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Earlier this summer, the California Court of Appeals ruled that a “care, custody and control exclusion” found in additional insured endorsements in general liability policies does not negate an insurer’s duty to defend a claim where a general contractor and subcontractor share care, custody or control of property under construction. In McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company, general contractor McMillin Homes Construction, Inc. contracted with Martin Roofing Company, Inc. for work on a housing community in Chula Vista. In its subcontract, Martin was required to name McMillin as an additional insured under its general liability policy with National Union.
The policy provided coverage, in part, for property damage caused by an occurrence as those terms are defined in the policy. McMillin was entitled to coverage as an additional insured “arising out of Martin’s ongoing operations at the project or out of McMillin’s general supervision of those operations.” However, the policy excluded additional insured coverage for damage to property in McMillin’s “care, custody or control.”
Several homeowners filed suit against McMillin for water damage caused by roofing defects at the Galvan project. McMillin tendered its defense to the insurer as an additional insured, but the insurer denied coverage on the basis of the “care, custody, or control exclusion” within the additional insured endorsement. McMillin filed suit against the insurer for bad faith.
The trial court originally sided with the insurer, stating that McMillin failed to carefully read the policy and consider the impact of the additional insured endorsement’s exclusion combined with another provision intended to “close the loop” by eliminating indirect indemnity claims by a general contractor where a subcontractor is the policyholder. It believed that McMillin had no reasonable expectation of coverage under those circumstances.
On appeal, the parties offered competing interpretations of the exclusion, and the appellate court reversed and found in favor of the general contractor on the following bases:
(1) The provision is to be narrowly interpreted, according to the rule that the duty to defend is broadly construed in favor of the (additional) insured, and the duty arises where the facts at the time of tender raise the potential for coverage. Any ambiguity in the provision will be interpreted in favor of the insured in order to protect the insured’s reasonable expectations.
(2) McMillin argued that to preclude coverage for an additional insured who is a general contractor because it has control over a construction site would essentially negate the additional insured coverage entirely, contrary to its reasonable expectations. The provision does not include the words “exclusive” or “complete” and those words should not be added by interpretation.
(3) The Court held that the exclusion only applies when the additional insured has exclusive, rather than shared, control based upon the conclusion reached in the previous Home Indemnity Co, v. Davis case. A general contractor who has overall responsibility for and nominal control of the entire project does not meet this standard where a subcontractor is “responsible for controlling its jobsite and supervising the roofing work” according to the decision. The Court did caution that the facts surrounding the nature and extent of the additional insured’s control in each case will bear on the result.
What does this mean for developers and general contractors? Insurance requirements in construction contracts may be one of the most important provisions to review and confirm that they provide sufficient protection. If insurance requirements are not sufficiently set forth in subcontracts, there is a higher likelihood that disputes will arise not only with the insurer who denies a claim, but also with the subcontractor who has independent indemnity obligations under the subcontract and common law.
Our insurance attorneys are well experienced in:
• The review of contracts to ensure that you are protected in the event of claims
• Handling questions and disputes relating to the application of insurance and indemnity among parties, and
• Instituting and defending litigation after a dispute as to coverage or indemnity arises
JoLynn Scharrer is a shareholder at Hunt Ortmann and leads the Firm’s Insurance Group and Employment Law Group. Our team is ready to take an immediate review of your insurance contracts or any other important documents to keep your business protected. Please contact us at firstname.lastname@example.org.