By Allen Eraut and Kevin Clonts
FountainCourt Homeowners’ Assoc. v. American Family Mut. Ins. Co., 360 Or 341 (2016)
Synopsis
Many are hailing the Oregon Supreme Court’s recent decision inFountainCourt Homeowners’ Assoc. v. American Family as “closing loopholes
for insurers” and as barring insurers from litigating coverage issues after a verdict against the insured. However, the case’s actual holdings are
much narrower, and the court could not address the majority of coverage issues due to the insurer’s failure to preserve the issues on appeal. As such,
the case stands for the less remarkable propositions that (1) an insurer that provides a defense for its insured cannot relitigate factual findings
made in the underlying litigation, including the insured’s liability, during a garnishment proceeding, though the insurer retains the right to raise
coverage defenses; (2) a plaintiff need not prove the precise amount of damages that occurred within a given policy period to establish an “occurrence”
under the policy; and (3) in order to argue issues on appeal, an appellant must properly preserve those issues.
Discussion
FountainCourt involved claims of construction defect at a housing complex consisting of 11 buildings with 97 units which was constructed
over the course of nearly two years. Three years after project completion, the owner sued the contractors, including the siding and window installer
(hereinafter “Subcontractor”). Some of the Subcontractor’s insurers, including American Family, provided its defense in the underlying litigation.
The jury returned a verdict in the plaintiff’s favor and allocated about 22% of fault to the Subcontractor. Thereafter, the plaintiff brought a garnishment
action against American Family.
At the garnishment hearing, American Family argued that some or all of the damages did not arise from “property damage” or an “occurrence” or that some
or all of the damages arose before or after its policy period. Plaintiff introduced evidence in the form of expert opinion that damages resulted, at
least partially, during the American Family policy period and that the entire jury award against the Subcontractor could have been for consequential
damages, which are covered by insurance, as opposed to the cost to replace the Subcontractor’s faulty work, which is not covered. In response to this,
the court held that plaintiff had met its prima facie burden of proving coverage, thereby shifting the burden to American Family to prove
that any portion of the judgment was excluded from coverage. Though American Family argued that various exclusions applied to preclude coverage, the
trial court held that American Family did not meet its burden to prove that any policy exclusion applied, and ruled in plaintiff’s favor.
American Family appealed. The Oregon Supreme Court started by reaffirming that “an insurer is not precluded (collaterally estopped) by the judgment in
the underlying action from taking a position in a later coverage proceeding that the damages awarded in the underlying action are not covered by the
insurance policy.” However, “an insurer cannot, in a subsequent proceeding, retry its insured’s liability, or alter the nature of the damages awarded
in that proceeding.” In so holding, the court rejected American Family’s argument that its interests were not aligned with those of its insured and,
therefore, it was not bound by the jury’s factual findings. Though it has been suggested by some commentators, this holding is not new law, but rather
a reaffirmation of longstanding Oregon law. Further, the court reaffirmed that Oregon law still allows an insurer to relitigate the insured’s liability
if the insurer “has not had an opportunity to litigate, on its own behalf and not as a part of its duty to defend the insured in the underlying proceeding,
coverage issues such as whether an exclusion applies or whether the damages awarded are otherwise covered by the policy.”
The court then affirmed the trial court’s finding that there had been some “property damage” and an “occurrence,” as those terms were defined by the policy,
during American Family’s policy period. American Family had argued that plaintiff was required to prove the precise amount of damage incurred during
its policy period. The court rejected this argument, holding that the plaintiff need only prove that some property damage occurred during American
Family’s policy period in order to trigger coverage.
Last, the court noted that the trial court appeared to use the “all sums” approach for allocation of damages. This method of allocation is used by some
states when damages occur over a number of years, thereby spanning multiple insurance policies, and holds that any policy found to have coverage is
liable for the whole of plaintiff’s damages. The Supreme Court did not adopt this method of allocation; instead, it did not address the issue, because
American Family did not preserve it.
Similarly, American Family failed to properly preserve its arguments regarding policy exclusions, thereby depriving the appellate courts of jurisdiction
over those issues. As the court explained, American Family “did not raise any issue in the Court of Appeals as to whether there were genuine issues
of material fact concerning the exclusions on which it bore the burden of proof, or whether the trial court erred in concluding that [American Family]
failed to satisfy its burden of proof regarding exclusions.” Therefore, the FountainCourt decision has no precedential value on the issue of policy exclusions.
In summary, the Oregon Supreme Court reaffirmed already established law that (1) a defending insurer cannot relitigate factual findings made in the underlying litigation in post-trial coverage proceedings; however, the insurer retains the right to litigate coverage defenses in those proceedings; (2) a plaintiff need not prove the precise amount of damage that occurred within a given policy period to trigger coverage; and (3) a party must preserve all issues that it intends to raise on appeal or lose the right to litigate those issues.
The full opinion can be found here: http://www.publications.ojd.state.or.us/docs/S062691.pdf.