In a victory for additional insureds, a California appeals court held, in Pulte Home Corp. v. American Safety Indemnity Co., Cal.Ct.App. (4th Dist.), Docket No. D070478 (filed 8/30/17), that an insurer’s denial of coverage for completed operations based on the inclusion of the phrase “ongoing operations” in an additional insured endorsement, was improper. Additionally, an insurer wishing to limit coverage under an additional insured endorsement to ongoing operations must do so via clear and explicit language.
Pulte Home Corp. v. American Safety Indemnity Co.
In the Pulte case, Pulte Home Corp. was the general contractor and developer for two residential housing projects beginning in 2003 and sold in 2005 and 2006. During construction, Pulte entered into subcontracts that obligated the subcontractors to name Pulte as an additional insured on their policies for completed operations. One of the insurers, American Safety, issued three types of additional insured endorsements with substantially similar language. The first endorsement provided coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’ which is ongoing and which is performed by the [named insured subcontractor] for [Pulte]” on or after the endorsement’s effective date. The second endorsement provided coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’ and only as respects ongoing operations performed by the [named insured subcontractor] for [Pulte]” on or after the endorsement’s effective date. The third endorsement provided coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’” performed at the project designated in the endorsement and only for “ongoing operations performed by the [named insured subcontractor]” on or after the endorsement’s effective date.
In 2011 and 2013, two construction defect lawsuits were filed against Pulte by homeowners on each project. Pulte tendered its defense of the lawsuits to American Safety. American Safety denied Pulte’s tenders, in part, on the grounds that coverage under the additional insured endorsements was limited to ongoing operations, and that the lawsuits alleged liability arising out of completed operations. Pulte sued American Safety for bad faith. The trial court ruled that American Safety’s denial of Pulte’s tenders was improper and that the additional insured endorsements were ambiguous because they did not effectively exclude coverage for completed operations.
On appeal, American Safety argued that the additional insured endorsements excluded coverage for completed operations because the inclusion of the phrase “ongoing operations” after the phrase “your work” was a limitation on “your work” and eliminated completed operations coverage. American Safety also argued that the endorsements limited coverage to the time frame of the subcontractors’ ongoing operations, and since the homes were sold as completed units, ongoing operations had already concluded.
The Court of Appeal rejected American Safety’s arguments. First, the court held that American Safety’s contention that there were no allegations of ongoing operations incorrectly focused on when the homeowners sustained financial damage through their purchase of the defective homes, and not when the homes became physically damaged. The court opined that the property damage could have occurred while the subcontractor’s operations were ongoing but after the homes had been sold, and since the property damage became evident after the work was completed, American Safety was placed on sufficient notice that some of the subcontractors’ work could have been ongoing and/or completed during its policy periods, since the homes were built in phases.
Next, the Court of Appeal reaffirmed the trial court’s ruling that the additional insured endorsements were ambiguous because they combined coverage for ongoing and completed operations in a single clause, and failed to expressly limit coverage to the time of the subcontractors’ ongoing operations. The court held that the endorsements’ language allowing coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’” could reasonably be read as a grant of coverage for liability arising out of the named insured’s completed operations. The court ruled that the mere linking of the phrase “ongoing operations” to the “liability arising out of ‘your work’” clause did not explicitly restrict coverage to ongoing operations. The court explained that if the “ongoing operations” language was intended by American Safety to preclude coverage for completed operations, the endorsements had to expressly state that coverage was limited to claims arising out of work performed during the policy period.
The Court of Appeal also noted the subcontracts’ requirement that Pulte be named as an additional insured for completed operations. The court observed that at the time American Safety issued the additional insured endorsements and at the time of Pulte’s tenders, it was aware that the subcontracts obligated the subcontractors to name Pulte as an additional insured for completed operations. The court ruled that based on American Safety’s knowledge of this information, it should have taken into account Pulte’s reasonable expectations of coverage in interpreting its policy, but it did not do so, thereby failing to give equal consideration to its interests and its insureds’ interests.
The Pulte decision should provide developers and general contractors with powerful ammunition against insurers’ attempts to deny completed operations coverage merely because the endorsements contain the phrase “ongoing operations,” without taking into account whether the wording of the endorsement is ambiguous. Pulte makes it clear that insurers intending to limit coverage to ongoing operations must ensure that their endorsements contain clear and unambiguous language to that effect. Pulte is also noteworthy from the perspective of a developer and general contractor because if a subcontractor’s insurer has knowledge of the subcontractor’s contractual obligation to add the developer or general contractor to its policies of insurance as an additional insured for completed operations, it obligates the insurer to consider the developer or general contractor’s reasonable expectations of coverage when evaluating an additional insured tender.