In a Case of First Impression, California Court of Appeal Extends the Duty to Defend Under a CGL Policy

Commercial General Liability (“CGL”) policies that cover personal injury and property damage require CGL carriers to defend “suits,” typically defined to mean “a civil proceeding in which damages . . . to which this insurance applies are alleged.” A question arises as to whether the process prescribed by the Calderon Act (the Calderon Process) is a” civil proceeding” within this definition. The Calderon Act requires a common interest development association to satisfy certain dispute resolution requirements with respect to the builder, developer, or general contractor before the association may file a complaint in court for construction or design defects. (Civil Code § 1375, subd. (a)) Although the Calderon Process occurs before a complaint is filed and itself does not result in a judgment or court-ordered payment of money, the Calderon Process is an integral part of construction defect litigation initiated by a common interest development association. In a case of first impression, the Fourth Appellate District in Clarendon America Insurance Co. v. StarNet Insurance Co., __ Cal. App. 4th ___ (decided July 27, 2010) held that a CGL insurer has a duty to defend its insured in such proceedings.

Centex Homes (Centex) was the developer of a residential development in Simi Valley known as Westwood Ranch. In July 2006, the Westwood Ranch Homeowners Association, Inc., served a notice of commencement of legal proceedings pursuant to section 1375 et seq. (Calderon Notice) on Centex that set forth a list of alleged construction defects at Westwood Ranch.

WSM Transportation doing business as Sam Hill & Sons, Inc. (Sam Hill), was a subcontractor on the Westwood Ranch development. StarNet Insurance Company (StarNet) issued two successive policies of CGL insurance (the StarNet CGL policies) to Sam Hill effective from June 12, 2002 to June 12, 2004. The StarNet CGL policies’ insuring agreement provides: “[StarNet] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The StarNet CGL policies’ defense agreement provides: “We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply. We may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”

The StarNet CGL policies define the word “suit” as follows: “‘Suit’ means a civil proceeding in which damages because of ‘bodily injury[,’] ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged. ‘Suit’ includes: [¶] a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or [¶] b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

Centex filed a cross-complaint against Clarendon America Insurance Co. (“Clarendon”) in 2007 seeking payment for defending against the proceeding initiated by WRHA. Clarendon in turn cross-complained against StarNet Insurance Co. (“StarNet”) claiming StarNet was obligated to provide a defense for Centex. StarNet moved for a summary judgment asserting the Calderon Action was not a suit within the meaning of the defense agreement in StarNet’s commercial general liability (“CGL”) policy.

The trial court denied StarNet’s motion for summary judgment and found for Clarendon for which StarNet appealed. StarNet argued the Calderon Process is not a suit within the meaning of their insurance policy.

The Court of Appeal held “The Calderon Process is mandatory: The Calderon Act prohibits an association from filing a complaint for construction or design defects until it satisfies all of the requirements of the Calderon Process.” Further, the court explained:

“The Calderon Process is more than a prelitigation alternative dispute resolution requirement: It is part and parcel of construction or design defect litigation initiated by an association and, as such, cannot be divorced from a subsequent complaint.”

This decision reached the correct conclusion. One has to wonder why an insurer would even challenge whether a defense was owed in these circumstances.