Court of Appeals Finds Additional Insured Coverage Despite “Care, Custody or Control” Exclusion

When things go wrong on a construction project it’s often a scramble of finger pointing. In McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company, Case No. D074219 (June 5, 2019), the California Court of Appeals for the 4th District considered whether an additional insured exclusion, excluding “property in the care, custody or control of the additional insured,” precluded a duty to defend by an insurer.

McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company

McMillin Homes Construction, Inc. was the developer and general contractor on a residential project known as Auburn Lane in Chula Vista, California.  McMillin subcontracted with Martin Roofing Company, Inc. to perform roofing work. Under the subcontract, Martin was required to obtain commercial general liability insurance naming McMillin as an additional insured.

The commercial general liability insurance policy secured by Martin was issued by National Fire and Marine Insurance Company. As is typical, the policy covered “property damage” and “personal injury” arising out of an “occurrence” during the policy period. McMillin was covered as additional insured under ISO endorsement form CG 20 09 03 97.

In 2014, homeowners at Auburn Lane sued McMillin for construction defects. The complaint alleged water intrusion and damages due to roofing defects. McMillin tendered defense to National Fire. However, National Fire denied the claim on the ground that an exclusion contained in the commercial general liability insurance policy, excluding “property in the care, custody or control of the additional insured,” precluded coverage and defense.

In 2016, McMillin sued National Fire for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing. The case was bifurcated, with the parties trying first, the issue of whether the exclusion precluded coverage. During the first phase of the bifurcated trial, McMillin argued that exclusion, excluding “property in the care, custody or control of the additional insured,” required that the property be in the “exclusive or complete” control of McMillin, and that here the property was not in the “exclusive or complete” control of McMillin, since McMillin subcontracted the roofing work to Martin.

National Fire, in turn, argued that nowhere in CG 20 09 03 97 are the terms “exclusive” or “complete” control used. Moreover, argued National Fire, ISO endorsement form CG 21 39 10 93, which precluded coverage for indemnity obligations, underscored the intent of the policy to preclude coverage for construction defects like the one at issue.

The trial court agreed with National Fire and McMillin appealed.

The Court of Appeal Decision

On appeal, the 4th District Court of Appeal identified several well-established principles applicable to the interpretation of insurance policies in California. Among them:

  • An insurer’s duty to defend is broader than its duty to indemnify and an insurer “must defend even where the evidence suggests but does not conclusively show the loss is not covered.”
  • An insurer’s duty to defend arises at the outset of a case “arising upon tender and lasting until litigation is resolved, or until the insurer has established there is no potential for coverage.”
  • Where an insurer denies coverage and a duty to defend, and an insured files an action for declaratory relief, the insured must only prove the existence of a “potential for coverage” while the insurer must establish “the absence of any such potential.”
  • Doubts as to whether an insurer owes a duty to defend is resolved in the insured’s favor.

The Court of Appeals, relying on Home Indemnity Company v. Leo L. Davis (1978) 79 Cal.App.3d 863), which involved a similar exclusion in which the court held that the exclusion did not apply where there was “shared” control, explained that while “McMillin was responsible for the whole project and coordinating schedules to ensure the project finished on time” “Martin was responsible for controlling its job site and supervising the roofing work.”  Thus, held the Court, “Martin an McMillin shared control over Martin’s roofing work.”

Moreover, explained the Court of Appeals, interpreting the policy in the manner urged by National Fire would not be consistent with McMllin’s objectively reasonable expectations, which was that, as an additional insured, it would be covered under Martin’s commercial general liability policy for property damage arising from Martin’s work.

Finally, as to National Fire’s CG 21 39 10 93 argument – which basically boiled down to: the policy was intended to preclude coverage for construction defect claims like the one involved, because together with CG 20 09 03 97, they were intended to preclude coverage for construction claims based in both tort and contract  – the Court of Appeal described the argument “convoluted.”

In interpreting insurance policy provisions, explained the Court, provisions are not interpreted to “protect the subjective beliefs of the insurer, but rather the objectively reasonable expectations of the insured.” And, here, the objectively reasonable expectation of McMillin was that as an additional insured, it would be covered by Martin’s commercial general liability insurance policy.

Speaking of “control,” here’s an early one from Miss. Jackson, who’s all about control, and has lots of it.

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