A general liability policy that covered products-completed operations but excluded professional services did not relieve the insurer of a duty to defend its insured, an engineering firm, against claims that the insured was negligent in constructing an earthen dam which later failed. ( North Counties Engineers, Inc. v. State Farm Gen. Ins. Co . (2014) 2014 WL 970063)
Facts
Lolonis Vineyards, Inc. (Lolonis) owns property on which there are vineyards and reservoirs. North County Engineers, Inc. (NCE) is a company that is primarily involved in engineering, but occasionally also does some construction.
In 1974, Lolonis hired NCE to design an earthen dam on Lolonis’s property. NCE in turn drafted the plans for Lolonis.
Twenty-four years later, in 1998, Lolonis hired NCE to perform some initial construction work on the dam on a time and materials basis. In 1999, Lolonis entered into a formal contract with NCE and others to furnish “all work, labor, tools, equipment, materials … necessary to construct and complete in a good, expeditious, workmanlike and substantial manner the dam project under the terms of this agreement.” Although NCE apparently mostly supervised construction work performed by others, NCE did participate to some extent in the actual construction work. In November 1999, NCE finished its work. Within months, part of the dam allegedly failed and a large amount of sediment was discharged onto lands of downstream-property owners and state waters.
In 2004, Lolonis sued NCE and others, alleging among other things that the defendants had failed to construct the dam in a “good and professional manner.” Lolonis further alleged that this had resulted in damage to downstream tributaries in 1999 and 2000.
At all relevant times, NCE was insured on general liability policies issued by State Farm General Insurance Company (State Farm). Up until June 2000, the State Farm policies provided products-completed operations coverage , but starting in June 2000, the policies contained products-completed operations exclusions . All of the State Farm policies contained “professional services” exclusions. NCE tendered the defense of Lolonis’s lawsuit to State Farm. However, State Farm refused to defend NCE against the lawsuit, based partly on the erroneous assumption that all of the State Farm policies contained products-completed operations exclusions.
Several years later, NCE re-tendered its defense to State Farm and pointed out that prior to June 2000, the State Farm policies provided products-completed operations coverage. In September 2007, State Farm agreed to provide a defense to NCE, but only on a “going forward” basis.
Eventually, Lolonis settled its lawsuit against NCE and the other defendants for $405,000, which was partially funded by State Farm and partially funded by NCE. As part of the settlement, State Farm and NCE mutually agreed not to seek reimbursement of their settlement contributions from each other, and State Farm agreed not to seek reimbursement of any defense costs it had paid on behalf of NCE.
NCE then sued State Farm for breach of contract and bad faith, seeking to recover over $500,000 in defense costs that NCE had allegedly incurred before State Farm agreed to defend NCE.
The case proceeded to a jury trial. At the close of the evidence, State Farm and NCE each moved for a directed verdict on the issue of whether State Farm had been obligated from the outset to defend NCE in the underlying action brought by Lolonis. The trial court ultimately concluded that Lolonis’s claims against NCE in the underlying action all fell within the “professional services” exclusion in the State Farm policies, and thus State Farm never had any duty to defend NCE in the underlying action. Accordingly, the trial court granted State Farm’s motion for directed verdict and entered judgment for State Farm. NCE appealed.
Holding
The Court of Appeal reversed and ruled that State Farm did have a duty to defend NCE in the underlying action. The appellate court found that Lolonis’s complaint and other facts purportedly available at the time of tender created a “potential” that NCE was liable for property damage during the time State Farm was on the risk.
Moreover, the “professional services” exclusion in the State Farm policies did not eliminate the possibility of coverage. The appellate court emphasized that the complaint in the underlying action contained allegations that NCE had not done only design and supervisory work, but had done at least some construction work. According to the appellate court, such “ordinary construction work” was ” not within the policy definition of professional services.”
Further, the appellate court was troubled by the fact that prior to June 2000, the State Farm policies had provided NCE with products-completed operations coverage. The appellate court suggested that there might be an inconsistency between a policy that provided an insured with coverage for property damage arising out of the products-completed operations hazard, and that simultaneously excluded coverage for property damage arising out of the insured’s rendering of professional services. However, the appellate court did not actually conclude that the State Farm policy was ambiguous, merely stating that “it might be argued that the ‘professional services’ exclusion cannot possibly apply” in such circumstances.
The appellate court reversed, with instructions for the trial court to enter judgment in favor of NCE and against State Farm on the duty to defend issue.
Comment
State Farm relied heavily on Stone v. Hartford Cas. Co. (C.D. Cal. 2006) 470 F.Supp.2d 1088. In Stone , a federal district court applying California law held that an insured’s alleged acts of drafting and construction constituted excluded “professional services.” However, the NCE court found that Stone was distinguishable on various grounds, including that (a) Stone involved a homeowners policy, not a business liability policy, and (b) Stone did not involve a policy with products-completed operations coverage.