California Federal Court Holds Scope of Duty to Defend Is Determined by the Language of the Contract

The Pen is Mightier Than the SwordIn Harper Construction Co. v. National Union Fire Insurance Co. of Pittsburgh, No. 3:18-CV-00471-BAS-NLS (S.D. Cal. Mar. 28, 2019), the Southern District of California rejected an insured’s attempt to expand a CGL policy’s definition of “suit” to encompass mere demands without a formal proceeding for damages.

In 2007, the federal government awarded a contract for a military training facility in Fort Sill, Oklahoma, to an insured general contractor. After structural deficiencies appeared in the facility, the insured began receiving complaints from the government. Following informal attempts to resolve the issues, the government threatened to escalate the matter formally, prompting the insured to file a claim with its CGL carrier.

The insurer denied coverage, stating that there was no duty to defend because the claim at issue did not involve a “suit” as defined by the policy. The insured responded by filing suit in California state court seeking declaratory relief and damages for, among other things, breach of contract. The insurer removed the case to federal court.

The insurer argued that it had no duty to defend because the government’s demands that the insured remedy the issues with the facility are just that, demands, whereas the policy’s duty to defend is limited to defending a “suit,” defined as “a civil proceeding” that includes “an arbitration proceeding” or “any other alternative dispute resolution proceeding.” The insured argued that the government’s demands constituted a “suit” under the “alternative dispute resolution proceeding” prong of the definition.

The court rejected the insured’s position, reasoning that:

Simply put, in applying the first portion of the Policy’s definition of “suit,” there is no evidence that [the insured] was faced with a “civil proceeding in which damages … are alleged” under the CDA — or otherwise — that triggered [the insurer]’s duty to defend. … Nor does [the insured] demonstrate [the insurer] had a duty to defend based on the portion of the Policy’s “suit” definition concerning “any other alternative dispute resolution proceeding.”

The court noted that both the duty to defend and duty to indemnify are dependent on the contours and text of the contract, but because the duty to defend is broader, if no duty to defend exists, neither does the duty to indemnify.

Consequently, the court found that the insurer was entitled to summary judgment on both the duty to defend and duty to indemnify.