Oregon “property damage” and duty to defend

In State Farm Fire & Casualty Co. v. American Family Mut. Ins. Co., A142944 (Ore. Ct. App. April 6, 2011), insured general contract Edgewater built a residence for Vossoughis.  Several years after completion, Vossoughis sued Edgewater in contract and tort seeking damages for the repair of defective construction performed by Edgewater and its EIFS subcontractor.  Edgewater tendered its defense to its CGL insurers, State Farm and American Family.  State Farm agreed to defend while American Family denied a defense.   State Farm filed suit against American Family seeking a declaration that American Family had a duty to defend and also sought contribution towards defense costs.  The trial court granted summary judgment for State Farm.  On appeal, the intermediate appellate court reversed.  Applying Oregon law, the court held that the defective construction, standing alone, did not constitute “property damage” and the complaint did not allege any resulting damage.   Although resulting moisture penetration damage “could have been a natural result” of the defective construction, because it was not a “necessary result,” to recover damages for any resulting water damage, Vossoughis would have been required, under Oregon’s rules of civil procedure, to specially plead such damages.  Because such damages were not plead, they could not be recovered and thus there was no potential for “property damage” that would otherwise trigger a duty to defend.

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