Mt. Hawley Insurance Company v. McAtamney

Background

This case concerns insurance coverage for an underlying construction-defect lawsuit. John McAtamney, a general contractor doing business as Kilrea Construction, Inc., was hired by Jeffrey Horowitz for a home-renovation project in 2016. Kilrea obtained six consecutive commercial general liability policies from Mt. Hawley Insurance Company between 2016 and 2021.

The policies generally covered amounts the insured became legally obligated to pay because of bodily injury or property damage arising from contractor operations. They also excluded coverage, and excluded any duty to defend, for claims involving bodily injury, property damage, or personal and advertising injury arising directly or indirectly from a breach of express or implied contract or warranty.

After Horowitz discovered alleged defects in the work, he sued Kilrea in San Francisco Superior Court. His claims were for breach of contract, breach of implied warranty, negligence, negligent supervision, and declaratory relief. The allegations included overbilling for defective work, defective construction, improper painting, defective installation, and other claimed damages.

Mt. Hawley initially agreed to defend Kilrea while reserving the right to deny coverage, deny indemnity, or withdraw from the defense if it later became apparent that none of the claims were covered. Mt. Hawley later informed Kilrea that it had no contractual duty to defend or indemnify it and then moved for partial summary judgment.

Legal standard

Summary judgment is a ruling without a trial that is proper when there is no genuine dispute about a fact that could affect the outcome and the moving party is entitled to judgment under the law. The court must view the evidence favorably to the party opposing the motion.

Under California law, interpreting an insurance policy is generally a legal question for the court. California recognizes a broad duty to defend when a claim creates a potential for coverage, but an insurer has no duty to defend when there is no potential for recovery on a covered claim.

Court’s analysis

The court focused on the exclusion for claims arising directly or indirectly from a breach of contract or warranty. It explained that California courts interpret “arising out of” broadly, requiring only a slight connection or incidental relationship between the alleged injury and the excluded risk. The legal theory used to label a claim does not control; the underlying facts do.

The court concluded that all five of Horowitz’s claims shared the same operative facts: Kilrea allegedly breached its agreement to properly construct the home. The breach-of-contract and breach-of-implied-warranty claims directly asserted contract or warranty rights. The negligence and negligent-supervision claims were also connected to the alleged contractual failures because they referred to duties to perform the work with care, comply with contract documents, and supervise employees and subcontractors. The declaratory-relief claim likewise arose from the same alleged conduct.

The court rejected Kilrea’s arguments that Mt. Hawley’s interpretation was too broad, that the interpretation would make the insurance coverage illusory, and that Mt. Hawley had not cited relevant authority. The court reasoned that the exclusion did not eliminate coverage for every lawsuit involving a contract or every injury arising from work performed under a contract. It therefore was not so broad as to make the coverage illusory.

Disposition

The court held that the breach-of-contract exclusion applied and precluded any potential for coverage for each claim in Horowitz’s lawsuit. It granted Mt. Hawley’s motion for partial summary judgment and stated that Mt. Hawley had no duty to defend Kilrea. Although Mt. Hawley’s motion also argued that it had no duty to indemnify Kilrea, the opinion’s conclusion specifically addresses the duty to defend and does not separately state a ruling on indemnity.