Hoffman Const. Co. of Alaska v. Fred S. James & Co. of Oregon

• Citation: 836 P.2d 703,313 Or. 464
• Parties: HOFFMAN CONSTRUCTION COMPANY OF ALASKA, a Foreign corporation, and Hoffman Construction, an Oregon corporation, Petitioners on Review, v. FRED S. JAMES & CO., OF OREGON, an Oregon corporation, Defendant, and Century Indemnity Company a Foreign corporation, Respondent on Review. CC A8901-00240, CA A63379, SC S38053.
• Decision Date: 25 August 1992
• Court: Supreme Court of Oregon

Page 703

836 P.2d 703

313 Or. 464

HOFFMAN CONSTRUCTION COMPANY OF ALASKA, a Foreign

corporation, and Hoffman Construction, an Oregon

corporation, Petitioners on Review, v. FRED S. JAMES & CO., OF OREGON, an Oregon corporation, Defendant, and Century Indemnity Company a Foreign corporation, Respondent on Review.

CC A8901-00240, CA A63379, SC S38053.

Supreme Court of Oregon.

Argued and submitted Nov. 7, 1991.

Decided July 9, 1992.

Reconsideration Denied Aug. 25, 1992.

Thomas H. Tongue, Dunn, Carney, Allen, Higgins & Tongue, Portland, argued the cause and filed the petition, for petitioners on review.

Peter R. Chamberlain, Bodyfelt, Mount, Stroup & Chamberlain, Portland, argued the cause, for respondent on review. With him on the response was Richard A. Lee, Portland.

Before CARSON, C.J., and PETERSON, GILLETTE, VAN HOOMISSEN, FADELEY and GRABER, JJ.

GILLETTE, Justice.

This case involves the extent of liability of an insurer under certain contractual limitations in an "umbrella" liability insurance policy, when one of the primary insurers becomes insolvent. ¹ Plaintiffs brought the action seeking a declaratory judgment that they are entitled to recover under an umbrella liability insurance policy issued by defendant Century Insurance Company. Both parties ² moved for summary judgment; the circuit court granted defendant's motion and denied plaintiffs'. ³ The Court of Appeals affirmed. Hoffman Construction Co. v. Fred S. James & Co., 106 Or.App. 329, 807 P.2d 808 (1991). We also affirm.

The material facts are not in dispute. Defendant sold plaintiffs a liability insurance policy that provided that defendant would, in the event of a loss covered by the policy, pay the excess of the amount of the loss over the "amount recoverable" under certain underlying insurance policies. There were two underlying insurance policies in this case: (1) The bottom layer, a policy for $50,000 with Seaboard Surety Company (Seaboard); and (2) the second layer, a policy for $450,000 with Holland-America Insurance Company (Holland-America). Plaintiffs suffered a covered loss in the amount of $375,000. Seaboard paid the first $50,000 of the loss. Holland-America became insolvent, however, and did not pay any of plaintiffs' loss. Plaintiffs then made a demand on defendant for the $325,000 that could not be recovered from Holland-America. Defendant denied liability; the present declaratory judgment action followed.

The insurance policy provides:

"COVERAGE AGREEMENTS

"I. COVERAGE. The Company hereby agrees, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify the Insured for all sums which the Insured shall be obligated to pay by reason of liability * * *.

"II. LIMIT OF LIABILITY. The company shall only be liable for the ultimate net loss the excess of either

"(a) the amount recoverable under the underlying insurances as set out in Item 7 of the Declarations, or

"(b) the amount of the retained limit stated in Item 4 of the Declarations in respect of each occurrence not covered by said underlying insurances,

"(hereinafter called the 'underlying limits'):

"and then only up to a further limit as stated in Item 5 of the Declarations in respect of each occurrence--subject to a limit as stated in Item 6 of the Declarations in the aggregate for each annual period during the currency of this policy, commencing from the effective date and arising out of any hazard for which an aggregate limit of liability applies in the underlying policies scheduled or listed herein. In the event of reduction or exhaustion of the aggregate limits of liability under said underlying insurances by reason of payment of claims in respect of occurrences occurring during the period of this policy, this policy, subject to all the terms, conditions and definitions hereof, shall

"(1) in the event of reduction pay the excess of the reduced underlying limit;

"(2) in the event of exhaustion continue in force as underlying insurance.

" * * * * *

"CONDITIONS

"THIS POLICY IS SUBJECT TO THE FOLLOWING CONDITIONS:

" * * * * *

"J. LOSS PAYABLE. Liability under this policy with respect to any occurrence shall not attach unless and until the Insured, or the Insured's underlying insurer, shall have paid the amount of the underlying limits on account of such occurrence. * * *

" * * * * *

"L. OTHER INSURANCE. If other valid and collectible insurance, whether or not scheduled hereunder, which is written by another insurer is available to the Insured covering a loss also covered by this policy, other than insurance that is in excess of this policy, the insurance afforded by this policy shall be in excess of and shall not contribute with such other insurance. * * *

" * * * * *

"Q. MAINTENANCE OF UNDERLYING INSURANCES. It is a condition of this policy that the underlying insurances as set out in Item 7 of the Declarations shall be maintained in full effect during the currency of this policy except for any reduction of the aggregate limit or limits applicable thereto solely by payment of claims in respect of occurrences occurring during the period of this policy. Failure of the Insured to comply with the foregoing shall not invalidate this policy but in the event of such failure, the Company shall only be liable to the same extent as it would have been had the Insured complied."

(Emphasis added.)

In their motions for summary judgment, plaintiffs and defendant offered competing interpretations of the phrase "amount recoverable under the underlying insurances" in part II(a) ("LIMIT OF LIABILITY") of the policy. Plaintiffs argued that the phrase means that defendant is required to pay for amounts that an insured is not able to recover from an underlying insurer like Holland-America. Defendant argued that the phrase means that plaintiffs are entitled to recover only for any portion of the net loss that exceeds the limits of the underlying policies.

The circuit court held that defendant is required to "drop down" ⁴ and provide coverage to plaintiffs only with respect to "occurrences" described in paragraph II(b) of the policy and that the insolvency of an underlying insurer is not such an "occurrence." The Court of Appeals affirmed, although on grounds different than those relied on by the trial court. The majority rejected plaintiffs' suggested interpretation, because it found that interpretation to be inconsistent with other provisions of the policy. Hoffman Construction Co. v. Fred S. James & Co., supra, 106 Or.App. at 333, 807 P.2d 808. The dissent found no such inconsistency. It would have held that the policy's reference, in Condition "L," to other "collectible insurance" affirmatively established that defendant was obligated to drop down if the underlying insurance were to prove to be uncollectible or unrecoverable. Id. at 335, 807 P.2d 808 (Riggs, J., dissenting).

Resolution of this case turns on a question of law, the interpretation of the insurance policy. In any such effort, "[t]he primary and governing rule of the construction of insurance contracts is to ascertain the intention of the parties." Totten v. New York Life Ins. Co., 298 Or. 765, 770, 696 P.2d 1082 (1985). We determine the intention of the parties based on the terms and conditions of the insurance policy. ORS 742.016 ("Except as provided in ORS 742.043 [relating to oral binders], every contract of insurance shall be construed according to the terms and conditions of the policy."). The insurance policy in the present case does not define the crucial term, "amount recoverable." We are therefore required to give that term meaning in the context of the present dispute.

Both plaintiffs and defendant offer plain meaning interpretations, based on dictionary definitions, of "amount recoverable." Plaintiffs argue that "amount recoverable" means the amount "able to be recovered," i.e., the amount that plaintiffs actually were able to get from their primary insurance carriers. Defendant argues that "amount recoverable" means the amount "capable of recovering," i.e., the amount that plaintiffs would have been able to recover from their prime carriers had not insolvency intervened. Recognizing that both propounded definitions are at least plausible, plaintiffs argue further that, because the term "amount recoverable" is susceptible to two meanings, it is "ambiguous" and, therefore, this court should adopt plaintiffs' suggested interpretation for that term under the rule that ambiguous terms contained within an insurance policy are to be construed against the insurer, who drafted the policy.

For a term to be ambiguous in a sense that justifies resort to the foregoing rule, however, there needs to be more than a showing of two plausible interpretations; given the breadth and flexibility of the English language, the task of suggesting plausible alternative meanings is no challenge to capable counsel. Competing plausible interpretations simply establish ambiguity that will require some interpretive act by the court. This triggers a series of analytical steps, any one of which may resolve the ambiguity. The rule on which plaintiffs rely is the last of these steps. In other words, a term is ambiguous in a sense that justifies application of the rule of construction against the insurer only if two or more plausible interpretations of that term withstand scrutiny, i.e., continues to be reasonable, after the interpretations are examined in the light of, among other things, the particular context in which that term is used in the policy and the broader context of the policy as a whole. See, e.g., Denton v. International Health & Life, 270 Or. 444, 450, 528 P.2d 546 (1974) ("all parts and clauses [of an insurance contract] must be construed to determine if and how far one clause is modified, limited or controlled by others"); Fisher v. California Insurance Co., 236 Or. 376, 380, 388 P.2d 441 (1964) ("Contracts, including insurance contracts, are to be construed as a whole, not as a...