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March 2010

Forecast Homes, Inc. v. Steadfast Insurance Company ? Additional Insured Denied Coverage Pursuant to Unambiguous Precondition

General Liability Policies Unambiguously Required Actual Payment by the Subcontractors of SIR Amounts as a Precondition for Coverage

(February, 11 2010) ___ Cal.App.4th ___, 10 C.D.O.S. 1953

Division Three of the Fourth Appellate District reviewed a judgment entered judgment against Forecast Homes Inc. ("Forecast") in a declaratory relief action against Steadfast Insurance Company ("Steadfast.")

Forecast develops and sells single family homes.  Forecast ordinarily hires subcontractors to build the homes and contractually requires all of its subcontractors to defend and hold it harmless against liability arising out of the subcontractors' work.  Subcontractors were also required to add Forecast to their policies as an additional insured.

Between 2001 and 2003, Forecast was served with five (5) different lawsuits for construction defects by homeowners living in Southern California ("underlying actions.")  Forecast was the only named defendant in the underlying actions.  After being served with the underlying actions, Forecast tendered its defense to several different insurance companies including Steadfast.  Steadfast denied Forecast's tender on the grounds that the only the named insured under each policy was able to satisfy the per-occurrence amounts set forth in the Self-Insured Retention ("SIR") and none of the subcontractors had satisfied the SIR.  Forecast filed suit for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. 
The trial court ruled that  only the named insured subcontractors and not Forecast, had the right to satisfy the SIR per occurrence amounts and Steadfast's defense obligation had not been triggered. It further concluded the SIR endorsements did not violate public policy and were not illusory.  Forecast appealed.  The Court of Appeal affirmed the trial court's judgment. 

The Court of Appeal held, that while insurance contracts have special features, they are still contracts subject to the ordinary rules of contract interpretation.  Thus, the parties' mutual intent must first be determined, if possible, from the written terms of the policy language.  Here, the language in the subject insurance contract clearly defined that only the named insured, "you" and "your" to mean the named insured only. Section I, concerning "Your Obligation," plainly referred to the named insured's obligation.  Further, the paragraph below this title, warning "it is a condition precedent to our liability that you make actual payment?until you have paid [SIR] amounts," clearly described that it is only the named insured who pays the SIR.

The Court of Appeal also found that the subcontractors had sound Public Policy reasons for wanting to control whether and when coverage under their insurance would be triggered. Forecast itself acknowledged that the primary purpose of an SIR provision is to allow the named insured to contain its insurance costs.  As with deductibles, the more risk the named insured claims for itself, the lower the premiums.  The Court of Appeal also noted Steadfast's argument that the language protects a subcontractor anticipating several claims as it may choose to preserve the coverage offered in later policies, and satisfy the SIR in earlier policies, to obtain the maximum benefit of its insurance.

Finally, the Court of Appeal rejected Forecast's argument that because only the named insured can satisfy the SIR obligation, the coverage afforded by the policy to additional insured is illusory.  A contract is illusory if performance is "conditional on some fact or event that is wholly under the promisor's control and bringing it about is left wholly to the promisor's own will and discretion."  Here, the condition of requiring the named insured to pay the deductible amount before coverage is triggered is not a fact or event under Steadfast's control or discretion.  Accordingly, the Court of Appeal held that Steadfast's policy was not illusory.

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This opinion is not final.  It may be modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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David L. Jones