What Lurks Within the 4 Corners of the Complaint?: Oregon Supreme Court Expands Scope of AI Coverage in Construction Arena
In a move that is sure to shakeup insurance underwriting, the Oregon Supreme Court, in West Hills Development Co. v. Chartis Claims, Inc., recently expanded the scope of coverage afforded by an Ongoing Operations AI Endorsement. What makes this case particularly interesting—or concerning, from an insurer’s standpoint—is that the underlying complaint clearly alleged damage based on the completed work of the contractors. Yet, the Oregon Supreme Court nevertheless read the complaint to trigger coverage for ongoing operations. The state’s highest court affirmed an appellate court decision, effectively requiring an insurer to provide completed operations coverage, where none was obtained by the insured.
As in many faulty workmanship cases surrounding CGL policies, the underlying action involved defective work in the construction of a residential development. When the new homeowners of Arbor Terrace took up residence in their brand-new townhomes, they quickly discovered shoddy construction was causing significant water intrusion. The Arbor Terrace homeowners then sued the general contractor, West Hills Development Co, alleging negligent construction based on faulty workmanship.
West Hills then tendered the Arbor Terrace suit to its subcontractor, L&T Enterprises, and the sub’s insurer, Oregon Automobile Insurance Company. Oregon Auto denied coverage, among other reasons, because its policy only provided coverage to additional insureds for property damage occurring in the course of L&T’s ongoing operations performed for West Hills. As there were no allegations of damage to townhomes while L&T was actually working on the project, and L&T did not purchase Completed Operations coverage for additional insureds, West Hills did not qualify for coverage under the Oregon Auto policy.
After settling the Arbor Terrace action with the homeowners, West Hills commenced a DJ against Oregon Auto to recover defense costs incurred. West Hills argued that the Arbor Terrace complaint triggered Oregon Auto’s duty to defend because the allegations sufficed to create the possibility that West Hills would have been subject to liability for L&T’s ongoing operations. West Hills also argued that the Ongoing Ops endorsement applied to damages arising out of L&T’s ongoing operations, and this covered consequential damages that resulted from L&T’s work. Oregon Auto argued the underlying complaint did not allege any negligence on the part of its insured, only that West Hills was negligent. As the Oregon Auto policy did not cover West Hills for its own negligence, no coverage was owed. Further, Oregon Auto claimed coverage was only afforded if there were allegations of damages occurring while L&T was working on the Arbor Terrace project. Because no allegations were made, West Hills was not entitled to coverage under the policy’s ongoing operations endorsement. The trial court and court of appeals agreed with West Hills, and Oregon Auto appealed to the Supreme Court of Oregon.
Unsurprisingly, the potential that the state’s highest court would rule in favor of West Hills encouraged a plethora of amicus briefs, including ones from the Property Casualty Insurers Association of American, the National Association of Mutual Insurance Companies, and the Oregon Trial Lawyers Association. There were many issues on appeal, but the crux of the matter boiled down to whether the 4-corners of the complaint could be read to allege property damage caused by L&T’s ongoing operations performed for West Hills, despite the clear evidence the work on the Arbor Hills development was complete by the time the suit was filed.
Both the court of appeals and the Supreme Court of Oregon found one particular allegation by Arbor Terrace to be dispositive: the homeowners alleged the property damage occurred by the time they purchased their townhomes. Taking a broad interpretation of this allegation, the Court held it was possible the damages occurred earlier, and thus it did not rule out the possibility that damage occurred before L&T finished its operations. The Oregon Supreme Court performed some legal gymnastics in a strained reading of the Arbor Terrace complaint to find coverage was potentially triggered under the ongoing operations endorsement. As a result, although there were no allegations that damage arose before work was completed, the Court nevertheless found coverage because the complaint could be reasonably interpreted to allege damage to the Arbor Terrace properties before the homeowners purchased their townhomes.
Ignoring the syntax and grammar of the allegations (all in the past-tense and referring to prior work), the court concluded one allegation was sufficient to grant the insured more coverage than that which it bargained for (i.e., converting Ongoing Operations into Completed Operations coverage). This speculation on what could be meant by a party’s allegations exceeds the traditional scope of the 4-corners rule. Normally, an insurer compares the 4-corners of the complaint with the policy to determine whether anything alleged falls within the scope of coverage. If the allegations fail to plead facts that could trigger coverage under the policy, the insurer is relieved of its coverage obligations. Now (at least in Oregon), so long as the complaint does not expressly state facts ruling out coverage (e.g., no “occurrence,” injury/damage occurred before inception of policy, etc.) there would be a duty to defend. Undoubtedly, attorneys will use this to their benefit by making their allegations as ambiguously broad as possible, as a way to trigger coverage.
Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please call or email Dennis Wade at for additional information.