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Will the duty to defend government claims come back to life?

Twelve years ago, the California Supreme Court followed a "bright-line, literal approach" in determining that an insurer’s duty to defend a "suit" is triggered by the filing of complaint in a civil action; anything less is a "claim" which does not trigger the duty to defend. Foster-Gardner, Inc. v. National Union Fire Insurance Co. (1998) 18 Cal.4th 857, 878-888. But the California Court of Appeals recently concluded that a pre-suit notice of a construction defect claim under California’s Calderon Act, Civ. Code § 1375 et seq., is a "suit" and thus triggers an insurer’s duty to defend. Clarendon Am. Ins. Co. v. StarNet Ins. Co. (July 2010) __ Cal.App.4th __, 10 C.D.O.S. 9499. Another insurance coverage case, Ameron Int’l Corp. v. Insurance Co. of the State of Penn. (2007) 150 Cal. App. 4th 1050, also confronted Foster-Gardner’s "bright line" rule, but unlike Clarendon, it felt compelled by Foster-Gardner to reluctantly conclude that an administrative proceeding before the U.S. Department of the Interior Board of Contract Appeals was not a "suit" and thus did not trigger the insurer’s duty to defend. Ameron was heard by the Supreme Court on September 7, 2010.

In Clarendon, the Court of Appeal affirmed a stipulated judgment that a duty to defend existed following the denial of a non-defending insurer’s motion for summary judgment in a contribution action. Solely in order to facilitate an appeal, the parties agreed to judgment against the non-defending insurer on the scope of its duty to defend a "Notice of Commencement of Legal Proceedings" under the Calderon Act. The Court of Appeal reasoned that the Calderon Act is an integral and required part of construction defect litigation and concluded that a "Notice of Commencement" under the Calderon Act is a "suit," defined as a "civil proceeding in which damages are alleged," for purposes of the duty to defend under standard CGL wording.

The Westwood Ranch Homeowners Association served a notice on the project’s developer, Centex Homes ("Centex"), pursuant to the Calderon Act. The Calderon Act requires a common interest development satisfy specific dispute resolution requirements before it can file a complaint for construction or design defects.

Clarendon America Insurance Company ("Clarendon") and StarNet Insurance Company ("StarNet") insured different subcontractors involved in constructing the Westwood Ranch project. Both insurers named Centex as an additional insured. All of the relevant policies defined "suit" as "a civil proceeding in which damages to which this insurance applies are alleged." (The term "suit" was also defined to include arbitrations and alternative dispute resolution proceedings seeking damages within the scope of coverage.)

Centex filed suit against Clarendon for its costs of defending the Westwood Ranch Calderon notice. Clarendon filed a cross-complaint seeking contribution from StarNet and other insurers that named Centex as an additional insured. StarNet moved for summary judgment, contending the Calderon notice was not a "suit" within the policy definition and, therefore, that it did not have a duty to defend Centex. The court denied StarNet’s motion. The parties stipulated to entry of judgment in Clarendon’s favor to expedite appeal.

The Court of Appeal began its analysis with the history, intent and requirements of the Calderon Act. The Calderon Act, passed in 1995, provides a detailed framework in the Civil Code for required notice and inspection of alleged construction and design defects, case management, and dispute resolution.

In particular, the Calderon Act requires prompt notice to subcontractors, design professionals and insurers. A common interest development association can file a complaint only after the mandatory dispute resolution efforts have failed. For purposes of trial setting priority, any complaint is deemed filed on the date the initial Calderon notice was served. Moreover, the Calderon Act imposes penalties for failure to participate. Contractors on notice are precluded from performing further inspections or testing in a later civil action, and settlements reached before litigation are binding in a later trial on contractors that failed to attempt to resolve the claim.

The court noted that the California Supreme Court had applied a "bright-line, literal approach" in Foster-Gardner, in holding that the term "suit," when not defined in the policy, means "a court proceeding initiated by the filing of a complaint." The court then turned to the StarNet policy noting that it did define the term "suit" as a "civil proceeding in which damages are alleged." The court noted that no case had determined whether the phrase "civil proceeding" includes pre-litigation proceedings.

Applying Foster-Gardner’s "literal meaning" approach, the court held that the pre-litigation proceeding under the Calderon Act is a "civil proceeding" which triggers a duty to defend. The court reasoned that the Calderon Act provides a detailed, required procedure under the Civil Code. It begins with notice, includes exchange of information akin to discovery, and culminates with a required "comprehensive demand" intended to encourage early settlement. Further, the Calderon Act imposes penalties affecting later litigation for failure to participate in inspection, testing or dispute resolution.

The court also rejected StarNet’s contention that a Calderon notice cannot result in an insured’s legal liability for damages. The court noted that StarNet was obligated to defend a "civil proceeding" in which damages are "alleged," meaning pled or charged. The court found a Calderon notice sufficiently alleges damages, even absent any basis to impose legal liability.

Ultimately, the court concluded that the pre-litigation Calderon process is part and parcel of any subsequent construction defect litigation that ensues. The court concluded the process is more than a pre-suit alternative dispute resolution requirement. Rather, its procedures and outcomes become a central part of any later litigation and bind the parties in various respects. The court refused to "divorce" the pre-suit proceedings from the civil action that could follow, and thus held the Calderon notice was a "suit" that StarNet was obligated to defend.

The Clarendon case is not the first to focus on the change in policy forms after 1985. In Ameron, the Court of Appeal upheld insurance coverage for claims brought against Ameron by the U.S. government in the U.S. Department of Interior Board of Contract Appeals. In a lengthy opinion, the Court ruled that coverage was not limited to lawsuits filed in a court, under policies issued after 1985. The Court of Appeal, in an unusual ruling, believed that Ameron should have coverage under pre-1985 policies, but felt bound to follow Supreme Court precedent as set forth in Foster-Gardner. The Supreme Court accepted the case and will hear oral argument on September 7, 2010.

How Clarendon and Ameron affect environmental cases remains to be seen. Under Clarendon’s analysis a government issued "Notice of Responsibility" to an insured does not compare to the pre-litigation proceedings under the Calderon Act. But what about a government-issued 60-day notice under the Polanco Redevelopment Act (Health & Saf. Code § 33459.1)? Or a citizen suit 90-day notice under RCRA (Resource Conservation and Recovery Act, 42 U.S.C. § 6972)? While some environmental statutes require pre-suit notice before commencing litigation, these do not invoke a comparable level of activity to Calderon proceedings. Accordingly, the impact on environmental cases resulting from these two decisions remains an open question. Needless to say, it is imperative to fully analyze each and every insurance policy to determine the potentially available coverages.

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