North Counties Engineering, Inc. v. State Farm General Insurance Company

(Insurer is Obligated to Defend Engineering Company in Connection with Continuing Loss Triggering Coverage Under Policies Which Did Not Include Completed Operations Exclusions)

In North Counties Engineering, Inc. v. State Farm General Ins. Co., 224 Cal.App. 4th 902 ( March 13, 2014), the California First District Court of Appeal reversed the trial court’s order granting State Farm General Insurance Company’s (“State Farm”) motion for directed verdict based on the absence of evidence triggering a duty to defend North Counties Engineering, Inc. (“NCE”) and its owner, Gary Akerstrom, in underlying lawsuits involving the construction of an earthen dam. The parties’ dispute arose out of NCE’s agreement to design and construct an earthen dam on property owned by Lolonis Winery (“Lolonis”). In addition, NCE entered into an oral agreement to construct improvements on two other dams located on the Lolonis property. Work on the dams was performed by North Counties Development, Inc. (“NCD”). NCD was co-owned and operated by the sons of the owner of NCE, Gary Akerstrom. Akerstrom also had an ownership interest in NCD.

Construction of the earthen dam as well as improvement work on the other dams on the Lolonis property began in 1998. In 1999, Lolonis signed written agreements with NCE and NCD to complete construction of the earthen dam in accordance with plans drafted by NCE in 1974. The subject contract defined both NCE and NCD as the “contractor” responsible for “furnishing all work, labor, tools, equipment, materials necessary to construct and complete in a good expeditious, workmanlike and substantial manner of the dam project under the terms of the agreement.”

In August 1999, NCE entered into two other agreements with Lolonis. One was to build an access road to the dam’s spillway, install large drainage culverts and work on the “south-borrow” area, from which soil was taken or borrowed to build the earthen dam embankment. The other was to construct a sediment basin adjacent to the south-borrow area.

Construction of the earthen dam was completed in November 1999. The California State Department of Water Resources, Division of Safety of Dams for the State of California (“DSOD”) issued a certificate of approval in February 2000 permitting the Lolonis to impound water and use the dam.

During the period of the construction of the dam as well as improvements to the other dams located on the Lolonis property, NCE was insured by State Farm. Up until June 11, 2000, the State Farm policies affording coverage to NCE did not include a “completed operations” exclusion. The State Farm policy on the risk beginning on June 11, 2000 included a “completed operations” exclusion.

Subsequently, the State of California filed a lawsuit in early 2004 against Lolonis seeking injunctive relief and damages related to sediment found in the creek downstream from the earthen dam constructed by NCE and NCD. As a result of the State’s complaint, Lolonis filed a cross-complaint against NCE, NCD, and Akerstrom asserting claims for breach of contract, negligence, indemnity and declaratory relief related to the design and construction of the earthen dam on its property. In addition, in April 2004, Lolonis filed a second lawsuit against NCE, NCD and Akerstrom. This lawsuit alleged causes of action for breach of contract, express/ implied warranty and negligence related to the design and construction of the earthen dam on the Lolonis property.

Subsequently, in May 2004, NCE and Akerstrom tendered the defense of the Lolonis cross-complaint filed in the State lawsuit as well as the Lolonis lawsuit to State Farm. In response to such tender, State Farm denied coverage of the Lolonis actions based on the “completed operations” exclusion in its policy on the risk beginning on June 11, 2000. Notwithstanding allegations of continuing damage taking place after completion of construction of the Lolonis earthen dam in November 1999, State Farm did not acknowledge or refer to its policy on the risk during this time period which did not include a “completed operations” exclusion.

NCE and Akerstrom re-tendered the defense of the Lolonis actions on November 20, 2006. Again, State Farm denied the duty to defend NCE and Akerstrom against the subject actions. Ultimately, in 2010 State Farm agreed to defend NCE and Akerstrom against the Lolonis actions and further agreed to reimburse the insureds for defense costs incurred from September 5, 2007 forward. Prior to State Farm’s acknowledgment of a defense obligation for the Lolonis actions, NCE and Akerstrom filed a lawsuit against State Farm for breach of contract and bad faith. On April 22, 2011, a second amended complaint was filed, which was the operative pleading when the case proceeded to a jury trial beginning on July 13, 2011.

Following motions in limine, testimony began on July 20 and plaintiffs’ case was presented over 18 days until August 18. On August 17, State Farm filed a motion for non-suit arguing that a duty to defend was not owed under its policy for the Lolonis actions. On August 18, following completion of the plaintiffs’ case, the trial court considered State Farm’s motion for non-suit and ultimately found that a duty to defend was not owed by State Farm to the insureds for the Lolonis actions. The court issued its order after State Farm had concluded its case in defense to the plaintiffs’ lawsuit. Essentially, the court determined the duty to defend after the entire trial of the plaintiffs’ lawsuit for breach of contract and bad faith.

In reversing the trial court’s entry of non-suit in favor of State Farm, the Court of Appeal noted that the earthen dam was completed in 1999, prior to the inception of the State Farm policy which included a “completed operations” exclusion. The Court of Appeal also noted that the underlying lawsuits related to damage sustained by “other property” due to the alleged negligent construction of the dam and the release of sediment downstream. Lastly, the Court of Appeal noted that the duty to defend was determined based on facts which support potential coverage for the insureds under an insurance policy. The Court of Appeal stated that the trial court only appeared to consider evidence suggesting that coverage was not afforded under the State Farm policies to NCE and Akerstrom. Essentially, because the trial court applied the wrong standard at the wrong time, (the conclusion of the State Farm trial), the Court of Appeal reversed the trial court’s decision and held that a duty to defend was owed to the insureds by State Farm under its policies on the risk for the period prior to the inception of the last State Farm policy included a completed operations exclusion. The Court of Appeal summarized the trial court’s erroneous handling of the duty to defend issues as follows:

In sum, these and other comments indicated that the court was looking at the evidence with the view that all that was involved was appellants' "expertise," and that they apparently should have had errors and omissions coverage. Whatever expertise appellants had is one thing. What Lolonis alleged against appellants is another.

Finally, we note the court's comment in the course of its holding that what this case was "about" was "a professional engineer . . . doing a sophisticated project . . . that requires the skill of a very intelligent person such as Mr. Akerstrom. . . ." While we may not agree with such description, we must ask how can a court determine what a case is "about" until it hears the case. And until it hears the case, the evidence is unknown. As many cases have held, "coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend." (Mirpad, LLC v. California Ins. Guarantee Assn. (2005) 132 Cal.App.4th 1058, 1068; accord Horace Mann, supra, 4 Cal.4th at p. 1085; Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 520.)

The law requires a trial court in ruling on State Farm's motion here to look for any evidence that might support appellants, and draw all inferences in their favor. The court here acted 180 degrees contrary. And reached the wrong conclusion. There was evidence supporting State Farm's duty to defend.

The Court of Appeal also rejected the trial court’s characterization of NCE’s liability as falling within the ambit of the “professional services” exclusion included in the State Farm policies. Essentially, the Court of Appeal noted that the Lolonis actions included claims of negligent construction of the earthen dam as opposed to the design of the dam. Based on these allegations, a duty to defend was owed to NCE and Akerstrom by State Farm.