Self-Insured Retention and the Multi-Home Construction Defect Action: Is Each House a Separate Claim?

In Clarendon America Ins. Co. v. North American Capacity Ins. Co., Case No. E048176 (Fourth Appellate District, Div. Two, July 7, 2010), the Court of Appeal reversed a trial court entry of summary judgment in favor of defendant insurer North American Capacity (NAC) concerning the application of the policy’s self-insured retention (“SIR”) clause and the insured’s reasonable expectation of coverage. 

 The case involved a construction defect action that eventually included 43 homes and 73 homeowners in a large housing development.  The builder, Tanamera Homes, tendered its defense to both Clarendon and NAC, as the consecutive general commercial liability insurance providers for the development.  Although the parties eventually agreed that NAC was only responsible for the 8 homes completed after the inception of its policy, NAC refused to provide a defense claiming that the insured had not paid the SIR of $25,000 “per claim,” which it insisted applied for each home in the action.  After providing a defense to Tanamera, Clarendon sued NAC for contribution.

NAC successfully moved for summary judgment, arguing that it did not have a duty to defend because the insured never paid the applicable SIR.  Pursuant to NAC’s policy, NAC had “no duty to defend or indemnify unless and until the amount of the ‘Retained Limit’ is exhausted.”  Additionally, the policy stated that the SIR “applies to each and every claim made against any insured, to which this insurance applies, regardless of how many claims arise from a single ‘occurrence’ or are combined in a single ‘suit.’”  NAC argued that each home was a separate claim, and, thus, it had no duty to defend until Tanamera paid its SIR of $200,000 (8 homes at $25,000 each).

 The Court of Appeal reversed the trial court’s decision, determining that NAC had failed to show that the term “claim,” in its ordinary and popular sense, could only have referred to each and every home in the defect action.  The court held that the policy definitions, and use of the word “claim” throughout the policy, could lead to varying conclusions about whether a suit involving many homes could represent a single claim.  The court based its decision on the fundamental principal that contract interpretation must reflect the “mutual intention” of the parties.  The mutual intent must first be derived solely from the written provisions of the contract, in their “ordinary and popular meaning.”  If ambiguity is found, the terms can be resolved in the insureds’ favor, but only to the extent consistent with the insureds’ objectively reasonable expectations. 

 Next, in the absence of a compelling interpretation of claim, the court turned to whether NAC had shown that Tanamera could not have reasonably expected a single SIR payment to apply to multiple homes in a single suit.  The court held that NAC had not offered any evidence of whether or not Tanamera had a reasonable expectation that the SIR would apply only once for a multi-home construction defect action. 

 Moreover, the court suggested that if Tanamera believed this insurance policy covered all 450 homes in the development, an expectation of a single SIR payment in a multi-home suit was reasonable.  Indeed, the court pointed out, the alternate conclusion offered by NAC – that Tanamera paid $404,320 in premiums for just $2 million in coverage that, in the event of a development-wide suit, would only take effect after $11.25 million in SIR payments – seems like the far less reasonable expectation.