Last month, the Ninth Circuit Court of Appeals, in an unpublished decision of first impression under Oregon law, held that damage sustained after a negligent repair is not a continuation, change, or resumption of known property damage. Alkemade v. Quanta Indemnity Co., No. 14-35605, 2017 WL 1404708 (9th Cir. April 20, 2017). As a result, the policy’s known loss provision did not preclude coverage.

Meltebeke Build Paradise Homes, Inc. (Meltebeke) sold Rachelle and Adrianus Alkemade a new house with an inadequate crushed rock foundation that sat upon expansive soils. After the house suffered extensive structural damage, Meltebeke repaired the existing damage and hired an engineering firm to install a helical pier foundation. However, the helical piers were installed incorrectly, and the Alkemades’ house suffered the same type of structural damage as before. The parties did not dispute that had the helical piers been installed correctly, the piers would have prevented any future damage.

The Alkemades sued Meltebeke for negligent supervision of the helical pier installation. Two of Meltebeke’s insurers, General Fidelity Insurance Company (GFIC) and Quanta Indemnity Insurance Company (Quanta), refused to defend Meltebeke on the basis that Meltebeke’s knowledge of the damage caused by the original, defective construction prevented coverage under the known loss provision in the policies. Following a settlement, Meltebeke assigned its rights to the Alkemades, and the Alkemades sued GFIC and Quanta for their failure to defend or indemnify.

GFIC and Quanta moved for summary judgment based, in part, on the known loss provision. The district court granted the motion. The court found that Meltebeke knew of a risk of property damage from the expanding soils prior to the policy periods and that the property damage was the same type of structural damage from the same danger of which Meltebeke knew, and had attempted unsuccessfully to address. The district court thus held that Meltebeke knew of the property damage prior to the policy period.

The Ninth Circuit agreed with this interpretation of the known loss provision but noted that the Alkemades’ alternative interpretation was also reasonable. Under Oregon law, if an insured offers a competing plausible and reasonable interpretation of the insurance policy, the insured’s interpretation governs despite an insurer offering a different interpretation that is also plausible and reasonable. The Alkemades contended “that the damage sustained after a repair that would have fixed the problem absent new negligence is not a ‘continuation, change or resumption’ of previously known damage.” Id. at *2.

In determining that the Alkemades’ interpretation of the known loss provision was plausible, the Ninth Circuit noted the plausibility bar is low. The court stated that the term “continuation, change or resumption” in the known loss provision is used to modify damage previously known, which implies that the damage previously known and the damage later suffered share a cause. Due to this casual relatedness, the court noted that it is “plausible to conclude that damage sustained after a repair that would have fixed the problem absent new negligence is not a ‘continuation, change or resumption’ of previously known damage.” Id. As a result, the court held that the Alkemades’ interpretation satisfied the plausibility requirement.

The court next determined that the Alkemades’ interpretation of the known loss provision was reasonable based on the same reasons the interpretation was plausible, as well as three additional grounds. First, the court noted that the “Alkemades’ interpretation [was] reasonable because it require[d] a causal relatedness between the previously known damage and the damage at issue.” Id. Second, the court noted that were it to adopt GFIC’s or Quanta’s interpretation, the court would be adding a new exclusion — damage caused by known risks. The Alkemades’ interpretation, in contrast, did not require reading new terms into the policy. Third, the court noted that under the Alkemades’ interpretation, a repair contractor’s knowledge of the conditions that led to the need for a failed repair would not preclude the insurance coverage the contractor is required to carry.

As a result of finding the Alkemades’ interpretation of the known loss provision plausible and reasonable, the court held that GFIC and Quanta had a duty to defend. The court remanded the case for further proceedings with respect to the duty to indemnify because of disputed facts.

The case illustrates the need to evaluate whether prior knowledge was of a risk or was of actual property damage before deciding whether the known loss provision precludes coverage.