14 Cal.App.5th 1086
Cal. Ct. App.2017Background
- Pulte was the general contractor/developer for two residential projects; three subcontractors (Concrete Concepts, Frontier Concrete, Foshay Electric) carried CGL policies from American Safety that included additional-insured endorsements (AIEs) naming Pulte.
- Homeowners sued Pulte in two construction-defect actions (2011, 2013) alleging water intrusion, foundation/slab defects, and related damage possibly implicating subcontractors’ work. Pulte tendered defense; American Safety denied coverage.
- Trial court (after summary adjudication rulings) held American Safety owed a duty to defend under the AIEs (ambiguities resolved for Pulte), found the denials unreasonable and in bad faith, awarded contract damages for unreimbursed defense costs, Brandt attorney fees, costs, and punitive damages.
- On appeal, the Court of Appeal affirmed the substantive rulings (duty to defend; bad faith; punitive-damage entitlement) but reversed in part the Brandt fee award and derivative punitive amount because Pulte had modified its contingency fee to an hourly arrangement posttrial in a way that improperly inflated Brandt damages.
- The matter was remanded for recalculation of Brandt fees consistent with the originally effective contingency agreement and corresponding adjustment of punitive damages (trial court otherwise affirmed).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to defend under AIE language ("liability arising out of ‘your work’" vs. "ongoing operations") | AIEs reasonably created potential for coverage of completed-operations or ongoing-operations-related damage; Pulte tendered facts showing potential coverage so insurer had duty to defend. | AIEs limited coverage to the subcontractors’ "ongoing operations" only (no completed-operations coverage for additional insureds); underlying suits alleged post-completion damage so no defense duty. | AIEs were ambiguous on completed vs ongoing operations; ambiguities resolved for insured — duty to defend existed. |
| Applicability of faulty-workmanship/work-product exclusions (j.(5), j.(6)) | Underlying complaints alleged interrelated/adjacent damage possibly implicating covered loss; insurer did not show undisputed facts conclusively invoking the exclusions. | Exclusions bar coverage for damage to the particular work or parts that must be repaired because of the subcontractor’s faulty work — so no potential coverage. | Insurer failed to establish exclusions applied as a matter of undisputed fact; exclusions did not eliminate potential for coverage at tender stage. |
| Bad faith / punitive damages (insurer’s claims handling) | American Safety engaged in a pattern of blanket denials, used form denial letters, ignored adverse authority, and its claims agents (and corporate designee) effectively adopted a policy of denying AI tenders — conduct was unreasonable and malicious. | Denials were based on a reasonable reading of the policy language and related defenses (e.g., sole negligence, SIR, project-on-file); insurer had arguable legal basis. | Substantial evidence supported the trial court’s finding of unreasonable, bad-faith denials and clear-and-convincing evidence of malice/oppression — punitive damages available. |
| Brandt fee award methodology and amount | Pulte sought Brandt fees equal to actual billed hourly fees (after it modified contingency agreement posttrial), arguing those were the reasonable fees paid to obtain contract benefits. | American Safety argued the posttrial modification was manipulative; Brandt fees must be limited to fees attributable to obtaining contract recovery under the originally effective contingency agreement and apportioned per Cassim. | Award of Brandt fees reversed in part: trial court abused discretion by relying on posttrial hourly modification; remand to recompute Brandt fees consistent with the originally effective contingency fee (with apportionment), and to adjust punitive damages accordingly. |
Key Cases Cited
- Pardee Constr. Co. v. Ins. Co. of the W., 77 Cal.App.4th 1340 (Cal. Ct. App.) (AIE wording may create potential for completed-operations coverage for additional insureds; ambiguous AIEs construed for insured)
- Montrose Chem. Corp. v. Super. Ct., 6 Cal.4th 287 (Cal. 1993) (insured need only show potential for coverage; effect of summary adjudication rulings in duty-to-defend context)
- Brandt v. Super. Ct., 37 Cal.3d 813 (Cal. 1985) (insured may recover attorney fees incurred to obtain contract benefits when insurer acted in bad faith)
- Cassim v. Allstate Ins. Co., 33 Cal.4th 780 (Cal. 2004) (method for allocating attorney fees between contract and tort work when awarding Brandt fees; courts may disregard manipulative fee agreements)
- Waller v. Truck Ins. Exchange, 11 Cal.4th 1 (Cal. 1995) (de novo review of policy interpretation; exclusions construed narrowly)
- Bullock v. Philip Morris USA Inc., 159 Cal.App.4th 655 (Cal. Ct. App.) (framework for evaluating punitive damages proportionality)