Farmers Ins. Co. of Oregon v. Trutanich

• Decision Date: 01 September 1993
• Citation: 858 P.2d 1332,123 Or.App. 6
• Parties: FARMERS INSURANCE COMPANY OF OREGON, a corporation, Appellant, v. Daniel M. TRUTANICH, Respondent. 9002-01206; CA A68108.
• Court: Oregon Court of Appeals

Page 1332

858 P.2d 1332

123 Or.App. 6

FARMERS INSURANCE COMPANY OF OREGON, a corporation, Appellant, v. Daniel M. TRUTANICH, Respondent.

9002-01206; CA A68108.

Court of Appeals of Oregon.

Argued and Submitted Dec. 9, 1992.

Decided Sept. 1, 1993.

Lisa E. Lear, Portland, argued the cause for appellant. With her on the briefs were S. Joel Wilson and Bullivant, Houser, Bailey, Pendergrass & Hoffman, Portland.

Robert E.L. Bonaparte, Portland, argued the cause for respondent. With him on the brief were Michael J. Gentry and Tooze, Shenker, Holloway & Duden, Portland.

Stephen D. Marcus, Imelda Terranzino and Claussen Miller Gorman Caffrey & Witous, P.C., Chicago, IL, and Jeffrey V. Hill and Zarosinski & Hill, Portland, filed a brief amicus curiae for Insurance Environmental Litigation Ass'n.

Before WARREN, P.J., and RIGGS and EDMONDS, JJ.

WARREN, Presiding Judge.

In this civil action, plaintiff Farmers Insurance Company (Farmers) sought a declaration that a homeowner's insurance policy it issued to defendant Trutanich does not cover defendant's losses. Defendant counterclaimed for breach of the insurance contract and intentional infliction of emotional distress.

In November, 1988, defendant purchased a house and had it insured by Farmers with an all-risk homeowner's insurance policy. In June, 1989, defendant moved to an apartment and rented part of the house to the Greshams. Defendant left most of his personal possessions in a locked bedroom. The Greshams lived in the house for approximately 45 days, and then found a new tenant, Pixler, who, with his children, began renting the house from defendant in late August, 1989. In late September, defendant stopped by the house and found that Pixler had moved out. Upon entering the house, he noticed a strong odor, which was later determined to be from a methamphetamine lab in the lower level of the house. ¹ Defendant made a claim for damages to the house and his personal property caused by the methamphetamine operation. Farmers denied the claim on the ground that the insurance contract excluded coverage for contamination. It then brought this declaratory judgment action. The trial court decided in favor of defendant on the contamination issue, as well as on other coverage issues raised by Farmers. However, it granted Farmers' motion for summary judgment on defendant's counterclaim for intentional infliction of emotional distress. ² After the court ruled in favor of defendant on the coverage issues, it submitted the damage issues to the jury. The jury returned a verdict on defendant's counterclaim for breach of contract as follows:

Farmers makes numerous assignments of error concerning the trial court's rulings on the coverage issues and attorney fees. ³ We review the trial court's rulings on coverage issues in a declaratory judgment proceeding as in an action at law and are bound by the trial court's factual findings if they are supported by any substantial evidence. See Lindsey v. Dairyland Ins. Co., 278 Or. 681, 688, 565 P.2d 744 (1977); C & B Livestock, Inc. v. Johns, 273 Or. 6, 10, 539 P.2d 645 (1975); Hartford v. Aetna/Mt. Hood Radio, 270 Or. 226, 229, 527 P.2d 406 (1974).

Farmers' first and primary assignment is that the trial court erred in ruling that the contamination exclusion did not apply to the losses to the house caused by a methamphetamine operation. The insurance policy covers "accidental direct physical loss" to the premises, but excludes, among other things,

" * * * direct or indirect loss from:

" * * * * *

"6. Wear and tear; marring; deterioration; inherent vice; latent defect; mechanical breakdown; rust; mold; wet or dry rot; contamination; smog; smoke from farm smudging or industrial operations; settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceiling; birds, vermin, rodents, insects or domestic animals." (Emphasis in original.)

In Largent v. State Farm Fire & Cas. Co., 116 Or.App. 595, 842 P.2d 445 (1992), rev. den. 316 Or. 528, 854 P.2d 940 (1993), we interpreted an almost identical exclusion and held that it did not exclude from coverage damage caused by an illegal methamphetamine operation. We are not persuaded by Farmers' argument that the provision in this case is different from that in Largent. Consequently, we affirm the trial court on the contamination issue. See also Shaffer v. State Farm Fire & Casualty Co., 120 Or.App. 70, 852 P.2d 245 (1993).

Farmers' second assignment is that, even if the contamination exclusion does not apply, the court erred in ruling that defendant's losses caused by odor from the methamphetamine "cooking" constituted "direct physical loss" within the meaning of the policy. We understand Farmers' argument to be two-fold. First, odor is not "physical." Second, even if it is, defendant is not entitled to recover the cost of removing it, because that cost is not a direct physical loss. We reject both arguments. On the first point, the trial court made a finding that "a pervasive odor persists in the house." We conclude that odor was "physical," because it damaged the house. See Ream v. Keen, 314 Or. 370, 372, 838 P.2d 1073 (1992); Davis v. Georgia-Pacific, 251 Or. 239, 242, 445 P.2d 481 (1968); Martin v. Reynolds Metals Co., 221 Or. 86, 89, 342 P.2d 790 (1959), cert. den. 362 U.S. 918, 80 S.Ct. 672, 4 L.Ed.2d 739 (1960).

On the second point, Farmers relies on Wyoming Sawmills, Inc. v. Transportation Ins. Co., 282 Or. 401, 578 P.2d 1253 (1978). There, a lumber manufacturer sold a lumber company defective 2 X 4 studs that were used in a building. After settling the lumber company's claim against it, the manufacturer sued its insurer, under a general liability policy, to recover labor expenses for removing and replacing the defective studs. The insurer denied liability, relying on the policy language that it was only liable for "property damage," which was defined, among other things, as "physical injury to or destruction of tangible property * * *." 282 Or. at 404, 578 P.2d 1253. It argued that "the property damage that is covered by the policy is damage occasioned by the defective studs to other property, i.e., the balance of the building, and that the [evidence does] not demonstrate that the labor expense incurred was occasioned by the repair of such damages." 282 Or. at 405, 578 P.2d 1253. The Supreme Court agreed:

"The present policy defines property damages as 'physical injury to * * * tangible property.' * * * The inclusion of this word ['physical'] negates any possibility that the policy was intended to include 'consequential or intangible damage,' such as depreciation in value, within the term 'property damage.' The intention to exclude such coverage can be the only reason for the addition of the words. As a result, in the absence of a showing that any physical damage was caused to the rest of the building by the defective studs and that the labor cost was for the rectification of any such damage, plaintiff cannot recover." 282 Or. at 406, 578 P.2d 1253. (First emphasis in original; second supplied; footnote omitted.)

This case is different. There is evidence that the house was physically damaged by the odor that persisted in it. The cost of removing that odor was a direct rectification of the problem. Wyoming Sawmills thus is not directly applicable here. To the extent that it has any relevance, it supports the conclusion that the removal cost is a direct physical loss. ⁴

We find that Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34 437 P.2d 52 (1968), on which the trial court relied, is on point and persuasive. There, the insurance policy insured a church building against "all other risks of direct physical loss * * *." 165 Colo. at 37, 437 P.2d 52. The building was closed because gasoline and vapors had "infiltrated and contaminated the foundation and halls and rooms of the church building." 165 Colo. at 37, 437 P.2d 52. The insured sued the insurer to recover the cost of remedying the infiltration and contamination problem. The court expressly rejected the insurer's characterization that the loss was simply a "loss of use," and held that it was "a direct physical loss" within the meaning of the policy. 165 Colo. at 40, 437 P.2d 52. Similarly, here the odor produced by the methamphetamine lab had infiltrated the house. The cost of removing the odor is a direct physical loss.

Farmers' third assignment is that the trial court erred in holding that the insurance policy covered damages to defendant's personal property caused by the methamphetamine operation. The policy provides, in part:

"We insure for accidental direct physical loss to property described in Coverage C [Personal Property], * * * caused only by these perils:

" * * * * *

"7. Smoke, if loss is sudden and accidental." ⁵

Farmers argues that the amalgam method of manufacturing methamphetamine produces only vapor and that vapor does not constitute smoke within the meaning of the policy. The trial court ruled below, as a matter of law, that smoke includes vapor. Cf. Stuart v. Occidental Life Ins. Co., 156 Or. 522, 68 P.2d 1037 (1937); K & Lee Corp. v. Scottsdale Ins. Co., 769 F.Supp. 870, 873 (E.D.Pa.1991), aff'd, 953 F.2d 1380 (3d Cir.1992); Capital Bank & Trust Co. v. Equitable Life Assur. Soc. of U.S., 542 So.2d 494 (La.1989); contra Henri Food Products Co. v. Home Ins. Co., 474 F.Supp. 889 (E.D.Wis.1979). We need not decide whether the court was correct, because there is evidence of smoke, even under the definition offered by Farmers.

According to Barnes, an expert called by Farmers, smoke is defined as "vapors and a particulate matter" or as a "dispersion of a particulate matter in a vapor." The trial court found that "that seems to be what was produced by the meth[amphetamine] cooking" in this case. There is evidence to support that finding. Pixler, the tenant who rented the house, testified that he saw smoke in the room when the...