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Insurer Has No Duty to Defend Insured Developer Against Suit Alleging Fraudulent Concealment of Construction Defects

A commercial general liability insurer had no duty to defend its insured, a developer, against a suit alleging fraudulent concealment of construction defects. (Swiss Re International SE v. Comac Investments, Inc. (2016) --- F.Supp.3d ---- 2016 WL 5394087)

Facts

Comac Investments, Inc. ("Comac") was a developer that built a condominium project known as "Portola Drive." The project was completed in 1996.

In 2014 (approximately 18 years after the project was completed), the Portola Drive Homeowners Association ("Association") sued Comac for alleged construction defects, including reverse sloped decks, negative sloping of wall caps, open roof eaves, and lack of sealant on lag bolts. The Association alleged that those defects resulted in significant water damage to the premises.

Pursuant to California Code of Civil Procedure section 337.15, lawsuits for latent construction defects are subject to a ten-year statute of limitations which commences upon substantial completion of the construction. The only exception to that statute of limitations is section 337.15(f), which allows a lawsuit for latent defects to be filed after ten years if the lawsuit is based on "willful misconduct or fraudulent concealment." In order to avoid the ten-year statute of limitations, the Association alleged that during construction, Comac's management personnel observed defective workmanship by subcontractors working on the subject premises, but in order to save money, chose not to correct the defects. In other words, the Association alleged that Comac's conduct fell within the "willful misconduct or fraudulent concealment" exception to the ten-year statute of limitations.

Comac was the named insured on four consecutive general liability policies issued by the predecessor to Swiss Re International SE ("Swiss Re"). Comac tendered defense of the construction defect action to Swiss Re, which agreed to defend Comac under a reservation of rights.

Swiss Re then filed a federal court declaratory judgment action against Comac, seeking a determination that Swiss Re had no duty to defend or indemnify Comac in the underlying construction defect action. Swiss Re moved for summary judgment.

Holding

The federal district court, applying California law, granted summary judgment in favor of Swiss Re and held that Swiss Re had no duty to defend or indemnify Comac in the construction defect action.

The court noted that in the construction defect action, the Association alleged that Comac willfully and fraudulently covered up construction defects in order to avoid the cost of fixing those defects. Those allegations of willful misconduct and fraudulent concealment were not allegations of an "occurrence," or "accident," as required by the insuring agreement of the Swiss Re policies. Absent an "occurrence," or "accident," the Swiss Re policies did not apply.

Further, the Association's allegations that Comac engaged in willful misconduct and fraudulent concealment triggered the Swiss Re policies' exclusion for property damage which was "expected or intended" by the insured. According to the federal district court, the policies' exclusion for injury that was "expected or intended" by the insured operated the same way as Insurance Code section 533's exclusion for losses caused by the "willful act" of the insured. The court concluded that the Association's allegations of intentional misconduct by Comac fell within both the express exclusion found in the policies and the implied exclusion set forth in the statute. For this independent reason, the Swiss Re policies did not apply.

Comment

The only way the plaintiff in the underlying action could get around the ten-year statute of limitations was to plead "willful misconduct" or "fraudulent concealment" by the insured. That, in turn, effectively eliminated any possibility of coverage. In other words, either the plaintiff would prevail in the underlying action and the insured's liability would not be covered, or the insured would prevail in the underlying action and the insured would not have any liability at all. However, in either scenario, the insurer would not have any obligation to indemnify the insured. Since there was "no potential" for indemnity, there was no duty to defend.

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