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Although not as liberal as the Washington courts, the Oregon courts have not necessarily been kind to liability insurers in coverage disputes arising out of construction defect claims. In a recent federal court ruling, however, the court has clearly held that construction defect claims resulting in breach of contract are not covered occurrences in Oregon. Moreover, the court held as a matter of law that claims for delay damage did not constitute property damage. The H.D.D. Company, Inc. v. Navigators Specialty Insurance Company, United States District Court for the District of Oregon, Case number 3:19-cv-00115-BR.

In the H.D.D. matter, H.D.D. was the subcontractor retained by SNC Lavalin Constructors to work on a natural transmission pipeline as part of the expansion of the underground natural gas reservoir. During the course of the project, a dispute arose as between H.D.D. and SNC. This dispute involved a retention of payments allegedly owed by SNC to H.D.D. and claims of alleged delay in completion of the subject work. As part of this dispute SNC demanded arbitration under the construction contract with H.D.D. H.D.D. then tendered the defense of the arbitration to Navigators who denied coverage on the basis that the claim did not involve an occurrence, that the claims did not involve property damage and that there were additional exclusionary exclusions which precluded coverage. H.D.D. subsequently sued Navigators. All parties to the action brought Cross-Motions for Summary Judgment for coverage issues.

The United States District Court for the District of Oregon denied H.D.D.’s Motion for Summary Judgment and found in favor of Navigators on its Motion. The court relied upon a long line of Oregon cases involving insurance coverage in the construction defect arena. The court concluded that Navigators had no duty to defend or indemnify H.D.D. H.D.D.’s primary arguments were that based upon the four corners of the Complaint there was a potential for coverage because the allegations could be read in such a way as to create a potential or plausible claim against H.D.D. Navigators argued that the claims set forth in the Complaint only asserted claims for breach of contract and delay which did not constitute an occurrence or property damage. The court agreed.

The court specifically held:

“A commercial general liability policy is not a warranty or performance bond for a contractor’s workmanship…. The risk being insured by such policies is the risk of tort liability for physical damages to others, and not contractual liability because the insured’s product is not at the quality for which the damaged person bargained…. When a Plaintiff alleges only breach of contract, there is not an “accident” within the meaning of the liability policy, and, therefore, there is not coverage under the policy.” (Internal citations omitted).

As a result, the court found that the alleged breach of contract in this case did not constitute an occurrence. In regard to the delay claims, the court also expressly held that such claims did not meet the definition of property damage. Despite the definition of property damage that includes loss of use language, the court still found that the loss of use has to arise from resulting covered property damage and not simply the insured’s defective work. The court expressly held that delay and increased construction costs that are the result of the defective component of the work performed by the insured does not constitute physical injury to, or loss of use of, tangible property.

The H.D.D. decision is a milestone decision in the Oregon courts in regard to both the issues of what constitutes an occurrence and what constitutes property damage under a liability policy.

Lether & Associates represented Navigators in the H.D.D.decision. We were pleased to be able to obtain this result and resolve this claim. If you would like to discuss this claim or other insurance disputes in the Northwest please feel free to contact our offices.