A recent California appellate court decision rejected the argument often raised by insurers in construction defect cases that policies providing ongoing operations coverage do not extend to third party claims filed after operations have been completed.
Specifically, in McMillin Management Services, L.P. v. Financial Pacific Ins. Co. (2017) 17 Cal.App.5th 187, Lexington Insurance issued policies to two named insureds that were subcontractors on a project on which McMillin was the general contractor. Lexington’s policies were in effect during the time that its named insureds were performing ongoing operations at the project, and endorsements on the policies extended additional insured status to McMillin for “ongoing operations.” However, after McMillin was sued for construction defects by the homeowners, Lexington denied coverage for McMillin based on the argument that “there were no homeowners who could have brought construction defect claims against McMillin during the time that [the named insureds’] operations were ongoing.” Lexington argued that the claims in the underlying lawsuit involved only completed operations and that the additional insured endorsements could not apply. The trial court granted summary judgment for Lexington and McMillin appealed.
The Court of Appeal rejected Lexington’s primary argument, noting that the policy’s insuring grant provided coverage for damages that occur during the policy period, not for liability that attaches during the policy period. The Court also found that an insured’s work at one part of a home could begin causing resultant damage prior to the insured completing its work on another part of the home. Although the homeowners did not discover damages or file suit until after the subcontractors completed their work, McMillin was potentially facing liability for damages that occurred during the ongoing operations of Lexington’s named insureds. Therefore, the Court held the ongoing operations additional insured endorsements in the Lexington policies provided coverage to McMillin. Importantly, the Court concluded that a construction defect claim by a homeowner does not solely involve completed operations damages.
Notably, the Court did not address the applicability of policy exclusions j(5) and j(6) which are often cited as eliminating property damage claims during the period of the insured’s ongoing work. As those exclusions were not asserted by Lexington, the Court did not consider their application.
The Court of Appeal rejected Lexington’s argument that the additional insured endorsements contained language expressly barring coverage for damages that occur after the named insured completed its work, which language was discussed in the seminal additional insured coverage decision of Pardee Const. Co. v. Ins. Co. of the West (2000) 77 Cal.App.4th 1340. The Court rejected Lexington’s argument that Pardee supported its position, noting that the Pardee court held that such a limitation would bar additional insured coverage under policies that incepted after the named insured completed their work. However, in this case, the Lexington policies were in effect during the named insured’s ongoing operations. Therefore, according to the Court of Appeal in McMillin, neither the limiting language in the endorsements nor the Pardee decision supported Lexington’s no coverage argument.
The Court refused to consider several broader arguments raised by the parties, and strictly limited its holding. For instance, the Court explicitly stated that “we do not decide whether an ongoing operations endorsement such as that used in this case provides coverage to the additional insured only for damages that occur prior to the completion of the named insured subcontractors’ ongoing operations.” The opinion also included an unpublished section related to arguments raised by a co-defendant insurer. However, because this section was unpublished, it is of no precedential value.
The holding in McMillin is not particularly surprising. Lexington’s attempt to limit coverage based on when a plaintiff has standing to file suit for damages he or she has sustained is unsupported by the standard insuring grant in liability policies which expressly states that policy obligations attach based on when the damage actually occurs. That being said, because the decision does not address whether exclusions j(5) and j(6) eliminate potential coverage during the time the named insured is performing work, the decision may have limited application in future cases.