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Property policy’s contaminants exclusion bars coverage for Oregon tenant’s methamphetamine usage residue

7/25/24

By: P. Betty Su

On June 5, 2024, in Lockner v. Farmers Ins. Co. of Oregon, 333 Or. Ct. App. 27 (2024), Case No. A178057, the Court of Appeals of Oregon decided that a landlord’s “all-risk” property policy did not cover claims of damage resulting from a tenant’s drug-use. In reaching its conclusion, the court decided that a tenant’s personal methamphetamine usage did not constitute vandalism such that the policy’s vandalism exclusion did not preclude coverage. The court also ruled that the policy’s contaminants exclusion precluded coverage for the costs to remove the residue from methamphetamine usage.  

The landlords sued their insurers Farmers Insurance Company of Oregon seeking costs to remove methamphetamine residue that a tenant discharged into the insured premises through her personal drug use. The policy’s “Losses Insured” section provided that “[Farmers does] not insure for loss either consisting of, or caused directly or indirectly by: . . . 12. Vandalism . . . if the dwelling has been vacant for more than 30 days just before the loss. . . . 13. (f). release, discharge or dispersal of contaminants, pollutants, insecticides, or hazardous gasses or chemicals[.]” 

The court noted that Farmers did not deny coverage under the vandalism exclusion and that the property had not been vacant more than 30 days before the loss, such that even if there was vandalism under this claim, the exclusion would not apply here. Nevertheless, it analyzed whether personal use of methamphetamine is vandalism and concluded it was not. The court focused on the intent behind the act rather than the destructive result and relied on the dictionary definition of vandalism: “willful or malicious destruction or defacement of things of beauty or of public or private property.” The court noted that the record contained no evidence that plaintiffs’ tenant intended to cause damage to the insured dwelling by smoking methamphetamine.

The court remarked that even according to Hatley v. Truck Insurance Exchange, 261 Or. 606, adh’d to on reh’g, 261 Or. 606 (1972), which provides that vandalism includes acts “reasonably certain or likely to result in damage,” there is in this case “no evidence that smoking methamphetamine was an act that plaintiffs’ tenant knew or should have known was likely to cause property damage.” Therefore, the vandalism exclusion did not preclude coverage for this claim. 

However, this policy’s contaminants exclusion did apply to this loss. Notably, the court distinguished this case from Largent v. State Farm Fire & Casualty Co., 116 Or. Ct. App. 595 (1992), in which a court held that a contamination exclusion did not apply to damage from a tenant’s production of methamphetamine. The exclusion in Largent was longer, and the court interpreted it in context to emphasize “wear and tear” situations. The Largent exclusion excluded losses “consisting of, or directly and immediately caused by . . . ‘wear and tear; marring; deterioration; inherent vice; latent defect; mechanical breakdown; rust; mold; wet or dry rot; contamination; smog, smoke from agricultural smudging or industrial operations; settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings; birds, vermin, rodents, insects or domestic animals.’” 

The court noted these were all gradual processes. In contrast, the Farmers policy’s contaminants exclusion is worded more like a pollution exclusion that stands alone, without reference to other terms that denote gradual processes, such as “wear and tear.” See, e.g., Fleming v. United Services Auto. Ass’n, 144 Or. Ct. App. 1 (1996), rev’d on other grounds, 329 Or. 449 (1999). 

Applied to the facts, the stand-alone contaminants exclusion barred coverage for the Plaintiffs’ costs to remove the methamphetamine residue, which were contaminants the tenant released into the premises. 

The court affirmed the trial court’s ruling that Farmers was entitled to prevail as a matter of law. This case provides some fundamental lessons useful for other coverage matters. It highlights how Oregon courts closely read policy provisions in context, with each word or clause weighing on others in proximity. The same or substantially similar terms can take on meanings different enough to affect the outcome in coverage decisions. In addition, this case shows us not to overlook dictionary definitions when considering undefined policy terms. 

For more information, please contact P. Betty Su at pbetty.su@fmglaw.com or your local FMG attorney.