California Court Confirms Broad Coverage Under “Ongoing Operations” Endorsements
A California Court of Appeal has confirmed that additional insured endorsements (“AIE”) granting coverage for liability arising out of a named insured’s “ongoing operations,” and in effect during those “ongoing operations,” do not require that the liability arise while the named insured is performing work. McMillin Mgmt. Servs., L.P. v. Financial Pacific Ins. Co., Cal. Ct. App., November 14, 2017, Case No. D069814.
In McMillin, a construction defect insurance coverage action, Lexington Insurance Company argued that McMillin had no liability to homeowners until after their homes closed escrow; thus, McMillin did not face liability while the named insureds’ work was ongoing. The Court of Appeal rejected Lexington’s argument, finding that the “ongoing operations” AIEs provide only that McMillin’s liability “be ‘linked’ through a ‘minimal causal connection or incidental relationship’ with [the named insureds’] ongoing operations.” (internal citations omitted). The Court reasoned that Lexington had not established that all of the damage in the underlying action occurred after the named insureds completed their work, thus Lexington had not established as a matter of law that there was no potential for coverage for McMillin under the policies.
While the McMillin Court explicitly limited its ruling to the issue regarding whether the lack of homeowners at the time the named insureds’ ceased work precluded coverage for McMillin under the AIE, this is yet another ruling limiting insurers’ abilities to rely on “ongoing operations” endorsements to preclude coverage when a named insured’s work is complete.
In reaching its decision, the McMillin Court relied on another recent California Court of Appeal decision, Pulte Home Corp. v. American Safety Indem. Co., 14 Cal. App. 5th 1086 (2017). Pulte held that “ongoing operations” AIEs, in effect at the time that work is completed, provide coverage to additional insureds for any liability arising out of the named insureds’ work performed during the policy periods. Both McMillin and Pulte show that California courts are willing to extend coverage to additional insureds pursuant to policies issued with “ongoing operations” AIEs where those policies are in effect at the time the named insured performs work.
Although McMillin and Pulte have seemingly resolved the “ongoing operations” AIE dispute with regard to policies in effect at the time work is performed, the question remains whether California courts will extend this reasoning to provide additional insured coverage under policies issued after a named insureds operations are complete. Policyholders should be prepared to continue to face disputes over “ongoing operations” AIE in disputes in those situations.