Publications
ZRZ Realty: Allocating the Burden of Proof for an Intentional Acts Exclusion
By: Alexander Williamson, October 2010
On October 14, 2010 the Oregon Supreme Court held in ZRZ Realty Co., et al. v. Beneficial Fire & Casualty Insurance Co., et al. that the burden of proving the application of an “expected or intended” clause in a commercial general liability policy depends on whether the policy incorporates the “expected or intended” term as part of the insuring agreement or whether it exists as an exclusion to coverage otherwise granted by the insuring agreement. In the former case, the insured bears the burden of proving that the bodily injury or property damage was not “expected or intended.” In the latter case, the insurer bears the burden of proving the damage was expected or intended.
The insureds in ZRZ Realty were a group of companies that operated a ship-breaking facility on the Willamette River that had released pollutants onto land and into ground and surface waters. After learning that they could be held liable for cleanup costs, the insureds tendered to their insurers. Several of the insurers rejected the tenders, and asserted that their policies did not provide coverage because the alleged property damage was “expected or intended” by the insureds.
There were two types of policies at issue in the case. First, “implied fortuity” policies, that did not expressly require that an occurrence be unexpected or unintended, but into which the trial court read a fortuity limitation as a matter of public policy. Second, “express fortuity” policies, that, in contrast, provided coverage for damage caused by an “occurrence,” which the policy defined as an “accident…which unexpectedly or unintentionally results in…property damage.”
The insurers argued that where the “expected or intended” language is incorporated into the initial grant of coverage, the burden of proof rests with the insured. In contrast, when the language is an exclusion, the insurer bears the burden of proof. The Oregon Supreme Court agreed with the insurers’ position, noting that to hold otherwise would require the Court to ignore the plain language of the policy and “rewrite the terms of the parties’ agreement, something that courts ordinarily lack authority to do.” Thus, where “the parties structure their agreement to provide limited coverage” for only unexpected and unintended damage, then the burden is “on the insured to prove that the event that triggered the loss came within the scope of that coverage.” Where, however, the “expected or intended” clause is phrased as an exclusion, the burden of proof rests with the insurer.
The insurers also argued that, even if the insurers would ordinarily have the burden of proving that a loss was expected or intended, the insureds assumed that burden because they were the party that initiated the declaratory action to determine coverage. The Court rejected this argument as well. In so doing, the court noted that there are two distinct types of declaratory actions. First, where the filing party would otherwise bear the burden of proof, there is no basis for reallocating the burden of proof simply because the dispute is being resolved via a declaratory action. Where, however, the parties were transposed (i.e. the erstwhile defendant files the declaratory action against the plaintiff), there is a split of authority as to whether the filing of a declaratory action complaint will shift that burden to the filing party. The Court concluded that the parties were not transposed in this case, and consequently there was no reason to reallocate the burdens of proof. In other words, the Insureds’ decision to add a claim for declaratory relief to their breach of contract complaint did not modify the parties’ respective burdens of proof.