West Hills Development Co. v. Chartis Claims

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 respon-
dent 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 obliga-
tions—an agreement by the subcontractor to indemnify,
joined with an agreement to name the general contractor
as an additional insured on the subcontractor’s insurance
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 amend-
ment, 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 cover-
age 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.