Tips for Renovating Existing Commercial Buildings

Make sure your insurance policy does not exclude coverage during renovation.

In TRB Investments, Inc. v. Fireman's Fund Ins. Co. (July 15, 2005), the California Court of Appeal affirmed the exclusion of coverage for losses caused by water damage where the building was vacant for more than 60 days during renovation.

Plaintiffs were a group of local businesses that develop and manage commercial real estate. Plaintiffs acquired a former bank building in Bakersfield and added it to their existing commercial insurance policy through Fireman's Fund. The policy was renewed during the renovation. The renewed policy contained a vacancy exclusion which excluded coverage for water damages where the building had been vacant for more than 60 consecutive days prior to the loss. After approximately 6 months of renovation during which the building was vacant, the building was damaged by a large amount of standing water caused by the failure of a water heater located on the building's top floor.

Plaintiffs tendered a claim to Fireman's Fund, which denied it on the basis of the vacancy exclusion. Plaintiffs sued, but the trial court enforced the exclusion and entered judgment for Fireman's Fund. The Court of Appeal affirmed the judgment holding, among other things, that "if the policy had wanted to include renovations as an exception to the vacancy exclusion, it would have said so."

For a comprehensive review of your policy, contact the author at (323) 6345566.

Is a General Contractor's Insurer Liable for Contribution to a Subcontractor's Insurer When the General Contractor Is Not Liable?

In Hartford Casualty Ins. Co. v. Mt. Hawley Ins. Co. (October 21, 2004), the California Court of Appeal said "no." Pursuant to a construction contract, the subcontractor agreed to indemnify the general contractor for claims and liabilities arising out of the subcontractor's performance and to obtain a commercial general liability (CGL) policy listing the general contractor as an additional insured. The general contractor also had his own CGL policy.

While construction was in progress, one of the subcontractor's employees was injured and sued the general contractor. The subcontractor's insurer provided a defense, settled the case and then sued the general contractor's insurer for onehalf of the defense and settlement expenses. The general contractor's insurer denied liability on the basis that under the contract's indemnity provision, the general contractor was not liable to the subcontractor. The trial court rejected the defense and issued judgment against the general contractor's insurer.

The Court of Appeal disagreed and reversed, holding that to permit contribution against the general contractor's insurer where the general contractor itself is not liable under the indemnity provision would "negate" the provision.

Is an Insurer Entitled to Reimbursement of Costs it Advanced to Defend its Insured under a Reservation of Rights?

In Scottsdale Ins. Co. v. MV Transportation (July 25, 2005), the California Supreme Court said "yes." Scottsdale advanced the costs of defending MV, its insured, in a third party action, but did so under a reservation of its right to recoup such costs. Thereafter, and while the third party action was pending, Scottsdale sued MV claiming that because its CGL policies issued to MV afforded no potential coverage for the third party action, it owed no defense and, therefore, it was entitled to reimbursement of the $340,000 it incurred in defense costs.

On appeal, the California Supreme Court agreed with Scottsdale, holding that to deny reimbursement would unjustly enrich and create a windfall for the insured "who did not bargain for a defense of noncovered claims."

Trial Court's Review of Insurance Commissioner's Denial of Claims Is Restricted to Evidence Actually Before the Commissioner at the Time of Denial.

In Garamendi v. Golden Eagle Ins. Co. (April 13, 2005), two former employees of an insolvent insurance company filed claims in the conservatorship proceedings to recover for alleged fraudulent inducement of their employment contracts, wrongful discharge, defamation and intentional infliction of emotional distress. After investigation, the Commissioner denied the claims. In the order to show cause proceeding brought in the trial court to review the Commissioner's denials, the employees submitted evidence that had not been considered by the Commissioner during his investigation. The trial court refused to consider the evidence noting that the trial court's review was restricted to whether the Commissioner had abused his discretion in denying the claims based on the evidence that was before the Commissioner at the time he denied the claims.

Notwithstanding this refusal, the trial court repeatedly offered to permit the employees to conduct discovery, ordered the Commissioner to lodge with the court the evidence he reviewed in his investigation, and offered to remand the matter back to the Commissioner for his review of the additional evidence and any other evidence gained during future discovery. When the employees declined to conduct discovery and declined the court's offer to remand the matter to the Commissioner, the trial court ruled that the Commissioner's rejections did not constitute an abuse of discretion based on the evidence before the Commissioner at the time the determinations were made.

The Court of Appeal agreed and affirmed, holding that the trial court was correct in refusing to consider supplemental evidence not considered by the Commissioner, because to allow "the trial court to secondguess the commissioner's judgment on the basis of evidence that was not before the commissioner would undercut the Legislature's assignment to the commissioner of primary responsibility for the determination of claims, since parties could withhold critical evidence from the commissioner in favor of a hearing in the trial court."

Weiss Beat is published by Michael R. Weiss, an attorney with the firm Epstein, Turner & Song, P.C. Mr. Weiss specializes in insurance litigation and regulation, insolvency, reinsurance and general business litigation. Write to or call the author at 5750 Wilshire Blvd., Suite 560, Los Angeles, California 90036. Tel: (323) 6345566. Fax: (323) 6345567. Email: [email protected]

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