Insurers are Reminded That They, Not Their Insureds, Bear the Burden of Disproving Coverage

The Oregon Court of Appeals’ recent decision in Fountaincourt Homeowners’ Assoc. v. Fountaincourt Development, LLC, reminds insurers that they, and not their insureds, bear the burden of disproving coverage.  In this case, a condominium owner’s association prevailed on a construction defect claim against the general contractor and several subcontractors.  One of the subcontractors sought coverage from its insurer, American Family, for its proportional share of liability.  Liability was based on proof of defects and damages in multiple buildings, only some of which were covered under American Family’s policy.  The jury made a blanket award of $453,958.16 in damages against American Family’s insured subcontractor, without apportioning damages between buildings.

The Fountaincourt Homeowners’ Association served American Family with a writ of garnishment for the entire award against American Family’s insured subcontractor.  American Family objected, arguing it was not obligated to pay the award against the subcontractor because it could not tell what portion of the award was for damages to buildings covered under its insurance policy.  The trial court disagreed entering a judgment against American Family on the writ of garnishment.  American Family appealed, arguing that its insured subcontractor had to establish what portion of the award was for covered buildings.

The Court of Appeals disagreed with American Family, ruling that American Family had to pay the entire damages award against its insured subcontractor because it, and not the subcontractor, bore the burden of proof in establishing what portion of the award was for uncovered buildings.  The Court of Appeals also noted that American Family supplied the subcontractor’s defense counsel, who largely controlled the defense, and American Family could have requested a segregated award had it deemed it necessary.

This ruling places the burden of disproving insurance coverage squarely on the party best able to make that determination—the insurer.   When a contractor purchases insurance and is subsequently sued, the contractor need merely demonstrate that the allegations arguably fall within the bounds of the contractor’s insurance policy to trigger the insurer’s obligation to provide the contractor with a defense and cover the contractor for any award made against it.  Thereafter, it is up to the insurer to prove that the allegations fall outside of the insurance policy for the insurer to avoid its defense and indemnity obligations.   If the insurer cannot meet this burden of proof, the contractor is covered.