Insurance Companies Can Choose Not To Defend Construction Claims Based On Exclusions

This is a case where an insurance company was able to withdraw its defense based on an exclusion in their policy that excludes condominiums and townhouses. In this case the developments were condominiums that had the appearance of detached single family homes.

California Traditions, Inc. (California Traditions) was the developer of a housing project. They hired Ja-Con Systems, Inc. (Ja-Con) to perform the rough framing work for 30 of the units in the development. Ja-Con was insured with a Comprehensive General Liability Policy by Claremont Insurance Company (Claremont) the entire time of the project. The owner of Ja-Con knew that his policy did not cover work on condominium projects. Each of the units were freestanding with no shared walls, roofs, halls, or plumbing or electrical lines. To avoid "set-back" requirements for single family homes, the project was developed, marketed and sold as condominiums.

One of the buyers of the condominiums sued California Traditions for defective construction, among other things. California Traditions then cross-complained against Ja-Con. Ja-Con tendered the defense to Claremont. Initially Claremont took on the defense and then withdrew based on the exclusion in their policy against condominiums. California Traditions eventually obtained a default judgment against Ja-Con for over $2 million. California Traditions then sued Claremont to satisfy the judgment from the Claremont policy, based on Insurance Code section 11580 and for declaratory relief. Claremont filed a Motion for Summary Judgment stating that the work performed by Ja-Con triggered the exclusion since it was work that had been incorporated into a condominium project. California Traditions opposed the motion stating that the term "condominium project" was undefined in the policy and therefore it was ambiguous as to what was excluded from coverage. Therefore, it must be interpreted most favorably to the insured. The trial court ruled that the exclusion was not ambiguous and that there was no potential for coverage because the development was a condominium project. The Court of Appeal agreed with the trial court.

The language in Claremont's policy stated "coverage is not provided for property damage or bodily injury that arises out of an insured's operations, work product or products that are incorporated into a condominium...project." California Traditions also asserted that Ja-Con had a reasonable expectation of coverage because the units for which it provided framing work had many of the outward appearances of non-condominium detached single family homes. The Court of Appeal concluded that the policy language was not reasonably susceptible to any interpretation other than the clear import of the unambiguous language contained in the exclusion. Both the terms "condominium' and "condominium project" are not ambiguous and are meticulously defined by Civil Code section 1351. California law also expressly includes freestanding units as one type of a condominium unit that can comprise part of a condominium project.

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