11640 Woodbridge Condominium Homeowners’ Association was in the middle of a re-roofing project when two rainstorms resulted in water intrusion in all the condominium units in the building. The association had an “all-risks” insurance policy with Farmers that covered all property damage, unless specifically excluded under the policy. The association tendered the claims twice: immediately following the first rainstorm and then two weeks later immediately after the second rainstorm. Farmers retained Pete Fowler Construction Services to inspect the roof. Fowler determined that the tarps on the roof were too small and that the roofer had violated industry standards by removing 80% of the roof at once instead of working in small sections. Based in part on Fowler’s report, Farmers denied the claim based on the water damage exclusion and the faulty workmanship exclusion.

Because the cost of remediation and repair of the water damage was estimated at more than $3.5 million, the association sued Farmers for breach of contract and for bad faith. The association also sued the roofing company. Farmers filed a summary judgment motion on the bad faith claim and on the request for punitive damages based upon the language of the policy and the fact that the water intrusion occurred not due to damage to the roof, but rather because the roof had been intentionally removed and was being repaired (water damage exclusion). Farmers also based its summary judgment motion on the fact that the roofer had intentionally removed 80% of the roof at once, which allegedly was outside the industry standard (faulty workmanship exclusion). The trial court granted the motion in favor of Farmers and against the association.

Previously, there was only one “all-risk” insurance case that had been decided in California arising out of damage during roof repairs (Diep v. California Fair Plan Assn.). In the Diep case, the insurance company prevailed on summary judgment. The appellate court not only looked at the prior California case, but also looked to other states’ decisions on all-risk insurance coverage. Ultimately, the appellate court decided to follow the cases from New York, New Jersey and Oregon.

As to the water damage exclusion the court held that there was always a roof on the building because “roof” was not a defined term in the policy and only certain layers of roofing material had been removed when the damage occurred; so the rain damage was covered. As to the faulty workmanship exclusion, the court found the term to be ambiguous because it could refer to faulty or negligent work and/or a faulty or negligent process. Accordingly, the court found that coverage was not unambiguously excluded and that there were triable issues of material fact. Because the court found that there was a reasonable interpretation of the policy language under which the association had coverage, the appellate court reversed the summary judgment rulings on both the bad faith claim and on the request for punitive damages. The association was awarded its costs on appeal. As of the print date of this document, the California Supreme Court has granted review of this case and briefing is pending, so this decision is not yet final.

TAKEAWAY:  Always tender early – you never know when there might be coverage.