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INSURANCE NOTES

CGL Policy's Duty To Defend Any “Suit” Includes Calderon Act Proceedings

08.11.2010

In a case of first impression, the California Court of Appeal held on July 28, 2010 that the provision in Commercial General Liability (CGL) insurance policies requiring the insurer “to defend the insured against any ‘suit’ seeking . . . damages” includes the duty to defend the insured in proceedings under California’s Calderon Act, Civil Code § 1375 et seq.

The Calderon Act requires a common interest development association to satisfy certain dispute resolution requirements before filing a lawsuit for construction or design defects against a builder, developer or general contractor. In Clarendon America Ins. Co. v. Starnet Ins. Co., 2010 WL 2904995 (2010), California’s Fourth Appellate District noted that although the Calderon Process takes place before a complaint is filed and does not result in a judgment or court-ordered payment of money, it is an integral part of construction defect litigation initiated by homeowners associations. The Court determined that the Calderon Process is “a civil proceeding in which damages . . . are alleged” within the definition of “suit” in standard CGL policies. 

In Clarendon, the homeowners association of a residential development served a “Notice of Commencement of Legal Proceedings” on the developer, Centex, pursuant to Civil Code § 1375 et seq., initiating the Calderon Process. Centex was named as an additional insured under various subcontractors’ policies. A defending insurer sued other subcontractors’ insurers, including Starnet, for contribution. Starnet asserted that it did not have a duty to defend or indemnify Centex because the Calderon Process was not a “suit” under its policies.

The Court of Appeal noted that case law established that “suit,” when it is not defined in the policy, is interpreted to mean “a court proceeding initiated by the filing of a complaint.” However, standard CGL policy forms after 1986, like Starnet’s policies, defined “suit” to include “a civil proceeding in which damages because of . . . ‘property damage,’ . . . to which this insurance applies are alleged.” The Court found that the Calderon Process was “a civil proceeding” as defined by the policies, reasoning that it was the mandatory first step in a continuous litigation process, was incorporated into the complaint for damages, included discovery-like procedures, and had binding effects on any subcontractor that failed to attend or participate in dispute resolution.

Therefore, the Court concluded that Starnet owed a duty to defend Centex during the Calderon Process. This decision illustrates yet again, notwithstanding case law on common terms, the specific language in issue controls the interpretation of policies. Given the broader definitions of “suit” in post-1986 CGL policies, insurers of other types of entities, not only builders, developers and contractors, may be required to defend disputes before those disputes reach the courthouse.

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