Jeff Sistrunk | Law 360 | August 30, 2017
A California appeals court on Wednesday upheld a lower court’s ruling after trial that American Safety Indemnity Co. had wrongly refused in bad faith to defend Pulte Home Corp. in a pair of lawsuits alleging construction defects at housing developments, finding that the insurer incorrectly interpreted key policy language and acted unreasonably.
Pulte, the developer of two San Marcos, California-area residential housing projects, was named an additional insured under liability policies that American Safety issued to a trio of subcontractors. When residents of the developments sued Pulte and others over alleged construction defects, the insurer denied the builder’s request for a defense, in part based on the position that the policies only extended additional insured coverage for claims relating to the subcontractors’ “ongoing operations,” not completed work.
A California state court rejected American Safety’s argument and sided with Pulte, saying the cited language created ambiguities regarding the potential for coverage of the construction defect suits, meaning the insurer was obligated to assume the builder’s defense.
In a published opinion issued Wednesday, a panel of the California Court of Appeal’s Fourth Appellate District affirmed the trial court’s decision on the defense issue, along with its finding that American Safety had acted in bad faith.
“Both sets of insureds could reasonably have expected that if the subcontractors had bought completed operations coverage for the work, it also applied to vicarious liability of the developer, if property damage problems appeared,” Judge Richard D. Huffman wrote for the panel.
However, the panel remanded the case for a recalculation of Pulte’s attorneys’ fees and corresponding punitive damages, holding that the lower court had improperly based its initial calculations on a new fee arrangement that the developer didn’t reach with its lawyers until trial.
The housing projects at issue were completed by 2006. In 2011 and 2013, two groups of residents sued Pulte for damages in separate suits alleging multiple construction defects at their respective developments, including deficiencies in the concrete and electrical work.
Pulte sought a defense from American Safety under liability policies issued to three of its subcontractors between 2003 and 2006, but the insurer declined on multiple grounds.
The policies provided the subcontractors coverage for claims tied to their “completed operations.” But American Safety asserted that Pulte was not entitled to that coverage because endorsements to the policies extended additional insured coverage to the developer only for liabilities arising out of the subcontractors’ work during ongoing operations. The insurer also pointed to several faulty workmanship exclusions.
Pulte sued American Safety in California state court in 2013, and the case proceeded to a two-phase bench trial after the court ruled that American Safety had a duty to defend under one of the policies. The first phase dealt with the insurer’s duty to defend under the remaining policies and Pulte’s claim that the insurer’s denials constituted bad faith.
The trial court found that the endorsement language cited by the insurer didn’t limit the developer’s coverage to claims pertaining to the subcontractors’ ongoing operations, and awarded Pulte over $455,000 in contractual damages and interest. Furthermore, the court held, Pulte showed that American Safety had acted in bad faith by engaging in a pattern of issuing additional insured endorsements and then using “every conceivable argument” to deny coverage.
In the second phase, the court granted Pulte about $500,000 in attorneys’ fees and court costs under the seminal California Supreme Court ruling of Brandt v. Superior Court, and also awarded punitive damages of the same amount.
American Safety raised a number of challenges on appeal. With respect to policy interpretation, the insurer again contended, among other things, that it had limited Pulte’s additional insured coverage to the subcontractors’ ongoing operations via the endorsement language.
But the Fourth Appellate District panel was unconvinced, opining that if American Safety had wanted to make clear to Pulte that it wouldn’t cover completed operations for the additional insured, it could have explicitly said so.
“These [additional insured endorsements] do not clearly restrict coverage to only ongoing operations, simply by linking the ongoing operations phrase to the ‘liability arising out of the work’ clause,” Judge Huffman wrote.
The appellate panel further held that the trial court had correctly ruled that American Safety’s denial of Pulte’s defense requests was in bad faith, and that the developer is entitled to punitive damages.
“In ruling that an award of punitive damages was justified, the trial court’s decision stated that American Safety had demonstrated its ‘pattern and practice’ of using every conceivable argument to deny coverage, whether the arguments are weak or strong, valid or invalid,” Judge Huffman wrote. “Such conduct showed the company was primarily protecting its own interests in refusing to defend its additional insureds in construction defect cases.”
American Safety also argued on appeal that the trial court’s calculation of Pulte’s “Brandt” fees — and, by extension, its punitive damages — was improper because Pulte had abruptly shifted during trial from a contingency fee arrangement with its lawyers to an hourly rate. Pulte has justified the change by asserting that it wanted to ensure that its counsel would receive the “full measure” of reasonable fees required to pursue the coverage action.
The panel expressed “serious concerns” that the change in Pulte’s fee arrangement was geared toward manipulating the Brandt calculation to the developer’s benefit. As a result, it sent the case back to the lower court to recalculate the Brandt fees and punitive damages based on Pulte’s original contingency arrangement.
Robert C. Carlson of Koeller Nebeker Carlson & Haluck, representing Pulte, told Law360 that “our client is pleased with the court’s decision as to the legal issues raised and think that it goes a long way to resolving uncertainties in the community with respect to a carrier’s obligation to defend additional insureds in construction defect litigation.”
An attorney for American Safety did not immediately respond to a request for comment Wednesday.
Judges Richard D. Huffman, Terry B. O’Rourke and William Dato sat on the appellate panel.
Pulte is represented by Robert C. Carlson, Sharon A. Huerta and Sarah P. Long of Koeller Nebeker Carlson & Haluck.
American Safety is represented by Gregory D. Hagen of Wilson Elser Moskowitz Edelman & Dicker LLP and Robert A. Olson and Gary J. Wax of Greines Martin Stein & Richland.
The case is Pulte Home Corp. v. American Safety Indemnity Co., case number D070478, in the California Court of Appeal, Fourth Appellate District, Division One