Standard Fire Ins. v. Spectrum Community

• Citation: 141 Cal.App.4th 1117,46 Cal.Rptr.3d 804
• Decision Date: 31 July 2006
• Docket Number: No. G034668.,G034668.
• Court: California Court of Appeals
• Parties: The STANDARD FIRE INSURANCE COMPANY, Plaintiff and Respondent, v. The SPECTRUM COMMUNITY ASSOCIATION, Defendant and Appellant. And 68 other cases.[<SMALL><SUP>*</SUP></SMALL>]

46 Cal.Rptr.3d 804

141 Cal.App.4th 1117

The STANDARD FIRE INSURANCE COMPANY, Plaintiff and Respondent, v. The SPECTRUM COMMUNITY ASSOCIATION, Defendant and Appellant. And 68 other cases.[^*]

No. G034668.

Court of Appeal, Fourth District, Division 3.

July 31, 2006.

Kabateck Brown Kellner, Pasadena, Brian S. Kabateck, Richard L. Kellner; Robertson & Vick, Alex Robertson IV and Kevin Davis, San Francisco, for Defendant and Appellant.

Morison-Knox Holden & Prough, William C. Morison-Knox, Marc J. Derewetzky, Robert C. Christensen, Walnut Creek, and Laurence S. Near for Plaintiff and Respondent.

OPINION

MOORE, J.

Statutory law permits a condominium homeowners association to bring a construction defect action with respect to damages to the condominium complex. (Civ.Code, § 1368.3; see also former Code Civ. Proc., § 383, repealed by stats.2004, ch. 754, § 7, p. 4473.) When an action is filed, can an insurer under an occurrence-based commercial general liability policy avoid providing a defense to the insured condominium complex developer by the simple device of claiming that the homeowners association could not have been damaged during the policy period because the homeowners association did not then exist? We think not. This would deprive the developer of the bargained-for insurance coverage and transform the occurrence-based policy into a claims made policy. Moreover, it would likely mean that there would rarely ever be insurance coverage available with respect to the condominium construction defect litigation permitted by statute. No dice.

In the case before us, an insurance company brought a declaratory relief action seeking a determination that it had no duty to defend developers who were sued in a massive construction defect lawsuit pertaining to a condominium complex. The trial court granted summary judgment in favor of the insurance company. The homeowners association for the condominium complex claims error. It asserts that at least some of the property damage occurred during the policy period and the fact that the homeowners association itself did not yet exist during the policy period, or own any of the damaged property during the policy period, did not mean that the property damage was not covered under the insurance policy. We agree.

We reject the insurance company's argument that there can be no coverage under the occurrence-based commercial general liability policy just because the homeowners association did not exist, or own any of the damaged property, during the policy period. The critical question is when the property damage occurred, not when the homeowners association came into existence. We reverse and remand.

I FACTS

The owners and occupants of the Spectrum Condominiums (Project) filed 67 separate construction defect lawsuits against the developers of the Project. They sought damages for, inter alia, bodily injury caused by mold infiltration, diminution in the value of their condominium units, and loss of use of those units.

Their homeowners association, known as The Spectrum Community Association (Association), also filed suit. It named as defendants Bristol House Partnership, Ltd., the prior owner and the developer of the Project, Urban Ventures Corporation and Bluestar Realty Ventures, Inc., the general partners of Bristol House Partnership, Ltd., Mercantile Builders, Inc., alleged to the be general contractor for the Project, and a number of other parties.

The Association's third amended complaint pleaded causes of action for strict liability, negligence, breach of implied warranty, negligent misrepresentation, breach of fiduciary duty, fraud and deceit, breach of contract, abatement of nuisance, and unfair competition. The third amended complaint contained a very extensive list of alleged design and construction defects affecting the Project. The Association sought damages for, inter alia, "costs of microbial remediation, costs to repair damaged property and/or costs to replace destroyed property, as applicable; costs of temporary housing, relocation, moving and storage expenses, security costs, loss of use and investigation costs . . . ." The Association estimated that its damages exceeded $20 million.

The Standard Fire Insurance Company (Standard Fire) issued a commercial general liability insurance policy with respect to the Project for the period of August 6, 1991 to August 6, 1992. However, the policy was cancelled effective June 26, 1992.

Standard Fire filed a complaint for declaratory relief, in which it sought a judgment declaring that it had no duty to defend or indemnify in connection with the construction defect litigation.¹ Standard Fire represented in its complaint for declaratory relief that Bristol House Partnership, Ltd., Urban Ventures Corporation, Bluestar Realty Ventures, Inc., Mercantile Builders, Inc., and certain others had tendered the defense of the construction defect litigation to it.² Standard Fire also represented that it had agreed to defend these entities and persons under a reservation of rights.³

Standard Fire followed up with a motion for summary judgment, which it filed in the declaratory relief action. In its motion for summary judgment, Standard Fire said that none of the plaintiffs in the underlying construction defect litigation had owned any interest in the Project during the policy period and that the Association had not even been formed before the termination of the policy period.⁴ In other words, it argued that there could be no potential for coverage under the policy for any of the construction defect plaintiffs' claims because none of those plaintiffs could have suffered any damage during the policy period. Therefore, Standard Fire argued that it could not have any duty to defend with respect to the underlying construction defect litigation.

The Association, and certain of the individual plaintiffs in the underlying construction defect litigation, filed a cross-motion for summary judgment in the declaratory relief action. They sought a judgment to the effect that, as a matter of law, the policy provided coverage for defense and indemnity with respect to the underlying construction defect litigation. In support of their motion, they cited extensive evidence to the effect that significant damage had occurred to the Project during the policy period. This included the declaration of a forensic architect to the effect that property damage due to defective construction began as early as 1990 and "it is . . . reasonably certain that actual property damage in the form of water-damaged drywall, ceilings, stucco, floors, framing members and carpets, dryrot [sic], mold and mildew, and resultant deterioration of building materials also began occurring and continued to occur in 1991 and 1992, some of which property damage still exists today." (Italics and boldface omitted.)

The Association and its co-moving parties stated that it was undisputed that damage to the Project had occurred during the policy period and furthermore that the plaintiffs in the underlying construction defect litigation had asserted that certain of the insureds under the policy were legally responsible for the damage. The Association and its co-moving parties argued that since it was undisputed that the damage had occurred during the policy period, the policy afforded coverage with respect to the underlying construction defect litigation as a matter of law. They further contended that the fact that the plaintiffs in the underlying construction defect litigation had not owned any interests in the Project at the time the damage occurred was irrelevant.

The Association and certain other plaintiffs in the underlying construction defect litigation opposed Standard Fire's motion for summary judgment on essentially the same grounds as they had outlined in their cross-motion for summary judgment. Standard Fire opposed the cross-motion for summary judgment based on the same arguments as it had presented in its own motion for summary judgment. Standard Fire did concede, only for the purpose of the cross-motion for summary judgment, that the Project, as opposed to the plaintiffs in the underlying construction defect litigation, had suffered property damage during the policy period.

The court granted Standard Fire's motion for summary judgment and denied the cross-motion for summary judgment. Judgment was entered in favor of Standard Fire in the declaratory relief action. The Association filed a notice of appeal from the judgment.⁵

II DISCUSSION

A. Standard of Review:

The issue that was before the trial court and is now before this court is a pure question of law, i.e., the interpretation of the insuring agreement of the insurance policy in question. (Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 389-390, 33 Cal.Rptr.3d 562, 118 P.3d 589.) "`The insurer is entitled to summary adjudication that no potential for indemnity exists . . . if the evidence establishes as a matter of law that there is no coverage. [Citation.] We apply a de novo standard of review to [a] . . . summary judgment when, on undisputed facts, the [judgment] is based on the interpretation or application of the terms of an insurance policy.' [Citations.]" (Id. at p. 390, 33 Cal.Rptr.3d 562, 118 P.3d 589.) Here, it is undisputed that the Association did not exist during the policy period and that none of the owners of the individual condominium units owned them during the policy period. Accordingly, we review de novo the question of whether, given these undisputed facts, there is any potential for coverage under the policy, and thus any duty for Standard Fire to provide a defense with respect to the underlying construction defect litigation. (Lomes v. Hartford Financial Services Group, Inc. (2001) 88 Cal. App.4th 127, 132, 105 Cal.Rptr.2d 471 [insurer has duty to defend only if there is potential for coverage].)

As we shall explain, Standard Fire, as the plaintiff in this declaratory relief...