Whether prelitigation proceedings under the Calderon Act, Civil Code section 1375 et seq., come within a carrier's duty to defend any "suit" is apparently an issue of first impression. Or at least, it was. Such proceedings are covered. In Clarendon America Insurance Co. v. StarNet Insurance Co. (2010) 186 Cal.App.4th 1397, the Fourth District holds that prelitigation proceedings are "civil proceedings" as that term is used to define a "suit" under the policy.

The Calderon Act requires common interest development associations (of projects greater than 20 units), to give notice to a builder, developer, or general contractor of construction or design defects before suing. Calderon sets forth a litany of prelitigation steps aimed toward settlement. (See Civil Code section 1375 subd. (a) - (s).) If the dispute is not resolved via the Calderon process, then suit may be filed. The complaint is deemed to have been filed on the date the Calderon notice was served. (See Civil Code section 1375.05 subd. (b).)

In Clarendon, Centex homes developed a residential development covered by Calderon. As Calderon requires, the homeowners association served a notice of commencement of legal proceedings prior to filing suit against Centex. The notice contained the requisite list of alleged construction defects.

Centex was an additional insured on a subcontractor's policy with StarNet Insurance Company. As is typical, the policy's defense agreement stated that StarNet had the "duty to defend the insured against any 'suit' seeking [ ] damages." The term "suit" was further defined as "a civil proceeding in which damages . . . to which this insurance applies are alleged." Centex sued carrier Clarendon, which cross-complained against StarNet, seeking a declaration that StarNet was obligated to defend Centex.

StarNet moved for summary judgment on the grounds that the Calderon process did not constitute a "suit" within the meaning of its CGL policies. The trial court rejected that argument and held that the Calderon prelitigation proceedings fall within the meaning of suit.

The Fourth District affirmed. The StarNet CGL policies define "suit" as "a civil proceeding in which damages because of . . . property damage . . . to which this insurance applies are alleged . . ." The Court of Appeal stated that such a definition was necessarily broader than just an "action or lawsuit initiated by a complaint filed in court." The Fourth District also observed that Calderon is a "proceeding created by the Civil Code that is required" before suit, and that the proceedings include notice, inspections and exchanges of documents, settlement demands and settlement conferences. Therefore, Calderon falls within the policy definition of a "civil proceeding."

The next policy language interpretation issue was whether Calderon is a civil proceeding "in which damages . . . are alleged." The appellate court observed that the Calderon Act not only mandates compliance with its prelitigation process, but in the event the process fails, "the procedures undertaken and results of the Calderon Process are incorporated into and become part of the post complaint litigation." As a result, the Calderon process is "part and parcel of construction or design defect litigation . . . and, as such, cannot be divorced from a subsequent complaint." Since damages are alleged in a complaint, and since the Calderon Process is "part and parcel" of such litigation, then Calderon falls within the policy definition of a civil proceeding "in which damages . . . are alleged."

To sum up, since an insurer has a duty to defend a suit which potentially seeks damages within the policy's coverage, and since the Calderon prelitigation process is a "civil proceeding" within the meaning of "suit," StarNet had a duty to defend Centex.