Wednesday, December 4, 2013
A New Trend Emerging Regarding the Definition of Ongoing Operations: Jaynes Corp. v. ASIC
The term “ongoing operations” has appeared in construction insurance policies for many years. Here in Colorado, that phrase has had a particular meaning when applied to an insurer’s coverage of liability arising out of an insured’s work, i.e. liability arising during an insured’s work on a specific project. The case of Jaynes Corporation v. American Safety Indemnity Company illustrates a new trend in other jurisdictions where courts are loosening the coverage application of an “ongoing operations” clause.
In December 2012, in U.S. District Court in Nevada, Judge Miranda M. Du ruled on cross motions for summary judgment filed by Jaynes Corporation (“Jaynes”) and American Safety Indemnity Company (“ASIC”). ASIC’s argument that the “ongoing operations” provision precludes coverage for Jaynes is the pertinent issue to this article.
The background facts of the case are pretty standard for construction litigation. A subcontractor entered into written agreement with Jaynes, the general contractor, for site concrete work at a residential housing project. In the contract, the subcontractor agreed to name Jaynes as an additional insured on policies issued by ASIC. The damages in the original construction litigation, between the homeowners association and the developer, were alleged to have occurred during the policy periods. The subcontractor performed its work on the project in 2003 and 2004.
ASIC asserted that the “ongoing operations” provision in the policies, issued to the subcontractor, precludes coverage for the construction defect claims in the underlying lawsuit because those claims involved completed operations. ASIC argued that the claims involved completed work and not works in progress. Jaynes countered-argued that the “ongoing operations” provision does not restrict coverage to damage that occurred during the subcontractor’s ongoing operations, but it also covers claims for damages that occurred after completed operations but was caused by ongoing operations.
Judge Du discarded ASIC’s arguments and agreed with Jaynes, determining that the “ongoing operations” clause applies to damage on work performed by the subcontractor caused by its ongoing operations. Judge Du cited two cases, from Arizona and California, which analyzed similar “ongoing operations” clauses. Those two cases, Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co., 426 Fed.Appx. 506 (9th Cir. 2011) and McMillin Construction Services, L.P. v. Arch Specialty Insurance Co., 2012 WL 243321 (S.D. Cal. Jan. 25, 2012), determined that the policies at issue covered liability performed by a subcontract caused by that subcontractor’s ongoing operations. In those cases, the specific language, “arising out of,” in the “ongoing operations” clause was vital to the courts’ rulings.
Judge Du noted that Nevada courts, like those of Arizona for Tri-Star and California for McMillan, review insurance policy terms from the perspective of a layman not trained in law or insurance, and the contract language viewed in its plain, ordinary, popular meaning. Judge Du found compelling the Tri-Star’s Court’s discussion of the phrase “arising out of,” “this language does not state that injury must occur, or liability must arise, during the name insured’s ongoing operations, but rather requires only that the liability arise “out of” the ongoing operations.” Tri-Star, 426 Fed.Appx. at 510 (9th Cir. 2011).
Judge Du also addressed ASIC’s arguments and supportive cases contrary to Tri-Star and McMillan. One of the cases ASIC cited was a Colorado case, Weitz Co., LLC v. Mid-Century Ins. Co., 181 P.3d 309 (Colo. App. 2007). Judge Du stated that those contrary cases relied not on the plain language of the provisions at issue, i.e. “ongoing operations,” but rather, the drafting history of the clause by the insurance company. Judge Du went further stating that such history lessons are not persuasive in the face of the plain language of the “ongoing operations” clause. Judge Du then let the Tri-Star case speak for her one more time:
Such evidence might be persuasive if the controversy . . . were between two insurers, or if it suggested that the language reflected the mutual intent of the parties. This evidence is wholly lacking here. Indeed, . . . the only court to construe the additional insured endorsement, without reference to the industry’s drafting history, held that it provided coverage for damages occurring after the completion of operations.
Tri-Star, 426 Fed.Appx. at 512 (9th Cir. 2011).
The Weitz case has a similar factual background to the Jaynes case: A general contractor, sued by a homeowner, brought an action against an insurer that issued a policy to a subcontractor to which the general contractor was an additional insured. The district court granted the insurer’s summary judgment motion asserting that coverage was limited to “ongoing operations” and there was no coverage for claims arising out of subcontractor’s completed work or operations. Weitz, the general contractor, appealed the order and the Colorado Court of Appeals affirmed the district court’s ruling.
In coming to its decision, the Colorado Court of Appeals found persuasive an analysis of the ISO’s history of drafting the additional insured endorsement (CG 20 10 1993) in another case. The Weitz court found their construction of the phrase and the coverage it affords to be in line with the views of commentators addressing the history of the ongoing operations clause. Ultimately, the Weitz court found that no ambiguity existed and the “ongoing operations” clause would not cover any work that had been previously completed.
The analysis by the Weitz court is exactly what Judge Du found unpersuasive as it failed to dissect the plain language of the clause, instead relying on the history of the clause within the insurance industry. While the Jaynes case is not authority in Colorado, the fact is a trend is emerging in courts of neighboring jurisdictions and soon Colorado courts may be faced with a similar analysis. We have to wait and see if Weitz will be challenged soon. Using these mounting cases as support for an extension of coverage under the “ongoing operations” clause seems imminent in Colorado courts.