By: Jamison McCune
In Phillips v. State Farm Fire & Casualty Company, 302 Or App 500 (2020), the Oregon Court of Appeals held a landlord’s claim for property damage caused by a tenant’s pets was not covered under the landlord’s insurance policy. Phillips is important for both insurers and policyholders because it shows how Oregon courts interpret coverage exclusions in an insurance policy. The decision also suggests how judges may apply such exclusions in future cases, albeit with potentially varying results.
I. The Coverage Dispute
The Phillips case arose from a nightmare scenario for a landlord—a tenant living in a rental home with over 100 cats. After the landlord evicted the tenant, the landlord submitted a claim to her insurer, State Farm, for property damage to the home. The claimed damage included an overpowering cat waste odor throughout the home that required over $150,000 in remediation costs. State Farm denied the claim under a domestic animal exclusion in the policy. By its terms, the domestic animal exclusion eliminated coverage for damage “directly and immediately” caused by “domestic animals.”
The landlord filed suit alleging State Farm breached the policy by failing to cover the remediation costs. State Farm moved for summary judgment based on the domestic animal exclusion, and the trial court granted State Farm’s motion. The landlord appealed, arguing the domestic animal exclusion did not apply because the cat waste odor was caused by the tenant’s actions (or inactions), as opposed to the cats. The landlord argued the tenant was negligent in failing to clean up the cat waste, which then caused the pervasive odor.
In the alternative, the landlord argued there was coverage under the policy’s ensuing loss provision. The ensuing loss provision stated, in effect, that State Farm would “insure for any ensuing loss” from domestic animals unless the loss was “itself a Loss Not Insured by this Section.” The landlord argued that even if there was no coverage for the cat waste under the domestic animal exclusion, the resulting odor-infested damaged property should still be covered as an ensuing loss.
II. The Court’s Ruling
The Court of Appeals rejected both of the landlord’s arguments. The court started by noting there was no dispute cats are domestic animals or that the tenant’s cats left waste in the home. The court reasoned the domestic animal exclusion was unambiguous and determined the cat waste odor was directly and immediately caused by the tenant’s cats. The court also concluded that the ensuing loss provision did not restore coverage for the resulting odor from the cat waste. While the court acknowledged the tenant’s failure to clean up the cat waste may have exacerbated the problem, the cats were still the initial source of the waste. Consequently, the court held there was no coverage for the landlord’s claim.
The Court of Appeals’ decision was not unanimous, however. Judge Steven Powers wrote a dissenting opinion, contending there was a factual question regarding whether the tenant caused the odor-infested property by failing to clean up the waste. Judge Powers noted the landlord was prepared to offer expert testimony that cat waste turns into vapor that permeates floors, walls, and ceilings if it is not cleaned up within a reasonable time. Judge Powers also noted the landlord was not seeking compensation for the cost of cleaning up the cat waste itself. The landlord was seeking coverage for the lingering odor in the home, which the landlord contended resulted from the tenant’s failure to promptly clean up the waste. In light of these factual disputes, Judge Powers concluded summary judgment was inappropriate.
The Phillips decision is a mixed bag for insurers and policyholders. Although State Farm won at trial and on appeal, insurers should not rely on the decision too heavily. As illustrated by the dissent, one criticism of the majority opinion is that it did not meaningfully address the landlord’s evidence and factual arguments. For example, the majority did not address the expert testimony the landlord planned to offer at trial that the tenant’s inactions caused the odor to linger and cause damage to the home. The majority’s reason for disregarding this expert testimony is unclear from the opinion, and the proffered testimony is not even mentioned.
The majority opinion could also be criticized for giving short shrift to the policy’s ensuing loss provision. Ensuing loss provisions typically operate to provide coverage where an excluded loss (cat waste) causes a subsequent loss that would otherwise be covered under the policy (lingering odor damage to the home). In Phillips, the majority did not analyze the text of the ensuing loss provision. Instead, the court summarily disposed of the landlord’s ensuing loss argument in two sentences by concluding that the cat waste and the odor in the home were one and the same for coverage purposes. How the majority could reach this conclusion as a matter of law is questionable,1 particularly when considering how the landlord pleaded and argued her claim at trial and on appeal.
In light of these potential flaws in the majority’s decision, Judge Powers’ dissent offers arguably the more persuasive opinion. While it is undisputed that the interpretation of insurance policy language is a question of law for the court, the specific cause of property damage may still present a factual question for the jury to decide. As shown by the Phillips case, judges can reach different conclusions regarding causation, especially in cases where the policyholder presents novel arguments in support of coverage.
1 For example, let’s assume for purposes of discussion that the cats only left waste on the ground floor of the house and that the lingering odor caused damage to the upstairs flooring. If the landlord then sought coverage for repairing the property damage to the upstairs flooring, walls and ceiling, where the cats did not leave waste, can the cat waste and resulting odor truly be categorized as one loss?