Additional Insured Endorsements - The Trend is Insured-Friendly
A. THE PULTE DECISION
In Pulte Home Corp. v. American Safety Indem. Co., 14 Cal.App.5th 1086 (2017), the California Fourth District Court of Appeal affirmed the trial court’s decision that a duty to defend Pulte Home Corporation (“Pulte”) was triggered under three American Safety policies issued to subcontractors which included additional insured endorsements (“AIEs” or “endorsements”) affording coverage to Pulte for liability arising out of the named insured’s work, but only with respect to ongoing operations. Essentially, the Court of Appeal held that the language in the endorsements was ambiguous, such that a defense was owed to Pulte under the American Safety policies, notwithstanding American Safety’s attempt to limit coverage for Pulte to only the time that its named insured was working on a jobsite.
American Safety did not intend to afford coverage to Pulte once its named insured completed its work at a jobsite. In dismantling American Safety’s position, the Court of Appeal appeared to conflate coverage afforded under AIEs for ongoing operations versus coverage afforded under the policies for completed operations. Indeed, the Court of Appeal noted that the AIEs’ language allowing coverage for “liability arising out of ‘your [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.”
The Court of Appeal went on to note 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. Thus, the Court of Appeal declared the language ambiguous and held that a defense was owed to Pulte under the American Safety policies.
B. THE McMILLIN DECISION
In McMillin Management Services, LLC v. Financial Pacific Ins. Co., 17 Cal.App.5th 187 (2017), the California Fourth District Court of Appeal reversed the trial court’s entry of judgment in favor of Lexington Insurance Company (“Lexington”) in connection with whether coverage was afforded to McMillin Management Services, LLC (“McMillin”) as an additional insured under the Lexington policies.
Lexington included McMillin as an additional insured during the time that its named insured subcontractors were performing work with respect to the construction of a single family home project prior to June 2005. The project was completed at that time. Thereafter, in June 2010, several homeowners within the project filed a construction defect action against McMillin. In turn, McMillin tendered the defense of the action to Lexington. The additional insured endorsements in the Lexington policies afforded coverage for ongoing operations only, and specifically excluded property damage occurring after the work performed by its named insureds had been completed.
In response, McMillin emphasized that the endorsements provided coverage for liability “arising out of” ongoing operations performed for McMillin. Hence, to the extent that potential property damage took place while the named insured were performing such operations on behalf of McMillin, a defense was owed under the Lexington policies.
In rejecting Lexington’s arguments, the Court of Appeal noted that “the endorsements do not state that Lexington would provide coverage solely for liability occurring during Martinez’ or Razema’s ongoing operations performed for McMillin.” Rather, the endorsements state that Lexington would provide coverage to McMillin for liability “arising out of such ongoing operations.” Because the endorsements did not clearly limit coverage to the additional insured during the time that its named insured was performing operations on a site, the Court of Appeal broadly interpreted the AIEs to afford a defense to McMillin under such policies.
From a duty-to-defend standpoint, the California Courts of Appeal are interpreting AIEs in an expansive manner so as to trigger potential coverage under a policy. In addition, the Pulte and McMillin decisions blur the line between ongoing and completed operations such that insurers need to consider the use of even more precise language to limit the scope of coverage afforded by AIEs to only the time that a named insured is working or performing operations for an entity claiming additional insured status under the named insured’s policy.