Probuilders Specialty Insurance Company, RRG v. Phoenix Contracting, Inc., 6:16-cv-00601

Background

Phoenix Contracting was general contractor on a 2005 Salem building project; subcontractors performed work (windows, roof, siding, etc.).
In 2015 FHC (owner) sued Phoenix and subcontractors for construction defects causing water intrusion and property damage; claims alleged subcontractor negligence and Phoenix's failure to supervise.
Phoenix tendered defense to ProBuilders Specialty Insurance (PBSIC); PBSIC agreed to defend under a full reservation of rights and later filed this declaratory action seeking a ruling that it had no duty to defend or indemnify.
The policy included a prominent "Contractors Special Conditions" endorsement making three conditions precedent to coverage for any claim "based in whole or in part" on independent contractors' work: (1) written indemnity from subcontractors, (2) certificates naming Phoenix as additional insured with at least $1,000,000 limits, and (3) retained records evidencing compliance.
PBSIC showed Phoenix did not satisfy any of those three conditions and knew of that noncompliance before the underlying suit was filed; Phoenix did not dispute noncompliance but argued the endorsement did not apply to the underlying claims.
Phoenix and FHC settled the underlying suit for $250,000; this case concerns whether PBSIC had duties to defend or indemnify for that settlement.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Was PBSIC required to defend Phoenix in the underlying suit?	No — the Contractors Special Conditions (a condition precedent) was not satisfied, and the underlying complaint showed claims arose at least in part from subcontractors' work.	PBSIC's reliance on the endorsement is a technical defense and/or the endorsement doesn't apply to the alleged claims.	Held for PBSIC: no duty to defend because all claims arose in part from subcontractors and conditions precedent were unmet.
Is PBSIC required to indemnify Phoenix for the $250,000 settlement?	No — because coverage is precluded by Phoenix's failure to satisfy conditions precedent for claims based on subcontractors' work.	Indemnity clauses required by the endorsement would unlawfully absolve Phoenix of liability or are unenforceable/technical.	Held for PBSIC: no duty to indemnify; conditions are enforceable and do not require indemnifying a party for its own negligence.
Burden of proof allocation in declaratory action	PBSIC (plaintiff) bears the burden to prove its affirmative case that conditions precedent were unmet and claims fall within endorsement.	Defendants contended usual insured burdens apply.	Held: In declaratory action, plaintiff bears burden to prove affirmative allegations; PBSIC met that burden.
Whether Lusch prejudice rule prevents denial based on technical noncompliance	PBSIC: Lusch is narrow (notice context) and does not apply to substantive conditions like indemnity agreements; PBSIC was prejudiced by lack of indemnities.	Defendants: insurer cannot rely on technical defenses absent demonstrable prejudice.	Held: Lusch is inapposite; insurer may enforce substantive conditions and PBSIC showed prejudice.

Key Cases Cited

Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
Ledford v. Gutoski, 877 P.2d 80 (Or. 1994) (insurer's duty to defend is judged from complaint and policy)
Bresee Homes, Inc. v. Farmers Ins. Exch., 293 P.3d 1036 (Or. 2012) (duty to indemnify judged by facts forming basis for settlement)
ZRZ Realty Co. v. Beneficial Fire & Cas. Ins. Co., 241 P.3d 710 (Or. 2010) (insured ordinarily has burden to prove coverage; insurer has burden for exclusions)
Employers Ins. of Wausau v. Tektronix, Inc., 156 P.3d 105 (Or. Ct. App. 2007) (policy interpretation framework)
Lusch v. Aetna Cas. & Sur. Co., 538 P.2d 902 (Or. 1975) (narrow prejudice rule for enforcement of notice-condition)
Wright v. State Farm Mut. Auto. Ins. Co., 196 P.3d 1000 (Or. 2008) (definition of condition precedent)