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INSURANCE IS PRECLUDED TO CONTRACTOR UNDER "PRODUCTS-COMPLETED OPERATIONS PROVISION" BECAUSE THE CONTRACTOR WAS FIRED AND COULD NOT COMPLETE THE WORK
On March 30, 2011, the California Court of Appeals, Second District, published the opinion titled Clarendon America Insurance Company v. General Security Indemnity Company of Arizona. The interesting point in this case pertains to the appellate court's decision regarding the products-completed operations provision.
The appellate court affirmed the trial court's order for judgment against Clarendon America Insurance Company ("Clarendon"). Clarendon filed a case against General Security Indemnity Company of Arizona ("General Security") for declaratory relief, contribution and indemnity after settling an action against their mutual insured, Hilmor Development. General Security cross-complained for declaratory relief. Clarendon and General Security filed competing motions for summary judgment. The trial court found in favor of General Security. Clarendon appealed, arguing there was coverage under General Security's policy's "products-completed operations hazard" provision and that exclusions j(5) and j(6) and the "claims in progress" exclusion do not apply. The trial court and appellate court were not persuaded.
Clarendon issued a general liability policy to Hilmor from July 1, 2000 to July 1, 2001, and General Security issued a general liability policy to Hilmor from July 1, 2001, to July 1, 2002.
On September 30, 1999, Hilmor entered into a contract to construct and complete improvements with the homeowner. On May 18, 2001, prior to the completion of the home, the homeowner terminated the contract with Hilmor. On November 12, 2004, the homeowner sued Hilmor for alleged construction defects.
Clarendon agreed to defend Hilmor (then withdrew, then again agreed). General Security first agreed then withdrew its defense on the ground there was no potential for coverage because Hilmor did not complete all of its work prior to the inspection of the policy (therefore the products-completed operations hazard clause was not triggered) and the faulty workmanship clauses and other exclusion precluded coverage.
The appellate court stated that the products-completed operations provision was designed to cover property damage that occurs after the insured's work is completed. Clarendon argued that Hilmor's work was completed because regardless of the original terms of the contract, the homeowner's termination of the contract terminated Hilmor's obligations under the contract. The appellate court disagreed, finding that Hilmor did not complete or abandon the job. Hilmor was fired before Hilmor completed the job.
This is an interesting decision in light of the construction climate over the past several years. There are many reasons why a contractor does not or cannot complete the job. The homeowner does not want to pay for any number of reasons, the homeowner fires the contractor such as in this case, or the contractor goes bankrupt. Financially, this decision could cause many ramifications to everyone involved on a construction project from the owner/homeowner to the developer to the general contractor to the subcontractor trades. |
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