Where an insured general contractor was fired from a construction job before the job was ever completed, a subsequent construction defect lawsuit against the insured fell within standard policy exclusion j.(6), and did not trigger the exclusion’s exception for property damage included in the “products-completed operations hazard.” ( Clarendon America Ins. Co. v. General Sec. Indem. Co. of Arizona (2011) 193 Cal.App.4th 1311)
Facts
In September 1999, Haim and Lucinda Revah entered into a written construction contract with Hilmor Development pursuant to which Hilmor agreed to serve as the general contractor for construction of the Revahs’ custom single family home in the City of Beverly Hills. The contract provided several conditions that had to be met before the Revahs’ home would be considered “complete,” including the filing of a Notice of Completion and the Revahs’ ability to beneficially occupy the entire property.
In May 2001, before the residence was completed, the Revahs terminated their contract with Hilmor. The Revahs then hired a new general contractor who finished work on the residence without any further participation from Hilmor. In September 2001, the City issued a temporary certificate of occupancy for the residence.
Later, the Revahs filed a construction defect lawsuit against Hilmor and others, seeking damages for continuous / progressive property damage to the residence. Hilmor tendered defense of the action to both Clarendon America Insurance Company, which had issued a general liability policy to Hilmor for the period of July 1, 2000 through July 1, 2001, and General Security Indemnity Company, which had issued a general liability policy to Hilmor for the period of July 1, 2001 through July 1, 2002. Clarendon defended and indemnified Hilmor in the construction defect action, but General Security disclaimed coverage.
Clarendon subsequently sued General Security, seeking contribution from General Security for the amounts Clarendon had paid to defend and indemnify Hilmor in the Revahs’ construction defect lawsuit. The trial court ruled that Clarendon was not entitled to contribution from General Security. Clarendon appealed.
Holding
The Court of Appeal affirmed. The appellate court reasoned, among other things, that General Security policy exclusion j.(6) barred coverage for property damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ [i.e., worked performed by or on behalf of Hilmor] was incorrectly performed on it.” According to the court, “[t]he exclusion found in j.(6) excludes coverage for the physical injury to, or loss of use of, that part of the property that must be replaced because Hilmor’s [or its subcontractors’] work was performed incorrectly.” Thus, according to the court, exclusion j.(6) effectively barred coverage for any liability Hilmor might have had because of any property damage occurring to the Revahs’ house during the General Security policy period.
Although exclusion j.(6) did contain the standard exception for property damage included in the “products-completed operations hazard,” the appellate court found that the products-completed operations hazard was not implicated here. Under the terms of the General Security policy, the “products-completed operations hazard” applied only where the insured’s work had been “completed” or “abandoned.” Here, however, Hilmor had neither “completed” nor “abandoned” its work. Rather, Hilmor had been terminated from the job before it completed its work, and indeed before General Security ever issued its policy. Thus, “[u]nder the plain language of the policy, the products-completed operations hazard does not apply.”
Since exclusion j.(6) applied, and the exclusion’s exception did not, General Security had no duty to defend or indemnify Hilmor against the Revahs’ claims in the underlying construction defect action. As such, Clarendon was not entitled to contribution from General Security.
Comment
This case should be helpful to insurers. The appellate court gave a somewhat broad reading to exclusion j.(6)’s general exclusionary language, essentially suggesting that the exclusion barred coverage for repair of property damage to any property arising from an insured’s allegedly defective workmanship. The court also held that exclusion’s exception for property damage included in the “products-completed operations hazard” can never apply in a situation where the insured contractor is fired from the job before the job is completed, because in that situation the insured’s work has not been either “completed” or “abandoned” as required under the definition of the “products-completed operations hazard.”