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Court rules for insurer in construction defect case

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SANTA ANA, Calif.—Only a named insured, not an additional insured, can satisfy a general liability policy’s self-insured retention to trigger coverage, a California appellate court has ruled in a construction defect case.

The dispute in Forecast Homes Inc. et al. vs. Steadfast Insurance Co. stemmed from a developer’s requirement that subcontractors agree to defend and hold it harmless for any liability arising from the subcontractors’ work. Forecast, the developer, also required subcontractors to name it as an additional insured on their general liability policies purchased from Steadfast.

When several homeowners sued Forecast in 2001 through 2003, Steadfast maintained that the subcontractors did not pay their policies’ self-insured retentions, which was a coverage precondition. It argued that only the named insured, not Forecast, could satisfy the policy’s retention and trigger coverage, court records state.

Forecast then sued Steadfast for breach of contract and good faith. Forecast argued that policy endorsements permitted an additional insured to satisfy the self-insured retention by paying defense costs in the underlying action. It also argued that Steadfast‘s position violated public policy and rendered the coverage illusory.

A trial court, however, concluded the policies were not ambiguous, not against public policy and not illusory. On Jan. 12, California’s 4th District Court of Appeal agreed. The appeals court also noted that “Forecast is protected by its hold harmless agreements with its subcontractors, which will require the subcontractors to provide a defense and pay damages regardless of insurance coverage.”

The state appellate court granted Steadfast’s request to publish the opinion on Thursday.