A recent Court of Appeals decision refused to interpret a $25,000 per claim (Self Insured Retention) as applying to each home in a multi-home construction defect lawsuit because the policy language did not unambiguously inform the insured that the SIR would be applied on a per-home basis. Clarendon American Insurance Company v. North American Capacity Insurance Company (2010) 186 Cal.App.4th 556.
Tanamera Homes was the GC/Developer for a 450 home project, Eagle Ranch, in Victorville. Tanamera had a CGL policy with Clarendon, followed by a CGL policy with North American Capacity (NAC). Its policy with NAC applied only to claims involving the Eagle Ranch project. The NAC policy had a $25,000 "per claim" SIR. The pertinent SIR language was:
"The Self Insured Retention applies to each and every claim made against any insured, to which this insurance applies, regardless of how many claims arise from a single 'occurrence' or are combined in a single 'suit.'"
Tanamera was sued by 73 homeowners, owning 43 homes, in one action titled "Bradley v. Tanamera Homes." Tanamera tendered its defense to both Clarendon and NAC. Only eight of the 43 homes in the action fell under the NAC policy. Clarendon defended the entire action and settled it, eventually, for $690,000. NAC refused to defend the action unless and until Tanamera tendered an SIR payment of $200,000, representing $25,000 for each of the eight homes in the action which fell under NAC's policy. Tanamera was willing to tender $25,000, but not $200,000. It maintained that the $25,000 "per claim" SIR did not apply to each home in the lawsuit, but rather to the lawsuit as a whole.
Clarendon brought a declaratory relief action against NAC to force NAC to reimburse its equitable share of Clarendon's defense and indemnity expenses. NAC argued that no defense obligation arose because its policy, by providing that a $25,000 per claim SIR applies 'regardless of how many claims are combined in a single suit,' unambiguously informed the insured that the $25,000 SIR would be collected as to each home involved in a construction defect lawsuit. The trial court agreed and entered summary judgment in favor of NAC.
On appeal, the trial court's ruling was reversed. The appellate court disagreed that the SIR language was unambiguous. Nowhere in the NAC policy was the term "claim" defined. Absent a clear definition, the court reasoned that, in the context of a multi-home construction defect case, a "claim" might refer to only the suit itself, to each home, to each homeowner, or to some other benchmark.
The court noted the NAC policy provided $2,000,000 of coverage, for which Tanamera paid a premium of $404,320. Further, the policy applied only to the Eagle Rock project, which contained 450 homes. Therefore, for Tanamera to have knowingly accepted a $25,000 per home SIR for coverage at the Eagle Rock project:
"[T]hat would mean the insured contemplated the $404,320 premium plus SIR's totaling $11.25 million (450 times $25,000) in exchange for $2,000,000 in maximum liability coverage on 450 homes before NAC had a duty to defend the insured in a single action involving all 450 homes."
The Court considered it unlikely a business entity would knowingly agree to pay $11,654,320 to obtain $2,000,000 of coverage. Accordingly, it held that NAC had not proved its policy language unambiguously informed the insured the SIR would be collected on a per-home basis in a multi-home construction defect action.
This case establishes that clear language is needed to inform an insured as to how an SIR or a deductible will be applied in a multi-home CD case. If it will be applied on a per-home basis, the language should say exactly that. Otherwise, the insured may not understand the coverage he is purchasing, and a court may not enforce a "per home" SIR or deductible. Kring & Chung's attorneys are available to discuss contractual language issues such as these on a pro-active basis.
Paul T. McBride is a Partner with Kring & Chung, LLP's Sacramento, CA office. He can be contacted at (916) 266-9000 or at firstname.lastname@example.org.