A commercial general liability policy’s exclusion for “condominium and townhouse projects” precluded coverage for an insured’s work on a condominium project, even though the project consisted of free-standing residential units that resembled detached single-family homes. ( California Traditions, Inc. v. Claremont Liability Insurance Company (2011) WL 2452684)
Facts
California Traditions, Inc. undertook to develop a 146-unit residential project. Although the project was legally classified as a “condominium project,” the residential units were to be free-standing units with no shared walls, roofs, halls, plumbing lines or electrical lines.
California Traditions hired Ja-Con Systems, Inc. to act as framing subcontractor for the project. Ja-Con Systems allegedly was unaware that the project was legally classified as a “condominium project.”
After the project was completed, California Traditions sold the units to various buyers. The purchase documents and grant deeds all described the units as “condominiums.”
Later, one of the residents in the project filed a construction defect lawsuit against the developer, California Traditions. California Traditions in turn filed a cross-complaint for indemnity against the framing subcontractor, Ja-Con.
Ja-Con tendered defense of the construction defect action to its general liability insurer, Claremont Liability Insurance Company. The Claremont policy contained a “condominium and townhouse projects” exclusion which precluded coverage for bodily injury or property damage “that arises out of an insured’s operations, work product or products that are incorporated into a condominium … or townhouse project.” Relying on this “condominium and townhouse projects” exclusion, Claremont declined to defend Ja-Con in the construction defect action. Thereafter, California Traditions obtained a $2 million default judgment against Ja-Con in that action.
California Traditions then filed a judgment creditor action against Ja-Con’s liability insurer, Claremont, seeking to collect the underlying $2 million judgment from Claremont. The trial court ruled that California Traditions’ judgment against Ja-Con in the underlying action was excluded from coverage by the “condominium and townhouse projects” exclusion in the Claremont policy. The trial court thus entered judgment in favor of Claremont. California Traditions appealed.
Holding
The Court of Appeal affirmed. The appellate court noted that California Traditions had developed and constructed the project as a “condominium project,” and had marketed and conveyed the units as a “condominiums.” That was sufficient to trigger the Claremont policy’s exclusion for any liability Ja-Con had arising from work on a “condominium or townhouse project.”
California Traditions argued that free-standing residential units resembling non-condominium single family residences should not be considered “condominiums,” and therefore the term “condominium project” was ambiguous. The appellate court disagreed, noting that California Civil Code section 1351 defines a “condominium project” as a “development consisting of condominiums,” and then defines a “condominium” as “an undivided interest in common in a portion of real property coupled with a separate interest in space called a unit…. The description of the unit may refer to … (3) an entire structure containing one or more units….” (Italics added.) Thus, according to the court, a free-standing unit is one type of condominium unit that may comprise part of a “condominium project.”
California Traditions also argued that the condominium or townhouse project exclusion should be deemed unenforceable because the work Ja-Con performed did not “materially alter the risk” contemplated by the parties under the policy. Specifically, California Traditions argued that the risk posed by Ja-Con’s work on structures in the subject condominium project was no greater than the risk which would have been posed if Ja-Con had worked on identical structures in a tract of non-condominium single family residences. The appellate court rejected this argument, reasoning that Claremont was not required to prove that there was an “actuarial basis” for an exclusion in order to enforce the exclusion.
In short, California Traditions’ underlying judgment against Ja-Con was not covered under the Claremont policy. Thus, California Traditions was not entitled to recover under the Claremont policy.
Comment
Perhaps the most interesting aspect of this case is the appellate court’s holding that an insurer does not have to prove that there is an “actuarial basis” for an exclusion in order to enforce the exclusion. In so holding, the appellate court disagreed with a prior decision – Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal. App. 4th 86 – which reached a contrary result. The appellate court stated that the Scottsdale decision “has gained no traction in any subsequently published case,” and further stated that the Scottsdal e decision appears to be at odds with existing case law upholding an insurer’s right to limit coverage without demonstrating actuarial impact.