Defendant Gemini Insurance Company insured TransMineral USA, a distributor of a stucco product. Plaintiff Fred Shearer & Sons, Inc. (Shearer) installed that product on the exterior of a residence. The product allegedly failed, and the property owners sued their general contractor who, in turn, sued Shearer and TransMineral. Shearer then tendered the defense of that underlying action to Gemini, on the theory that the policy issued by Gemini to TransMineral contained an endorsement that also required Gemini to cover “vendors” of TransMineral products, and that Shearer was such an entity. Gemini rejected the tender, and Shearer brought this action seeking, among other relief, a declaration that Gemini owed Shearer a duty of defense. The trial court granted Shearer’s motion for partial summary judgment to that effect, and, after a trial on stipulated facts, entered a limited judgment
Although the facts themselves are undisputed, there is a question in this case as to which of those facts properly may be considered when determining the duty to defend. We discuss that issue below and resolve it in favor of the more inclusive position.
In May 2000, Walsh Construction Co. entered into a contract with the Evenstads to perform various repairs to their residence. Walsh then subcontracted with Shearer to apply stucco to the exterior of the residence, which Shearer did. Sometime after the repairs were completed, the Evenstads discovered cracking in the stucco, and they eventually filed an action against various defendants, including their general contractor, Walsh. The factual allegations in that complaint included the following:
“After the repairs were completed, the [Evenstads] began to notice cracking of the stucco and were told by * * * Walsh and Shearer that such cracking was normal and to be expected. Plaintiffs became more concerned as the cracking continued and they began to notice leaking and mold[.] * * *.
“* * * * *
“While the plaintiffs have not yet obtained bids for performing the repairs that will be necessary, their preliminary estimate is that the total costs of the design and repair work will be approximately $1.5 million. The [Evenstads] will amend this Complaint to allege the specific items and amounts of the damages when they become known.”
(Paragraph numbering omitted.)
The Evenstads further alleged that Walsh had breached its construction contract in a number of specifics, including:
“(a) Failing to mix and apply the stucco products and cladding system in a professional and workmanlike manner;
“(b) Failing to mix and apply the stucco products and cladding system in accordance with industry standards;
“(c) Failing to mix and apply the stucco products and cladding system according to the stucco manufacturer’s instructions and recommendations;
“(d) Failing to properly mix the lime plaster compounds to meet the appropriate density for the stucco;
“(e) Failing to supply plaintiffs with a stucco product and cladding system that was free of defects and that met industry standards;
“(f) Applying the cement plaster, lime plaster and/or limestone mortar that make up the stucco cladding during periods when the ambient temperature was greater than 77° F without follow-up moist-curing of the basecoat during the cure process;
“* * * * *
“(h) Applying a stucco product that did not contain a proper mix of hinder agents;
“(i) Applying a stucco product that was represented to contain only lime-based materials, but that in fact contained non-lime based materials;
“(j) Applying a defective stucco product and cladding system * * *.”
In response to the complaint, Walsh filed its own third-party complaint against Shearer, its subcontractor, and TransMineral. Walsh alleged that Shearer “was responsible for all aspects of recommending, selecting, and applying stucco products to the Residence,” and was therefore liable to Walsh on a theory of indemnity or contribution. As for TransMineral, Walsh alleged that the company was “in the business of distributing limestone products” and was negligent “in designing and manufacturing the stucco product used on the Residence * * *.”
After receiving the third-party complaint, Shearer tendered the defense of the claims to Gemini, which, beginning in 2000, had insured TransMineral under a general liability policy. Shearer claimed that it, too, was covered by TransMineral’s policy through
Shearer, at all relevant times, had been operating under an “Exclusive Applicator Agreement” with TransMineral. The agreement provided that “TransMineral desires to grant to the Exclusive Applicator [Shearer] the exclusive right to distribute Lé Decor Products [stucco] and all the other products [TransMineral] distributes.” Nonetheless, Gemini rejected Shearer’s tender, on the ground that, “[i]f there is any fault in this matter, it will bear a relationship to the negligent ‘mixing’ of the product and/or the application thereof.” 2
Its tender rejected, Shearer filed this action against Gemini seeking a declaration that, under the vendors endorsement, Gemini owed a duty to defend Shearer in the underlying litigation. Shearer then moved for partial summary judgment on that question, and the trial court granted the motion. Additional issues regarding the amount of the defense obligation were tried to the court, and the court again ruled in Shearer’s favor. The rulings were reduced to a limited judgment, which Gemini now appeals. That judgment provides, in part:
“1. Gemini owes a duty to defend Shearer in the Evenstad Residence Case, which duty accrued on November 4, 2004;
“* * * * *
“3. Gemini is responsible for fifty percent (50%) of Shearer’s defense costs in * * * the Evenstad Residence [case] * * * from the date[ ] specified above;
“* * * * *
“5. Shearer’s billed defense costs * * * were ‘incurred’ and are recoverable[.]”
In its first assignment of error, Gemini challenges the trial court’s ruling on Shearer’s motion for partial summary judgment regarding the duty to defend. The trial court erred in granting that motion, Gemini argues, for either of two reasons: One, Shearer is not an insured for purposes of the vendors endorsement to TransMineral’s policy; and, two, even assuming that Shearer is an insured, certain exclusions in the policy eliminate any coverage that Shearer might otherwise have had. 3
We begin with the question whether Shearer is an “insured” under TransMineral’s policy. The vendors endorsement to that policy, as explained above, extends coverage to
“any person or organization (referred to below as vendor)” that distributes or sells TransMineral’s products in the “regular course of [that person or organization’s] business.”
Meanwhile, Shearer appears to accept Gemini’s statement of the “four-corners rule” but argues that the pleadings do, in fact, demonstrate that Shearer was an “insured.”
5
Shearer’s concession regarding the scope of our review, however, is not well founded and for the reasons that follow, we choose not to accept it.
McLauchlan and McLauchlan,
The seminal case regarding the duty to defend under Oregon law is
Ledford v. Gutoski,
“Whether an insurer has a duty to defend an action against its insured depends on two documents: the complaint and the insurance policy. Oakridge Comm. Ambulance v. U.S. Fidelity,278 Or 21 , 24,563 P2d 164 (1977). An insurer has a duty to defend an action against its insured if the claim against the insured stated in the complaint could, without amendment, impose liability for conduct covered by the policy. Nielsen v. St. Paul Companies,283 Or 277 , 280,583 P2d 545 (1978); Oakridge Comm. Ambulance v. U.S. Fidelity, supra, 278 Or at 24; Ferguson v. Birmingham Fire Ins.,254 Or 496 , 507,460 P2d 342 (1969).
“In evaluating whether an insurer has a duty to defend, the court looks only at the facts alleged in the complaint to determine whether they provide a basis for recovery that could be covered by the policy:
“ ‘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. If a contrary rule were adopted, requiring the insurer to take note of facts other than those alleged, the insurer frequently would be required to speculate upon whether the facts alleged could be proved. We do not think this is a reasonable interpretation of the bargain to defend. It is more reasonable to assume that the parties bargained for the insurer’s participation in the lawsuit only if the action brought by the third party, if successful, would impose liability upon the insurer to indemnify the insured.’ Isenhart v. General Casualty Co.,233 Or 49 , 54,377 P2d 26 (1962).
“An insurer should be able to determine from the face of the complaint whether to accept or reject the tender of the defense of the action. Ferguson v. Birmingham Fire Ins., supra,254 Or at 505-06 .”
Ledford,
Certain parts of that passage, read in isolation, support Gemini’s contention that the duty to defend is determined solely by facts alleged in the underlying complaint. However, it is important to understand what was at issue in
Ledford
— and what was not. The question in
Ledford
was whether the complaint could “impose liability for
conduct
covered by the policy.”
Gemini (and Shearer, by way of concession) would have us apply the same four-corners rule to both inquiries, looking exclusively to the facts of the underlying complaint to determine (1) whether Shearer was an “insured” within the meaning of the policy and (2) if so, whether the alleged conduct falls within the scope of the coverage. But those inquiries, in our view, are analytically distinct, 7 and the four-corners rule is not easily justified in the case of the former.
When the question is whether the insured is being held liable for conduct that falls within the scope of a policy, it makes sense to look exclusively to the underlying complaint. That complaint sets the boundaries of the insured’s liability, and, as the court reasoned in
Isenhart,
“[i]f a contrary rule were adopted, requiring the insurer to take note of facts other than those alleged, the insurer frequently would be required to speculate upon whether the facts alleged could be proved.”
The same cannot be said with respect to whether a party seeking coverage is an “insured.” The facts relevant to an insured’s relationship with its insurer may or may not be relevant to the merits of the plaintiffs case in the underlying litigation. The plaintiff in the underlying case is required to plead facts that establish the defendant’s liability; the plaintiff often is not required to establish the nature of the defendant’s relationship to some other party or to an insurance company in order to prove a claim. In this case, for example, the Evenstads had no reason to allege that Shearer sold or distributed TransMineral’s products in the ordinary course of its business; nor did Walsh need to allege that fact in order to make out its third-party claim against Shearer.
For that reason, we do not see the logic in requiring Shearer to demonstrate that the underlying complaints establish the relationship between TransMineral and Shearer, or, consequently, that Shearer is Gemini’s “insured” within the meaning of the policy.
Accord Northfield Ins. Co. v. Loving Home Care, Inc.,
We turn, then, to Gemini’s alternative contention that certain policy exclusions operate to defeat coverage, thereby eliminating its duty to defend. Gemini first contends that the policy excludes coverage for “work product” — that is, damage to the stucco itself. According to Gemini, the Evenstads alleged only that the stucco on their home cracked and leaked; they did not allege, as the policy requires, some damage to their home “beyond the cost of replacing the faulty stucco.” Shearer responds, once again, that Gemini reads the underlying complaint too narrowly.
On this issue, the parties have correctly identified our scope of review. In determining whether a policy exclusion applies to the conduct at issue, we look “only at the facts alleged in the complaint to determine whether they provide a basis for recovery that could be covered by the policy.”
Ledford,
In their complaint against Walsh, the Evenstads alleged that, “[a]fter the repairs were completed, [they] began to notice cracking of the stucco * * *.” They further alleged that they “became more concerned as the cracking continued and they began to notice leaking and mold[.]” As for the cost of the repairs, the Evenstads alleged that, although they had not yet obtained bids, “their preliminary estimate is that the total costs of the design and repair work will be approximately $1.5 million.” In its third-party complaint, Walsh sought to pass that same liability along to Shearer.
The Evenstads’ complaint clearly alleges cracking of the stucco itself. The complaint is ambiguous, however, as to whether damages from “leaking and mold” pertain
only
to the stucco, or rather to other parts of the house. The allegations reasonably can be read to refer to the
latter
— i.e., damage to the house beneath the stucco siding, as a result of “leaking and mold.” And because a reasonable reading of the complaint would bring some of the allegations within the coverage of the policy, it is irrelevant — at least for purposes of the duty to defend — that
Gemini next relies on two policy exclusions specific to the vendors endorsement. The first states that “the insurance afforded the vendor does not apply to * * * [a]ny physical or chemical change in the product made intentionally by the vendor[.]” The second states that the coverage does not apply to “[products which, after distribution or sale by you, have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor.” According to Gemini, by mixing TransMineral’s products with water and then installing them on the house, Shearer “necessarily changed the physical composition of the TransMineral stucco products” and “fabricated on-site a product that was separate and distinct from its constituent parts.”
The meaning of a policy exclusion is a question of law.
Hoffman Construction Co. v. Fred S. James & Co.,
We begin, then, with the language of the exclusions. The vendors endorsement provides:
“WHO IS AN INSURED (Section II) is amended to include as an insured any [vendor], but only with respect to ‘bodily injury’ or ‘property damage’ arising out of‘your products’ * * * which are distributed or sold in the regular course of the vendor’s business, subject to the following additional exclusions:
“1. The insurance afforded the vendor does not apply to:
“a. ‘Bodily injury’ or ‘property damage’ for which the vendor is obligated to pay damages by reason of the assumption of liability in a contract or agreement. * * *;
“b. Any express warranty unauthorized by you;
“c. Any physical or chemical change in the product made intentionally by the vendor,
“d. Repackaging, unless unpacked solely for the purpose of inspection, demonstration, testing, or the substitution of parts under instructions from the manufacturer, and then repackaged in the original container;
“e. Any failure to make such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the distribution or sale of the products;
“f. Demonstration, installation, servicing or repair operations, except such operations performed at the vendor’s premises in connection with the sale of the product;
“g. Products which after distribution or sale by you, have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor.”
(Emphasis added.)
Gemini takes the position that, under the exclusions listed in paragraphs c. and g., the mere fact of mixing TransMineral’s product or installing it as part of a stucco cladding system is sufficient to trigger the exclusion. That is, Gemini argues that, regardless of where the alleged defect was introduced into the product — before or after Shearer’s mixing and installation — the exclusions are triggered once a vendor mixes and installs the
Neither the exclusions in dispute nor the issue before us in this case is uncommon. A number of courts in other jurisdictions have previously considered when and how these same exclusions in a vendors endorsement apply, and more specifically, whether the exclusions require some nexus between the vendor’s conduct and the damages alleged.
See, e.g., Weaver v. CCA Industries, Inc.,
Paragraph c., set out above, states that the “insurance afforded the vendor does not apply to * * * [a]ny physical or chemical change in the product made intentionally by the vendor[.]” It could be, as Gemini contends, that the parties meant for that exclusion to eliminate coverage once the product has been changed, regardless of whether bodily injury or property damage arose out of the “changed” product or from some defect that was present from the outset. But that is not literally what the text says. The direct object of the sentence — i.e., that to which the “insurance afforded the vendor does not apply” — is the product “change” itself. Given that sentence structure, it is also plausible to read the exclusion as eliminating coverage only with respect to the physical or chemical change to the product, which would preserve coverage for property damage or liability that arose otherwise, i.e., from a defect independent of the change.
Paragraph g. is similarly ambiguous. It states that the vendor’s insurance does not apply to “[p]roducts which after distribution or sale by you, have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor.” It could be that the exclusion is triggered once the product has been “labeled or relabeled or used as a container, part or ingredient,” regardless of whether those activities actually contributed to the bodily injury or property damage. In other words, once the product has been labeled, relabeled, or used as a container, part, or ingredient, coverage is lost no matter the source of the bodily injury or property damage. Or, it could be that the exclusion was intended to eliminate coverage only for the labeled, relabeled, or used product itself; that is, it only excludes coverage if the claims actually arise out o/the labeling, relabeling, or use of the product as a container, part, or ingredient.
Nothing in the broader context of the vendors endorsement, or the policy as a whole, eliminates the ambiguity in those exclusions. The policy states that Gemini will “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” It further provides that Gemini “will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” The vendors endorsement likewise is clear as to the nature of the “insurance afforded the vendor”: coverage for “ ‘bodily injury’ or ‘property damage’
arising out of
‘your products[.]’ ” (Emphasis added.)
Given that the policy frames the “insurance afforded the vendor” in terms of whether “bodily injury” or “property damage” has arisen out of the product, a reasonable purchaser of insurance might well expect the exclusions to that insurance to similarly relate to how bodily injury or property damage has arisen. At the same time, the fact that the policy elsewhere imposes an “arising out of’ requirement, but does not do so in the exclusions, supports Gemini’s interpretation. 10
Because we are unable to resolve the ambiguity based on the text and context of the policy, we therefore will interpret the provision against the insurance company and in favor of coverage.
North Pacific Ins. Co. v. Hamilton,
With that understanding of the policy language, we turn back to the allegations in the Evenstads’ complaint and Walsh’s third-party complaint. The Evenstads’ complaint alleged a number of specific ways in which Walsh breached the construction contract and/or was negligent. Among them were (1) “Failing to supply plaintiffs with a stucco product and cladding system that was free of defects and that met industry standards”; (2) “Applying a stucco product that was represented to contain only lime-based materials, but that in fact contained non-lime based materials”; and (3) “Applying a defective stucco product and cladding system.” Walsh, in turn, alleged in its third-party complaint that TransMineral was negligent “in designing and manufacturing the stucco product used on the Residence” and that Shearer was “responsible for all aspects of recommending, selecting, and applying stucco products to the Residence.”
Read together, the allegations in the complaint and third-party complaint make out a claim against Shearer for, among other things, recommending and supplying a stucco product to the Evenstads that was defective when designed and manufactured by TransMineral. The exclusions in paragraphs c. and g. of the vendors endorsement do not exclude
coverage for that conduct. Therefore, Gemini owed a duty to defend Shearer against the claim, even if other theories of recovery against Shearer would be excluded under the policy.
Abrams,
Gemini’s remaining assignments of error pertain to the trial court’s calculation and allocation of defense costs. In its third assignment, Gemini argues that the trial court erred in concluding that Gemini owed half of Shearer’s defense costs for each year, even though three separate insurers had an obligation to defend Shearer. The correct allocation, according to Gemini, would have been one-third because each insurance policy contained an “other insurance” clause that limited coverage to an equal share of the obligation.
The trial court allocated the funds after a trial on stipulated facts. In its ruling, the court explained:
“A number of insurers were involved over the years in insuring TransMineral and its vendor, [Shearer]. The relationships between the insurers were somewhat complicated. The various companies owned, bought or sold one another, and at various times were the predecessor or successor of another. At all times, including when defendant was involved, there were a total of two insurers.
“All of the relevant policies have similar other insurance clause language. For the purpose of calculating [Gemini’s] share, [Shearer’s] other insurers are treated, relative to defendant, as one entity. * * *
“The net result is that [Gemini], at any given time, and at all times relevant here, is effectively a co-primary insurer. Accordingly, [Gemini] shares an equal obligation for defense costs, i.e. fifty percent.”
(Emphasis added.)
In light of the stipulated facts in this case, we are not persuaded that the trial court erred in its allocation of defense costs. The parties stipulated as follows:
“OneBeacon Insurance Company is legally liable for all losses that occur on North Pacific Insurance Company policies issued prior to November 1, 2001. Both North Pacific and Oregon Automobile Insurance Company are under Liberty Northwest ownership and Liberty Northwest is legally liable for all losses that occur on policies issued after November 1, 2001.
“By mutual agreement, OneBeacon Insurance Company and North Pacific Insurance Company are both contributing to the defense of plaintiff in the [Evenstad action], pursuant to the defense obligation arising out of the insurance policies [described in the stipulation] and the allocation of legal liability described [in the preceding paragraph]. North Pacific’s contribution to plaintiffs defense is on behalf of Liberty Northwest.”
Under that stipulation, either OneBeacon Insurance Company or Liberty Northwest is liable to Shearer for policy periods, but not both. Gemini’s defense obligation, meanwhile, spanned 2000 through 2004. So, as the trial court explained, at all relevant times, there were only two insurers on the risk (with North Pacific agreeing to pay Liberty Northwest’s defense obligation). Under those circumstances, the trial court did not err in treating Gemini as one of two co-primary insurers.
In its final assignment, Gemini argues that the trial court erred in awarding defense costs to Shearer for expenses that Shearer’s other insurers, OneBeacon and
Affirmed.
Notes
Gemini also appeals a general judgment that was subsequently entered, but it concedes that the issues regarding the limited judgment are dispositive as to both appeals.
Gemini’s claim representative first set out that position in November 2004, in response to an earlier tender from Shearer — one made before any claims had actually been filed against Shearer. The claim representative reiterated that position in response to the later tender as well.
Although it assigns as error the grant of Shearer’s motion for partial summary judgment, the relief Gemini seeks is a reversal and remand for entry of judgment dismissing Shearer’s claims — presumably based on the understanding that the issues before us are purely legal. However, as we have previously explained, there is a difference between defeating an adverse motion for summary judgment, on the one hand, and prevailing on one’s own summary judgment motion, on the other. Because Gemini did not assign error to the denial of its own motion, it would be entitled, at most, to a remand for further proceedings were it to prevail on this assignment of error.
Gemini further contends that an “insured” for purposes of the vendors endorsement includes only persons or organizations who sell over the counter or “off the rack,” and does not include companies that, like Shearer, provide a product “incident to a service transaction.” The text of the policy does not support that narrow interpretation.
Shearer’s brief is somewhat ambiguous on this point, offering an unenthusiastic defense of the trial court’s admission of extrinsic evidence and then “assuming for the sake of argument” that the court may consider only the policy and the underlying complaints. At oral argument, Shearer expressly conceded that the inquiry regarding the duty to defend was limited to the facts in the underlying complaints, relying on extrinsic evidence only for purposes of “background.”
In
Winther v. Valley Ins. Co.,
The Supreme Court has treated the inquiries separately.
See, e.g., Holloway v. Republic Indemnity Co. of America,
See also Allan D. Windt, Insurance Claims and Disputes § 4.5, 4-97 (5th ed 2007) (“Before the general principle regarding the duty to defend applies [barring consideration of facts outside the complaint], it must be shown that the person claiming coverage is, in fact, an insured.”); Barry R. Ostrager and Thomas R. Newman, Handbook on Insurance Coverage Disputes § 5.02[b], at 147 (6th ed 1993) (“[W]here the duty to indemnify cannot be resolved by trial of a third-party’s action against the insured, the duty to defend may depend upon actual facts and not upon the allegations of the complaint.”).
Again, we do not understand Gemini to argue that there were disputed issues of fact as to whether Shearer sold or distributed stucco products in the ordinary course of its business. Rather, we understand Gemini to argue that Shearer was required to prove that the underlying complaints established those facts, as opposed to some other evidence (for example, the Exclusive Applicator agreement by which Shearer contracted to distribute TransMineral’s limestone products).
In
Dometic Corp.,
the court explained that “the typical broad form vendors endorsement went through language changes leading to the exclusion language at issue in this case.”
Our reading of the policies is consistent with the majority rule described in Lee R. Russ and Thomas F. Segalla, 9A Couch on Insurance 3d, § 130:10 (2008):
“Such exclusions [in a vendors endorsement] are interpreted narrowly; for the exclusion upon subsequent changes to apply, there must, in fact, be subsequent changes, and whatever the description of the change that triggers the exclusion, the injury or damage complained of must arise out of that subsequent change to the product.
“If the exclusion is written to apply once the insured’s product has been relabeled, for example, injury must arise out of the relabeling or out of the use of the insured’s product as part of another product in order for coverage to be excluded.”
(Emphasis added; footnotes omitted.)