Pacific Bay Masonry, Inc v. Navigators Specialty Insurance Company

Background

Pacific Bay Masonry, Inc. (PBM) performed concrete masonry unit work for a shopping facility under a subcontract with Deacon Corp. PBM was insured under commercial general liability policies issued by Navigators Specialty Insurance Company.

The facility’s owner sued Deacon and others in state court, alleging numerous construction defects, including problems involving waterproofing, masonry walls, planter boxes, and related property damage. Deacon later named PBM as a cross-defendant. PBM and Deacon asked Navigators to provide a defense and indemnity.

Navigators investigated the underlying claims and, on August 15, 2018, denied coverage. It relied on policy exclusions for damage to the insured’s own product and work. In 2021, PBM presented additional information indicating that another subcontractor’s silicone sealer or waterproofing work may have damaged the CMU walls. Navigators then agreed to defend PBM under a reservation of rights and reimbursed PBM for fees and costs incurred since the August 15, 2018 tender of defense.

PBM moved for partial summary judgment on Navigators’ duty to defend.

Legal standard

Summary judgment is appropriate when no genuine dispute exists about a material fact and the moving party is entitled to judgment under the law. The court does not weigh competing evidence or decide witness credibility at this stage.

Under California law, an insurer’s duty to defend is broader than its duty to indemnify. The duty arises when the allegations or facts known to the insurer create a possibility of coverage. The court compares the underlying complaint with the policy and also considers facts reasonably inferable from the complaint and facts known to the insurer when the defense is requested.

Policy exclusions and possibility of coverage

The policies provided coverage for sums PBM became legally obligated to pay because of bodily injury or property damage and gave Navigators a duty to defend covered suits. The policies included exclusions for property damage to the insured’s product and for property damage to the insured’s work arising from completed operations. The work exclusion did not apply when the damaged work, or the work causing the damage, was performed on the insured’s behalf by a subcontractor.

Navigators argued that the exclusions applied because the alleged damage was connected to PBM’s masonry work. The court rejected that argument. It explained that the exclusions presuppose that the insured’s own work or product was defective. They do not eliminate coverage when the damage may have resulted from another subcontractor’s work.

The information Navigators had when it denied coverage showed that waterproofing the tops of the CMU parapet walls and waterproofing the planter boxes were outside PBM’s scope of work. The underlying materials also described moisture intrusion, missing waterproofing, and damage involving the CMU walls and planter boxes. These facts created at least a possibility that another subcontractor’s work caused the damage. Because the insurer could not conclusively determine at the tender stage that PBM’s own defective work caused the damage, the work-product exclusions could not defeat the duty to defend.

The court also considered disputed statements about PBM’s scope of work and whether the underlying action involved damage to property other than PBM’s work. Those disputes did not eliminate the duty to defend because disputed facts must be considered in evaluating that duty, and the underlying complaint alleged consequential damage to other building components and other property.

Whether the claims involved covered property damage

Navigators argued that the underlying complaint did not allege covered property damage. The policy defined property damage to include physical injury to tangible property and loss of use of tangible property. California law generally requires physical injury to some part of a larger system beyond the defective component itself.

The court rejected Navigators’ argument at the duty-to-defend stage because Navigators could not definitively establish that PBM’s work was defective. The allegations that PBM’s work resulted in damage to other building components and other property were sufficient to create a possibility of covered liability.

Ruling

The court held that Navigators had a duty to defend PBM in the underlying construction-defect action. It granted PBM’s motion for partial summary judgment to the extent stated. The court did not reach PBM’s separate argument that Navigators owed defense and indemnity duties under the policy’s insured-contract provision.

Navigators’ objections to evidence submitted by PBM’s chief executive officer were denied as moot because the court did not rely on the challenged material.