Jun 18, 2018

California Decision Finds Policy Language in Additional Insured Endorsements Must Be Clear and Explicit

By: Charles Bolcom

In Pulte Home Corp. v. American Safety Indemnity Co., 14 Cal. App. 5th 1086 (August 30, 2017), the California Fourth District Court of Appeal held that an insurer’s denial of coverage based on a limitation of “ongoing operations” was unreasonable.  The Court concluded that “ongoing operations” did not necessarily limit coverage to an additional insured such that the insurer’s denial of Pulte Home Corp.’s tender was in bad faith.

In the Pulte case, Pulte Home Corp. (“Pulte”) was the general contractor and developer for two residential projects where the subcontractors were required to name Pulte as an additional insured on their policies.  After the work was completed, homeowners on each project filed suit against Pulte, which tendered its defense to American Safety Indemnity Company (“American Safety”), one of the insurers for the subcontractors.  American Safety denied Pulte’s tenders, in part, because coverage under the additional insured endorsements was limited to the insured’s work arising out of “ongoing operations” and the lawsuits alleged liability arising out of completed operations.  Pulte filed suit against American Safety.  The trial court ruled the denial was improper and that the additional insured endorsements were ambiguous.  American Safety appealed claiming the “ongoing operations” language was a limitation that eliminated coverage for harm arising after the homes had been completed.  

The Court of Appeal found American Safety had focused on the idea that the property damage had occurred when the homeowners bought their homes and learned of the defects.  But the Court said those purchases only indicated when the homeowners suffered financial damage.  With the mechanism that caused the property damage unknown and the timing of the property damage in relation to the home purchases unknown, property damage could have occurred on a completed home and the harm could have been covered if subcontractors were still working on other homes in the project.  Under that circumstance, the condition of ongoing operations was satisfied.  Thus, American Safety had not met its burden in showing the damages did not fall within the scope of coverage for Pulte.  The Court of Appeal added that the additional insured endorsements were also ambiguous because they combined coverage of ongoing and completed operations in a single clause and failed to limit coverage to the time of the subcontractors’ ongoing operations.

In view of this decision, insurance companies should review and update their additional insured endorsements to ensure any policy language regarding ongoing operations is clear and explicit.