Court Reminds Insurer that the Mere Possibility Of Coverage at the Time of Tender Triggers a Duty to Defend in a Defect Action

Jatin Patel | Newmeyer Dillion

It has long been the law in California that an insurer’s duty to defend is broader than the duty to indemnify and that the mere possibility of coverage triggers a duty to defend.   Nevertheless, insurers still periodically ignore this clear principle and attempt to narrow the scope of the duty to defend.  Recently, a Federal District Court issued a reminder to a wayward insurer.

In Pacific Bay Masonry, Inc., v. Navigators Specialty Insurance Company, (N.D. Cal., Sept. 16, 2021, No. C 20-07376 WHA, 2021 WL 4221747 (“Pacific”)), the Court was asked to assess whether a tender of defense by a concrete masonry subcontractor to its insurer for a construction defect action required a defense.   Pacific Bay Masonry, Inc. (“PBM”) installed concrete masonry units (also known as “CMUs”) at a new retail shopping center in Oakland, California.  The subsequent owner of the retail center filed suit against the general contractor for alleged construction defects, including “efflorescence of roof deck at CMU wall” and “improper waterproofing and flashing of the CMU block wall.”   The general contractor filed a cross-complaint against PBM.

PBM tendered the defense of the case to Navigators Specialty Insurance Company (“Navigators”) along with copies of a preliminary defect list, a description of defects, interrogatory responses and an expert witness damage analysis.  Navigators denied coverage and a duty to defend citing to the work product exclusion of the policy.  PBM asked Navigators to reconsider.  Navigators held firm on its denial. Two years later, PBM filed suit.

In the litigation, PBM sought summary judgment on the duty to defend.  Navigators argued that the work product exclusion applies if the alleged defect damages are minimally causally linked to the insured’s work (here, the CMUs).  Navigators further explained that it denied coverage to PBM on the basis that PBM’s work was defective and had not yet caused any physical injury to tangible property.

The Court disagreed with Navigators on both counts, finding that:  (1) the bare possibility that an external source is responsible for the subcontractor’s work being damaged triggers an insurer’s duty to defend despite standard work product exclusions; (2) this bare possibility is to be considered in a duty to defend analysis from the facts the insurer knows or becomes aware of at time of underlying lawsuit or time of tender; (3) disputed facts must be considered in the duty to defend analysis; and (4) the insurer has a duty to defend until the insurer can definitively show that the insured’s work is the sole defective source.

The Court reasoned that a bare possibility of coverage can arise when the work of multiple subcontractors overlaps to an extent that it is unclear as to which subcontractor’s defective work led to the property damage.

The lesson for builders and contractors is that even though the duty to defend is extremely broad, and insurers clearly know this, they will still wrongfully deny tenders of defense in construction defect actions.  This case is another in a long line of cases that policyholders can use to obtain a defense of a construction defect lawsuit if there is a mere possibility of coverage.

Calif. Supreme Holds the Line on Homeowners’ Liability for Contractor Injuries

Jim Sams | Claims Journal

A homeowner who exercised no control over the worksite is not liable for injuries to an independent contractor even though the homeowner had failed to repair an obvious hazard, the California Supreme Court ruled.

In a unanimous decision Thursday, the high court overturned the Court of Appeals, saying it will “decline to adopt a rule that subjects landowners to greater liability than other hirers for injuries stemming from known hazards.”

The high court said it saw no reason to add a third exception to the “Privette doctrine,” a longstanding legal principle in California that presumes property owners have no obligation to protect independent contractors or a contractor’s employees from safety hazards.

The case has been closely watched by professionals in the insurance, contracting and real estate industries because of its potential impact on injury claims. The American Property Casualty Insurance Association, U.S. Chamber of Commerce, California Association of Relators, Association of Southern California Defense Counsel, California Building Industry Association, Associated General Contractors of California, Civil Justice Association and Consumer Attorneys of California filed amicus briefs with the Supreme Court.

Marvin Putnam

“The Court of Appeal decision, had it been affirmed, would have resulted in an unprecedented expansion of tort liability for homeowners, property owners, and hirers, which in turn would have had massive implications for property insurers,” stated Los Angeles attorney Marvin S. Putnam, who represented defendant John R. Mathis in the case.

June Barlow, general counsel for the Realtors association, said her client was concerned by the Court of Appeals decision because real estate agents often refer their clients to contractors for home inspections or repairs. She said the Supreme Court’s ruling “takes a common sense approach.”

“When you hire an expert, you don’t expect to be sued,” she said.

June Barlow

Mathis’ housekeeper hired Luis Gonzalez’s business, Hollywood Hills Window Cleaning Co., to clean the skylight over an indoor pool inside Mathis’ one-story, flat-roofed home. The company advertised that is was a specialist in washing “hard to reach windows and skylights.”

Gonzalez has been cleaning the same skylight since the 1990s, first as an employee of another company and then as owner of his own window-washing business.

On Aug. 1, 2012, Gonzalez was at Mathis’ home while two of his employees cleaned the skylight. Mathis’ housekeeper asked him to tell the workers to use less water because water was leaking into the house.

Gonzalez climbed a ladder to access the roof where his employees were working and passed the message along. In order to climb back down, he had to walk on a 20-inch wide space between the edge of the roof and parapet wall that was built to hide air conditioning equipment.

Gonzalez slipped and fell off the roof, sustaining serious injuries. He had no workers’ compensation insurance.

Gonzalez filed a premises liability claim against Mathis. He alleged that his accident was caused by the dangerous conditions on the roof, including loose pebbles and sand, a lack of tie-off points for a safety harness, a lack of guardrails and the unreasonably narrow path between the parapet wall and the edge of the roof.

Los Angeles County Superior Court Judge Gerald Rosenberg granted summary judgment in favor of Mathis, finding that the precedent set in 1993 by the Privette decision barred his premises liability claim.

A three-judge panel for the 2nd Appellate District reversed. The court said a 2005 California Supreme Court decision, Kinsman v. Unocol, established that a premises owner can be held liable for injuries to an independent contractor “when he or she exposes a contractor (or its employees) to a known hazard that cannot be remedied through reasonable safety precautions.”

The Supreme Court said in its opinion that Kinsman did not go that far. The court said it held that a property owner who is aware of a concealed dangerous condition may be held liable for an injury to a contractor if they fail to disclose the existence of the hazard.

There was no concealed hazard alleged in Gonzalez’s lawsuit, the Supreme Court said. However, the court acknowledged that the facts in the case beg a question: If a contractor cannot correct a known safety hazard on a property, can the owner be held liable if the contractor is injured?

The high court said no.

“A landowner does not fail to delegate responsibility to the contractor for workplace safety simply because there exists a known hazard on the premises that cannot be readily addressed by the contractor,” the court said. “Were we to hold otherwise, we would vastly expand hirer liability and create considerable tension with decades of case law establishing that a hirer is not liable where it is merely aware of a hazardous condition or practice on the worksite.”

Putnam, a partner with the Latham & Watkins law firm, said in an email that California homeowners would have been exposed to “catastrophic liability” had the decision gone the other way.

“As today’s decision affirms, when homeowners hire an independent contractor to perform work, the independent contractor—rather than the homeowner—is responsible for ensuring the safety of the contractor’s employees at the worksite,” he said. “Today’s result affirms what we have said from the outset—while Mr. Gonzalez’s injuries were undeniable tragic, Mr. Mathis in no way contributed to that tragedy.”

Ellie Ruth

Attorney Ellie S. Ruth, who filed an amicus brief on behalf of the Southern California Defense Counsel, said the Court of Appeals ruling’s potential to create more litigation was just as onerous as the expansion of liability.

Ruth, who is with the Greines, Martin, Stein & Richland firm in Los Angeles, said the appellate court decision would require judges hearing injury lawsuits by contractors against property owners to make a decision about whether reasonable safety precautions could have been taken to prevent the injury. She said generally that kind of fact finding requires a trial, so summary judgment would be virtually impossible.

Ruth said the Supreme Court clearly understand that eliminating the summary judgment option for defense attorneys would have exposed insurers to increased litigation costs. The court devoted nearly five pages of its opinion to the issue. While Privette created a presumption that property owners are not liable for contractor injuries, the Court of Appeals ruling practically eliminated that presumption because the presumption would be rebuttable in almost every case, the high court said.

“In the niche that we occupy, it would be a humongous headache,” Ruth said.

CSLB Begins Processing Applications for New B-2 License

Garret Murai | California Construction Law Blog

As we wrote about in our 2021 Construction Law Update, one of the new laws to take effect on January 1, 2021 was the enactment of SB 1189 which created a new B-2 Residential Remodeling Contractor’s license. The new license is available to contractors working on existing homes with residential wood frame structures requiring at least three (3) unrelated trades or crafts under a single contract.

Beginning June 1, 2021, the Contractors State License Board began accepting applications for the B-2 Residential Remodeling Contractor’s license. According to a press release from the CSLB:

The B-2 classification provides a pathway to licensure for many unlicensed people who are currently working on remodeling and small home improvement projects that don’t qualify for a B-General Building License because the contracted work does not include framing or rough carpentry. Consumers employing a licensed contractor have reduced liability and greater consumer protection. Licensees benefit from licensure as they have opportunities to lawfully advertise, and compete on a level playing field for jobs.

In order to qualify for a B-2 Residential Remodeling Contractor’s license, applicants must have at least four (4) years of experience working in three (3) or more trades or crafts for residential remodeling projects. Applicants can satisfy up to three (3) years of the experience requirement with qualifying education.

The Residential Remodeling Contractor’s license does come with a few restrictions, however. Residential Remodeling Contactors are:

  • Limited to working on existing (not new) residential wood frame structures;
  • Cannot make structural alterations to load-bearing partitions and walls;
  • Cannot install or extend electrical or plumbing systems but may make modifications to existing systems (e.g., install recessed lighting or alter plumbing for two shower heads); and
  • Cannot install or replace HVAC systems.

Applicants interested in obtaining a Residential Remodeling Contractor’s license will need to complete a CSLB Application for Original Contractor License, take and pass the B-2 Residential Remodeling Contractor’s examination, furnish a contractor’s license bond, and, if employing employees, obtain and maintain worker’s compensation insurance.

Statutory Offer to Compromise – A Potential Pitfall for CA Contractors, With a Way Out

Ian Williamson | Gordon Rees Scully Mansukhani

A statutory offer to compromise a case is a common tool in litigation in California. Under CCP section 998, a party can make an offer to the opposing party. If that offer is not accepted, the case goes to trial, and the recipient does not do better at trial than the offer, the code imposes penalties. Conversely, if you get a better outcome, the code provides benefits in the form of enhanced costs (notably including the costs of experts). It is a useful tool. However, on its face, the code contemplates that a judgment be entered against the party making payment.

For many entities, this is a non-issue. However, for contractors and professional license holders in California, that judgment can have potentially severe unintended consequences that go far beyond the litigation. Judgments arising from your work can (and in some cases must) be reported to licensing agency. Discipline can result. In addition, bonding companies look negatively at the judgments. Additionally, many bidding packages require the bidder to disclose any job-related judgments. In sum, a contractor whose attorney utilizes a 998 offer can end up with a long-lingering smear on their license and professional reputation.

For years, savvy lawyers have worked around this outcome with terms in the 998 offer that offered a settlement agreement instead of a judgment. This was an accepted practice for years, and then some appellate decisions called it into question. Good news for our licensed clients came from the Third District Court of Appeals in late May. In the case of Arriagarazo v BMW of North America, LLC (to be published, formal citation not yet available), the court specifically and unequivocally approved the offer of a settlement agreement rather than a judgment in an effective 998 offer of compromise.

The parties in the Arriagarazo case still did not get it quite right, but the court gave us a clear road map of what will be acceptable. Any doubt about the effectiveness of a 998 offer that suggests a settlement agreement instead of a judgment should be resolved. Whether other conditions can be imposed is still questionable – but this question is resolved.

1st District Joins 2nd District Court of Appeals and Holds that One-Year SOL Applies to Disgorgement Claims

Garret Murai | California Construction Law Blog

We’re beginning to see a trend.

This past year, the 2nd District Court of Appeals, in Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, 53 Cal.App.5th 1201 (2020), held for the first time that a one (1) year statute of limitations period beginning upon substantial completion of a project applies to disgorgement claims under Business and Professions Code section 7031. In San Francisco CDC LLC v. Webcor Construction L.P., the 1st District Court of Appeals became the second Court of Appeals in the state to hold that a one (1) year statute of limitations beginning upon completion or cessation of work on a project applies to disgorgement claims under Business and Professions Code section 7031.

The San Francisco CDC LLC Case

The Defect Action

In September 2005, San Francisco CDC LLC entered into a $144 million construction contract with Webcor Construction, Inc. doing business as Webcor Builders to build the InterContinental Hotel in San Francisco, California.

In July 2007, Webcor Construction, Inc. merged into Webcor Construction, L.P. The new entity, Webcor Construction, L.P., obtained a contractor’s license before the merger on June 26, 2007. Later that year, Webcor Construction, L.P. was acquired by Obayashi Corporation.

In October 2013, SF CDC tendered a warranty claim alleging defects with the windows of the hotel. The parties entered into a tolling agreement tolling SF CDC’s claim from the date of discovery of defects on October 4, 2013.

In June 2015, SF CDC filed a lawsuit against “Webcor Builders, Inc.” and others alleging claims with the windows. After it was discovered that Webcor Builders, Inc. was a separate entity unrelated to Webcor Construction, L.P., the parties agreed to substitute Webcor Construction, L.P. for Webcor Builders, Inc.

Suspecting that Webcor Construction, L.P. might not have been properly licensed as a contractor during construction of the hotel, SF CDC tried to allege that the licensure issue during trial, however, the trial court refused to hear the claim. The parties later settled and the defect action was dismissed. Presumably, the parties’ settlement reserved claims with respect to disgorgement as the next series of events suggest.

The Disgorgement Action

In June 2017, SF CDC filed a second lawsuit, alleging that Webcor Builders, L.P. (Note: It’s a little confusing here. I think the Court meant to say Webcor Construction, L.P.), Webcor Construction, Inc., and Obayashi Corporation were not properly licensed and subject to disgorgement under Business and Professions Code section 7031. Specifically, SF CDC alleged that Webcor Construction, Inc.’s contractor’s license expired in December 2007 and was never transferred.

In response, the defendants filed a demurrer and requested judicial notice of records of the Contractors State License Board showing that Webcor Construction, L.P. obtained its own contractor’s license in June 2007, prior to the merger, and thus did not need Webcor Construction, Inc. to transfer its license. Rather than respond to the demurrer, SF CDC filed a first amended complaint.

In its first amended complaint, SF CDC continued to allege a claim of disgorgement under Business and Professions Code section 7031 but also added a claim for conversion and fraudulent concealment. According to the first amended complaint, defendants were not properly licensed during construction of the hotel and “executed a series of mergers to conceal their licensing violations.” The defendants filed a second demurrer.

In January 2018, the trial court sustained the demurrer with leave to amend. In sustaining the demurrer, the trial court found that all three claims related to disgorgement and that a one (1) year statute of limitations period applied under Code of Civil Procedure section 340(a) which applies to actions based “upon a statute for a penalty or forfeiture.”

In May 2018, SF CDC filed a second amended complaint. In its second amended complaint, SF CDC continued to allege the same three causes of action, but also alleged that Webcor Construction, L.P.’s contractor’s license automatically terminated during construction when its general partner disassociated from the partnership, and that work continued to be performed after June 23, 2016 and through the beginning of 2017, within one (1) year of when SF CDC filed its disgorgement action. The defendants filed a third demurrer.

The trial court sustained the demurrer with leave to amend. In sustaining the demurrer, the trial court found that SF CDC had not identified the contractor who allegedly performed work after June 23, 2016 and through the beginning of 2017, did not adequately allege any misrepresentation or concealment concerning the licensing violations that could not have been identified through public records, and rejected SF CDC’s contention that Webcor Construction, L.P.’s contractor’s license had been “automatically terminated” through the disassociation of its general partner.

In October 2018, SF CDC filed a third amended complaint. In its third amended complaint, SF CDC alleged that on several occasions, “Webcor Builders, Inc.” had been identified as the hotel’s general contractor in change orders, permits prepared by subcontractors, and other documents. SF CDC also alleged that between October 2016 and January 2017, defendants had prepared “scopes, schedules and sequences of work and obtain[ed] and present[ed] proposals and bids . . . to perform the original contract scope of work with trade contractors who would repair and improve the windows and curtain wall components. The defendants demurred a fourth time.

In their demurrer, defendants argued that SF CDC’s belief that “Webcor Builders, Inc.” had built the hotel, was undermined by the publicly recorded notice of completion which identified “Webcor Construction L.P., dba Webcor Builders” as the original contractor, and that obtaining and presenting proposals and bids, did not require a contractor’s license and would not be actionable under Business and Professions Code section 7031.

The trial court sustained the demurrer without leave to amend, finding that SF CDC was unable to allege a claim that was not time-barred, that documents prepared by third-party subcontractors identifying the general contractor as “Webcor Builders, Inc.” could not provide a basis for equitable estoppel because the statements were not made by defendants, that the notice of completion undermined SF CDC’s claim that it did not become aware of the identity of the general contractor until 2017, and that the preparation of bids and proposals did not require a contractor’s license.

Judgment was later entered against SF CDC. SF CDC appealed.

The Court of Appeals Decision

Providing an overview of Business and Professions Code section 7031, the Court of Appeal noted that the purpose of Section 7031 is “to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay,” that “[d]isgorgement is permitted even when the project owner knows that that the contractor is unlicensed,” that disgorgement applies even if “the contractor is only unlicensed for part of the time it performed work requiring a license” and even “when the work performed by the unlicensed contractor is free of defects.” Section 7031, explained the Court, is “‘truly a strict liability statute’” and ‘”represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.”

With respect to the statute of limitations, the Court of Appeal held that the one-year statute of Code of Civil Procedure section 340 “governs actions brought under section 7031(b) because disgorgement is a statutory penalty for work performed by an unlicensed contractor” and noted that this is consistent with the Eisenberg decision. 

Although not directly addressing whether the statute of limitations could be equitably tolled, the Court of Appeal held that equitable estoppel or delayed discovery did not apply, because SF CDC knew or should have known that Webcor Construction L.P. built the hotel when the notice of completion was recorded in February 2009, which was more than eight (8) years before SF CDC filed its disgorgement action in 2017.

As to SF CDC’s allegation that preparing bids requires a contractor’s license, the Court of Appeal held that such argument ran counter to MS Erectors Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 38 Cal.4th 412, in which the California Supreme Court held that the preparation of bids and proposals is a pre-contractual activity for which a contractor’s license is not needed.

Conclusion 

So there you have it. We now have a trend with the 1st District and 2nd District Court of Appeals both holding that a one-year statute of limitations beginning upon completion or cessation of work on a project applies to disgorgement claims under Business and Professions Code section 7031.