Berding | Weil - Attorneys At Law

Construction Defect and Insurance Saga Nets $6,000,000 for Three Homeowner Associations

BerdingWeil Team Successfully concludes both Construction Defect and Insurance Coverage Litigation against Condominium Conversion Developer and its Insurance Carrier

A BerdingWeil construction litigation team headed by Partner Allison Andersen, and assisted by Partner Randy Paul and Counsel John Andersen successfully resolved construction defect claims and a long and complex insurance coverage lawsuit in Sacramento Superior Court for three homeowner association clients.

This case arose out of construction defect actions filed by BerdingWeil in 2007 against an unscrupulous developer who converted three obsolete apartment complexes into condominiums and sold them at the peak of the real estate boom. After doing little more than patching roofs, re-painting and re-carpeting the units, the developer sold these 30-year old rental units as “new” homes to unsuspecting buyers. Inadequate repairs were compounded by the developer's gross underfunding of the maintenance reserves, leaving the three associations completely unable to restore the buildings without imposing significant special assessments—assessments that these low and moderate income buyers could not afford.

The developer was individually named in the suit along with several Limited Liability Companies (LLCs) which he used to convert and sell the condos. These LLCs were not insured, but the members of these companies—other developer investment entities—had a Business Owners insurance policy for the developer's office space—with a $2,000,000 limit for each of the three years that the policy was in effect.

Initially, the Business Owners insurer assumed the defense of the individual developer and his investment entities in the underlying construction defect lawsuits. At the same time, however, the insurer filed a separate Declaratory Relief action seeking a judicial determination that the Business Owners policy did not provide coverage for the homeowner associations' construction defect claims, as well as claiming that the policy did not require that the insurance company defend the underlying lawsuits. The insurer also joined the three homeowner association clients in the Declaratory Relief action. BerdingWeil simultaneously prosecuted the underlying construction defect lawsuits against the insolvent developer and litigated the insurance coverage dispute, claiming that the insurer owed a duty to defend and indemnify the developer.

BerdingWeil defeated a pre-trial motion brought by the Insurer, successfully arguing that the insurance policy and the application form documents were ambiguous and that they were contradicted by the existence of separate "completed operations" coverage within the insuring document. The Court also specifically held that the Insurer was obligated to provide the developer with a legal defense in the three underlying construction defect actions. The Insurer appealed to the Third District Court of Appeal for a writ reversing the Sacramento Superior Court's ruling. The Court of Appeal refused to entertain the Insurer's petition.

Instead of defending the developer as the court ruling required, the insurer instead "rescinded" all three years of the Business Owners policy asserting that the developer had misrepresented the nature of its business operations in the insurance policy and brought a second pre-trial motion to confirm the rescissions. The court again denied the insurer's motion, ruling that the same ambiguities in the policy and policy application documents precluded it from determining that the rescission was legally proper without a jury trial on the disputed facts. Again the Insurer asked the Court of Appeal for a writ which was summarily denied.

In the meanwhile each of the three homeowner associations' construction defect actions proceeded to trial against the developer, his investment entities and the LLC for each conversion project. Allison Andersen and her team obtained $32,000,000 in three final judgments against the individual developer and its insolvent investment entities and also negotiated assignments to the associations of the developer's claims against its insurance company, including claims for "bad faith" arising from the Insurer's refusal to defend the underlying construction defect lawsuits.

The Court reset the insurance coverage case for trial and the BerdingWeil litigators went on the offensive. In July of 2012, the three homeowner associations filed their own Motion for Summary Judgment on the assigned and direct claims, arguing that (a) the Insurer had breached its duty to defend by allowing the insured developer to be unrepresented at the three trials which resulted in $32,000,000 in judgments being entered against him, (b) that the Insurer was precluded by California Insurance Code from rescinding the insurance policies after filing a Declaratory Judgment lawsuit, and (c) that the rescission claims were barred by the statute of limitations. The motion was strategically set for hearing only four weeks before the October 2012 trial date. In early August of 2012, apparently recognizing that numerous actions taken by its original coverage litigation counsel were now under attack in the litigation on the assigned bad faith claims, the Insurer brought in new litigation counsel, formally waived the applicable attorney-client privilege, and asserted an "advice of counsel" defense to the bad faith allegations.

Subsequently however, through final pre-trial discovery, BerdingWeil discovered that the insurer had entered into a settlement with the developer in 2009 under the disputed insurance policy involving a different condominium conversion. This discovery was devastating to the carrier because in settling the claim against the policy, the Insurer had waived its rescission rights--the primary defense to the bad faith claims.

During the last week of August 2012, the BerdingWeil trial team traveled to the home office of the insurer to depose the Vice President of Claims and the Vice President of Underwriting, as well as other senior officials. Three and a half days of cross-examination exposed serious flaws in the carrier's defense and with the depositions of the insurer's coverage counsel and the hearing on the homeowner associations' summary judgment motion scheduled for the following week, the insurer abruptly announced that it wished to hold a mediation to resolve the dispute. The Insurer subsequently agreed to pay $6,000,000--the full limits of the policy.

This five year saga demonstrates BerdingWeil's commitment to our clients and the cases we pursue on their behalf. In this case our litigators successfully represented both the claims of the client associations and the assigned rights of the developer and made the insurance carrier honor its obligations to the parties involved in construction defect claims.

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