California Court Holds Continuous Progressive Injury Exclusion Applicable to Construction Defect Claim

In its recent decision in Saarman Construction, Ltd. v. Ironshore Specialty Ins. Co., 2017 U.S. Dist. LEXIS 13633 (N.D. Cal. Jan 31, 2017), the United States District Court for the Northern District of California had occasion to consider the application of a continuous and progressive injury exclusion in the context of a construction defect claim.

The underlying suit arose out of Saarman’s work as a general contractor at a condominium complex performed in 2006 and 2007 to address pre-existing water intrusion problems.  In 2011, a lessee of one of the units sued the unit owner, claiming that her unit suffered from several defects, including mold, plumbing leaks and water intrusion.  The unit owner, in turn, sued several parties, including Saarman based on the theory that it failed to remedy the defects, which contributed to the mold growth.

Ironshore insured Saarman under a general liability policy issued for the period June 30, 2010 to June 30, 2011.  The policy contained an exclusion applicable to any claim alleging bodily injury or property damage “arising out of, in whole or in part, the actual, alleged or threatened discharge … of any mold, mildew, bacteria or fungus.”  The policy also contained an exclusion applicable to any bodily injury or property damage:

  1. which first existed, or is alleged to have first existed, prior to the inception of this policy. “Property damage” from “your work,” or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such “property damage” is sudden and accidental and takes place within the policy period [sic]; or
  1. which was, or is alleged to have been, in the process of taking place prior to the inception date of this policy, even if such “bodily injury” or “property damage” continued during this policy period; or
  1. which is, or is alleged to be of the same general nature or type as a condition, circumstance or construction defect which resulted in “”bodily injury” or “property damage” prior to the inception date of this policy.

Ironshore relied on both exclusions to deny coverage.

On motion for summary judgment, Saarman argued that the mold exclusion did not apply, at least for duty to defend purposes, because the claim against it alleged harms other than mold, such as water intrusion and water damage.  Ironshore countered that the exclusion, on its face, applied to any claim alleging any mold damage, even if that suit includes other damages attributable to other causes.  In considering the issue, the court reasoned that Ironshore’s broad interpretation of the exclusion clashed with California law requiring an insurer to defend a lawsuit that includes covered and uncovered claims, and that California does not permit an insurer to contract around this obligation:

As the California Supreme Court explained in Buss, “in a ‘mixed’ action, the insurer has a duty to defend the action in its entirety.” … Here, Ironshore has attempted to circumvent that principle by hinging its duty to defend on the presence of any allegations of non-covered damage in the “suit”—no matter how small or inconsequential those allegations may be. However, the court in Buss suggested that insurers could not contract around their duty to defend mixed actions in this way. …. In short, Ironshore cannot contract around California law that requires insurers to defend the entire action if there is any potentially covered claim. Because the language in the mold exclusion barring coverage for “any claim, demand, or ‘suit’ alleging [damage] arising out of, in whole or in part, the . . . alleged . . . existence of any mold” tries to do precisely that, it is unenforceable.

Thus, finding that the underlying suit alleged damages that were independent of mold, i.e. water intrusion and water damage, the court concluded that the mold exclusion did not apply to the entirety of the underlying claim and thus did not operate to preclude a duty to defend.

Turning to the policy’s continuous or progressive injury exclusion, referred to by the court as the CP exclusion, Saarman agreed that it finished its work prior to the policy’s issuance, and thus fell within the first paragraph of the exclusion.  Saarman nevertheless argued that the damage at issue in the underlying was not continuous but instead intermittent based on rainfall events.  The court rejected this argument, noting that the exclusion only requires the completion of work prior to the policy’s issuance for the exclusion to apply and does not focus on when or under what circumstances the property damage occurs.  In so concluding, the court considered but rejected Saarman’s argument that the exclusion rendered the policy’s completed operations coverage illusory, finding that the policy still provided coverage for operations completed during the policy period, just not operations completed prior to the policy period.



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