California’s Fourth District Court of Appeal recently determined that manuscript additional insured endorsements (AIEs), which purportedly provided coverage for ongoing operations only, were ambiguous. The court also found the insurer that issued the policies, American Safety Indemnity Co. (American Safety), acted in bad faith due to its systematic eff orts to deny coverage to general contractors as additional insureds.
In Pulte Home Corp. v. American Safety Indemnity Co.,1 Pulte Home Corporation (Pulte Home), a general contractor, sued American Safety for failure to defend Pulte Home as an additional insured in connection with two underlying construction defect lawsuits. American Safety contended that it did not have a duty to defend Pulte Home because the loss occurred after the construction project was complete and the applicable AIEs did not provide coverage for completed operations, and/or because the policy’s faulty workmanship exclusions applied. The trial court awarded $1.4 million in compensatory and punitive damages to Pulte Home, and American Safety appealed.
The manuscript AIEs at issue provided additional insured coverage “but only with respect to liability arising out of ‘your work’ and only as respects ongoing operations . . .” and “but only with respect to liability arising out of ‘your work’ which is ongoing . . . .” American Safety argued that this language expressly limited coverage to the time of the named insured’s ongoing operations, and excluded coverage for completed operations. However, the appellate court held that the portion of the AIE providing coverage for “liability arising out of ‘your [the named insured subcontractor’s] work’” could reasonably be read to provide coverage for the insured’s completed operations, if property damage ensued from those completed operations. The AIE did not clearly restrict coverage by linking the ongoing operations phrase to the “liability arising out of ‘your work’” phrase, nor did it expressly state that completed operations were not covered, thereby creating an ambiguity. Pursuant to California law, because American Safety drafted the manuscript AIEs at issue, the ambiguity was resolved against American Safety; therefore, this language did not eliminate American Safety’s duty to defend.
The appellate court also addressed American Safety’s argument that the policy’s faulty workmanship exclusions, j.(5) and j.(6), applied. The appellate court determined that American Safety did not provide evidence or specifi c rationale for its reliance on these exclusions, and failed show that all the claims alleged in the underlying complaints fell within the exclusions. Therefore, neither exclusion eliminated American Safety’s duty to defend.
Finally, the appellate court upheld the trial court’s fi nding of bad faith against American Safety due to its lack of a legitimate reason for denying additional insured coverage to Pulte Home, as well as evidence of American Safety’s systematic eff orts to deny coverage to contractors in other cases, and concluded that Pulte Home was entitled to punitive damages.
This decision is a positive outcome for additional insureds, and should deter insurers from denying coverage without providing ample, defi nitive evidence that all underlying claims are outside the scope of the policy’s coverage.
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______________________________________________________________________________________________________ 1 Pulte Home Corp. v. Am. Safety Indem. Co., No. D070478, 2017 WL 3725045 (Cal. Ct. App. Aug. 30, 2017).