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By: Zach Moura
In two recent published decisions, the California Court of Appeal held that additional insured endorsements (“AIE”) intended to limit coverage to damages sustained while the insured is performing ongoing operations were ambiguous.
In Pulte Home Corporation v. American Safety Indemnity Company, an appeal from a coverage action related to two underlying construction defect lawsuits, the Court of Appeal concluded the AIE did not expressly exclude the policies’ completed operations coverage. Pulte Home Corporation v. American Safety Indemnity Company (2017) 14 Cal.App.5th 1086.
In the underlying action, homeowners sued the general contractor and developer, Pulte Home Corporation, for alleged foundation, electrical, and waterproofing defects.
Several of Pulte’s subcontractors purchased CGL policies with American Safety Indemnity Company, including completed operations coverage. The AIE named Pulte as an additional insured “but only with respect to liability arising out of ‘your work’ … only as respects ongoing operations [or alternatively work ‘which is ongoing’] performed by the Named Insured for the Additional Insured on or after” the AIE’s effective date.
American Safety denied Pulte a defense to the lawsuits, arguing in the coverage action the AIE properly removed completed operations coverage for additional insureds. The trial court disagreed, ruling American Safety owed Pulte a duty to defend because the AIE’s reference to “ongoing operations” was ambiguous and failed to expressly exclude completed operations coverage.
The Pulte court affirmed the judgment, rejecting American Safety’s argument that the “ongoing operations” language constituted “a limiting term excluding completed-operations coverage”. The court’s final word on the issue can be read as an instruction to subcontractors and their insurers: “If the ‘ongoing operations’ language was meant by American Safety to preclude coverage for completed operations losses, it had to expressly state ‘that coverage was limited to claims arising from work performed during the policy period.’” Id. at 1116.
In the other recent case construing ongoing operations language in an exclusion, Global Modular, Inc. v. Kadena Pacific, Inc., the Court of Appeal narrowly interpreted exclusions j(5) and j(6) of a standard ISO CGL, affirming a ruling finding of coverage for the additional insured. Global Modular, Inc. v. Kadena Pacific, Inc. (Sept. 8, 2017) 15 Cal.App.5th 127, 137.
In Global Modular, a general contractor (Kadena) hired to build a rehabilitation center subcontracted the tasks of building, delivering, and installing the modular units that comprised the rehabilitation center to Global Modular, Inc. Global delivered the units covered only by a ¾” sheet of plywood, as agreed (the roofing was to be completed by a different subcontractor). The units were delivered in October and November – not an ideal time to leave rooms exposed to the elements with only plywood for protection. (Global covered the units with tarps, which unsurprisingly did not save the units from interior water damage when the rain came).
In finding coverage, the Global Modular court held “the active, present tense construction” of the phrase “are performing operations” in exclusion j(5) of the ISO CGL only excludes damage caused during physical construction activities, as opposed to damage to any of an insured’s uncompleted work in progress. Id. at 139. The court also held the language “particular part” of exclusion j(6) refers to components of a structure, not the structure as a whole. The court noted that while the only arguably defective “parts” of Global’s work were the plastic tarps that failed to keep water out, it was not an undisputed fact the tarps were faulty or Global’s placement of them incorrect, and there was no allegation the items for which Kadena sought repair and replacement costs were themselves defective. Id. at 141.
The Global Modular court’s narrow construction of the AIE meant that exclusions j(5) and j(6) did not exclude coverage for water damage to the modular units’ interiors. And because Kadena incurred delay damages while it repaired property damage to which the CGL applied, the delay damages were covered under the policy’s insuring clause.
Pulte and Global Modular make clear that insurers in California intending to cover only ongoing operations must be aware that such limitations are out of favor, and if they intend to exclude completed operations must include language that clearly and expressly does so. Further, because the Pulte court relied in part on the developer/GC’s reasonable expectation of coverage from the AIE, a subcontractor’s insurer will need to take that into consideration when considering the wording of any exclusion it intends to rely on.
If you have any questions or would like more information, please contact Zach Moura at [email protected].