Vought Construction Inc. v. Allied World Surplus Lines Insurance Company

Background

Vought Construction Inc. held five consecutive one-year insurance policies issued by Allied World Surplus Lines Insurance Company from November 1, 2017, to November 1, 2022. The policies covered certain property damage caused by an “occurrence,” defined as an accident, and required Allied World to defend Vought against suits seeking covered damages.

In an underlying Alameda County Superior Court action, Brennan Boblett asserted breach-of-contract and negligence claims against Vought. Boblett alleged that Vought performed construction work inadequately, caused delays, and performed work in an unworkmanlike manner. During discovery, Boblett identified damages including repair costs, additional rent, construction-mortgage interest, site costs, and amounts related to incorrect or repair-based work. He also described cracks in a nearby street that allegedly resulted from Vought’s use of excavation equipment and contributed to construction delays. Vought settled that action before trial, and the parties’ claims were dismissed with prejudice under their settlement agreement.

Vought repeatedly asked Allied World to provide a defense and reimburse legal costs. Allied World denied coverage, asserting that no covered “occurrence” took place and that policy exclusions barred coverage for defective work. Vought then sued Allied World for breach of contract, including a duty-to-defend and indemnification claim, and for breach of the implied covenant of good faith and fair dealing.

Duty to Defend

The court applied California law, under which an insurer must defend when the underlying complaint alleges liability potentially covered by the policy or might be amended to allege covered liability. To avoid that duty, the insurer must show that the underlying complaint could not, under any conceivable theory, raise an issue bringing it within coverage.

The court concluded that Vought established at least a possibility of covered property damage. Although Boblett’s cross-complaint did not specifically allege damage to the street, information available near the beginning of the underlying case referred to an eleven-month delay. The court determined that the allegations and available extrinsic evidence could support a theory that Vought caused physical damage to the street and that the damage contributed to the delay.

The court also concluded that the alleged construction delay could potentially qualify as loss of use of tangible property under the policies. The court rejected Allied World’s argument that delay-related damages were necessarily only economic losses because the alleged loss of rent was connected to alleged physical damage and loss of use. Allied World also did not show that the alleged events could not constitute an “occurrence.”

Defective Work

The court reached a different conclusion for damages based on defective work, including alleged problems with the pool excavation, foundation, concrete masonry-unit walls, and placement of construction elements. The policies’ j(5) and j(6) exclusions barred coverage for portions of property that needed restoration, repair, or replacement because of Vought’s work. The professional-services exclusion also applied to relevant professional services. The court therefore granted Allied World’s motion for summary judgment in part as to its duty to defend against allegations rooted in defective work product.

Other Claims and Disposition

Because the court found that Allied World owed Vought a duty to defend in the underlying Boblett action, it did not address the merits of Allied World’s request for summary adjudication on Vought’s indemnification and implied-covenant claims. The opinion states that those claims will be decided at trial.

The court granted Vought’s motion for summary judgment on its duty-to-defend claim. It denied Allied World’s motion for summary judgment on the duty to defend except concerning defective work product. It also denied Allied World’s motion for summary judgment on Vought’s indemnification and implied-covenant claims.