It has long been the law in California that an insurer’s duty to defend is broader than the duty to indemnify and that the mere possibility of coverage triggers a duty to defend.   Nevertheless, insurers still periodically ignore this clear principle and attempt to narrow the scope of the duty to defend.  Recently, a Federal District Court issued a reminder to a wayward insurer.

In Pacific Bay Masonry, Inc., v. Navigators Specialty Insurance Company, (N.D. Cal., Sept. 16, 2021, No. C 20-07376 WHA, 2021 WL 4221747 (“Pacific”)), the Court was asked to assess whether a tender of defense by a concrete masonry subcontractor to its insurer for a construction defect action required a defense.   Pacific Bay Masonry, Inc. (“PBM”) installed concrete masonry units (also known as “CMUs”) at a new retail shopping center in Oakland, California.  The subsequent owner of the retail center filed suit against the general contractor for alleged construction defects, including “efflorescence of roof deck at CMU wall” and “improper waterproofing and flashing of the CMU block wall."   The general contractor filed a cross-complaint against PBM.

PBM tendered the defense of the case to Navigators Specialty Insurance Company (“Navigators”) along with copies of a preliminary defect list, a description of defects, interrogatory responses and an expert witness damage analysis.  Navigators denied coverage and a duty to defend citing to the work product exclusion of the policy.  PBM asked Navigators to reconsider.  Navigators held firm on its denial. Two years later, PBM filed suit.

In the litigation, PBM sought summary judgment on the duty to defend.  Navigators argued that the work product exclusion applies if the alleged defect damages are minimally causally linked to the insured’s work (here, the CMUs).  Navigators further explained that it denied coverage to PBM on the basis that PBM’s work was defective and had not yet caused any physical injury to tangible property.

The Court disagreed with Navigators on both counts, finding that:  (1) the bare possibility that an external source is responsible for the subcontractor’s work being damaged triggers an insurer’s duty to defend despite standard work product exclusions; (2) this bare possibility is to be considered in a duty to defend analysis from the facts the insurer knows or becomes aware of at time of underlying lawsuit or time of tender; (3) disputed facts must be considered in the duty to defend analysis; and (4) the insurer has a duty to defend until the insurer can definitively show that the insured’s work is the sole defective source.

The Court reasoned that a bare possibility of coverage can arise when the work of multiple subcontractors overlaps to an extent that it is unclear as to which subcontractor’s defective work led to the property damage.

The lesson for builders and contractors is that even though the duty to defend is extremely broad, and insurers clearly know this, they will still wrongfully deny tenders of defense in construction defect actions.  This case is another in a long line of cases that policyholders can use to obtain a defense of a construction defect lawsuit if there is a mere possibility of coverage.