I’Ashea Myles-Dihigo | The Dispute Resolver | September 6, 2017
Gary Barrera | California Construction Law Blog | September 11, 2017
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.
David L. Beck | Pillsbury Winthrop Shaw Pittman LLP | September 6, 2017
Coverage B under traditional Commercial General Liability (CGL) policies may be the least understood coverage that nearly every company carries. Coverage B provides liability protection for claims of Personal and Advertising Injury, such as false arrest, libel or slander, and violation of a person’s right to privacy, among others. Yet with so much recent focus on cyber liability insurance and the protection that these policies can provide for the inadvertent exposure of personal information stored electronically, Coverage B gets little attention. This is mostly deserved, as many CGL policies expressly exclude coverage for the loss or exposure of electronic data, and Coverage B applies in mostly non-traditional circumstances. Nonetheless, it is important to remember that for many claims, particularly those involving non-traditional facts, Coverage B will apply.
Recent events highlight the importance and continued relevance of Coverage B. For example, a recent case in the news involves a health insurer being sued by its insureds for mailing them information regarding HIV medication in transparent envelopes, thereby exposing their identity and the medication they were seeking. The suit alleges that the insurer negligently revealed confidential information and, given the reported facts, should trigger Coverage B (as well as other coverages).
Coverage B also applies in circumstances beyond improper disclosure of confidential information. In another recent case, a developer was sued by one of its occupying tenants because construction equipment necessary to expand the development blocked the ingress and egress to the tenant’s property. The CGL insurer initially denied the developer’s request for defense, contending that there were no allegations of “personal injury” or “property damage” necessary to trigger Coverage A. The insured correctly responded that the claims brought against it included “invasion of the right to private occupancy,” thereby triggering the duty to defend under Coverage B. Upon further consideration, the CGL insurer agreed and provided the insured with a defense. The duty to defend one claim is the duty to defend all.
In another case, a general contractor working in a war zone was sued by one of its subcontractors for unpaid contract balance. In addition to seeking payment of the alleged outstanding balance, the subcontractor claimed that it was held against its will for a period of an hour by a group of armed mercenaries working on behalf of the general contractor. This allegation, although wholly unrelated to the underlying dispute of unpaid fees, was sufficient to trigger Coverage B under the general contractor’s CGL policy, providing the general contractor with defense and indemnity.
In short, Coverage B applies in many non-traditional circumstances (as well as more traditional ones), and should always be considered by companies when facing liability for claims other than “personal injury” or “property damage.”
Lawrence Moon | Property Insurance Coverage Law Blog | September 10, 2017
In Assignment of Unaccrued or Contingent Benefits, I discussed the distinction between assignments of Contingent Benefits and assignments of Noncontingent Benefits under a property insurance policy. For purposes of this blog, a Contingent Benefit is a benefit or payment that is either not yet fixed in amount or the carrier is not yet obligated to provide because additional, specific conditions of the policy have not yet been fulfilled or excused. Noncontingent Benefits are those for which all of the applicable conditions have been fulfilled or excused and the carrier’s obligation to provide the benefits (such as a payment) has accrued. An example of a Noncontingent Benefit is a policyholder’s right to receive payment of the Actual Cash Value (ACV) of a claim after the insurance company has been notified of the loss and the policyholder has cooperated with the carrier’s evaluation of the loss. An example of a Contingent Benefit regarding a replacement cost property insurance policy is the right to receive the depreciation holdback (sometimes called the replacement cost holdback) prior to completion of the underlying repairs. In other words, the carrier’s obligation to pay the depreciation holdback is contingent upon, and does not arise unless and until, the underlying repairs are completed.
I noted in my previous blog that in 2015, the Supreme Court of California pointed out that insurance companies had only recently begun to challenge the validity of assignments of Contingent Benefits. In this blog, I will discuss how the Supreme Court of California handled that question—that is, the validity of assignments of Contingent Benefits—in Fluor Corporation v. Superior Court, 61 Cal.4th 1175, 354 P.3d 302 (2015).
The specific question presented to the California Supreme Court in Fluor was whether a statute that has been on the books in California since 1872 had any effect on the court’s prior ruling regarding the validity of assignments of Contingent Benefits under common law principles. In its 2003 decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934, 62 P.3d 69 (2003), the court ruled that, based on common law principles, the policyholder under a liability policy that contained a provision prohibiting assignments could not assign the right to invoke coverage under the policy, even after a loss, until the loss had “been reduced to a sum of money due or to become due.” In other words, in Henkel, the court ruled that, under common law principles, the policyholder’s assignment of a Contingent Benefit under a liability policy was not valid or enforceable, despite the fact that the respective loss had already occurred.
Henkel remained the law in California with respect to post-loss assignments of Contingent Benefits until the court was asked to review the same question in Fluor—except in Fluor, the court was asked to consider that question in light of section 520 of California’s Insurance Code. That section states: “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” Although section 520 was in effect at the time the court decided Henkel, neither party addressed section 520 and the court did not consider that statute when it reached its decision based on common law principles.
In a lengthy opinion in which it analyzed the history of California’s insurance code and the treatment of assignments of insurance benefits, specifically regarding liability policies, the California Supreme Court ruled in Fluor that section 520 prohibits carriers from refusing to honor post-loss assignments of Contingent Benefits, as well as Noncontingent Benefits. The court further held that section 520 supersedes common law principles applicable to assignments, including the principles it relied on when it decided Henkel twelve years before.
The court noted that the principle reflected in the decisions of other courts that have upheld the validity of post-loss assignments of Contingent Benefits have been “described as a venerable one, born of experience and practice, facilitating the productive transformation of corporate entities, and thereby fostering economic activity.” Interestingly, the court surmised that although section 520 of California’s Insurance Code has been in effect for over 145 years, it had not previously been asked to address its application to assignments of Contingent Benefits apparently because insurers had only “recently beg[u]n to disallow and contest such assignments [and therefore,] . . . there was little cause for insureds to think about, much less rely on, section 520.”
Although the decision in Fluor concerned a post-loss assignment of benefits under a liability policy, the court at least suggested that section 520 applies to first party, as well as third party, policies. Therefore, policyholders under property insurance policies should be able to rely on section 520. The California Supreme Court decision in Fluor suggests that post-loss assignments of Contingent Benefits under property insurance policies are valid in California, as in the other states I mentioned in my prior blog.
In an upcoming blog, I’ll discuss how we addressed the issue of post-loss assignments of Contingent Benefits in the Arizona cases we are handling, and how the courts in Arizona have ruled on that question.
Sometimes courts express general principles that go beyond the specific case they are deciding and which are worth noting in other contexts, even on a personal level. In that regard, the California Supreme Court stated the following in its last footnote in Fluor, in which it addressed the fact that neither party in Henkel had raised section 520 in their briefs, although that statute clearly applied to the dispute and would have changed the outcome of it:
Of course, this still does not explain why section 520 was not discussed by the parties — especially the plaintiff or its amicus curiae — in Henkel itself. And yet as observed . . . such omissions occasionally happen. This reminds us that even with access to computer research technology, any human enterprise cannot be perfect; and that it is better that wisdom, or at least controlling authority, come to our attention late, rather than not at all.
R. Bruce Wallace | Nexsen Pruet | September 7, 2017
As hurricane season swings into full measure, the flooding of Hurricane Harvey has ravaged Texas, and Irma’s path remains uncertain, it is time to revisit the law of flood insurance.
In May of this year, Nexsen Pruet wrote about the Woodson decision from the United States Court of Appeals for the Fourth Circuit, which ruled that the FEMA 1-year statute of limitations covered flood insurance claims. Now, the United States District Court for South Carolina considered a motion to remand a bad faith action involving another FEMA flood insurance claim.
Briefly, in Roberts v. Discovery Home Loans, Inc., 2017 WL 3316047, Plaintiff William A. Roberts sued Discovery Home Loans, its servicing company, and Allstate Insurance Company in South Carolina state court over the failure of the servicing company to renew Roberts’ flood insurance policy on his home. Despite having sufficient funds in escrow to pay Roberts’ flood renewal premium, the servicing company failed to pay the renewal, and Allstate canceled the policy. Following cancellation, Roberts could only find replacement flood insurance at vastly higher premiums. Roberts alleged he would have to pay these higher premiums over the life of the loan. In his state court complaint, Roberts alleged causes of action for gross negligence, negligence, negligent misrepresentation, breach of contract, breach of fiduciary duty, unfair trade practices and unjust enrichment.
Allstate removed the action to the district court, arguing federal question jurisdiction. To begin its analysis, the district court confirmed that Allstate serves as a Write-Your-Own carrier (“WYO”), which issues flood insurance policies under the government program in its own name. WYO carriers’ flood insurance policies under the WYO program must mirror the exact terms and conditions found in FEMA flood regulations promulgated by the U.S. government. As such, “Federal common law alone” governs the insurance policy at issue. Nevertheless, the district court looked further, and held that federal question jurisdiction exists when the plaintiff’s “well-pleaded complaint establishes … that the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal law….” Following the United States Supreme Court opinion in Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg.(2005), the district court considered four factors to decide whether Roberts’ state law claims raised a substantial federal question:
(1) whether the state law claim necessarily raises a federal issue;
(2) whether the federal issue is disputed;
(3) whether there is a substantial federal issue; and
(4) status of federal/state balance in light of the federal issue.
The district court easily resolved the factors in favor of federal question jurisdiction. The flood insurance policy was issued pursuant to the National Flood Insurance Program, and its terms must mirror federal flood regulations. As a result, federal law establishes the standard of care. Citing cases from the Seventh and Eleventh Circuits, the district court found a complaint alleging breach of a flood insurance policy raises “a substantial federal question on its face.” Finally, the district court found “federal rules, federal regulations or federal common law govern all disputes involving the handling of a [flood] claim”, such that those claims are restricted to federal court. As a result the exercise of federal question jurisdiction over all flood insurance policies “will not disturb the balance of federal and state power.”
Roberts argued some of his claims arose out of the “procurement” of the flood insurance policy rather than the handling of a claim under the policy. Relying on a line of Fifth Circuit decisions, Roberts argued such claims did not implicate federal question jurisdiction. Under Campo v. Allstate Insurance Co.(5th Cir. 2009), federal law does not preempt state law procurement-based claims. The district court found the resolution of the issue turned on “the status of the insured at the time of the interaction between the parties.” Because Roberts was covered by a federal flood insurance policy at the time he alleges Allstate owed him a duty of care, then Roberts’ claims fall under “handling,” not procurement. Therefore, federal law, not state law, controlled.