On March 2, 2011, Division Two of the Second District of California's Court of Appeal issued its opinion in Clarendon America Insurance Company v. General Security Indemnity Company of Arizona. Clarendon American Insurance Company ("Clarendon") and General Security Indemnity Company ("General Security") were successive general liability carriers for Hilmor Development ("Hilmor"), the general contractor for a 14,000 square foot custom home. During the Clarendon policy, and prior to inception of the General Security policy period, the owners of the home fired Hilmor from the project. The owners then hired a second general contractor which finished the project. Several years later, the owners brought suit against Hilmor, alleging defects in the construction of the home. Clarendon agreed to defend Hilmor in that action. However, General Security rejected the tender, arguing that coverage was precluded by exclusions j(5) and j(6) in the policy. General Security also claimed that, because Hilmor was fired from the project, coverage under the policy's "products-completed operations hazard" was not triggered. Clarendon filed suit against General Security for contribution arising from General Security's coverage denial.
With respect to General Security's "products-completed operations hazard" argument, the court of appeal observed that the policy definition of "products-completed operations hazard" contains an exception for "work that has not yet been completed or abandoned." The court then found that there was no evidence that either party intended to abandon the contract. Instead, Hilmor was fired as the general contractor. Furthermore, counsel for Clarendon admitted at oral argument that Hilmor "didn't abandon the project." The court further found that Hilmor had not completed its work at the project. The court explained that, because Hilmor's unfinished work had been taken over by another contractor, by the time the homeowners put their home to its intended use, it was no longer Hilmor's work. Based on these findings, the court held that the "products-completed operations hazard" did not apply.
As for exclusions j(5) and j(6), the court concluded that "[t]hose faulty workmanship exclusions preclude coverage for deficiencies in the insured's work." Specifically, exclusion j(5) applies to work in progress and bars coverage for property damage that occurs while the insured is performing operations on that property. Exclusion j(6) precludes coverage for physical injury to, or loss of use of, that part of the property that must be replaced because Hilmor's work was performed incorrectly. Under these exclusions, no coverage was available for: (1) "property damage that occurred while Hilmor or its subcontractors were performing operations on the property"; and (2) "claims?based on alleged 'defects and deficiencies' in the residence resulting from poor workmanship and/or material."
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