Opinion
Civil No. 01-514-HA.
May 26, 2004
Beth R. Skillern, Sheila H. Potter, Diane K. Dailey, Bullivant Houser Bailey, PC, Portland, Oregon.
Jan K. Kitchel, Robert H. Hamrick, Nancy M. Erfle, Schwabe Williamson Wyatt, PC, Portland, Oregon, Attorneys for Plaintiffs.
Edwin C. Perry, Tonkon Torp LLP, Portland, Oregon.
James A. Riddle, Thelen Reid Priest, LLP, San Francisco, California, Attorneys for Defendant Stimson Lumber Company.
Michael A. Lehner, Lehner Mitchell Rodriguez Sears, Portland, Oregon, Attorney for American National Fire Insurance Company.
Alexander S. Wylie, Eric J. Neiman, Williams Kastner Gibbs PLLC, Portland, Oregon.
Pamela M. Andrews, Johnson Christie Andrews Skinner, PS, Seattle, Washington.
Stephen G. Skinner, Johnson Christie Andrews Skinner, KS, Seattle, Washington.
Vivian Raits Solomon, Tooze Duden Creamer Frank Hutchinson, Portland, Oregon, Attorneys for National Union Fire Insurance Company of Pennsylvania and Insurance Company of the State of Pennsylvania.
Douglas G. Pickett, John L. Langslet, Martin Bischoff Templeton Langslet Hoffman, Portland, Oregon, Attorneys for Oregon Insurance Guaranty Association.
OPINION AND ORDER
On April 26, 2004, the court heard oral argument on the following motions: (1) plaintiffs' Motion for Summary Judgment (Doc. #109); (2) a Motion for Summary Judgment from National Union Fire Insurance Company of Pennsylvania and Insurance Company of the State of Pennsylvania (collectively National Union) (Doc. #112); (3) Stimson Lumber Company's (Stimson) Motion for Partial Summary Judgment (Doc. #116); (4) plaintiffs' Motion for Partial Summary Judgment on Allocation (Doc. #204); (5) Stimson's Cross-Motion for Partial Summary Judgment on Allocation (Doc. #229); (6) National Union's Motion for Partial Summary Judgment on Drop-Down (Doc. #213); and (7) the Oregon Insurance Guaranty Association's (OIGA) Motion for Summary Judgment on Net Worth Limitation (Doc. #241).
FACTUAL BACKGROUND
Plaintiffs the Home Insurance Company (the Home), Wausau Business Insurance Company, Wausau Underwriters Insurance Company, Employers Insurance of Wausau (collectively Wausau), and California Insurance Company (Coregis) brought this action against Stimson and several other insurance companies. Plaintiffs issued contracts of primary liability insurance to Stimson, and defendants National Union (excess insurers) issued contracts of excess liability insurance to Stimson. Plaintiffs sought a declaration of their obligations to Stimson regarding Stimson's claims for insurance coverage. Plaintiffs also sought a declaration of the excess insurers' obligations to Stimson and to plaintiffs concerning payment of any damages under the insurance contracts.
Stimson filed cross-claims seeking insurance coverage for property damage claims arising out of the installation of its siding product. Stimson also asserted two counter-claims for relief against the plaintiff insurers: (1) Stimson requests a declaration that the insurers are obligated to pay all sums that Stimson has become or in the future becomes legally obligated to pay with respect to the siding claims; and (2) Stimson requests an award of money damages for amounts it has already paid to resolve the siding claims.
Stimson purchased Commercial General Liability (CGL) policies from plaintiffs, the excess insurers, and other insurers since 1980. Stimson purchased these policies to insure itself against the risk of various general liabilities, including the risk of liability on account of property damage.
Stimson manufactures wood products, including an exterior hardboard siding product known as Forestex. Plaintiffs allege that Stimson manufactured siding from 1986 until June 1997 at its plant in Oregon. Stimson sold its products throughout the western United States. Since the early 1990s, Stimson has been sued for defects in its Forestex siding that allegedly caused property damage to the siding and to other property. In these lawsuits, the only construction material that Stimson manufactured, sold, handled, or distributed was the siding.
Stimson has notified plaintiffs and the excess insurers of the suits and claims against Stimson arising out of the use of the siding. For most of the last ten years, Stimson's insurers have accepted the responsibility to defend and indemnify Stimson in connection with the siding lawsuits. In many of the cases, the insurers collectively paid the entire agreed settlement on Stimson's behalf. In some cases, the carriers requested that Stimson make a contribution towards the settlements, apparently based on interpretations of the applicable policies.
Except to the extent that coverage is plainly and unambiguously precluded by an exclusion set forth in the contract, Stimson maintains that the insurers are contractually obligated to defend or indemnify Stimson in connection with the siding claims. Plaintiffs agreed to defend Stimson in some of those claims, subject to a reservation of rights.
The claimants in nearly all of the lawsuits against Stimson allege that premature failure of the hardboard siding material caused damage to other elements of the claimants' buildings, requiring repair and replacement of items such as wall framing, exterior sheathing material, metal flashing, primer and finish paint. These claimants also allege consequential damages such as design services, insurance costs, and rent loss. In one case, Boulders on the River Incorporated v. Stimson Lumber Company, CV 16-07-07547 (Lane County, Oregon) (hereinafter Boulders lawsuit), the claimant's sole allegation was that Stimson breached its warranty. The claimant did not seek any amount for consequential damages. The claimant alleged that the siding Stimson provided was buckling and that Stimson refused to compensate the claimant under the terms of the warranty. The jury found that Stimson had breached the warranty and awarded damages.
On June 13, 2003, the Home, once a plaintiff in this action, was ordered liquidated with a finding of insolvency by the Superior Court of New Hampshire. Following the order of liquidation, Judge Hubel issued an order requesting that Stimson join the relevant guaranty associations as third-party defendants. These non-profit guaranty associations were created by the state legislatures to cover outstanding liabilities of insolvent insurers. Stimson identified the associations with which Stimson believed it had covered claims. All of these insurance guaranty associations have since been dismissed for lack of personal jurisdiction except for the OIGA.
The following is the pertinent portions of the operative insuring agreement in each policy issued to Stimson by Wausau, Coregis, and the Home:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for. . . . This insurance applies only to "bodily injury" and "property damage" which occurs during the policy period. The "bodily injury" or "property damage" must be caused by an "occurrence."
Concise Statement of Facts in Supp. of Insurers' Mo. for Summ. J., Ex. K.
Pursuant to the CGL policies, the following definitions apply:
"Bodily injury" means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.
"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
"Property damage" means: (a) Physical injury to tangible property, including all resulting loss of use of that property; or (b) Loss of use of tangible property that is not physically injured.Id.
The CGL policies contain the following exclusions:
This insurance does not apply to:
a. "Bodily injury" or "property damage" expected or intended from the standpoint of the insured.
j. "Property damage" to: . . . (5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or (6) That particular part of any property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it.
k. "Property damage" to "your product" arising out of it or any part of it.
l. "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."
m. "Property damage" to "impaired property" or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy, or dangerous condition in "your product" or "your work;" or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.
n. Damages claimed for any loss, cost, or expense incurred by you or others for the loss of use, withdrawl, recall, inspection, repair, replacement, adjustment, removal, or disposal of: (1) "Your product;" (2) "Your work;" or (3) "Impaired property;" if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.Id.
The following terms, used in the policy exclusions, are defined by the policies:
5. "Impaired property" means tangible property, other than "your product" or "your work," that cannot be used or is less useful because: (a) It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or (b) You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by: (a) the repair, replacement, adjustment, or removal of "your product" or "your work"; or (b) Your fulfilling the terms of the contract or agreement.
14. "Your product" means: (a) Any goods or products, other than real property, manufactured, sold, handled, distributed, or disposed of by (1) You; (2) Others trading under your name; or (3) A person or organization whose business or assets you have acquired; and (b) Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.
"Your product" includes warranties, or representations made at any time with respect to the fitness, quality, durability or performance of any of the items included in (a) and (b) above.
15. "Your work" means: (a) Work or operations performed by you or on your behalf; and (b) Materials, parts, or equipment furnished in connection with such work or operations.
"Your work" includes warranties or representations made at any time with respect to the fitness, quality, durability, or performance of any of the terms included in (a) or (b) above.Id. STANDARDS
Oregon law applies to the questions presented in this case. Home Indem. Co. v. Stimson Lumber Co., 229 F. Supp.2d 1075, 1090 n. 4 (D. Or. 2001).
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Summary judgment is not proper if factual material exists for trial. Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995).
The moving party has the burden of establishing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings and identify facts that show a genuine issue for trial. Id. at 324. Assuming there has been sufficient time for discovery, summary judgment should be entered against a "party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322.
Special rules of construction apply to evaluating summary judgment motions: (1) all reasonable doubts as to the existence of genuine issues of material fact should be resolved against the moving party; (2) all inferences to be drawn from the underlying facts must be viewed in the light most favorable to the nonmoving party; and (3) the court must assume the truth of direct evidence set forth by the nonmoving party if it conflicts with direct evidence produced by the moving party. T.W. Elec. Serv. v. Pac. Elec. Contractors, 809 F.2d 626, 630 (9th Cir. 1987). When different ultimate inferences can be reached, summary judgment is not appropriate. Sankovich v. Life Ins. Co. of N. Am., 638 F.2d 136, 140 (9th Cir. 1981).
The issue of material fact required by Rule 56 to entitle a party to proceed to trial does not need conclusive resolution in favor of the party asserting its existence. Rather, all that is required is sufficient evidence supporting the claimed factual dispute to require a trier of fact to resolve the parties' differing versions of the truth at trial. Id. At the summary judgment stage, the judge does not weigh conflicting evidence or decide credibility. Those determinations are the province of the factfinder at trial. Id., see also Abdul-Jabbar v. Gen. Motors Corp., 85 F.3d 407, 410 (9th Cir. 1996) (on a motion for summary judgment, the court does not weigh the evidence or determine the truth of the matter asserted, but decides only whether there is a genuine issue for trial).
PENDING MOTIONS
1. Plaintiff Insurers' Motion for Summary Judgment and Stimson's Cross-Motion for Summary Judgment
Wausau, Coregis, American National Fire Insurance Company, and National Union (collectively the insurers) move for an order granting them summary judgment on their claim for declaratory relief. Wausau and Coregis also move for an order granting them summary judgment on Stimson's First and Second Claims for Relief. OIGA joins in this motion.
The language of the insurance policies at issue evidences an intent to insure against unexpected damage to property or work — other than Stimson's — that is caused by Stimson's product or work. The insurers argue that based on this insurance policy language, they are entitled to declarations that there is no coverage for: (1) claims for breach of warranty; (2) claims for the cost of repair and replacement of defective siding; and (3) claims for violation of consumer protection statutes. The insurers further argue that they are entitled to judgment that, as a matter of law, Stimson knew or expected that damage would result from its product. Finally, the insurers assert they are entitled to judgment on Stimson's counter-claims for breach of contract and breach of the implied warranty of good faith.
Generally, the interpretation of an insurance policy is a question of law. St. Paul Fire Marine Ins. Co., Inc. v. McCormick Baxter Creosoting Co., 923 P.2d 1200, 1205 (Or. 1996). The exception is that if language in the policy is ambiguous and evidence is properly admitted to show meaning, the question becomes one of fact. Libby Creek Lodging, Inc. v. Johnson, 358 P.2d 491, 493 (Or. 1960).
Construction of insurance policies requires ascertaining the parties' intent. Hoffman Constr. Co. v. Fred S. James Co., 836 P.2d 703, 706 (Or. 1992). In doing so, the terms of the contract are presumed to have been incorporated and used in their primary and general meaning. O.R.S. 42.250. An insurance policy should be interpreted in accordance with the understanding of an ordinary purchaser of insurance. Botts v. Hartford Acc. Indem. Co., 585 P.2d 657, 659-60 (Or. 1978).
If there is ambiguous language in the contract, first the court should examine the text and the context of the ambiguous language, giving words of common usage their plain and ordinary meaning. Smurfit Newsprint Corp. v. Dep't of Rev., 997 P.2d 185, 188 (Or. 2000). Second, the court should examine the context to determine whether the parties intended for the disputed language to have a meaning other than its plain and natural meaning. Sunflower v. Bladorn, 1 P.3d 513, 521 (Or.App. 2000). Third, if an examination of the text and context does not provide an answer, other aids of construction may be employed to determine the parties' intent. Id. The parties' practical interpretation of the terms of the policy can be a safe guide to the intended meaning. Krieg v. Union Pac. Land Res. Corp., 525 P.2d 48, 52 (Or. 1974).
The insurer has the burden of drafting exclusionary clauses that are clear and unambiguous. N. Pac. Ins. Co. v. Hamilton, 22 P.3d 739, 744 (Or. 2001). Therefore, any ambiguity in an exclusionary clause should be strictly construed against the insurer. Stanford v. Am. Guaranty Life Ins. Co., 571 P.2d 909, 911 (Or. 1977).
a. Claims for Breach of Warranty
The insurers argue that liability policies similar to the one at issue do not insure payments for breach of warranty, which they assert are designed to fulfill the contractual promise and appease customers. Absent language to the contrary, liability policies are not a warranty or performance bond for a contractor's workmanship. Timberline Equip. Co. v. St. Paul Fire Marine Ins. Co., 576 P.2d 1244, 1246 (Or. 1978). Liability policies are instead meant to insure against injury to persons and damage to other property caused by inferior workmanship or products. Id. The risk being insured is that of tort liability for physical damages to others, and not contractual liability because the insured's product is not that for which the damaged person bargained. See id.; see also Oak Crest Const. Co. v. Austin Mut. Ins. Co., 998 P.2d 1254, 1257-58 (Or. 2000) (where a plaintiff alleges only breach of contract, there is no "accident" within the meaning of the CGL policy and no coverage).
In this case, the policy language provides insurance for damages because of "property damage" caused by an "occurrence," which is defined as an "accident." Oregon courts have concluded that a breach of contract is not an accident. See e.g. Kisle v. St. Paul Fire Marine Ins., 495 P.2d 1198, 1200-01 (Or. 1972). Whereas accidents are by their definition unexpected and unforeseeable, the failure of a product to perform as warranted is not beyond the realm of expectation. It is for this reason that warranties are provided. Stimson argues that the jury verdict rendered in the Boulders lawsuit finding Stimson liable for breach of warranty does not conclusively establish that the damages awarded for the purchase price of the siding were confined to the cost of Stimson's product.
As provided above, the relevant language in the CGL policy at issue provides:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for. . . . This insurance applies only to "bodily injury" and "property damage" which occurs during the policy period. The "bodily injury" or "property damage" must be caused by an "occurrence."
The court concludes that this language is not ambiguous. Accordingly, the interpretation of the clause is a question of law. An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The court agrees that a breach of contract or warranty is not an accident or an "occurrence." Accordingly, because there is no allegation of third-party property damage in the Boulders lawsuit, there is no coverage for the judgment entered against Stimson in the Boulders lawsuit.
The plaintiff insurance companies are therefore entitled to judgment as a matter of law on Stimson's claim for reimbursement of the sum it paid to satisfy the judgment entered in the Boulders lawsuit. Plaintiff insurers' motion is granted insofar as it pertains to this claim.
Stimson contends that insurance policies such as the one at issue here do not base coverage on the formal manner in which the claimants chose to plead their claims. Thus, it is irrelevant whether a claimant couches his or her cause of action in negligence, breach of warranty, or violations of consumer protection statutes. The application and scope of coverage turns on the substance of the factual allegations asserted, namely the nature of the property damage alleged.
The court agrees. Under the CGL policies, the insurers are not allowed to refuse coverage under the policy simply because a claim may contain an allegation for breach of warranty. Coverage under a CGL insurance policy does not depend on the form of the action chosen by the claimant, but rather the nature of the damage controls coverage. See Goodyear Rubber Supply Co. v. Great Am. Ins. Co., 471 F.2d 1343, 1344 (9th Cir. 1973) (applying Oregon law). Breach of warranty claims involve damages to the insured's property, which are damages that are excluded by the relevant policies. Thus, the lynchpin question is not whether "breach of warranty" claims are covered, but whether there is covered third-party property damage alleged. Therefore, this ruling is inapplicable to any of the lawsuits against Stimson that allege third-party damage, regardless of whether there are also allegations for breach of contract or breach of warranty.
b. Cost of Replacing and Repairing Defective Products
The insurers argue that repair and replacement costs of defective work or products are not insured by the policies because such repair and costs are simply the cost of doing business. In support of their argument, the insurers point to the product exclusion and the repair cost exclusion language in the policies.
The policies provide coverage for damages arising from "property damage." "Property damage" includes "[p]hysical injury to tangible property, including all resulting loss of use of that property; or [l]oss of use of tangible property that is not physically injured." The policies do not cover "`[p]roperty damage' to `impaired property' or property that has not been physically injured arising out of: [a] defect, deficiency, inadequacy or dangerous condition in `your product' or `your work,' or [a] delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms."
"Impaired property" includes: "tangible property, other than `your product' or `your work,' that cannot be used or is less useful because [i]t incorporates `your product' or `your work' that is known or thought to be defective, deficient, inadequate or dangerous; or [y]ou have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by: [t]he repair, replacement, adjustment, or removal of `your product' or `your work'; or [y]our fulfilling the terms of the contract or agreement."
The court concludes that this language is unambiguous and that the interpretation of the clause is a question of law. The definition of "property damage" as "physical injury to tangible property" negates any possibility that this policy was intended to include consequential or intangible damage such as diminution in value. See Wyoming Sawmills, Inc. v. Transp. Ins. Co., 578 P.2d 1253, 1256 (Or. 1978). As such, absent a showing that physical damage was caused to a claimant's property as a result of Stimson's defective siding, Stimson cannot recover the labor costs associated with repairing or replacing its defective siding. See id.
In Wyoming Sawmills, a lumber manufacturer (the insured) sold defective studs to a building contractor and sought reimbursement from its insurance carrier for the labor expense incurred in removing and replacing the defective studs. Id. The Oregon Supreme Court concluded that unless the defective studs caused other damage to the contractor's building and that the insured's labor cost was for repair of that damage, the insured could not recover. Id. Accordingly, Stimson may recover labor costs under the CGL policies for repairs of physical damage caused by Stimson's defective siding.
The policies also contain language excluding coverage for the cost to inspect, repair, or replace Stimson's product, work, or "impaired property," if the product, work, or property is withdrawn from either the market or use because of a known or suspected defect or dangerous condition. "Impaired property" means tangible property, other than Stimson's product or work, that cannot be used or is less useful because the property incorporates Stimson's defective product or work that is known or thought to be defective or inadequate. It also includes property that can be restored to use by the repair, replacement, or removal of Stimson's defective product or work.
Stimson asserts that because there has not been a commercial withdrawal of any Stimson hardboard siding, this exclusion is inapplicable. The exclusion at issue is nearly identical to the one addressed in Wyoming Sawmills. In Wyoming Sawmills the insurance policy excluded from coverage "damages claimed for the withdrawal, inspection, repair, replacement, or loss of use of the named insured's products . . . or of any property of which such products . . . form a part, if such products . . . are withdrawn from the market or from use because of any known or suspected defect. . . ." Id. at 1255. The court referred to this exclusion as the "sistership" exclusion and explained that "[i]t is intended to exclude from coverage the cost of preventative or curative action by withdrawal of a product in situations in which a danger is to be apprehended." Id. at 1257. The court provided as an example the recall by automobile manufacturers of vehicles for corrective measures. Id. Because the lumber manufacturer's product had not been recalled from the market, the court found the exclusion inapplicable. Id. Accordingly, under Wyoming Sawmills, the exclusion at issue in this case is interpreted to exclude from coverage the cost of preventative or curative action by withdrawal of a product in situations in which a danger is to be apprehended. Because Stimson's product has not been withdrawn in such a manner from the market, the exclusion is inapplicable. Plaintiff insurers' motion is denied insofar as it pertains to this exclusion.
c. Claims for Violations of Consumer Protection and Unfair Trade Practices
Some of the lawsuits against Stimson allege violations of a Consumer Protection Act or Unfair Trade Practices Act. For example, Gardner v. Stimson Lumber Company, King County Superior Court Case No. 00-2-17633-3 (Washington), is a class action lawsuit in which the class's only allegation is for violation of the Consumer Protection/Unfair Trade Practices statutes promulgated in various states. The claim is based on allegations that Stimson fraudulently and willfully concealed the true character of its Forestex siding product.
Allegations of misrepresentation, fraud, and deceit are considered to infer intentionally harmful behavior and are not covered by an insurance policy. Drake v. Mut. of Enumclaw Ins. Co., 1 P.3d 1065, 1070 (Or.App. 2000). The policies at issue here do not insure against intentional harm. First, the policies define "occurrence" as excluding expected or intended property damage or bodily injury. Second, it is against public policy to insure against intentionally harmful conduct. Isenhart v. Gen. Cas. Co., 377 P.2d 26, 28-29 (Or. 1962). Accordingly, based on the language of the insurance policies and public policy considerations, the court finds that the scope of the policies fails to cover those claims that assert a violation of a Consumer Protection and/or Unfair Trade Practices statute. Plaintiff insurers' motion is granted insofar as it pertains to these claims.
d. Coverage for Loss the Insured Knows Will Occur
Insurance contracts are designed to provide coverage for losses that are unexpected and unforseen. Fox Country Mut. Ins. Co., 964 P.2d 997, 1002 (Or. 1998). Both parties agree that liability coverage does not apply unless the alleged injury is the result of an "accident." An "accident" is not defined in the policies. Thus, it becomes necessary to consider the plain meaning of "accident." The word "accident" commonly means an unexpected and unintentional event occurring by chance or arising from remote or unknown causes that is not due to any fault or misconduct on the part of the injured person. McCormick, 923 P.2d at 1212. Unless otherwise stated in the policy, there is no distinction between unintended events that result from intentional acts and unintended events that result from unintentional acts. Id. Accordingly, the court in McCormick interpreted an "accident" as "an `incident or occurrence that happened by chance, without design and contrary to intention and expectation.'" Id. at 1213 (quoting Finley v. Prudential Life Cas. Ins. Co., 388 P.2d 21, 26 (1963)).
The policies at issue here exclude from coverage any damage to property that the insured expects or intends. Intentional harm can be inferred when the insured acts in a manner certain to effectuate the particular type of harm that occurred. Mut. of Enumclaw Ins. v. Gutman, 21 P.3d 101, 105 (Or.App. 2001). Harm is expected when it is probable or considered likely or certain. See Kuckenberg v. Hartford Accident Indem. Co., 226 F.2d 225, 226-27 (9th Cir. 1955) (applying Oregon law, the court found that the insurance policy did not cover damage that was within the normal expectancies of the insured).
Stimson has produced about 500 million board feet of hardboard siding products for nearly forty years. Stimson has received 2652 complaints of deficient siding. The number of complaints make up roughly one percent of the estimated total number of homes in which Stimson has installed its siding. The court finds that there is a genuine issue of material fact as to whether Stimson should reasonably have known of a likely exposure to losses. Plaintiff insurers' motion is denied insofar as it pertains to this issue.
e. Stimson's Counter-claims for Breach of Contract and Breach of the Implied Duty of Good Faith
The insurers argue that Stimson's counter-claim for breach of the implied duty of good faith fails because the applicable statute of limitations has run. This is true if the claim is based on a tort theory and the applicable statute of limitations is two years. See O.R.S. 12.110. However, Stimson's counter-claim for implied duty of good faith sounds in contract and the six-year statute of limitations applies. See O.R.S. 12.080.
Regardless, because Stimson has provided insufficient evidence supporting its counter-claims, they must fail. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-7 (1986) (in a motion for summary judgment, the nonmoving party must do more than show that there is some abstract doubt as to the material facts, but must produce cogent probative evidence supporting its position). Stimson's counter-claims are dismissed.
2. National Union's Motion for Summary Judgment
National Union seeks an order preventing Stimson from "stacking" successive excess insurance policies to respond to the same loss. National Union issued excess liability insurance policies to Stimson for the years 1990 through 1993 and 1997 through 2001. Stimson seeks insurance coverage for the policy years dating from at least 1990 through 2001. National Union argues that its insurance policies contain a "Non-Cumulation of Liability" provision specifically designed to prevent horizontal stacking of excess policies based on a continuing occurrence. This bar is allegedly contained in a "Prior Insurance Non-Cumulation of Liability" provision that states:
If a loss covered by this policy is also covered in whole or in part under any other excess policy issued to the Insured prior to the effective date of this policy, the limits of liability as stated in the declarations will be reduced by any amounts due to the Insured under such prior insurance.
Stimson asserts that the non-cumulation provision will not be triggered because each of the excess carriers' policies provides excess coverage of at least $1 million per occurrence, or $2 million aggregate. Stimson contends that no single claim will exceed these amounts and therefore the provision will not come into play. National Union argues that the provision is triggered not by a single occurrence loss, but by the total loss for which Stimson seeks coverage.
As stated above, the existence of an ambiguity is a question of law. Groshong v. Mut. of Enumclaw Ins. Co., 985 P.2d 1284, 1287 (Or. 1999). If the policy language is ambiguous, the court ascertains the intent of the parties. Hoffman, 836 P.2d at 706. The parties' intent is determined by looking at the terms and conditions of the policy. If a term is ambiguous, it should be construed against the drafter of the policy. Id. However, this is a rule of last resort and applies " only if two or more plausible interpretations of [the ambiguous] term withstand scrutiny, i.e., continues to be reasonable, after the interpretations are examined in the light of . . . the particular context in which that term is used in the policy and the broader context of the policy as a whole." Id. (emphasis in original). Every provision and clause in a policy must be construed to determine whether and how far one clause is limited or modified by others. Fisher v. California Ins. Co., 388 P.2d 441, 444 (Or. 1964).
Stimson argues that the term "loss" as used in the non-cumulation provision refers only to each individual siding claim paid for by Stimson and that no single claim will trigger application of the clause. Albeit plausible, this interpretation is unreasonable within the meaning of the policy. Although the term "loss" is not defined by the policies, it is also not limited by any other language. There is no policy language that ties the term "loss" to only individual occurrences. Accordingly, the term should be afforded its broadest meaning. See Hoffman, 836 P.2d at 706.
Stimson's proposed limitation is also unreasonable when reading the policy as a whole. Many of the policies at issue include the term "ultimate net loss." This is defined as "the amount payable in settlement of the liability of the Insured after making deductions for all recoveries for other valid and collectible insurances, excepting however the policy(ies) of the primary insurer(s) and shall include all costs, which are paid by the Company in addition to the ultimate net loss." See National Union's Concise Statement of Material Facts in Supp. of Mo. for Summ. J. When addressing the term "ultimate net loss," the policy refers to "the liability" that the insured pays for property damage minus deductions for all recoveries from other collectible insurances. The term "loss" must be defined more broadly because "loss" has none of the qualifiers found in the definition of "ultimate net loss."
Under Stimson's proposed definition, the court would be required to disregard other policy provisions, such as the definition of "ultimate net loss." See Hoffman, 836 P.2d at 709 (a proffered definition is unreasonable where acceptance necessitates disregarding other terms of the policy). Conversely, National Union's proffered definition is reasonable when read in light of the policy as a whole.
The court concludes that the term "loss" is interpreted to apply to the gross amount Stimson is seeking in its claim under the policy. Accordingly, National Union's motion is granted. To the extent that there is any excess insurance coverage available for the siding loss, the non-cumulation provision applies to reduce National Union's policy limits by the amounts paid in prior policy years or amounts paid by other excess settling insurers.
3. Plaintiff Insurers' Motion for Partial Summary Judgment on Allocation and Stimson's Cross-Motion for Partial Summary Judgment
Plaintiff insurers argue that the plain language of the policies provide that any obligation of a primary insurer is limited to actual "property damage" that is proven to have occurred during the period of time the specific policy was in effect. Alternatively, plaintiff insurers argue that any loss should be allocated on a pro rata basis, and that Stimson or a guaranty association should bear any loss that occurred during the period of time that the insolvent Home policies were in effect.
Stimson has filed a cross-motion, requesting that the court declare that the underlying property damage alleged against Stimson for which coverage is sought was continuous and progressed over time. The OIGA joins in Stimson's motion. Stimson contends that the alleged property damage began with the substantial completion of the structures in question and continued either to the date of resolution or through the last policy covering the risk, whichever was sooner. Accordingly, Stimson requests that the court declare that coverage under each primary policy on the risk during this period has been triggered. Stimson also seeks a declaration that where a particular insurer's policy is triggered, that insurer is liable up to its full policy limits, irrespective of whether only a portion of the alleged property damage took place during the policy period.
The determination of an insurance policy's scope and content is generally a matter of law committed to the court. Smith v. State Farm Ins., 927 P.2d 111, 113 (Or.App. 1996). The plain language of the policy must be applied. Only if the policy language is ambiguous is the court to resolve any ambiguity against the drafter. Hoffman, 836 P.2d at 706. Plaintiff insurers assert that the policies here establish unambiguously that the obligation of the primary insurers is limited to that covered "property damage" which Stimson is able to prove occurred during each policy year.
The primary policies at issue provide that the insurers will "pay those sums that the insured becomes legally obligated to pay as damages because of `property damage' to which this insurance applies." The insurance is triggered by "`property damage' which occurs during the policy period," and the relevant "property damage" must be caused by an "occurrence." (emphasis added). The term "property damage" is defined as "physical injury to tangible property, including all resulting loss of that property" or "loss of use of tangible property that is not physically injured." The term "occurrence" is defined as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions."
Actual injury must occur during the policy period in order to trigger a policy's coverage. See McCormick, 923 P.2d at 1210. Construing similar language, the court in McCormick reasoned that the "operative phrase in the trigger clauses contained in the caused-by-accident policies is `during the policy period.'" Id. Thus, if an accident occurs at some point in the policy period, that event is covered. Id. In addition, the policies provided that an "occurrence" has occurred and coverage is triggered "if there is direct injury to or destruction of tangible property during the policy period." Id. The court reasoned that under this language, if property is injured during the policy period, there has been an occurrence and the policy is triggered. Id.
Similarly, the policies here cover property damage that occurred during the policy period. As stated in McCormick, if property damage occurs at some point during the course of the policy, coverage is triggered. It follows that coverage is not triggered for injury to property that occurred outside the policy period. This "trigger" theory is commonly referred to as the "actual injury" or "injury-in-fact" trigger of coverage. Courts applying this trigger theory have found coverage exists under every policy that was in effect during the time periods in which damage to property actually occurred, even if the damage was discovered long after it began.
The essence of the "actual injury" trigger theory is that each insurer is liable only for those damages that occurred during the time its policy was in place and is not liable for any damages that occurred outside its policy period. Sentinel Ins. Co., Ltd. v. First Ins. Co. of Hawai'i, Ltd., 875 P.2d 894, 915 (Haw. 1994).
The lawsuits brought by various claimants against Stimson are not based on damage to property that occurred at the same time. Rather, the claims allege damage to different structures in different locations, each occurring at different times. To show that a particular policy coverage has been triggered, Stimson must prove that property damage occurred during that policy period. Accordingly, Stimson may recover insurance benefits under a policy only by proving that there was actual property damage that was covered by the policy in effect at the time of the damage.
Oregon courts have not addressed directly the issue of allocation of insurance when the insured sustains loss that occurred over a period of time and during more than one policy period. However, at least one federal circuit has concluded that a pro rata allocation of damage is appropriate. See Olin Corp. v. Ins. Co. of N. Am., 221 F.3d 307, 322 (2d Cir. 2000). Applying this methodology, liability is allocated among all triggered policies based on some objective factor, such as the amount of risk the insurer assumed, or the amount of time the insurer spent on the risk ("time on the risk analysis"). Id. Unlike joint and several liability, allocation avoids burdening one insurer with the complete loss, the duty to bring claims for contribution, and the risk that contribution may not materialize because of insolvent insurers. Id. at 322-23.
Here, the plain language of the policies states that coverage extends to "property damage" that occurred during the policy period. Thus, each insurer should be liable only for damages that Stimson can prove it sustained during that insurer's policy period. If property damage can be linked to a given policy period, it should be apportioned to that policy. Alternatively, the next best approach is to employ the allocation theory and hold each insurer liable for its proportionate share of the damage. The court in Sentinel utilized this approach, reasoning that where there is a continuous injury that is covered under different policies and precise apportionment of the damages is difficult to ascertain, the liability for the total loss should be equitably apportioned among the insurers. Sentinel, 875 P.2d at 917-19. Accordingly, if Stimson cannot prove what specific damage occurred during each policy period, but is able to prove that some damage occurred over the period of time covered by the insurers' policies, a pro rata allocation of loss based on each policy year's share of the loss is most equitable. Assuming there is liability and that the liability is covered by the policy, each of the insurers would be liable for a share of Stimson's liability based on that period of time in which the insurer's policies were in effect, compared to the total number of years in which damage occurred.
Plaintiff insurers contend that either Stimson or the OIGA should be liable for property damage occurring during the period of time that policies issued by the insolvent Home were in effect. Plaintiff insurers assert that an insurer should not be responsible for damages that occurred when it was not insuring the risk. The Home insured Stimson for four years and its policies provided insurance for property damage that occurred during those policy periods. The other primary insurers did not agree to insure property damage occurring during the period of time the Home's policies were in effect and did not agree to be the guarantors of the Home.
Stimson argues that it should be allowed to seek coverage from plaintiff insurers for damage that occurred outside their policy periods and within the policy period of the Home because Stimson was not at fault in the liquidation of the Home. This argument is without merit. Stimson fails to explain why plaintiff insurers should be required to guarantee the obligations of an insurance company that they had no part in selecting and with which they had no contract. Plaintiff insurers' motion is granted and Stimson's cross-motion is denied.
4. National Union's Motion for Partial Summary Judgment on Drop-Down
National Union seeks an order declaring that it has no duty to "drop-down" to fill a gap in coverage created by the insolvency of the Home. From March 1990 through March 1994 Stimson purchased primary liability insurance from the Home. During each of these policy years, Stimson also purchased commercial liability umbrella policies from National Union. National Union contends that these policies were intended to provide Stimson with coverage in excess of the amount recoverable under the Home policies. As a consequence of the Home's liquidation, a "gap" in coverage arose for the four policy periods.
The policies at issue contain provisions that establish that National Union's coverage obligations are triggered only upon the exhaustion of the limits provided in any underlying primary insurance policies. The Declarations page for the National Union policies sets forth the coverage structure:
The limits of the Company's liability shall be as stated herein subject to all the terms of this policy having reference thereto
(A) $5,000,000. Single Limit any one occurrence Personal Injury or Property Damage or Advertising Liability or any combination thereof.
in excess of
(1) the amount recoverable under the underlying insurance as set out in the attached schedule A.
or
(2) $25,000. ultimate net loss in respect of each occurrence not covered by said underlying insurance.
Accordingly, National Union's coverage is meant to apply only to amounts in excess of the applicable limits of any underlying insurance coverage. The policies establish a minimum dollar threshold for coverage, regardless of the availability of the underlying insurance coverage to pay that sum.
There is also a "Limit of Liability" provision in the policy that provides:
(A) The Company shall be liable only for that portion of the Ultimate Net Loss, excess of the insured's retained limit defined as either:
(1) The total of the applicable limits of the underlying policies listed on the schedule of underlying insurance hereof and the applicable limits of any other underlying insurance providing coverage to the insured. . . .
(B) In the event of reduction or exhaustion of the aggregate limits of liability under said underlying insurances by reason of losses paid thereunder, this policy shall, subject to its terms and conditions and the limit of liability stated in Items 3(A) and 3(B) of the Declarations:
(1) In the event of reductions, pay the excess of the reduced underlying insurance, or
(2) In the event of exhaustion of the limits of liability, continue in force as underlying insurance.See National Union's Concise Statement of Material Facts in Supp. of Mo. for Summ. J. (emphasis added).
Stimson argues that the undefined term "applicable" is ambiguous and could reasonably be interpreted to mean "capable of or suitable for being applied," according to its dictionary definition. Under this interpretation, National Union is required to drop-down and fill any gaps in primary coverage created by the Home's insolvency. This is so because where an underlying insurer has been declared insolvent, the limits of its policies are not "capable of" being applied to the insured's loss. However, in addition to providing an alternative definition of a term, Stimson must also show that its interpretation is reasonable in order for the term to be ambiguous. See Hoffman, 836 P.2d at 706. Applying Stimson's proposed interpretation of the term "applicable" would render meaningless the "Limit of Liability" section, because by operation of A(1), National Union would already have an obligation to pay the reduced limit and there would be no need for paragraph B.
In the policy years 1993 and 1994, there was an amended endorsement in the policies that specifically addressed primary insurer insolvency:
(E) The limit of this policy shall not apply by reason of underlying limits which are not available, or because of the bankruptcy, insolvency or otherwise inability of underlying carrier(s) to pay. In case of bankruptcy, insolvency or otherwise inability of underlying carrier(s) to pay, this policy, in the event of such failure shall only be liable to the same extent as it would have been had underlying limits existed.
Furthermore, there exists a policy provision captioned "Maintenance of Underlying Insurance," which provides:
6. The policy or policies referred to in the attached "Schedule of Underlying Insurances", and any renewal or replacement thereof, not more restrictive, shall be maintained by the Insured in full effect during the currency of this policy without alteration of terms or conditions except for any reduction of the aggregate limit or limits contained therein solely by payment of claims. Failure of the Insured to comply with the foregoing shall not invalidate this policy but in the event of such failure, the Company shall only be liable to the same extent as it would have been had the Insured so maintained such policy or policies.
Under this provision, if Stimson fails to maintain primary insurance, National Union has no obligation to drop-down to fill a gap in coverage. If the court were to accept Stimson's proposed interpretation of the term "applicable," this provision would also be rendered meaningless.
Reading the provisions together, it is clear that the policies provided that Stimson would obtain primary liability insurance and that National Union would provide coverage for loss amounts in excess of the primary insurers' policy limits. Contrary to Stimson's assertion, there is no policy language that requires National Union to assume responsibility for losses that did not exhaust the underlying limits of insurance coverage.
In Hoffman, the Oregon Supreme Court held that the excess liability insurer, Century Insurance Company (Century), was not obligated to pay a claim on a covered loss that was less than the limit of the primary policy, even though the primary insurer became insolvent and unable to pay the claim. Id. at 709-10. The court rejected the insured's argument that the phrase "amount recoverable under the underlying insurances" as used in the "Limit of Liability" section of Century's policy could be interpreted to mean that the insurer is required to pay for amounts that an insured is unable to recover from its primary insurer, for any reason including insolvency. Id. The court reasoned that accepting such an interpretation would require the court to disregard other provisions of the policy. Id. at 709.
Unlike the policy language in Hoffman, the excess insurers' policies here do not use the phrase "amount recoverable." Instead, the "Limit of Liability" language of these policies is even more restrictive than the language in Hoffman, because it ties National Union's coverage to the "applicable limits of the underlying policies." It follows that National Union is not liable to Stimson until Stimson's covered loss exceeds the primary insurers' policy limits. A contrary interpretation would effectively nullify the Declarations page, the "Limit of Liability," and the "Maintenance of Underlying Insurance" conditions. Accordingly, National Union's Motion for Partial Summary Judgment on Drop-Down is granted.
5. OIGA's Motion for Summary Judgment on Net-Worth Limitation
The OIGA was created by the Oregon legislature and is governed primarily by O.R.S. 734.510 et seq. Stimson is a corporation duly organized and existing under the laws of the State of Oregon. The Home was an insurer authorized to do business in the State of Oregon. The Home executed and issued to Stimson CGL insurance policies for four consecutive years. As of December 31, 2002, Stimson had a combined net worth in excess of $25 million.
The purpose of the statutes under which the OIGA operates "is to provide for the payment of covered claims under certain insurance policies to avoid excessive delay in payment and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer. . . ." O.R.S. 734.520. To effectuate this purpose, the OIGA steps into the shoes of insolvent insurers and provides coverage for all "covered claims."
A "covered claim" is an unpaid claim that is within the coverage and limits of an applicable insurance policy. O.R.S. 734.510(4). The insured must be a resident of Oregon at the time of the occurrence giving rise to the unpaid claim. Id. A "covered claim" does not include "[a]ny first party claim by an insured whose net worth exceeds $25 million on December 31 of the year next preceding the date the insurer becomes an insolvent insurer. . . ." O.R.S. 734.510(4)(b)(D).
Stimson contends that the OIGA is required to provide it with a defense to the siding claims and to indemnify it against any liability Stimson may incur as a result of the siding claims. To the extent that Stimson is not reimbursed by the plaintiff insurers or National Union, Stimson asserts that the OIGA must reimburse Stimson for the costs and expenses that it incurred in defense and/or settlement of any resolved siding claims.
The OIGA argues that all of Stimson's claims are not "covered claims" under O.R.S. 734.510(4)(b)(D) because Stimson's net worth exceeded $25 million on December 31, 2002.
The prevailing method for interpreting statutes is set out in PGE v. Bureau of Labor and Industries, 859 P.2d 1143 (Or. 1993). The court's focus is to ascertain the legislative intent by examining the text and context of the statute. Id. at 1145-46. If the legislative intent is clear from both the text and context of the statute, the court need not proceed to further analysis. Id. at 1146. If the legislative intent is unclear after examining the text and context, the court must then look to the legislative history. Id. If the legislative intent remains unclear after examining the text, context, and legislative history, the court is allowed to resort to other methods of statutory construction, such as determining what the legislature would have intended had it considered the issue. Id. Another method of statutory construction is construing language in a manner consistent with the statute's purpose. Welliver Welding Works v. Farmen, 890 P.2d 429, 433 (Or.App. 1995).
Stimson argues that because the net worth statutory exclusion refers to "first party claims," it is inapplicable to Stimson's claim against the OIGA because the lawsuits against Stimson are third party claims. The term "first party insurance" refers to coverage for property damage, whereas "third party insurance" refers to liability coverage. Stimson maintains that the exclusion applies only in instances where the insured is making a claim for damage to its own property.
The OIGA disputes this argument, asserting that the legislative intent behind the statute was to exclude claims arising from all kinds of direct insurance, not just an insured's claim for property damage. The purpose of the net worth exclusion is to exclude from the protection of the statute those insureds who can absorb the loss sustained by the insolvency of an insurer and also to preserve funds for insureds who are unable to absorb such losses. The term "first party" is simply a descriptive phrase that distinguishes claims made by an insured from claims made by persons who have claims against the insured.
To adopt Stimson's position would be contrary to the legislative intent and it would result in the application of the exclusion based on the type of claim made against the OIGA rather than based on the ability of the insured to absorb a loss. It would also put the OIGA in the position of accepting many claims even though the insured is capable of absorbing the losses.
The companion statute to O.R.S. 734.510(4)(b)(D) is O.R.S. 734.695(2)(a), which provides that the OIGA may recover from "[a]ny insured whose net worth exceeds $25 million on December 31 of the year next preceding the date the insurer becomes an insolvent insurer" the amount of any covered claim made on behalf of the insured. This statute supports interpreting the legislature's intent as excluding from the protection of the statute insureds who are capable of absorbing losses. See Oregon Laws 2001, Chap. 974, §§ 1, 2. The legislature did not limit the OIGA's right of reimbursement to instances where the insured had received payment of a claim for property damage. Therefore, the legislature did not intend to limit the net worth exclusion to instances where the insured presented a claim for property damage.
The OIGA also contends that had the legislature intended to limit the net worth exclusion to instances in which the insured is making a claim for property damage, the legislature would have done so expressly. In O.R.S. 734.640(2)(a), the legislature provided that "[r]ecovery on first party claims for damage to property with a permanent location shall first be sought from whichever organization serves the location of the property. . . ." The legislature specifically promulgated a rule regarding first party claims for damage to property and yet did not so limit first party claims for property damage in O.R.S. 734.510(4)(b)(D). This reflects the legislature's intent that the "any first party claim by an insured" language in the net worth exclusion applies to claims arising from all kinds of direct insurance and not just to first party claims for property damage.
Moreover, Stimson provides no legislative history in support of its position. Stimson's position is contradictory with the legislature's intent to exclude insureds from the protection of the statute who are able to absorb losses, and to preserve funds for insureds who are not able to absorb such losses.
The Home was declared insolvent on June 13, 2003. Stimson's net worth exceeded $25 million on December 31 of the year preceding the date on which the Home became insolvent. Therefore Stimson's claims against the OIGA are not "covered claims." Accordingly, as a matter of law, the OIGA is not obligated to pay any claims Stimson tenders. OIGA's motion is granted.
CONCLUSION
For the reasons provided above, the court rules as follows: (1) Plaintiff Insurers' Motion for Summary Judgment (Doc. #109) is granted in part and denied in part and Stimson's Cross-Motion (Doc. #116) is granted in part and denied in part; (2) National Union's Motion for Summary Judgment (Doc. #112) is granted; (3) Plaintiff Insurers' Motion for Partial Summary Judgment on Allocation (Doc. #204) is granted and Stimson's Cross-Motion (Doc. #229) is denied; (4) National Union's Motion for Partial Summary Judgment on Drop-Down (Doc. #213) is granted; and (5) OIGA's Motion for Summary Judgment on Net-Worth Limitation (Doc. #241) is granted.
IT IS SO ORDERED.