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Assurance Co. of America v. Ironshore Specialty Ins. Co.

United States District Court, D. Nevada

August 24, 2017

Assurance Co. of America, et al., Plaintiffs
v.
Ironshore Specialty Ins. Co., Defendant

          ORDER ON MOTIONS FOR SUMMARY JUDGMENT [ECF NOS. 39, 40]

          JENNIFER A. DORSEY UNITED STATES DISTRICT JUDGE

         The plaintiff insurance companies footed the bill for 15 construction-defect lawsuits brought against various construction companies. These insurers bring this action because they believe that the defendant Ironshore Specialty Insurance Company also owed a duty to defend in the underlying cases, so it should help pay the defense costs. The twist is that the plaintiffs do not dispute that Ironshore's policies provide no coverage for the underlying judgments against the insureds. Instead, they argue that the complaints in the underlying lawsuits were so vague that there was, at one point, a potential for coverage-and this potentially triggered Ironshore's duty to defend and its obligation to pay defense costs.

         Ironshore's duty to defend was triggered only if the construction companies were sued for "sudden and accidental" damages. The thrust of the complaints in the underlying actions is that the insureds made mistakes when they built homes, like using the wrong materials. But nowhere do the complaints seek relief for damages caused by a sudden accident. The plaintiffs suggest that because it was theoretically possible that an accident was caused by an alleged defect, Ironshore should have defended the insureds until it was clearer that there was no coverage.

         Although the duty to defend is broad, it is not limitless. A possibility that there could later be a potential for coverage is not the same as an existing potential for coverage-and the latter is needed to trigger the duty to defend. I thus grant summary judgment in favor of Ironshore and against the plaintiffs.

         Background

         The construction company insureds were sued in 15 separate lawsuits.[1] The complaints in these suits all allege that the insureds caused property damage by failing to use reasonable care when building residential homes.[2] The complaints vaguely allege that the defects in the buildings caused damage. They also attach a list of alleged defects, including problems like "defective lights, " "inconsistent water temperature at showers, " "excessive drywall cracking, " and "defectively applied drywall patches."[3] The insureds demanded that Ironshore provide a defense to these suits, but Ironshore refused because it concluded that the lawsuits fell under an exclusion in Ironshore's policy.

         Ironshore's policies generally cover property damage caused by its insureds.[4] But each policy excludes coverage for "continuous or progressive injury."[5] This exclusion says that Ironshore's policy does not cover any damages that existed "prior to the inception of this policy."[6] And it also deems any damages caused by an insured's work to be "prior to the inception of this policy" if the insured's work was performed before the policy-start date.[7] In short: the exclusion bars coverage if the insured worked on a home before the policy-start date, even if the damage from that work actually occurred after the policy went into effect.

         So there is no coverage for damages caused by things that the insured construction companies did prior to the policy-start dates. That is a problem for the plaintiffs, because there is no dispute that all of the construction work was done prior to Ironshore's policies going into effect.

         The plaintiffs rely on an exception to this exclusion, which states that the coverage bar does not apply to "sudden and accidental" damage.[8] In other words: even if the insured's work was completed prior to the policy date, there is still coverage for sudden accidents that occur after the policy-start date.

         Discussion

         A. The underlying complaints did not trigger Ironshore's duty to defend.

         "The duty to defend is broader than the duty to indemnify."[9] An insurer has a duty to defend unless "there is no potential for coverage."[10] The duty to defend arises whenever the insurer "ascertains facts [that] give rise to the potential of liability under the policy"[11] and "continues throughout the course of the litigation."[12] To prevent an insurer from evading its defense obligations "without at least investigating the facts behind a complaint, " any doubts about the insurer's duty to defend must be resolved in the insured's favor.[13] The duty to defend may be triggered by facts known to the insurer through extrinsic sources or by the factual allegations in the complaint.[14] The insured has the duty to point to allegations or evidence giving rise to a potential for coverage.[15]

         Although broad, the duty to defend is not limitless. "An insured may not trigger the duty to defend by speculating about extraneous facts regarding potential liability."[16] The allegations in a complaint must create a current potential of coverage, not merely raise a theoretical possibility that a potential for coverage could exist in the future. For example, a district court held in another case that Ironshore had no duty to defend construction-defect cases brought against its insureds because the complaints in the underlying actions did not actually allege that any covered accidents occurred.[17]The court rejected the argument that there was an existing potential for coverage because the complaint could later be amended to allege an accident that that would give rise to coverage.[18]

         I similarly held in a recent case that just because an insured was sued for intentional interference with a business relationship did not mean that a defamation-claim insurance policy was triggered.[19] This was so even though it was possible that the intentional-interference claims could later encompass an underlying defamation claim.[20] I explained that, until there is some existing allegation or evidence suggesting that the insured is actually being sued for defamation, the duty to defend is not triggered.[21]

         The plaintiffs maintain that the allegations against the insureds in the underlying actions create a potential for coverage triggering Ironshore's duty to defend under its policy. They reason that although the complaints did not allege that any sudden accidents happened, they also did not expressly state there were no such accidents. In short: because the insureds were sued for causing property damage, and because causing property damage could, in theory, include an accident-there is a potential for coverage triggering the duty to defend.

         The plaintiffs' argument would expand the duty to defend to the breaking point. Before the duty is triggered, there must be some allegation or evidence to create a current potential for coverage. And an allegation that is so vague that it could possibly encompass covered allegations in the future is not enough. Not only are there no actual allegations here that a sudden accident occurred, there is not even the suggestion of an accident in any of the complaints. The thrust of the complaints is that the insureds defectively built homes before Ironshore's policies started. And that claim is precisely what ...


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