One of the ongoing issues in California residential construction lawsuits is whether a real estate developer is entitled to a defense under broad form additional insured endorsements that were issued on behalf of subcontractors of the developer. In Pulte Home Corporation v. American Safety Indemnity Company (2017) WL 3725045, the Court of Appeal ruled that an insurer, American Safety Indemnity Company (“American Safety”), was liable to developer Pulte Home Corporation (“Pulte Home”) based upon additional insured endorsements issued in regard to several sequential, comprehensive general liability insurance policies which were issued to three subcontractors of Pulte Home during the time period from 2003 to 2006.
In the Pulte Home litigation, groups of homeowners in two residential developments sued Pulte Home for damages in separate construction defects lawsuits. Pulte Home tendered its defense based upon additional insured endorsements issued on behalf of three subcontractors. The American Safety policies provided coverage for “property damage” caused by an “occurrence” and contained a number of fairly standard provisions as to work product exclusions1. Each subcontract specified that Pulte Home was to be named as an additional insured on the subcontractor’s general liability policy by having the insurance carrier issue a “CGL-2010 Endorsement, Additional Insured-Endorsement Edition date 10/93, or its equivalent as determined by Pulte [Home].”
American Safety declined to provide Pulte Home with a defense and Pulte Home filed a separate action asserting that the additional insured endorsements afforded it a right to a defense in the construction defect lawsuits. The Trial Court granted summary
1 Occurrence” was defined as an accident, “including continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” included: “a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.” The policies included “products-completed operations” coverage. The definition of “products—completed operations hazard,” included all property damage occurring away from the insured’s premises, “arising out of ‘your product’ or ‘your work[.]’ ” The term “your work” was defined as: “(a) Work or operations performed by you or on your behalf, and (b) Materials, parts or equipment furnished in connection with such work or operations.” “Your work” was defined to include warranties as to fitness and quality.
judgment ruling, as a matter of law, that a duty to defend was owed under at least one of the policies. In that regard, the Trial Court found that, as of the time of tender, Pulte Home was potentially exposed to liability for work performed on the homes by the subcontractors on or after the effective date of the additional insured endorsements. The Trial Court also found no triable issues as to application of the “work product” exclusions. Rather, the Trial Court found that the subcontractors’ policies provided coverage for completed operations and that the additional insured endorsements did not exclude that coverage. The Trial Court ruled that American Safety breached its duty to defend because it could not effectively exclude possible coverage under the policies and that American Safety had acted in bad faith in denying the tenders. During a later phase of trial, the Trial Court awarded punitive damages and attorney's fees under Brandt v. Superior Court (1985) 37 Cal.3d 813 (California Supreme Court holding that attorney's fees are recoverable as compensatory damages where attributable to counsel's efforts in obtaining rejected amounts due under an insurance contract).
The Court of Appeal affirmed, save for the award of attorney's fees. In its ruling, the Court of Appeal agreed with the Trial Court that American Safety’s denial of coverage was unreasonable. The Court of Appeal ruled that even fairly general allegations of damage and a rough time frame in which the damages occurred (within the past 10 years) was sufficient to prove timing of loss. The Court of Appeal also ruled that the completed operations exclusion could be negated by the developer’s reasonable expectations of coverage. The Court of Appeal further ruled that the definitions and exclusions dealing with “your work” did not bar the duty to defend in the subject cases.
It should be noted that a federal court in Pulte Home Corp. v. American Safety Indemnity Co. (2017) WL 4050347, applying Georgia law, just reached a different conclusion, albeit applying Georgia state law.
In any event, the Court of Appeal's rulings are significant, or at least potentially significant, insofar as there is a broad ruling as to the potential for coverage regarding additional insureds and the duty to defend under additional insured endorsements. It is to be expected that real estate developers may insist on an immediate defense in a construction defect case from any insurer which has provided a broad form additional insured endorsement.
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