On September 13, 2023, the Oregon Court of Appeals ("Court") addressed several arguments made by an insurer, Arrowood Indemnity Company ("Arrowood"), as to why it did not have a duty to defend, or why it should only defend covered claims, in environmental litigation involving the Portland Harbor Superfund site ("Superfund site"). State of Oregon v. Pacific Indemnity Company, 328 Or App 64, 2023 WL 5947318 (2023).
The Court ultimately found that Arrowood had a duty to defend and had to defend all claims, not just what it considered to be covered claims. Id. at 66. The Court's ruling has implications for insurance coverage for construction claims, including construction defect claims. We address those implications in our Takeaways below.
The Oregon Department of Transportation ("ODOT") brought a legal action against Arrowood seeking to establish Arrowood's duty to pay ODOT's defense costs in litigation by the Environmental Protection Agency ("EPA") relating to the cleanup of environmental contamination at the Superfund site. The trial court found that Arrowood had a duty to defend ODOT and pay ODOT's defense costs against all Superfund site claims and that Arrowood may not limit its obligation to pay defense costs to those claims deemed to be covered by the policy. The trial court entered a limited judgment against Arrowood consistent with its ruling. Pacific Indemnity Company, 328 Or App at 66.
Arrowood appealed, asserting that the trial court erred in determining that Arrowood had a duty to defend ODOT and in rejecting Arrowood's contention that it is entitled to apportion and limit its duty to defend to potentially covered claims under the insurance policy. The Court of Appeals concluded that the trial court did not err and affirmed the limited judgment against Arrowood. Id.
Arrowood, through its predecessor insurance company, issued an insurance policy to Northwest Copper Works, Inc., which leased property from ODOT's predecessor for use as a parking lot. The policy provided coverage for damages caused by contamination from automobiles on the leased property, and ODOT, through an endorsement to the policy, was named as an additional insured on that policy. Id. at 66-68.
In 2008, the EPA issued to ODOT and ODOT responded to a "104(e) demand," pursuant to 104(e) of CERCLA. In 2011, the EPA issued a General Notice Letter ("GNL") to ODOT and asserted that the EPA believed ODOT may be a potentially responsible party with respect to the Superfund site and tendered the GNL to Arrowood, requesting defense of ODOT's potential liability for the environmental cleanup. Arrowood declined to defend and also declined coverage. Id.
On appeal, Arrowood first argued that it had no duty to defend because the GNL did not constitute a complaint or, more particularly, a "suit" under Arrowood's policy, which would give rise to a duty to defend. Id. at 69. The Court rejected Arrowood's argument, not only because the Court found that Arrowood conceded elsewhere in its briefing that the GNL constituted a "suit" but also because the Court found that the GNL and the 104(e) demand constituted a "suit" under Oregon law, citing to Anderson Bros., Inc. v. St. Paul Fire & Marine Ins. Co., 729 F.3d 923 (9th Cir. 2013). Id. at 69-70.
Separately, despite acknowledging the "four-corners" (or eight-corners) rule (whereby the duty to defend depends on whether the "four-corners" of the Complaint and "four-corners" of the insurance policy allege facts that would, if proved, impose liability covered by the policy), Arrowood nevertheless argued that it did not have a duty to defend. Arrowood's argument was based on three points about the specifics of the GNL and the 104(e) demand: i) they did not specifically mention the leased property; ii) they referenced a completely different location; and iii) they did not contain any facts about the nature of the possible contamination released from ODOT's property. Thus, Arrowood argued, apart from speculation, the GNL and 104(e) demand did not include any coverage-triggering facts. Id. at 70-71.
ODOT countered by pointing out that an insured does not have to prove that there are covered damages to be entitled to a defense, but rather the insurer owes a duty to defend if the claimant can recover against the insured under the allegation of the complaint "upon any basis for which the insurer affords coverage." ODOT also pointed out that any ambiguity in the complaint with respect to whether the allegations could be within coverage is resolved in favor of the insured. And ODOT even went a step further and asserted that even if a complaint is unclear or devoid of coverage-related facts, there is a duty to defend if the complaint's allegations would permit the presentation of evidence that would establish the uncertain or missing coverage fact. Id. at 71.
The Court agreed with ODOT and explained that in "the face of ambiguity or lack of clarity, a complaint should be interpreted in favor of the insured and require a duty to defend 'if the court can reasonably interpret the allegations to include an incident or injury that falls within the coverage of the policy.'" The Court then went on to state that Arrowood's duty to defend arises because the GNL and the 104(e) demand together "would permit proof that contaminants running off of [the leased property], for which Arrowood provided coverage, caused damage." Id. at 71-72 (internal citations and quotations omitted).
Arrowood then argued that in the face of an ambiguous complaint, the insured must produce coverage-triggering facts that would give rise to an obligation to defend, relying on Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 237 Or App 468, 240 P.3d 67 (2010). The Court distinguished Fred Shearer & Sons, Inc., where the issue was whether the defending party was an "insured" under the policy, not whether the allegations fell within the scope of coverage. The Court stated that the insured has "no burden to come forth with facts beyond those alleged in the complaint." That is, while extrinsic evidence (outside of the complaint) could be used to determine whether a defending party was an "insured" under the policy, an insured was not required to demonstrate through extrinsic evidence that there are facts that would give rise to an obligation to defend. Id. at 72-73.
Thus, the Court determined that the question is whether, despite any ambiguity, the GNL and 104(e) demand "can reasonably be interpreted to allow proof at trial of liability covered by the policy." The court concluded that the EPA's allegations of releases from state-owned land at the site, which implicitly includes the leased property, fall squarely within that standard and give rise to a duty to defend. Id. at 74 (emphasis added).
As for Arrowood's argument that its duty to defend should be limited to those aspects of the EPA's claim that were determined to be within the scope of the policy's coverage, the Court rejected that argument and held that if Arrowood has an obligation to defend ODOT on any of the EPA allegations, it has a duty to defend ODOT in the entire litigation – i.e., the "complete defense" rule applies, despite Arrowood's citation to federal and California case law that suggest that its obligation to defend should be so limited. Id. at 74-75.
Lastly, the Court rejected Arrowood's argument that the "complete defense" rule should be limited to cases involving multiple claims arising from a single occurrence (same damages for the same injury from the same covered event) and should not apply to require defense of claims like those relating to the Superfund site cleanup, in which damages are claimed for separate injuries for separate occurrences. In rejecting that argument, the Court relied on the joint and several liability language of CERCLA. Id. at 75-76.
So what does this all mean in the construction context?
The Court seems to be saying that if a complaint does not clearly allege facts which would be covered under the policy, there may be a duty to defend if the complaint's allegations would permit the presentation of evidence at trial that would establish the uncertain or missing facts concerning coverage. And lastly, for a typical general liability policy the "complete defense" rule requires an insurer to defend all claims in the litigation if there is a duty to defend any single claim alleged in the litigation.
For assistance with insurance issues on construction projects, construction defects claims, or how to respond to construction defect notices, please contact Davis Wright Tremaine's government contracts and construction attorneys.
 "CERCLA," or the Comprehensive Environmental Response, Compensation, and Liability Act, establishes retroactive joint and several liability for environmental cleanup of past and current landowners or operators of properties or facilities from which hazardous substances have been released or disposed into the environment. CERCLA required the creation of a National Priorities List ("List") of Superfund-financed cleanup sites. The Portland Harbor Superfund site at issue was added to that List in December 2000.