In a recent case out of the Fourth Appellate District of the California Court of Appeal, Clarendon America Ins. Co. v. Starnet Ins. Co., the Court held that an insurer’s duty to defend applies to the mandatory pre-litigation procedures required in California construction defect cases, holding that the term “suit”, as used in a commercial general liability (CGL) insurance policy, includes the duty to defend an insured in proceedings under the Calderon Act, California Civil Code section 1375, et seq.

The Calderon Act, enacted in 1995, sets out certain dispute resolution requirements that a common interest development association must first satisfy before filing a complaint in court for construction or design defects against a builder, developer or general contractor. The process begins when notice (“Calderon Notice”) is served on the general contractor. The notice begins a 180-day period in which the parties must attempt to resolve the dispute. If the parties are unable to resolve the dispute within that time, a complaint may be filed. The complaint is deemed filed on the date the Calderon Notice was served.

The Clarendon case involved the development of a Simi Valley residential development called Westwood Ranch. In July of 2006 the Westwood Ranch Homeowners Association, Inc. (“Westwood HOA”) served notice that it was commencing legal proceedings under the Calderon Act on Centrex Homes, the developer.

Two subcontractors had named Centex as an additional insured under their CGL policies with StarNet and Clarendon. Centrex thus brought suit against Clarendon seeking coverage of its defense fees associated with defending against the Calderon process initiated by the Westwood HOA. In turn, Clarendon brought a cross-complaint against additional insurers, including Starnet. In a motion for summary judgment, Starnet argued that it had no obligation to defend because the Calderon process was not a “suit” as defined in its CGL policy. The trial court denied StarNet’s motion. Starnet and Clarendon subsequently stipulated to judgment in Clarendon’s favor, with Starnet retaining the right to appeal from the judgment, which StarNet promptly did. The appellate court affirmed the lower court’s order.

The StarNet CGL policy at issue agreed to pay defense costs arising from “any suit seeking damages.” The policy used the standard definition of suit, including, “a civil proceeding in which damages … to which this insurance applies are alleged.” Clarendon argued that the Calderon process is a civil proceeding alleging damages, which StarNet argued against.

The appellate court looked at a California Supreme Court case, Foster v. Gardner, in which the Court took a literal meaning approach to the definition of “suit” in a CGL policy and held that a suit is a court proceeding initiated by the filing of a complaint. The Foster case, however, did not involve a policy which defined suit as a “civil proceeding.”

Employing the literal meaning approach taken in Foster, and applying it to the term “civil proceeding,” the court appellate held that the term encompassed the Calderon process because the process entailed notice, discovery-like procedures, and a comprehensive demand.

The court further considered whether damages are “alleged” in the Calderon process and held that the process is a necessary step in any construction or design defect litigation and thus could not be separated from the overall litigation process.

The appellate court affirmed that lower court, which stated that “[a]lthough the Calderon Process occurs before a complaint is filed and itself does not result in a judgment or court-ordered payment of money” it is itself “an integral part of construction defect litigation initiated by a common interest development association.”