McMillin Mgt. Services v. State Farm Gen. Ins. CA4/1 (2013) · DecisionDepot
McMillin Mgt. Services v. State Farm Gen. Ins. CA4/1
California Court of Appeal Sep 20, 2013 No. D062178Unpublished
Filed 9/20/13 McMillin Mgt. Services v. State Farm Gen. Ins. CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
MCMILLIN MANAGEMENT SERVICES, D062178 LP, et al.,
Plaintiffs and Appellants, (Super. Ct. No. v. 37-2011-00084376 CU-IC-CTL)
STATE FARM GENERAL INSURANCE COMPANY,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Diego County, Judith F.
Hayes, Judge. Reversed.
Law Offices of Greg J. Ryan and Greg J. Ryan for Plaintiffs and Appellants.
Hughes & Nunn, Randall M. Nunn and E. Kenneth Purviance for Defendant and
Respondent.
I.
INTRODUCTION
State Farm General Insurance Company (State Farm) issued a contractor's policy
(the State Farm Policy) to DeLeon Enterprises (DeLeon), a company that installs rain
gutters. DeLeon entered into a subcontract with appellant and general contractor,
Central Valley Residential Builders, LP (Central Valley), to install rain gutters on
residences that Central Valley was constructing. As required by the subcontract, DeLeon
procured additional insured endorsements on the State Farm Policy in favor of Central
Valley and various related entities, including appellants McMillin Management Services,
LP and Bakersfield Residential Builders, LP. The subcontract named McMillin
Management Services, LP as the "project manager" with respect to the construction of the
residences and indicated that Central Valley is a "Corky McMillin Company."1
A group of homeowners filed a construction defect lawsuit against McMillin.
After State Farm refused McMillin's request to defend it in the construction defect
lawsuit, McMillin brought this action against State Farm, asserting claims for declaratory
relief, breach of contract, and breach of the covenant of good faith and fair dealing. State
Farm filed a motion for summary judgment and/or adjudication on the ground that it did
not owe McMillin a duty to defend the underlying lawsuit, and that all of McMillin's
causes of action were premised on the existence of such a duty. After issuing a tentative
1 We refer to appellants Central Valley, McMillin Management Services, LP, Corky McMillin Construction Services, Inc., and Bakersfield Residential Builders, LP collectively as "McMillin."
2
order denying State Farm's motion in its entirety, the trial court granted the motion for
summary judgment and entered judgment in favor of State Farm. On appeal, McMillin
contends that the trial court erred in concluding that State Farm established as a matter of
law that it did not owe McMillin a duty to defend the construction defect lawsuit.
Whether an insurer owes its insured a duty to defend a third party's lawsuit
depends, in the first instance, on a comparison of the allegations of the third party's
complaint and the terms of the insured's policy. If any facts stated or fairly inferable in
the complaint, or otherwise known or discovered by the insurer, suggest a claim
potentially covered by the policy, the insurer's duty to defend arises.
In the operative complaint in the underlying lawsuit, the homeowners alleged that
their residences had "drainage defects" that "resulted in damage to the homes and their
component parts." The State Farm Policy provided liability coverage to McMillin for
resulting property damage arising out of DeLeon's work installing rain gutters. Because
the purpose of rain gutters is to provide drainage, we conclude that the homeowners'
complaint suggested a claim that was potentially covered by the State Farm Policy. We
therefore conclude that the trial court erred in its determination that State Farm
established that it did not owe McMillin any duty to defend the underlying action.
Accordingly, we reverse the judgment.
3
II.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Housing Developments
Between 2003 and 2005, McMillin acted as the developer and general contractor
for the construction of two single-family housing developments in Bakersfield (the
Housing Developments). One of the McMillin entities, Central Valley, entered into a
subcontract with DeLeon to install rain gutters, downspouts, and splash blocks on the
residences. The subcontract required DeLeon to name McMillin as an additional insured
on DeLeon's general liability insurance policy. Pursuant to the terms of the subcontract,
DeLeon procured endorsements from State Farm naming McMillin as an additional
insured on the State Farm Policy.
B. The State Farm Policy
The liability insuring clause of the State Farm Policy provides in relevant part:
"We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . property damage . . . to which this insurance applies."
The State Farm Policy also provides, "We will have the right and duty to defend
any claim or suit seeking damages payable under this policy even though the allegations
of the suit may be groundless, false or fraudulent."
The State Farm Policy contains "work product" exclusions that limit coverage
under the policy. Those exclusions provide in relevant part:
"[T]his insurance does not apply:
"[¶] . . . . [¶]
4
"12. [T]o property damage to your product arising out of it or any part of it . . . ;
"13. [T]o property damage to your work arising out of it or any part of it . . . ."
The term "your product" includes any products "handled, distributed or disposed
of" by DeLeon. The term "your work" is defined as "work or operations performed by
[DeLeon] or on [its] behalf; and [¶] . . . materials, parts, or equipment furnished in
connection with such work or operations."2
The State Farm Policy also includes additional insured endorsements providing
coverage to McMillin for liability "arising out of" DeLeon's work.
C. The underlying construction defect lawsuit
In January 2009, a group of homeowners in the Housing Developments filed a
complaint for damages against McMillin alleging defects in the construction of their
residences.3 The original complaint contains the following allegations:4
2 It is undisputed that in light of the work product exclusions, the State Farm Policy did not provide coverage for damage to the rain gutters themselves. Rather, coverage was limited to property damage other than to the rain gutters, caused by DeLeon's work, sometimes referred to in insurance law as "resultant property damage" or "consequential property damage." (Monticello Ins. Co. v. Essex Ins. Co. (2008) 162 Cal.App.4th 1376, 1379, fn. 1 (Monticello) ["The Essex policy[, which provided liability insurance to an installer of drywall,] contained an exclusion which precluded coverage for the insured's defective work. Thus, coverage was limited to consequential property damage or resultant property damage, that is to say, damage to work other than the drywall caused by the defective work of the insured."].)
3 State Farm and appellants proceeded in both the trial court and in this court as though all of the appellants were named as defendants in the underlying action. Although 5
"16. At the time of the purchase by Plaintiffs, the PROPERTY was defective and unfit for its intended purposes because Defendants did not construct the PROPERTY in a workmanlike manner as manifested by, but not limited to, numerous defects which have resulted in damage to the homes and their component parts. The defects include, without limitation and to various degrees on the plaintiffs' respective residences, the following:
"Faulty soil compaction, faulty existing underlying soils and expansive soils resulting in soil movement and damage to the structures, concrete slabs, flatwork and foundation defects; plumbing defects; electrical defects; drainage defects; roof defects; HVAC defects; waterproofing defects; window and door defects; landscaping and irrigation defects; framing, siding and structural defects; ceramic tile, vinyl flooring and countertop defects; drywall defects; fence and retaining wall defects; cabinet and wood trim defects; fireplace and chimney defects; tub and shower door defects; painting defects; sheet metal defects; and stucco defects." (Italics added.)
In December 2009, McMillin requested that State Farm defend the action on its
behalf. McMillin provided State Farm with various documents supporting that request,
including a copy of the operative second amended complaint. State Farm wrote a letter to
McMillin's counsel acknowledging McMillin's tender of the defense and stating that State
Farm was considering whether "we have a duty to provide a defense to your clients."
State Farm further stated, "The basis of the action does not include any specific
allegations that our insured caused the alleged defects." Shortly thereafter, State Farm
it is unclear whether the complaint in the underlying action in fact named all of the appellants as defendants, we will proceed as though it did.
4 The first and second amended complaints also contain these allegations. 6
obtained a copy of the subcontract between DeLeon and Central Valley pertaining to
DeLeon's installation of rain gutters on the Project.5
Throughout 2010, McMillin continued to request that State Farm provide it with a
defense in the action. On several occasions, McMillin provided State Farm with
additional evidence pertaining to alleged damages to the residences in the Housing
Developments that McMillin contended supported its request for a defense. State Farm
continued to refuse to defend the action on the ground that none of the information
provided by McMillin suggested that DeLeon had caused damage that was covered by
the State Farm Policy.
In March 2011, State Farm's coverage counsel sent a letter to McMillin's counsel
reiterating that "State Farm is advising you that it will not be participating in the defense
of your clients at this time."
D. This action
1. The operative first amended complaint
In February 2011, McMillin filed a first amended complaint against a number of
insurance companies, including State Farm, alleging causes of action for declaratory
relief, breach of contract, and breach of the covenant of good faith and fair dealing.
Although the original and first amended complaints are not contained in the record, it is
undisputed that all of McMillin's causes of action against State Farm are premised on its
5 In support of its motion for summary judgment, State Farm offered the declaration of the claims representative who handled McMillin's claim. The declaration states that State Farm obtained the DeLeon subcontract, and suggests that it did so sometime in December 2009 or January 2010. 7
contention that State Farm breached its duty to defend McMillin in the underlying
lawsuit.
2. State Farm's motion for summary judgment and/or adjudication
a. State Farm's motion
State Farm filed a motion for summary judgment and or/adjudication.6 In its
supporting brief, State Farm contended that McMillin would be unable to establish that
State Farm owed McMillin a duty to defend the underlying lawsuit. State Farm argued
further that it was entitled to summary judgment because each of McMillin's causes of
action depended on the existence of such a duty.
State Farm acknowledged that in light of the applicable provisions of the State
Farm Policy, State Farm would have had a duty to defend McMillin if the underlying
action had sought to impose liability on McMillin for damages to property (other than
rain gutters) arising out of DeLeon's work. State Farm contended that it owed no such
duty to defend because the underlying action did not contain any allegations asserting
such liability, reasoning:
"It is not enough for [McMillin] to simply raise the possibility of such damage. Rather, they must identify specific allegations or extrinsic evidence linking DeLeon's work to damage to other property."
State Farm argued further that the complaints in the underlying action contained
"no allegations whatsoever of any defective work performed by DeLeon, let alone any
6 In its motion, State Farm requested that in the event that the court were to deny its motion for summary judgment, the court summarily adjudicate that it owed no duty to defend McMillin in the underlying action. 8
property damage arising out of such work." State Farm also maintained that none of the
extrinsic evidence presented either at the time of McMillin's initial tender, or in the
ensuing months, established the existence of a duty to defend.
State Farm supported its motion with the declarations of two State Farm
employees who had participated in the handling of McMillin's claim. State Farm also
lodged the relevant State Farm Policy, the original and amended complaints in the
underlying action, and various portions of its claim file, including the DeLeon
subcontract and documents pertaining to the homeowners' claims in the underlying
construction defect litigation.
b. The opposition
McMillin filed an opposition in which it argued that the complaints in the
underlying action demonstrated the possibility of coverage under the State Farm Policy,
and thus, a concomitant duty on the part of State Farm to defend the action. McMillin
noted that the original complaint, as well as the first and second amended complaints in
the underlying action, alleged that "drainage defects" had "resulted in damage to the
homes and their component parts." McMillin also noted that State Farm was aware of
"DeLeon's scope of work requiring it to install rain gutters under existing metal roof
flashing in a manner to ensure a watertight seal."
McMillin argued that in light of State Farm's knowledge of DeLeon's scope of
work and the allegations in the complaints in the underlying action relating to drainage
defects, State Farm had "utterly failed to meet its burden of presenting undisputed facts
that conclusively eliminated a potential for covered liability . . . ." McMillin maintained
9
that the allegations demonstrated that "it was possible that defective work performed by
DeLeon may have caused property damage, other than to its own work product."
c. The trial court's ruling and the appeal
After State Farm filed a reply, the trial court issued a tentative ruling denying the
motion for summary judgment. In its ruling the court stated, "The Court finds defendant
State Farm failed to establish it had no duty to defend plaintiff [against] the underlying
complaint."
The court held a hearing on the motion. At the hearing, State Farm's counsel
argued that none of the complaints in the underlying action used the word "gutter" or
referred to property damage arising out of the installation of gutters. State Farm's counsel
argued that under Monticello, supra, 162 Cal.App.4th 1376, the plaintiffs in the
underlying case were required to "allege something specific" and that State Farm was not
required "to speculate that the broad allegations in this complaint that don't mention
gutters, don't mention DeLeon, are enough to extend to DeLeon . . . ."
McMillin's counsel argued that State Farm could establish that it lacked a duty to
defend only if it could demonstrate " 'that the underlying complaint and extrinsic facts
known [by State Farm] can by no conceivable theory raise a single issue which could
bring it within policy coverage." Counsel argued further that no such showing was
possible in this case in light of allegations in the underlying complaint that the homes had
"drainage defects," "roof defects," and "waterproofing defects," and that State Farm knew
that DeLeon "had a scope of work that included installing gutters underneath roof
flashing."
10
The court took the matter under submission and subsequently issued an order
granting the motion for summary judgment. In its order, the court stated:
"The Court finds, as a matter of law, that defendant State Farm established it had no duty to defend [McMillin] in the underlying complaint [sic]. (Monticello, [supra, 162 Cal.App.4th 1376].) [¶] Since State Farm had no duty to defend McMillin, the remainder of [McMillin's] complaint alleged against State Farm is dismissed."
McMillin filed a motion for reconsideration on the ground that the trial court's
order granting summary judgment was deficient in that it failed to adequately "specify the
The court issued a revised minute order in which it clarified the basis for its
decision to grant the motion for summary judgment. The following month, the court
entered a formal order granting the motion for summary judgment. The court's formal
order relies on the reasons provided in the prior minute orders, and states in relevant part:
"Based on the undisputed facts, the court finds that the Underlying Action did not assert a potential claim against [McMillin] for damages covered under the terms of the State Farm Policy. . . . [T]he court finds that the original and amended complaints [in the underlying action] do not allege facts that evidence a potential claim against [McMillin] for property damage arising out of DeLeon's work. (See [the complaints in the underlying action]; [Monticello, supra, 162 Cal.App.4th at pp. 1386-1387].) The court also finds that facts extrinsic to the original and amended complaints do not evidence a potential claim against [McMillin] in the Underlying Action for property damage arising out of DeLeon's work to property other than Deleon's own work or product. . . . Absent a duty to defend, [McMillin's] causes of action against State Farm for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing must necessarily fail."
Approximately a week later, the trial court entered judgment in favor of State
Farm. McMillin timely appealed from the judgment.
11
III.
DISCUSSION
The trial court erred in granting summary judgment in favor of State Farm
McMillin claims that the trial court erred in concluding that State Farm did not
owe McMillin a duty to defend the underlying action and in granting summary judgment
in favor of State Farm on this basis.
A. Governing law
1. The law governing summary judgment
A moving party is entitled to summary judgment when the party establishes that it
is entitled to the entry of judgment as a matter of law. (Code Civ. Proc., § 437c, subd.
(c).) A defendant may make this showing by demonstrating that the plaintiff cannot
establish one or more elements of all of his causes of action, or that the defendant has a
complete defense to each cause of action. (Towns v. Davidson (2007) 147 Cal.App.4th
461, 466.)
In reviewing a trial court's ruling on a motion for summary judgment, the
reviewing court makes " 'an independent assessment of the correctness of the trial court's
ruling, applying the same legal standard as the trial court in determining whether there
are any genuine issues of material fact or whether the moving party is entitled to
judgment as a matter of law. [Citations.]' [Citation.]" (Trop v. Sony Pictures
Entertainment, Inc. (2005) 129 Cal.App.4th 1133, 1143.)
12
2. Substantive law governing the duty to defend
It is well established that "[t]he insurer's duty to defend is broader than its duty to
indemnify." (Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 547.)
"The . . . duty [to indemnify] runs only to claims that are actually covered by the policy,
while the duty to defend extends to claims that are merely potentially covered.
[Citations.]" (Ibid.)
Whether an insurer has a duty to defend "depends, in the first instance, on a
comparison between the allegations of the complaint and the terms of the policy.
[¶] . . . [¶] . . . If any facts stated or fairly inferable in the complaint, or otherwise known
or discovered by the insurer, suggest a claim potentially covered by the policy, the
insurer's duty to defend arises and is not extinguished until the insurer negates all facts
suggesting potential coverage. On the other hand, if, as a matter of law, neither the
complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty
to defend does not arise in the first instance." (Scottsdale Ins. Co. v. MV Transportation
see also Crawford v. Weather Shield Mfg., Inc., supra, 44 Cal.4th at p. 547 [" 'The
[insurer's] defense duty is a continuing one, arising on tender of defense and lasting until
the underlying lawsuit is concluded [citation], or until it has been shown that there is no
potential for coverage . . . .' [Citation.]"].)
B. The trial court erred in concluding that State Farm established that it had no duty to defend McMillin in the underlying action
McMillin contends that the allegations in the operative complaint in the
underlying action suggested a claim that was potentially covered by the State Farm
Policy.
1. The homeowners' second amended complaint suggested a claim that was potentially covered by the State Farm Policy
In light of the case law described above, State Farm was entitled to summary
judgment only if could establish as a matter of law the absence of any potential for
coverage of McMillan under the State Farm Policy with respect to the claims asserted in
the underlying action. The allegations of the operative complaint in the underlying
14
action, when considered in connection with the nature of DeLeon's scope of work,
prevent State Farm from carrying this heavy burden.
We begin our analysis by examining the terms of the State Farm Policy. The
State Farm Policy required State Farm to indemnify McMillin for sums that McMillin
became legally obligated "to pay as damages because of . . . property damage . . . to
which this insurance applies." The applicable work product exclusions and additional
insured endorsements provide that the insurance applies to property damage that arises
out of DeLeon's work, other than DeLeon's work itself. Given the applicable provisions
of the State Farm Policy, State Farm owed a defense to McMillin if the underlying action
potentially sought to impose liability on McMillin for property damage to the
homeowners' residences (other than to the gutters themselves) arising out of DeLeon's
work.7
In their complaints in the underlying lawsuit, including the operative second
amended complaint, the homeowners alleged that their residences had "drainage defects"
that "resulted in damage to the homes and their component parts."
DeLeon's scope of work required it to install gutters on the homes. A gutter is a
"metal trough . . . to catch rainwater and carry it off (as to a downspout)." (Webster's 3d
New Internat. Dict. (2002) p. 1013.) DeLeon's subcontract required it to "[p]lace
gutter[s] up and under the existing metal roof flashing to produce a water-tight
7 In its brief in support of its motion for summary judgment, State Farm acknowledged that, "State Farm would . . . owe a defense to the McMillin Entities if the underlying action asserted liability on their part for damages to property (other than gutters) arising out of DeLeon's work." 15
installation," and to "[i]nstall a splash block at each down spout location to drain water
away from the house."
Given that the homeowners' second amended complaint alleged drainage defects
that resulted in damage to the homes, and DeLeon's scope of work required it to install a
component on the homes designed to provide drainage, we conclude that the
homeowners' second amended complaint suggested a claim that was potentially covered
by the State Farm Policy. Accordingly, the trial court erred in concluding that State Farm
established that it did not owe McMillin a duty to defend the underlying action.
State Farm's arguments to the contrary are not persuasive. State Farm notes that
during the litigation of the underlying action, the homeowners amended their complaint
to name 17 other subcontractors as defendants in the action, but never named DeLeon as
a defendant. State Farm contends, "This, alone, should be enough to establish that the
homeowners never sought recovery against [McMillin] for property damage arising out
of DeLeon's work." We disagree. The fact that the homeowners did not sue DeLeon
directly clearly does not establish that the homeowners were not seeking recovery against
McMillin for property damage arising out of DeLeon's work. Indeed, the homeowners'
cause of action against McMillin alleging "drainage defects" that "resulted in damage to
the homes and their component parts" incorporated another allegation that stated, "In
order to build and construct said project the DEVELOPER DEFENDANTS [, including
McMillin,] hired, retained, employed or contracted with persons or entities to provide
labor and materials in the construction of the PROPERTY and project(s)." Thus, the fact
that, for whatever reason, the homeowners elected not to sue DeLeon directly, does not
16
mean that the homeowners did not seek to impose liability on McMillin for property
damage arising out of DeLeon's work.
State Farm also notes that the operative complaint does not "mention rain gutters,"
or allege that rain gutters "caused any resulting property damage." That much is true.
However, the operative complaint does contend that drainage defects caused resultant
property damage. For the reasons stated above, allegations that drainage defects caused
resultant property damage at least suggest the possibility that the installation of a
component on the homes designed to facilitate drainage (i.e. rain gutters) caused resultant
property damages. The homeowners' allegations thus "suggest[ed] a claim potentially
covered by the policy." (Scottsdale, supra, 36 Cal.4th at pp. 654–655.)8
State Farm contends that "the same type of broad interpretation [of the operative
complaint in the underlying action] proposed by [McMillin] was considered and rejected
by the court in Monticello[, supra, 162 Cal.App.4th at page 1387]." However, Monticello
is distinguishable. In Monticello, the Court of Appeal considered whether an insurer had
a duty to defend a general contractor against construction defect claims as an additional
insured pursuant to a policy issued to a subcontractor that had installed drywall on the
property at issue in the construction defect action. (Monticello, supra, at p. 1378.) The
Monticello court noted that the plaintiffs in the underlying action alleged " '[e]xcessive
cracking in the interior and exterior of the . . . property,' " " '[p]remature failure of painted
8 Similarly, while State Farm claims that McMillin attempts "to draw inferences from non-specific allegations" from the operative complaint in the underlying action, the law is clear that facts "inferable in the complaint" (Scottsdale, supra, 36 Cal.4th at p. 655) that suggest the potential for coverage trigger the duty to defend. 17
surfaces,' " and " '[w]ater damage to structure.' " (Id. at p. 1387.) The Monticello court
concluded that the "excessive cracking" allegation did not reveal a possibility of coverage
under the drywall installer's policy, reasoning:
"The word 'drywall' is not even mentioned in the underlying complaint. There was no allegation therein that the 'excessive cracking' was in any way related to the work of [the drywall installer] or to any drywall installation. 'Cracking' and 'drywall' are not synonymous. [The insurer] was not required to speculate that the 'excessive cracking' might be attributed to the work of [the drywall installer.] [Citation.]" (Ibid.)
The Monticello court also noted that the complaint in that case alleged that damages
related to " 'premature failure of painted surfaces' " and " 'water damage to structure' "
were attributable to defects other than the drywall. (Ibid.) Accordingly, the Monticello
court concluded that the complaint did not reveal a possibility that the action against the
general contractor might be covered by the drywall installer's policy. (Ibid.)
Monticello does not control here because "drainage" and "rain gutters" are related
in a way that " 'excessive cracking' " and " 'drywall' " are not. While a residence's
drainage system necessarily includes rain gutters, " 'excessive cracking in the interior' "
(Monticello, supra, 162 Cal.App.4th at p. 1387) does not identify a part of a residence
that necessarily includes drywall. More specifically, an allegation of "excessive cracking
in the interior" (ibid.) clearly may refer to parts of the residence other than drywall, such
as the foundation or floors of the residence. Thus, the nonspecific allegation of
" 'excessive cracking in the interior,' " without more, did not encompass an allegation that
the installation of the drywall was faulty. (Ibid.) In contrast, in this case, the allegation
that the residences had "drainage defects" raised the possibility of defects related to any,
18
or all, of the components of the drainage systems in the Housing Developments,
including the rain gutters.
Further, the painting and water damages at issue in Monticello were not alleged to
be "in any way related to drywall work." (Monticello, supra, 162 Cal.App.4th at p.
1387.) In contrast, in this case, the second amended complaint alleged that defects in the
homes, including "drainage defects," had "resulted in damage to the homes and their
component parts." (See Kaufman & Broad Monterey Bay v. Travelers Prop. Cas. Co. of
America (N.D. Cal., Jul. 18, 2012, 5:10-CV-2856-EJD) U.S. Dist. LEXIS 100005 at [18]-
[19] [concluding complaint adequately alleged that subcontractor's work caused resultant
damages triggering insurer's duty to defend where complaint alleged that defects
attributable to subcontractor "have resulted in damage to the homes and their component
parts"].) In sum, the fact that the particular factual allegations at issue in Monticello did
not give rise to a duty to defend in that case does not compel the same result in this case.
Finally, State Farm cites several cases that support the proposition that an "insured
may not speculate about unpled third party claims to manufacture coverage."
(Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114, italics added.) In
Gunderson, the court concluded that the insurer did not have a duty to defend a complaint
that alleged "three equitable causes of action to quiet title to real property, for declaratory
relief, and for injunctive relief," merely because the plaintiff in the underlying case
"could have made a claim for [damages for] 'physical injury to or destruction of tangible
property,' " which would have been covered. (Id. at p. 1115, italics in original.) In
contrast, in this case, for all of the reasons stated above, a claim at least suggesting
19
potential coverage under the State Farm Policy is pled, and thus, no speculation about
"unpled third party claims" is required. (Id. at p. 1114.)
2. State Farm has not identified evidence extrinsic to the operative complaint in the construction defect litigation that conclusively negates the possibility of coverage
State Farm contends that "extrinsic facts made available to [it] . . . confirmed the
absence of any potential claim by the homeowners for property damage arising out of
DeLeon's work." To the extent that State Farm intends to maintain that it established that
it did not owe McMillin a duty to defend because it presented evidence that
" 'conclusively negate[d] the potential for coverage' " (Sprinkles v. Associated Indemnity
Corp., supra, 188 Cal.App.4th at p. 77), we reject the argument.9
State Farm identifies three items of evidence that it maintains establish that there
was no possibility of a covered claim. First, State Farm notes that its claim representative
reviewed reports produced by the homeowners' experts in the underlying litigation.
However, far from " 'conclusively negat[ing] the potential for coverage' " (Sprinkles v.
Associated Indemnity Corp., supra, 188 Cal.App.4th at p. 77), the cost of repair report
cited in State Farm's brief contains a subsection entitled "Gutter and Downspouts," that
listed $1,079.39 in "investigative costs" and $30,070.14 for defects related to "leaking at
9 It is not entirely clear from its brief whether State Farm intends to contend that it presented extrinsic evidence that conclusively negated the possibility of coverage, or intends merely to argue that extrinsic evidence did not trigger a duty to defend. We reject the latter argument in light of our conclusion in part III.B.1., ante, that the allegations of the second amended complaint, combined with evidence that State Farm had knowledge of DeLeon's scope of work, triggered its duty to defend McMillin. In this section, we consider whether additional extrinsic evidence to which State Farm refers in its brief negated the possibility of coverage under the State Farm Policy. 20
gutter/downspout." While the report also states that the $30,070.14 in costs to repair was
"included under [r]emoval and reinstallation of gutter for fascia and/or starter plywood
repairs or replacement," the report does not conclusively establish that the homeowners
suffered no resultant property damage from faulty gutter installation.
Second, State Farm notes that McMillin's counsel sent an e-mail in March 2010 to
homeowners' counsel in which McMillin's counsel stated, "Based on the defect list and
cost of repair, there does not appear to be any defect in the installation or material
associated with the rain gutters. . . . I have nothing; can you confirm that there [are] no
defects attributable to the supply or installation of rain gutters?" McMillin's counsel's
question clearly does not conclusively establish the absence of any possible damage
related to gutter installation, particularly since homeowners' counsel responded, "[t]here
are some leaks at the gutters," and attached a photo of a leaking gutter.
Further, in a follow up e-mail sent to McMillin's counsel the following day,
homeowners' counsel stated:
"I spoke with my expert and the only criticism of the gutter installation is the leaks, such as the photo I sent you. The plans show the gutter straight up against the fascia and then a separate drip edge to be installed over and into the gutter. The separate drip edge is what is missing along with short felt not extended over the eave fascia and other defects allowing water to get to the underlayment, causing damaged eave fascias." (Italics added.)
This correspondence clearly does not conclusively establish the absence of any
potential coverage.
Finally, State Farm argues that McMillin's expert failed to provide "supporting
information" to substantiate its hypothesis as to a manner by which gutter leaks may have
21
caused resultant property damage. Even if true, the absence of "supporting information"
to substantiate a theory of damage does not constitute evidence conclusively establishing
the absence of damage.
In short, the extrinsic evidence to which State Farm refers in its brief on appeal
falls far short of conclusively establishing the absence of any possible coverage under the
State Farm Policy. Accordingly, we conclude that State Farm was not entitled to
summary judgment on the ground that it had no duty to defend McMillin in the
underlying litigation because evidence extrinsic to the operative complaint in the
construction defect litigation conclusively negated the possibility of coverage under the
State Farm Policy.
IV.
DISPOSITION
The judgment is reversed. State Farm is to bear costs on appeal.
AARON, J.
WE CONCUR:
McCONNELL, P. J.
O'ROURKE, J.
22
AI Brief
AI-generated · verify before citing
Holding. The court held that the insurer had a duty to defend the general contractor because the underlying complaint's allegations of "drainage defects" resulting in property damage, when compared with the subcontractor's scope of work installing rain gutters, suggested a claim potentially covered by the policy.
Issues
Whether the trial court erred in concluding that the insurer established as a matter of law that it did not owe a duty to defend the underlying construction defect lawsuit.
Disposition. Reversed
Quotations verified verbatim against the opinion
“If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises.”
“Because the purpose of rain gutters is to provide drainage, we conclude that the homeowners' complaint suggested a claim that was potentially covered by the State Farm Policy.”