The California Court of Appeal determined there was no duty to indemnify and the insured had to reimburse the insurer's contribution to a settlement. Nevertheless, there was a duty to defend, meaning the insured did not have to reimburse amounts it was entitled to under the supplemental payments provision. Navigators Specialty Ins. Co. v. Moorefield Constr., 2016 Cal. App. LEXIS 1132 (Cal. Ct. App. Dec. 27, 2016).
Moorefield was the general contractor for a shopping center project to be developed by DBO Development No. 28 (DBO). The project included the construction of a 30,055-square-foot building to by used as a Best Buy store. In January 2002, DBO entered a 15-year lease with Best Buy.
DBO and Moorefield entered into an owner-contractor agreement for the Best Buy store which was to be completed by August 22, 2003. The plans and specifications for the Best Buy building called for the installation of an interior concrete floor slab. Then both vinyl composition tile and carpet tile would be placed on top of the concrete slab.
Unfortunately, the carpet tiles had a polyvinyl cholride backing that did not permit breathing. Moisture in the concrete slab caused the glue used to adhere the carpet tiles to the slab to turn to liquid. Testing showed that the moisture vapor emissions for the concrete slab were far above an acceptable level. Another four to eight months of drying time was necessary for the concrete slab to cure sufficiently so that the moisture vapor emission level would be acceptable.
Nevertheless, Moorefield's project manager felt there was low risk to no risk that flooring would fail if laid on a concrete slap with the existing high moisture vapor emissions. Going ahead with the project was discussed with DBO and Best Buy. Both DBO and Best Buy directed the project manager to have the flooring installed. The decision was based on a cost-benefit analysis. It would be cheaper to install the flooring immediately so that the Best Buy store would be open for holiday shopping and deal with flooring problems later.
Of course, the floor failed. As early as the grand opening, Best Buy noticed carpet tiles not sticking to the floor. The edges of the carpet tiles curled, moisture and adhesive oozed through the edges, staining appeared at the edges, and odors were detected. Best Buy eventually repaired the floor repairs and withheld $377,404 in monthly rent from JSL Properties, LLC, the owner of the building.
JSL sued Moorefield and DBO to recover the amounts withheld by Best Buy. DBO filed a cross-complaint against Moorefield. Moorefield tendered to its insurer, Navigators Specialty Insurance Company, which defended under a reservation of rights. The suit eventually settled for $1.3 million. Navigators contributed its $1 million policy limits.
Navigators then filed suit against Moorefield seeking a declaration it had no duty to defend or to indemnify. The trial court ruled in favor of Navigators and awarded judgment for $1 million plus $68,274 in interest.
The California Court of Appeals found there was no duty to indemnify. Moorefield acted deliberately in installing the carpet tiles on the concrete slab. Moorefield knew that the moisture vapor emission rate was too high to install the tiles, but did so anyway. Hence, there was no accident. Moorefield argued that installing the carpet tiles was an occurrence because the flooring damage was caused by moisture vapor emission from the concrete slab over a period of years. But Moorefield had engaged in an intentional act that produced property damage.
However, the supplementary payments provision applied to some portion of the $1 million paid by Navigators toward settlement. The provision stated, "with respect to any claim . . . or any 'suit' against an insured we defend," Navigators would pay "[a]ll costs taxed against the insured." Moorefield argued that this provision required Navigators to pay that portion of the settlement attributable to attorney fees and costs of the suit. Attorney fees, when authorized by contract, were allowable as costs of suit. The attorney fees incurred by JSL and DBO would have been an item of costs falling within the supplementary payments provision. JSL sought attorney fees based on a provision in the construction contract, the rights under which had been assigned to JSL. Moorefield's liability to JSL for attorney fees would be a cost of suit and not damages.
The Court of Appeals determined that Navigators had a duty to defend Moorefield and therefore had an obligation to pay attorney fees and costs of the suit under the supplementary payments provision. The ultimate determination by the trial court that the loss was caused by a non-covered occurrence did not mean that JSL's lawsuit never presented any potential for coverage. Although the leading candidate was always moisture in the slab, there was a possibility that roof leaks or a design defect were the cause of the damage.
Therefore, the decision below was affirmed insofar as it declared that Navigators had no duty to indemnify. In all other respects, the judgment was reversed and remanded.