Does Your Additional Insured Endorsement Entitle You To A Defense?

The litigation history of AI language in ISO and manuscript endorsements is diverse and differs across jurisdictions.  Of particular interest here are the differences in interpretation of key terms in AI endorsements such as “ongoing operations” and “your work” in conjunction with “arising out of” in various jurisdictions and the impact that jurisdictional differences can have on the scope of coverage provided, particularly for “completed operations.” 

Town of Fort Ann and Ongoing Dam Operations

For example, a broad interpretation came out of New York in Town of Fort Ann v. Liberty Mutual Ins. Co., 69 A.D.3d 1261, 1262-63 (3d Dep’t 2010), finding that “ongoing operations” meant more than when work was currently in progress.  The failure of the dam in Town of Fort Ann took place after “major construction . . . had ended,” but the work was not considered complete under the contract because all inspections had not occurred.  However, other courts have construed similar language as only providing coverage for liability that arises while the work is actually in progress and that “completed operations” were excluded.  See Davis v. Liberty Mut. Grp., 814 F. Supp. 2d 1111, 1121 (W.D. Wash. 2011); Hartford Ins. Co. v. Ohio Cas. Ins. Co., 145 Wn. App. 765, 189 P.3d 195, 201 - 202 (Wash. App. 2008); Weitz Co., Ltd. Liab. Co. v. Mid Century Ins. Co., 181 P.3d 309, 313-15 (Colo. App. 2007) (“the term ‘ongoing operations’ used in conjunction with ‘only’ in the endorsement limits the coverage provided to the general contractor or additional insured” and differentiates what is covered from “completed operations.”)  While still other courts have found that “ongoing operations” is ambiguous as to whether it imparts temporal limitations on AI coverage.  See McMillin Construction Servs., L.P. v. Arch Specialty Ins. Co., 2012 U.S. District LEXIS 8339 (S.D. Cal. 2012).  

Pulte Home Corp and Ambiguous “Ongoing Operations” Language

The California Court of Appeal in Pulte Home Corp. v. American Safety Indemnity Co., No. D070478, 2017 WL 3725045 (Cal. Ct. App. Aug. 30, 2017) recently issued a broad coverage decision after interpreting similar language in a manuscript AI endorsement.  The Court affirmed the trial court’s ruling in favor of a developer/contractor and affirmed punitive damages against the insurance carrier for its bad faith denial of a defense.  

The case arose from Pulte’s development of two residential projects in Southern California beginning in 2003.  The homes were sold in 2005-2006.  Pulte was named as an additional insured on certain subcontractors’ polices issued by American Safety in 2003-2006.  After residents of the developments filed construction defect suits against Pulte in 2011 and 2013, Pulte tendered the claims to American Safety, which denied Pulte’s request for a defense based primarily on the position that the AI endorsements excluded the subcontractors’ completed operations.  Pulte then filed suit against American Safety.  

The relevant subcontractors’ insurance policies all identified the aggregate limit for “products-completed operations” as $1 million; however, the policies contained multiple manuscript AI endorsements—that American Safety and Pulte agreed were substantially similar to each other in application and scope, despite minor wording differences.  The key AI endorsement cited in Pulte granted AI coverage, “but only with respect to liability arising out of ‘your work’ which is ongoing and which is performed by the Named Insured for the Additional Insured on or after the effective date of this Endorsement.”[1]  The trial court found that this language in the AI endorsements on the relevant policies was ambiguous on the potential for coverage of the alleged claims; therefore, American Safety was required to provide a defense to Pulte.  At trial, Pulte was awarded $455,238.45 for defense fees, costs, and prejudgment interest for the defense of the two underlying construction defect suits.  The trial court also awarded $500,000 in punitive damages against American Safety finding that its decision to deny coverage was unreasonable and in bad faith.   

Pulte on Appeal

On appeal, the Pulte court affirmed the trial court’s award of contract damages and Pulte’s entitlement to punitive damages.[2]  Relying on Pardee Construction Co. v. Insurance Co. of the West, 77 Cal. App. 4th 1340 (2000), the Pulte court stated that “the initial issue for policy interpretation is whether the additional insured endorsements explicitly exclude coverage for the subcontractors’ completed operations.”  After reviewing the relevant policy language and endorsements and the parties’ arguments, the Pulte court held that the AI endorsement did not clearly exclude “completed operations” coverage for the AI because liability for harm caused by the subcontractors’ “completed operations” could arise from any work performed after the policy was effective.  Moreover, the specific language of the AI endorsement did not clearly limit the coverage to liabilities that arose while the subcontractors were performing construction work.  American Safety had “failed to expressly limit covered completed operations as to time or particular project in their policy and endorsement language.”  The AI endorsements did not define “‘your work’ as work ‘now being performed or to be performed during the term of the policy.’” 

Writing for the panel, Justice Huffman stated that “[b]oth 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.”  He further noted that “[t]hese AIEs 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.”  Based on the facts surrounding the preparation of the manuscript AI endorsements and applicable legal precedent, doubts about whether a duty to defend existed should have been resolved in favor of Pulte and a defense provided.

After addressing whether American Safety had a duty to defend, the Pulte court went on to review the trial court’s finding that the insurer had acted unreasonably and in bad faith when it denied Pulte coverage for the alleged defects.  The court affirmed the trial court’s decision finding there was substantial evidence that American Safety: (1) knew the policies were purchased to satisfy contractual requirements to provide completed operations coverage; (2) had a “pattern and practice of using every conceivable argument to deny coverage, whether the arguments are weak or strong, valid of invalid”; (3) routinely issued form letters denying AI coverage without reasonable case-by-case investigation; (4) denied coverage despite awareness of prior federal court decisions against its coverage interpretation; and (5) had continued these practices over a course of years.  Justice Huffman concluded that “[s]uch conduct showed the company was primarily protecting its own interests in refusing to defend its additional insureds in construction defect cases.”  Based on the above conduct, the Pulte court approved of Pulte’s entitlement to a punitive damages award, which would be recalculated on remand using an approximate one-to-one ratio after the trial court recalculated Pulte’s Brandt[3] fees and costs.

Proper AI Endorsement Language is Critical in All Jurisdictions

Where the Pulte case centers on insurance policies and AI endorsements that were drafted more than a decade before the case was decided, it serves as an important reminder of the critical nature that such language can play in construction litigation, which may take place many years after a project is completed.  This is especially significant given that the length of many jurisdictions’ statutes of repose can be ten years. 

Pulte is also a reminder that the time to review the key language of AI endorsements is when the coverage is procured, as opposed to years down the road when a coverage dispute arises and litigation has begun.  This applies to all parties of the insurance agreement – including those named as additional insureds.  Insurers, insureds, and additional insureds all need to make sure that the coverage is as broad (or narrow) as expected, and that any risk associated with the scope of coverage is priced into the parties’ contracts.   

Finally, even with the evolution of ISO endorsements since 1985, which endeavor to clarify the scope of coverage granted to additional insureds for “ongoing” and “completed” operations, coverage litigation continues due to jurisdictional differences in interpretation of endorsement language.  Moreover, the use of manuscript AI endorsements, as in Pulte, that blend key language and provisions and fail to clearly define and limit coverage, will continue to fuel coverage disputes well into the future. 

Endnotes

[1] Two other noted versions of the AI endorsements stated that the AI was insured: (1) “but only with respect to liability arising out of ‘your work’ and only as respects ongoing operations performed by the Named Insured for the Additional Insured on or after” the endorsement’s effective date; and (2) “but only with respect to liability arising out of ‘your work’ which is performed at the project designated above. This Endorsement applies only to ongoing operations performed by the Named Insured on or after” the endorsement’s effective date.

[2] The amount of punitive damages was remanded for adjustment following the trial court’s recalculation of Brandt fees, which were remanded only as to amount, not entitlement.

[3] In Brandt v. Superior Court, 37 Cal.3d 813 (1985), the California Supreme Court permitted policyholders to recover as bad faith damages their attorney's fees for obtaining policy benefits.