A provision in a commercial general liability insurance policy requiring the insurer to “defend the insured against any ‘suit’ seeking … damages” to which the insurance applies includes the duty to defend the insured in proceedings under the Calderon Act. ( Clarendon Nat’l Ins. Co. v. StarNet Ins. Co. (2010) 2010 WL 2904995)
Facts
Centex Homes (Centex) was the developer of a residential development known as Westwood Ranch. Centex hired WSM Transportation doing business as Sam Hill & Sons, Inc. (Sam Hill) to act as a subcontractor during construction. Pursuant to the subcontract, Centex was listed as an additional insured on Sam Hill’s general liability policies issued by StarNet Insurance Company (StarNet).
California Civil Code section 1375 et seq. – typically referred as the “Calderon Act” – establishes procedural rules and practices that a common interest development association must follow prior to filing a construction defect lawsuit against a developer, builder or contractor. The Calderon Act’s stated purpose is to encourage settlement of construction defect disputes and to discourage unnecessary litigation.
In 2006, the Westwood Ranch Homeowners Association, Inc. (HOA) served a notice of commencement of legal proceedings against Centex pursuant to the Calderon Act. The notice set forth a list of alleged construction defects at the Westwood Ranch development. Centex subsequently incurred legal fees in defending against the Calderon process initiated by the HOA.
Centex later sued Clarendon National Insurance Company (Clarendon), asserting that Clarendon had a duty to pay defense costs incurred by Centex in connection with the Calderon process initiated by the HOA. Clarendon filed a cross-complaint against StarNet, asserting that StarNet also had a duty to contribute toward defense costs incurred by Centex during the Calderon process. StarNet denied liability under its policies, claiming that the Calderon process did not qualify as a “suit” within the meaning of the StarNet policies.
The trial court entered judgment in favor of Clarendon, finding that the Calderon process against Centex was a “suit” within the meaning of the StarNet policies, and that StarNet thus had a duty to defend Centex during the Calderon process. StarNet appealed.
Holding
The Court of Appeal affirmed. The appellate court noted that under the StarNet policies, StarNet agreed to indemnify an insured against damages because of covered bodily injury or property damage, and to defend an insured against any “suit” seeking such damages. The StarNet policies then defined a “suit” so as to include “a civil proceeding in which damages because of ‘bodily injury’ [or] ‘property damage’ … to which this insurance applies are alleged.”
According to the appellate court, the Calderon process qualified as a “civil proceeding” within the meaning of the StarNet policies’ definition of “suit”. The court emphasized that the Calderon Act requires a common interest development association to satisfy certain dispute resolution requirements with respect to the builder, developer, or general contractor before the association may file a complaint in court for construction or design defects. The court reasoned that although the Calderon Process occurs before a complaint is filed and itself does not result in a judgment or court-ordered payment of money, the Calderon process is nevertheless an “integral part of construction defect litigation initiated by a common interest development association.” The Calderon process was thus a “suit.” As such, StarNet was obligated to contribute toward the defense costs Centex had incurred in defending against the Calderon process initiated by the HOA.
Comment
In Foster-Gardner, Inc. v. National Union Fire Insurance Company (1998) 18 Cal.4th 857, the California Supreme Court held that where a policy does not define the term “suit,” the term “suit” will be construed to mean “a court proceeding initiated by the filing of a complaint.” However, in the present case, the policy defined the term “suit” so as to include “a civil proceeding” in which covered damages are asserted. Thus, according to the Court of Appeal, under the subject policy, the term “suit” meant something more than a proceeding initiated by the filing of a complaint. Applying the “literal meaning” approach to policy interpretation used by the Supreme Court in Foster-Gardner, the Court of Appeal held the Calderon process is a “civil proceeding” within the meaning of the current standard-form CGL policy.