Sep 15, 2017

California Court Finds Ambiguous "Ongoing Operations" Limitation in Contractor's Additional Insured Endorsement

By: Moris Davidovitz

Reported trial court decisions in California and adjacent states have sought ways to find coverage for construction defect claims against additional insureds under endorsements with wording limited to the insured’s “ongoing operations”. A recent appellate court decision found an ambiguity in “ongoing operations” wording, such that the insurer was found in bad faith for denying a defense to the additional insured. Pulte Home Corporation v. American Safety Company (August 30, 2017).

Insurer American Safety issued several CGL policies to three of Pulte’s subcontractors, adding Pulte an additional insured, and American Safety denied Pulte a defense to a construction defect action, essentially on the basis that the AIE limitation to “ongoing operations” excluded coverage for claims considered to be completed operations because asserted after construction had been completed. The court found the “ongoing operations” wording linking the “ongoing operations” phrase to the “liability arising out of your work” phrase did not clearly restrict coverage to only ongoing operations. The court also found there was a potential for coverage (and so a duty to defend) because work on some homes could have been ongoing at the same time that some of the homes were completed (following an interpretation of a trial court in an unreported California coverage case against the same insurer).

The court’s opinion also contains a caution to insurers whose claim representatives use standard form letters for denials of coverage.  In finding the insurer in bad faith, the court found that the denial letters contained references to bases for denial which were not applicable to the claim presented, and so found the trial court “had ample reasons for concluding they are form letters, rather than then product of any appropriate case-by-case analysis.”