West Hills Development Co. v. Chartis Claims, Inc.

650 December 8, 2016 No. 77

IN THE SUPREME COURT OF THE

STATE OF OREGON

WEST HILLS

DEVELOPMENT COMPANY,

an Oregon corporation,

Respondent on Review,

v.

CHARTIS CLAIMS, INC., et al.,

Defendants,

and

OREGON AUTOMOBILE

INSURANCE COMPANY,

an Oregon company,

Petitioner on Review.

OREGON AUTOMOBILE

INSURANCE COMPLANY,

Third-Party Plaintiff,

v.

QUANTA SPECIALTY LINES

INSURANCE COMPANY,

Third-Party Defendant.

(CC C107384CV; CA A152556; SC S063823)

En Banc

On review from the Court of Appeals.*

Argued and submitted September 20, 2016.

Thomas M. Christ, Cosgrave Vergeer Kester LLP,

Portland, argued the cause and filed the briefs for petitioner

on review.

Michael E. Farnell, Parsons Farnell & Grein, LLP,

Portland, argued the cause and filed the brief for respondent

on review. Also on the brief were Steven R. Powers and W.

Blake Mikkelsen.

______________

*  Appeal from Washington County Circuit Court, D. Charles Bailey, Judge.

273 Or App 155, 359 P3d 339 (2015).

Cite as 360 Or 650 (2016) 651

Linda B. Clapham, Carney Badley Spellman PS, Seattle,

filed the brief for amici curiae Property Casualty Association

of America and National Association of Mutual Insurance

Companies.

Nicholas A. Thede, Ball Janik, LLP, Portland, filed the

brief for amicus curiae Oregon-Columbia Chapter of the

Associated General Contractors. Also on the brief was Kyle

A. Sturm.

Nadia H. Dahab, Stoll Stoll Berne Lokting & Shlachter

PC, Portland, filed the brief for amicus curiae Oregon Trial

Lawyers Association.

BREWER, J.

The decision of the Court of Appeals and the judgment of

the circuit court are affirmed.

Case Summary: General contractor was named as “additional insured” on sub-

contractor’s commercial general liability policy. Townhome owners later brought

action against general contractor for negligence. General contractor formally

requested insurer to defend the general contractor in that action, but insurer

refused to do so. Subsequently, general contractor brought action against insurer

for its proportional share of defense costs. Trial court and Court of Appeals both

agreed that insurer had had duty to defend general contractor. Held: (1) terms of

insurance policy provided that insurer would have duty to defend insured when

allegations in complaint assert a claim covered by the policy; (2) when complaint’s

allegations are ambiguous or unclear, then doubts about facts are resolved in

favor of insured; and (3) allegations in complaint against general contractor were

sufficient to establish insurer’s duty to defend.

The decision of the Court of Appeals and the judgment of the circuit court

are affirmed.

652 West Hills Development Co. v. Chartis Claims

BREWER, J.

This case presents a question about a liability

insurer’s duty to defend an insured against a civil action.

Ordinarily, courts decide whether an insurer had a duty to

defend by comparing the provisions of the insurance pol-

icy to the allegations of the complaint against the insured,

without regard to extrinsic evidence. Bresee Homes, Inc.

v. Farmers Ins. Exchange, 353 Or 112, 116, 293 P3d 1036

(2012). In this case, the trial court and the Court of Appeals

concluded that extrinsic evidence should be considered, and

after considering such evidence, held that the insurer had

a duty to defend. On review, we agree that the insurer had

a duty to defend and therefore affirm. We do not see any

need to resort to extrinsic evidence, however, or to modify

our existing case law regarding when an insurer has a duty

to defend.

I.  OVERVIEW OF DUTY TO DEFEND

Before we discuss the facts of this case, it is helpful

to set out the legal principles that govern our analysis.

A.  Duty to Defend and Duty to Indemnify

When an insured purchases an insurance policy

that protects against liability, the insurer typically agrees to

assume multiple duties to the insured. Typically the insurer

agrees to pay the insured for any liability that is covered by

the policy (up to the policy limits). That contractual obliga-

tion is known generally as the duty to indemnify. See Bresee

Homes, 353 Or at 114; Ledford v. Gutoski, 319 Or 397, 405,

877 P2d 80 (1994). Another important duty commonly found

in liability policies is an agreement to defend the insured

in legal actions involving claims covered by the policy. That

contractual obligation is known generally as the duty to

defend. See FountainCourt Homeowners v. FountainCourt

Develop., 360 Or 341, 354, 380 P3d 916 (2016).

Although both duties turn on the terms of the pol-

icy, the two duties are independent. See Bresee Homes, 353

Or at 114; City of Burns v. Northwestern Mutual, 248 Or 364,

368, 434 P2d 465 (1967). Thus, there are occasions when an

insurer has a duty to defend, but if trial ends with a ver-

dict that is not covered by the policy, then the insurer has

Cite as 360 Or 650 (2016) 653

no duty to indemnify. See ZRZ Realty v. Beneficial Fire and

Casualty Ins., 349 Or 117, 150, 241 P3d 710 (2010), on recons,

349 Or 657, 249 P3d 111 (2011). Conversely, there are times

when an insurer does not have a duty to defend, but if the

trial ends with a judgment that is covered by the policy, then

the insurer will have a duty to indemnify. Ledford, 319 Or at

403; City of Burns, 248 Or at 368-69.

As discussed, the issue here involves the duty to

defend under a liability policy. We consider in more detail,

then, the circumstances that trigger an insurer’s duty to

defend.

B.  Duty to Defend: Four-Corners Rule

An insurer’s duty to defend, according to the widely

accepted “four-corners” rule, is determined by comparing

the complaint to the insurance policy. See, e.g, Restatement

of Liability Insurance § 13 comment a (tentative draft no. 1,

April 11, 2016) (so noting). The rule refers to the four cor-

ners of the complaint; it also sometimes is referred to as

the eight-corners rule (for the four corners of the complaint

plus the four corners of the policy). Id. However denomi-

nated, under that rule, one compares the allegations in the

complaint to the insurance policy’s terms. See, e.g., Bresee

Homes, 353 Or at 116 (court determines duty to defend using

two documents: insurance policy and complaint); Marleau v.

Truck Insurance Exchange, 333 Or 82, 89, 37 P3d 148 (2001)

(same); Ledford, 319 Or at 399 (same). If the allegations in

the complaint assert a claim covered by the policy, then the

insurer has a duty to defend. E.g., Id. at 399-400. If the alle-

gations do not assert a claim covered by the policy, then the

insurer has no duty to defend. Id. By limiting the analysis

to the complaint and the insurance policy, the four-corners

rule generally prevents consideration of extrinsic evidence.

The four-corners rule originates in the insurance

contract itself. Although the text of liability policies may

vary, an insurer typically includes a provision making its

duty to defend turn on the plaintiff’s allegations. See Ellen

S. Pryor, The Tort Liability Regime and the Duty to Defend,

58 Md L Rev 1, 21-22 (1999) (so noting after quoting various

standard contractual provisions); Comment, The Insurer’s

Duty to Defend Under A Liability Insurance Policy, 114 U Pa

654 West Hills Development Co. v. Chartis Claims

L Rev 734, 734 (1966) (noting that a four-corners rule “seems

to fall squarely within the ‘alleging such injury’ language

in the policy”). Compare James M. Fischer, Broadening the

Insurer’s Duty to Defend: How Gray v. Zurich Insurance Co.

Transformed Liability Insurance Into Litigation Insurance,

25 UC Davis L Rev 141, 150 (1991) (agreeing that duty

arises from contract, but suggesting that some courts had

delineated duty in a way more suggestive of public-policy

norms). As we will discuss later, the liability policy at issue

here itself incorporates the four-corners rule.

The Court of Appeals has articulated an exception

to the four-corners rule, allowing extrinsic evidence to be

used to show that a putative insured did, in fact, occupy

insured status and therefore was entitled to a defense. In

Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 237 Or App

468, 240 P3d 67 (2010), rev den, 349 Or 602 (2011), the

Court of Appeals concluded that extrinsic evidence could be

used to show that a person who claimed to be an “additional

insured” under a liability policy was in fact an insured

entitled to a defense. In that case, the “additional insured”

policy stated that it applied to “ ‘all vendors’ ” of a product

“ ‘in the regular course of the vendor’s business.’ ” Id. at 472.

The complaint against the putative additional insured did

not allege that it was a vendor of the product in the regu-

lar course of business. However, there was no factual issue

regarding whether it was, as to the circumstances alleged in

the complaint, in fact a vendor in the regular course of busi-

ness. Id. at 474, 478 n 9. The Court of Appeals held, under

those circumstances, that it would be appropriate to allow

the use of extrinsic evidence to establish the facts relevant

to whether the person was an “insured”—in that case, facts

that were undisputed, albeit not facts alleged in the com-

plaint. Id. at 476-77. Accordingly, the court upheld judgment

against the insurer even though “the underlying pleadings

did not affirmatively demonstrate” that the defendant met

the conditions to be an additional insured. Id. at 478.

II. FACTS

With that background, we turn to the facts in

this case. The trial court granted judgment for West Hills

based on the following undisputed facts. West Hills was the

Cite as 360 Or 650 (2016) 655

general contractor for a townhome development in Sherwood,

Oregon. West Hills hired L&T Enterprises, Inc. (L&T) as a

subcontractor on the project. The terms of the subcontract

between West Hills and L&T are not directly relevant to

the legal issue presented here, but they do serve as useful

context to orient the reader. The subcontract required L&T

to indemnify West Hills against any liability that West Hills

might incur for L&T’s work. The subcontract also required

L&T to obtain a liability insurance policy, and to name West

Hills as an additional insured on that policy.

Construction contracts that combine those

obligations—an agreement by the subcontractor to indem-

nify, joined with an agreement to name the general contrac-

tor as an additional insured on the subcontractor’s insur-

ance policy—are fairly common. Samir B. Mehta, Comment,

Additional Insured Status in Construction Contracts and

Moral Hazard, 3 Conn Ins L J 169, 169-70 (1996). Parties to

such contracts often agree that the subcontractor will name

the general contractor as an additional insured in order to

“confer upon the additional insured [the general contrac-

tor] direct rights with respect to defense coverage.” Id. at

175. Although the general contractor is entitled to eventual

reimbursement under the indemnity provision, the general

contractor may be listed as an additional insured to gain

the right “to have the insurer pay for the costs of defense/

resolution as they are incurred.” Id. at 176-77 (footnote

omitted).

A.  Insurance Policy Provisions

L&T complied with its subcontract by obtaining a

commercial general liability policy from petitioner on review

Oregon Automobile Insurance Company.1 The policy pro-

vided that Oregon Auto would defend its insured against

certain lawsuits, and also provided that Oregon Auto would

pay certain damage awards up to a specified amount.

Regarding the duty to defend, the policy stated:

“We will have the right and duty to defend the insured

against any ‘suit’ seeking those damages [to which this

1

The first policy was issued in 2004, and it was renewed annually for two

more years. Although the three policies cover different time periods, they are

generally identical in their relevant terms.

656 West Hills Development Co. v. Chartis Claims

insurance applies]. However, we will have no duty to defend

the insured against any ‘suit’ seeking damages * * * to

which this insurance does not apply.”

The policy further defined “suit” as “a civil proceeding in

which damages * * * to which this insurance applies are

alleged.”

Oregon Auto’s duty to defend was owed to anyone

who qualified as an insured under the terms of the policy.

L&T, pursuant to its subcontract with West Hills, negoti-

ated with Oregon Auto to have West Hills listed, by name,

as an additional insured on the policy. Oregon Auto did not

agree to provide West Hills with the same range of coverage

that it provided to L&T, however. In addition to other lim-

its on policy coverage, the policy provided that West Hills

was an insured “only with respect to liability arising out of

[L&T’s] ongoing operations performed for [West Hills].”2

B.  Complaint Against West Hills

In December 2009, the homeowners association for

the townhome development, Arbor Terrace Homeowners

Association (Arbor Terrace), filed an action against (as

relevant here) West Hills. The complaint alleged that the

townhomes had had defects that led to damage from water

intrusion. The alleged defects included, among other things,

improperly installed siding and trim, improper or insuffi-

cient flashing, insufficient weatherproofing, and improper

sealants.

The complaint alleged that West Hills had been

negligent in a number of respects. As relevant here, the

complaint alleged that West Hills’s subcontractors had been

negligent, and that West Hills was liable because of that

2

The last policy phrased the West Hills limitation somewhat differently.

That policy provided that West Hills was an additional insured

“only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘per-

sonal and advertising injury’ caused by [L&T’s] ongoing operations for [West

Hills] at the location(s) designated above and only to the extent that such

‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ is

caused by [L&T’s] negligence or the negligence of those performing opera-

tions on [L&T’s] behalf.”

On review, Oregon Auto makes no argument that depends on those additional

terms.

Cite as 360 Or 650 (2016) 657

negligence. Specifically, the complaint alleged that West

Hills had hired and supervised subcontractors and had

been negligent in “[f]ailing to properly * * * oversee, inspect,

and supervise * * * subcontractors” and “[f]ailing to notify

* * * subcontractors * * * of improper construction means and

methods.” The complaint contained very little information

regarding the time when the damages allegedly occurred.

The complaint did allege, however, that when the owners

purchased the townhomes, the defects in the townhomes

already “existed and had already started to cause property

damage.”

The parties dispute the degree to which the com-

plaint alleged defects in the specific work that L&T had

performed under its subcontract: installing front porch col-

umns. As we will explain, we can resolve this case without

reference to those allegations.

C.  West Hills Tenders Defense to Oregon Auto

After being served with the complaint, West Hills

sent a letter to Oregon Auto invoking Oregon Auto’s duty

to defend West Hills as an additional insured. The letter,

which enclosed a copy of the complaint, added that L&T was

a subcontractor on the project and had installed the front

porch columns. Oregon Auto refused to defend West Hills,

however, on the ground that the damages alleged in the

complaint arose from “completed operations” rather than

“ongoing operations.”3

D.  Result of Arbor Terrace’s Action; West Hills’s Action

Against Oregon Auto

In Arbor Terrace’s action, West Hills filed a third-

party complaint against L&T and the other subcontractors.

Eventually, Arbor Terrace’s claims were settled. West Hills

then filed its own action against Oregon Auto (among other

insurers) for Oregon Auto’s proportional share of its defense

costs in the Arbor Terrace action. Ultimately, the case was

tried to the court on stipulated facts.

3

Oregon Auto’s letter offered a different justification for denying coverage

under the third policy, asserting that the townhome development project “was not

scheduled on the policy” as required. Oregon Auto does not renew that argument

on review.

658 West Hills Development Co. v. Chartis Claims

Oregon Auto argued to the trial court that West

Hills had failed to show that it qualified as an insured for

purposes of the duty to defend. Oregon Auto observed that,

although West Hills was named as an additional insured,

it was an additional insured only to the extent of liability

based on L&T’s ongoing operations. Oregon Auto contended

that “ongoing operations” required that the damages sought

must have been incurred while L&T was actually working

on the project, not later. Arbor Terrace’s complaint, Oregon

Auto asserted, did not show that damages had been incurred

while L&T was actually working on the project, nor had

West Hills introduced any extrinsic evidence to show that

particular timing for the damages.

West Hills countered, arguing (among other argu-

ments) that Arbor Terrace’s complaint itself was sufficient

to trigger Oregon Auto’s duty to defend. The allegations in

that complaint, it contended, were sufficient to create the

possibility that West Hills would have been subject to lia-

bility for L&T’s ongoing operations. Additionally, West Hills

asserted that the “ongoing operations” provision was not

as limited as Oregon Auto had argued. Because the policy

applied to damages “arising out of ongoing operations,” West

Hills contended that consequential damages that resulted

from L&T’s work were sufficient to fall within the policy.

E.  Trial Court Judgment for West Hills

The trial court granted judgment for West Hills.

In a letter explaining its decision, the court concluded that

Oregon Auto had a duty to defend “unless it is all but crystal

clear that the policy does not impose coverage.” The court

rejected Oregon Auto’s contention that the term “ongoing

operations” was limited to property damage that occurred

only during L&T’s operations. The court agreed that the

provision could be read that way. But the court concluded

that the provision also could be read more broadly, as West

Hills had urged. Because it concluded that the provision

was ambiguous, the court construed the provision against

Oregon Auto.

The court also held that the complaint against

West Hills contained allegations sufficient to trigger Oregon

Auto’s duty to defend. The complaint alleged damage due to

Cite as 360 Or 650 (2016) 659

improperly constructed porch columns; L&T was the sub-

contractor that worked on the porch columns; and thus, the

court reasoned, West Hills might be held liable for L&T’s

work. In so concluding, it appears that the court relied on

extrinsic evidence to determine that L&T was the subcon-

tractor that had worked on the porch columns.

F.  Appeal to Court of Appeals

On appeal, Oregon Auto maintained that the alle-

gations against West Hills in Arbor Terrace’s complaint did

not trigger its duty to defend. The policy only covered West

Hills for L&T’s liability, but the complaint—according to

Oregon Auto—only alleged that West Hills itself had been

negligent. Because, as Oregon Auto saw things, the com-

plaint did not name L&T or allege that West Hills was liable

for L&T’s negligence, the four-corners rule was not satisfied.

Oregon Auto also asserted that extrinsic evidence could not

be considered, arguing that Shearer permitted extrinsic evi-

dence only when the added fact related to coverage but not

to liability. Finally, Oregon Auto renewed its argument that

the policy restriction to “ongoing operations” required that

any covered damages must have occurred while L&T was

working on the project.

The Court of Appeals nevertheless affirmed. West

Hills Development Co. v. Chartis Claims, 273 Or App 155,

359 P3d 339 (2015). The court held that Arbor Terrace’s com-

plaint did not need to identify L&T, because, under Shearer,

West Hills could introduce extrinsic evidence to show that

it qualified as an additional insured. Id. at 163. West Hills

did so, the court opined, when it sent the letter tendering

the defense to Oregon Auto. Id. at 163-64. The court further

held that the complaint alleged damages for which L&T was

responsible, because it specifically referred to the porch col-

umns that L&T had constructed. Id. at 164-65.

The Court of Appeals deemed it unnecessary to

resolve the exact meaning of the “ongoing operations” pro-

vision. Id. at 166-67. Even if Oregon Auto was correct that

it required that the damages occur while L&T was working

on the project, the court stated, the allegations in the com-

plaint satisfied that narrower definition. The Arbor Terrace

complaint alleged that damage had already started to occur

660 West Hills Development Co. v. Chartis Claims

when the purchasers had bought the townhomes, and that

was sufficient. As the court explained, the allegation “does

not rule out the possibility that damage occurred before

L&T finished.” Id. at 167 (emphasis in original).

III. DISCUSSION

On review, Oregon Auto makes two main argu-

ments. First, it asserts that the Court of Appeals should

not have looked beyond the face of the Arbor Terrace com-

plaint to determine whether there was a duty to defend.

Second, Oregon Auto contends that the duty to defend is

not triggered merely because a complaint fails to “rule out”

the possibility of coverage. Instead, it asserts that the duty

to defend applies only if the complaint “rules in” coverage.

Although Oregon Auto focuses its second argument on the

Court of Appeals’ conclusion that that court did not need to

resolve the meaning of “ongoing operations” in the policy,

that argument in fact implicates the applicable legal stan-

dard as a whole.

A.  Insurance Policy Here Incorporates Four-Corners Rule

We begin with the four-corners rule generally. As

noted, the four-corners rule derives from the insurance pol-

icy itself. We find that principle in the insurance policy here.

The policy states that Oregon Auto will “defend the insured

against any ‘suit’ seeking those damages” that are covered

by the policy.4 (Emphasis added.) As noted, the term “suit” is

defined by the policy as “a civil proceeding in which damages

* * * to which this insurance applies are alleged.” (Emphasis

added.) Oregon Auto thus contractually agreed that its

duty to defend turns on a plaintiff’s allegations against its

insured.

B.  Four-Corners Rule and Indefinite Complaints

On its face, the four-corners rule seems clear.

Applying that rule to real world complaints, however, can

create more of a challenge. In particular, a complaint may

not definitively allege the facts that ultimately will deter-

mine whether a claim is covered by the policy.

4

See also Pryor, 58 Md L Rev at 22 (quoting almost identical text from a

standard insurance policy as an example that triggers the four-corners rule).

Cite as 360 Or 650 (2016) 661

Chief Judge Learned Hand addressed that problem

in Lee v. Aetna Casualty & Surety Co., 178 F2d 750 (2d Cir

1949). In Lee, a pet store’s liability policy excluded injuries

arising out of the use of an elevator. The plaintiff had gone

to the store seeking a pet located on the fifth floor. The pres-

ident of the store opened the gate to the elevator and ges-

tured for the plaintiff to step inside—but the elevator was

not there, and the plaintiff fell down the shaft. The plaintiff

sued the store and ultimately obtained a judgment against

it. See Lee v. Aetna Casualty & Surety Co., 81 F Supp 1008,

1009-10 (SD NY 1949). In turn, the store filed an action

against its insurer, contending that the insurer was obli-

gated (1) to pay the judgment, and (2) to reimburse the store

for the costs of its defense. Id.

The trial court had first concluded that the insurer

did not have a duty to indemnify the pet store, because the

judgment against it fell within the exclusion for “use” of the

elevator. On that holding, the Second Circuit affirmed. 178

F2d at 751. The trial court had further held, however, that

the insurer did have a duty to defend the store. The Second

Circuit affirmed that conclusion as well. Judge Hand’s opin-

ion began with the four-corners rule: the duty to defend

depends on a comparison between the policy and the alle-

gations in the complaint. Id. In that case, the policy would

cover liability from the plaintiff falling into an unguarded

shaft, but the policy would not cover liability resulting from

the “use” of the elevator. Id. at 752. The allegations in the

complaint, however, did not clearly indicate whether the

injury would be covered. The allegations were ambiguous as

to whether the injury had been from “use” of the elevator or

from falling down an unguarded shaft.

In the face of a complaint that failed to allege the

determinative facts, the court concluded that “we should

resolve the doubt in favor of the insured.” Id. The court rea-

soned that the parties had intended for the insurer to defend

in any case in which the insurer would eventually become

liable to pay. Id. The only exception would be if an injured

plaintiff alleged a claim that “was outside the policy,” but the

plaintiff ultimately received a judgment that was covered by

the policy. Id. Otherwise, “[w]hen * * * the complaint com-

prehends an injury which may be within the policy, we hold

662 West Hills Development Co. v. Chartis Claims

that the promise to defend includes it.” Id. at 753 (emphasis

added).

Applying that standard to the facts, the Second

Circuit upheld the judgment that the insurer had a duty to

defend. The complaint “did not limit the plaintiff’s recovery”

to an injury excluded from the policy (“use” of the elevator).

Id. The complaint’s allegations were “consistent” with the

plaintiff falling into an open and unguarded elevator shaft,

an event that would have been covered by the policy. Id.

This court follows the same rule. In Blohm et al. v.

Glens Falls Ins. Co., 231 Or 410, 373 P2d 412 (1962), this

court explained that:

“* * * Where the complaint does not state facts sufficient

to bring the case clearly within or without the coverage,

the general rule is that the insurer is obligated to defend

if there is, potentially, a case under the complaint within

the coverage of the policy. In other words, in case of doubt

as to whether or not the allegations of a complaint against

the insured state a cause of action within the coverage of a

liability policy sufficient to compel the insurer to defend the

action, such doubt will be resolved in the insured’s favor.”

231 Or at 415-16 (internal quotation marks and citation

omitted). See also Bresee Homes, 353 Or at 117 (“Any ambi-

guity concerning potential coverage is resolved in favor of the

insured.”); Marleau, 333 Or at 91 (insurer has duty to defend

if complaint is unclear but could reasonably be interpreted

to allege covered claim); Ledford, 319 Or at 400 (ambiguities

in complaint are resolved in favor of duty to defend).5

5

Various treatises also concur that ambiguous complaints are construed in

favor of the duty to defend. The New Appleman on Insurance Law Library Edition

states:

“If any of the facts pleaded in the complaint establishes the potential for cov-

ered liability the insurer must defend. Any doubt as to whether a defense

obligation exists must be resolved against the insurer and in favor of the

insured[.]”

Jeffrey E. Thomas, 3 New Appleman on Insurance Law Library Edition § 17.01[2]

[a] (2016) (footnotes omitted). See also Lee R. Russ and Thomas F. Segalla, 14

Couch on Insurance § 200:11 (3d ed 2016) (“When coverage under the duty to

defend depends on an outstanding factual dispute, the disputes must be resolved

in favor of coverage until the insurer conclusively establishes that there is no

potential for coverage.” (Footnote omitted.)); 1 Law and Practice of Insurance

Coverage Litigation § 4:14 (July 2016) (“For an insurer to avoid the obligation to

defend, it must be concluded as a matter of law that there is no possible factual or

Cite as 360 Or 650 (2016) 663

Applying that approach in Ledford, this court

stated the rule as whether the complaint “could, without

amendment, impose liability for conduct covered by the

policy.” 319 Or at 399-400 (emphasis added). The court held

that the insurer there had no duty to defend because the

complaint “alleged only conduct that clearly falls outside

the coverage of the policy.” Id. at 403 (emphasis added).

Similarly, in Marleau, this court summarized the rule as

whether the complaint, “without amendment, may impose

liability for conduct covered by the policy.” 333 Or at 89

(emphasis added; internal quotation marks and citation

omitted).

Most recently, in Bresee Homes, this court described

its interpretive approach this way:

“Regardless of the presence of ambiguity or unclarity

in the complaint, 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.”

353 Or at 117.

Oregon Auto nevertheless argues that the duty to

defend does not exist merely because the complaint does

not “rule out” coverage. It maintains instead that the com-

plaint must “rule in” coverage. In support of that argument,

Oregon Auto quotes the following statement from Ledford:

“If the facts alleged in the complaint against the insured do

not fall within the coverage of the policy, the insurer should

not have the obligation to defend.”

319 Or at 400 (internal quotation marks and citation

omitted).

In context, however, Ledford makes it clear that the

insurer has a duty to defend, even if the complaint is unclear

about whether it alleges a covered injury:

“The insurer has a duty to defend if the complaint pro-

vides any basis for which the insurer provides coverage.

legal basis on which the insurer might eventually be held obligated to indemnify

the insured under any provision of the insurance policy.” (Footnote omitted.));

Fischer, 25 UC Davis L Rev at 153 n 30 (stating that insurer has duty to defend

unless the insurer shows “that there is no possibility of coverage under any poten-

tial coverage in the policy”).

664 West Hills Development Co. v. Chartis Claims

Even if the complaint alleges some conduct outside the

coverage of the policy, the insurer may still have a duty

to defend if certain allegations of the complaint, without

amendment, could impose liability for conduct covered by

the policy. Any ambiguity in the complaint with respect

to whether the allegations could be covered is resolved in

favor of the insured.”

Id. (emphasis in original; citations omitted). Accordingly,

Ledford explained, the question was whether the facts

alleged in the complaint at issue “may reasonably be inter-

preted to include conduct within the coverage of [the insur-

ance] policy.” Id.

Ledford implicitly drew a distinction between the

broad principle that an insurer has no duty to defend unless

the complaint alleges a covered claim and the way in which

that principle applies to particular cases. What Ledford

did implicitly, this court did more expressly in Casey v.

N. W. Security Ins. Co., 260 Or 485, 491 P2d 208 (1971). This

court’s opinion in that case also began with the proposition

that:

“The insurer has a duty to defend only if the claim made

against the insured is one covered by the insurer.”

260 Or at 489 (citation omitted). The court recognized, how-

ever, the problems with applying that principle when it was

not clear whether a particular complaint alleged a covered

claim. The court held that, in case of doubt, the insurer has

a duty to defend; otherwise the insured would lose the bene-

fit of his or her bargain.

“The difficulty [with applying the general principle]

arises when there is doubt as to coverage. This doubt some-

times cannot be resolved until a judgment is entered in lit-

igation between the insured and the insurer. This is too

late; the lawsuit by the injured party has been filed and

probably gone to judgment before this time. The insurer

has contracted with its insured to defend him. This benefit

to the insured would be curtailed if it could be withheld in

the event of a dispute about coverage.”

Id. at 489. See also Bresee Homes, 353 Or at 125 n 1 (quoting

that analysis with approval).

Cite as 360 Or 650 (2016) 665

We thus reject Oregon Auto’s assertion that there is

no duty to defend unless the complaint “rules in” coverage.

Instead, as this court most recently held in Bresee Homes,

the question is whether, “[r]egardless of the presence of

ambiguity or unclarity in the complaint, * * * the court can

reasonably interpret the allegations to include an incident

or injury that falls within the coverage of the policy.” 353 Or

at 117. Having set out the governing legal standard, we turn

to the facts of this case.

C.  Applying Four-Corners Rule to Complaint Here

On review, the only issues relate to the require-

ments of the “additional insured” policy provision for West

Hills. The provision at issue states that West Hills is an

additional insured “only with respect to liability arising out

of [L&T’s] ongoing operations performed for [West Hills].”

Oregon Auto’s duty to defend West Hills thus depends on

whether the court can reasonably interpret the allegations of

the Arbor Terrace complaint to include an incident or injury

that falls within the coverage of the policy. Bresee Homes,

353 Or at 117; Ledford, 319 Or at 399-400. We answer that

question in the affirmative.

First, the policy here names West Hills as an addi-

tional insured. The complaint asserted claims against West

Hills, and so West Hills might be subject to some liability. In

addition, the policy provides that West Hills is an additional

insured as to “liability arising out of [L&T’s] ongoing oper-

ations performed for [West Hills].” The complaint expressly

alleged that West Hills was liable for subcontractor opera-

tions that had been performed for West Hills: specifically,

that West Hills’s subcontractors used “improper construc-

tion means and methods” in their operations, and West Hills

was liable in negligence for not preventing the subcontrac-

tors from doing so. L&T may not have been be identified by

name in the complaint, but that is not the issue. The alle-

gations of the complaint reasonably could be interpreted to

result in West Hills being held liable for conduct covered by

the policy: L&T’s operations for West Hills.

The only remaining question is whether the allega-

tions could result in West Hills being held liable for L&T’s

666 West Hills Development Co. v. Chartis Claims

“ongoing operations.” As noted, Oregon Auto has argued

that “ongoing operations” requires that any covered dam-

ages must have occurred before L&T completed its work on

the project. The Court of Appeals did not find it necessary

to resolve that question, 273 Or App at 166, and neither do

we. The complaint alleges that damages had occurred by the

time the owners purchased their townhomes. It is possible

that the damages occurred earlier. Reasonably interpreted,

then, the complaint could result in West Hills being held lia-

ble for conduct covered by the policy. See Bresee Homes, 353

Or at 122-23 (concluding insurer had duty to defend even

though complaint made no allegations about when damages

had occurred).

Under the four-corners rule, then, Oregon Auto had

a duty to defend West Hills. The complaint’s allegations,

reasonably interpreted, could result in West Hills being held

liable for damages covered by the policy.

In so concluding, we have treated the “additional

insured” provision here the same as any other factual con-

dition found in the policy. In Shearer, however, the Court

of Appeals treated conditions relating to whether a party

was an “insured” differently from other conditions relating

to coverage. 237 Or App at 476-77. Without deciding whether

Shearer was correctly decided, we conclude that that case is

distinguishable on these facts. Shearer was decided in the

context of a policy that created an open class of “additional

insureds.” The class was defined entirely by the relationship

between the otherwise unidentified class members and the

named insured. An insurer who received a tender of defense

from such a person, unknown to the insurer and unnamed

on the policy, would have had no way to know whether the

alleged insured had any relationship to the insurance con-

tract at all.

That issue is not presented here, however. West

Hills is designated by name in the policy here as an addi-

tional insured. The condition found in the policy—“only with

respect to liability arising out of [L&T’s] ongoing operations

performed for [West Hills]”—does not relate to whether

West Hills is an additional insured. Instead, any facts perti-

nent to that condition have to do with the particular claims

Cite as 360 Or 650 (2016) 667

against West Hills that Oregon Auto agreed to cover. By

their nature, such facts are indistinguishable from facts

pertaining to any other limitation on coverage that might

be found in the policy (e.g., whether the claim involved

“property damage,” whether the damages occurred within

the policy period, whether the claim is excluded because the

insured inflicted the injury intentionally). Accordingly, we

resolve the parties’ dispute with respect to those facts based

on the familiar principle that, regardless of ambiguity or

lack of clarity, the duty to defend is triggered if the com-

plaint’s allegations, reasonably interpreted, could result in

the insured being held liable for damages covered by the

policy.

IV. CONCLUSION

In this case, Oregon Auto issued a liability policy

naming West Hills as an additional insured. When Arbor

Terrace filed a complaint against West Hills, West Hills

tendered the defense to Oregon Auto. Oregon Auto contrac-

tually agreed to apply the four-corners rule to its duty to

defend the insureds under the policy. Under that provision,

if a complaint against the insureds alleged a covered claim,

then Oregon Auto had a duty to defend. To give effect to

that contractual obligation, we resolve uncertainty about

the allegations in favor of the duty to defend. The com-

plaint’s allegations here, reasonably interpreted, could have

resulted in West Hills being held liable for damages covered

by the policy.6 The trial court and Court of Appeals therefore

correctly held that Oregon Auto had a duty to defend.

The decision of the Court of Appeals and the judg-

ment of the circuit court are affirmed.

6

Again, it is important to distinguish between the duty to defend and the

independent duty to indemnify. If the issue had been indemnification, Oregon

Auto could have argued whether any damages actually awarded to Arbor Terrace

were within the contractual terms of the policy.