Court Finds No Occurrence for Installation of Defective flooring and Explains Coverage for Attorney Fee Awards

In Navigators Specialty Ins. Co. v. Moorefield Const. (No.G050759, filed 12/27/16), a California appeals court held that the knowing installation of flooring over a vapor-emitting slab was not an accident or occurrence, entitling the insurer to reimbursement of money paid as damages to settle a construction defect suit. But the court further held that there was no right of reimbursement for the portion of money payable under the policy’s supplementary payments coverage as costs for contractual prevailing party attorney’s fees.

Navigators insured Moorefield, the general contractor for a Best Buy store. Testing in construction revealed a vapor emission rate from the concrete slab above the approved standard for the flooring. The contractor’s personnel testified that it was normal to install the flooring regardless. Notwithstanding, the contractor’s personnel testified that they consulted the owner and were directed to proceed. In doing so, the contractor also expressly released the flooring subcontractor from any warranty claims.

The flooring began to fail in the first year, and continued for another six years. The subsequent owner of the building sued the original owner, resulting in cross-complaints among the various parties. Navigators defended the contractor under a reservation of rights and the case was ultimately settled, with Navigators paying its $1 million policy limit, with a further $310,000 coming from other sources.

Navigators then sued for declaratory relief, alleging it had no duty to defend or indemnify the contractor. The trial court agreed that there was no duty to indemnify, because the knowing installation of flooring when vapor rates were above specification was not an accident or occurrence. Further, the trial court ruled that Navigators had no obligation for any part of the settlement attributable to contractual prevailing party attorney’s fees, because the contractor’s “potential liability arose from a non-covered claim.”

The appeals court agreed that there was no accident or occurrence, but held that Navigators was nonetheless obligated for supplementary payments. The appeals court pointed out that the trial court had denied Navigators’ summary judgment motion, thus signaling unanswered fact questions and a duty to defend.

The appeals court cited Delgado v. Interinsurance Exchange of Automobile Club of Southern California (2009) 47 Cal.4th 302; Fire Ins. Exchange v. Superior Court (2010) 181 Cal.App.4th 388; Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41; and State Farm General Ins. Co. v. Frake (2011) 197 Cal.App.4th 568, on the occurrence issue stating:

“The evidence at trial established that Moorefield knew at the time that two separate tests had shown the moisture vapor emission rate from the concrete slab exceeded specifications. Cote discussed the moisture vapor emission rate results with representatives of DBO and Best Buy and the decision was made, based on a cost benefit analysis, to install the flooring. Because Moorefield, the insured, performed a deliberate act, there was no accident unless ‘some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.’ [] Such was not the case. After installation of the flooring, nothing else happened that might have caused the flooring to fail…. We conclude Moorefield’s conduct was not an accident because it was a deliberate decision made with knowledge that the moisture vapor emission rate from the concrete slab exceeded specifications. The damage was not produced by an additional, unexpected, independent, and unforeseen happening.”

Consequently, Navigators was entitled to reimbursement for any moneys paid as damages for property damage. However, the Moorefield court nonetheless held that the supplementary payments provision applied to some portion of the $1 million paid by Navigators toward settlement. Specifically, the court noted that the original construction contract had an attorney fee provision and, when authorized by contract, fees are allowable as costs of suit. (Code Civ. Proc., § 1033.5(a)(10).) Thus, attorney fees incurred by the owner would have been an item of costs falling within the supplementary payments provision of the Policy. And because supplementary payments coverage for costs is a function of the duty to defend (State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274), Navigators would have been obligated to the extent that the settlement included a component for attorney’s fees.

In reaching that conclusion, the Moorefield court rejected a claim that any attorney’s fees would have been “damages” not “costs” (and therefore also within the policy limits). The court cited Golden Eagle Ins. Co. v. Insurance Co. of the West (2002) 99 Cal.App.4th 837, for the distinction between attorney’s fees awarded as damages pursuant to an indemnity or hold-harmless provision and those awarded as costs of suit by virtue of a prevailing party fee clause. The Moorefield court noted that in contrast to contractual attorney’s fees coming within the supplementary payments coverage for costs, fees awarded under indemnity agreements typically fall within CGL coverage for insured contracts, and stated:

Golden Eagle dealt with a situation in which the contractor/indemnitee sought indemnity from the subcontractor/indemnitor for the damages the contractor incurred as a result of a third party lawsuit. If an indemnitor fails to defend an indemnitee against a third party, the indemnitee may recover, as damages, its attorney fees and costs incurred in defending the third party claim. [] In that situation, the damages incurred by the indemnitee include the attorney fees and costs it incurred defending the third party lawsuit. That is because, as the Golden Eagle court noted, ‘it is established that the indemnitee’s attorney fees constitute an ‘item of damages’ for the indemnitor’s breach of its indemnity obligation.’ … In this case, however, Moorefield did not seek indemnification from its concrete and flooring subcontractors [] for damages Moorefield had to pay to [the owner]. Moorefield was sued by [the owner] for breach of the Construction Contract, negligence, and breach of implied warranty to recover damages [the owner] incurred for construction defects. [The owner] sought attorney fees from Moorefield based on the attorney fees provision in the Construction Contract…. Moorefield’s liability to [the owner] for attorney fees therefore would be as a cost of suit, not as damages.”

Having reached those determinations, the Moorefield court concluded by ruling that on remand, the burden was on Navigators, not the insured, to establish the proper allocation: “The insurer, not the insured, has the burden of proving by a preponderance of the evidence that ‘the settlement payments were allocable to claims not actually covered, and the defense costs were allocable to claims not even potentially covered.’”

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December 29, 2016