Interpreting “Ongoing Operations” In An Additional Insured Endorsement

St. Paul Fire and Marine Insurance Company v. ACE American Insurance (2014 WL 4078660, August 14, 2014)

In this Federal Eastern District case, the court’s interpretation of “ongoing operations” in an additional insured endorsement included a temporal element.  However, this temporal element places emphasis on when the damage occurred, as opposed to when the damage was discovered.  Because the homeowners discovered the damage after the sub-contractors completed their work, but the damage initially occurred during their operations, Arch was required to defend Beazer as an additional insured.

Facts of the Case:

Plaintiffs St. Paul Fire and Marine Insurance Company (St. Paul) and Travelers Property Casualty Company of America (Travelers) sue, inter alia, defendant Arch Specialty Insurance Company (Arch) for declaratory judgment and equitable contribution, claiming Arch breached its contractual duty to defend and/or indemnify Beazer Homes (Beazer) in an action brought by homeowners for construction defects.

The owners of 152 single family homes at housing developments in Yuba City, California filed an action in Yuba County Superior Court against Beazer.  The homeowners alleged defects and damages in their homes.

Beazer was the developer and general contractor for six residential developments.  Beazer entered into subcontracts with Borge Construction, Inc., Tileco; Larry Methvin Installations; Michael Hopper Construction, Inc. and Marble Palace, Inc. for various work at some or all of the six residential developments.  Defendant Arch issued commercial general liability policies to Borge Construction, Inc., Tileco, Larry Methvin Installations and Michael Hopper Construction.  Travelers issued a policy to Marble Palace, Inc.

Beazer tendered its defense of the underlying action to Arch under the policies issued by Arch.  Arch denied any duty to defend Beazer on various grounds, including limitations of the additional insured endorsements contained in the policies, which limit coverage to an otherwise qualifying additional insured to liability arising out of the named insured’s “ongoing operations.”  Beazer tendered its defense of the underlying action to Travelers.  Travelers issued a letter denying the duty to defend Beazer.

Application:

The dispute turned on interpretation of the additional insured coverage in Arch’s insurance policies, in particular, the coverage for “property damage” caused by an “occurrence” but “only with respect to liability arising out of [the subcontractors’] ongoing operations.”  It was undisputed that, as to Beazer, the insurance policies at issue do not cover property damage arising out of the subcontractors” “completed operations.”  The precise question before the court was whether coverage under the policies for property damage “arising out of . . . ongoing operations” included property damage that occurred during the “ongoing operations” of the subcontractors, but was not was not discovered until after those “ongoing operations” had concluded.

“Occurrence” was defined in the Arch insurance policies as “an accident, including continuous or repeated exposure to substantially the same harmful conditions.” Under California law, “the time of occurrence of an accident within the meaning of the insurance policy is the time the complaining party was damaged, not the time the wrongful act was committed.” (Pennsylvania General Ins. Co. v. American Safety Indemnity Co., 185 Cal.App.4th 1515, 1526 (2010)- quoting Hallmark Ins. Co. v. Superior Court, 201 Cal.App.3d 1014, 1018 (1988)).  Thus, “the ordinary trigger of coverage would focus on when damage was inflicted, not on when the causal acts were committed.. . .”  Id. (emphasis in original).

Ongoing operations coverage and completed operations coverage are defined temporally.  “Ongoing operations” generally refers to “work in progress only”. (Pardee Construction Co. v. Insurance Co. of the West, 77 Cal.App.4th 1340, 1359 (2000)).  Under the Arch policies, completed operations coverage was defined in relevant part to cover property damage “arising out of” the subcontractors’ work “except . . . work that has not yet been completed or abandoned.”  The policies include specific provisions for when work is “deemed completed.”  Generally, ongoing operations and completed operations coverages “are complementary and not overlapping.” (Fibreboard Corp. v. Hartford Accident & Indemnity, 16 Cal.App.4th 492, 500 (1993); see also Pardee, 77 Cal.App.4th at 1359 (restriction of “coverage for an additional insured to the ‘ongoing operations’ of the named insured . . . effectively precludes application of the endorsement’s coverage to completed operations losses.”)

Analysis:

As a general rule, determination of whether the insurer owes a duty to defend is “made by comparing the allegations of the complaint with the terms of the Policy.  The insurer’s defense duty is obviated where the facts are undisputed and conclusively eliminate the potential the policy provides coverage for the third party’s claim.”  (Regional Steel Corporation v. Liberty Surplus, 226Cal.App.4th 1377, at 1389 (2014)).  The court interpreted the insurance policy by following the general rules of contract interpretation.

While the inquiry about whether there is a duty to defend begins with the allegations of the complaint, “[f]acts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.” (Montrose Chem. Corp v. Superior Court, 6 Cal.4th 287, at 295 (1993)).

The court noted, in relevant part, the policies cover property damage that occurs during the policy period.  The exclusions precluded coverage for damage to those parts of the property within the scope of each subcontractor’s work; thus the policies limit coverage to damage to property other than the part of the project the subcontractor was working on.  With respect to claims against Beazer, the additional insured, coverage was limited to property damage “arising from” the subcontractors’ “ongoing operations.” “Ongoing operations” means work in progress.  Construing all of these clauses together, the court found that, as to Beazer, the Arch policies cover property damage that happened during the policy periods, arose from the ongoing operations of the subcontractors, and was to property other than property within the scope of the subcontractors’ duties.

Relying on Tri-Star Theme Builders, Inc. v. OneBeacon Ins. Co., 426 Fed.Appx. 506 (9th Cir. 2011) and McMillin Const. Services, L.P. v. Arch Specialty Ins. Co., 2012 WL 243321 (S.D. Cal. 2012),  plaintiff argued that the additional insured endorsement covers only the type of activity from which Beazer’s liability must arise in order to be covered, not the time at which the injury or damage must occur.  Arch contend that coverage for liability arising from “ongoing operations” ends when the subcontractors’ work is complete, and that the policies do not extend “completed operations” coverage to Beazer.

The court agreed to a certain extent with both parties.  The court found “ongoing operations” and “completed operations” are temporal concepts, with “ongoing operations” referring to work in progress and “completed operations” referring to work that has been completed, as defined in the policies.  Because they are temporal concepts, property damage that arises from ongoing operations must occur while the operations are ongoing.  The two concepts do not, however, address in any way when the property damage must manifest or be discovered in order for coverage to arise, and nothing in the policies before the court addresses that question.  Viewing the policies as a whole, the court found that, as to Beazer, they cover claims for property damage, other than to the property the subcontractors were working on, that arose from the subcontractors’ ongoing operations and occurred during those operations.

Ruling:

The court found the underlying homeowners’ complaint included claims which could give rise to liability under the policies as construed by the court.  The allegations included allegations of damage to property other than property within the scope of the subcontractors’ work which arose from the subcontractors’ work.  The homeowners have alleged that the defects were latent and not “reasonably apparent” on inspection at the time the homes were purchased.  The court further found these allegations were sufficient to give rise to a possibility of coverage extended to Beazer under the additional insured endorsement in the policies. This decision was issued by a Federal Court applying California law. A California appellate court has yet to consider this particular issue.

ABOUT THE AUTHOR: David Ramirez is a Senior Counsel at TYSON & MENDES, LLP, and primarily represents clients in complex litigation, including construction defect, insurance law, property disputes, and product liability.  Mr. Ramirez was named as a “Top Lawyer” in California for “Litigation” in the March 2014 issue of American Lawyer Media and a “Top Lawyer” of San Diego for “Complex Litigation” in the March 2014 issue of San Diego Magazine.

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