Ninth Circuit Holds That Despite ‘Known Damage’ Exclusion Insurer Had Duty Under Oregon Law to Indemnify and Defend Contractor When Property Damage Resulted From Contractor’s Negligent Repair of a Prior Negligent Act

Alkemade v. Quanta Indem. Co., 2017 U.S. App. LEXIS 6896 (9th Cir. Apr. 20, 2017)

 In 1994, Adrianus and Rachelle Alkemade (the “Alkemades”) bought a house from Meltebeke Built Paradise Homes (“Meltebeke”). The home was built on expanding soils, causing significant structural damage.  Meltebeke repaired the existing damage and hired an engineering firm to install a helical pier foundation, which would have prevented any further damage to the home.  However, the helical pier foundation was also installed negligently, afflicting the home with the same type of structural damage as before.

Alkemades sued Meltebeke for negligent supervision of the helical piers installation. Meltebeke entered a settlement agreement with Alkemades in which Meltebeke assigned to Alkemades the right to sue its insurers, Quanta and GFIC, who refused to defend Meltebeke on grounds that its knowledge of the damage caused by the original, defective construction prevented coverage under a known damages provision in Meltebeke’s policies (the “Policies”).  Alkemades subsequently sued the issuers for breach of contract in the U.S. District Court for the District of Oregon for their failure to defend and indemnify Meltebeke.  The insurers moved for summary judgment.

The Policies excluded coverage for damage known by the insured, in whole or in part, that occurred before the policy period began. If such damage was known to the insured, then any “any continuation, change or resumption” of that damage was also deemed known, and excluded.  

The insurers argued that “the helical piers were simply one more in a long line of unsuccessful attempted remedial fixes to the known property damage resulting from expanding soils.” In other words, the property damage sustained after the installation of the helical piers was a “continuation, change, or resumption” of the previously known property damage.  Therefore, the known damages provisions excluded coverage.  The District Court found this interpretation reasonable and granted summary judgment for the insurer’s favor.

On appeal, Alkemades argued that damage caused by Meltebeke’s first negligent act does not “continue, change or resume” when later damage is sustained after a repair that would have fixed the problem absent a second negligent act. The Ninth Circuit evaluated Alkemades’ argument in light of Oregon law, which provides that if the insured offers a competing plausible and reasonable interpretation of the policy, that interpretation governs regardless of whether the insurer offers a different interpretation that is also plausible and reasonable.

The Ninth Circuit reasoned that the Policies’ phrase “continuation, change, or resumption” modified “damage previously known,” a reasonable interpretation is that both the previously known damage and the later damage must share a cause. Because it was possible that the later damage was due to the negligently installed helical pier, and not the original negligent construction, the Court determined that it was plausible to treat the later damage separately.

To view the full text of the court’s decision, courtesy of Lexis®,  click here.

Alex Corey, assisted by Michelle Cuozzo*

*Ms. Cuozzo is a 2017 Summer Associate in the Construction Practice of Pepper Hamilton LLP.  She is not admitted to practice law.

 

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