The California Court of Appeal affirmed the trial court's finding of coverage for faulty workmanship allegations and bad faith by the insurer. Pulte Home Corp. v. Am Safety Indem. Co., 2017 Cal. App. LEXIS 748 (Cal. Ct. App. Aug. 30, 2017).
Pulte Home Corporation was the general contractor and developer of two residential projects. American Safety issued several sequential comprehensive general liability policies to three of Pulte's subcontractors which named Pulte as an additional insured. The projects were completed by 2006.
In 2011 and 2013, two groups of residents sued Pulte for faulty workmanship in separate lawsuits. American Safety denied tenders for a defense of both lawsuits.
The policies stated that the aggregate limit for "products-completed operations" was $1 million. "Products-completed operations" was defined to include all property damage occurring away from the insured's premises, arising out of 'your product' or 'your work.'" The policies defined additional insureds in an Additional Insured Endorsement (AIE) as "WHO IS AN INSURED" as "the person or organization shown in the Schedule, but only with respect to liability arising out of 'your work' which is ongoing and which is performed by the Named Insured for the Additional Insured on or after the effective date of this Endorsement."
In denying coverage, American Safety relied upon separate "faulty workmanship" or "work product" exclusions. In exclusion j (5), the subcontractors' policies stated that no coverage was afforded for "property damage" to "[t]hat particular part of real property on which you . . . are performing operations, if the 'property damage' arises out of those operations[.]" Exclusion j (6) precluded coverage for "]t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it."
Pulte sued American Safety. The trial court granted Pulte's motion for summary judgment, determining that American Safety had a duty to defend. The court also determined that contract damages were owed on each policy for the failure to defend. The trial court further ruled that American Safety had breached its implied covenant duties through its bad faith conduct in claims handling that denied a defense. Finally, the court awarded Pulte punitive damages.
The appellate court affirmed the decision that American Safety had breached its duty to defend. American Safety argued that the underlying complaints failed to allege any ongoing operations at the time the homeowners bought the homes, and therefore there was no potential for coverage. Once the defective homes were sold, only completed operations coverage could have applied, but it was excluded by including the ongoing operations language in the AIEs. To the extent that a subcontractor caused damage to the project during its ongoing operations, American Safety argued that the faulty workmanship exclusions j (5) and j (6) applied to preclude any duty to defend. Pulte responded that if the American Safety AIEs expressly stated there would be no completed operations coverage, then the subcontractors would have been told to go back to the insurer to obtain more complete additional insured coverage.
The appellate court stated that the AIEs seemed to allow completed operations coverage based on potential liability that might yet arise from the subcontractors' completed work. The policies also added another form of coverage for "ongoing operations . . . on or after the effective date of this Endorsement." The purported "ongoing" limitation did not undo a grant of coverage against liability arising from work completed during the effective dates of the AIEs. If the "ongoing operations" language was meant by American Safety to preclude coverage for completed operations losses, it had to expressly state "that coverage was limited to claims arising from work performed during the policy period."
Moreover, the record did not show that all of the damage the homeowners were claiming was limited to the particular location where one or another of the subcontractors was performing their work, such that the exclusions relied upon by American Safety would apply. The complaints alleged potentially overlapping forms of damage among the different locations of concrete, electrical and other types of work, all of which had permitted some kind of moisture damage to occur over time. It was factually unclear under exclusion j (5) that no coverage was possible for property damage located at the site of each named insured's operations, or if the alleged damage arose solely out of those particular operations.
Regarding exclusion j (6), coverage would be precluded for damage to portions of property " that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The complaints broadly alleged that both work and materials were defective, and American Safety did not show that each of the named insureds' work was incorrectly performed such that no possible basis for coverage could have existed, on a vicarious liability basis. Therefore, the faulty workmanship exclusions did not clearly apply to preclude a duty to defend.
On the bad faith issue, American Safety had disregarded the only available case law in evaluating its duties in claims handling and denials of defenses. There were several instances of conduct by American Safety representatives that constituted bad faith. American Safety was aware of trial court decisions against its position on the interpretation of ongoing operations. American Safety had been a defendant in some of these cases. There was evidence that hundreds of additional insureds' claims were routinely denied based on the restrictive policy interpretations. Letters denying a defense were form letters, rather than the product of a case-by-case analysis. This demonstrated that the claims were not reviewed carefully, if at all. It was clear American Safety was looking out for its own interests in refusing to defend its additional insureds.
Further, punitive damages were properly awarded. The company's upper management and general counsel did not need to be consulted on denials of tenders because the denials were routine. American Safety inflicted economic harm on Pulte as a result of intentional malice, trickery or deceit.