United States: McMillin Homes Constr., Inc. v. Nat'l Fire & Marine Ins. Co.

Last Updated: September 23 2019
Article by Michael R. Velladao and Kayla Berlin

In McMillin Homes Constr., Inc. v. Nat'l Fire & Marine Ins. Co., 35 Cal. App. 5th 1042 (2019), the appellate court reversed the trial court's judgment, finding that a subcontractor's insurer owed a duty to defend the additional insured general contractor in a construction defect suit even though the additional insured endorsement excluded coverage for "property in the care, custody or control of the additional insured."

McMillin Homes Construction, Inc. ("McMillin") was the developer and general contractor for a housing community project referred to as Auburn Lane. As part of its subcontract agreement, subcontractor Martin Roofing Company, Inc. ("Martin") was required to obtain general liability insurance naming McMillan as an additional insured. Martin's commercial general liability ("CGL") policy with National Fire & Marine Insurance Company ("National Fire") included McMillin as an additional insured on an endorsement which provided that National Fire would cover property damage or bodily injury arising out of Martin's ongoing operations at the Auburn Lane, or out of McMillin's general supervision of those operations. The National Fire policy excluded coverage for damage to property in McMillin's "care, custody, or control."

Homeowners in Auburn Lane and six other development projects sued McMillin for construction defects, including allegations of water intrusion and damage caused by roofing defects. McMillin tendered its defense to National Fire, who denied coverage. McMillin then filed a declaratory relief action against National Fire, additionally asserting causes of action for breach of contract and bad faith contending that National Fire breached its duty to defend McMillin.

National Fire argued that the text of the "care, custody, or control" exclusion ("CCC exclusion") did not provide that it only applied where McMillin's control over the damaged property was complete or exclusive and, therefore, it applied to preclude coverage in this instance. National Fire further argued that its CG 21 39 10 93 endorsement ("CG 21 39 endorsement") was intended to "close the loop" and eliminate any indirect indemnity coverage to McMillan for construction defect litigation pursuant to an indemnification agreement in the subcontract. While the National Fire policy provided coverage for liability assumed in an "insured contract", the CG 21 39 endorsement defined "insured contract" to exclude coverage for indemnification agreements like the one included in the McMillan-Martin subcontract. The trial court agreed with National Fire's arguments, entering judgment in favor of National Fire after a bench trial, finding it owed no duty to defend McMillan.

On appeal, the parties did not dispute that National Fire's duty to defend was triggered based on the coverage provision of the additional insured endorsement; instead, National Fire argued that the CCC exclusion precluded coverage. National Fire argued that because McMillan was the general contractor on the development project, any damage allegedly sustained while the homes were being built constituted damage to property in McMillan's care, custody, or control. McMillan countered that the CCC exclusion only applied where the insured had exclusive or complete control over the damaged property.

The appellate court found that the CCC exclusion was not ambiguous and that it required the insured to have exclusive or complete control over the property in order to apply. The court referred to prior appellate decisions construing the CCC exclusion, relying largely on the Third Appellate District's decision in Home Indem. Co. v. Leo L. Davis, Inc., 79 Cal. App. 3d 863 (1978) ("Davis").

Seven years after Silva, Davis surveyed the landscape regarding the CCC exclusion. From Volf and Silva, the Davis court concluded, "in the California cases that have applied the exclusion to defeat coverage, contractual responsibility for the entire operation rested with the insured." (Davis, supra, 79 Cal.App.3d at p. 870.) After examining a handful of out-of-state cases, Davis explained: "Almost invariably where coverage is denied, physical control by the insured has been exclusive, even if such exclusivity was only momentary, so long as the damage occurred in that moment. [Citation.] Our attention has been drawn to several cases in which the exclusion similarly defeated coverage despite the fact that the insured's control was not exclusive because he was receiving directions from another. [Citations.] Such cases are to be contrasted, however, both with the present case and with those denying effect to the exclusion and thus affirming coverage, where physical control was shared by another with the insured." (Id. at p. 871.)

Noting that the care, custody, or control exclusion had been deemed both ambiguous and unambiguous, the Davis court believed "[t]he only consistency in the[se] cases is the need for painstaking evaluation of the specific facts of each case, especially those that bear on the nature and extent of the insured's control." (Davis, supra, 79 Cal.App.3d at pp. 871–872.) It noted "the courts are not averse to holding [the exclusion] inapplicable where the control exercised by the insured—possessory or physical—is not exclusive and complete at the critical moment in question." (Id. at p. 872.)

The McMillin court interpreted Davis as announcing the general rule that "[t]he CCC exclusion is inapplicable where the facts at best suggest shared control." As such, the CCC exclusion unambiguously required exclusive or complete control in order to apply.

After determining the CCC exclusion was unambiguous, the appellate court found it did not apply to McMillin as National Fire's interpretation of the CCC exclusion was based on assumptions regarding McMillin's control over the development project, rather than facts. The record disclosed that while McMillin was responsible for the whole project and coordinating schedules to ensure the entire development project finished on time, Martin was responsible for controlling its jobsite and supervising the roofing work. As such, Martin and McMillin shared control over Martin's roofing work.

The appellate court further reasoned that, even if the CCC exclusion was ambiguous, National Fire still owed no duty to defend as the reasonable expectations of McMillin were that "control" within the meaning of the exclusion required more than merely being the general contractor. The court noted that a key motivation for a general contractor to obtain an additional insured endorsement on a subcontractor's liability policy is to offset the typically expensive costs of defending lawsuits where the general contractor's liability is only derivative.

In construing policy language, we assess "the meaning a layperson would ordinarily attach to it." (Waller, supra, 11 Cal.4th at p. 18.) National Fire's construction bears little connection to the risk involved or the reason for a general contractor to seek coverage as an additional insured. Its stance might be "reasonable in the abstract," but it is inconsistent with the basic rule that limitations on a promised defense duty must be conspicuous, plain, and clear. (Maryland, supra, 65 Cal.App.4th at p. 30.)

Finally, the appellate court rejected National Fire's argument that the CG 21 39 endorsement – which allowed coverage for liability assumed by Martin in an "insured contract" – excluded coverage for construction defect litigation by excluding indemnification agreements from the definition of an "insured contract".

In a nutshell, National Fire argues that by broadening the scope of an exclusion as to Martin, it closed the loop on its duty to cover McMillin for construction defect litigation. Construing the policy as a whole, National Fire believes the combined effect of these two exclusions showed its intent to eliminate its duty to pay for McMillin's defense in Galvan "whether to McMillin directly as an additional insured or to McMillin indirectly as an indemnitee of Martin Roofing." Accepting this theory, the trial court concluded "National Fire did not intend for this endorsement to reach construction defect litigation."

The argument is unpersuasive for a simple reason. In resolving an ambiguity, we interpret provisions in the sense an insured reasonably understood them at the time of contract formation. (Maryland, supra, 65 Cal.App.4th at p. 29.) This rule does not protect the subjective beliefs of the insurer, but rather the objectively reasonable expectations of the insured. (Ibid.) Even if we accept the premise of National Fire's argument, its intent as to coverage does not resolve which of two purportedly reasonable constructions of the CCC exclusion comports with the insured's objectively reasonable expectations.

Accordingly, the Court of Appeal reversed the judgment, directing the trial court to enter judgment in McMillin's favor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions