The California Court of Appeal, Fourth Appellate District, reversed an order granting summary judgment to a defendant insurer in an action seeking contribution for the costs of defending a construction defect action involving multiple homes on the basis that the insured had not satisfied a $25,000 per claim self-insured retention ("SIR") in the defendant insurer's policy. The Court of Appeal reversed, holding the defendant insurer failed to show the insured could not have had an objectively reasonable expectation the SIR applied only once to a construction defect action involving numerous homes.
Eagle Ranch Residential, LLC, doing business as Tanamera Homes and Resort Communities, LLC ("Tanamera"), built a residential development known as Shenandoah at Eagle Ranch ("Eagle Ranch"). Clarendon America Insurance Company ("Clarendon") and North American Capacity Insurance Company ("NAC") insured Tanamera under consecutive liability policies. The NAC policy included an SIR endorsement that required Tanemera to pay a $25,000 SIR that applied "to each and every claim made against any insured?regardless of how many claims arise from a single 'occurrence' or are combined in a single 'suit'."
An Eagle Ranch homeowner, Leslie Bradley, filed a putative class action lawsuit ("the Bradley Action") regarding alleged defects in the Eagle Ranch homes. The class allegations were dismissed and, ultimately, the Bradley Action involved the owners of 43 homes. Tanamera tendered the Bradley Action to Clarendon and NAC. Clarendon agreed to defend under a reservation of rights, but NAC refused the tender on the ground it had no duty to defend or indemnify Tanamera until Tanamera satisfied its SIR.
Clarendon sued NAC for declaratory relief, equitable contribution, and partial equitable indemnity. NAC filed a motion for summary judgment arguing it had no duty to defend Tanamera because the SIR endorsement in its policy applied to each of the eight homes at issue in the Bradley Action to which its policy applied. Tanamera would therefore have to spend $200,000 ($25,000 times eight) of its own funds in defense or settlement of the Bradley Action before NAC's duty to defend Tanamera would arise. Because Tanamera had not met the SIR, NAC argued it did not owe Clarendon contribution or indemnity.
The trial court agreed and granted NAC's motion. Clarendon appealed. Clarendon argued Tanamera only had to satisfy a single $25,000 SIR, which it did. Clarendon submitted evidence that the Bradley Action was a "collective" action involving common questions of law and fact for all homeowners who did not seek damages on a per-home basis or present individual settlement demands. In addition, the action was defended in its entirety and only one settlement was paid to resolve the action. Clarendon argued the Bradley Action involved a single demand for payment and therefore one claim. Clarendon made a showing that Tanamera had spent $25,000 in attorneys fees and had satisfied the SIR with those payments.
NAC argued the policy distinguished the term "claim" from the term "suit." "Suit" was defined in the NAC policy but "claim" was not. Focusing on the language of the SIR providing the SIR applied to "each and every claim?regardless of how many claims?are combined in a single suit," NAC asserted the SIR contemplated more than one "claim" may be asserted in a single "suit" and so the terms are not synonymous.
The court noted both insurers relied on the purportedly "ordinary and popular" meaning of "claim" but differed as to what that meaning was. The court reasoned disputed policy language must be examined in context and with regard to its function in the policy, which requires a consideration of the policy as a whole, the circumstances of the case in which the claim arose, and common sense. The court did not agree with Clarendon that the Bradley Action must be a single claim because it involved only one demand for payment. But, it also found NAC's reasoning flawed when the terms of the "Defense of Claims or Suits" provision were considered because that provision used "claim" and "suit" synonymously.
Because the NAC policy does not define the term "claim," the SIR endorsement could be read to contemplate that a single suit can represent one or more claims. The court found a reasonable insured in Tanamera's position may have understood that the term "claim," as used in the SIR endorsement, was synonymous with "suit."
The court noted NAC had offered no extrinsic evidence to show the objectively reasonable expectations of Tanamera as to the meaning of "claim." The court noted the record incidentally showed the premium NAC charged for its policy was over $400,000. The policy potentially covered as many as 450 homes with limits up to $2 million. Assuming the policy covered 450 homes, if the SIR applied on a "per claim" basis for each home, that would mean Tanamera paid $400,000 in premiums but would potentially have to pay an additional $11.25 million (450 times $25,000) in defense or settlement expenses before it could access the $2 million in limits the NAC policy afforded, even for purposes of the duty to defend.
The court concluded NAC did not meet its burden of showing its insured could not have had an objectively reasonable expectation that the $25,000 "per claim" SIR would apply only one time to a single construction defect lawsuit involving numerous homes. Because NAC failed to meet this burden, the appellate court reversed the trial court's order granting NAC summary judgment and remanded the matter back to the trial court.
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