Tanamera Homes and Resort Communities (Tanamera) constructed a residential development in which a construction defect action was brought by 43 homeowners.  Clarendon American Insurance Co. (Clarendon) and North American Capacity Insurance Co. (NAC) insured Tanamera under separate and consecutive general commercial liability policies.  Clarendon defended Tanamera in the underlying action and sought contribution from NAC for sums expended in that defense. 

The NAC policy provided for a $25,000 "per claim" self-insured retention (SIR) which, when applied to the eight homes that had been completed after the effective date of the policy, totals $200,000, which Tanamera never paid.  Thus, NAC argued that because of Tanamera's failure to pay the SIR of $200,000, no duty to defend arose on its part.  The trial court agreed with NAC and granted NAC's motion for summary judgment.

The Fourth District Court of Appeal reversed and held that NAC did not meet its burden of showing there was no potential for coverage under the terms of its policy or no duty to defend Tanamera as a matter of law.  The court stated that “Tanamera may have had an objectively reasonable expectation, at the time the policy was issued, that the $25,000 SIR would apply only once to the construction-defect lawsuit as a whole rather than to each of the eight homes that were completed after the effective date of the NAC policy.” The case was remanded to the trial court for further proceedings.

A copy of the Court of Appeal’s opinion in Clarendon America Ins. Co. v. North American Capacity Ins. Co is available at www.courtinfo.ca.gov