Fire Insurance Exchange v. Superior Court (Altman)
116 Cal. App. 4th 446 (2d Dist. Mar. 2, 2004)

A group of homeowners whose homes were damaged in the 1994 Northridge earthquake brought claims against their insurance companies to recover under their policies and for damages, alleging breach of contract, insurance bad faith, fraud and negligence. The trial court found the policy at issue to be ambiguous and certain exclusions related to land stabilization and building code upgrades to be invalid and unenforceable. The insurance companies filed a petition for a writ of mandate. The Court of Appeal analyzed the “plain, unambiguous language of the policy” and reversed the trial court’s finding that the policy included the cost of repairing the land under damaged structures.

The Court of Appeal affirmed the trial court’s finding that the policy includes coverage for the increased costs of repair or replacement of damaged buildings where such increased costs are due to the need to conform to updated building codes. The Court concluded that the statutory language of Insurance Code Section 2071 (setting forth the standard form fire insurance policy) did not control because the policy did not “substantially comply” with Section 2071.

Thus, the Court applied the “usual rules of policy interpretation.” The Court found that the policy exclusion for loss caused by “enforcement of any ordinance or law regarding construction” was ambiguous, therefore any doubt must be resolved in favor of coverage.

F&H Construction v. ITT Hartford Insur. Co. of the Midwest
118 Cal. App. 4th 364 (3d Dist. May 5, 2004)

F&H Construction was general contractor for construction of a water pumping plant. F&H’s subcontractor manufactured steel pile caps with A-36 grade steel instead of the required A-50 grade steel, and F&H was compelled to repair its subcontractor’s defective work in order to deliver the project on time. F&H filed suit against the subcontractor’s insurer under the subcontractor’s commercial general liability insurance policy, seeking damages for the cost of modifying the defective pile caps and the lost bonus for early completion of the project. The trial court upheld the insurance company’s motion for summary judgment and the Court of Appeal affirmed, finding that F&H’s alleged damages did not constitute “property damage” under the insurance policy. The policy at issue described “property damage” as “[p]hysical injury to tangible property.”

The Court observed that F&H’s alleged economic damages were not “property damage” because “the incorporation of a defective component or product into a larger structure does not constitute property damage unless and until the defective component causes physical injury to tangible property in at least some other part of the system.” The Court also explained that the “mere failure of a defective product to perform as intended” does not constitute property damage.

Garamendi v. Golden Eagle Insurance Co.
116 Cal. App. 4th 694 (1st Dist. Mar. 4, 2004)

Subcontractor filed an answer to complaint alleging construction defects but, on the eve of trial, it was discovered that subcontractor’s corporate status had been suspended; thus subcontractor could not participate in the litigation. Subcontractor’s insurer declined to intervene on its own behalf.

The Court of Appeal ruled that subsequent judgment entered against subcontractor was not a default judgment under Section 580 of the Code of Civil Procedure and therefore subcontractor’s insurer was obligated, under Insurance Code Section 11580, for the full amount of the valid judgment against subcontractor covered by insurer’s policies. The Court of Appeal remanded for a determination of whether subcontractor’s insurer was estopped from asserting its coverage defenses because it failed to defend subcontractor at trial.

Hartford Casualty Insurance Company v. Mt. Hawley Insurance Company 123 Cal. App. 4th 278 (2d Dist. Oct. 21, 2004)

Subcontractor agreed to indemnify general contractor against all costs arising out of subcontractor’s work on a construction project. Subcontractor’s insurer sought equitable contribution from general contractor’s insurer after paying to defend and settle a lawsuit brought by subcontractor’s employee who was injured on the job. The court found that here, where general contractor’s and subcontractor’s insurers were subrogated to the rights of their respective insureds, and the parties had bargained for subcontractor to bear all risk associated with the type of injury at issue, subcontractor’s insurer is not entitled to contribution.

The court reasoned that to apportion the loss in this case based on an equitable principle would negate the contractual indemnity agreement and impose liability on general contractor’s insurer when general contractor bargained with subcontractor to avoid that very result.

Jordan v. Allstate Ins. Co.
116 Cal. App. 4th 1206 (2d Dist. Mar. 18, 2004)

Homeowner’s insurance policy expressly excluded coverage for losses caused by “wet or dry rot” or “collapse,” but an exception to the collapse exclusion provided “additional coverage” for an “entire collapse.” The Court of Appeal found the policy ambiguous as to whether coverage applied to the partial “collapse” of plaintiff’s home caused by a water-conducting fungus known as Meruliporia Incrassata. The Court of Appeal, explaining that exceptions to exclusions must be construed in favor of the insured, reversed the trial court’s summary judgment in favor of the insurer and remanded for a determination of whether coverage applied.

Opinion of Lockyer, A.G.,
87 Cal. Op. Atty Gen. 121, No. 03-1102 (Aug. 26, 2004)

A member of the California State Assembly requested an opinion regarding the following three issues: (a) is an insurer required to report to the California Architects Board a settlement or arbitration award exceeding $5,000 that involves a claim alleging that an insured architect has engaged in wrongful conduct; (b) what type of “settlement” of what type of “claim” must an insurer report to the Board; and (c) is an insurer required to report to the Board a settlement or arbitration award exceeding $5,000 that is paid on behalf of an architectural firm where the claim alleges that there was wrongful conduct with respect to the architectural services performed?

The AG opined that, under Business and Professions Code Section 5588, an insurer is required to report such a settlement or arbitration award. Further, Section 5588’s reporting requirements are triggered by claimant’s allegation of wrongdoing alone and may not be avoided by an architect’s or insurer’s refusal to concede fault or by the lack of a finding of fault by an arbitrator. Regarding the second issue, under Section 5588 “settlement” of a “claim” is any agreement resolving all or part of a demand for money which is based on an insured architect’s alleged wrongful conduct. To qualify as a claim under Section 5588, the demand must be premised on the license holder’s alleged “fraud, deceit, negligence, incompetency, or recklessness in practice” and the value of the claim as measured by the settlement amount or arbitration award must exceed $5,000.

Finally, as to the third issue, because an architectural firm furnishes services under the responsible control of a licensed architect, an insurer’s payment of a settlement or arbitration award exceeding $5,000 on behalf of an architectural firm must be reported to the Board with respect to the architect having “responsible control,” where the claim or action for damages is based on alleged wrongful conduct regarding the architectural services performed. “Responsible control” is defined in Business and Professions Code Section 5535.1 as “that amount of control over the content of technical submissions during their preparation that is ordinarily exercised by architects applying the required professional standard of care.”

Palacin v. Allstate Insurance Co.
119 Cal. App. 4th 855 (4th Dist. Jun. 22, 2004)

Palacin purchased a condominium owner’s insurance policy from Allstate. The Allstate policy incorporated the homeowners’ association rules and covered real property items that were Palacin’s “insurance responsibility” as expressed or implied under the rules. The rules, as expressed in the condominium complex’s CC&R’s, provided that the homeowners’ association would insure all improvements within the development, however the homeowner could separately insure any improvements made by an owner within her unit. Allstate later denied Palacin’s claim for water damage to her walls and floors on the grounds that the homeowners’ association was wholly responsible for the loss.

Palacin sued Allstate for breach of contract. The trial court sustained Allstate’s demurrer, finding that the homeowners’ association was solely responsible for Palacin’s loss. The Court of Appeal reversed, holding that Allstate’s demurrer should be sustained, however Palacin should be granted leave to amend her complaint to allege that her claimed property damage was not covered by the homeowners’ association’s policy (thus triggering coverage under Allstate’s policy) and/or to allege that the items damaged constitute separately insured “improvements” that were Palacin’s insurance responsibility.

Travelers Casualty and Surety Co. v. Century Surety Co.
118 Cal. App. 4th 1156 (4th Dist. May 21, 2004)

Plaintiff and defendant insurers issued policies covering a framing contractor who was sued for alleged construction defects that caused continuous injury during the period of time each policy was in effect. Each insurer was sole provider of coverage during the time its policy was in effect. Plaintiff’s and defendant’s policies contained mutually repugnant “other insurance” clauses: plaintiff’s policy provided for pro rata contribution from other available insurance while defendant’s policy included an “escape clause” providing that, if other insurance is available to the insured, defendant’s policy is “excess of” such insurance.

The appellate court held that, notwithstanding defendant’s escape clause, defendant had a duty to contribute to settlement and defense costs incurred by plaintiff because giving effect to defendant’s policy would impose on plaintiff “the burden of shouldering that portion of a continuous loss attributable to the time when defendant was the only liability insurer covering [the framing contractor].”

Watts Industries, Inc. v. Zurich American Insurance Company
121 Cal. App. 4th 1029 (2d Dist. Aug. 24, 2004)

Insurer refused to defend insured manufacturers of parts for municipal water systems in underlying action by municipalities alleging injury to their water systems. The trial court granted plaintiffs summary adjudication, holding that insurer had a duty to defend in the underlying action because there was a triable issue of fact regarding the possibility of coverage. The Court of Appeal affirmed, holding that the underlying allegations of harm raised a possibility of coverage sufficient to trigger a duty to defend, that the claim that plaintiffs’ parts containing hazardous materials were incorporated into municipalities’ water systems also raised a possibility of coverage, and that insurer did not show that all alleged damage was excluded under policy provisions applicable to defective products and “impaired property.”

Finally, the Court held that the remedies sought by municipalities, including reimbursement of costs to replace plaintiffs’ substandard parts, were remedial and not prophylactic where the underlying suit alleged that injury to the water systems and contamination of the water with lead had already occurred.

For more information please contact a member of the Real Estate and Construction Law Blog Editorial Team.