In the world of insurance coverage, the word “claim” is one of the most frequently spoken. It is used by an injured party to describe its pursuit of relief against an insured-tortfeasor. The insured-tortfeasor then turns around and uses the term claim to describe its pursuit of coverage, from its insurer, for the claim being made against it by the injured party.
But, as the court in ProBuilders Specialty Ins. Co. v. Yarbrough Plastering, Inc., No. 16-16952 (9th Cir. June 25, 2018) demonstrated, the term “claim,” despite its lack of controversy when used in conversation, is not immune from disputes when it appears in an insurance policy. This result led to a significant exposure for an insurer. And one that it no doubt believed was not owed, based on its understanding of what’s a “claim.”
Lenox Homes hired Yarbrough Plastering to perform stucco and drywall work on several large residential developments in Bakersfield, California. Numerous homeowners sued Lenox for construction defects. It was the manner of these suits that gave way to a coverage dispute.
Specifically, 636 homeowners filed three separate lawsuits against Lenox in state court. Lenox filed three cross-complaints for indemnity against its subcontractors, including Yarbrough. Yarborough sought coverage from its insurer, ProBuilders. ProBuilders settled the claims against Yarbrough for $1.4 million—about $2,000 per home. ProBuilders filed a declaratory judgment action, seeking reimbursement of the entire settlement amount from Yarbrough. “ProBuilders alleges that, under the ‘per-claim’ deductible policies, Yarbrough owes a separate deductible for each of the 636 homes at issue in the three homeowners’ suits. Because the $2,000 per-home settlement falls below the deductible—either $4,000 or $10,000, depending on the applicable policy—ProBuilders says Yarbrough is obligated to reimburse it for the entire $1.4 million settlement.”
Good news for ProBuilders – the court concluded that its interpretation of the “per claim” deductible was reasonable. Bad news for ProBuilders – that wasn’t the only reasonable interpretation: “We agree with Yarbrough and the district court that only three deductibles are due—one corresponding to each of ProBuilders’ cross-complaints for indemnity. The policies specify that a separate deductible is due for each claim and contemplate that multiple claims can be joined in a suit.”
The downfall for ProBuilders was that the policies did not specify whether the operative “claim,” for purposes of the “per claim” deductible, was the homeowner’s claims against the general contractor (of which there were 636, grouped into three complaints) or the general contractor’s claim against the subcontractor, of which there were three, i.e., the cross-claims. Since the court held that both constructions were “reasonable and are supported by the policy language,” the interpretation favoring the insured controlled. Translation, the insured was responsible for only three deductibles – one for each cross-claim.
The court also rejected the insurer’s multi-deductible argument that Yarbrough would have been obligated to pay 636 deductibles if the homeowners had sued Yarbrough directly. But that was not relevant, as the court saw it: “Under California law, [t]he proper question is whether the provision or word is ambiguous in the context of this policy and the circumstances of this case.” (emphasis in original).
