A recent California appellate court decision held that a broad “catch-all” provision in an exclusionary endorsement to an insurance policy applied to bar coverage for all claims asserted in an underlying lawsuit, even though the lawsuit was a “mixed” action containing some otherwise covered claims.
Specifically, in 24th & Hoffman Investors, LLC, et al. v. Northfield Ins. Co., 2022 WL 3754741 (2022), the court interpreted a liability policy issued by Northfield Insurance Company to 24th & Hoffman Investors, LLC for an apartment complex it owned. Two tenants in the complex filed a lawsuit against 24th & Hoffman alleging “a variety of ‘substandard, indecent, offensive and hazardous conditions’ at the property.” The complaint included eleven causes of action. 24th & Hoffman tendered its defense to the lawsuit to Northfield; Northfield disclaimed coverage based on an exclusionary endorsement barring coverage for actions including claims for breach of the implied warranty of habitability. The insured defended the case using its own counsel and settled for a payment of approximately $150,000.
24th & Hoffman filed a bad faith lawsuit against Northfield alleging its denial of defense was improper. The parties then filed cross-motions for summary adjudication or summary judgment. The trial court denied Northfield’s motion for summary judgment and granted 24th & Hoffman’s motion for summary adjudication, holding that Northfield had a duty to defend 24th & Hoffman because three of the causes of action in the complaint – retaliation, conversion, and trespass to chattels – were not habitability claims. Citing Buss v. Superior Court, 16 Cal.4th 35 (1997), the trial court held that, in a “mixed action” involving covered and uncovered claims, the insurer has a duty to defend the entire action. Id. at 48-49. The parties stipulated to damages of $350,000 and judgment was entered in favor of the insured.
On appeal, the issue was whether an insurer can avoid the broad defense obligation created by Buss by excluding coverage for an entire lawsuit if it includes an excluded claim. The Northfield policy included an endorsement entitled “EXCLUSION – HABITABILITY OF PREMISES” which included two subsections. The first subsection explicitly excluded claims arising out of “[a]ctual or alleged violation of any federal, state or local law, code, regulation, ordinance or rule relating to the habitability of any premises . . . [b]reach of any lease, rental agreement, warranty or covenant to maintain a premises in a habitable condition; or . . . [w]rongful eviction from, wrongful entry into or invasion of the right of private occupancy … due to failure to maintain a premises in a habitable condition.” The second subsection of this endorsement explicitly excludes all claims “[a]lleged in any claim or ‘suit’ that also alleges any violation, breach or wrongful eviction, entry or invasion as set forth in Paragraphs (1)(a)–(c) above.” The trial court found the exclusion to be clear and unambiguous, but concluded that only 8 of the 11 causes of action were excluded by the first part of the exclusion while the remaining three non-habitability causes of action were not excluded. Therefore, the court ruled that Northfield had a duty to defend the entire action.
On appeal, Northfield argued that the trial court failed to apply the second “catch all” section of the endorsement and, because there was no dispute that 8 of the 11 claims alleged in the lawsuit were habitability claims, the second subsection of the endorsement barred any possible coverage for the entire action, including the non-habitability claims.
The appellate court agreed with the trial court that the exclusion was plain, clear and conspicuous and thus enforceable. The appellate court also agreed with the trial court that at least two of the causes of action were not related to habitability claims. However, the appellate court disagreed with the trial court’s assessment that Buss required Northfield to defend the entire case. The appellate court agreed with Northfield that the second subsection of the exclusion eliminated any potential coverage for the lawsuit. The appellate court relied on the decisions in S.B.C.C., Inc. v. St. Paul Fire & Marine Ins. Co., 186 Cal.App.4th 383, 397 (2010); Northfield Ins. Co. v. Hudani, 2021 WL 3556672 (C.D.Cal. March 16, 2021); and Pinnacle Brokers Ins. Solutions, LLC v. Sentinel Ins. Co., 2015 WL 5159532 (N.D.Cal. Sept. 2, 2015) to hold that the “catch-all” language in subsection 2 of the endorsement applied to eliminate any possible coverage for 24th & Hoffman with respect to the underlying lawsuit. The court held that Buss was irrelevant in this matter because application of the “catch-all” language in the exclusion meant none of the claims in the lawsuit were potentially covered, thus the underlying action was not a “mixed action” involving covered and uncovered claims.
The appellate court rejected the insured’s reliance on two decisions that have found a duty to defend despite broad exclusionary language. In Saarman Const., Ltd. v. Ironshore Spec. Ins. Co., 230 F.Supp.3d 1068 (N.D.Cal. 2017), the court rejected an insurer’s attempt to deny coverage for an entire construction defect claim based on a mold exclusion. The court distinguished that decision because the exclusion in Saarman did not include “catch-all” language similar to that in the policy issued to 24th & Hoffman. The insured also relied on Conway v. Northfield Ins. Co., 399 F.Supp.3d 950 (N.D.Cal. 2019) which addressed the same habitability exclusion, but involved claims related to both commercial and residential real estate. The decision in Conway held that the habitability exclusion could not apply to commercial real estate and therefore a defense was owed. The court here distinguished Conway because the matter before it did not involve commercial real estate.
Although the court distinguished the insured’s cases, more importantly, the court also stated that “to the extent that Saarman and Conway are inconsistent with this conclusion, we respectfully disagree with them.” Because the 24th and Hoffman decision is a state appellate court case, and Saarman and Conway are federal district court cases, the decision in 24th & Hoffman is binding precedent on lower California state courts. However, there is arguably a split of authority between the federal courts (Saarman and Conway) and state courts regarding the enforceability of “catch-all” exclusions. This interpretational dispute may end up before the California Supreme Court either from an appeal of the 24th & Hoffman decision or by certification of the issue from the Ninth Circuit. Until then, the 24th & Hoffman case stands for the proposition that insurers can – to some extent – contract around the impact of the Buss decision’s broad duty to defend both covered and uncovered claims by including “catch-all” language in their policy exclusions.