In California, Looks Really Do Matter: Visual Appearance and Internal Consistency of Policy Language Supports Application of Exclusion

By Kimberly Forrester, Sedgwick San Francisco

In Yu v. Landmark American Ins. Co., 2014 WL 4162365 (Cal. Ct. App. Aug. 22, 2014)*, the California Court of Appeals relied on the visual appearance and internal consistency of an endorsement entitled “EXCLUSION – YOUR PRIOR WORK” to find that the endorsement precluded coverage for construction defect claims asserted against a subcontractor for work performed over a year before the policy’s inception.

Yu, a developer, entered into a contract with a general contractor for the construction of a hotel.  The general contractor then entered into a subcontract with C&A Framing Company (“C&A”), but fired C&A before it had completed all of the work required by the subcontract. After May 2003, C&A never returned to the construction site.

Landmark American Insurance Company (“Landmark”) issued C&A a commercial general liability policy for the period of September 18, 2004 to September 18, 2005.  The policy contained an endorsement entitled “EXCLUSION – YOUR PRIOR WORK,” which provided that the insurance did not apply to bodily injury, property damage, or personal and advertising injury arising out of C&A’s work prior to 9/18/04.

In 2004, the developer sued C&A for alleged construction defects, and C&A tendered its defense to Landmark.  The insurer declined the tender on the basis of the Your Prior Work Exclusion and the Policy requirement that the outset of damage occur during the policy period.  Although C&A did not dispute the declination, the developer brought suit against Landmark and other insurers, alleging that C&A had assigned to her all rights against any insurer.  The developer argued that Landmark could not rely on the prior work exclusion because it was ambiguous and should be construed in favor of coverage.  The developer also argued that Landmark had failed to consider certain facts when denying coverage.  Specifically, the developer argued that the language of the prior work exclusion could be construed to modify the term “property damage,” such that property damage rather than prior work was excluded.

Rejecting the developer’s arguments, the court found that the heading of the endorsement, set out in all caps and boldface type, was prominent, clear, explicit and did not require any technical interpretations.  Finding that the developer’s interpretation was not objectively reasonable, the court also relied on the exclusion for pre-existing damage or injury to conclude that the plaintiff’s interpretation would be “wholly redundant and constitute surplusage” if the prior work exclusion was interpreted to preclude prior property damage.  Based on the clear application of the prior work exclusion, the court also rejected all of the developer’s arguments regarding Landmark’s failure to properly investigate or defend the matter.

The court’s holding in Yu is an important reminder for insurers regarding the visual appearance and internal consistency of their policies.  The court’s reliance on the caps and boldface type as well as the title of the “YOUR PRIOR WORK” exclusion illustrates the significance of carefully crafted and visually clear policy headings.  Further, the court’s secondary support in the policy’s pre-existing damage exclusion reinforces that courts will interpret the policy as a whole.  Thus, when limiting and exclusionary language is internally consistent, insureds will face an uphill battle in their efforts to broadly construe policy language for purposes unintended by the insurers.

 

*The opinion is unpublished

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