Opinion
3:18-cv-00580-SB
06-11-2021
EXECUTIVE 1801 LLC, an Oregon limited liability company, Plaintiff, v. EAGLE WEST INSURANCE COMPANY, a California corporation, Defendant.
AMENDED FINDINGS AND RECOMMENDATION
HON. STACIE F. BECKERMAN UNITED STATES MAGISTRATE JUDGE
Executive 1801 LLC (“Executive”) filed this action against Eagle West Insurance Company (“Eagle West”), alleging claims for breach of an insurance contract and breach of the implied covenant of good faith and fair dealing. Eagle West now moves for summary judgment. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1). For the reasons explained below, the Court recommends that the district judge grant in part and deny in part Eagle West's motion for summary judgment.
Unless otherwise noted, the following facts are either undisputed or presented in the light most favorable to Executive.
I. THE INSURED PROPERTY
Executive owns the Executive 1801 Apartments (the “property”), a multiple-building apartment complex located at 1801 Northeast 162nd Avenue in Portland, Oregon. (Dep. of Cheryl Dalton (“Dalton Dep.”) 8:1-23, 25:3-10, Feb. 5, 2020, ECF No. 44-1.) The property was built in the 1970s, and it consists of six buildings, which are two to three stories in height, wood-framed, and include elevated exterior walkways, attached decks, exterior access stair towers, and siding. (Decl. of Daniel Bentson in Supp. of Def.'s Mot. for Summ. J. (“Bentson Decl.”) Ex. C at 4; Dep. of Mark Rose (“Rose Dep.”) 18:20-25, 19:8-11, Nov. 22, 2019, ECF No. 44-1; Dalton Dep. 25:3-10, 57:22-25.)
II. THE INSURANCE POLICY
Eagle West insured the property between January 1, 2006, and January 1, 2016. (Decl. of Suzanna Leporati in Supp. of Def.'s Mot. for Summ. J. (“Leporati Decl.”) ¶ 2, ECF No. 45; Leporati Decl. Ex. A at 4.) The insurance policy (the “policy”) provides coverage for “direct physical loss of or damage to [the property] at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” (Leporati Decl. Ex. A at 7.) The policy defines “Covered Causes of Loss” as “[r]isks of [d]irect physical [l]oss unless the loss is” either “[e]xcluded” or “[l]imited” in the policy's lists of exclusions and limitations. (Leporati Decl. Ex. A at 8.)
A.Limited Coverage for Collapse
The policy's list of exclusions includes the following provision regarding a loss or damage caused by or resulting from “collapse,” an undefined term in the policy: “We will not pay for loss or damage caused by or resulting from . . . [c]ollapse, except as provided in the Additional Coverage for Collapse. But if collapse results in a Covered Cause of Loss, we will pay for the loss or damaged caused by that Covered Cause of Loss.” (Leporati Decl. Ex. A at 16, 18.) The Additional Coverage for Collapse provision provides coverage for “direct physical loss or damage to [the property] caused by collapse of a building or any part of a building insured under this policy, if the collapse is caused by . . . [h]idden decay,” and specifies that “[c]ollapse does not include settling, cracking, shrinkage, bulging, or expansion.” (Leporati Decl. Ex. A at 9.)
B. Negligent Work Exclusion and Resulting Loss
The policy also excludes from coverage “loss or damage caused by or resulting from . . . [n]egligent [w]ork,” unless it “results in a Covered Cause of Loss.” (Leporati Decl. Ex. A at 16, 19) (bold typeface omitted). The policy includes the following description of negligent work:
Faulty, inadequate or defective:
(1) Planning, zoning, development, surveying, siting;
(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
(3) Materials used in repair, construction, renovation, or remodeling; or
(4) Maintenance; of part or all of any property on or off the described premises.(Leporati Decl. Ex. A at 19.)
III.THE COVERAGE DISPUTE
In 2009, Executive hired a general contractor, Sage General Contracting (“Sage”), to install new siding on the property. (Dalton Dep. 70:3-12, 76:14-77:24.) Instead of “stripp[ing] the [old] siding before recladding it,” Sage, who discovered wood rot during “the course of its siding . . . work,” installed the new siding over the property's old siding. (Dalton Dep. 70:13-71:8.)
In 2014, Executive hired a contractor, Creative Contracting (“Creative”), to work on the property's attached decks. (Bentson Decl. Ex. D at 1.) After beginning the removal of the decks and balconies, Creative discovered “major dry rot” behind the ledger boards and found that “no flashing was put in [when Sage] re-did the [property's] siding,” which resulted in water “leaking in behind the siding for some time (between where the decks meet the building).” (Bentson Decl. Ex. D at 1.)
In 2015, Executive hired a construction consultant, CERTA Building Solutions (“CERTA”), to inspect the property and formulate a plan for addressing any damage. (Rose Dep. 21:11-16, 55:7-56:15.) During its inspection of the property, CERTA discovered, among other things, that the property's wooden decks and balconies and wood-framed staircases were (1) “in distress because of exposure to water,” (2) “missing flashing at window heads,” (3) had “improperly installed flashing,” and (4) had “improperly constructed weather sealant joints.” (Rose Dep. 23:23-25:17.)
Based on CERTA's findings, Executive filed a construction defect lawsuit against Sage in December 2015. (Bentson Decl. Ex. F at 1-9.) Executive amended its complaint on August 19, 2016, and added construction defect-related claims against Creative. (Bentson Decl. Ex. G at 1-12.) About four months later, in late December 2016, Executive, Sage, and Creative executed a settlement agreement, pursuant to which Sage and Creative agreed to pay $900,000 and $50,000, respectively, to Executive for performing defective construction work. (Dalton Dep. 117:6-119:15.)
Executive paid $3,683,713 to rehabilitate the property. (Decl. of Kevin Mapes in Supp. of Pl.'s Resp. to Def.'s Mot. for Summ. J. (“Mapes Decl.”) Ex. C at 1-3, ECF No. 49-3.)
A few months before entering into the settlement agreement, Executive filed an insurance claim with Eagle West for rain and collapse-related damage to the property. (Leporati Decl. Ex. B at 1-3.) In support of its claim, Executive explained that it enlisted the services of Jeff Lewis (“Lewis”), a structural engineer, who “noted widespread damage to the structural elements of decks and retaining walls at [the property], including, in places, ‘over an inch' of actual downward movement,” and “expressed concern over [such] collapse conditions.” (Leporati Decl. Ex. B at 3.) Executive further explained that it “shored its decks and retaining walls in response to . . . [the] extensive decay and resulting actual downward movement.” (Id.) Executive also stated that the policy's exclusions “did not apply to damage caused by rain that lands on and infiltrates exterior building components to cause damage.” (Leporati Decl. Ex. B at 2.)
After receiving notice of Executive's claim, Eagle West hired Ken Oliphant (“Oliphant”), a structural engineer, to assist with its investigation. (Leporati Decl. Ex. C at 1.) Oliphant participated in an initial observation of the property and “a joint destructive examination of select exterior locations,” and “performed detailed examination[s] of the decks and exterior stairways and walkways located at one of the six wood-framed apartment buildings.” (Bentson Decl. Ex. C at 1.)
In a report dated October 3, 2017, Oliphant explained that he examined the property's “exterior decks and walkways [to] determine if [they had] collapsed” and that, for the purposes of his report, “a collapsed deck or exterior stairway/walkway condition [would] be [found] if the structure [had] suffered substantial structural impairment to the extent that it is incapable of resisting Code-required gravity loading.” (Bentson Decl. Ex. C at 2.) Oliphant reported that he found no evidence of a collapsed deck, exterior stairway, or exterior walkway. (Bentson Decl. Ex. C at 2-42.)
In November 2017, Eagle West received a report from Executive's structural engineer, Felix Martin (“Martin”). (Leporati Decl. Ex. D at 1; Bentson Decl. Ex. H at 4-236.) Martin's October 23, 2017, report relied on the following definition of structural collapse: “A condition of structural collapse occurs when a building's (or a building portion's) structural support system has, due to a loss of strength, or through excess deflection or deformation, reached a state of structural instability and ceased to provide its intended structural support purpose.” (Bentson Decl. Ex. H at 7.)
Martin's investigation revealed: (1) “a significant amount of structural damage exists to the [property's] access stairways, entry walkways, exterior walls, and balconies” and that “[s]ome of these areas have reached a state of structural instability due to the unexpected partial to complete structural collapse of their structural components,” (2) “[i]n some cases, [a] collapse condition exists [that is] mostly hidden from view by the architectural finishes and its full extent was not known until those finishes were removed and the structural framing was exposed,” and (3) the “structural collapse damage [at the property] is extensive and systemic, with drastic reductions in structural capacity to areas of all [the] buildings on [the property].” (Bentson Decl. Ex. H at 6.) Martin's report also explained that the “damage observed . . . during visual inspections and destructive testing was all caused by water intrusion,” the “water intrusion occurred due to defective original construction which failed to properly protect the sheathing and framing beams due to non-existent or defective flashing and water protective barriers,” and the water intrusion “would have begun immediately after completion of the remodel in 2009.” (Bentson Decl. Ex. H at 11.)
After receiving Martin's report, Eagle West sent a letter to Executive on March 9, 2018, stating that “no coverage applies under the policy for any of the observed damage and defects affecting [the buildings on the] property.” (Leporati Decl. Ex. E at 18.) Eagle West also stated that (1) although “some components of Building A were found to have sustained [substantial impairment of structural integrity (‘SISI')] damage,” the conditions did “not meet the criteria for [c]ollapse coverage since the collapse, or S[I]SI, was not caused by one of the . . . [coverage-triggering] perils” under the policy, such as hidden decay, and (2) “[n]o SISI conditions were found to exist in any other portions of the building[s] [on the] property.” (Leporati Decl. Ex. E at 15.)
On April 5, 2018, Executive filed this action against Eagle West, asserting claims for breach of contract and breach of the implied covenant of good faith and fair dealing. (Compl. ¶¶ 6, 8, 17-28.)
On August 1, 2018, Oliphant issued a supplemental report disagreeing with Martin's findings regarding structural collapses on the property. (Bentson Decl. Ex. I at 1-7.) On October 15, 2018, Eagle West issued a second letter to Executive denying coverage. (Leporati Decl. Ex. F at 1-3.)
On November 11, 2019, Executive responded to Eagle West's first interrogatories and requests for production. (Bentson Decl. Ex. J at 1-7.) In its responses, Executive stated that it was seeking coverage under the policy for the property's “decks, stairs, and elevated walkways [that] reached a state of collapse,” as described in Martin's report. (Bentson Decl. Ex. J at 2-3.) Additionally, Executive stated that it was seeking coverage for damage caused by rain that “penetrated the building envelope, causing widespread and systemic damage to structural and non-structural building components beneath the building envelope.” (Bentson Decl. Ex. J at 3-4.)
Eagle West's motion for summary judgment followed, and the Court issued its original Findings and Recommendation on May 5, 2021 (ECF No. 55). Executive filed objections on June 2, 2021 (ECF No. 60), arguing for the first time that a covered collapse occurred even if the Court does not adopt its definition of collapse, and submitting a supplemental declaration (ECF No. 61). The district judge referred the matter back to the undersigned to consider Executive's new argument and evidence (ECF No. 62).
LEGAL STANDARDS
Summary judgment is proper if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). At the summary judgment stage, the court views the facts in the light most favorable to the non-moving party, and draws all reasonable inferences in favor of that party. Porter v. Cal. Dep't of Corr., 419 F.3d 885, 891 (9th Cir. 2005). The court does not assess the credibility of witnesses, weigh evidence, or determine the truth of matters in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting First Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 289 (1968)).
DISCUSSION
Eagle West moves for summary judgment on Executive's claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Eagle West argues that Executive cannot show that a covered “collapse” occurred at the property, and the policy's negligent work exclusion bars coverage for rain damage here. (Def.'s Mot. for Summ. J. (“Def.'s Mot.”) at 9, ECF No. 43.) As explained below, Executive has demonstrated that there are disputed facts as to whether collapse occurred at the property, but it has not established that rain was the efficient proximate cause of the damage to the building. The Court therefore recommends that the district judge grant in part and deny in part Eagle West's motion for summary judgment.
I.BREACH OF CONTRACT
A. Collapse Claim
1.Insurance Policy Interpretation
“In Oregon, the interpretation of an insurance policy is a question of law.” Factory Mut. Ins. Co. v. Peri Formworks Sys., Inc., 223 F.Supp.3d 1133, 1137 (D. Or. 2016) (citing Hoffman Constr. Co. v. Fred S. James & Co., 836 P.2d 703, 706 (Or. 1992)). As the Oregon Supreme Court has explained, “[i]f an insurance policy explicitly defines the phrase in question, [the court applies] that definition.” Holloway v. Rep. Indem. Co. of Am., 147 P.3d 329, 333 (Or. 2006) (citing Groshong v. Mut. of Enumclaw Ins. Co., 985 P.2d 1284, 1287 (Or. 1999)). But when the insurance policy does not define the term in question, as is the case here with “collapse,” the court “resort[s] to various aids of interpretation to discern the parties' intended meaning.” Id. (citation omitted).
The Court “ha[s] diversity jurisdiction, so [it] must follow Oregon law with respect to the interpretation of the insurance policy.” Alexander Mfg., Inc. Emp. Stock Ownership Plan & Tr. v. Ill. Union Ins. Co., 560 F.3d 984, 986 (9th Cir. 2009) (citing Kabatoff v. Safeco Ins. Co. of Am., 627 F.2d 207, 209 (9th Cir. 1980)).
“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.” Groshong, 985 P.2d at 1287 (citing Hoffman, 836 P.2d at 706). “If the term has only one plausible interpretation, the ‘parties' intent conclusively is established, and [the court's] interpretive inquiry is at an end.'” Peri Formworks, 223 F.Supp.3d at 1138 (quoting Groshong, 985 P.2d at 1287). Considering “the breadth and flexibility of the English language, the task of suggesting plausible alternative meanings is no challenge to capable counsel.” Id. (quoting Hoffman, 836 P.2d at 706). “Competing plausible interpretations simply establish ambiguity that will require some interpretive act by the court.” Id. (citation omitted).
If the parties present competing plausible interpretations and thus establish ambiguity, the court must then examine the ambiguous, undefined “term in 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. (quoting Hoffman, 836 P.2d at 706). Finally, “[i]f the ambiguity remains after the court has engaged in [the aforementioned] analytical exercises, then any reasonable doubt as to the intended meaning of [the term] will be resolved against the insurance company and in favor of extending coverage to the insured.” Id. (quoting N. Pac. Ins. Co. v Hamilton, 22 P.3d 739, 742 (Or. 2001)) (simplified).
2. Collapse Policy Provision
The policy provides coverage for “direct physical loss or damage to [the property] caused by collapse of a building or any part of a building insured under this policy, if the collapse is caused by . . . [h]idden decay,” and specifies that “[c]ollapse does not include settling, cracking, shrinkage, bulging, or expansion.” (Leporati Decl. Ex. A at 9.)
3. Analysis
Eagle West argues that under Oregon law, an object must “fall some distance” to constitute a collapse. (Def.'s Mot. at 11.) According to Eagle West, Executive cannot identify any component at the property, such as decks, stairs, or elevated walkways, that fell any distance, and therefore Eagle West is entitled to summary judgment on Executive's claim for collapse coverage. (Def.'s Mot. at 12.) The Court disagrees.
a. Definition of Collapse
Eagle West directs the Court's attention to Hennessy v. Mutual of Enumclaw Insurance Co., 206 P.3d 1184, 1185-86 (Or. Ct. App. 2009), in which the Oregon Court of Appeals addressed an insurance policy that did not define “collapse,” like the policy at issue here. In Hennessy, the insured's building was covered with a layer of stucco product. Id. at 1185. The insured filed an insurance claim after discovering that a piece of the stucco had “visibly separated from the [building's] underlying concrete wall and appeared to be in danger of falling.” Id. The insurer denied the insured's claim and an insurance coverage suit followed. Id. The insured maintained that she was entitled to reimbursement for the cost of removing and repairing the damaged portion of stucco because her policy provided coverage for “damage or direct physical loss caused by ‘collapse' of a building or any part of a building.” Id. at 1186.
The Oregon Court of Appeals began its analysis by noting that although the policy generally excluded loss or damage caused by “collapse,” the insured could “recover for direct physical loss or damage caused by ‘collapse' if she prove[d] that (1) a specified condition, such as hidden decay, (2) caused ‘collapse' of a building or part of a building, and (3) the collapse resulted in direct physical loss or damage to covered property.” Id. (citation omitted). To resolve the parties' dispute about whether the stucco's separation from the underlying concrete wall constituted a collapse, the Oregon Court of Appeals addressed the plain meaning of “collapse” because the policy did not define that term, “other than to say that it does not include ‘settling, cracking, shrinking, bulging, or expansion.'” Id. at 1187. As discussed in more detail below, the Oregon Court of Appeals determined that “‘collapse' requires only that an object fall some distance,” and therefore held that the insured was entitled to reimbursement for the costs of removing and repairing the portion of the stucco that had abruptly separated from the underlying concrete wall. Id.
Executive, on the other hand, directs the Court's attention to two cases from this district, both of which predate the Oregon Court of Appeals' decision in Hennessy and predicted that Oregon courts would define “collapse” to mean SISI (i.e., substantial impairment of structural integrity). (Pl.'s Resp. to Def.'s Mot. for Summ. J. (“Pl.'s Resp.”) at 9, ECF No. 48.) Those cases are Richardson v. Travelers Property Casualty Insurance Co., No. 03-cv-01185-HA, 2004 WL 1173186, (D. Or. May 25, 2004), and Schray v. Fireman's Fund Insurance Co., 402 F.Supp.2d 1212 (D. Or. 2005).
In Richardson, the plaintiffs sought insurance coverage after discovering extensive construction-related defects at their three retail office buildings. 2004 WL 1173186, at *1. The “construction defects had allowed water to enter behind the [buildings'] cladding, damaging the underlying sheathing and structural framing and causing extensive hidden decay of structural members.” Id. The plaintiffs' subsequent repair work also revealed extensive decay damage that had been hidden by synthetic stucco, and that “[b]eams and structural members were determined to be incapable of supporting their design loads, and some were crumbling into a state of ‘imminent collapse.'” Id.
The insurance policy in Richardson provided coverage for loss or damage “caused by or resulting from risks of direct physical loss involving collapse of a building or any part of a building caused only by . . . [h]idden decay,” and specified that “[c]ollapse does not include settling, cracking, shrinkage, bulging or expansion.” Id. At the summary judgment stage, the court addressed the meanings of the undefined term “collapse” and “risks of direct physical loss involving collapse,” both of which “appear[ed] to be questions of first impression in Oregon.” Id. at *2-3. The court rejected the insurer's argument that the insured property must fall to the ground to trigger coverage under the policy, noting that the “ordinary meaning of ‘collapse' [was] eclipsed by the inclusion of the phrase risks of direct physical loss involving collapse in the Additional Coverage portion of the policy.” Id. at *3. Relying on authorities from other jurisdictions, and construing ambiguous terms against the insurer, the court “adopt[ed] the ‘majority view' interpreting ‘collapse' and ‘risks of direct physical loss involving collapse' as referring to substantial impairment to the structural integrity of a property.” Id. at *3-4. The court also stated that if the insurer wanted to limit its risk to instances where the covered property actually collapsed to the ground, the insurer could have done so. Id. at *4. Based on these reasons, the court denied the insurer's motion for summary judgment. See Id. (finding that there were genuine issues of fact as to whether any hidden decay amounted to substantial impairment to the structural integrity of the property).
One year later, in Schray, the insureds sought coverage under their homeowner's policy for damage related to the improper installation of stucco siding. 402 F.Supp.2d at 1213-15. The homeowner's policy generally excluded losses or damage caused by collapse, but provided limited coverage “for direct physical loss to covered property involving collapse of a building or any part of a building caused only by . . . [h]idden decay.” Id. at 1214. The homeowner's policy also stated that “[s]ettling, shrinking, bulging or expansion (including cracking which results) are not collapse,” but it did not define the term collapse. Id. The Schray court agreed with the Richardson court's conclusion that “both ‘collapse' and ‘risks of direct physical loss involving collapse' [are] ambiguous.” Id. at 1217. Relying largely on authorities from other jurisdictions, the Schray court predicted that the Oregon Supreme Court would “follow the modern trend and apply the collapse coverage if any part of the [insureds'] building sustained substantial impairment to its structural integrity.” Id. at 1218.
Based on Richardson and Schray, Executive argues that the Court should interpret “collapse” to mean SISI. (Pl.'s Resp. at 9-14.) Executive argues that Eagle West's reliance on the Oregon Court of Appeals' decision in Hennessy is “misplaced,” because it “did not involve a claim for structural collapse, and the court's fact-specific analysis does not establish a broad, one-size-fits-all standard for collapse claims in Oregon.” (Pl.'s Resp. at 10.) Eagle West, by contrast, argues that Hennessy “clarified Oregon law: collapse requires that a building component actually fall.” (Def.'s Mot. at 12-13.)
To resolve the parties' dispute, this Court must interpret the meaning of “collapse,” as that term is used in the policy here. However, unlike Richardson and Schray, where the courts were attempting to predict how the Oregon Supreme Court would interpret the meaning of the undefined policy term “collapse,” this Court now has guidance on how Oregon's intermediate appellate court would rule on that issue. In Hennessy, the Court of Appeals addressed policy language nearly identical to the language now before the Court, and the Court has not been presented with persuasive evidence suggesting that the Oregon Supreme Court would repudiate Hennessy. See In re Bledsoe, 569 F.3d 1106, 1110 (9th Cir. 2009) (“[The appellant] argues that [the Oregon Court of Appeals' decision in] Greeninger was wrongly decided, but there is little evidence-and certainly not ‘convincing evidence'-that the Oregon Supreme Court would repudiate Greeninger.”); In re Bartoni-Corsi Produce, Inc., 130 F.3d 857, 861 (9th Cir. 1997) (“[W]here there is no convincing evidence that the state supreme court would decide differently, a federal court is obligated to follow the decisions of the state's intermediate appellate courts.” (quoting Lewis v. Tel. Emps. Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996))); see also Great Am. All. Ins. Co. v. Sir Columbia Knoll Assocs. Ltd. P'ship, 484 F.Supp.3d 946, 952 n.4 (D. Or. 2020) (distinguishing the decisions in Richardson and Schray based in part on the fact that they “were published before Hennessy”).
As the Oregon Court of Appeals explained in Hennessy, Webster's definition of “collapse” requires “only that an object, acting under the force of gravity, descend or drop involuntarily,” but it is “not clear that the definition requires a total or complete descent.” 206 P.3d at 1187. Like the policy in Hennessy, the policy here provides that “[c]ollapse does not include settling, cracking, shrinkage, bulging, or expansion” (Leporati Decl. Ex. A at 9), but that “does not answer the question of whether, as used in the policy, a collapse must be total or complete.” 206 P.3d at 1187-88. The particular context in which “collapse” is used in the policy, and the broader context of the policy as a whole, is unhelpful in resolving that issue. Cf. Id. at 1188 (“Nor does the remainder of the policy contain any language that is helpful in resolving that question.”). Thus, the Court must conclude, in accordance with Hennessy, that as used in the policy, the definition of “collapse” means to “fall some distance.” Id.
Although Executive urges the Court to disregard Hennessy and adopt other courts' definition of collapse to mean SISI, this Court does not write on a blank slate. On the contrary, the Court is obligated to follow Hennessy, and other post-Hennessy decisions in this district have expressly recognized that the Oregon Court of Appeals in Hennessy did not construe collapse to mean SISI. See Ass'n of Unit Owners of Nestani v. State Farm Fire & Cas. Co., 670 F.Supp.2d 1156, 1162 (D. Or. 2009) (“[T]he Hennessy court did not construe ‘collapse' to mean ‘substantial impairment to [a building's] structural integrity.'”); see also Columbia Knoll, 484 F.Supp.3d at 954 (following Hennessy and finding that the insured's expert report relying on the SISI definition of collapse was “irrelevant”).
The Court considered Executive's argument that the meaning of “collapse” could mean “fall some distance” when applied to the stucco siding in Hennessy but mean SISI when applied to the dry rot at issue here. However, in Hennessy, the Oregon Court of Appeals applied Hoffman to interpret “collapse” based in large part on the plain language of the same policy term at issue here, and the Court of Appeals then applied the meaning of “collapse” to the particular circumstances of that case. The Hoffman analysis to determine the meaning of “collapse” as used in the policy does not depend on the type of material collapsing. Indeed, the Ninth Circuit recently certified to the Washington Supreme Court a question similar to the one this Court seeks to answer, but under Washington law: “What does ‘collapse' mean under Washington law in an insurance policy that insures ‘accidental direct physical loss involving collapse,' subject to the policy's terms, conditions, exclusions, and other provisions, but does not define ‘collapse,' except to state that ‘collapse does not include settling, cracking, shrinking, bulging or expansion?'” Queen Anne Park Homeowners Ass'n v. State Farm Fire & Cas. Co., 763 F.3d 1232, 1235 (9th Cir. 2014). Notably, the Ninth Circuit sought an answer to the meaning of the word “collapse” in the abstract, and not construed to the circumstances of a particular case. The Oregon Court of Appeals has already held that “collapse” as used in an almost identical policy means “fall some distance,” and the role of this Court is to apply Oregon law to the particular facts of this case, not second guess the Oregon Court of Appeals' interpretation of Oregon law.
For these reasons, the Court finds that under Oregon law, collapse, as relevant here, means to fall some distance.
b. Definition of Collapse Applied Here
Having interpreted the term “collapse,” the Court must address whether Executive has presented sufficient evidence to demonstrate that “(1) a specified condition, such as hidden decay, (2) caused ‘collapse' of a building or part of a building, and (3) the collapse resulted in direct physical loss or damage to covered property.” Hennessy, 206 P.3d at 1186 (citation omitted) (noting that the insured bears the burden of proving the applicability of an exception to an exclusion).
As discussed above, Executive seeks coverage for the property's “decks, stairs, and elevated walkways [that] reached a state of collapse.” (Bentson Decl. Ex. J at 2-3.) The Court concludes that Executive has presented sufficient evidence to establish a material factual dispute regarding whether collapse occurred under the Hennessy definition.
For example, the record reflects that Lewis, a structural engineer, at one point “noted widespread damage to the structural elements of decks . . . at [the property], including, in places, ‘over an inch' of actual downward movement,” and Executive reported that it “shored its decks and retaining walls in response to . . . [the] extensive decay and resulting actual downward movement.” (Leporati Decl. Ex. B at 3.) Executive also filed a supplemental declaration from Lewis, which confirms that (1) he “visited the Executive 1801 Apartments in 2015 and 2016 to assess structural concerns regarding stairwells, landings, and walkways,” because the property managers “were concerned about safety issues and potential collapse conditions,” (2) he “personally observed widespread damage to the structural elements of the stairwells, landings, and walkways, including over an inch of downward movement in places,” (3) he “recommended shoring of stairwells in several locations” to “protect the safety of residents and to prevent further damage,” and (4) it was his “understanding that shoring was, in fact, installed to prevent further downward movement.” (Decl. of Jeffrey Lewis in Supp. of Pl.'s Objs. ¶¶ 2-4, ECF No. 61.)
Executive did not designate Lewis as an expert witness, and therefore appears to rely only on his observations as a fact witness.
Executive also relies on the deposition testimony of CERTA's Fed.R.Civ.P. 30(b)(6) designee, Mark Rose (“Rose”). (Pl.'s Resp. at 19-22.) Rose testified that the scope of repairs that CERTA identified included removing and disposing of stairway towers because they were “failing,” unsafe, deteriorated, and “falling apart” due to wood rot, “differential movement between the connectors,” crumbling foundations, “bowing walls,” and “deteriorated connectors.” (Rose Dep. 90:18-91:18.) Rose added that some of the wood rot was “hidden” from view. (Rose Dep. 91:19-93:20.)
Based on this testimony about downward movement, shoring of stairwells, bowed walls, and hidden rot, Executive has presented sufficient evidence to demonstrate that there is a disputed issue of material fact as to whether a collapse occurred under the Hennessy definition of collapse. Accordingly, the Court recommends that the district judge deny Eagle West's motion for summary judgment on Executive's collapse claim.
The Court reached the same conclusion before issuing its original Findings and Recommendation, but Executive did not argue in its response to Eagle West's motion for summary judgment that a collapse occurred under the Hennessy definition.
B. Rain Damage Claim
Eagle West also moves for summary judgment on Executive's claim that rain “penetrated the building envelope, causing widespread and systemic damage to structural and non-structural building components beneath the building envelope.” (Bentson Decl. Ex. J at 3-4.) Eagle West argues that the policy's negligent work exclusion bars coverage when “a building envelope has defects that allow for rainwater intrusion and damage to a building's siding and substructure underneath[.]” (Def.'s Mot. at 21.)
1.Negligent Work Exclusion
The policy excludes from coverage “loss or damage caused by or resulting from . . . [n]egligent [w]ork,” unless it “results in a Covered Cause of Loss.” (Leporati Decl. Ex. A at 16, 19) (bold typeface omitted). The policy includes the following description of negligent work:
Faulty, inadequate, or defective:
(1) Planning, zoning, development, surveying, siting;
(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
(3) Materials used in repair, construction, renovation, or remodeling; or
(4) Maintenance; of part or all of any property on or off the described premises.(Leporati Decl. Ex. A at 19.) The parties do not dispute that negligent work allowed rain to enter the building's envelope, but they dispute whether the negligent work exclusion applies here.
Executive argues that the phrase “caused by or resulting from” negligent work “can reasonably be interpreted to exclude only loss or damage that results directly from the faulty, inadequate, or defective construction.” (Pl.'s Resp. at 23.) After acknowledging that it “does not, and indeed cannot, dispute the presence of construction defects,” Executive asserts that the “negligent work . . . allowed the rain to enter the building envelope, but it did not cause the rain or the resulting damage.” (Pl.'s Resp. at 24.) Executive argues that the rain was the “efficient proximate cause of the property damage for which [it] seeks coverage,” not the faulty construction, and therefore the negligent work exclusion does not apply here. (Pl.'s Resp. at 25-26.) The Court disagrees.
Chief Judge Hernández's decision in Columbia Knoll is instructive. Columbia Knoll involved a coverage dispute about water-damaged apartment buildings. 484 F.Supp.3d at 949. Similar to the policy at issue here, the policy in Columbia Knoll excluded coverage for loss or damage resulting from faulty, inadequate, or defective: (1) “[p]lanning, zoning, development, surveying, siting;” (2) “[d]esign, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;” (3) “[m]aterials used in repair, construction, renovation or remodeling;” and (4) “[m]aintenance.” Id. at 969 n.21.
At summary judgment, the parties “appear[ed] to agree that defects in construction allowed rain to damage the building,” but the owner (Columbia Knoll) argued that a jury could find that “rain was the proximate efficient cause of the damage.” Id. at 966. Chief Judge Hernández disagreed, and explained that a trier of fact could not find that wind-driven rain was the efficient proximate cause of the loss:
The Court does not agree [with Columbia Knoll]. First, by Columbia Knoll's reasoning, all rain damage claims would survive summary judgment on the issue of proximate cause. Yet the Ninth Circuit has found that these questions may, in fact, be resolved on summary judgment. Second, while Columbia Knoll relies heavily on Washington case law, Columbia Knoll has not demonstrated that the Oregon and Washington proximate cause rules are, in fact, virtually indistinguishable. . . . [T]he Court [also] sees only support for the undisputed proposition that, as a general matter, questions of proximate cause should be left for the jury when there are [genuine] disputes of [material] fact or diverging inferences to be drawn from those facts.
Here, with no [genuine] disputes of [material] fact, the Court remains persuaded by Judge Jelderks' reasoning in [Point Triumph Condo. Ass'n v. Am. Guarantee & Liab. Ins. Co., No. 99-1504-JE, 2000 WL 34474454 (D. Or. Dec. 29, 2000)]. . . .
. . . [L]ike in Point Triumph, Columbia Knoll cites no evidence in the record that would support the conclusion that the losses of which it complains were not the result of problems with installation or maintenance that are subject to the faulty, inadequate, or defective [construction] exclusion. There is no evidence of any particularly severe rainstorm or that any of the damage would have occurred in the absence of faulty, inadequate, or defective construction. Thus, the Court finds that here, like in Point Triumph, the rain cannot be characterized as the dominant or most important cause of loss. Accordingly, a trier of fact could not conclude that wind-driven rain constituted the efficient proximate cause. Summary judgment is therefore granted on this issue.Id. at 967 (simplified); see also Point Triumph, 2000 WL 34474454, at *6 (“The damage to plaintiff's buildings was not a ‘natural' direct or indirect consequence of the rain, but instead was an abnormal occurrence that would not occur in the absence of other conditions-the faulty material, construction, or maintenance established by the record-that were specifically excluded from coverage under the policy. . . . Here, . . . the rain cannot be characterized as the ‘dominant' or ‘most important' cause of loss. Accordingly, a trier of fact could not conclude that wind-driven rain constituted the efficient proximate cause.”).
Here, as in Columbia Knoll and Point Triumph, there is no evidence in the record that any of the damage to the property's building envelope would have occurred in the absence of faulty, inadequate, or defective construction. Indeed, Executive acknowledges that the “negligent work . . . allowed the rain to enter the building envelope.” (Pl.'s Resp. at 24.) Thus, a reasonable trier of fact could not find that rain was the efficient proximate cause of Executive's loss here. Accordingly, the Court recommends that the district judge grant Eagle West's motion for summary judgment on Executive's rain damage claim.
2 .Ensuing Loss Exception
Executive also argues that the ensuing loss exception to the negligent work exclusion restores coverage for its rain damage claim. (Pl.'s Resp. at 27; see also Leporati Decl. Ex. A at 19, “But if an excluded cause of loss [such as negligent work] . . . results in a Covered Cause of Loss, we will pay for the loss caused by that Covered Cause of Loss.”). The Court disagrees.
Other judges in this district have rejected Executive's interpretation of the ensuing loss exception: “The ensuing loss clause ‘does not reinsert coverage for excluded losses, but reaffirms coverage for secondary losses ultimately caused by excluded perils. In other words, ‘an ensuing loss provision does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property itself.'” Prudential Prop. & Cas. Ins. Co. v. Lillard-Roberts, No. 01-cv-1362-ST, 2002 WL 31495830, at *19 (D. Or. June 18, 2002) (simplified). With respect to applying the ensuing loss exception to water damage caused by negligent work, “if defectively installed [building components] allow[] water to leak into the [building], then subsequent damage caused by water, such as dry rot or mold, to the interior of the house is caused by the faulty workmanship and not covered.” Id. “If, however, the water migrates into an electrical box and causes an electrical short which in turn causes a fire, then the fire damage is a covered ‘ensuing loss.'” Id.
The Prudential court held that “an ensuing loss requires an unexpected loss due to an intervening or contributing cause other than the mere passage of time.” Id. at *20 (“Because mold is a natural and expected, as opposed to a separate and independent, result of water damage, it cannot be an ensuing loss.”); see also 12W RPO, LLV v. Affiliated FM Ins. Co., 353 F.Supp.3d 1039, 1061 (D. Or. 2018) (entering summary judgment for defendant insurer where the insured presented no evidence of a subsequent loss “separate and independent from the original peril” and holding that “the policy's ensuing loss provision does not reinstate coverage” as an exception to the relevant exclusions); Point Triumph, 2000 WL 34474454, at *7 (“This ‘exception to the exclusion' provision is inapplicable to the present action, because the moisture damage caused by defects in siding or by faulty construction or maintenance cannot be characterized as ‘separate and independent' of those defects. Instead, the deterioration of the siding and the substructure underneath is a natural and resulting consequence of those excluded perils-the defects in siding or inadequate construction or maintenance, that are clearly established by the record before the court.”).
The Court adopts Prudential's well-reasoned analysis, finds that the ensuing loss exception is not ambiguous here, and concludes that Executive's interpretation of the ensuing loss exception to restore coverage for rain damage caused by negligent work is not reasonable. See Prudential, 2002 WL 31495830, at *21 (“[I]t is difficult to reasonably interpret the ensuing loss clause contained in the defective construction and materials exclusion to be a grant of coverage. The ensuing loss clause may be confusing, but it is not ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered. The uncovered event itself, however, is never covered. . . . [T]he intent of the ensuing loss clause is not to enlarge the list of items covered under the policy.” (quoting McDonald v. State Farm Fire & Cas. Co., 837 P.2d 1000, 1005 (Wash. 1992))). Executive has presented no evidence of loss separate and independent from the excluded peril, and therefore the ensuing loss exception does not apply and Eagle West is entitled to summary judgment.
II.BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
Eagle West also moves for summary judgment on Executive's claim for breach of the implied covenant of good faith and fair dealing. Eagle West argues that this claim cannot proceed if Eagle West had an objectively reasonable basis for denying coverage. (Def.'s Mot. at 31.)
The Court agrees that Eagle West had an objectively reasonable basis for denying coverage on any rain damage-related claim, and therefore recommends that the district judge grant Eagle West's motion for summary judgment on Executive's claim for breach of the implied covenant of good faith and fair dealing to the extent it is based on a rain damage claim. Cf. Mfrs. & Traders Tr. Co. v. Fidelity Nat'l Title Ins. Co., No. 3:12-cv-00744-AA, 2012 WL 5462887, at *6 (D. Or. Nov. 4, 2012) (“[D]efendant had an objectively reasonable basis for denying coverage because such a denial was permitted under the plain language of the Policy. Accordingly, defendant's motion is granted and plaintiff's motion is denied as to its breach of good faith and fair dealing claim.”); see also U.S. Nat'l Bank of Or. v. Boge, 814 P.2d 1082, 1092 (Or. 1991) (“The obligation of good faith does not vary the substantive terms of the bargain or of the statute, nor does it provide a remedy for an unpleasantly motivated act that is expressly permitted by contract or statute.”).
However, because Executive has presented sufficient evidence to demonstrate that there is a genuine issue of material fact as to whether a collapse occurred under the Hennessy definition, the Court recommends that the district judge deny Eagle West's motion for summary judgment on Executive's claim for breach of the implied covenant of good faith and fair dealing to the extent it is based on the collapse claim. See Foraker v. USAA Cas. Ins. Co., 345 F.Supp.3d 1308, 1314 (D. Or. 2018) (explaining that if the insurer's actions could have frustrated the plaintiffs reasonable contractual expectations, it is inappropriate for a court to grant the defendant's motion for summary judgment on a claim for breach of the implied covenant of good faith and fair dealing) (citations omitted).
CONCLUSION
For the reasons stated, the Court withdraws its original Findings and Recommendation (ECF No. 55), and recommends that the district judge GRANT IN PART and DENY IN PART Eagle West's motion for summary judgment (ECF No. 43).
SCHEDULING ORDER
The Court will refer its Findings and Recommendation to a district judge. Objections, if any, are due within fourteen (14) days. If no objections are filed, the Findings and Recommendation will go under advisement on that date. If objections are filed, a response is due within fourteen (14) days. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will go under advisement.