with respect to whether it included attorneys’ fees.  AmFam appealed.

The Court of Appeals reviewed the fees in two ways.  First, whether the fees were part of the “obligation to pay damages because of ‘property damage’ which the insurance applie[d].”  Second, whether the fees constitute “costs” under the “Supplementary Payments” provision.

The Court determined that attorneys’ fees and costs can potentially constitute covered damages.  The Court recognized that, under Oregon common law, when attorneys’ fees are claimed as consequential damages as a result of tortious or wrongful conduct by a defendant which causes a plaintiff to litigate with a third party, the standard American Rule does not apply.

The Court found that since the claims against the developer and general contractor arose in part from the WGC’s defective work, the insured was therefore liable for some portion of the fees incurred in defending those claims by the Condo Association. The Court concluded that such fees could qualify as consequential damages recoverable against the insured, even in the absence of a contractual indemnity provision.  As consequential damages, the Court reasons, they could be considered “damages because of property damage” within the meaning of the policy.

The Court notes, however, that fees incurred by the developer and general contractor in litigating claims directly against the insured would not qualify as such “damages.” Such fees are not subject to the third-party litigation rule set forth above.

The Court did, however, determine that the fees incurred by the developer and general contractor in pursuing the insured directly may qualify as “costs” under the “Supplementary Payments” provision.  The Court reasoned that since “costs” was not defined, it was required to interpret that term with the use of dictionary definitions.  The Court found that the common definitions of the term “costs” could be construed to either include or exclude attorneys’ fees.  Therefore, the Court held that the term was ambiguous, and ruled in favor of coverage. As a result, the term “costs” was construed to include attorneys’ fees, as well as expert expends, and the Trial Court’s denial of AFM’s Motion for Summary Judgment was upheld.

In addition the issues discussed above, the Court of Appeals reviewed the constitutionality of denying an insurer the right to a jury trial in the context of a Garnishment Proceeding. ORS 18.782 provides that, in a contested garnishment hearing at which the garnishee’s liability is determined, “[t]he proceedings against a garnishee shall be tried by the court as upon the trial of an issue of law between a plaintiff and defendant.” AmFam contended that this statute violated its constitutional right to a jury trial, pursuant to Article 1, Section 17 of the Oregon Constitution.

The Court agreed, and held that the insurer must be given the right to a jury trial as part of a full opportunity to litigate any coverage issues. As a result, the Court found that ORS 18.782 is unconstitutional to the extent it compels parties to a garnishment action to litigate coverage issues to the Court without the ability to elect a jury trial.

This decision obviously impacts several areas of law concerning insurance in the State of Oregon.  If you have any questions or concerns about how this decision may impact any pending or future claims, please feel free to contact our office at any time.