Exclusion Bars Coverage for Construction Defects

Condominium exclusion bars coverage for construction defects

May 31, 2010

The U.S. District Court for the Southern District of California ruled that a "condominium, townhouse, multi-family dwelling projects" exclusion in a commercial general liability insurance policy precluded coverage for construction defects claims where the exclusion did not have a carveout for work performed on apartment buildings.

On Jan. 27, 2003, Sully-Jones Contractors Inc. entered into a contract with Pacifica Cos. to re-roof a residential complex located in Encinitas, Cal. The contract stated the work was for 11 apartment buildings and 22 carport buildings. Sully-Jones claimed that it finished work on the apartment buildings, which was converted to condominiums, by May 19, 2003 and finished work on the entire project by July 11, 2003. According to Sully-Jones, damages were incurred and attempted repairs were performed in 2003, 2004 and 2005.

On Jan. 11, 2007, an action was brought against Sully-Jones alleging construction defects and related damages in connection with Sully-Jones' re-roofing. Sully Jones' liability insurer, Maxum Indemnity Co., tendered a defense to American Safety Indemnity Co. (ASIC). ASIC denied coverage under the 02-03 and 03-04 policies based, in part, on an endorsement titled "Condominium, Townhouse, Multi-Family Dwelling Projects Exclusion." ASIC agreed to defend under the 04-05 policy, subject to a reservation of ASIC's rights and subject to satisfaction of the conditions in the 04-05 policy.

On Oct. 24, 2008, Sully-Jones brought an action against ASIC alleging, inter alia, breach of contract. The parties moved for summary judgment on the 02-03 and 03-04 policies.

The district court denied summary judgment with regard to the extent of coverage afforded under the 02-03 policy, the nature of work performed during the 02-03 term, and whether and when the duty to defend was triggered under that policy. The parties did not dispute that, pursuant to the endorsement, work performed on condominiums was excluded from coverage. However, Sully-Jones alleged that the endorsement included a carveout for work performed on apartment buildings.

Issue exists regarding carveout for work performed.

Sully-Jones submitted undisputed extrinsic evidence, dated around the time the policy was signed in 2002, showing it negotiated the carveout prior to signing the 02-03 policy. Despite the undisputed nature of the 2002 evidence, the district court found a genuine issue of material fact existed regarding the carveout and the endorsement because, inter alia, the 2002 evidence only stated the intentions and negotiations from one party.

However, the district court granted summary judgment in ASIC's favor with regard to the 03-04 policy on the grounds there was no material dispute that the 03-04 policy incorporated the endorsement, the endorsement thereunder did not include an apartment "carveout" and, therefore, Sully-Jones' work at the residential complex during the 03-04 term was not covered by the 03-04 policy. Because no coverage applied under the 03-04 policy, the issue of whether and when the duty to defend was triggered under that policy was moot.