The Travelers Indemnity Company of Connecticut v. I.C. Refrigeration Service…

Background

Travelers filed this insurance-coverage action against I.C. Refrigeration Service Inc. and Flory Construction, Inc., seeking declarations that it had no duty to defend or indemnify them in an underlying lawsuit pending in Alameda County Superior Court. Flory contended that it was covered as an additional insured under I.C.’s policy.

The underlying lawsuit involved construction work, including heating, ventilation, and air-conditioning work. Highbridge’s cross-complaint alleged that Flory’s work caused problems with the heating, ventilation, and air-conditioning system and sought more than $1.5 million in damages, including loss of use and lost rents. Travelers had accepted the tenders of defense for I.C. and Flory and appointed defense counsel, while continuing to defend them under a reservation of rights.

Motion and Analysis

Flory moved to dismiss Travelers’ declaratory-relief action or, alternatively, to stay it until the underlying lawsuit ended.

The court held that the declaratory-relief action presented an actual controversy even though the underlying state-court case was still pending. Under California law, an insurer has a broad duty to defend when the underlying allegations create any potential for coverage. The court evaluates that duty using the underlying complaint and the policy terms, resolving doubts in favor of the insured.

The policy covered property damage, including physical injury to tangible property and loss of use of tangible property that was not physically injured. The court concluded that the allegations about tenants threatening to leave and terminate their leases could potentially involve covered loss of use. The allegations also could potentially involve physical injury to tangible property caused by defective heating, ventilation, and air-conditioning work. Because a potential for coverage was enough to trigger the duty to defend, Travelers could not obtain a declaration that it had no duty to defend.

The court also rejected Travelers’ reliance on several policy exclusions. It concluded that Travelers had not shown conclusively that the exclusions barred all potential coverage for the claims against Flory.

Ruling

The court granted Flory’s motion to dismiss without prejudice as to Travelers’ claim seeking a declaration that it had no duty to defend Flory. The court determined that Travelers had a duty to defend Flory based on the potential for covered property damage.

The court did not decide the duty to indemnify. Because that duty depends on the underlying liability and damages being established, the court stayed the indemnity issue pending final resolution of the underlying lawsuit. The parties were ordered to file a written status update by April 3, 2026.