PULTE HOME CORPORATION, Plaintiff and Respondent, v. AMERICAN SAFETY INDEMNITY COMPANY, Defendant and Appellant.
D070478
COURT OF APPEAL, FOURTH APPELLATE DISTRICT DIVISION ONE STATE OF CALIFORNIA
8/30/17
CERTIFIED FOR PUBLICATION; (Super. Ct. No. 2013-00050682-CU-IC-CTL)
APPEAL from a judgment of the Superior Court of San Diego County, Ronald L. Styn, Judge. Affirmed in part and reversed in part with directions.
Wilson, Elser, Moskowitz, Edelman & Dicker, Gregory D. Hagen; Greines, Martin, Stein & Richland, Robert A. Olson and Gary J. Wax, for Defendant and Appellant.
Koeller, Nebeker, Carlson & Haluck, Robert C. Carlson, Sharon A. Huerta and Sarah P. Long, for
In this insurance defense dispute, defendant and appellant American Safety Indemnity Company (American Safety or ASIC) challenges a judgment after court trial that awarded over $1.4 million in compensatory and punitive damages to plaintiff and respondent Pulte Home Corporation (Pulte), who was the general contractor and developer of two residential projects in the San Marcos area. American Safety issued several sequential comprehensive general liability (CGL) insurance policies to three of Pulte‘s subcontractors,1 and during 2003 to 2006, it added endorsements to those policies that named Pulte as an additional insured. The projects were completed by 2006.
In 2011 and 2013, two groups of residents of the developments sued Pulte for damages in separate construction defect lawsuits. After American Safety declined to provide Pulte with a defense, Pulte filed this action, asserting that
During the next phase of trial, the court awarded Pulte punitive damages and attorney fees under Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt) [attorney fees recoverable as compensatory damages, attributable to counsel‘s efforts in obtaining rejected amounts due under insurance contract]; Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 807 [applying Brandt in context of contingency fee agreement].)
To address American Safety‘s challenges to the judgment, we first interpret the coverage provisions of the subject policies in light of the teachings of Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340, 1356 (Pardee). In that case, this court addressed the scope of coverage that may be afforded by additional insured endorsements in the factual context of construction defect litigation. We conclude that the trial court was correct in ruling that the language of American Safety‘s additional insured endorsements on the underlying insurance policies created ambiguities on the potential for coverage in the construction defect lawsuits, thus requiring it to provide Pulte with a defense to them. The trial court‘s subsequent decision that American Safety‘s failure to do so was unreasonable and in bad faith is supported by substantial evidence. We additionally uphold the court‘s decision that Pulte is entitled to an award of punitive damages that is proportional, on a one-to-one basis, to the award of compensatory damages in tort. (Bullock v. Philip Morris USA Inc. (2008) 159 Cal.App.4th 655, 690, fn. 18.)
Although we affirm the judgment as to its substantive rulings, as above, we are required to reverse it in part as to the award of $471,313.52 attorney fees under Brandt, supra, 37 Cal.3d 813, which we find to be inconsistent with the damages principles and policies set forth in Brandt. We believe the court abused its discretion in implementing an hourly attorney fee arrangement that Pulte did not arrive at until after trial, to replace the previous contingency fee agreement in a manner that Pulte intended would operate to increase its
FACTUAL AND PROCEDURAL BACKGROUND
A. Underlying Lawsuits and Tenders
Beginning in 2003, Pulte was the general contractor and developer for two single-family residential housing projects, Meridian and Mariners’ Landing (the projects), and it began to sell the homes in 2005 and 2006. During construction of both projects, Pulte entered into subcontracts with Concrete and Frontier to supply concrete foundations and flatwork. Pulte also entered into subcontracts with Foshay to supply electrical and related waterproofing work for both projects. All the subcontracts required that the subcontractors maintain liability insurance and that they name Pulte as an additional insured on their insurance policies.
In 2011, a group of Meridian homeowners filed a construction defect lawsuit against Pulte. (Schaefer v. Pulte Home Corporation (Super Ct. San Diego County, 2011, No. 37-2011-00086211-CU-CD-CTL) (the Schaefer action).) This lawsuit contained allegations against Pulte that its homes, sold after 2005 and 2006, were defectively constructed in their foundation systems and slabs, thus allowing moisture to enter into the structure and limiting the type of flooring materials and installation available. Such allegations, and those of other water intrusion and cracks in the walls and ceilings, potentially implicated the concrete subcontractors’ work on the Meridian project. Pursuant to Concrete‘s and Frontier‘s policies and endorsements, Pulte tendered its defense of the lawsuit to American Safety. It provided copies of the subcontracts, insurance certificates and/or endorsements, and the construction defect complaint, with a homeowner matrix. American Safety refused for numerous reasons.
Both construction defect actions went forward. Another carrier that is not a part of this lawsuit, Interstate, provided a partial defense to Pulte.
B. The Insurance Policies
During the time frames 2003 through 2006, American Safety issued to each of the three subcontractors, as “Named Insureds,” several liability insurance policies for successive one-year periods. Each policy‘s insuring agreement provided coverage for property damage (or bodily injury, not involved here) to which the insurance applied, caused by an occurrence, during the policy periods.
The declarations page of each of the policies states that the aggregate limit for “products – completed operations” was $1 million. The insuring agreement and the definitions portions of the policies set forth terminology that is relevant here. The definitions of “products – completed operations hazard,” include all property damage occurring away from the insured‘s premises, “arising out of ‘your product’ or ‘your work’ ” (except for incomplete work or abandoned work; not involved here). ” ‘Your work’ ” is defined as meaning “(a) [w]ork or operations performed by you or on your behalf, and (b) [m]aterials, parts or equipment furnished in connection with such work or operations.” ” ‘Your work’ ” includes warranties as to fitness and quality. Within the “products – completed operations” definitions, “your work” is deemed complete either when the work (a) called for in the contract is complete; (b) at a particular job site is complete; or (c) is put to its intended use.
Under the policy, “occurrence” means an accident, “including continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” includes: “a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.”
“WHO IS AN INSURED (SECTION II) is amended to include as an insured the person or organization shown in the Schedule, 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.”
An alternative version of the AIE amended the definition of “who is an insured” to include Pulte as an additional insured, “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. (Italics added.) Some of the policies replace the italicized ”and” (as above) with ”but.”
In two of the Foshay versions (all three of which were applicable only to the Large project, not Schaefer), the AIEs are stated to provide coverage to the additional insured, “but only with respect 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. (Italics added.) These Foshay policies specify “at the project designated above,” because they include a line in the endorsement for the “Name of Project,” which identifies, “Those projects on file with the Company.”4
Each of the subcontractors’ policies includes numerous exclusions in sections designated by that heading. As relevant here, American Safety relies on separate “faulty workmanship” or “work product” exclusions. In exclusion j.(5), the subcontractors’ policies state that no coverage is afforded for “property damage” to “[t]hat particular part of real property on which you . . . are performing operations, if the ‘property damage’ arises out of those operations[.]” Likewise, exclusion j.(6) precludes coverage for “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” This exclusion j.(6) “does not apply to ‘property damage’ included in the ‘products-completed operations hazard.’ ” American Safety also discusses exclusion (l), “Damage to Your
C. This Action Filed; Series of Summary Judgment Motions
Pulte filed this action in 2013 seeking damages, including awards of unreimbursed defense expenses, Brandt fees and punitive damages. Declaratory relief was requested on the duty to defend and/or indemnify, breach of contract damages for the failure to defend and/or indemnify, and further relief for breach of the duty of fair dealing and good faith. As bad faith, Pulte alleges American Safety (1) failed to conduct “a reasonable, timely, and unbiased investigation” to fully evaluate the requests for a full defense; (2) failed to respond in a timely manner; (3) refused to honor its obligations under the policies; (4) misrepresented pertinent policy provisions; (5) based the coverage decisions “on a desire to reduce and/or avoid obligations to Pulte,” thus refusing to afford it a defense. This conduct allegedly “purposely deprived Pulte of the rights and benefits as an insured under the policies.” Moreover, it was alleged to be part of a “conscious and deliberate pattern of unfair claims practices” of nonpayment and rejection of tenders of defense and indemnity made by the insureds, thus serving to frustrate Pulte‘s and other additional insureds’ reasonable expectations for coverage under the terms of the liability insurance policies.
Pulte‘s initial motion for summary adjudication as to a declaration of the duty to defend was denied, and this court denied its petition for a writ of mandate vacating that ruling. (Pulte Home Corporation v. Superior Court, Dec. 16, 1984, D067083.)
Later in the action, Pulte and American Safety filed cross-summary judgment/summary adjudication motions. According to Pulte, it was entitled to summary adjudication and declaratory relief that American Safety had a duty to defend both underlying actions, under the Concrete policies.
In contrast, American Safety sought summary judgment that (1) it owed no duty to defend as to any of the subcontractors’ policies, and (2) as a matter of law, its position that there was no duty to defend and no coverage potential was reasonable, for purposes of the bad faith claim.
Next, the court denied American Safety‘s motion for summary judgment or summary adjudication. As previously noted (fn. 5, ante), two issues that were dealt with are no longer pursued on appeal, a sole negligence restriction and a SIR requirement.6 However, the court issued key rulings denying summary judgment to American Safety based on the ongoing operations language in its policies. The court analyzed the authority of Pardee, supra, 77 Cal.App.4th at pages 1356 through 1357, on the related topic of completed operations coverage as arising out of this property damage AIE language, “liability arising out of ‘your work.’ ” The court found that the AIEs’ references to ongoing operations had not expressly excluded complete operations coverage, and there were triable issues of fact on a potential for such coverage that would preclude a summary judgment for American Safety. The court also addressed a policy term found only in Foshay‘s policies, that covered projects had to be “on file” with the company. The court determined that there were triable issues of material fact as to whether those projects were known to be on file with American Safety, within the meaning of the policy.
D. Phase 1 of Court Trial: Rulings on Duty to Defend and Bad Faith
At trial beginning in November 2015, Pulte submitted a motion under
This motion was opposed by American Safety on several grounds, arguing that some of the material being relied on by Pulte, purported statements of claims adjusters, was insufficient because it amounted to rephrasing hearsay information provided by Pulte in tendering the defense under the policies. American Safety argued that even though Pulte had prevailed on its own motion, it still had to prove there were “ongoing operations of the named insureds” during the effective dates of the endorsements, and it was not enough to submit subcontracts and homeowner matrixes from the underlying actions.
As explained in the court‘s written decision after trial, the procedure it had followed was to hear Pulte‘s motion under
Pulte conducted direct examination of adverse witnesses, three of American Safety‘s claims examiners and their supervisor, corporate claims counsel Jean Fisher. (
At the close of testimony, the court addressed the reserved issues under
Based on the court‘s independent reading of the policy language in light of the analysis in Pardee, supra, 77 Cal.App.4th 1340, it confirmed that these AIEs did not effectively exclude coverage for “completed operations” or for ongoing operations. Because American Safety was found to have owed a duty to defend Pulte under each policy, the court outlined as the remaining issues whether Pulte had suffered any damages from that conduct and, if so, how much, regarding its claims on breach of the insurance agreements, for the expenses of defending the underlying Schaefer and Large actions. The court received extensive briefing, attorney declarations and invoices as to the fees Pulte had incurred and the recent change it had agreed to, from a contingency attorney fee arrangement to an hourly one.
In reaching its conclusions on breach of insurance duties and damages, the court noted it had years of experience with construction defect cases. The court made the observation that “construction defect litigation is notoriously fluid. Claims omitted from one defect list pop up on a later defect list. While American Safety is not required to speculate on future claims, the [inspection] reports do not establish there was no potential for coverage after their preparation.” In evaluating American Safety‘s refusal to provide a defense, the court commented that the types of defects being alleged by the homeowners in the underlying cases gave rise to a potential for coverage.
Based on expert testimony, the court made a finding that the fees Pulte had incurred in defending the Schaefer and Large actions were reasonable. After making appropriate credits for fees Pulte had received from the other insurer (Interstate), the court made reductions for “(1) the $25,000 SIR [Schaefer], (2) fees incurred pre-tender, and (3) all fees for tendering to American Safety which, if awarded, would be part of the Brandt fees.” Ultimately, the adjusted and corrected contract damages, with prejudgment interest, totaled $455,238.45.7
The court next addressed whether the denials of defenses had been made in bad faith, so as to entitle Pulte to Brandt fees and, if so, the amount awardable. It concluded that American Safety‘s claims handling and denials of defenses had been conducted in bad faith, in breach of its duty of good faith and fair dealing owed to Pulte. American Safety had interpreted the only available case law by disregarding California federal courts’ unpublished cases that were contrary to its noncoverage position. The court relied on several instances of conduct by American Safety representatives as constituting bad faith. However, it determined that the continuing refusal to defend Pulte, after the court issued its summary judgment rulings, was not per se unreasonable, in light of its knowledge and belief that another carrier, Interstate, was providing Pulte some form of defense in the underlying cases.8
The court then reached the issue of the substantive entitlement to punitive damages, in terms of whether Pulte had established by clear and convincing evidence that American Safety was guilty of oppression, fraud or malice. The court found Pulte had made an adequate showing of American Safety‘s demonstrated pattern and practice of issuing AIEs, then using every conceivable argument to deny coverage, regardless of the merit of the arguments. The evidence showed this conduct had occurred not only in the current case but also in hundreds of denials of other additional insureds’ tenders, amounting to misrepresentations about the policy provisions. The court determined that the testimony of Attorney Fisher and the claims adjusters demonstrated that Fisher had exercised substantial independent authority and judgment in claims handling, thus effectively determining corporate policy with the knowledge and cooperation of her managers, who ratified her decisions. All that conduct occurred in the context of American Safety‘s knowledge that both the named insureds and additional insureds intended that they would be receiving a defense if they were sued in construction defect cases. This conduct amounted to clear and convincing evidence of its malice and oppression.
The court accordingly required American Safety to produce evidence about its financial condition, in connection with the punitive damages requests. A second phase of trial on punitive damages and Brandt fees was required.
E. Phase Two of Trial: Punitive Damages and Attorney Fees
Pulte submitted declarations dated February 9, 2016, after trial, from its house counsel Michael Laramie and its third party claims administrator, John Macy, about why Pulte had changed its contingency fee agreement to an hourly one, believing that more compensation for counsel was needed in response to the hard fought nature of the trial. Following further briefing and oral argument, the court issued a separate decision on punitive damages and all of the attorney fees issues. In the discussion portion of this opinion, we will set forth its specific reasoning and awards. Pulte‘s base award of defense fees and costs, plus prejudgment interest, for the defense of the Schaefer and Large actions amounted to $455,238.45. In addition, it received a separate award of attorney fees and costs pursuant to Brandt, supra, 37 Cal.3d 813, in an amount intended to be equivalent to what Pulte had actually incurred and paid, subject to reductions by the court for ineligible fees (those incurred pre-tender, those incurred in pursuit of a defense, and the applicable self-insured retention amount). Pulte was thus awarded its unreimbursed defense fees and costs incurred, as Brandt attorney fees of $471,313.52, together with associated costs of $38,587. The court determined that punitive damages should be awarded against American Safety, on a one-to-one ratio to the Brandt fees, as appropriate for this type of case.
In total, the judgment entered against American Safety was for $1,478,288.37, with interest.9 Its new trial motion on excessive damages grounds was denied and it appeals.10
DISCUSSION
Here, as in Pardee, supra, 77 Cal.App.4th at page 1356, the initial issue for policy interpretation “is whether the additional insured endorsements explicitly exclude coverage for the subcontractors’ completed operations.” American Safety chiefly contends that its coverage exposure was limited to the time frame of the subcontractors’ ongoing operations at the project sites, and that since the homes were sold as completed units, such ongoing operations had long been concluded. It also argues the faulty workmanship policy exclusions applied, in connection with its position that its noncoverage determinations were reasonable and not in bad faith.
In response, Pulte claims that as an additional insured, the tenders of defense that it provided to American Safety contained sufficient information to demonstrate its entitlement to a defense, based on potential completed operations coverage that should have been available under the policies. Pulte argues this grant of coverage “for liability arising out of ‘your work’ ” was not inconsistent with the “ongoing operations” language. To address these issues and whether there is support in the record for the different forms of relief awarded by the trial court, we first outline policy interpretation standards in this factual context. (Griffin Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal.App.4th 172, 208 (Griffin Dewatering Corp.) [reasonableness of insurer‘s contractual position depends on both the factual context in which the dispute arose and the rules of contract interpretation].)
I
POLICY INTERPRETATION
A. Duty to Defend
Both parties agree that the trial court‘s basic policy interpretation rulings are subject to de novo review. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18 (Waller); Pardee, supra, 77 Cal.App.4th at p. 1349, fn. 3.) “The determination whether an insurer owes a duty to defend is made in the first instance by comparing the terms of the policy with the allegations of the complaint. Facts extrinsic to the complaint give rise to a duty to defend when they reveal the possibility the claim may be covered by the policy. Conversely, where such facts eliminate the potential for coverage, the insurer may decline to defend even where the bare allegations of the complaint suggest potential liability. This is so because the duty to defend, although broad, is not unlimited, but rather measured by the nature and kinds of risks covered by the policy. An insurer may have a duty to defend even though it ultimately may have no obligation to indemnify . . . . Finally, the duty to defend is a continuing one, arising upon tender and lasting until the underlying litigation is resolved, or until the insurer has established there is no potential for coverage.” (Id. at p. 1350.)
“The fundamental rules governing the interpretation of contracts apply equally to the construing of insurance contracts. They are premised on the primary goal of giving effect to the mutual intention of the parties at the time the contract is formed. That intent is to be inferred, if possible, solely from the written provisions of the contract. If the language of the insurance contract is clear and explicit, it governs. [¶] . . . [¶] . . . [B]ut in
order to protect the objectively reasonable expectations of the insured, the courts endeavor to interpret the ambiguous language in the sense in which the insurer believed, at the time of making it, the insured understood it. Only if this approach does not resolve the ambiguity, do the courts then resolve it against the insurer.” (Pardee, supra, 77 Cal.App.4th at p. 1352; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265.)
“Since construction defect litigation is typically complex and expensive, a key motivation in procuring an additional insured endorsement is to offset the cost of defending lawsuits where the general contractor‘s liability is claimed to be derivative.” (Maryland Casualty Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th 21, 33.) ” ‘Endorsements on an insurance policy form a part of the insurance contract [citation], and the policy of insurance with the endorsements and riders thereon must be construed together as a whole [citation].’ ” (Narver v. California State Life Ins. Co. (1930) 211 Cal. 176, 181.)
B. Potential for Coverage Regarding Additional Insureds
The subcontractors’ base agreement with Pulte required them to “add Pulte []as an Additional Insured on the above general liability policy by having the insurance carrier issue a CGL-2010 Endorsement, Additional Insured-Endorsement Edition date 10/93, or its equivalent as determined by Pulte. This endorsement shall apply to the full extent of the actual limits of Contractors’ coverage . . . .”
As to any AIE, “in resolving whether the allegations in a complaint give rise to coverage under a CGL policy, we must consider the occurrence language in the policy, as well as the endorsements, if any, that broaden coverage included in the policy terms.” (Pardee, supra, 77 Cal.App.4th at p. 1351.) Pardee contains extensive analysis of the different versions of AIEs used in the industry, as drafted by the ISO (e.g., a sample AIE, the “2010” form; see Cal. Practice Guide: Insurance Litigation (The Rutter Group 2016) ¶ 7:1407.5, pp. 7E-3 to 7E-4.) Construction defect claims may arise long after completion of the project. Pardee‘s discussion references the commercial reality of the CGL market as giving contour to the reasonable expectations of policyholders and additional insureds in this context, as follows:
“Damage resulting from a subcontractor‘s work often does not arise for years. It is thus prudent for general contractors to obtain completed operations coverage as additional insureds from their subcontractors’ insurers. . . . [A]dditional insured coverage is intended by the insurance industry to cover vicarious liability that an additional insured may incur due to operations of the originally named insured. Nor is there any dispute the endorsements were purchased so as to protect the general contractor against potential construction defect litigation.” (Pardee, supra, 77 Cal.App.4th at pp. 1360-1361.)
It is well recognized that ”property damage resulting from defective construction may occur over an extended period of time, spanning several policy periods. [Citation.] Consequently, it is common for a general contractor or developer to be insured under several separate policies for the same construction liability. In such cases, the several insurers on the risk may be required to share the costs of defense and indemnification.” (Cal. Practice Guide: Insurance Litigation, supra, ¶ 7:1408.7, p. 7E-5; italics added.) It is in this context that Pardee, supra, 77 Cal.App.4th at pages 1355 to 1359 addresses whether “completed operations” coverage under the subcontractor‘s policy, for its negligence, extends to the vicarious liability of an additional insured developer. The conclusion to be reached depends on the wording of the additional insured endorsement. (Ibid.; Cal. Practice Guide: Insurance Litigation, supra, ¶¶ 7:1409.15-7:1409.16, pp. 7E-13 to 7E-14.)
Where, as here, the insurer has drafted the policy language, it is usually held responsible for ambiguous policy language, through the rule of construction in favor of the insured‘s reasonable expectations. (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822–223.) If it is clear that an insurance policy was actually negotiated and jointly drafted, less attention is paid to protecting the insured from ambiguous or highly technical drafting. (Ibid.) American Safety wrote its own “manuscript” AIEs, which the named insurers obtained for Pulte. That sequence of events does not indicate there was approximately equal bargaining power in this case. This leaves us with the usual rule for resolving ambiguities against the insurer, to interpreting the potential scope of coverage under these specialized AIEs, as it relates to a duty to defend.
II
DUTY TO DEFEND UNDER ADDITIONAL INSURED ENDORSEMENTS
A. Effect of Summary Judgment/Adjudication Rulings
At the outset of trial, Pulte‘s
Using those exemplars of American Safety‘s denial letters, Pulte‘s
In ruling on the
“In the motion filed by [American Safety], the argument, at least as addressed in the summary adjudication, was not that there were not, in fact, operations, but rather the interpretation of the policy. And the ruling was not a factual ruling, but a legal rule. But nothing would change on that. The facts are still the same on that. Nothing changes. The policy is still the same. [¶] . . . [¶] So some of the issues were denied on questions of fact, material issues of fact. . . . I went into the arguments on both sides as opposed to simply saying that there was a failure on the initial burden of proof. [¶] So I think the traditional rule of Montrose [I, supra, 6 Cal.4th 287, 300-301; citations] applies. And the effect of the denial of American Safety indemnity‘s motion for summary judgment and summary adjudication established the duty to defend. And therefore, the issue I have to decide is whether or not the denials were reasonable or in good faith. [¶] . . . [¶] I think all of the facts adduced at trial are still relevant as to reasonableness. [¶] . . . [¶] So go ahead . . . .”
Although we accept that the trial court‘s summary adjudication ruling establishing there was a duty to defend (as to Concrete) served to limit the legal issues presented at trial, we also acknowledge that other arguments on the potential for coverage were developed during trial. After it heard the evidence, the court essentially confirmed its previous rulings on the pretrial motions, consistent with its understanding of the explanation in Montrose I, supra, 6 Cal.4th at pages 300 through 301, of the extent of the binding effect of a summary judgment ruling in this context. (See McMillin, supra, 233 Cal.App.4th 518, 541.) The court accordingly told counsel that the evidence already presented about the coverage and exclusions issues was now to be considered on the bad faith questions, as part of the evaluation of the reasonableness of the denials of defenses.
To some extent, this appeal reargues the same policy interpretation issues on the potential for coverage, under its completed operations and ongoing operations language. However, many of the issues for which the trial court found the existence of triable material facts have essentially been dropped out of the appeal (e.g., the self-insured retention, other insurance, and sole negligence). The better approach now is to assess the merits of the trial court‘s various, consistent coverage rulings on a de novo basis, concerning the duty to provide a defense, and then to decide the closely related reasonableness issues on the bad faith claims (pt. III, post).
B. Nature of Potential Coverage under Policies
The terms of the AIEs must be read in light of the definitions and coverage provisions of the policies. Pulte was named as an additional insured “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. (Italics added.)12 Another typical version states:
“WHO IS AN INSURED (SECTION II) is amended to include as an insured the person or organization shown in the Schedule, 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.” (Italics added.)
” ‘Your work’ ” includes warranties as to fitness and quality. Within the ” ‘products–completed operations hazards’ ” definitions, ” ‘your work’ ” is deemed complete either when the work (a) called for in the contract is complete; (b) at a particular job site is complete; or (c) is put to its intended use.
The reader will recall that the declarations pages offer coverage for “products–completed operations hazard,” defined as including all property damage occurring away from the insured‘s premises, “arising out of ‘your product’ or ‘your work’ ” (except for incomplete or abandoned work; not applicable here).
1. Respective Arguments
American Safety argued the underlying construction defect complaints failed to allege any ongoing operations as of the time the homeowners bought the homes, and therefore no potential for coverage existed. (But see D.R. Horton Los Angeles Holding Co., Inc. v. American Safety Indem. Co. (S.D.Cal., Jan. 5, 2012, No. 10CV443WQH) 2012 U.S. Dist. LEXIS 1881, at pp. *53-*54 (D.R. Horton) [additional-insured coverage could exist for ongoing operations, if work on other phases of the development continued after completion of the particular homes sued upon].) American Safety claims that once the defective homes were sold, only completed operations coverage could have applied, but it was successfully excluded by including their ongoing operations language in the AIEs. It believes its AIEs had complied with the “roadmap for carriers” created by Pardee, supra, 77 Cal.App.4th 1340 on how to insure named insureds, but without granting coverage for completed operations to additional insureds. This was done through its “project on file” restriction (Foshay only, through 2004 only) and its “ongoing operations” language, which American Safety used as tools to limit its coverage exposure.
American Safety‘s trial attorney contended that in the AIEs, ” ‘ongoing operations’ immediately follows ‘your work.’ So it has to be read as a limitation upon ‘your work.’ ‘Your work’ cannot be read without the limit of ‘ongoing operations.’ ” On the issue of ongoing operations, American Safety took the position that its “ongoing operations” language contained in the AIEs should be read as a restricted grant of coverage, not an exclusion, but part of the actual grant. It further argued Pulte had failed to establish that it was an insured under this grant of coverage, because “construction defect claims by their very nature are completed operations claims as the product has been completed and put to its intended purpose; namely, it‘s been sold to homeowners who are now suing.”
Next, to the extent that a subcontractor caused damage to the project itself during its ongoing operations, American Safety argued that the faulty workmanship exclusions (j.(5) and (j.(6)) applied to preclude any duty to defend.
For purposes of discussion, the trial court summarized Pulte‘s position as claiming that its reasonable expectation, in requiring its subcontractors to obtain their own completed operations coverage and to provide it with additional insured status, was to obtain the same coverage for itself. The court surmised that when the subcontractors went to American Safety, they obtained and provided “something and it says ‘your work’ and it says something about completed operations. It‘s kind of confusing. [Pulte says], ‘Well, that probably satisfies, so we‘re okay.’ We don‘t find out until -- that‘s the argument.” Pulte was thus arguing that if the American Safety AIEs had expressly stated there would be no completed operations coverage, then the developer would have understood that, and would have told the subcontractors, “Go back and try again,” to obtain more complete additional insured coverage.
2. Distinctions on Appeal: Completed Operations and Ongoing Operations
Pulte‘s request for a defense arose out of the named insureds’ participation in construction work that was done over a period of time, in several phases. American Safety contends that the AIEs it drafted contain language that expressly limited the time frame of such coverage to the time of the ongoing operations of the named insureds (i.e., before completion). (See Pardee, supra, 77 Cal.App.4th at p. 1356.) It argues we must give each term in the endorsement its proper effect, and to do so, the ongoing operations reference in the AIEs should be read as a limitation upon “your work,” and as to when it occurred.
In its reply brief, American Safety represents that the issues at trial were mainly litigated in terms of the existence of any completed operations coverage, but that on appeal, Pulte‘s respondent‘s brief seems to argue that there was a potential for coverage under either type of coverage, completed operations and/or ongoing operations. American Safety contends that the policy clearly distinguishes between liability for ongoing versus “completed operations” coverage. It says these coverages are time sensitive and “complementary and not overlapping.” (See Fibreboard Corp. v. Hartford Accident & Indemnity Co. (1993) 16 Cal.App.4th 492, 499-506 (Fibreboard Corp.) [addressing coverage under a “products hazard” clause containing a special asbestos exclusion in a policy issued to a manufacturer of asbestos-containing products].) As explained in Fibreboard Corp.:
“[A] manufacturer or person who performs a service can incur liability in a number of ways, including ‘(1) while work is in progress, [and] (2) after completion. . . . An injury or loss may result while an activity is in progress, and prior to the completion thereof, either as a result of an act of negligence or an omission. Such liability is embraced within the ordinary liability aspect of a public liability policy under coverage for premises-operations. [¶] . . . [O]nce a product has been completed and sent to market . . . liability may be incurred by reason of a defect in merchandise or improper workmanship. It should be clear that the premises-operations coverage is not appropriate coverage and the individual now needs ‘products liability’ or ‘completed operations’ coverage. The coverages are complementary and not overlapping . . . .’ [Citation.] Thus, as a matter of sequencing, ‘it is well to recognize that products liability is a coverage that takes over where premises-operations leaves off . . . .’ ” (Fibreboard Corp., supra, 16 Cal.App.4th 492, 500-501.)
This authority indicates that there may be a clear distinction among products liability claims concerning a completed product, compared to other liability claims for work in progress. (Fibreboard Corp., supra, 16 Cal.App.4th at pp. 500-501.) That is a different context and type of work from the case before us, arising in the context of construction defects in which one faulty component or portion of a subcontractor‘s work could allegedly have caused physical injury to nearby work. Since we are evaluating only a potential for coverage, as related to a duty to defend and on a de novo basis, we must consider the language of the AIEs for any or all type of coverage they may afford. (Pardee, supra, 77 Cal.App.4th at p. 1351 [court considers occurrence language in the policy with the endorsements to determine whether coverage included in the policy terms is broadened].)
3. Timing of Alleged Property Damage
A standard occurrence based CGL policy potentially provides coverage for injury or damage even if it may not have been discovered or manifested until after the policy period ended. (Century Indemnity Co. v. Hearrean (2002) 98 Cal.App.4th 734, 743.) American Safety‘s initial argument seems to be that we should evaluate the construction defect complaints as alleging injury that did not occur until the date of purchases by the individual home buyers, of completed homes. It is claiming that there were no longer any ongoing operations by the subcontractors, once the homes were completed.
When Pulte tendered its defense, American Safety was notified of allegations that the subject homes contained violations of construction standards, leading to existing and anticipated property damage from moisture that was invading the faulty concrete, electrical, or waterproofing work. With regard to the timing of alleged property damage, the Schaefer action alleged that within the past 10 years, the defendants, as original owners or developers of the project, had constructed the homes, which since their completion, “have become known to be defective as herein alleged,” in that they are not adequately constructed to prevent water intrusion. Such construction was alleged to have been done in an improper fashion, resulting in the homes’ water damage as a direct and proximate consequence.
The Large complaint alleged that Pulte had performed construction and development of the homes, which were substantially completed within the last 10 years. Large alleged that the defendant real estate developers and their agents had failed to meet residential construction standards for components such as waterproofing systems, electrical systems, and concrete, and that many of the violations were causing property damage to their homes.
Exposure to liability under a policy is evaluated according to the specific language under review, to reconcile the effect of related elements in the CGL policy. (Baker v. National Interstate Ins. Co. (2009) 180 Cal.App.4th 1319, 1337-1339 (Baker).) Under these policies, ” ‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” includes: “a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it . . . .” None of this language requires “that the eventual claimant own the property at the time the property is damaged for coverage to ensue.” (Garriott Crop Dusting Co. v. Superior Court (1990) 221 Cal.App.3d 783, 791.) In any event, there was a lack of evidence about when the subcontractors’ work was performed at the defective homes.
These policy terms may be read to cover construction work that creates “physical injury to tangible property,” such as from exposure to moisture leakage, due to the nature of concrete or electrical work that was performed during the effective periods stated in the AIEs. Physical injury to the homes’ foundations and walls, as established by inspections, is clearly alleged in the underlying construction defect complaints, and is not tied to the current owners’ finances. Attorney Huerta generally testified that defects lists could be updated during litigation. The trial court agreed, “construction defect litigation is notoriously fluid. Claims omitted from one defect list pop up on a later defect list. While [American Safety] is not required to speculate on future claims, the [inspection] reports do not establish there was no potential for coverage after their preparation.” The creation of reported defects in the concrete and electrical work performed, as an occurrence during the policy period, could have allowed continuous or repeated exposure to harmful conditions elsewhere.
” ’ “[T]he existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. [Citation.] Hence, the duty ‘may exist even where coverage is in doubt and ultimately does not develop.’ ” ’ ” (Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017, 1033 (Atlantic Mutual).) Where insuring agreements provide coverage for property damage occurring during the policy periods, a construction defect complaint alleging progressive damage gives rise to the potential ” ‘that there existed—at least potentially—a covered event, i.e., a continuing and progressively deteriorating process which began with defective design and construction . . . within the pertinent policy period.’ ” (Century Indemnity Co. v. Hearrean, supra, 98 Cal.App.4th 734, 740.) American Safety incorrectly focuses on when the current property owners became financially damaged through purchases. This begs the question of when the subject property damage occurred from the work of the subcontractors. The coverage potential depends on when the property became physically damaged. (Standard Fire Ins. Co. v. Spectrum Community Assn. (2006) 141 Cal.App.4th 1117, 1132; Garriott v. Crop Dusting Co., supra, 221 Cal.App.3d 783, 791.)
From the circumstances shown in the tenders of defense, in which property damage became evident after the work was completed, American Safety was placed on sufficient notice that some of the subcontractors’ work could have been ongoing and/or completed during its policy periods, since the homes were constructed in phases. At that time, the mechanisms of the alleged property damage remained unknown, as did the timing of the damage in relation to the dates of purchase. As the trial court‘s decision correctly observed, the damage or occurrence might have occurred “while the subcontractor‘s operations were ongoing but after the house had been sold to one of the plaintiffs.” We disagree with American Safety‘s claim that it should not have had to respond to these defense demands, without a greater showing that its policy applied, based on the subcontractors’ work and Pulte‘s potential vicarious liability for it.
As explained in Montrose I, in the comparable legal context of a declaratory relief action, “[t]o prevail [] the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales. Any seeming disparity in the respective burdens merely reflects the substantive law.” (Montrose I, supra, 6 Cal.4th at p. 300; Pardee, supra, 77 Cal.App.4th at p. 1351 [” ‘when a suit against an insured alleges a claim that potentially or even possibly could subject the insured to liability for covered damages, an insurer must defend unless and until the insurer can demonstrate, by reference to undisputed facts, that the claim cannot be covered.’ “].)
Under this authority, American Safety cannot show that Pulte, as its additional insured, “failed to timely provide information to an insurer that would have established the potential for coverage in the first instance.” (Atlantic Mutual, supra, 100 Cal.App.4th 1017, 1040.)
4. “Ongoing Operations” as a “Limiting Term” or Exclusion?
American Safety next argues there was no possibility of products-completed operations hazard coverage applying here, because it had inserted the following italicized qualifier into the AIEs, that policy benefits would be afforded for “liability arising out of ‘your work,’ ‘but only as respects ongoing operations.’ ” It calls this “ongoing operations” language “a limiting term excluding completed-operations coverage,” and argues that its use of different terms in the policy was evidently intended to afford different meanings for them. (See Weitz Company, LLC v. Mid-Century Insurance Co. (Colo. App. 2007) 181 P.3d 309, 313 [interpreting policy term “completed operations” as extending such coverage to named insured/subcontractor, but finding the term “ongoing operations,” used in conjunction with “only” in the endorsement, served to limit the coverage provided to general contractor/additional insured].)
Attorney Fisher testified that she knew of one contracting company that had paid as much as $100,000 to obtain more completed operations coverage than was afforded in its AIEs. American Safety now argues it can be inferred (apparently from the lower price of the AIEs, which is unclear from the briefing) that it did not intend to provide completed operations coverage to Pulte. It relies on language in Baker, supra, 180 Cal.App.4th 1319, that describes the costly nature of products-completed operations hazard coverage: ” ‘The modern CGL policy provides basic “premises and operations” coverage. This coverage insures for damages arising out of an occurrence at the insured‘s place of business as a result of the insured‘s ongoing business activities. The risk covered by the CGL premises and operations coverage differs from the risk posed once an insured relinquishes its products to third parties or completes its work. This latter risk is insured, for an additional hefty premium, under the products-completed operations hazard coverage. The purpose of the products-completed operations hazard coverage is to insure against the risk that the product or work, if defective, may cause bodily injury or damage to property of others after it leaves the insured‘s hands.’ ” (Id. at p. 1337, italics added.)
American Safety‘s interpretation fails to demonstrate any coverage is potentially limited to ongoing operations. The AIEs’ language allowing coverage for “liability arising out of ‘your [the named insured subcontractor‘s] work’ ” can reasonably be read as a grant of coverage for the insured‘s completed operations, if property damage ensued from them. As noted in Pardee, supra, 77 Cal.App.4th at page 1356, ” ‘your work’ is further defined in the policies as including warranties and representations. Liability arising out of such inherently involves completed work, not work in progress.”
It is well accepted as a commercial reality that construction work performed at one time may deteriorate or manifest injury or damage, possibly to adjacent work, at a later time or after completion. (Pardee, supra, 77 Cal.App.4th at pp. 1360-1361.) Unlike in Pardee, where the policies were issued postconstruction, the subject AIEs were issued during construction, while the subcontractors were still working on different phases of the projects. Both sets of insureds could reasonably have expected that if the subcontractors had bought completed operations coverage for the work, it also applied to vicarious liability of the developer, if property damage problems appeared. (Id. at p. 1350.) These AIEs do not clearly restrict coverage to only ongoing operations, simply by linking the ongoing operations phrase to the “liability arising out of the work” clause. (Id. at pp. 1359-1360.) We should give effect to each of the phrases defining the scope of coverage.
The court‘s decision stated that American Safety had failed to clearly state in the AIEs that completed operations are not covered, and failed to restrict coverage as applicable only to ongoing operations. Instead, “ASIC has taken a middle-ground and left the language in that the endorsement applies to ‘your work’ but limited to ongoing operations and therefore creating an ambiguity. Had ASIC wished to make it clear to Pulte that it was not covering completed operations for the additional insured (which its policy covers for the named insured), ASIC could have clearly said so.” (Italics added.) We agree that the AIEs are ambiguous in combining these two types of coverage in one clause. They “failed to expressly limit covered completed operations as to time or particular project in their policy and endorsement language.” (Pardee, supra, 77 Cal.App.4th at p. 1357Id. at p. 1356.) They do not adequately define ” ‘your work’ as work ‘now being performed or to be performed during the term of this policy.’ ” (Ibid.)
If this “ongoing operations” language is meant as an exclusion, it must be narrowly construed. (Waller, supra, 11 Cal.4th at p. 16.) Assuming that the subcontractors carried out ongoing operations “on or after the effective date of the endorsement,” their work was performed during the policy period and coverage was not clearly excluded.