- California Sanctions an Insurer’s Denial of Coverage for “Completed Operations”
- October 6, 2017 | Author: William F. Bresee
- Law Firm: Leech Tishman - Pasadena Office
On August 30, 2017, the California Court of Appeals (Fourth District) concluded that language of an insurance carrier’s additional insured endorsements on the underlying insurance policies created ambiguities on the potential for coverage in construction defect lawsuits, thus requiring it to provide the additional insured with a defense to them, and concluded further that the insurer’s failure to provide coverage was unreasonable and in bad faith in light of substantial evidence. This is the first time in a published opinion that a California appellate court directly addressed whether the ongoing operations limitation in additional insured endorsements precludes completed operations coverage. Pulte Home Corp. v. American Safety Indemnity Co., Cal.Ct.App. (4th Dist.), Docket No. D070478 (filed 8/30/17).
Pulte Home Corp. was the general contractor and developer for two residential housing projects on which construction began in 2003; the project units being sold in 2005 and 2006. Pulte had subcontracted to others some of the work and required its subcontractors to name it as an additional insured on their policies for completed operations. American Safety, one of the insurers on the projects, issued additional insured endorsements to subcontractors it insured on substantially similar commercial general liability forms, however, the language of the endorsements differed slightly.
One endorsement provided coverage for liability arising out of the subcontractor’s work which is “ongoing.” Another provided coverage for liability arising out of the insured subcontractor’s work “only as respects ongoing operations” performed by the subcontractor. And a third provided coverage for liability arising out of the insured subcontractor’s work and only for “ongoing operations performed” by the subcontractor. Each policy deemed the named insured’s work complete when:
a. the work called for in the contract is complete;
b. the work at a particular job site is complete; or
c. the work is put to its intended use.
Some six to seven years later, construction defect lawsuits were filed against Pulte by homeowners in each of the housing projects. Pulte tendered defense of the lawsuits to American Safety. American Safety denied Pulte’s tenders, the denial being in part on the grounds that coverage under the additional insured endorsements was for “ongoing operations,” whereas the lawsuits alleged liability arising out of “completed operations.” Pulte sued American Safety for bad faith. The trial court determined that the policies were ambiguous and therefore did not effectively preclude coverage for completed operations. The trial court concluded that American Safety’s denial of coverage was in bad faith because it had disregarded several unpublished federal court decisions that had reached a contrary position to that taken by American Safety,… including one against American Safety itself… and awarded Pulte compensatory damages and punitive damages, as well as attorneys’ fees under Brandt v. Superior Court, 37 Cal.3d 813 (1985). Affirmed [and reversed in part and remanded as to the Brandt attorney fee award since the fees award was based on a post-trial modification of the attorney’s contract with his client, the insured, changing it from a contingency fee to hourly rate, to the insurer’s disadvantage].
The appellate court ruled that the mere linking of the phrase “ongoing operations” to the liability arising out of the “your work’” clause did not explicitly restrict coverage to ongoing operations. Relying upon Pardee Construction Co. v. Insurance Company of the West (77 Cal.App.4th 1340 (2000)), which addressed the “commercial reality of the CGL market” and recognized that damage from a subcontractor’s work may not arise for years — thus requiring that, to preclude coverage, endorsements need to include language to “expressly restrict coverage for an additional insured” — the court explained that if the “ongoing operations” language was intended by American Safety to preclude coverage for “completed operations,” the endorsements had to expressly state that coverage was limited to claims arising out of work performed during the policy period (noting that the property damage could have occurred while the subcontractor’s operations were ongoing but after the homes had been sold and, since the property damage became evident after the work was completed, the insurer was placed on sufficient notice that some of the subcontractors’ work could have been ongoing and/or completed during its policy periods).
The Court of Appeal also focused attention on the subcontract requirement that Pulte be named as an additional insured for completed operations, stating that, when American Safety issued the endorsements and when Pulte’s tendered defense of the construction defect lawsuits, it was aware that the subcontracts obligated the subcontractors to name Pulte as an additional insured for completed operations. Against this background, the court ruled that as American Safety knew this, it should have taken into account Pulte’s reasonable expectations of coverage in interpreting its policy.Pulte makes clear that insurers intending to limit coverage to “ongoing operations” must ensure that their endorsements contain clear and unambiguous language to that effect. Additionally, if a subcontractor’s insurer knows of the subcontractor’s contractual obligation to add the general contractor (or owner or developer) to its comprehensive general insurance policies as an additional insured for completed operations, the insurer must consider the reasonable expectations of coverage of the additional insured when evaluating a tender of defense under the policy.