California Court of Appeal holds that "additional insured" endorsement for "ongoing operations" covers claims of buyers who purchased completed homes.

In a recent opinion, a California Appellate Court held that an "additional Insured" endorsement was sufficient to provide insurance protection to the owner of a residential construction project, against claims being made by claimants who purchased the homes after they were completed.

McMillin Management Services, L.P. and Imperial Valley Residential Valley Residential Builders, L.P. (collectively "McMillin") filed suit against numerous insurance companies, including respondents Lexington Insurance Company (Lexington) and Financial Pacific Insurance Company (Financial Pacific). McMillin alleged that it had acted as a developer and general contractor of a residential development project in Brawley and hired various subcontractors to help construct the Project. As relevant here, McMillin alleged that Lexington and Financial Pacific breached their respective duties to defend McMillin in a construction defect action (underlying action) brought by homeowners within the Project. McMillin alleged that Lexington and Financial Pacific each owed a duty to defend McMillin in the underlying action pursuant to various comprehensive general liability (CGL) insurance policies issued to the subcontractors that named McMillin as an additional insured. The trial court granted Lexington's motion for summary judgment, reasoning, that there was no possibility for coverage for McMillin as an additional insured under the policies "[b]ecause there were no homeowners in existence until after the subcontractors' work was complete[ ] . . . ." On appeal, McMillin contended that the fact that the homeowners did not own homes in the Project at the time the subcontractors completed their work did not establish that its liability did not arise out of the subcontractors' ongoing operations. The trial court granted Financial Pacific's motion for summary judgment, finding McMillin did not establish homeowners in the underlying action had sought potentially covered damages arising out of the subcontractors' drywall installation. The Court of Appeal reversed as to Lexington, and affirmed as to Financial Pacific.

“On appeal, McMillin contends that the fact that the homeowners’ did not own homes in the Project at the time the subcontractors completed their work does not establish that its liability did not arise out of the subcontractors’ ongoing operations. In support of this contention, McMillan argues that the endorsements “make no reference to when liability must arise.”  In contrast Lexington argues that “since the homeowners’ cause of action accrued after operations were completed, McMillin could have no liability to the homeowners during the [subcontractors] ongoing operations”. McMillin’s argument is supported by the text of the endorsements , while Lexington’s argument is not. The endorsements do not provide coverage solely for “liability…during the [subcontractors] ongoing operations”, but rather broadly provide for coverage for liability “arising out of” such operations. Thus the fact that there were no homeowners in existence at the time the subcontractors’ completed their ongoing operation does not establish that McMillin could not have potential liability to the homeowners “arising out of” the subcontractors’ ongoing operations.”

Accordingly, the summary judgment granted by the trial court was reversed.