The California Court of Appeal has concluded that a liability policy’s “development/construction exclusion” applied only if the insured—and not some third party—engaged in the excluded activity. ( Marquez Knolls Property Owners Association, Inc. v. Executive Risk Indemnity, Inc. (2007) WL 2007569)
Facts
Marquez Knolls Property Owners Association, Inc. (Association) is a non-profit corporation whose members own or reside in homes in the Marquez Knolls area of Pacific Palisades, California. One of the Association’s main activities is to mediate disputes between its members over the covenants, conditions and restrictions (CC&Rs) to which their properties were subject.
Association members Nicholas and Yasuko Valery remodeled their property. Later, a neighboring homeowner, Joan Robertson, complained that the Valerys’ construction obstructed views from Robertson’s property, in violation of the CC&Rs.
In response to Robertson’s complaint, the Valerys contacted the Association for assistance in resolving the dispute. The Association allegedly told the Valerys that it would provide informal, non-partisan assistance in an effort to help the neighbors settle their differences. In fact, however, the Association allegedly took Robertson’s side in the dispute; issued a formal determination stating that the Valerys’ replacement structure violated the CC&Rs; and assisted Robertson in prosecuting a lawsuit against the Valerys.
The Valerys subsequently sued the Association for fraud, breach of fiduciary duty and breach of duty to act in good faith. The Association tendered defense of the lawsuit to Executive Risk Indemnity, Inc. (Executive Risk) under a policy which covered the Association for “wrongful acts,” defined as “any actual or alleged error, omission, misstatement, misleading statement or breach of duty.” However, the policy also contained a “development/construction exclusion” which barred coverage for any wrongful act “based on, arising out of … or any way involving … the design, construction, renovation or rehabilitation of any … structure or other improvement on any real property.” Executive Risk, relying on the development/construction exclusion, declined to defend the Association against the Valerys’ lawsuit.
The Association then brought a bad faith action against Executive Risk, claiming that Executive Risk had wrongfully failed to defend the Association in the underlying lawsuit filed by the Valerys. The trial court found that the policy’s “development/construction exclusion” barred coverage for any potential liability the Association might have in the underlying lawsuit filed by the Valerys, and thus ruled that Executive Risk had no duty to defend the Association in the Valerys’ lawsuit. The Association appealed.
Holding
The Court of Appeal reversed, holding that the “development/construction exclusion” did not bar coverage for the Association’s alleged liability to the Valerys in the underlying lawsuit. According to the court, when read in context, the development/construction exclusion only barred coverage for liability arising from the insured’s “design, construction, renovation or rehabilitation” of a structure, not someone else’s “design, construction, renovation or rehabilitation” of a structure. Here, the Valerys’ claims against the Association arose not from the Association’s construction activities, but rather from the Valerys’ construction activities. Thus, the exclusion did not relieve Executive Risk of the duty to defend the Association against the Valerys’ lawsuit.
Comment
Note that the exclusion contained seemingly broad language, i.e., it barred coverage for any wrongful act “based on, arising out of … or any way involving … the design, construction, renovation or rehabilitation of any … structure.” However, despite the seemingly broad wording of the exclusion, the court narrowly construed the exclusion to apply only to wrongful acts arising from the insured’sconstruction activities. According to the court, if the exclusion applied to wrongful acts arising from a third party’sconstruction activities, the exclusion would render the policy largely illusory, since the insured’s (i.e., the Association’s) primary function was to mediate disputes arising from construction activities of third parties (i.e., the Association’s members).