This article was originally published in the Spring 2021 issue of the Oregon State Bar Construction Law Section's Construction Law Newsletter.
The U.S. District Court for the District of Oregon issued three significant decisions related to an insured’s ability to bring a first-party suit against a property insurance carrier. The decisions have equipped insureds with additional arguments to extend the time to bring suit and will be of special interest to any construction lawyer who deals with cases involving hidden property damage.
The holdings interpret a contract clause commonly referred to as a “suit-limitation clause” which, in the context of an insurance policy, contractually limits the time-period when an insured can bring suit against the insurance carrier. Oregon courts have routinely enforced and interpreted these suit-limitation clauses in favor of the insurance carriers. The recent decisions by the Oregon federal court address hidden property damage and hold that the language of certain suit-limitation clauses were ambiguous when they deviated from the statutory language of ORS 742.240.
I. Statutory Suit-Limitation Clause for Fire Policies
To understand the significance of these federal decisions, a brief overview of the statutory To understand the significance of these federal decisions, a brief overview of the statutory provisions related to a suit-limitation clause is warranted. In Oregon, fire insurance policies, like other types of insurance, are regulated by statute. See ORS 731.004, et seq. (the “Insurance Code”). The Insurance Code contains a section that specifically addresses fire insurance, and it provides that a fire insurance policy must have certain mandatory provisions.1 See ORS 742.200, et seq. One of those mandatory clauses is provided in ORS 742.2402, which provides:
No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 24 months next after inception of the loss. (Emphasis added.)
Although some cases have referred to this suit-limitation clause as “statute of limitations,” the Oregon Supreme Court clarified that ORS 742.240 is not a statute of limitations but, rather, a provision that “requires a particular contractual arrangement between the parties to insurance policies.” Ben Rybke Co. v. Royal Globe Ins. Co., 293 Or 513, 518 (1982). This means that ORS 742.240 prevents an insurance carrier from imposing a shorter limitation period, but does not provide a maximum time in which a suit may be filed. Id. Of course, the reality is that almost all first-property insurance policies contain a suit-limitation clause that acts to reduce Oregon’s six-year statute of limitations for a breach-of-contract action to only two years. See ORS 12.080 (contract actions). Because of this shortened time period, it is crucial for the insured to understand when the clock begins to run.
A. Interpretation of the Phrase “Inception of the Loss.”
ORS 742.240 provides that an insured must bring suit against its fire insurance carrier within 24 months after “inception of the loss.” However, does the “inception of loss” mean the date the loss occurred or accrual of the insurance carrier’s liability?
In 1962, the Oregon Supreme Court held that the term “inception of the loss” meant the “beginning” of the casualty or event insured against. Bell v. Quaker City Fire & Marine Ins. Co., Philadelphia, 230 Or 615, 625 (1962). In Bell, a fire damaged an insured’s property which resulted in a suit being filed against the insurance carrier. Id. at 617. The question before the court was whether the suit was timely. The fire policy contained a suit-limitation clause that mirrored ORS 744.100 (a former version ORS 742.240) that required commencement of a suit within “12 months after the inception of the loss.” Id. The court reviewed whether “inception of the loss” meant the occurrence of the fire, or whether it was when the loss was ascertained and payable by the insurance carrier. Central to the decision was the history of the phrase, which was changed in 1945 from “after the fire shall have occurred” to “inception of the loss.” Id. at 618 (citing to in Margulies v. Quaker City Fire & Marine Ins. Co., 276 App Div 695, 97 NYS2d 100 (1950). Based on the reasoning that this change was similar to a New York statute, and the plain meaning of “inception,” the court reasoned that “inception” meant the beginning of the “occurrence of the casualty or event insured against” or, in this case, the date of the fire. Id.
B. Inception of Loss and the Discovery Rule.
The Bell court dealt with a readily apparent event—a fire. It did not address when the time period would begin to run in the event of hidden damage or late discovery. In other words, does ORS 742.240 incorporate a “discovery rule” that extends the time to bring suit?
Unfortunately, for insureds, thirty years later, the Oregon Supreme Court held that Oregon law does not apply a “discovery rule” to this statutorily required insurance provision. Moore v. Mut. of Enumclaw Ins. Co., 317 Or 235, 250 (1993). In Moore, the insured rented a house to tenants from July 1989 to October 1990. Id. at 238. On October 15, 1990, the tenant confessed to the police to using the house for cooking methamphetamine. Id. at 239. Plaintiff submitted a claim to its carrier for property damage a week later, and the insurance carrier issued payment to the insured in December 1990. The insured objected to the amount of payment and sued the insurance carrier in February 2020, four months after the discovery of the damage. Id. After reviewing Bell, the court held that the clause “inception of the loss” was not ambiguous, and there was no exception for the discovery of the loss. Thus, the insured’s suit was untimely as it was not brought within 12 months3 of when the “cooking” occurred.
Based on this strict interpretation, insureds were left with little recourse in the event of hidden or latent property damage.
II. New Line of Oregon Federal Cases
A new line of Oregon federal cases have provided insureds with some relief from this strict interpretation. Although these cases do not reject the ruling in Bell and Moore, they do interpret policies that include a suit-limitation clause without the “inception of the loss” language.
As stated above, both policies in question in the Bell and Moore decisions contained a suit-limitation clause that mirrored the language of ORS 742.240, and included the “inception of the loss” language. Many insurance policies do not contain this language because the insurance carrier uses ISO4 form policies, or has drafted its own suit-limitation provision.
The following line of Oregon federal cases address suit-limitation clauses that do not include the “inception of the loss” language, and highlight the extreme importance in reviewing the policy for the exact language.
A. Housing Northwest Incorporated v. American Insurance Company, 3:19-CV-00253-SB, 2019 WL 7040922 (D Or Dec 20, 2019).
In Housing Northwest Incorporated v. American Insurance Company, 3:19 CV 00253 SB, 2019 WL 7040922 (D Or Dec 20, 2019), Magistrate Judge Beckerman held that a suit-limitation clause was ambiguous, and construed it against the insurance carrier. In this case, the insured provided college housing in Portland, Oregon. In 2017, the insured retained the services of a building envelope expert who reported that the insured’s property was sustaining “hidden property damage from water intrusion,” and that such damage likely happened from 1997 until it was discovered in 2017. Id. at *1. The insured tendered the claim to its insurance carriers, and both carriers denied, citing the suit-limitation clause contained in the policies. Id. The suit-limitation clause provided that “[t]he action be brought within 2 years after the date on which the direct physical loss or damage occurred.” Id. (Emphasis added).
The insured argued that the suit was timely because it was filed within two years of the date of the discovery of the physical loss or damage. The insurance carriers, relying on Moore and ORS 742.240, argued that no discovery rule applied. The court noted that the suit-limitation clause at issue did not include the “inception of the loss” language, which, instead, had been replaced with “direct physical loss or damage occurred.” The court held that the term “occurred” was ambiguous, and it construed the term against the insurance carrier.
Not only did the court construe the provision in favor of the insured and hold the suit was timely, it also warned insurance carriers as follows:
First, any insurance company selling property insurance in Oregon should be aware that progressive water damage is a common occurrence, and should be motivated to draft clear policy language to govern coverage of such damage. Second, insurance companies have been litigating this same policy language in Oregon for over one hundred years, and Defendants were on notice regarding the ambiguity of the term ‘occurred’ in this context.”
Id. at *4.
B. Great American Alliance Insurance Co. v. SIR Columbia Knoll Associates Limited Partnership, No. 3:18-CV-00908-HZ, 2020 WL 5351035 (D Or Sept 4, 2020).
In September 2020, Chief Judge Hernandez examined the same suit-limitation language as in Housing Northwest in the context of long-term hidden water damage of some buildings. Great American Alliance Insurance Co. v. SIR Columbia Knoll Associates Limited Partnership, No. 3:18 CV 00908 HZ, 2020 WL 5351035 (D Or Sept 4, 2020).
In this case, the court dealt with the exact same suit-limitation language as in Housing Northwest—that legal action must be “brought within 2 years after the date on which the direct physical loss or damage occurred.” Id. at *12 (emphasis added). In Great American, the insured argued that its suit was timely, as it had been brought within two years of the date of the discovery of the damage, while the insurance carriers argued that no discovery rule applied. The court adopted the reasoning in Housing Northwest, and held that the discovery rule applied, because the term “occurred” could also mean “to present itself,” “to appear,” or “to exist.” Further, ORS 742.240 was not applicable because the policy’s suit-limitation clause deviated from the statutory language of ORS 742.240.
C. Silver Ridge Homeowners' Ass'n, Inc. v. State Farm Fire & Cas. Co., No. 3:19-CV-01218-YY, 2020 WL 5893317 (D Or Oct 5, 2020).
Lastly, on October 5, 2020, Magistrate You expanded on the rulings of both Housing Northwest and Greater American. Silver Ridge Homeowners' Ass'n, Inc. v. State Farm Fire & Cas. Co., No. 3:19-CV-01218-YY, 2020 WL 5893317, *4 (D Or Oct 5, 2020).
In Silver Ridge, plaintiff owns a townhome development in Portland, Oregon. The defendant, State Farm Fire and Casualty Company, insured the townhomes from 1993 to 2009. Id. at *1. In February 2018, plaintiff retained a building consultant who discovered systemic property damage. Id. The expert opined that the hidden damage commenced in 1993 and continued each year, until it was discovered in 2018. Id. Plaintiff tendered the claim for property damage to State Farm, State Farm denied, and plaintiff filed suit. State Farm brought a summary judgment motion asking the court to dismiss plaintiff’s claims as barred by the policy’s suit-limitation provision. Like Housing Northwest and Greater American, the suit-limitation clause did not follow the statutory language of ORS 742.240 but, rather, stated that the action must be “brought within two years after the accidental direct physical loss occurred.”
For the same reasons as set forth in Housing Northwest and Greater American, the court held that the suit-limitation clause was ambiguous and construed it against State Farm.
However, of significance, is that the court also addressed whether Oregon law requires the court to incorporate the language of ORS 742.240 if the policy was not drafted to include the statute’s exact language. Thus, State Farm argued that it still be construed consistently with ORS 742.240 and not allow a discovery rule, even though its suit-limitation clause failed to include the “inception of the loss” language. The court disagreed, and reiterated that ORS 742.240 is a contractual limitation, not a maximum time in which to file a lawsuit. Id. (Citing to Ben Rybke, 293 Or at 518). Therefore, an insurance carrier can deviate from the statutory language of ORS 74.240, and provide a broader time limit.
The takeaway from these three recent decisions is that the exact language of the suit-limitation clause is crucial, and it is likely to be interpreted broadly if it deviates from the statutory language.
III. Final Comments
For many of us construction lawyers, insurance coverage for hidden property is a common issue. With the new line of Oregon federal cases, it is extremely important to review the exact language of the suit-limitation clause, keeping in mind that most property insurance policies use standard form language that do not include “the inception of the loss” language. Although, insurance carriers may heed the warning of the courts, and change their forms in the near future, these new decisions provide some ammunition moving forward. Thus, if the suit-limitation clause deviates from the statutory language of ORS 742.240, such language may be considered ambiguous and favorable to the insured.
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1 Most courts now refer to “fire insurance” and “property insurance” interchangeably. See, e.g., Herman v. Valley Ins. Co., 145 Or App 124, 126 (1996) (applying provisions to a burglary). The Insurance Code defines “property insurance” but does not define “fire insurance.” See ORS 731.182 (defining “property insurance”). Although beyond the scope of this article, based on the legislative history, an insured could make the argument that Chapter ORS 742 should be narrowly interpreted to only homeowner “fire insurance,” as opposed to broadly construed to cover all types of property insurance.
2 ORS 742.240 was originally numbered ORS 743.660, and included a limitation period of one year.
3 ORS 742.240 was amended in 1991 to increase this limitation period from one year to two years. Oregon Laws 1991, chapter 437, § 1.
4 “ISO” refers to the Insurance Services Office, which was created in 1971. Since 1971, ISO has served as an advisory organization to the insurance industry and, in that role, has published many standard insurance forms. Many of these forms are considered the industry standard, and do not include the “inception of the loss” language. See, e.g., ISO forms: HO 00 05 10 00 (homeowner); CP 00 90 07 88 (commercial property); and FP 00 10 09 94 (farm policy).
