“Arises Out Of” is Unambiguous

Ninth Circuit Supports Clear and Unambiguous Exclusion

Although the Ninth Circuit has been called the court of reversal it also will often write clear decisions that make logical and legal sense. Therefore, when a contractor sued its insurance company for defense and to pay an amount it settled a construction defect claim, when the facts established that the loss for which coverage was sought arose out of the work of the contractor and fell afoul of  interpretations of the phrases “that particular part” and “arises out of” when applied to a general contractor. Poor workmanship and defective materials are usually considered a commercial risk.

In Archer Western Contractors, Ltd., an Illinois Corporation v. National Union Fire Insurance Company Of Pittsburgh, Pennsylvania, a Pennsylvania Corporation, United States Court of Appeals, Ninth Circuit, 2017 WL 816891, No. 15-55648 (3/2/17) the insurer’s motion for summary judgment was granted.

FACTS

AWC served as the general contractor for the San Diego County Water Authority’s (“Water Authority”) emergency water storage project. After settling a construction defect lawsuit brought against it by the Water Authority, AWC sued one of its insurers, National Union, for failing to indemnify portions of its settlement obligations. The district court determined that two exclusions barred coverage for the underlying construction defect claims, and it granted summary judgment in favor of National Union.

Here, the alleged property damage was to the pump house and turbine generators, discrete portions of the property for which AWC was partially if not fully responsible, and the damage flowed from its allegedly defective work on the property.

ANALYSIS

Under California law, an insurer’s duty to indemnify runs only to claims that are actually covered by the policy, in light of the facts proved. Where, as here, a case settles prior to trial, the duty to indemnify is determined on the basis of the settlement, i.e., the undisputed facts set forth in the underlying complaint and those known to the parties.

The district court properly concluded that exclusions e(5) and e(6) of National Union’s insurance policy precluded coverage of the underlying construction defect claims. The e(5) exclusion precludes coverage for property damage to “that particular part of real property on which [the contractor] … [is] performing operations, if the Property Damage arises out of those operations,” and the e(6) exclusion precludes coverage for property damage to “that particular part of any property that must be restored, repaired, or replaced because [the contractor’s] Work was incorrectly performed on it.” Under California law, exclusionary clauses are interpreted narrowly against the insurer but they are not applied religiously against the insurer. If clear they must be applied.

The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer California courts have consistently adopted broad interpretations of the phrases “that particular part” and “arises out of” when applied to a general contractor.

In light of the California courts’ consistently broad reading of this phrase there is no indication that the exclusionary language is ambiguous.

ZALMA OPINION

Insurance companies have the unquestioned right to write an insurance policy as it desires and to which the insured agrees as long as the language of the contract is not ambiguous. In California the wording phrases “that particular part” and “arises out of” when applied to a general contractor are unambiguous. Insurance is not a guarantor of the workmanship of a contractor.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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