Filed: December 31, 2012

IN THE SUPREME COURT OF THE STATE OF OREGON

BRESEE HOMES, INC., an Oregon c orporation, Petitioner on Review,

v.

FARMERS INSURANCE EXCHANGE, a California c orporation, Respondent on Review.

(CC 06C12550; CA A136397; SC S057573)

Argued and submitted May 13, 2010.

On rev iew from the Court of Appeals.*

J. Michael Alexander, Swanson, Lathen, Alexander, McCann & Prestwich, PC, Salem, argued the cause and file d the brief for petitioner on review.

Misty Edmundson, Soha & Lang P.S., Seattle, argued the cause and filed the brief for respondent on review.

Cody Hoesly, Larkins Vacura LLP, Portland, filed the brief for amicus curiae Oregon Trial Lawyers Association.

Rick Pope, Kirklin Thompson & Pope LLP, Portland, filed the brief for amicus curiae Oregon Home Builders Association, Home Builders Association of Marion & Polk Counties, Central Oregon Home Builders Association, Associated General Contractors Oregon

- Columbia Chaper, Walsh Construction Co.

, and Adair Homes, Inc

. Diane L. Polscer, Gordon & Polscer, LLC, Portland, filed the brief for amicus curiae State Farm Fire and Casualty Company. With her on the brief was Brian C. Hickman.

Gregory L. Baird, Gordon & Polscer, LLC, Portland, filed the brief for amicus curiae Complex Insurance Claims Litigation Association. With him on the brief were Laura A. Foggan, Amanda Schwoerke, and Wiley Rein LLP.

Before Balmer, Chief Justice, and Durham, De Muniz, Kistler, Walters, and Linder.**DURHAM, J.

The decision of t he Court of Appeals is reversed. The judgment of the circuit court is reversed

, and the case is remanded to that court for further proceedings.

*Gillette and Landau, JJ

. , did not participate in the decision of this case.

**Appeal from an order of th e Marion County Circuit Court, Joseph Ochoa

, Judge. 227 Or App 587, 206 P3d 1091 (2009).1 DURHAM, J. 1

Plaintiff, Bresee Homes, Inc. (Bresee), see ks review of a Court of Appeals 2

decision that affirmed a trial court judgment in favor of defendant

, Farmers Insurance 3

Exchange (Farmers). Bresee Home s , Inc. v. Farmers In c

. Exchange , 227 Or App 587, 4

206 P3d 109 1 (2009). The dispute concerns the correct interpretation of the commercial 5

general liability (CGL) policy that Farmers sold to Bresee. For the reasons explained 6

below, we reverse. 7

The trial court granted a motion for summa ry judgment in favor of Farmers 8

and denied the cross

- motion for partial summary judgment filed by Bresee. On review, 9

this court examines the summary judgment record, in accordance with ORCP 47 C, to 10

determine whether the pleadings and any supporting docum ents on file show that there is 11

no genuine issue as to any material fact and that the moving party is entitled to prevail as 12

a matter of law. Jones v. General Motors Corp ., 325 Or 404, 420, 939 P2d 608 (1997). 13

Bresee's claims allege that Farmers breached its obligations under the policy (a) to defend 14

Bresee against a claim against Bresee, and (b) to indemnify Bresee against any liability 15

for damages arising out of the claim. Those are separate obligations requiring a separate 16

analysis. Paxton

- Mitchell C o. v. Royal Indemnity Co. , 279 Or 607, 61 0

- 11 , 569 P2d 581 17

(1977). 18

On July 15, 2005, the Joneses filed an action against Bresee for breach of 19

contract and negligence regarding the construction of their home. The Joneses alleged 20

that, on April 2, 1999, t hey had contracted with Bresee, a contractor, for the construction 21

of a custom home in Salem. They alleged that Bresee had failed to install flashing 222

properly and that the exterior synthetic stucco, known as the Exterior Insulated Finish 1

System (EIFS), le aked water into the interior and failed. They sought $52,580 in 2

damages from Bresee, consisting of both the cost to repair the siding work and damages 3

arising from the failure of the siding. 4

According to Bresee, Farmers had sold a CGL policy to Bresee t hat was in 5

effect over various successive periods from the late 1980s to June 17, 2003. When 6

Bresee received the Joneses' complaint, Bresee tendered the Joneses' claim s to Farmers 7

and requested a defense and indemnification under the CGL policy. When Bre see 8

tendered the Joneses' claim s , Farmers, acting through its lawyer, denied the tender, citing 9

the "products

- completed operations hazard" exclusion in the policy. We discuss the 10

pertinent provisions of the CGL policy and the exclusion below. 11

Bresee filed this action against Farmers for breach of contract and for a 12

declaratory judgment, asserting , as noted above, that Farmers had contractual obligations 13

to provide a defense against the Joneses' action and to indemnify Bresee for any liability 14

to the J oneses. Farmers filed a motion for summary judgment and argued that the 15

"products

- completed operations hazard" endorsement to the CGL policy precluded any 16

liability to Bresee . Bresee filed a cross

- motion for partial summary judgment and argued 17

that the endorsement did not apply and that, even if it did, the court should conclude that 18

the Joneses' complaint, reasonably construed, could be read to include a covered loss, i.e.
, 19

property damage occurring before completion of construction and damages arising from 20

the failure of a product installed by a subcontractor

. 21

Bresee also contended that extrinsic evidence of Farmers' s adjustment and 223

settlement of multiple nearly identical EIFS damage claims by other homeowners against 1

Bresee was relevant for two reas ons. First, it constituted some evidence of how the 2

parties intended the CGL policy to apply to similar claims by homeowners against 3

Bresee. Second, it amounted to some proof that Farmers had waived i t s position that the 4

"products

- completed operations hazard" endorsement precluded any coverage of the 5

Joneses ' claim against Bresee. 6

The trial court, as noted, granted Farmers' s motion for summary judgment 7

and denied Bresee's cross

- motion for partial summary judgment. The trial court 8

determined, as an in itial matter, that the property damage claimed by the Joneses was 9

included within the coverage portion of the Farmers CGL policy. However, the court 10

ultimately concluded that the "products

- completed operations hazard" policy provision 11

defeated any claim for coverage. The trial court also determined that Bresee's claim for a 12

defense was not well taken because Bresee, in submitting evidence on summary 13

judgment, had not established when Bresee's subcontractor had completed the work and 14

when the alleged dam age had occurred. 15

The Court of Appeals did not separately analyze Bresee's claims for a 16

defense against the Joneses' claim and for coverage under Farmers' s CGL policy. That 17

court concluded, however, that the tr ia l court was correct in deciding that the policy was 18

unambiguous and afforded no coverage to Bresee. The Court of Appeals affirmed the 19

trial court 's decision to grant summary judgment against Bresee. This court granted 20

Bresee's petition for review. 21

Bresee's claims for a defense and for coverag e under the CGL invoke 224

separate contractual obligations governed by different legal standards. We begin with 1

Bresee's claim for a defense against the Joneses' action. 2

This court examines two documents to determine whether an insurer has a 3

duty to defend an action against its insured: the insurance policy and the complaint in the 4

action against the insured. Marleau v. Truck Insurance Exchange , 333 Or 82, 89, 37 P3d 5

148 (2001). As t his court has explained: 6

"An insurer has a duty to defend an action against its insured if the claim 7 against the insured stated in the complaint could, without amendment, 8 impose liability for conduct covered by the policy

. 9
"In evaluating whether an insurer has a duty to defend, the court 10 looks only at the facts alleged in the complaint to determine whether they 11 provide a basis for recovery that could be covered by the policy[.] * * * An 12 insurer should be able to determine from the face of the complaint whet her 13 to accept or reject the tender of the defense of the action. 14
"The insurer has a duty to defend if the complaint provides any basis 15 for which the insurer provides coverage. Even if the complaint alleges 16 some conduct outside the coverage of the policy, the insurer may still have 17 a duty to defend if certain allegations of the complaint, without amendment, 18 could impose liability for conduct covered by the policy. Any ambiguity in 19 the complaint with respect to whether the allegations could be covered is 20

r esolved in favor of the insured." 21
Ledford v. Gutoski , 319 Or 397, 399

- 400, 877 P2d 80 (1994) (emphasis in original ; 22

citations omitted ). 23

Regardless of the presence of ambiguity or unclarity in the complaint, the 24

key question is whether the court can reaso nably interpret the allegations to include an 25

incident or injury that falls within the coverage of the policy. B lohm et al v. Glens Falls 26

Ins. Co. , 231 Or 410, 416, 373 P2d 412 (1962). As this court observed in Marleau

, 27

"[N]either the failure to identify correctly the claims nor the failure to state them 285

separately defeats the duty to defend." 333 Or at 91. As long as the complaint contains 1

allegations that, without amendment, state a basis for a claim covered by the policy, the 2

duty to defend arises. Id. The inclusion in the complaint of other allegations describing 3

claims that fall outside the policy's coverage is immaterial. See Abrams v. General Star 4

Indemnity Co

. , 335 Or 392, 400, 67 P3d 931 (2003) (if the complaint contains allegations 5

of covered conduct, the insurer has a duty to defend even if the complaint also contains 6

allegations of excluded conduct). Any ambiguity concerning potential coverage is 7

resolved in favor of t he insured. Ledford , 319 Or at 400. 8

We turn now to the provisions of the CGL policy that Farmers issued to 9

Bresee. The parties agree that the following policy terms were in effect between June 17, 10

1998, and June 17, 2003 ; that the parties renewed the p olicy annually ; and that the policy 11

pertains to the claim that the Joneses filed against Bresee. 12

The policy, as pertinent to this dispute, consists of a broad insuring 13

agreement stating the insurer's promise to pay specified damages and to defend the 14

ins ured against claims brought against the insured to recover those damages. A list of 15

exclusions from coverage follows the insuring agreement. Finally, the policy sets out a 16

list of definitions of terms and phrases in the policy. We set out below those re levant 17

parts of the policy: 18

"Throughout this policy the words 'you' and 'your' refer to the Named 19 I nsured shown in the Declarations, and any other person or organization 20 qualifying as a Named I nsured under this policy. 21

"* * * * * 22

" SECTION I

- COVERAGES 236

"COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE 1 LIABILITY 2

"1. Insuring Agreement 3

" a

. We will pay those sums that the insured becomes legally 4 obligated to pay as damages because of ' bodily injury ' or 5

' property damage ' to which this insurance applies. We wi ll 6 have the right and duty to defend the insured against any ' suit ' 7 seeking those damages. However, we will have no duty to 8 defend the insured against any ' suit ' seeking damages for 9

' bod il y injury ' or ' property damage' to which this insurance 10 does not app ly. * * * 11

"* * * * * 12

" 2. Exclusions 13
"This insurance does not apply to: 14

"* * * * * 15

" j. Damage to Property 16

" 'Property damage' to: 17

"( 1 ) Property you own, rent, or occupy; 18

"* * * * * 19

"(5) That particular part of real property on which you or 20 any contractors or subcontractors working directly or 21 indirectly on your behalf are performing operations, if 22 the ' property damage' arises out of those operations; or 23

"(6) That particular part of any property that must be 24 rest ored, repaired or replaced because 'your work' was 25 incorrectly performed on it. 26

"* * * * * 27
"Paragraph (6) of this exclusion does not apply to 28 'property damage' included in the ' products

- 29 completed operations hazard .' 30

"* * * * * 317 " l. Damage to Your Work 1

" ' Property damage' to 'your work' arising out of it or any part 2 of it and included in the ' products

- completed operations 3 hazard

. ' 4
"This exclusion does not apply if the damaged work or the 5 work out of which the damage arises was performed on your 6 behalf by a subcontractor. 7

"* * * * * 8

" SECTION V

- DEFINITIONS 9

"* * * * * 10

"14. ' Products

- completed operations hazard ': 11

"a. Includes all 'bodily injury' and 'property damage' occurring 12 away from premises you own or rent and arising out of 'your 13 product' or 'your w ork' except: 14

"(1) Products that are still in your physical possession; or 15

"(2) Work that has not yet been completed or abandoned. 16 However, 'your work' will be deemed completed at the 17 earliest of the following times: 18

"(a) When all of the work called for in your contract 19 has been completed. 20

"(b) When all of the work to be done at the job site 21 has been completed if your contract calls for 22 work at more than one job site. 23

"(c) When that part of the work done at a job site 24 has been put to its intended use by any person 25 or organization other than another contractor or 26 subcontractor working on the same project. 27

" Work that may need service, maintenance, correction, repair 28 or replacement but which is other wise complete , will be 29 treated as completed. 30

" * * * * * 318

"15. 'Property damage' means: 1

"a. Physical injury to tangible property, including all resulting 2 loss of use of that property. All such loss of use shall be 3 deemed to occur at the time of the physical injury that caused 4 it; or 5

"b. Loss of use of tangible property that is not physically injured. 6 All such loss of use shall be deemed to occur at the time of 7 the 'occurrence' that caused it. 8

" * * * * * 9

" 18. 'Your product' means: 10

"a. Any goods or products, other than real property, 11 manufactured, sold, handled, distributed or disposed of by: 12

"(1) You; 13

"(2) Others trading under your name; or 14

"(3) A person or organization whose business or assets you 15 have acquired; and 16

"b. Containers (other than vehicles), materials, par ts or 17 equipment furnished in connection with such good or 18 products. 19

'' ' Your product' includes: 20

"a. Warranties or representations made at any time with respect 21 to the fitness, quality, durability, performance or use of 'your 22 product'; and 23

"b. The providing of or failure to provide warnings or 24 instructions. 25

'' ' Your product' does not include vending machines or other property 26 rented to or located for the use of others but not sold. 27

"19. 'Your work' means: 28

"a. Work or operations performed by you or on your beha lf; and 29

"b. Materials, parts or equipment furnished in connection with 309 such work or operations. 1

"'Your work' include s : 2

"a. Warranties or representations made at any time with respect 3 to the fitness, quality, durability, performance or use of 'your 4 work'; and 5

"b. The providing of or failure to provide warnings or 6 instructions. " 7
The policy was accompanied by a separate form labeled as the 8

" EXCLUSION

- PRODUCTS

- COMPLETED OPERATIONS HAZARD " endorsement, 9

which states: 10

"This endorsement modifies insurance pr ovided under the following: 11 COMMERCIAL GENERAL LIABILITY COVERAGE Part. 12

" This insurance does not apply to ' bodily injury ' or ' property damage' 13 included with in the ' products

- completed operations hazard .' " 14
Several aspects of the insurance policy are not eworthy. First, the coverage 15

agreement, and specifically the duty to defend Bresee, would apply to the Joneses' claims 16

if the property damages that their complaint sought constitute s "property damage" to 17

which the policy applied. 18

Second, the policy inco rporates qualifying wording for some property 19

damage exclusions that has the effect of limiting or cancelling the particular exclusion. 20

For example, in the coverage portion of the policy, paragraph 2

.j

. (6) excludes property 21

damage to property "that must b e restored, repaired or replaced because ' your work ' was 22

incorrectly performed on it

. " However, the policy declares that that exclusion is 23

inapplicable "to 'property damage' in the ' products

- completed operations hazard .' 24

Similarly, paragraph 2

. l

. exclu des " '[ p ]roperty damage' to 'your work' arising out of it or 2510

any part of it and included in the ' products

- completed operations hazard [
, ] '" but then 1

declares that that exclusion is inapplicable "if the damaged work or the work out of which 2

the damage aris es was performed on your behalf by a subcontractor." 3

Finally, the policy definition of the " products

- completed operations 4

hazard ," which the property damage exclusions just cited incorporates, is itself subject to 5

an exception under section V, paragrap h 14

. a

. (2) for "[w]ork that has not been 6

completed." The definition then sets out several factual circumstances under which the 7

policyholder's "work" is deemed completed. 8

In construing the policy to determine whether it gives rise to a duty to 9

defend, we construe the text of the policy as a whole, rather than view particular parts of 10

the policy in isolation. Hoffman Construction Co. v. Fred S. James & Co. , 313 Or 464, 11

836 P2d 703 (1992). That principle applies with equal force to the construction of policy 12

endorsements, exclusions, and exceptions. We may conclude, after construction of the 13

policy as a whole, that a particular provision nullifies or limits coverage or that one 14

policy provision controls over another. That conclusion, however, must result from the 15

application of familiar principles of interpretation to the policy as a whole, not from an 16

attempt to give particular weight or effect to one provision because it is an exclusion or 17

exception to the policy's coverage. 18

Some aspects of the Joneses' complaint are noteworthy. T he allegations do 19

not state whether the claimed damages from the alleged breach of contract and 20

negligence occurred before or after the comple tion of Bresee's work. From all that 21

appear s from a reading of the complaint, the described property damage occurred, or 2211

could have occurred, when Bresee's work was neither completed nor "deemed complete" 1

under the "products

- completed operations hazard, " as defined in the policy. 2

Farmers argues that this court should conclude that the property damage 3

alleged in the Joneses ' complaint occurred after Bresee completed its work, in part 4

because th at complaint was filed in 2005 and used verbs in their past tense ( e.g. , "flashing 5

was not properly installed," "the exterior synthetic stucco system failed") to describe the 6

alleged deficient performance. We are not persuaded. The allegations describe events 7

and damage that occurred in the past, but which could have occurred at any time after 8

contract execution. The allegations describing past deficient performance and damage do 9

not necessarily say anything about the date Bresee completed its work. 10

The Joneses ' allegations also do not permit this court to conc lude that the 11

alleged damage arose from Bresee's work that "may [ have ] need[ed] service, 12

maintenance, correction, repair or replacement but which is otherwise complete" within 13

the meaning of the "products

- completed operations hazard" definition. The all egations 14

say nothing about whether Bresee's work was "otherwise complete," or whether Bresee's 15

work might need service, maintenance, etc., to be regarded as completed. 16

Farmers also argue s that Bresee bore the burden of demonstrating that the 17

work was not completed when the alleged property damage occurred, in order to avoid 18

the effect of the "products

- completed operations hazard" exclusion. T hat is not correct. 19

With regard to the duty to defend, Bresee has no burden to come forth with facts beyond 20

tho se alleged in the Joneses' complaint. Those allegations stated the pertinent facts when 21

Bresee tendered the Joneses' claims to Farmers and requested a defense. Our analysis of 2212

the duty to defend focuses on those allegations whether or not different or ad ditional facts 1

might be adduced at trial. 2

The Court of Appeals applied a different analysis of Farmers' s motion for 3

summary judgment, and we take this opportunity to correct it. As noted, the Court of 4

Appeals observed that Farmers had presented some evi dence in support of its motion for 5

summary judgment indicating that Bresee had completed work on the Joneses' home in 6

1999

, and that Bresee had presented no contradictory evidence that the claimed damage 7

had occurred before Bresee had completed its work. The Court of Appeals concluded

, as 8

a result

, that the record contained no issue of fact on that question and that Farmers was 9

entitled to summary judgment. The court reasoned that Bresee had a specific burden to 10

produce evidence that an exception ( i.e. , d amage arising out of uncompleted work) to the 11

exclusion

-- the "products

- completed operations hazard "

-- applied. See Bresee , 227 Or 12

App at 593. 13

The Court of Appeals was mistaken in that analysis. Farmers relied on 14

facts concerning the completion of Bresee's work that were not alleged in the Joneses' 15

complaint. Farmers could discern from facts alleged by the Joneses and from its policy 16

that the J oneses potentially could prove that the claimed damage arose before Bresee 17

completed its work. When Bresee tendered the Joneses' complaint for defense, the 18

factual question of whether the claimed damages had occurred before or after the 19

completion of Bres ee's work was an issue that the litigation between the Joneses and 20

Bresee might determine

, and, once established, could affect Farmer s 's duty to indemnify 21

Bresee. The potential factual determinations in that litigation, however, are not the facts 2213

that gov erned Fa r mers' s duty to defend Bresee. When Bresee tendered the Joneses' 1

claims, only the facts alleged by the Joneses and the terms of the Farmers policy 2

governed Farmers 's duty to provide a defense. 3

Farmers also posits that the court's analytical focu s in this context is not 4

confined strictly to the insurance policy and the underlying complaint, because th is 5

court's cases have left the door open for consideration of other "compelling evidence of 6

no coverage" outside the complaint that would nullify a d uty to defend. See Casey v. 7

N.W. Security Ins. Co. , 260 Or 485, 489, 49 0 P2d 208 (1971) (applying that criterion); 8

Marleau , 333 Or at 91 (quoting that criterion in Casey ). However, the qualification that 9

Casey recognized is a narrow one and has no applic ation here. 10

In Casey , the insured drove his automobile into Shelton, causing injuries. 11

Shelton sued the insured, alleging assault and battery. He then amended his complaint to 12

also allege negligence. Ordinarily, th e alleged facts would have be en suffi cient to state a 13

claim covered by the insured's automobile liability policy , and thus, the facts would have 14

give n rise to the insurer's duty to defend the insured against Shelton's claim. This court, 15

however, considered other evidence in the record. That evidence demonstrated that

, 16

before Shelton filed his complaint, the insured had been criminally prosecuted for his 17

conduct and had been convicted of intentionally injuring Shelton with his automobile. 18

The court held that that evidence was available for c onsideration because it established 19

beyond dispute that the insured was e stopped to assert that he did not act intentionally in 20

injuring Shelton. 260 Or at 490

- 92. The court declined to permit the insured to relitigate 21

a key factual issue that the crimin al prosecution already had conclusively resolved against 2214

him. The incontrovertible determination that the insured had intentionally injured 1

Shelton established that the insured had no insurance coverage

, and thus, the insurer had 2

no duty to defend. Id. a t 492. 3

This case involves no court determination that precludes coverage like the 4

criminal court adjudication considered in Casey . This court has consistently focused its 5

analysis on the policy and the underlying complaint

, 1 Marle a u , 333 Or at 91, and we 6

adhere to that approach in this case. 7

The foregoing discussion indicates that the "p roducts

- completed 8

operations hazard " exclusion does not eliminate Farmers' s du ty to defend Bresee against 9

the Joneses' claims

. We conclude that the Farmers policy p rovides a basis for coverage 10

of property damage claims that the "products

- completed operations hazard" exclusion 11

1 Casey explained why the court, in the absence of a judicial determination that precluded coverage, confines its analysis of a claim based on the duty to defend to the insurance policy and the complaint against the insured:

"The insurer has a duty to defend onl y if the claim made against the insured is one covered by the insurer. MacDonald v. United Pacific Ins. Co. , 210 Or 395, 399, 311 P2d 425 (1957).
"The difficulty arises when there is doubt as to coverage. This doubt sometimes cannot be resolved until a judgment is entered in litigation between the insured and the insurer. This is too late; the lawsuit by the injured party has been filed and probably gone to judgment before this time. The insurer has contracted with its insured to defend him. This bene fit to the insured would be curtailed if it could be withheld in the event of a dispute about coverage. For this reason we have adopted the rule that in the absence of any compelling evidence of no coverage, the insurer owes a duty to defend if the injure d claimant can recover under the allegations of the complaint upon any basis for which the insurer affords coverage ."
260 Or at 489 (emphasis added).15

does not eliminate. Under the facts alleged in the Joneses' complaint, Bresee could have 1

liability for conduct covered by the policy. Under this court's standard, as discussed in 2

Marleau and Ledford , Farmers owed a duty to defend Bresee. The trial court erred in 3

granting Farmers' s motion for partial summary judgment and in denying Bresee's cross

4

motion for summary judgment on the issue of th e duty to defend. 5

The parties have submitted additional arguments regarding Farmers' s 6

ultimate duty to pay the benefits of its policy to Bresee. We cannot determine the answer 7

to that question at this point. Bresee informed the trial court that the und erlying case 8

involving the Joneses had been settled. However, neither party disclosed to the trial court 9

the cost of indemnifying Bresee as a consequen ce of that agreement. Neither party 10

advised the Court of Appeals or this court of the terms of the sett lement or how they may 11

affect any issue concerning indemnification. As Bresee correctly argued, whether 12

Farmers has a duty to pay must be determined on the basis of the ultimate facts proven at 13

trial or, as in this case, the facts that formed the basis fo r the settlement. We cannot 14

determine, from the record made below, whether the policy affords a basis for 15

indemnification. We conclude that neither party was entitled to summary judgment on 16

the issue of indemnification. 17

The decision of the Court of App eals is reversed. The judgment of the 18

circuit court is reversed and the case is remanded to that court for further proceedings. 19