No “Occurrence” Found Where Contractor Intentionally Performed Defective Work With The Hope It Would Not Cause Property Damage

By and on February 6, 2017
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The California Court of Appeal, Fourth Appellate District, affirmed in part and reversed in part an order awarding an insurance company its $1 million policy limits used to settle a construction defect claim on behalf of an insured general contractor.

In Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), a building owner, JSL Properties, LLC (“JSL”), and a developer, D.B.O. Development No. 28 (“DBO”), sued a general contractor, Moorefield Construction, Inc. (“Moorefield”), for floor leaks which occurred at a Best Buy electronics store between 2003 and 2009. In its second amended complaint, JSL claimed that Moorefield had defectively installed flooring on top of a concrete slab despite knowing that the existing slab contained excessive moisture levels. Navigators Specialty Insurance Company (“Navigators”) defended Moorefield in the action subject to a reservation of rights under a commercial general liability insurance policy. The litigation settled for $1,310,000 of which Navigators contributed its $1 million policy limits.

Navigators filed a declaratory relief lawsuit against Moorefield seeking a declaration that it had no duty to defend or indemnify the general contractor in the underlying construction defect action. Following a bench trial, the trial court issued a decision in favor of Navigators and against Moorefield. The trial court found that the flooring defects did not constitute an “occurrence” or accident under the policy. The trial court also held that Navigators had no duty to make any payments under the “supplementary payments” portion of the policy. Navigators received an award which required Moorefield to reimburse Navigators its $1 million policy limits contributed to settle claim.

The Court of Appeal agreed with the trial court that Navigators had no duty to indemnify Moorefield in the underlying action. The appellate court found evidence which established that Moorefield knew about the excessive moisture in the concrete slab and that it deliberately installed the flooring despite this known condition. Thus, the Court of Appeal held that no unexpected or unintended event constituted an “occurrence” to trigger an indemnity obligation under the policy. Moorefield and amicus curiae argued that construction defects could not be considered intentional conduct unless the contractor expected or intended its work to be defective and cause property damage. The Court of Appeal rejected that argument by stating, on the record before it, Moorfield knew about and intended to perform defective work with the hope it would not cause property damage. Even though Moorfield did not intend to cause property damage, the insured’s subjective belief was irrelevant.

However, the Court of Appeal reversed the portion of the trial court’s ruling which found that Navigators had no duty to make payments under the “supplementary payments” provision of the policy. The Court of Appeal determined that Navigators owed a duty to pay for attorneys’ fees and costs as part of the settlement because such amounts were recoverable under the construction contract and were awardable as taxed costs in litigation. Although no duty to indemnify existed, the appellate court found that Navigators was obligated to pay “supplementary payments” as part of its broader duty to defend.

The Court of Appeal also found that the trial court had improperly determined that the entire $1 million settlement payment was made for damages, rather than attorneys’ fees. The evidence indicated that JSL and DBO had only incurred $377,000 in damages related to the floor leaks. The appellate court further held that the trial court had committed prejudicial error in placing the burden of proof for this issue on Moorefield. Accordingly, the Court of Appeal remanded the case for a new trial seeking allocation of the settlement payment between damages and attorneys’ fees.

Click here for the opinion.

The opinion in Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

Filed under Commercial General Liability, Construction Defect, Duty to Defend

Insurance Companies Held Liable As Real Parties In Interest After Unsuccessfully Prosecuting Action Under Assigned Contract With Attorneys’ Fees Provision

By and on May 11, 2016
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In Hearn Pacific Corporation v. Second Generation Roofing, Inc. 2016 Cal. App. LEXIS 354 (May 2, 2016), the California Court of Appeal, First Appellate District, reversed an order denying a subcontractor’s motion to add two insurance companies as judgment debtors in an action after the insurers unsuccessfully prosecuted a contractual indemnity claim based upon an assignment of rights under a contract which included an attorneys’ fees provision.

The Court of Appeal determined that the trial court had abused its discretion in refusing to add North American Specialty Insurance Company (“North American”) and RSUI Group, Inc. (“RSUI”) as judgment debtors in a lawsuit under California Code of Civil Procedure section 368.5. The appellate court held that the insurers’ ability to prosecute the action in the insured transferee’s name under the statute did not insulate them from exposure as real parties in interest. The appellate court similarly found that North American and RSUI should be added as judgment debtors even though they only received a partial assignment of rights from their insured.

The Court of Appeal also rejected the trial court’s finding that Insurance Code section 11580 prevented the subcontractor from suing North American and RSUI. Although Insurance Code section 11580 provided certain litigants with a means to sue third-party insurers for policy benefits, the appellate court found that there was no language in the statute which indicated that it provided an exclusive remedy against insurers who had prosecuted assigned rights under a contract. In so ruling, the Court of Appeal partially rejected the Ninth Circuit’s decision in Fireman’s Fund Ins. Co. v. City of Lodi, California (9th Cir. 2002) 302 F.3d 928 which broadly interpreted the statute.

Filed under Commercial General Liability

ERP Exclusion Bars Coverage For Alleged False Imprisonment And Invasive Inspections Of Employees

By and on October 2, 2014
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In Jon Davler, Inc. v. Arch Insurance Company, Case No. B252830 (2014 Cal. App. LEXIS 837), the California Court of Appeal, Second Appellate District, affirmed dismissal of the insured’s coverage action, holding that an Employment-Related Practices (ERP) exclusion in a CGL policy barred coverage for employees’ claims against their employer that a supervisor falsely imprisoned them in a workplace bathroom for invasive inspection purposes under threat of termination.

The complaint alleged that three female employees were forced to enter a workplace restroom and have their undergarments inspected to determine whether they had left a sanitary napkin next to the women’s toilet.  They sued their employer John Davler, Inc. (JDI) and the involved supervisor for false imprisonment and other causes of action.

INSBlog_prisonbarsJDI’s insurer, Arch, declined to defend under a CGL policy which included an ERP exclusion.  The exclusion listed a number of “employment-related” practices, but it did not mention false imprisonment.  JDI filed suit against Arch based on the coverage denial.  The trial court sustained a demurrer by Arch without leave to amend, and this appeal followed.

The Court of Appeal rejected JDI’s arguments that the phrases “such as” and “arising out of” in the ERP exclusion are ambiguous.  “Such as” is not exhaustive, and the court concluded the allegations clearly “arose out of” employment.  The employees allegedly were detained because they were employees, they were following their supervisor’s directive at their place of employment, and she threatened loss of their jobs if they did not comply.

The court also rejected JDI’s argument that there was a structural ambiguity because the policy’s insuring agreement specifically provided coverage for false imprisonment while the ERP exclusion did not explicitly exclude such claims.  The Court of Appeal based its decision on Frank and Freedus v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461 which held a similar exclusion was unambiguous and applied to defamation even though “employment-related practices” were not defined and the insuring agreement explicitly provided coverage for defamation claims.

The Court of Appeal declined to follow Zurich Ins. Co. v. Smart & Final, Inc. (C.D. Cal. 1998) 996 F.Supp. 979, in which the court held a reference to false imprisonment in the insuring agreement but not in the ERP exclusion did create an ambiguity.  The court also concluded Zurich v. Smart & Final is factually distinguishable as the conduct alleged there (interrogation and false imprisonment as a loss prevention tactic) was not clearly employment related.

Filed under Employment-Related Practices Exclusion

Caution: SIRs Will Be Strictly Construed

By and on April 10, 2014

The California Court of Appeal, Fourth Appellate District, parsed an insurer’s defense and indemnity obligations allegedly both subject to a self-insured retention (SIR).  The court held the SIR only precluded an indemnity obligation prior to SIR exhaustion and had no effect on the insurer’s duty to defend.

CON BLOG_home buildAmerican Safety Indemnity Co. v. Admiral Insurance Co. (2013) 220 Cal.App.4th 1, involved typical indemnity and additional insured obligations arising from a homeowners’ suit over bad grading. The homeowners sued the developer, grading subcontractor and certain developer-related entities.  The developer and the developer-related entities tendered their defense to their insurer, Admiral, and the developer pursued additional insured rights under the grader’s policy with American Safety Indemnity Co. (ASIC).

ASIC initially denied the developer’s tender but eventually paid its fees.  The construction defect action settled for $4.9 million and Admiral and ASIC contributed their respective $1 million policy limits to the settlement.

ASIC sued Admiral seeking to recover the cost of defending the developer and related entities.  Admiral contended the developer-related entities had not satisfied its policy’s SIR.  The trial court found Admiral’s duty to defend was independent of the SIR provision.

On Sept. 27, 2013, the appellate court upheld the trial court’s ruling and found that the SIR provision in Admiral’s policy specifically limited its duty to pay “damages” and did not mention its duty to defend.  The appellate court further held that a reasonable insured would expect to receive a defense under a primary policy unless the SIR coverage limitation was clear and conspicuous. The court supported its interpretation of the Admiral policy by comparing the SIR endorsement with the “other insurance” provision, which expressly limited Admiral’s duty to defend.

Click here for the opinion.

Image courtesy of Flickr by Great Valley Center

Filed under Self Insured Retentions