The California Court of Appeal, Fourth Appellate District, affirmed in part and reversed in part an order awarding an insurance company its $1 million policy limits used to settle a construction defect claim on behalf of an insured general contractor.

In Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), a building owner, JSL Properties, LLC ("JSL"), and a developer, D.B.O. Development No. 28 ("DBO"), sued a general contractor, Moorefield Construction, Inc. ("Moorefield"), for floor leaks which occurred at a Best Buy electronics store between 2003 and 2009. In its second amended complaint, JSL claimed that Moorefield had defectively installed flooring on top of a concrete slab despite knowing that the existing slab contained excessive moisture levels. Navigators Specialty Insurance Company ("Navigators") defended Moorefield in the action subject to a reservation of rights under a commercial general liability insurance policy. The litigation settled for $1,310,000 of which Navigators contributed its $1 million policy limits.

Navigators filed a declaratory relief lawsuit against Moorefield seeking a declaration that it had no duty to defend or indemnify the general contractor in the underlying construction defect action. Following a bench trial, the trial court issued a decision in favor of Navigators and against Moorefield. The trial court found that the flooring defects did not constitute an "occurrence" or accident under the policy. The trial court also held that Navigators had no duty to make any payments under the "supplementary payments" portion of the policy. Navigators received an award which required Moorefield to reimburse Navigators its $1 million policy limits contributed to settle claim.

The Court of Appeal agreed with the trial court that Navigators had no duty to indemnify Moorefield in the underlying action. The appellate court found evidence which established that Moorefield knew about the excessive moisture in the concrete slab and that it deliberately installed the flooring despite this known condition. Thus, the Court of Appeal held that no unexpected or unintended event constituted an "occurrence" to trigger an indemnity obligation under the policy. Moorefield and amicus curiae argued that construction defects could not be considered intentional conduct unless the contractor expected or intended its work to be defective and cause property damage. The Court of Appeal rejected that argument by stating, on the record before it, Moorfield knew about and intended to perform defective work with the hope it would not cause property damage. Even though Moorfield did not intend to cause property damage, the insured's subjective belief was irrelevant.

However, the Court of Appeal reversed the portion of the trial court's ruling which found that Navigators had no duty to make payments under the "supplementary payments" provision of the policy. The Court of Appeal determined that Navigators owed a duty to pay for attorneys' fees and costs as part of the settlement because such amounts were recoverable under the construction contract and were awardable as taxed costs in litigation. Although no duty to indemnify existed, the appellate court found that Navigators was obligated to pay "supplementary payments" as part of its broader duty to defend.

The Court of Appeal also found that the trial court had improperly determined that the entire $1 million settlement payment was made for damages, rather than attorneys' fees. The evidence indicated that JSL and DBO had only incurred $377,000 in damages related to the floor leaks. The appellate court further held that the trial court had committed prejudicial error in placing the burden of proof for this issue on Moorefield. Accordingly, the Court of Appeal remanded the case for a new trial seeking allocation of the settlement payment between damages and attorneys' fees.

Click here for the opinion.

The opinion in Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.