- Pulte Home Corporation v. American Safety Indemnity Co. (4th Dist. Ct. App. 2017) ___Cal. App. 5th ___, 2017 DJDAR 8507, Case No. D070478
- November 7, 2017
Pulte was the general contractor and developer of two housing projects. It entered into subcontracts with Concrete and Frontier for concrete foundations and flatwork. It also entered into a subcontract with Foshay for electrical and waterproofing work. The subcontractors were required to maintain liability insurance naming Pulte as an additional insured. In 2005 and 2006 Pulte began selling the homes. In 2011 and 2013 a group of homeowners filed construction defect lawsuits against Pulte alleging water intrusion. Pulte tendered the defense of the actions to American Safety which had issued policies to the subcontractors and which named Pulte as an additional insured. Pulte was insured "but only with respect to liability arising out of 'your work' which is ongoing and which is performed by the Named Insured for the Additional Insured on or after the effective date of this Endorsement." Other policies changed the language slightly to cover Pulte "but only with respect to liability arising out of 'your work' and only as respects ongoing operations performed by the Named Insured for the Additional Insured on or after" the endorsement's effective date. In other policies, the word "and" was replaced with "but". Finally, under two of the Foshay policies, the additional insured endorsement applied only to liability "arising out of 'your work' which is performed at the project designated above.' This Endorsement applies only to ongoing operations performed by the Named Insured on or after" the endorsement's effective date. Each of the polices also contained the standard work product exclusions. American Safety, relying on this policy language, declined Pulte's tender.
Pulte filed suit against American Safety seeking declaratory relief and alleging breach of contract and bad faith. Pulte sought to recover damages including unreimbursed defense fees, Brandt fees and punitive damages. Pulte and American Safety filed cross motions for summary judgment/summary adjudication. The trial court granted Pulte's motion for summary adjudication as to the Concrete policy, finding that American Safety had a duty to defend. However, American Safety still failed to defend Pulte. The court also denied American Safety's motion, finding that the additional insured endorsements' reference to ongoing operations did not expressly exclude completed operations coverage. Subsequently at trial, the court also determined there was a duty to defend under the Frontier and Foshay policies and ultimately awarded $455,238.45 in contract damages. The trial court next addressed the bad faith claim and found that American Safety's pattern and practice of issuing additional insured endorsements and "then using every conceivable argument to deny coverage, regardless of the merit of the arguments" was unreasonable and amounted to bad faith conduct. As such, the trial court awarded Brandt fees. Finally, the trial court found that American Safety had acted with malice, fraud and oppression and therefore awarded punitive damages based on a 1:1 ratio with the compensatory damage award.
APPELLATE COURT'S RULING
The Court of Appeal first addressed the issue of whether the endorsements required that American Safety provide Pulte with a defense. Citing Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal. App. 4th 1340, the Court of Appeal noted that whether the endorsement will apply to completed operations and extend to the vicarious liability of the developer for such operations depends on the language of the endorsement. The Court of Appeal also noted that when the endorsement is drafted by the insurer, it will be responsible for any ambiguity in the language. Finally, the Court of Appeal noted that the endorsement must be read in light of the definitions and coverage provisions of the policy.
Applying the above legal principles, the Court of Appeal first addressed American Safety's argument that the underlying complaints alleged injury occurring after the dates of purchase by individual home buyers. Therefore, according to American Safety, there were no longer any "ongoing operations" and coverage was not triggered. The appellate court disagreed with this contention noting that, based on the evidence, there was a potential of continuing and progressive damage which began with the alleged defective construction.
Next the Court of Appeal addressed American Safety's contention that its policies did not provide completed operations coverage to the additional insured based on the endorsement which specifically applied only to ongoing operations. The appellate court, in refusing to accept American Safety's position, found the endorsement was ambiguous in that it combined coverage for "your work," which would include completed operations, with the "ongoing operations" language. The Court of Appeal determined that the endorsement failed to expressly limit the time frame for coverage for the additional insured to the time of ongoing operations and did not adequately define "your work" as work being performed now or during the policy term. The Court of Appeal explained that "[f]or purposes of determining a defense duty, the [additional insured endorsements] seem to allow completed operations coverage, based on potential liability that might yet arise from the subcontractors' completed work. Next, the policies add another form of coverage, for 'ongoing operations...on or after the effective date of this Endorsement.' We do not understand that purported 'ongoing' limitation to be clearly undoing a grant of coverage against liability arising from work completed during the effective dates of the AIEs. If the 'ongoing operations' language was meant by American Safety to preclude coverage for completed operations losses, it had to expressly state 'that coverage was limited to claims arising from work performed during the policy period.' (citation.) We cannot say the underlying complaints pleaded zero facts bringing Pulte within potential policy coverage. Assuming there was doubt as to whether the duty to defend existed, it should have been resolved in favor of the additional insureds."
The Court of Appeal then addressed the faulty work exclusions and determined that American Safety had failed to show that all the alleged damage fell within such exclusions. As the court noted, "there was no reliable way shown for determining, at the outset of the construction defect matters, which subcontractors' work had been substandard or whether it had damaged its own or another's adjacent work. As of the time of tender, those claims could have involved damage from one or more types of work done at the projects. The faulty workmanship exclusions did not clearly apply to preclude a duty to defend. (Citation.)"
With respect to the bad faith claim, the trial court cited several instances of conduct which it concluded justified a finding of bad faith on the part of American Safety. For example, there was an apparent strategy on the part of American Safety to pursue its own policy interpretation without guidance by the courts, which it avoided by settling cases. In fact, after an adverse ruling on its policy interpretation in the trial court, American Safety continued to refuse a defense to Pulte and did not file an appellate challenge to that ruling. In addition, American Safety was aware of trial court decisions against its interpretation of ongoing operations. It also knew that at the time it issued the endorsement, the contracts between Pulte and the subcontractors required that Pulte be named as an additional insured, including for completed operations. Thus, American Safety should have taken into account the reasonable expectations of Pulte but failed to do so. Finally, American Safety unjustifiably ignored the possibility of an occurrence during the insured's ongoing operations.
The appellate court also referred to the trial court's written decision where it cited to testimony from claims representatives and corporate claims counsel regarding the fact that additional insured claims were regularly denied based on its strict interpretation of the endorsement. In fact, the adjusters could not recall ever accepting an additional insured's tender. The denial letters were also form letters which often cited language which was not even in the policy. According to corporate claims counsel, adjusters were well trained and updated on the law, yet all three adjusters testified that, although their denial letters would refer to the "project on file" language to deny coverage, even when that language did not appear in the policy, none of them knew what this phrase meant. Based on this evidence, the appellate court agreed with the trial court's conclusion that American Safety's failure to defend Pulte was "unreasonable and without proper cause."
The Court of Appeal next addressed the trial court's finding that punitive damages were warranted. The trial court found that American Safety had issued the additional insured endorsements knowing that coverage would never be honored and knowing that the additional insureds would believe that they would receive a defense if sued in a construction defect case. The court further found this conduct was done with a willful and knowing disregard of Pulte's rights. The appellate court agreed with the trial court's conclusions and found there was substantial evidence to support Pulte's entitlement to punitive damages.
Finally, the appellate court discussed the award of Brandt fees. American Safety challenged the amount of the award as it was based on a post-trial modification of the fee arrangement from a contingency fee to an hourly fee. Had the contingency fee arrangement been considered, the fee award would have been approximately $371,000. However, after modification of the fee agreement, the insured sought to recover fees of approximately $645,000. Although the trial court addressed the case of Cassim v. Allstate Ins. Co. (2004) 33 Cal. 4th 780, wherein the appellate court noted that "trial courts retain discretion to disregard fee agreements that appear designed to manipulate the calculation of Brandt fees to the plaintiff's benefit", it disagreed with American Safety that the change in the fee agreement was to manipulate the process. Therefore, after making deductions for fees unrelated to pursuing amounts due under the insurance contract, the trial court awarded $471,313.52 in Brandt fees. On this point, the Court of Appeal disagreed: "[w]e have serious concerns that this change in Pulte's fee agreement was apparently 'designed to manipulate the calculation of Brandt fees to the plaintiff's benefit.' (citation.)" The appellate court concluded that the trial court should have made the attorney fee award based on the agreement in force during the trial. The Court of Appeal remanded the case to the trial court to recalculate the proper amount of attorneys' fees and to adjust the punitive damage award since it was based, in part, on the attorney fee award.
EFFECTS OF THE COURT'S RULING
This case will likely have a significant impact on insurers which have issued similar additional insured endorsements that attempt to limit coverage for the additional insured to ongoing operations. Although the language appears fairly straight forward and purports to limit the additional insured's coverage, the Court of Appeal found the language to be ambiguous and interpreted it against the insurer, effectively disregarding the language limiting the coverage to ongoing operations. Insurers with policy endorsements similarly purporting to limit such coverage will have to reevaluate whether, in light of the holding in this case, the limitation is sufficiently clear to put the additional insured on notice that completed operations coverage is excluded. Similarly, insurers who intend to exclude such coverage to additional insureds should consider amending the language in any similarly worded endorsement to overcome any ambiguity argument. On the other hand, this case contains helpful language for insurers on the issue of Brandt fees, establishing that an insured and its counsel cannot amend the fee arrangement after trial in order to obtain a greater fee award.
This opinion is not final. It may be withdrawn from publication, modified upon rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.