Homeowners’ Nonexistence When Property Damage Occurred Doesn’t Preclude Ongoing Operations Coverage

Nancy Raney

In McMillin Management Services, Inc. v. Financial Pacific Insurance Co. (2017) 17 Cal. App. 5th 187, the Fourth Appellate District, Division One, recently held that an insurer was not entitled to summary judgment when it failed to establish that the property damage did not arise during the insureds’ ongoing operations, or that the property damage could have occurred only after operations were completed. Unless the insurer can prove that there was no property damage during the insured’s ongoing operations, the insurer owes a duty to defend.

Lexington issued commercial general liability policies to two subcontractors and a policy with an additional insured endorsement with ongoing operations coverage to McMillin, the developer – general contractor of a residential development project.

McMillin completed construction on the project in June 2005.  In June 2010, several homeowners brought a construction defect action against McMillin.  Lexington denied McMillin’s tender of its defense.  In October 2012, McMillin brought suit against Lexington for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing.

On summary judgment, Lexington argued that there was no potential for coverage under the policies because there were no homeowners until after the subcontractor’s work was complete.  Because their construction defect related causes of action accrued after operations were completed, the developer – general contractor could have no liability to the homeowners during the subcontractors’ ongoing operations.

In opposition, McMillin argued that the fact that the subcontractors’ work on the Project was completed before the homeowners owned their homes or made their claims did not establish the lack of a potential for coverage. The additional insured endorsements provided coverage to McMillin “with respect to liability arising out of … ongoing operations performed” for McMillin, and did not incorporate any coverage limitations related to when the liability must arise.

The Court of Appeal noted that the endorsements do not state that Lexington would provide coverage solely for liability occurring during the subcontractors’ ongoing operations performed for McMillin.  They state that Lexington would provide coverage to McMillin for liability “arising out of” such ongoing operations, a term that has been given a broad interpretation.

That there were no homeowners when the subcontractors ceased ongoing operations does not establish as a matter of law the lack of a potential for coverage for McMillin under the policies.  If property damage occurs before the named insured finishes work at the job site, under the plain language of the policy, an additional insured may be entitled to coverage pursuant to an “ongoing operations” endorsement.

The court concluded that Lexington did not prove that the property damage did not occur during the subcontractor’s ongoing operations, nor did it prove that the property damage could have occurred only after operations were completed.  Unless the insurer can prove that no property damage occurred during the insured’s ongoing operations, the insurer owes the additional insured a duty to defend, i.e., if property damage could have occurred during the insured’s ongoing operations, the additional insured is owed a duty to defend.