Construction companies and real estate managers should be mindful of an insurer’s broad duty to defend, especially when they face a lawsuit in which they are allegedly responsible for property damage (or bodily injury) due to multiple reasons. So long as one of the alleged reasons for or causes of the damages at issue is potentially covered by your insurance policy, your insurer may have to defend you even if the other alleged reasons for or causes of the damages are not covered.
Insurance coverage cases involving covered and noncovered claims are referred to as “mixed cases” and, depending on the applicable law, an insurer may have to defend the entire lawsuit.
A recent case out of California illustrates this point. In Saarman Construction, Ltd. v. Ironshore Specialty Insurance Company, 230 F. Supp. 3d 1068 (N.D. Ca. Jan. 31, 2017), the policyholder, Saarman Construction, had been retained in 2006 by a homeowners’ association (HOA) to repair the exterior of a condominium building located in San Francisco. The building was constructed in the late 1990s and apparently began to experience problems immediately including “significant water intrusion.” Saarman was retained as the general contractor to address the situation; Saarman and its subcontractors completed the repair work in 2006 and 2007.
In 2011, the lessee of one of the condominium units found mold in her unit. She sued, among others, the owners/lessors of the unit and the HOA for “several defects in the unit, including mold, plumbing leaks, and water intrusion.” The unit owners and HOA then brought Saarman into the lawsuit (along with the owners of two neighboring units), alleging, among other things, that “Saarman and its sub-contractors negligently performed repair work to the building, resulting in water intrusion and water damage to the interior of their unit that contributed to mold growth.” Saarman ultimately contributed $65,000 to settle the claims of the unit owners and HOA.
Ironshore Specialty Insurance Company, Saarman’s general liability insurer, refused to defend and indemnify Saarman in connection with the lawsuit, based on, among other things, a mold exclusion contained in its policy. The Court rejected the insurer’s reliance on the mold exclusion as grounds for refusing to defend Saarman. The Court noted that, in addition to mold, there existed ‘“at least 2-3 areas of water intrusion due to deficiencies in work performed by Saarman (and/or [its subcontractor]), which ha[d] resulted in tangible property damage to the unit interiors and fixtures.”’ In other words, the unit owner and HOA’s claims against Saarman “included claims for water intrusion and water damage, separate and apart from the mold damages.”
While the Ironshore policy did not cover mold, it did cover water intrusion and water damage. Accordingly, the Court agreed with Saarman that, under applicable law (California), Ironshore had a duty to defend the “entire underlying action, including the uncovered mold claim.”
The Court went further and ruled that Ironshore could not rely on the specific language of its mold exclusion to “evade its duty to defend mixed actions that include covered claims,” even though that exclusionary language arguably supported Ironshore’s argument that, so long as mold was an issue in the lawsuit, it had no duty to defend. California’s law favoring the duty to defend in mixed cases trumped Ironshore’s policy language to the contrary.
In the end, Ironshore’s refusal to defend ultimately was upheld for another reason (the damages at issue first existed and/or resulted from work performed by Saarman prior to when Ironshore’s policy went into effect on June 30, 2010; recall, Saarman completed the repairs in 2007, three years before the policy went into effect). However, the case is a good reminder to always scrutinize an insurer’s refusal to defend where the property damage and/or bodily injury alleged arguably involves multiple causes.