Duty to Defend and the Products and Completed Operations Hazard

The insured homebuilder brought an action against the insurer, alleging failure to defend against claims arising from work performed by the insured's subcontractor. This case is Bresee Homes, Inc. v. Farmers Insurance Exchange, 293 P.3d 1036 (2012).

 

In 2005, the Joneses filed an action against Bresee for breach of contract and negligence regarding the construction of their home. The alleged that Bresee had failed to install flashing properly and that the exterior synthetic stucco (EIFS) leaked water into the interior of the house. The Joneses sought $52,580 in damages from Bresee, consisting of both the cost to repair the siding work and damages arising from the failure of the siding.

 

Bresee tendered the claim to its insurer, Farmers Insurance. The insurer denied coverage, citing the products/completed operations hazard exclusion in the general liability policy. Bresee filed an action against Farmers. The trial court and the appeals court sided with the insurer and Bresee appealed to the Oregon Supreme Court.

 

The court stated that it had to examine two documents to determine whether an insurer has a duty to defend an action against its insured: the insurance policy and the complaint against the insured. The court would look at the facts alleged in the complaint to determine whether they provide a basis for recovery that could be covered by the policy. If there is any basis in the complaint for which the insurer provides coverage, the court will find a duty to defend. So, the key question is whether the court can reasonably interpret the allegations to include an incident or injury that falls within the coverage of the policy.

 

In reviewing the complaint, the court noted that the allegations do not state whether the claimed damages from the alleged breach of contract and negligence occurred before or after the completion of Bresee's work. From all that appears from a reading of the complaint, the described property damage occurred, or could have occurred when Bresee's work was neither completed nor deemed complete under the products/completed operations hazard as defined in the policy.

 

Farmers argued that the court should conclude that the damage occurred after Bresee completed its work because the complaint was filed in 2005 and used verbs in the past tense. The court was not persuaded and said that the allegations describing past deficient performance and damage do not necessarily say anything about the date Bresee completed its work.

 

Farmers also argued that Bresee bore the burden of demonstrating that the work was not completed when the alleged property damage occurred in order to avoid the effect of the products/completed operations hazard exclusion. The court said that this was not correct. The insured had no burden to come forth with facts beyond those alleged in the complaint. When Bresee tendered the claims to Farmers, only the facts alleged by the Joneses and the terms of the policy governed Farmer's duty to provide a defense.

 

The court concluded that the policy provides a basis for coverage of the property damage claims and the products/completed operations hazard does not eliminate this point. Under the facts alleged in the Joneses' complaint, Bresee could have liability for conduct covered by the policy. The rulings of the lower courts were reversed and the case was remanded.

 

Editor's Note: With this decision, the Supreme Court of Oregon strengthened the fact that the duty to defend is broader than the duty to indemnify. In this instance, the complaint against the insured alleged facts that could (not necessarily would) require a defense by the insurer. The complaint provided a basis for recovery that could possibly be covered by the policy and that was enough for the court to rule in favor of the insured.