Although an insurer issued additional insured endorsements purportedly limiting coverage to “ongoing operations,” the insurer was liable for breach of contract, bad faith and punitive damages after refusing to defend an additional insured against two construction defect lawsuits. ( Pulte Home Corporation v. American Safety Indemnity Company (2017) 14 Cal.App.5th 1086)
Facts
Beginning in 2003, Pulte Home Corporation (“Pulte”) was the developer and general contractor of two housing projects in the San Diego area. Pulte entered into subcontracts with Concrete Concepts, Inc., Frontier Concrete, Inc. and Foshay Electric Co., Inc. (collectively “the subcontractors”) to perform various aspects of the work. The subcontracts required the subcontractors to maintain general liability insurance policies, and to name Pulte as an additional insured on those policies.
Between 2003 and 2006, American Safety Indemnity Company (“ASIC”) issued various general liability policies listing the subcontractors as named insureds. Each policy provided that ASIC would defend an insured against suits seeking damages because of “property damage” that occurs “during the policy period,” that is caused by an “occurrence,” and that is not otherwise excluded. Each policy also contained an endorsement identifying Pulte as an additional insured, “but only with respect to liability arising out of ‘your work’ and only as respects ongoing operations performed by the Named Insured for the Additional Insured. “
By 2006, Pulte had completed the projects. In 2011 and 2013, two groups of homeowners filed construction defect lawsuits against Pulte. Among other things, the homeowners alleged that the homes they had purchased suffered from moisture intrusion damage arising from work the subcontractors had performed for Pulte. Pulte tendered the lawsuits to ASIC on the ground that Pulte was an additional insured on the ASIC policies. ASIC repeatedly refused to provide Pulte with a defense.
Pulte hired counsel on a contingent fee arrangement to sue ASIC, and Pulte then filed a lawsuit for breach of contract and bad faith against ASIC. On cross-motions for summary adjudication, the trial court ruled that ASIC had a duty to defend Pulte in the underlying construction defect litigation. Despite that ruling, ASIC did not assume Pulte’s defense.
Following a bench trial, the trial court awarded Pulte contract damages of approximately $455,000, representing the unreimbursed legal fees Pulte had incurred in defending against the underlying construction defect actions. After the trial court ruled that ASIC was obligated to defend Pulte, Pulte and its counsel modified their fee agreement from a contingency arrangement to an hourly arrangement. The trial court then found that ASIC had acted in bad faith in refusing to defend Pulte, and based on the “new” hourly fee agreement, awarded Pulte attorney’s fees of approximately $509,000 pursuant to Brandt v. Superior Court (1985) 37 Cal.3d 813. The trial court also found that ASIC had acted with malice and oppression in refusing to defend Pulte, and thus awarded Pulte $500,000 in punitive damages, reflecting an approximate one-to-one ratio with the compensatory damages (i.e., Brandt fees). The overall judgment exceeded $1.4 million. ASIC appealed.
Holding
The Court of Appeal affirmed the trial court’s ruling on the substantive coverage issues, but remanded to the trial court for recalculation of the compensatory damages (i.e., Brandt fees) and punitive damages.
With respect to the threshold issue of whether ASIC was liable for breach of contract, the appellate court held that there was a “potential” for coverage, and hence ASIC had a duty to defend Pulte. Specifically, the appellate court found that the alleged moisture intrusion into the homes in the underlying lawsuits was physical injury to tangible property and, hence, “property damage.” Moreover, there was at least a possibility that some property damage could have occurred “during the [ASIC] policy period,” even if the underlying homeowners did not purchase the homes until after the policy period. Further, the language in the additional insured endorsements covering Pulte “but only with respect to liability arising out of ‘your work’ and only as respects ongoing operations ” did not unambiguously exclude coverage to Pulte for any property damage included within the “products-completed operations hazard.” Last the ASIC policies’ “faulty workmanship” exclusions – exclusions j.(5) and j.(6) – did not relieve ASIC of a duty to defend Pulte because ASIC had not shown “that all of the damage the homeowners were claiming was limited to the particular location where one or another of the subcontractors was performing their work.” Thus, ASIC had breached its contractual duty to defend Pulte in the underlying construction defect litigation.
With respect to the issue of whether ASIC had acted in bad faith, the appellate court held that there was sufficient evidence ASIC had acted unreasonably in denying Pulte’s tenders. Specifically, ASIC had conducted a cursory investigation of Pulte’s tenders; interpreted the policy terms in an unduly restrictive fashion; ignored case authority that was unfavorable to ASIC; issued form denial letters citing policy exclusions and limitations that either did not exist or did not apply; etc. Thus, Pulte was entitled to recover Brandt fees from ASIC. However, the appellate court had “serious concerns” that near the end of the coverage litigation, Pulte and its counsel had modified their original contingent fee agreement to an hourly fee agreement in an attempt “to manipulate the calculation of Brandt fees to [Pulte’s] benefit.” Accordingly, the appellate court held that the trial court should recalculate the amount of Brandt fees utilizing the original contingent fee agreement between Pulte and its counsel.
Last, with respect to the issue of punitive damages, there was sufficient evidence that ASIC had acted with malice and oppression thus justifying an award of punitive damages. ASIC had demonstrated a “pattern and practice” of “using every conceivable argument to deny coverage” to additional insureds in construction defect litigation, even if those arguments were “invalid.” Further, that pattern and practice of not accepting additional insured tenders had “gone on for years and clearly was known to the officers and managing agents of ASIC.” Thus, punitive damages were appropriate. However, because the trial court had concluded that punitive damages should be awarded on an approximate one-to-one ratio with compensatory damages (i.e., Brandt fees), and because the trial court would have to recalculate the compensatory damages, the trial court would likewise have to adjust the punitive award to maintain the approximate one-to-one ratio.
Comment
The Pulte case could have a significant impact on insurers that have issued similar additional purporting to limit coverage for the additional insured to ongoing operations. Insurers with similarly-worded endorsements may want to reevaluate whether their endorsements are sufficiently clear to put the additional insured on notice that completed operations are not covered.