Brosamer & Wall, Inc. v. Indian Harbor Insurance Company

Background

Brosamer & Wall, Inc. constructed flood-protection improvements for the Santa Clara Valley Water District. Testing later showed that soil used in several levees did not meet the project’s required plasticity standards. The District rejected the work and required Brosamer to remove and replace the nonconforming soil. The remediation cost Brosamer $4.6 million. The District did not sue Brosamer, but Brosamer sought insurance reimbursement.

Indian Harbor insured Brosamer under professional and contractor pollution legal-liability policies covering 2017–18 and 2018–19. Zurich insured Brosamer under a builders-risk policy. Both insurers denied coverage, and both declined to defend to the extent they had a duty to do so. Brosamer sued the insurers and later moved for partial summary judgment. Indian Harbor moved for summary judgment, and Zurich sought additional discovery under Rule 56(d) before responding to Brosamer’s motion.

Indian Harbor Policies

The policies selected New York law, but the court applied California’s choice-of-law rules. It held that New York lacked the required substantial relationship or other reasonable basis to govern the policies. The project, the insured work, and the performance of the insurers’ obligations were connected to California, while the court found Indian Harbor’s asserted New York contacts insufficient. California law therefore governed both policies.

The court held that the claimed $4.6 million remediation expense was not a covered “professional loss.” The policy excluded costs incurred by the insured to redo, change, supplement, or fix its own work or services. Because the District demanded a remediation plan and replacement of the nonconforming soil, the court held that the main expense Brosamer sought was expressly excluded. The court did not need to decide whether Brosamer’s notice of the District’s claim effectively triggered professional-loss coverage under the 2017–18 policy.

The court separately held that rectification-expense coverage under the 2017–18 policy was barred because Brosamer did not provide timely notice under that coverage part. The extended reporting period for professional-loss claims did not apply to rectification-expense coverage, and the court found that Brosamer reported the claim three months late. The court did not decide whether rectification-expense coverage was available under the 2018–19 policy.

For the 2018–19 policy, Indian Harbor argued that Brosamer had known of circumstances that could lead to a claim before the policy began and had made material misrepresentations by answering “No” to questions in the renewal application. The court held that factual disputes required a trial. A fact finder could reasonably conclude either that Brosamer should have foreseen a covered loss or that it reasonably believed no covered loss would occur. The same factual dispute defeated Indian Harbor’s misrepresentation argument.

The court also held that the District’s claim involved an act, error, or omission in “professional services.” The policy listed value engineering, field changes to design, and constructability reviews as professional services but did not define those terms. The court found the term “value engineering” ambiguous and interpreted it in favor of coverage. Brosamer’s process of developing and testing a soil blend to meet the project’s specifications fit the parties’ competing definitions of value engineering.

Zurich Builders-Risk Policy

The Zurich policy covered direct physical loss of or damage to covered property, including property under construction and temporary works. Zurich argued that Brosamer had not shown the required physical loss or damage. The court did not reach that threshold issue because it held that the policy’s “cost of making good” exclusion applied.

The exclusion barred costs that would have been incurred to correct faulty or defective materials, among other conditions. The parties agreed that the soil was “material.” Applying the ordinary meaning of “defective” in the context of the policy and the construction contract, the court held that the nonconforming soil constituted defective material. The cost-of-making-good exclusion therefore defeated coverage for the claimed soil-remediation expense.

Disposition

The court granted summary judgment on these issues: California law governed both policies; professional-loss coverage was barred because the claimed loss fell within the policy’s exclusion; rectification-expense coverage was barred under the 2017–18 policy because notice was untimely; and the claim involved professional services.

Triable issues remained concerning whether the known-circumstances exclusion barred coverage under the 2018–19 policy and whether Brosamer made misrepresentations in its renewal application. Indian Harbor’s motion for summary judgment was denied as to those issues. Rectification-expense coverage under the 2018–19 policy remained open, subject to the late-notice argument.

Brosamer’s motion for partial summary judgment against Zurich was denied because the cost-of-making-good exclusion defeated coverage. Zurich’s and Indian Harbor’s motions under Rule 56(d) were both denied.