In the recent decision in McMillin Homes Construction v. National Fire & Marine Ins. Co. (2019 WL 2366468) the Fourth District Court of Appeal continued a recent trend of finding coverage for additional insureds in construction related cases.
McMillin Homes Construction, Inc. (“McMillin”) acted as the developer and general contractor on the Auburn Lane housing community project in the city of Chula Vista. It hired Martin Roofing Company, Inc. (“Martin”) to “render a complete roofing job.” The subcontract required Martin to obtain general liability insurance naming McMillin as an additional insured.
National Fire and Marine Insurance Company (“National Fire”) issued a CGL policy to Martin. The subject policy covered “property damage” or “bodily injury” caused by an “occurrence” during the policy period. McMillin was covered as an additional insured under the ISO endorsement form. In that ISO form, National Fire broadly agreed to cover property damage or bodily injury during the policy period arising out of Martin’s ongoing operations or out of McMillin’s general supervision of those operations.
Homeowners in project developed and built by McMillin, sued McMillin for construction defects. The complaint alleged water intrusion and damage caused by roofing defects. Two homes that Martin worked on were at issue in the suit.
McMillin tendered its defense of the action to National Fire, attaching a subcontract addendum for Martin’s work; the additional insured endorsement; the subject complaint; a matrix of homes at issue; and a matrix of insurance carriers McMillin believed owed a defense duty. National Fire refused coverage, noting McMillin had not provided a copy of the McMillin-Martin subcontract. McMillin submitted the subcontract and sought reconsideration. National Fire again denied owing McMillin a duty to defend.
McMillin subsequently sued National Fire for declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing. With respect to each cause of action, the operative Third Amended Complaint alleged that National Fire breached its duty to defend McMillin.
Central to this case was the “care, custody, or control exclusion” (hereafter “CCC exclusion”). In particular, National Fire took the position there was no coverage for damage to property in McMillin’s “care, custody, or control.” McMillin argued the provision applied only where control over the damaged property was complete or exclusive. Disagreeing, National Fire noted those words were missing from the text of the exclusion. It also claimed a subject endorsement intended to “close the loop” by eliminating indirect indemnity coverage to McMillin for construction defect litigation pursuant to the subcontract.
The court entered judgment in favor of National Fire. It acknowledged decisions broadly construing the duty to defend for general contractors covered as additional insureds. (Pulte Home Corp. v. American Safety Indemnity Co. (2017) 14 Cal.App.5th 1086 (“Pulte”); McMillin Management Services, L.P. v. Financial Pacific Ins. Co. (2017) (“McMillin”). However, those cases did not involve the subject endorsement with its CCC exclusion. As the first to construe that exclusion in the subject forum, the court declined to require exclusive or complete control.
McMillin appealed the judgment, arguing the court misconstrued the CCC exclusion and erroneously relied on an unrelated endorsement to find no defense duty.
The Court acknowledged two recent decisions broadly construe a general contractor-additional insured’s right to a defense under the “ongoing operations” coverage provision. (Pulte, supra, 14 Cal.App.5th at p. 1113 [although property damage became evident after the work was completed, it could have occurred within the policy periods while subcontractor’s operations were ongoing]; McMillin, supra, 17 Cal.App.5th at pp. 204−205, 225 [rejecting insurer’s claim that liability could not “arise out of” subcontractor’s “ongoing operations” until after homeowners closed escrow, at which point subcontractors had completed their work].)
Although the endorsement here, like the one in McMillin, excluded damages occurring after operations were completed, damage could begin during a subcontractor’s ongoing operations in the policy period, triggering a duty to defend. (McMillin, at pp. 204−205)
National Fire did not dispute that the additional insured endorsement covers McMillin for liability arising out of Martin’s ongoing operations or out of McMillin’s supervision of those operations during the policy period. The homeowners alleged water intrusion due to defects in the roofing systems. Property damage could have occurred while the subcontractor’s operations were ongoing in the policy period. Under Pulte and McMillin, the duty to defend was triggered based on the coverage provision. National Fire does not suggest otherwise.
Instead, National Fire argues the CCC exclusion in the additional insured endorsement fundamentally distinguishes this case from Pulte and McMillin, which relied on endorsement forms without that exclusion. The additional insured endorsement applicable to McMillin does not cover:
“Property damage’ to [¶] … [¶] Property in the care, custody, or control of the additional insured(s) or over which the additional insured(s) are for any purpose exercising physical control.”
This exclusion, National Fire contends, “precluded a duty on the part of National Fire to defend McMillin as an additional insured in the action.” It argues that because McMillin was the general contractor on the project, any damage alleged in the action while the homes were being built would have been to property in McMillin’s care, custody, or control. The question on appeal is whether the CCC exclusion, narrowly construed, is reasonably interpreted to foreclose coverage to a general contractor for construction defect liability. As the Court explained, the Court believed it is not.
The Court of Appeal was not persuaded and did not struggle in overturning the trial court’s decision in favor of National Fire. In looking at prior cases dealing with the CCC exclusion, the court found the CCC exclusion has been traditionally construed in a sufficiently analogous context to require exclusive or complete control. In other words, previous courts had already interpreted this language and concept, and previously ruled exclusive or complete control is required. Therefore, this language was not ambiguous.
The presence of the roofing contractor on the site was enough to cause the Court of Appeal to rule that McMillin was not in complete and exclusive control. The court stated the additional insured’s mere status as the general contractor with overall responsibility for and nominal control of the entire project does not meet the standard of exclusive or complete control. National Fire did recognize that it may have liability for ongoing operations in connection with this project. However, National Fire was attempting to limit any potential exposure by stating McMillin was barred from coverage by the CCC exclusion. The Court of Appeal did not buy into this argument.
The Court of Appeal found this argument unpersuasive for a simple reason. In resolving an ambiguity, the Court interpreted provisions in the sense an insured reasonably understood them at the time of contract formation. (Maryland Cas. Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th 21, 29.) This rule does not protect the subjective beliefs of the insurer, but rather the objectively reasonable expectations of the insured. The Court indicated that even if it accepted the premise of National Fire’s argument, its intent as to coverage does not resolve which of two purportedly reasonable constructions of the CCC exclusion comports with the insured’s objectively reasonable expectations.
Thus, the effort by National Fire to get the court to rule it did not have a duty to defend the additional insured was defeated.
David P. Ramirez is 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 San Diego for “Complex Litigation” in March 2019 by San Diego Magazine.