Duty to Defend a Policyholder During Statutory Pre-Litigation Formalities: Will Clarendon Opinion Affect South Carolina Contractors and Defect Litigation?

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Clarendon America Insurance Co. v. Star Net Insurance Co. (2010) 186 Cal. App. 4th 1397.

Similar to the Notice and Opportunity to Cure Act in South Carolina, (which provides a 90 day ?cooling off? period for the homeowner to serve written notice on the contractor before filing any action in court) California?s Calderon Act requires community associations (of projects greater than 20 units) to give notice to a builder, developer, or general contractor notice prior to filing suit. Calderon sets forth a litany of pre-litigation steps aimed toward settlement. (See Civil Code section 1375 subd. (a) ? (s).) Per the language of the act, litigation might only initiated once these steps to avoid litigation have been deemed compliant.

In the Clarendon America case (?CAI v. StarNet?), Centex homes developed a residential development covered by Calderon. As Calderon requires, the homeowners association served a notice of commencement of legal proceedings prior to filing suit against Centex. There are no inferences or allegations which insinuate that the act was not complied with.

Centex enjoyed additional insured status on a Star Net Insurance Company. As is typical, the policy?s defense agreement stated that StarNet had the ?duty to defend the insured against any ?suit? seeking [ ] damages.? The term ?suit? was further defined as ?a civil proceeding in which damages . . . to which this insurance applies are alleged.? Centex sued carrier Clarendon, which cross-complained against Star Net, seeking a declaration that Star Net was obligated to defend Centex.

Star Net moved for summary judgment on the grounds that the Calderon process did not constitute a ?suit? within the meaning of its CGL policies. The trial court rejected that argument and held that the Calderon pre-litigation proceedings fall within the meaning of suit.

The Court found that any civil proceeding qualified as a suit, and coverage was found. StarNet was forced to indemnify Centex under the insuring agreement even prior to a suit being filed.