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California’s Fourth District Court of Appeal held an insurer lacked a coverage obligation for a suit between co-insureds. Roel Construction Co., Inc. (“Roel”) was the general contractor on a project in San Diego. Roel subcontracted the project’s drywall work to Great Western Drywall (“Great Western”). The subcontract required Great Western to indemnify Roel from all claims arising from Great Western’s performance. Interstate insured Roel under a commercial general liability (“CGL”) policy. Great Western was a named insured on the Interstate policy as Roel’s subcontractor.
Great Western sued Roel over a payment dispute. Roel then cross-complained alleging Roel overpaid Great Western and that Roel had to hire others to finish and correct Great Western’s work after it abandoned the project. Roel also alleged Great Western negligently caused property damage to other work on the project.
Great Western tendered the defense of Roel's cross-complaint to Interstate. Interstate denied the tender based, in part, on the cross suits exclusion which provides:
CROSS SUITS EXCLUSION
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
This policy does not apply to any claim or suit for injury or damage by one Insured against another Insured.
This exclusion does not apply to... actions to apportion liability between Insured's [sic] where any Insured has been sued for a covered loss.
The underlying action between Roel and Great Western resulted in a net recovery to Great Western of $11,258. Great Western sued Interstate for failure to defend and indemnify and breach of the implied covenant of good faith and fair dealing. Interstate successfully moved for summary judgment based on the cross-suits exclusion. The trial court granted the motion. Great Western appealed.
The court of appeal affirmed holding that, under general principles of contract interpretation, the cross suits exclusion precluded Interstate’s obligation to defend Great Western against Roel’s cross-complaint. The cross-complaint was by one insured (Roel) against another insured (Great American).
The court found that Roel’s cross-complaint did not fit the exception to the cross suits exclusion because it could not be characterized as an action for indemnity or apportionment. The cross-complaint alleged Roel paid Great Western more than what was due under the subcontract; Great Western abandoned the job before completion; and Great Western failed to correct its defective work. This caused Roel damage. The cross-complaint did not allege any third party property damage required for indemnity and apportionment. The language in the exception to the cross suit exclusion “has been sued” requires that the cross-complaint be preceded by a third party lawsuit. As there was none, the exception did not apply.
The court also rejected Great Western’s argument the cross suits exclusion negated the subcontract’s indemnity agreement. The court held the policy’s insuring agreement controls, not the subcontract’s language. The court of appeal affirmed the trial court’s summary judgment in Interstate’s favor finding that Interstate did not breach the contract and, therefore, could not be liable for breach of the implied covenant.
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This opinion is not final. It may be withdrawn from publication, modified on rehearing or the California Supreme Court may grant review. Should any of these events take place, the opinion would be unavailable for use as authority in other cases. This and other publications are available at www.gordonrees.com.
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