Care, Custody or Control Exclusion Requires Complete and Exclusive Control by Insured Claiming Coverage

In McMillin Homes Construction v. Natl. Fire & Marine Ins. Co. (No. D074219, filed 6/5/19) a California appeals court held that a “care, custody or control” exclusion did not bar coverage for defense of a general contractor as an additional insured under a subcontractor’s policy, because the exclusion requires exclusive control, but the facts and allegations posed a possibility of shared control with the subcontractor.

McMillin was the general contractor on a housing project and was added as an additional insured to the roofing subcontractor’s policy pursuant to the construction subcontract. The homeowners sued, including allegations of water intrusion from roof defects. McMillin tendered to the roofing subcontractor’s insurer, which denied a defense based on the CGL exclusion for damage to property within McMillin’s care, custody or control.

In the ensuing bad faith lawsuit, McMillin argued that the exclusion required complete or exclusive care, custody or control by the insured claiming coverage, which was not the case for McMillin. The insurer argued that the exclusion said nothing about complete or exclusive care, custody or control. Further, the intent to exclude coverage for damage to any and all property in McMillin’s care, custody or control, to whatever degree, was demonstrated by the fact that the additional insured endorsement in question was not an ISO CG2010 form, but a CG2009 form, which expressly adds a care, custody or control exclusion to the additional insured coverage not found in the CG2010 form. The argument was that the CG2009 form evidences an intent to conclusively eliminate coverage for property in the additional insured’s care, custody or control. In addition, the insurer argued that this result was also reinforced by its inclusion of an ISO CG2139 endorsement in the roofer’s policy, which eliminated that part of the “insured contract” language of the CGL form, defining an “insured contract” as “[t]hat part of any other contract or agreement pertaining to your business . . . under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization.” The insurer’s argument was that by having eliminated coverage for contractual indemnity or hold harmless agreements, it had “closed the loop” of eliminating additional insured coverage for construction defect claims.

In a bench trial, the trial court agreed and entered judgment for the insurer. However, the appeals court reversed. The appeals court pointed out that the care, custody or control exclusion had already been judicially construed to require exclusive or complete control. (Citing Home Indem. Co. v. Leo L. Davis, Inc. (1978) 79 Cal.App.3d 863, 872.) And the facts indicated only shared control between the general contractor and its roofing subcontractor.

The McMillin court did not even discuss whether the difference between the CG2009 and the CG2010 forms had any effect, but merely ruled that the care, custody or control exclusion did not apply, presumably meaning either way. According to the court, “[w]here a policy term has been judicially construed, it is not ambiguous. (County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 423.) ‘[T]he judicial construction of the term should be read into the policy unless the parties express a contrary intent.’ (Bartlome v. State Farm (1989) 208 Cal.App.3d 1235, 1239.)” In footnote, the McMillin court also dismissed a distinction in the fact that the CG2009 form uses the words, “over which the insured exercises physical control,” saying that physical control was a possibility under the circumstances.

Disagreeing that the insurer’s interpretation would render additional incurred coverage totally illusory, the McMillin court did say that covering construction defect lawsuits was within McMillin’s reasonable expectations, given that the requirement for procuring the coverage was contained in a construction subcontract.

As to the insurer’s “close the loop” argument regarding elimination of contractual indemnity coverage by way of the modification to the insured contract definition under the CG2139 endorsement, the McMillin court questioned whether that would be a reasonable expectation for McMillin but found it irrelevant regardless, having already concluded that coverage was mandated because of its rejection of the care, custody or control argument. Thus, “[b]ecause 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.”

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June 10, 2019