HNRK Coverage Corner

A recent opinion out of the District of Oregon analyzed a “care, custody, or control” exclusion, among others, in assessing whether an insurer must defend a property manager in a suit arising from a fire at a vacation home maintained by the policyholder.  In finding for the insured, the Court’s decision highlights a broad duty to defend where the allegations in the underlying complaint could establish any potential for an injury covered by the policy.

In Colony Insurance Co. v. Vacasa LLC, Magistrate Judge Stacie F. Beckerman held that Colony Insurance Company (“Colony”) had a duty to defend Vacasa LLC (“Vacasa”) in an underlying California property damage lawsuit—rejecting Colony’s reliance on a number of exclusions in its policy.

Background

In Vacasa, the owners of a vacation home entered into a Vacation Rental Services (“VRS”) Agreement with Vacasa, a management company, for maintenance, repairs and other services for the home.  The VRS Agreement stated that Vacasa would provide “vacation rental services for a property located at a California address but defined as ‘the [h]ome.’”  According to the owners, a Vacasa subcontractor caused a fire at the property while cleaning when she used combustible cleaning fluid in the oven.  The fluid allegedly flowed into the oven vents and ignited, causing a fire that resulted in  $1.5 million in property damage. 

The property owners (and their insurer) sued Vacasa, and Vacasa tendered the suit to Colony.  In response, Colony denied coverage and then sued in federal court for a declaratory judgment that it owed neither defense nor indemnity under its commercial general liability policy.  The court bifurcated briefing on the duty to defend and duty to indemnify. The court’s recent decision addressed only the parties’ cross-motions for summary judgment on the duty to defend.   

In arguing against coverage, Colony focused on four policy exclusions: “care, custody, or control”; “ongoing operations”; “work performed”; and a “Real Estate Property Management” (“REPM”) endorsement.  The court addressed these policy terms against the backdrop of two familiar rules: one, Colony had the burden of proving noncoverage—i.e., that the exclusion applied—by a preponderance of the evidence; and two, when a court considers an insurer’s alleged duty to defend, it is guided by the allegations in the complaint of the underlying suit (the “four-corners” rule).

Care, Custody, or Control

The Colony policy excluded coverage for “property damage” to “personal property in the care, custody or control of the insured.”  Colony argued that Vacasa’s management of the rental home placed the property within its “care, custody or control.”  The court disagreed, noting that Oregon precedent requires that the insured have complete dominion and the legal right to control the damaged property before the exclusion applies.  Because the underlying complaint did not allege facts establishing such control and could also reasonably be read to encompass property that was outside of what Vacasa had the authority to manage under the VRS Agreement—including, for example, undefined “other structures” listed as damaged in the complaint—the court held that Colony had not met its burden of showing this exclusion operated to bar coverage.

“Ongoing Operations” and “Work Performed”

The court next considered “ongoing operations” and “work performed” exclusions in the policy.  The ongoing operations exclusion barred coverage for property damage to “that particular part of real property on which [the insured is] performing operations.”  And the “work performed” exclusion barred coverage for property damage to “that particular part of any property that must be restored, repaired or replaced because [the insured’s] work was incorrectly performed on it.” 

The court held that the phrase “that particular part” was ambiguous because each party offered a plausible interpretation.  Colony argued that the damage in this case arose solely from Vacasa’s operations at the managed property, but the court found that the record did not establish that all claimed damage solely occurred on “that particular part” of property that the maid was working on. 

The court focused on the fact that the complaint included allegations of damages to undefined structures on the land of the homeowners, which made it impossible for the court to determine whether those other structures bore relation to the maid’s work or to Vacasa’s “vacation rental services” of the “home,” under the language of the VRS Agreement.  Because ambiguities in insurance contracts are construed in the insureds’ favor under Oregon law, the court denied Colony’s summary judgment on those exclusions.

The REPM Endorsement

Finally, the court rejected Colony’s REPM argument for the same reasons as the “ongoing operations” and “work performed” exclusions.  The REPM endorsement excludes coverage for damage to “[p]roperty you operate or manage or as to which you act as agent for the collection of rents or in any other supervisory capacity.”  Colony argued that the endorsement relieved it of coverage because Vacasa was managing the property at the time of the fire and was the homeowners’ agent for rent collection and housekeeping.  The court found that Colony failed to demonstrate that the VRS Agreement encompassed the undefined other structures on the property, that the homeowners authorized Vacasa and guests to use the entirety of the property, or that the homeowners prevented Vacasa and guests from accessing or otherwise reserved parts of the property for their own purposes.

The Colony decision is encouraging for policyholders seeking to trigger their insurer’s duty to defend in the face of exclusions that might appear to remove coverage for a lawsuit.  Insurers that seek declaratory judgments that they have no duty to defend may find themselves on the hook where a complaint’s allegations could potentially provide a basis for damages covered by the policy.