Navigators Specialty Insurance Co. has prevailed in a coverage dispute with a Travelers Cos. Inc. unit, with a federal appeals court holding it is not obligated to contribute to coverage in a construction defect case, based on a policy exclusion.

St. Paul Mercury Insurance Co., a unit of Hartford, Connecticut-based Travelers, had issued a contractors commercial general liability policy to Dana Point, California-based D.J. Hickman & Son effective Nov. 1, 2003 to Nov. 1, 2004, according to court papers in St. Paul Mercury Insurance Co. v. Navigators Specialty Insurance Co.

New York-based Navigators issued a CGL policy effective Nov. 1, 2012, to Nov. 1 2013, under which Hickman was a named insured.

In March, 2010, a construction defect lawsuit was filed related to the construction of a San Clemente, California office building.  The Hickman firm had been retained as a subcontractor to construct a keystone retaining wall at the project, which was completed in 2000-2001, according to court papers.

St. Paul agreed to provide defense and indemnity, subject to a reservation of rights, then settled the case for $350,000, according to court papers. 

 It then filed suit against Navigators in U.S. District Court in Santa Ana, California, in May, 2013, asking that Navigators contribute a “fair and proportionate share to the settlement.”

The District Court ruled against St. Paul, which was upheld by a unanimous three-judge panel of the 9th U.S. Circuit Court of Appeals in San Francisco in a ruling filed Tuesday.

The appeals court agreed with the lower court that a policy exclusion for damage caused by “subsidence,” which is the gradual caving in or sinking of land, applies. “The underlying case against the subcontractor alleged only damage caused by ‘subsidence,’ as defined in the policy,” said the appeals court ruling.

“The policy excluded ‘subsidence’ for coverage, including the duty to defend,” the ruling said.  “Even if the initial complaint in the underlying case could be read to allege property damage other than that caused by subsidence, defendant’s investigation clarified that the only damage plaintiff claimed was damage caused by subsidence,” said the ruling.  “That is, the investigation eliminated any possibility of coverage.”