Liability insurance policies usually include two main agreements by the insurer. First, the insurer agrees to defend the insured against claims that may come within the policy. Second, if the insured is liable for a claim, the insurer agrees to pay up to the policy limit.
The agreement to defend benefits both the insurer and the insured. The insurer wants to minimize how much it pays out, so it wants to control the defense. The insured wants to have someone else handle the defense and not have to pay for it.
In a recent case, West Hills Development Co. v. Chartis Claims, 360 Or 650 (2016), <http://www.publications.ojd.state.or.us/docs/S063823.pdf>, the Oregon Supreme Court reaffirmed a basic principle of the duty to defend. If a claim, as presented, could reasonably be understood to include a covered matter, the insurer is required to defend it.
West Hills was the general contractor for a townhouse development. It hired several subcontractors, including L&T Enterprises. As is common in the industry, the subcontractors agreed to buy liability insurance and to name West Hills as an insured on the policy. L&T bought a policy from Oregon Automobile Insurance. That policy specifically identified West Hills as an insured for all liabilities arising out of L&T’s “ongoing operations” with respect to West Hills.
After the development was completed, the homeowners’ association sued West Hills for negligently causing water infiltration that led to damage. The complaint alleged negligent supervision of the subcontractors and listed the work done by L&T as one of the defects. L&T was not identified by name. The complaint also alleged that the damage had begun by the time buyers took possession. West Hills asked Oregon Auto and various other insurers to defend the case. Oregon Auto was one of several who declined. After the suit was settled, West Hills (probably acting on behalf of its other insurers) sued Oregon Auto and the other the declining insurers for a share of the costs of the defense. There appears to have been no suit for violation of the agreement to pay the homeowners’ association’s claims.
Oregon Auto appears to be the only insurer who did not settle the second suit against the insurers. At all stages, the courts ruled for West Hills, with the Oregon Supreme Court clearly stating that the if the claim could include an allegation covered by the policy, the duty to defend applied. This was true even if the reason the insured might be eventually found liable turned out not to be covered.
The court also ruled that there was no reason to change the usual rule that the question of whether the duty to defend applied could be determined solely by comparing the complaint to the policy. West Hills was specifically named as an insured, so there was no question it held rights under the policy. The complaint alleged negligence of subcontractors, which was enough to include L&T. Finally, Oregon Auto’s argument that the “ongoing operations” provision might limit coverage did not matter because the complaint alleged damages occurring before the buyers took possession. That was enough to imply that damage occurred before L&T’s work was done. In all, therefore, the complaint included an allegation that could reach Oregon Auto’s policy, so Oregon Auto was required to defend.
Even if you are not in business, you may have a policy with a named other insured. “Other insured” clauses show up in many other insurance policies, including naming lenders on property insurance and multiple drivers on car insurance Don’t be surprised if those policies are called on as a result of the “other insured’s” actions or losses.
In addition, many plaintiffs’ lawyers try to include claims that are likely to be covered by policies in order to trigger the duty to pay. This usually also results in the duty to defend being activated. Plaintiff’s lawyers like that because insurance companies are more likely to settle claims than defendants without insurance. On the other hand, if you delay reporting a possible claim, you may put yourself at risk of losing the right to have a defense, or, worse, have the insurer pay. As a result, there are many reasons to notify your insurance as soon as possible if someone makes a reasonably sized claim against you.