Mcmillin Homes Constr., Inc. v. Nat'l Fire & Marine Ins. Co.

CourtCalifornia Court of Appeals
Citation247 Cal.Rptr.3d 825,35 Cal.App.5th 1042
Decision Date05 June 2019
Docket NumberD074219
Parties MCMILLIN HOMES CONSTRUCTION, INC., Plaintiff and Appellant, v. NATIONAL FIRE & MARINE INSURANCE COMPANY, Defendant and Respondent.

Ryan & Associates and Greg J. Ryan, San Diego, for Plaintiff and Appellant.

Summers & Shives, Martin L. Shives, and Peter B. Lightstone, San Diego, for Defendant and Respondent.


A general contractor was covered as an additional insured on a commercial general liability (CGL) policy issued to its roofing subcontractor. The insurer refused to defend the general contractor after it was sued by homeowners for construction defects concerning roofing, prompting this lawsuit. After a bench trial, the trial court concluded the insurer owed no duty to defend. It believed the exclusion in the additional insured endorsement for damage to "property in the care, custody or control of the additional insured" precluded any duty to defend the general contractor in construction defect litigation.

The general contractor disputes the insurer's interpretation of the policy and asserts there was a duty to defend. We agree and reverse the judgment.1 As judicially construed, the care, custody, or control exclusion requires exclusive or complete control. ( Home Indem. Co. v. Leo L. Davis, Inc. (1978) 79 Cal.App.3d 863, 872, 145 Cal.Rptr. 158 ( Davis ).) The facts indicate only shared control between the general contractor and its roofing subcontractor. Because the insurer did not prove coverage for the underlying construction defect litigation was impossible, it owed the general contractor a duty to defend the homeowner claim.


McMillin Homes Construction, Inc. acted as the developer and general contractor on the Auburn Lane housing community project in the city of Chula Vista. It hired Martin Roofing Company, Inc. to "render a complete roofing job." The subcontract required Martin to obtain general liability insurance naming McMillin as an additional insured.

National Fire and Marine Insurance Company issued a CGL policy to Martin. Effective from November 12, 2003 to November 12, 2004, the policy covered " ‘property damage’ " or " ‘bodily injury’ " caused by an " ‘occurrence’ " during the policy period. McMillin was covered as an additional insured under ISO endorsement form CG 20 09 03 97 (hereafter CG 20 09).2

National Fire broadly agreed to cover property damage or bodily injury during the policy period arising out of Martin's ongoing operations at Auburn Lane, or out of McMillin's general supervision of those operations. Central to this appeal is the "care, custody or control exclusion" (hereafter CCC exclusion): National Fire excluded coverage for damage to property in McMillin's "care, custody, or control."3

In 2014, homeowners in seven projects developed and built by McMillin, including Auburn Lane, sued McMillin for construction defects. (Gabriel Galvan, et al. v. McMillin Auburn Lane II, LLC, et al. (Super. Ct. San Diego County, 2014, No. 37-2014-00007987-CU-CD-CTL) (Galvan ).) The complaint alleged water intrusion and damage caused by roofing defects. Two homes that Martin worked on were at issue in Galvan.

McMillin tendered its defense of the Galvan action to National Fire in June 2014, attaching a subcontract addendum for Martin's work; the additional insured endorsement; the Galvan complaint; a matrix of homes at issue in Galvan ; and a matrix of insurance carriers McMillin believed owed a defense duty. National Fire refused coverage, noting McMillin had not provided a copy of the McMillin-Martin subcontract. McMillin submitted the subcontract and sought reconsideration. National Fire again denied owing McMillin a duty to defend.

McMillin sued National Fire in 2016 for declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing. With respect to each cause of action, the operative Third Amended Complaint alleged that National Fire breached its duty to defend McMillin in Galvan.

The parties agreed to bifurcate proceedings. ( Code Civ. Proc., § 598.) Phase one was a bench trial on the papers to decide whether National Fire owed McMillin a duty to defend under the additional insured endorsement. Jointly submitted exhibits included policy documents, the subcontract, Galvan pleadings, and communications between McMillin and National Fire regarding coverage. National Fire also submitted deposition excerpts and discovery responses, but the court sustained McMillin's objections to these on relevancy grounds because they were not known to National Fire when any defense duty was triggered.4

The parties offered competing interpretations of the CCC exclusion. Citing Davis , supra , 79 Cal.App.3d 863, 145 Cal.Rptr. 158, McMillin argued it applied only where control over the damaged property was complete or exclusive. Disagreeing, National Fire noted those words were missing from the text of the exclusion. It also claimed a separate endorsement (CG 21 39 10 93 (hereafter CG 21 39)) intended to " ‘close the loop’ " by eliminating indirect indemnity coverage to McMillin for construction defect litigation pursuant to the subcontract.

The court entered judgment in favor of National Fire. It acknowledged decisions broadly construing the duty to defend for general contractors covered as additional insureds. ( Pulte Home Corp. v. American Safety Indemnity Co. (2017) 14 Cal.App.5th 1086, 223 Cal.Rptr.3d 47 ( Pulte ); McMillin Management Services, L.P. v. Financial Pacific Ins. Co. (2017) 17 Cal.App.5th 187, 225 Cal.Rptr.3d 221 ( McMillin ).) But those cases did not involve the CG 20 09 endorsement with its CCC exclusion. As the first to construe that exclusion in the GC 20 09 form , the court declined to require exclusive or complete control.

The court stated the GC 20 09 endorsement was "specifically drafted to avoid affording insurance to a general contractor in a construction defect setting where the [named] insured is a subcontractor." At the time National Fire refused to defend McMillin, two things were clear: McMillin was the general contractor, and the Galvan plaintiffs sued for construction defects in their homes. The court reasoned that these facts triggered the CCC exclusion. Moreover, the court agreed with National Fire that the CG 21 39 endorsement to Martin's policy was designed to " ‘close[ ] the loop’ " and demonstrated its intent to deny construction defect coverage to McMillin via indirect means. As the court read the record, "McMillin did not carefully read the insurance-related papers it received from Martin" or "consider the combined impact" of the CG 20 09 and CG 21 39 endorsements. It believed McMillin had no reasonable expectation of coverage for construction defect litigation.


McMillin appeals the judgment, arguing the court misconstrued the CCC exclusion and erroneously relied on an unrelated GC 21 39 endorsement to find no defense duty. We agree and conclude National Fire owed McMillin a duty to defend.

1. Legal principles

a. The duty to defend

Broader than the duty to indemnify, a liability insurer's duty to defend is assessed at the very outset of a case. ( Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 287, 172 Cal.Rptr.3d 653, 326 P.3d 253 ( Hartford ); Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340, 1350, 92 Cal.Rptr.2d 443 ( Pardee ).) "An insurer owes a broad duty to defend against claims that create a potential for indemnity under the insurance policy"; it must defend even where the evidence suggests but does not conclusively show the loss is not covered. ( Hartford , at p. 287, 172 Cal.Rptr.3d 653, 326 P.3d 253.) Moreover, "the duty to defend is a continuing one, arising upon tender and lasting until the underlying litigation is resolved, or until the insurer has established there is no potential for coverage." ( Pardee , at p. 1350, 92 Cal.Rptr.2d 443.)

To evaluate whether an insurer owes a duty to defend, we start by comparing the allegations of the complaint to the terms of the policy. ( Hartford, supra , 59 Cal.4th at p. 287, 172 Cal.Rptr.3d 653, 326 P.3d 253.) Extrinsic facts may give rise to a duty to defend where they reveal the possibility of coverage. ( Ibid. ; Pardee, supra , 77 Cal.App.4th at p. 1350, 92 Cal.Rptr.2d 443.) Doubt as to whether an insurer owes a duty to defend is resolved in the insured's favor. ( Hartford , at p. 287, 172 Cal.Rptr.3d 653, 326 P.3d 253.)

Although broad, the duty to defend is not limitless and is measured by the nature and kinds of risks covered by the policy. ( Hartford, supra , 59 Cal.4th at p. 288, 172 Cal.Rptr.3d 653, 326 P.3d 253.) "In an action seeking declaratory relief concerning a duty to defend, ‘the insured must prove the existence of a potential for coverage , while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. " ( Ibid. ) In a mixed action where only certain claims are potentially covered, the insurer has a duty to defend those potentially covered claims. ( Ibid. ) An insurer has no obligation to defend " ‘if the third-party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. " ( Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153 ( Montrose ).)

b. Rules governing insurance policy interpretation

The "interpretation of an insurance policy is a question of law." ( Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18, 44 Cal.Rptr.2d 370, 900 P.2d 619 ( Waller ).) Insurance policies are contracts, and the ordinary rules of contract interpretation apply. ( Maryland Cas. Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th 21, 28, 76 Cal.Rptr.2d 113 ( Maryland ).) The same rules of interpretation apply...

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