Pulte Home Corporation v. American Safety Indemnity Company
In Pulte Home Corporation v. American Safety Indemnity Company, 14 Cal.App.5th 1086 (August 30, 2017), the California Fourth District Court of Appeal affirmed the trial court’s ruling that a duty to defend Pulte Home Corp. (“Pulte”) was triggered under three American Safety policies issued to subcontractors which included additional insured endorsements (“AIEs”) affording coverage to Pulte for liability arising out of the named insured’s work, but only with respect to ongoing operations. The Court of Appeal held that the terms of the AIEs were ambiguous when interpreted in the context of the American Safety policies as a whole. In particular, the AIEs could be interpreted to afford coverage to Pulte for liability related to ongoing operations, notwithstanding that the underlying lawsuits had been filed after the homes had been completed.
The Court of Appeal also held that American Safety’s failure to consider conflicting trial court decisions interpreting similar endorsements, narrow interpretation of its policies and its “blanket policy” of denying additional insured tenders, constituted bad faith. Further, such conduct was so pervasive as to merit an award of punitive damages.
However, the Court of Appeal reversed the trial court’s decision awarding Brandt fees based on its incorrect use of an alternative attorneys’ fees calculation submitted by Pulte after the trial of the lawsuit.
The Pulte decision arose out of Pulte’s tender of defense of two lawsuits under three subcontractor policies issued by American Safety:
- Schaefer v. Pulte Home Corporation (2011) – tendered under American Safety policies issued to Concrete Concepts, Inc. (“Concrete”) and Frontier Concrete, Inc. (“Frontier”); and
- Large v. Pulte Home Corporation (filed 2013) - tendered under policies issued to Concrete, Frontier and Foshay Electric Company, Inc. (“Foshay”).
Pulte tendered the defense of the construction defect actions to American Safety. However, American Safety refused to defend Pulte based on numerous coverage defenses. In particular, American Safety based its coverage denials on:
- The AIEs included with the subcontractor policies did not afford products – completed operations coverage (and implicitly excluded such coverage); and
- The “damage to property” exclusions 2.j.(5) and 2.j.(6) applied to bar coverage of the construction defect actions.
The Court of Appeal stated as follows in connection with affirming the trial court’s holding regarding the duty to defend Pulte against the construction defect actions:
- These policy terms (i.e., American Safety terms and provisions) 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 period stated in the AIEs. Physical injury to the homes’ foundations and walls, was established by inspections, is clearly alleged in the underlying construction defect complaints, and is not tied to the current owners’ finances” (i.e. is not tied to damage after the owner purchased the home).
- The 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. Hence, the duty “may exist even where coverage is in doubt and ultimately does not develop.” 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 began with defective design and construction within the pertinent policy period.”
- American Safety incorrectly focuses on when the current property owners became financially damaged through purchases (i.e. after completion of the homes). 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 damage became physically damaged. 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 contractors’ 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 after the house had been sold to one of the plaintiffs.”
The Court of Appeal also rejected American Safety’s argument that the AIEs limited coverage to “ongoing operations” such that the phrase “as respects ongoing operations” excluded “completed – operations coverage.” In rejecting American Safety’s argument, the Court of Appeal noted as follows:
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."
. . .
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. 1357.) They are not "expressly limiting the time frame of the additional insured coverage to the time of the ongoing operations of the named insured." (Id. 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.'
2. Damage to Property Exclusions
The Court of Appeal also rejected American Safety’s arguments that the “damage to property” exclusions in its policies (exclusions 2.j.(5) and (6)) barred coverage of the construction defect actions. In particular, the court noted that the complaints alleged facts suggesting that the work of the subcontractors for which Pulte was held liable, could have damaged the work of other subcontractors working on the projects. Hence, the exclusions did not apply to bar a defense of Pulte against the construction defect actions.