- McMillin Management Services v. Financial Pacific Ins. Co. (4th Dist. Ct. App. 2017) ___Cal. App.5th___, 2017 DJDAR 10763, Case No. D069814
- February 6, 2018
McMillin, the developer and general contractor on a housing project, hired several subcontractors to perform work, including Martinez, Rozema, A.M. Fernandez and J.Q. Drywall. Martinez and Rozema were insured by Lexington and A.M. Fernandez and J.Q. Drywall were insured by Financial Pacific. McMillin was an additional insured under these policies. Construction was completed in June 2005. Several homeowners filed suit against McMillin in June 2010 alleging defective construction. McMillin tendered its defense to Lexington and Financial Pacific but both insurers declined a defense. McMillin filed suit against Lexington and Financial Pacific alleging declaratory relief, breach of contract and bad faith. Both insurers filed motions for summary judgment contending they owed no duty to defend and that McMillin would be unable to establish any of its claims as a matter of law. The trial court agreed and granted the motions. McMillin appealed.
APPELLATE COURT'S RULING
First, the appellate court addressed the granting of Lexington's motion for summary judgment. Lexington argued that it did not have a duty to defend because the additional insured endorsement only covered liability arising out of the subcontractors' ongoing operations performed for McMillin and there were no homeowners in existence at the time who could have brought construction defect claims during ongoing operations of the subcontractors. Instead, according to Lexington, the claims arose out of completed operations. McMillin argued that Lexington failed to present any evidence that the alleged property damage could only have occurred after operations were completed. The trial court found that because there were no "homeowners" until after the work was completed and because McMillin's potential liability therefore must have arisen from completed operations, summary judgment was proper.
The appellate court identified the relevant question as: "Did the trial court properly determine that there was no potential for coverage under the endorsements naming McMillin as an additional insured for '"liability arising out of [Martinez's or Rozema's] ongoing operations performed for [McMillin]"' because there were no homeowners in the Project at the time of Martinez's and Rozema's ongoing operations?" The appellate court noted that the additional insured endorsements did not state that Lexington would only provide coverage for liability occurring during ongoing operations but instead that it would provide coverage for liability arising out of such operations. This meant that McMillan had coverage for liability linked through a minimal causal connection with the ongoing operations and the appellate court held that "if property damage occurs before the named insured finishes work at the jobsite, under the plain language of the policy, an additional insured may be entitled to coverage pursuant to an 'ongoing operations' endorsement."
The appellate court further held that the decision in Pardee Const. Co. v. Insurance Co. of the West (2000) 77 Cal. App. 4th 1340 did not dictate a different result as it simply supported the proposition that insurers can limit coverage to claims arising from work completed before inception of the policy. However, in the present case, Lexington failed to establish that the damages arose from work completed before policy inception. Further, even assuming that the policy limitation could be read broadly as restricting coverage to damages occurring before completion of ongoing operations, Lexington had not established as a matter of law that all property damage occurred after completion of the subcontractors' work. The appellate court concluded that it did not need to address whether the endorsement provided coverage only for damages occurring before completion of the subcontractors' ongoing operations since Lexington had not established as a matter of law that all the damages occurred after completion of ongoing operations. Furthermore, the appellate court found no California authority supporting Lexington's position that the nonexistence of homeowners at the time operations were completed established as a matter of law the lack of a potential for coverage. Because Lexington failed to show no damage occurred prior to completion of ongoing operations, summary judgment was improper.
The appellate court next addressed the trial court's granting of the motion for summary judgment by Financial Pacific. Financial Pacific argued that there was no evidence that the work of its named insureds, J.Q. Drywall and A.M. Fernandez, resulted in damage to the plaintiffs. Although McMillin had presented evidence that showed improper drywall or stucco installation may have led to water intrusion, the trial court had sustained Financial Pacific's objections to the evidence noting that there was no evidence the homeowners claimed the drywall had damaged other property and the water intrusion was attributed to issues with windows and doors, which the subcontractors insured by Financial Pacific had not installed. McMillan's failure to challenge the trial court's sustaining of Financial Pacific's objections to its evidence forfeited its contention that the appellate court could consider such evidence. Since there was no evidence that the subcontractors' work had resulted in property damage, the trial court properly granted Financial Pacific's motion.
Finally, the appellate court addressed McMillin's argument that it should treat Financial Pacific's alleged failure to adequately investigate the claim as a breach of its duty to defend. However, since there was no evidence such an investigation would have revealed a potential for coverage, any inadequate investigation could not create a duty to defend where none existed. Since there was no potential for coverage, the trial court properly granted Financial Pacific's motion for summary judgment.
EFFECTS OF THE COURT'S RULING
The main holding in this case is simply that an insurer who fails to present undisputed material facts establishing the absence of covered damage is not entitled to summary judgment. What is interesting about the case is that the appellate court elected not to address the insurer's argument that the additional insured endorsement covering only ongoing operations would not apply to homeowner lawsuits filed after operations were complete. Instead, the appellate court elected to leave this issue untouched because it found that the insurer had failed to establish that none of the damage occurred prior to completion of the project. In so holding, the court distinguished Pardee, supra, finding that the court in that case was discussing how the insurers could have restricted coverage for projects completed before policy inception. An additional insured endorsement covering ongoing operations, when properly worded, may be used to preclude coverage for damages arising out of work completed prior to policy inception. The appellate court went on to say that "even assuming that an ongoing operations additional insured endorsement may have a broader effect (e.g., by restricting coverage to damages that occur before the completion of the subcontractors' ongoing operations)," Lexington failed to show that all damage occurred after completion. Presumably, had Lexington's endorsement stated that coverage was only provided for liability arising during ongoing operations, as opposed to liability arising out of such operations, the result would have been different and coverage would have been defeated.
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.This publication is intended for informational purposes only and is not intended as legal advice or as a substitute for legal consultation in a particular case or circumstance. Transmission of this information is not intended to create, and receipt does not create, an attorney-client relationship.