Pulte Home Corp. v. Am. Safety Indem. Co.

• Decision Date: 30 August 2017
• Docket Number: D070478
• Citation: 14 Cal.App.5th 1086,223 Cal.Rptr.3d 47
• Court: California Court of Appeals Court of Appeals
• Parties: PULTE HOME CORPORATION, Plaintiff and Respondent, v. AMERICAN SAFETY INDEMNITY COMPANY, Defendant and Appellant.

14 Cal.App.5th 1086

223 Cal.Rptr.3d 47

PULTE HOME CORPORATION, Plaintiff and Respondent,

v.AMERICAN SAFETY INDEMNITY COMPANY, Defendant and Appellant.

D070478

Court of Appeal, Fourth District, Division 1, California.

Filed August 30, 2017

Wilson, Elser, Moskowitz, Edelman & Dicker, Gregory D. Hagen, San Diego; Greines, Martin, Stein & Richland, Robert A. Olson and Gary J. Wax, Los Angeles, for Defendant and Appellant.

Koeller, Nebeker, Carlson & Haluck, Robert C. Carlson, Sharon A. Huerta and Sarah P. Long, San Diego, for Plaintiff and Respondent.

HUFFMAN, Acting P.J.

In this insurance defense dispute, defendant and appellant American Safety Indemnity Company (American Safety or ASIC) challenges a judgment after court trial that awarded over $1.4 million in compensatory and punitive damages to plaintiff and respondent Pulte Home Corporation (Pulte), who was the general contractor and developer of two residential projects in the San Marcos area. American Safety issued several sequential comprehensive general liability (CGL) insurance policies to three of Pulte's subcontractors,¹ and during 2003 to 2006, it added endorsements to those policies that named Pulte as an additional insured. The projects were completed by 2006.

In 2011 and 2013, two groups of residents of the developments sued Pulte for damages in separate construction defect lawsuits. After American Safety declined to provide Pulte with a defense, Pulte filed this action, asserting that the additional insured endorsements afforded it coverage and therefore required American Safety to provide it with defenses on the construction defect issues. The trial court resolved companion summary judgment and adjudication motions by ruling as a matter of law that a duty to defend was owed under at least one of the policies. ( Code Civ. Proc.,² § 437c.) In bifurcated proceedings, the court proceeded to hear testimony to determine that contract damages were owed on each policy for the failure to carry out the duty to defend. (§ 592 [issues of law resolved before issues of fact].) The court also ruled that American Safety had breached its implied covenant duties through its bad faith conduct in claims handling that denied a defense.

During the next phase of trial, the court awarded Pulte punitive damages and attorney fees under ( Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796 ( Brandt ) [attorney fees recoverable as compensatory damages, attributable to counsel's efforts in obtaining rejected amounts due under insurance contract]; Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 807, 16 Cal.Rptr.3d 374, 94 P.3d 513 [applying Brandt in context of contingency fee agreement].)

To address American Safety's challenges to the judgment, we first interpret the coverage provisions of the subject policies in light of the teachings of Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340, 1356, 92 Cal.Rptr.2d 443 ( Pardee ). In that case, this court addressed the scope of coverage that may be afforded by additional insured endorsements in the factual context of construction defect litigation. We conclude that the trial court was correct in ruling that the language of American Safety's additional insured endorsements on the underlying insurance policies created ambiguities on the potential for coverage in the construction defect lawsuits, thus requiring it to provide Pulte with a defense to them. The trial court's subsequent decision that American Safety's failure to do so was unreasonable and in bad faith is supported by substantial evidence. We additionally uphold the court's decision that Pulte is entitled to an award of punitive damages that is proportional, on a one-to-one basis, to the award of compensatory damages in tort. ( Bullock v. Philip Morris USA , Inc. (2008) 159 Cal.App.4th 655, 690, fn. 18, 71 Cal.Rptr.3d 775.)

Although we affirm the judgment as to its substantive rulings, as above, we are required to reverse it in part as to the award of $471,313.52 attorney fees under Brandt, supra, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796, which we find to be inconsistent with the damages principles and policies set forth in Brandt . We believe the court abused its discretion in implementing an hourly attorney fee arrangement that Pulte did not arrive at until after trial, to replace the previous contingency fee agreement in a manner that Pulte intended would operate to increase its demand.³ Second, since the court calculated its $500,000 award of punitive damages by appropriately utilizing a one-to-one ratio to the compensatory damages under Brandt (fees in the amount of $471,313.52), it is necessary to direct the trial court to recalculate not only the fees award under Brandt but also to adjust the amount of punitive damages accordingly. The judgment will be reversed to that extent, with directions to award Brandt fees only at a level consistent with Pulte's originally effective contingency fee agreement, and then to impose an amount of punitive damages that reflects the basic one-to-one proportion previously ordered. The balance of the judgment is affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

A. Underlying Lawsuits and Tenders

Beginning in 2003, Pulte was the general contractor and developer for two single-family residential housing projects, Meridian and Mariners' Landing (the projects), and it began to sell the homes in 2005 and 2006. During construction of both projects, Pulte entered into subcontracts with Concrete and Frontier to supply concrete foundations and flatwork. Pulte also entered into subcontracts with Foshay to supply electrical and related waterproofing work for both projects. All the subcontracts required that the subcontractors maintain liability insurance and that they name Pulte as an additional insured on their insurance policies.

In 2011, a group of Meridian homeowners filed a construction defect lawsuit against Pulte. (Schaefer v. Pulte Home Corporation (Super Ct. San Diego County, 2011, No. 37-2011-00086211-CU-CD-CTL) (the Schaefer action).) This lawsuit contained allegations against Pulte that its homes, sold after 2005 and 2006, were defectively constructed in their foundation systems and slabs, thus allowing moisture to enter into the structure and limiting the type of flooring materials and installation available. Such allegations, and those of other water intrusion and cracks in the walls and ceilings, potentially implicated the concrete subcontractors' work on the Meridian project. Pursuant to Concrete's and Frontier's policies and endorsements, Pulte tendered its defense of the lawsuit to American Safety. It provided copies of the subcontracts, insurance certificates and/or endorsements, and the construction defect complaint, with a homeowner matrix. American Safety refused for numerous reasons.

In 2013, a group of homeowners in Meridian and in Mariners' Landing filed their construction defect lawsuit against Pulte. (Large v. Pulte Home Corporation(Super. Ct. San Diego County, 2013, No. 37-2013-00043457-CU-CD-CTL) (the Large action).) This lawsuit contained water intrusion and other claims against Pulte potentially implicating the concrete subcontractors' work at the sites. Allegations were made that Foshay's electrical and related waterproofing work on the two projects was substandard and had contributed to damage at the projects, for which Pulte should be vicariously responsible. Pursuant to all three policies and with supporting documentation, Pulte tendered its defense of the lawsuit to American Safety, which declined. Numerous reasons were given.

Both construction defect actions went forward. Another carrier that is not a part of this lawsuit, Interstate, provided a partial defense to Pulte.

B. The Insurance Policies

During the time frames 2003 through 2006, American Safety issued to each of the three subcontractors, as "Named Insureds," several liability insurance policies for successive one-year periods. Each policy's insuring agreement provided coverage for property damage (or bodily injury, not involved here) to which the insurance applied, caused by an occurrence, during the policy periods.

The declarations page of each of the policies states that the aggregate limit for "products—completed operations" was $1 million. The insuring agreement and the definitions portions of the policies set forth terminology that is relevant here. The definitions of "products—completed operations hazard," include all property damage occurring away from the insured's premises, "arising out of ‘your product’ or ‘your work’ " (except for incomplete work or abandoned work; not involved here). " ‘Your work’ " is defined as meaning "(a) [w]ork or operations performed by you or on your behalf, and (b) [m]aterials, parts or equipment furnished in connection with such work or operations." " ‘Your work’ " includes warranties as to fitness and quality.

Within the "products—completed operations" definitions, "your work" is deemed complete either when the work (a) called for in the contract is complete; (b) at a particular job site is complete; or (c) is put to its intended use.

Under the policy, "occurrence" means an accident, "including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" includes: "a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it."

With respect to what entities constitute "the insured" under the subcontractors' policies, American Safety issued additional insured endorsements (AIEs) to Pulte, to become effective upon policy issuance (or later, when work first started, etc.). Both appellant and respondent in this case agree that while the exact language of the various AIEs in the various policies varies slightly, they are all substantially similar. A key version of the grant of coverage in the AIEs...