December 13, 2021 - The construction industry is a key contributor to California's economy. According to the Associated General Contractors of America, in 2019, the construction sector contributed $118.1 billion of the state's total gross domestic product.

The recently signed federal Infrastructure Investment and Jobs Act is expected to be a boon to the industry, funneling about $45.5 billion to California to improve the state's infrastructure. Billions will be pumped into rebuilding roads and bridges and improvements to airports. The package promises to keep public and private construction firms busy for years to come.

The construction trade has been hit with an increasing number of disputes. According to experts, the value of disputed construction costs for projects active within the last year and a half reached $73 billion. With insurance remaining the backbone supporting this multibillion-dollar industry, a rise in insurance coverage disputes has followed.

Numerous construction insurance disputes made their way to California courts in 2021. Policyholders secured a number of significant wins. Below is a look at five standout decisions issued this year.

Takeaway: Guastello v. AIG Specialty Insurance Co. reinforces that, in the context of latent construction defect damages (routine with construction projects), the issue of whether property damage has occurred during the policy period is generally inappropriate for resolution on summary judgment. This appellate court decision is an asset for policyholders faced with insurer summary judgment motions (all-too-common) on the timing of property damage.

In Guastello, a subcontractor built a retaining wall that collapsed years after it was built (and years after the policy expired). When the subcontractor's commercial general liability (CGL) carrier refused to indemnify for a judgment obtained by the homeowner, the homeowner filed suit. The trial court granted summary judgment for the insurer, ruling that no coverage was owed since the collapse did not occur until long after the policy expired.

The appellate court reversed, finding that the timing of the "property damage" was plainly a disputed issue of material fact. In so holding, the court looked to the summary judgment evidence — specifically, a declaration submitted by the homeowner's expert. The expert opined that the subcontractor negligently built the retaining wall (a latent construction defect) which caused continuous and progressive damage to the homeowner's lot and perimeter wall beginning during the policy period.

Takeaway: Webcore-Obayashi Joint Venture v. Zurich American Insurance Co. is an important decision for builder's risk policyholders as it represents a U.S. court (one of the first) adopting and applying the divisibility concept applied by non-U.S. courts in the context of a faulty workmanship/design exclusion. The court separated the work/design and the property into divisible, component parts when assessing whether the insurance claim involved covered "damage."

Webcore-Obayashi, a decision issued by the Northern District of California, involved an insurance claim under a builder's risk policy arising from the fracturing of structural steel girders at a public works project. The fractures caused structural damage to the girders that needed to be repaired. After the insurer denied coverage based in part on a faulty workmanship/design exclusion (similar to the LEG 2/96 exclusion), the policyholder sued.

On summary judgment, the carrier argued that the exclusion's language meant that if a design defect or faulty workmanship was present, property was not "damaged" and the exclusion barred coverage. The insurer further claimed that covered "damage" would only exist if there was some additional cause of damage, "such as a truck colliding into covered property."

While noting that no court had interpreted the exact exclusion at issue, the Northern District of California sided with the policyholder. In so ruling, the court adopted the divisibility concept espoused in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., a 2014 decision issued by the British Columbia Supreme Court. Applying that concept, the court separated the work/design and the property into divisible, component parts when determining whether the claim involved covered "damage."

The court ultimately denied summary judgment, given the existence of factual disputes: (1) what caused the girders to fracture; and (2) whether there were additional "defects" that needed to be remedied apart from the fractured girders.

Takeaway: Pacific Bay Masonry, Inc. v. Navigators Specialty Insurance Co. marks a significant policyholder win on insurance coverage defenses that plague construction industry participants facing liability claims. First, whether the claim involves covered "property damage"; and second, whether "work product" exclusions bar a defense.

In Pacific Bay, a masonry subcontractor filed suit after its CGL insurer refused to defend against an underlying construction defect action. The Northern District of California granted the subcontractor's motion for partial summary judgment, dismissing the insurer's argument that the underlying action did not allege "property damage." The court further ruled that the "Damage To Your Product" and "Damage To Your Work" exclusions did not bar potential coverage.

A possibility existed, the court reasoned, that damage to the insured's work and product could have arisen due to the actions or omissions of another subcontractor. Even accepting the carrier's argument that only damage to the property of others is covered, the court ruled a duty to defend still arose. The underlying complaint alleged the insured's work resulted in damage to property other than its own. Importantly, the court further held that conflicting statements which foster a dispute over facts relevant to the obligation to defend does not extinguish the duty to defend.

Takeaway: Policyholders can add La Roca Christian Communities International, Inc. v. Church Mutual Insurance Co. to their arsenal to defeat insurers' routine arguments that liability policies do not cover breach of contract claims. La Roca further strengthens insureds' coverage rights under their CGL policies and affirms the broad coverage that was intended to be provided under these policies.

The Southern District of California in La Roca ruled that a party's breach of a lease agreement could be construed as an "accident" and thus an "occurrence" under a multi-peril policy. The court rejected the insurer's argument that no defense was owed because the lessor did not use its best efforts to comply with its contractual obligation and thus the breach of contract was expected.

Citing the California Supreme Court's 2018 landmark decision in Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., the court reasoned that a defense was owed given that the allegations could be construed to allege intentional (uncovered) or negligent (covered) conduct. The court also outright dismissed the insurer's argument that a breach of contract can never constitute an "occurrence."

Takeaway: Pulte HomeCorp. v. Tig Insurance Co. constitutes a policyholder victory on the scope of a commonly used blanket additional insured (AI) endorsement, an ever-critical risk-shifting mechanism for construction industry participants.

Pulte Home involved a general contractor's claim for AI coverage under its subcontractors' CGL policies for underlying construction defect litigation. The policies conferred AI status on "parties required to be named as an Additional Insured in a written contract with the Named Insured entered into prior to the loss or occurrence."

Applying Georgia insurance law principles identical to California's and relying on California cases, the Southern District of California rejected the insurer's position on the scope of the AI endorsement. Dismissing the carrier's contention that the general contractor did not qualify as an AI unless its written contract explicitly applied to the project at issue, the court refused post-claim to write an additional requirement into the policy.

Even if the carrier's interpretation was correct, the court concluded, a defense was still owed pursuant to the incorporation by reference doctrine. The agreements between the general contractor and its subcontractors that set forth the scope of work incorporated the terms of the parties' base agreements. The scope of work agreements specifically applied to the project at issue, and the base agreements required the subcontractors to list the general contractor as an AI on the subcontractors' policies.