Filed 11/14/17
                      CERTIFIED FOR PARTIAL PUBLICATION*


                 COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                      DIVISION ONE

                                STATE OF CALIFORNIA



McMILLIN MANAGEMENT SERVICES,                      D069814
L.P. et al.,

        Plaintiffs and Appellants,
                                                   (Super. Ct. No. 37-2012-00104981-
        v.                                         CU-IC-CTL)

FINANCIAL PACIFIC INSURANCE
COMPANY et al.,

        Defendants and Respondents.


        APPEALS from judgments of the Superior Court of San Diego County,

Katherine Bacal, Judge. Reversed as to respondent Lexington Insurance Company;

affirmed as to respondent Financial Pacific Insurance Company.

        Ryan & Associates and Greg J. Ryan for Plaintiffs and Appellants.

        Gordon & Rees, Arthur Schwartz and Randall P. Berdan for Defendant and

Respondent Financial Pacific Insurance Company.




*      Pursuant to California Rules of Court, rule 8.1110, this opinion is certified for
publication with the exception of part III.C.
       Lewis Brisbois Bisgaard & Smith, Rebecca R. Weinreich, Christine Magarian;

Herold & Sager, Andrew D. Herold and Kendall Dulich for Defendant and Respondent

Lexington Insurance Company.

                                             I.

                                    INTRODUCTION

       McMillin Management Services, L.P. and Imperial Valley Residential Valley

Residential Builders, L.P. (collectively "McMillin")1 filed this action against numerous

insurance companies, including respondents Lexington Insurance Company (Lexington)

and Financial Pacific Insurance Company (Financial Pacific). In its complaint, McMillin

alleged that it had acted as a developer and general contractor of a residential

development project in Brawley (the Project) and that it had hired various subcontractors

to help construct the Project. As relevant to this appeal, McMillin alleged that Lexington

and Financial Pacific breached their respective duties to defend McMillin in a

construction defect action (underlying action) brought by homeowners within the Project.

McMillin alleged that Lexington and Financial Pacific each owed a duty to defend

McMillin in the underlying action pursuant to various comprehensive general liability

(CGL) insurance policies issued to the subcontractors that named McMillin as an

additional insured.




1      None of the parties make any argument concerning the significance of the
distinctions between these parties. Accordingly, we refer to them collectively as
McMillin.
                                              2
       Whether an insurer owes an insured a duty to defend a third party's lawsuit

depends, in the first instance, on a comparison of the allegations of the third party's

complaint and the terms of the insured's policy. (Scottsdale Ins. Co. v. MV

Transportation (2005) 36 Cal.4th 643, 654–655.) If any facts stated in or fairly inferable

from the complaint, or otherwise known or discovered by the insurer, suggest a claim

potentially covered by the policy, the insurer's duty to defend arises. (Ibid.)

       Lexington filed a motion for summary judgment in which it contended that it did

not owe McMillin a duty to defend the underlying action because there was no potential

for coverage for McMillin under the Lexington policies. Lexington noted that the

policies contained additional insured endorsements that provided coverage to McMillin

for " 'liability arising out of [the named insured subcontractors'] ongoing operations.' "

(Italics altered.) Lexington argued that there was no potential for coverage for the

construction defect claims asserted against McMillin in the underlying action because

McMillin had "no liability to the homeowners until after the close of escrow of each

homeowner's property" and thus, McMillin "did not have any liability to plaintiffs [in the

underlying action] for property damage that took place while [the subcontractors] were

working on the Project . . . ." (Italics added.) The trial court granted Lexington's

summary judgment motion on this ground, reasoning, that there was no possibility for

coverage for McMillin as an additional insured under the policies "[b]ecause there were

no homeowners in existence until after the subcontractors' work was complete[ ] . . . ."

       On appeal, McMillin contends that the fact that the homeowners did not own

homes in the Project at the time the subcontractors completed their work does not

                                              3
establish that its liability did not arise out of the subcontractors' ongoing operations. In

support of this contention, McMillin argues that the endorsements "make no reference to

when liability must arise," and that nothing in the text of the endorsements "requires that

the homeowners exist or make their claims during ongoing operations." In contrast,

Lexington argues that "since the [h]omeowners' cause of action accrued after operations

were completed, McMillian could have no liability to the homeowners during the

[subcontractors'] 'ongoing operations.' " (Italics altered.) McMillin's argument is

supported by the text of the endorsements, while Lexington's argument is not. The

endorsements do not provide coverage solely for "liability . . . during the

[subcontractors'] 'ongoing operations' " (italics altered), but rather, broadly provide for

coverage for liability " 'arising out of' " (italics added) such operations. Thus, the fact

that there were no homeowners in existence at the time the subcontractors completed

their ongoing operations does not establish that McMillin could not have potential

liability to the homeowners arising out of the subcontractors' ongoing operations.

Accordingly, the trial court erred in granting Lexington's motion for summary judgment

on this ground.

       Financial Pacific also filed a motion for summary judgment on the ground that it

did not owe McMillin a duty to defend the underlying action. Financial Pacific

contended that McMillin was seeking coverage based on policies issued to subcontractors

that installed drywall on the Project, and that neither the complaint in the underlying

action nor any extrinsic evidence established that the homeowners in the underlying

action had sought potentially covered damages arising out of the subcontractors' drywall

                                               4
installation. The trial court granted Financial Pacific's motion on this basis and entered a

judgment in its favor.

       On appeal, McMillin contends that the trial court erred in granting Financial

Pacific's motion because there is a triable issue of fact with respect to whether there was a

potential for coverage under the policies. In the unpublished portion of this opinion, we

conclude that the trial court properly determined that there was "no potential for

coverage" under the relevant polices and that Financial Pacific was entitled to judgment

as a matter of law.

       Accordingly, we reverse the summary judgment in favor of Lexington and affirm

the summary judgment in favor of Financial Pacific.

                                             II.

                      FACTUAL AND PROCEDURAL BACKGROUND

       McMillin acted as the developer and general contractor of the Project. McMillin

hired numerous subcontractors to perform construction work on the project, including

Martinez Construction Concrete Contractor, Inc. (Martinez), Rozema Corporation

(Rozema), A.M. Fernandez Drywall (A.M. Fernandez), and J.Q. Drywall.

       Lexington issued CGL policies to Martinez and Rozema and Financial Pacific

issued CGL policies to A.M. Fernandez and J.Q. Drywall. The Lexington and Financial

Pacific policies name McMillin as an additional insured.

       McMillin completed construction of the homes in the Project in June 2005.




                                             5
       In June 2010, several homeowners within the Project filed the underlying action

against McMillin. The homeowners alleged that they had discovered defective

conditions arising out of the construction of their homes.

       McMillin tendered its defense of the underlying action to Lexington and Financial

Pacific, among other insurers. Both Lexington and Financial Pacific refused to defend

McMillin.

       In October 2012, McMillin asserted claims against Lexington and Financial

Pacific for declaratory relief, breach of contract, and breach of the implied covenant of

good faith and fair dealing. With respect to each claim, McMillin contended that

Lexington and Financial Pacific had breached their respective contractual obligations to

defend McMillin in the underlying action.2

       Lexington and Financial Pacific each filed a motion for summary judgment in

which they contended that they did not owe McMillin a duty to defend the underlying

action and that McMillin would therefore be unable to establish any of its claims as a

matter of law.

       The trial court granted both motions. The court subsequently entered a summary

judgment in favor of Lexington and a separate summary judgment in favor of Financial

Pacific.




2       McMillin states in its brief on appeal that "the duty to indemnify is not at issue in
this action."
                                              6
       McMillin filed a notice of appeal from the summary judgment in favor of

Lexington, and filed a second notice of appeal from the summary judgment in favor of

Financial Pacific.

                                            III.

                                      DISCUSSION

       The trial court erred in granting Lexington's motion for summary judgment,
         but properly granted Financial Pacific's motion for summary judgment

       McMillin claims that the trial court erred in granting Lexington's and Financial

Pacific's motions for summary judgment. McMillin maintains that the trial court erred in

concluding that neither Lexington nor Financial Pacific had a duty to defend McMillin in

the underlying action, and thus, that McMillin could not establish any of its claims for

declaratory relief, breach of contract, and breach of the implied covenant of good faith

and fair dealing.

A. General principles of law relevant to both appeals

       1. The law governing summary judgment

       A moving party is entitled to summary judgment when the party establishes that it

is entitled to the entry of judgment as a matter of law. (Code Civ. Proc., § 437c, subd.

(c).) A defendant may make this showing by demonstrating that the plaintiff cannot

establish one or more elements of all of his causes of action, or that the defendant has a

complete defense to each cause of action. (Towns v. Davidson (2007) 147 Cal.App.4th

461, 466.)




                                             7
       In reviewing a trial court's ruling on a motion for summary judgment, the

reviewing court makes " 'an independent assessment of the correctness of the trial court's

ruling, applying the same legal standard as the trial court in determining whether there

are any genuine issues of material fact or whether the moving party is entitled to

judgment as a matter of law.' " (Trop v. Sony Pictures Entertainment, Inc. (2005) 129

Cal.App.4th 1133, 1143.)

       2. The duty to defend

       In Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277

(Hartford), the Supreme Court explained that "[t]he duty to defend is guided by several

well-established principles. An insurer owes a broad duty to defend against claims that

create a potential for indemnity under the insurance policy. [Citation.] An insurer must

defend against a suit even ' "where the evidence suggests, but does not conclusively

establish, that the loss is not covered." ' " (Id. at p. 287.)

       The Hartford court also explained the manner by which a court is to determine

whether an insurer owed its insured a duty to defend:

           " 'Determination of the duty to defend depends, in the first instance,
           on a comparison between the allegations of the complaint and the
           terms of the policy. [Citation.] But the duty also exists where
           extrinsic facts known to the insurer suggest that the claim may be
           covered.' [Citation.] This includes all facts, both disputed and
           undisputed, that the insurer knows or ' "becomes aware of" ' from
           any source . . . . 'Moreover, that the precise causes of action pled by
           the third party complaint may fall outside policy coverage does not
           excuse the duty to defend where, under the facts alleged, reasonably
           inferable, or otherwise known, the complaint could fairly be
           amended to state a covered liability.' [Citation.] Thus, '[i]f any facts
           stated or fairly inferable in the complaint, or otherwise known or
           discovered by the insurer, suggest a claim potentially covered by the

                                                8
           policy, the insurer's duty to defend arises and is not extinguished
           until the insurer negates all facts suggesting potential coverage.'
           [Citation.] In general, doubt as to whether an insurer owes a duty to
           defend 'must be resolved in favor of the insured.' " (Hartford, supra,
           59 Cal.4th at p. 287.)

       However, "[w]hile the duty to defend is broad, it is 'not unlimited; it is measured

by the nature and kinds of risks covered by the policy.' " (Hartford, supra, 59 Cal.4th at

p. 288.)

       The Hartford Court also explained the relative burdens of proof in a case in which

the insured contends that an insurer breached the duty to defend:

           " '[T]he insured must prove the existence of a potential for coverage,
           while the insurer must establish the absence of any such potential.
           In other words, the insured need only show that the underlying claim
           may fall within policy coverage; the insurer must prove it cannot.' "
           [Citation.] Thus, an insurer may be excused from a duty to defend
           only when ' "the third party complaint can by no conceivable theory
           raise a single issue which could bring it within the policy
           coverage." ' " (Hartford, supra, 59 Cal.4th at p. 288.)

B. The trial court erred in granting Lexington's motion for summary judgment

       1. Additional factual and procedural background

              a. The Project

       As noted in part II, ante, McMillin developed and acted as the general contractor

for the Project. Martinez performed concrete flatwork on the Project between 2003 and

November 2005. Rozema performed lath and stucco work on the Project between March

2003 and October 2005. McMillin completed construction of the homes in the Project by




                                             9
mid-June 2005.3 McMillin completed all initial sales of the homes in the Project by early

August 2005.

               b. Lexington's policies

                     i. The policy periods

       Martinez and Rozema each obtained CGL coverage through policies issued by

Lexington. Lexington issued two CGL policies to Martinez for the policy periods

February 27, 2004 through February 27, 2005 and February 27, 2005 through February

27, 2006, respectively. Lexington issued a CGL policy to Rozema for the policy period

October 1, 2004 through October 1, 2005.

                     ii. The insuring agreements

       All three policies contain identical insuring agreements that provide that

Lexington would pay those sums that the insured became legally obligated to pay

because of " 'property damage' " caused by an " 'occurrence' " during the policy period.

The policies define "property damage" as:

          "a. Physical injury to tangible property, including all resulting loss of
          use of that property. All such loss of use shall be deemed to occur at
          the time of the physical injury that caused it; or



3      As indicated in the text, the parties' statements of undisputed facts state that
McMillin completed construction of the homes in the Project by mid-June 2005, but that
Martinez performed work on the Project until November 2005 and Rozema performed
work on the Project until October 2005. The trial court repeated these dates in its
summary judgment order. The parties do not explain this apparent incongruity in their
briefing. However, McMillin states in its opening brief, "McMillin concedes the
homeowners did not exist until after the Project was completed." Accordingly, we
assume for purposes of this decision that all of Martinez's and Rozema's work was
completed prior to the date on which homeowners purchased the homes in the Project.
                                             10
             "b. Loss of use of tangible property that is not physically injured.
             All such loss of use shall be deemed to occur at the time of the
             'occurrence' that caused it."

          The policies define "occurrence" as:

             "[A]n accident, including continuous or repeated exposure to
             substantially the same general harmful conditions."

          The policies further provide that Lexington has the duty to defend any suit seeking

such damages.

                       iii. The additional insured endorsements

          The Lexington policies contain substantively identical additional insured

endorsements that amend the polices to provide coverage to McMillin " 'but only with

respect to liability arising out of your [i.e., Martinez's or Rozema's] ongoing operations

performed for [McMillin].' " The endorsements also each contain an exclusion that

states:

             "With respect to the insurance afforded to these additional insureds,
             the following exclusion is added:

                ". . . Exclusions

                "This insurance does not apply to 'bodily injury' or 'property
                damage' occurring after:

                 "(1) All work, including materials, parts or equipment furnished
                      in connection with such work, on the project (other than
                      service, maintenance or repairs) to be performed by or on
                      behalf of the additional insured(s) at the site of the covered
                      operations has been completed; or

                 "(2) That portion of 'your work' out of which the injury or
                      damage arises has been put to its intended use by any
                      person or organization other than another contractor or


                                                 11
                    subcontractor engaged in performing operations for a
                    principal as a part of the same project."

              c. McMillin's complaint in this action

       McMillin alleged in its complaint in this action that Martinez and Rozema had

acted as subcontractors on the Project. McMillin also alleged that Lexington had issued

CGL policies to both Martinez and Rozema, and that the policies listed McMillin as an

additional insured. McMillin further alleged that the complaint in the underlying action

"sought damages against [McMillin] arising out of alleged negligent and defective work

of [McMillin] and its subcontractors and suppliers on the Project."

              d. Lexington's motion for summary judgment

       Lexington filed a motion for summary judgment on the ground that it did not owe

McMillin a duty to defend the underlying action because there was no possibility for

coverage under the policies, in light of the additional insured endorsements. Specifically,

Lexington noted that the endorsements provided coverage only for " 'liability arising out

of your [i.e., Martinez's or Rozema's] ongoing operations performed for [McMillin].' "

(Italics omitted.) Lexington argued that there was no possible coverage under the

endorsements because there were no homeowners who could have brought construction

defect claims against McMillin during the time that Martinez's or Rozema's operations

were ongoing. Specifically, Lexington argued in relevant part:

          "McMillin would have no liability to the homeowners until after the
          close of escrow on each homeowner's property. [¶] Furthermore,
          pursuant to well-established California law, a construction defect
          action does not accrue until the plaintiff discovers the defect.
          [Citation.] Therefore McMillin did not have any liability to the
          homeowners until after close of escrow of their property, and only

                                            12
          after the homeowners discovered the defects complained of in the
          [underlying action]. [¶] . . . [P]laintiffs [in the underlying action]
          waited approximately five to seven years after taking possession of
          their properties to file [the underlying action]. As such, because
          McMillin did not have any liability to plaintiffs [in the underlying
          action] for property damage that took place while Martinez and
          Rozema were working on the Project . . . the allegations in the
          [underlying action] are not covered under the ongoing operations
          additional insured endorsements to the [p]olicies." (Italics added.)

       Lexington further argued "it is clear that the claims at issue in the [underlying

action] constitute claims for completed operations" (italics added), and that the language

of the endorsements made clear that McMillin was entitled to coverage only for ongoing

operations claims.

       Finally, Lexington contended that McMillin "understood the difference between

an 'ongoing operations' additional insured endorsement and a 'completed operations'

version." In support of this contention, Lexington cited a memorandum that McMillin's

risk manager, Jim Jordan, drafted in May of 2003, summarizing the standard additional

insured endorsement form used in the Martinez and Rozema policies. Jordan's

memorandum states in relevant part:

          "[The ongoing operations endorsement] restricts coverage for the
          Additional Insured to liability only arising out of the subcontractors'
          'ongoing operations.' In other words, the coverage for the Additional
          Insured ends when the subcontractor's work is no longer
          ongoing . . . or, in other words, is finished or completed . . . ."
          (Emphasis and omissions are from Lexington's brief.)

                     e. McMillin's opposition

       McMillin filed an opposition in which it argued that the fact that Martinez's and

Rozema's work on the Project was completed before the homeowners owned their homes


                                             13
or made their claims in the underlying action did not establish the lack of a potential for

coverage under the additional insured endorsements. McMillin noted that the

endorsements in the relevant policies provided coverage to McMillin " 'with respect to

liability arising out of . . . ongoing operations performed' " for McMillin. McMillin

argued, "This language does not incorporate any coverage limitations related to when the

liability must arise. Instead, it told McMillin at the time operations were ongoing, that

any liability 'arising out of' those operations would be insured."

       McMillin also argued that whether it was covered under the endorsements was

determined by "when the property damage occurred" (italics omitted) and that Lexington

had presented "no evidence . . . that any property damage could only have occurred after

operations were completed."

       McMillin maintained that Lexington was mistaken in contending that "no

coverage is triggered because the homeowners' cause of action did not accrue until they

discovered the defects." McMillin reasoned, "[T]hat is not the standard for the duty to

defend[,] which depends upon when property damage occurs, not when it is discovered."

       Finally, McMillin contended that, because the proper interpretation of the

endorsements was a legal question, any statements made in Jordan's memorandum

concerning coverage were "irrelevant and immaterial to whether a defense is owed."

(Italics omitted.) McMillin also argued that, in any event, Jordan's memorandum merely

reflected his understanding that coverage under the ongoing operations endorsement

applies to property damage occurring before the completion of Martinez's and Rozema's



                                             14
work, which was consistent with McMillin's interpretation of the endorsement in its

opposition to Lexington's motion.

              f. Lexington's reply

       In its reply, Lexington reiterated its argument that "[s]ince as a matter of law

McMill[i]n could not have had liability to the . . . plaintiffs ('Homeowners') until after the

Homeowners took possession of their homes long after operations were complete, . . .

liability cannot have arisen from ongoing operations." For example, Lexington argued,

"The critical question in this case . . . is whether McMillin was liable to the Homeowners

during Martinez['s] and/or Rozema's . . . ongoing operations." (Italics added.) Lexington

then argued the answer to that question by stating, "McMillin had no liability to the

Homeowners during Martinez'[s] and Rozema's ongoing operations because it is

undisputed that the Homeowners took possession after all work had been completed."

(Italics altered & boldface omitted.)

       Lexington maintained that "[b]ecause the Homeowners in the [underlying action]

could only sue for construction defect[s] after taking possession of their homes, and after

all work had been completed, the word 'liability' in the [additional insured] endorsements

must encompass a temporal element." Lexington made clear that, under its interpretation

of the endorsements, McMillin had no possible coverage for construction defect claims,

since such claims would accrue to homeowners only after the homeowners took

possession of the homes and all of Martinez's and Rozema's work was complete.

Lexington argued:



                                             15
          "Here, it is undisputed that [the underlying action] involves
          construction defect claims[ ] [citation] and that the subject
          [additional insured] endorsements limit coverage for the [additional
          insured] to liability arising out of Martinez's and Rozema's ongoing
          operations performed [for] McMillin. [Citation.] Accordingly, there
          is no coverage for McMillin under the ongoing operations
          [additional insured] endorsements and Lexington owed no duty to
          defend McMillin."

              g. The trial court's ruling

       After hearing argument from counsel, the trial court issued a ruling granting

Lexington's motion for summary judgment. The court reasoned in relevant part:

          "The additional insured endorsements ('AIE') provide[ ] coverage
          'only with respect to liability arising out of [the subcontractors']
          ongoing operations.' [Citation.] Because there were no
          homeowners in existence until after the subcontractors' work was
          completed, it follows that . . . any potential liability to the
          homeowners arising out of the subcontractors' work must have
          arisen out of the subcontractor's completed operations." (Italics
          added.)

       The trial court reasoned further that "[t]here is a distinction between ongoing

operations and completed operations coverage." (Citing Pardee Const. Co. v. Insurance

Co. of the West (2000) 77 Cal.App.4th 1340, 1340–1345 (Pardee).)

       After an extensive discussion of Pardee, the trial court stated:

          "Moreover, McMillin itself has acknowledged that [additional
          insured endorsement] coverage for ongoing operations ends when
          the subcontractor's work is completed. [Citation.][4] [¶]
          [McMillin's] interpretation would also run afoul of the rule that


4       In support of this point, the trial court cited to two undisputed material facts
referencing the May 2003 Jordan memorandum discussed in part II.B.1.d, ante, that
stated in relevant part, "In other words, the coverage for the Additional Insured ends
when the subcontractor's work is no longer ongoing . . . or, in other words, is finished or
completed . . . ." (Italics omitted.)
                                             16
          insurance contracts must be construed to avoid rendering terms
          surplusage. [Citation.] McMillin contend[s] the endorsement
          provides coverage as long as liability arose out of the subcontractors'
          work. [McMillin] fail[s] to give any meaning to the phrase 'ongoing
          operations.' "

       2. Governing law

              a. Applicable principles of law governing the interpretation of an
                 insurance policy

       In Hartford, supra, the Supreme Court outlined the following relevant law

governing the interpretation of an insurance policy:

          "In determining whether a claim creates the potential for coverage
          under an insurance policy, 'we are guided by the principle that
          interpretation of an insurance policy is a question of law.' [Citation.]
          'Under statutory rules of contract interpretation, the mutual intention
          of the parties at the time the contract is formed governs
          interpretation. (Civ. Code, § 1636.)' [Citation.] In determining this
          intent, '[t]he rules governing policy interpretation require us to look
          first to the language of the contract in order to ascertain its plain
          meaning or the meaning a layperson would ordinarily attach to it.'
          [Citation]. We consider the ' "clear and explicit" meaning of these
          provisions, interpreted in their "ordinary and popular sense," unless
          "used by the parties in a technical sense or a special meaning is
          given to them by usage." ' [Citation.] We must also 'interpret the
          language in context, with regard to its intended function in the
          policy.' " (Hartford, supra, 59 Cal.4th at p. 288.)

              b. The meaning of the key terms in the endorsement

       As discussed in part III.B.1.b.iii, ante, Lexington named McMillin as additional

insured for " 'liability arising out of [Martinez's or Rozema's] ongoing operations

performed for [McMillin].' "




                                            17
                     i. Liability

       We assume for purposes of this decision that Lexington is correct that the meaning

of the term "liability" in the endorsements is "loss and legal obligation for [the loss]."

                     ii. Arising out of

       In Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App.4th 321 (Syufy), the

Court of Appeal discussed the meaning of the phrase "arising out of," while interpreting

an additional insured endorsement in a CGL policy. The Syufy court stated:

          "California courts have consistently given a broad interpretation to
          the terms 'arising out of' or 'arising from' in various kinds of
          insurance provisions. It is settled that this language does not import
          any particular standard of causation or theory of liability into an
          insurance policy. Rather, it broadly links a factual situation with the
          event creating liability, and connotes only a minimal causal
          connection or incidental relationship." (Id. at p. 328.)

                     iii. Ongoing operations

       In St. Paul Fire and Marine Ins. Co. v. American Dynasty Surplus Lines Ins. Co.

(2002) 101 Cal.App.4th 1038, 1056–1057 (St. Paul), the court interpreted an additional

insured endorsement that, as in this case, provided coverage limited " 'to liability [to [the

additional insured]] arising out of [named insured's] ongoing operations performed for

[the additional insured].' " (Id. at p. 1055.) The St. Paul court stated that the term

"ongoing operations" was "the work to be performed for [the additional insured] under

the [s]ubcontract," by the named insured. (Id. at pp. 1056–1057.)

       3. Application

       In order to resolve this appeal, we are faced with a narrow question. Did the trial

court properly determine that there was no potential for coverage under the endorsements

                                              18
naming McMillin as an additional insured for " 'liability arising out of [Martinez's or

Rozema's] ongoing operations performed for [McMillin]' " because there were no

homeowners in the Project at the time of Martinez's and Rozema's ongoing operations?

       Lexington contends that the answer to that question is "yes," and that we may

affirm the judgment on this basis. As it argued in the trial court, Lexington contends that

the fact that there were no homeowners at the time Martinez and Rozema were working

on the Project establishes that McMillin did not have any liability to the homeowners

during Martinez's and Rozema's ongoing operations. Lexington repeats this contention

throughout its brief:

          "The trial court correctly ruled that McMillin did not have any
          liability to the Homeowners during 'ongoing operations' because
          there were not Homeowners until after operations were completed."
          (Italics altered.)

          "In other words, the determinative issue is whether McMillin's
          potential liability to the Homeowners arose during a named insured's
          'ongoing operations.' " (Italics added.)

          "On these facts, since the Homeowners' causes of action accrued
          after operations were completed, McMillin could have no liability to
          the Homeowners during the named insureds' 'ongoing operations.' "
          (Italics altered.)

          "[T]he central question here is whether McMillin faced any liability
          to the Homeowners during the named insureds' 'ongoing
          operations,' . . . ." (Italics added.)

          "Under the terms of the Lexington [additional insured]
          [e]ndorsements, McMillin could have coverage for liability for
          bodily injury or property damage when that liability arises during
          ongoing operations." (Italics added.)

          "The key issue is whether McMillin's liability arose during the
          named insureds' 'ongoing operations.' " (Italics added.)

                                            19
          "Specifically, the 'liability,' i.e., the loss and legal obligation for
          same, must take place during the named insured's ongoing
          operations." (Italics altered.)

       Even assuming that Lexington is correct that McMillin did not face any liability to

homeowners during Martinez's or Rozema's ongoing operations,5 the endorsements do

not state that Lexington would provide coverage solely for liability occurring during

Martinez's or Rozema's ongoing operations performed for McMillin. Rather, the

endorsements state that Lexington would provide coverage to McMillin for liability

"arising out of" such ongoing operations. The term "arising out of" is, of course, not

synonymous with "during." (Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey (8th

Cir. 1984) 726 F.2d 1286, 1290 [rejecting interpretation of agreement that "would require

reading the words 'arising out of' as synonymous with 'during' "].)

       Indeed, as discussed above, the phrase "arising out of," has specifically been given

a "broad interpretation," in the context of additional insured endorsements. (See Syufy,

supra, 69 Cal.App.4th at p. 328.) The term "arising out of" in the endorsements granting

McMillin coverage for " 'liability arising out of [Martinez's or Rozema's] ongoing

operations,' " provides only that McMillin's liability must be "linked," through a "minimal

causal connection or incidental relationship" (ibid.), with Martinez's or Rozema's ongoing

operations. Thus, the fact that there were no homeowners at the time of Martinez's and




5     We emphasize that we do not conclude that Lexington would have been entitled to
summary judgment if the endorsements restricted coverage to liability occurring during
ongoing operations.
                                               20
Rozema's ongoing operations does not establish that McMillin could suffer no liability

arising out of such ongoing operations.

       For example, consider the work of Lexington subcontractors such as those in this

case, who performed concrete flatwork and stucco work. The improper pouring of

concrete on a foundation or the improper installation of stucco could permit water

damage to other portions of the home.6 Thus, consequential damage could begin long

before the subcontractors' work ended. If homeowners did not discover and file suit to

recover for such damages until after the subcontractors ceased ongoing operations, that

would not establish that McMillin suffered no liability arising out of such ongoing

operations.7

       Both Lexington and the trial court have focused on the terms "ongoing operations"

and "completed operations" in tandem, suggesting that any claim by a homeowner is

necessarily covered, if at all, only by "completed operations" coverage. Lexington

appears to suggest that an "ongoing operations" additional insured endorsement does not



6       We emphasize that we mention such potential damages by way of example for
illustrative purposes and not to in any way suggest that this is the basis of the potential
coverage in this case.
7       In Pulte Home Corp. v. American Safety Indemnity Co. (2017) 14 Cal.App.5th
1086, this court made a similar point in affirming a judgment against an insurer
(American Safety) for breaching its duty to defend a general contractor named as an
additional insured on several CGL policies issued to its subcontractors:
          "American Safety incorrectly focuses on when the current property
          owners became financially damaged through purchases. This begs
          the question of when the subject property damage occurred from the
          work of the subcontractors. The coverage potential depends on
          when the property became physically damaged." (Id. at. p. 1113.)
                                              21
afford the additional insured with coverage provided under a named insured

subcontractor's "products-completed" coverage.

       The policies in this case state that " 'property damage' " covered under the

" 'products-completed operations hazard' " does not include the named insured

subcontractors' "[w]ork that has not yet been completed or abandoned." Thus, the policy

language makes clear that property damage occurring before completion of the named

insured subcontractors' work would not be covered by "products-completed operations

hazard."8

       As our example above demonstrates, the lack of homeowners does not establish

that any property damage caused by the named insured subcontractors' work occurred

after the completion of their work. Thus, even assuming that Lexington is correct that an

"ongoing operations" additional insured endorsement does not provide the additional

insured with the same coverage afforded under a named insured subcontractor's

"products-completed" coverage, a homeowner's construction defect claim is not, as

Lexington suggests in its brief, necessarily one that is brought to recover under the

"products-completed" coverage of a named insured subcontractor's policy. On the

contrary, if property damage occurs before the named insured finishes work at the jobsite,


8      One prominent commentator explains that "[t]he 'products-completed operations
hazard' covers liability for accidental bodily injury or property damage following
completion of the insured's work or operations. This type of coverage is generally
conditioned on damage occurring during the policy period, as long as the work was
completed before the damage occurred . . . ." (Croskey et al., Cal. Practice Guide:
Insurance Litigation (The Rutter Group 2017) ¶ 7:1429, p. 7E-27 (second italics added).)
Thus, "products-completed" coverage only covers damage that occurs after the named
insured completes operations.
                                             22
under the plain language of the policy, an additional insured may be entitled to coverage

pursuant to an "ongoing operations" endorsement.9

       This court's decision in Pardee, supra, 77 Cal.App.4th 1340, on which both the

trial court and Lexington heavily rely, does not support a contrary result. In Pardee, we

concluded that several insurers that had issued CGL policies to subcontractors, including

"completed operations coverage as to projects completed before [the policies'] inception,"

owed a duty to defend an additionally insured general contractor in third party litigation

alleging vicarious liability for the subcontractors' acts in constructing the completed

projects. (Id. at pp. 1344–1345, italics added.) In the course of reaching this conclusion,

the Pardee court noted that if the insurers had wished to exclude coverage for "projects

completed before inception of policies" (id. at p. 1358), the insurers had several options:

          "The insurers could have limited coverage by express policy
          language that coverage was limited to claims arising from work
          performed during the policy period. However, they did not. Indeed,
          they acknowledge they intended to provide the named insureds
          completed operations coverage for projects completed before
          inception of policies. Similarly, the insurers could have used the
          form 2009 additional endorsement, which has been widely employed
          since the mid-1980's to add a contractor as an additional insured
          under a subcontractor's policy and which clearly excludes 'completed
          operations.' Again, they did not." (Id. at p. 1358, fn. omitted.)

       The Pardee court stated that, alternatively, the insurers could have used additional

insured endorsements that restricted coverage to the ongoing operations of the named



9      As discussed in the text, post, we need not, and do not, decide whether an
additional insured is entitled to coverage under an "ongoing operations" endorsement
where the property damage occurs after the named insured finishes work at the jobsite
but before the termination of the policy.
                                             23
insured. (Pardee, supra, 77 Cal.App.4th at p. 1359.) The Pardee court detailed the

history of the availability of such endorsements as follows:

          "[I]n 1993, the Insurance Services Office (ISO)[10] revised the
          language of the form 2010 endorsement utilized by the insurance
          industry to expressly restrict coverage for an additional insured to
          the 'ongoing operations' of the named insured.[ ] This revised
          language effectively precludes application of the endorsement's
          coverage to completed operations losses. [Citation.] One insurance
          commentator stated regarding the 1993 revisions of the standard
          additional insured endorsement forms: 'The restriction of coverage
          in the two endorsements to only ongoing operations makes it clear
          that additional insureds will have no coverage under the named
          insured's policy for liability arising out of the products-completed
          operations[11] exposure. . . . The effect of this change—restricting
          the coverage to ongoing operations—is, however, much more
          profound on [form 2010]. Previous editions of [that form] contained
          no completed operations exclusion and, thus, could be called on to
          cover an additional insured for liability arising out of the products-
          completed operations hazard.' [Citation.] Similarly, construction
          industry and underwriting spokespersons have echoed this
          assessment: 'Completed Operations Coverage. Prior to the 1993 . . .
          revisions, the standard ISO additional insured endorsements
          provided the additional insured with coverage for liability arising out
          of "your operations performed for" the additional insured, which
          included completed operations. More recent editions of these
          endorsements provide coverage only with respect to "your ongoing

10    In a footnote at this portion of the quotation, the Pardee court described the ISO as
follows:
         " 'ISO is a nonprofit trade association that provides rating, statistical,
         and actuarial policy forms and related drafting services to
         approximately 3,000 nationwide property or casualty insurers.
         Policy forms developed by ISO are approved by its constituent
         insurance carriers and then submitted to state agencies for review.
         Most carriers use the basic ISO forms, at least as the starting point
         for their general liability policies.' " (Pardee, supra, 77 Cal.App.4th
         at p. 1359.)
11    "[P]roducts-completed operations coverage applies to defects in merchandise or
improper workmanship after the product has been completed and distributed." (Travelers
Casualty & Surety Co. v. Employers Ins. of Wausau (2005) 130 Cal.App.4th 99, 113.)
                                            24
          operations," which effectively eliminates coverage for completed
          operations.' [Citation.] Although these 1993 revisions postdated the
          insurers' policies here with the exception of [one insurer], they
          evince as to [the other insurers] alternative express limiting language
          that could have been employed. [¶] Consequently, the insurers'
          failure to use available language expressly excluding completed
          operations coverage implies a manifested intent not to do so." (Id. at
          pp. 1358–1359.)

       Since the Pardee court was discussing how the insurers in that case could have

restricted coverage "for projects completed before inception of [the] policies" (Pardee,

supra, 77 Cal.App.4th at p. 1358), Pardee supports the proposition that an ongoing

operations endorsement may be used by an insurer to make clear that there is no coverage

for damages arising out of work completed prior to the inception of the policy. (See also

id. at p. 1358 ["insurers could have limited coverage by express policy language that

coverage was limited to claims arising from work performed during the policy period"

(italics added)].) It is undisputed in this case that Lexington did not establish that the

damages in this case arose from work completed before the inception of the policies.

       Moreover, even assuming that an ongoing operations additional insured

endorsement may have a broader effect (e.g., by restricting coverage to damages that

occur before the completion of the subcontractors' ongoing operations), the trial court did

not conclude that Lexington had established as a matter of law that all of the property

damage in the underlying action occurred only after the completion of the Martinez's and

Rozema's ongoing operations.12 Lexington does not argue to the contrary on appeal.



12     Coverage for property damage under an occurrence based CGL policy, such as the
policies in this case, is deemed "to occur over the entire process of the continuing injury,"
                                              25
Instead, it contends, "The relevant issue is when liability arose, not when property

damage first commenced."13

       The parties have not cited, and our own research has not uncovered, any relevant

California authority specifically addressing whether an ongoing operations additional

insured endorsement such as the one in the Lexington policies provides coverage to the

additional insured only for damages that occur before the completion of the named

insured's ongoing operations. Cases from other jurisdictions are in conflict on this issue.

(Compare e.g., Noble v. Wellington Assocs. (Miss. 2013) 145 So.3d 714, 720

["endorsement did not cover property damage manifesting[14] itself after [subcontractor

named insured] stopped working on the site"] with Tri-Star Theme Builders, Inc. v

OneBeacon Ins. Co. (9th Cir. 2011) 426 Fed.Appx. 506, 508 (Tri-Star) [rejecting



and not simply when the damage is discovered or becomes manifest. (Pepperell v.
Scottsdale Ins. Co. (1998) 62 Cal.App.4th 1045, 1053 (Pepperell).) Given that damages
from construction defects often consist of "a continuing and progressively deteriorating
process" (id. at. p. 1055), damages may occur during a subcontractors' ongoing
operations, only to be discovered at a far later time. (See, e.g., id. at pp. 1048–1049,
1054–1055 [construction defect complaint that alleged defective roof design and
construction that was completed by November 1988 alleged potentially covered damages,
despite fact that policy terminated in 1989 and defects were not discovered until severe
leakage occurred in 1991].)
13        In addition, Lexington does not contend that it presented evidence that established
as a matter of law that the exclusions contained in the additional insured endorsements
related to the timing of the occurrence of property damage applied. (See pt. III.B.1.b.iii,
ante ["This insurance does not apply to . . . 'property damage' occurring after: (1) All
work . . . at the site of the covered operations has been completed; or (2) That portion of
'your work' out of which the injury or damage arises has been put to its intended
use . . . ."].)
14       Noble is also distinguishable because, as discussed in footnote 12, ante, California
law does not require that property damage become "manifest" in order to trigger coverage
under a CGL policy. (Pepperell, supra, 62 Cal.App.4th at p. 1052.)
                                             26
insurer's contention that additional insured general contractor was "covered [only] for

damages suffered while [named insured subcontractor] was performing work on the

[p]roject"].)

       However, we need not decide this issue in this appeal, because Lexington has not

established as a matter of law that all of the damages in the underlying action occurred

after the completion of Martinez's and Rozema's ongoing operations. Rather, as

discussed above, we need decide only whether Lexington and the trial court are correct

that the nonexistence of homeowners at the time Martinez and Rozema ceased ongoing

operations establishes as a matter of law the lack of potential for coverage for McMillin

under the policies. On this issue, neither the Pardee court, nor any other case that

Lexington has cited or of which we are aware, has held that the fact that there were no

homeowners at the time the named insured subcontractor ceased ongoing operations

demonstrates that an additional insured did not suffer liability arising out of the named

insured's ongoing operations. The one out-of-state case that Lexington cites, without

discussion, that comes closest to stating as much, Hartford Ins. Co. v. Ohio Cas. Ins. Co.

(2008) 145 Wash.App.765, 780 (Ohio), relied on Pardee only in reaching the conclusion

that an insurer was "correct in its argument that the additional insured endorsement

'limited [the additional insured's] coverage to property damage arising out of the

subcontractors' work in progress only.' " (Ohio, supra, at p. 778, italics added.)15 As



15       The Ohio court suggested that the additional insured would have had coverage
"[i]f there were allegations in the complaint [in the underlying construction defect action]
or other evidence that would have shown that [the insurer] was being asked to cover [the
                                             27
discussed above, we need not resolve the conflict in the non-California case law16

concerning this issue because Lexington did not establish that all of the damage in the

underlying action occurred after Martinez and Rozema completed operations.

       We acknowledge that the Ohio court did conclude that an insurer had no duty to

defend the additional insured in that case, in part, because "the condo owners did not own

the units until after the completion of subcontractor operations." (Ohio, supra, 145

Wash.App. at p. 780.) However, the Ohio court did not cite Pardee as support for this

portion of its analysis (Ohio, supra, at p. 780) nor did the court explain why it viewed this

fact as establishing that there was no possibility for coverage under a policy that provided

that "the additional insured was an insured only with respect to '[the named insured's]

ongoing operations for that insured, whether the work is performed by [the named

insured] or for [the named insured].' " (Id. at p. 777.) For the reasons stated above, the

fact that there were no homeowners in the Project at the time Martinez and Rozema

ceased ongoing operations does not logically establish that the complaint in the

underlying action did not subject McMillin to potential " 'liability arising out of

[Martinez's or Rozema's] ongoing operations performed for [McMillin].' " (Italics

added.) In short, neither Pardee, nor the text of the endorsements, provide any support

for the trial court's order or Lexington's contention on appeal.




additional insured] for liability arising from work in progress . . . ." (Ohio, supra, 145
Wash.App. at p. 780, italics added.)
16     The Ninth Circuit has distinguished Ohio (Tri-Star, supra, 426 Fed.Appx. at p.
512) and criticized a portion of its reasoning (Id. at p. 514).
                                             28
       Lexington's argument that we may affirm the judgment on the ground that

McMillin's interpretation of the endorsement would render the term "ongoing" surplusage

also fails. Lexington contends that we may affirm the judgment on this ground because

McMillin purportedly argues that it is entitled to coverage for claims arising out of the

subcontractors' completed operations, "since even 'completed operations' (under

McMillin's argument) arise out of operations which were, at some point, ongoing."17

Even assuming that McMillin is making this argument, we reverse the judgment solely on

the narrow ground that the fact that there were no homeowners at the time Martinez and

Rozema ceased ongoing operations does not establish as a matter of law the lack of a

potential for coverage for McMillin under the policies. As explained above, we do not

decide whether an ongoing operations endorsement such as that used in this case provides

coverage to the additional insured only for damages that occur prior to the completion of

the named insured's subcontractors' ongoing operations.18

       We also reject Lexington's argument that we may affirm the judgment on the

ground that the May 2003 Jordan memorandum demonstrates that McMillin understood

that the endorsements would provide no coverage for the claims in the underlying action.

Even assuming that the Jordan memorandum is properly considered as extrinsic evidence

17     We quote from Lexington's respondent's brief.
18     One can imagine that damage from a subcontractor's ongoing operations might
occur either prior to the completion of ongoing operations (e.g., a poorly installed pipe
that causes a leak that begins to cause water damage to drywall while the subcontractor
continues to work on the project, but that is not discovered until the home is purchased)
or after the completion of ongoing operations (e.g., a poorly installed pipe that causes a
leak that begins to cause water damage to drywall after the subcontractor ceases
operations).
                                             29
of the parties' understanding of the endorsements, the Jordan memorandum merely states,

"[c]overage for the Additional Insured ends when the subcontractor's work is no longer

ongoing . . . or, in other words, is finished or completed . . . ." (Italics omitted.) Since

homeowners are not mentioned in the cited portion of the Jordan memorandum, the

memorandum does not constitute evidence that McMillin believed that the fact that there

were no homeowners during the subcontractor's ongoing operations demonstrated that

McMillin would have no potential coverage for construction defect claims under the

endorsements.19

       Accordingly, we conclude that the trial court erred in granting Lexington's motion

for summary judgment.20




19      We are not persuaded by Lexington's contention that we may affirm the judgment
on the basis that McMillin failed to address the surplusage interpretation issue and the
Jordan memorandum issue in its opening brief. While Lexington asserts that these issues
are "independent grounds," upon which the trial court granted summary judgment, in
fact, they are not. (Italics added.) The trial court's reasoning with respect to both issues
was related to the sole ground on which the court granted summary judgment, namely,
that Lexington established that it had no duty to defend McMillin in the underlying action
because there was no possibility for coverage under the policies given the " 'ongoing
operations' " limitation in the additional insured endorsements. McMillin adequately
addressed this issue in its opening brief, and Lexington is not entitled to affirmance
merely because McMillin did not address in its opening brief every aspect of the court's
reasoning in granting summary judgment.
20      In its respondent's brief, Lexington raises two claims under separate headings that
we need not consider in this appeal. Specifically, Lexington contends that it is entitled to
"summary adjudication of McMillin's claim for bad faith." Lexington also maintains that
McMillin is "not entitled to punitive damages." (Capitalization & boldface omitted.)
Neither claim constitutes a basis for affirming the trial court's order granting summary
judgment in favor of Lexington. We therefore express no opinion with respect to either
issue.
                                              30
C. The trial court properly granted Financial Pacific's motion for summary judgment

        McMillin claims that the trial court erred in granting Financial Pacific's motion

for summary judgment. McMillin argues that the allegations in the underlying action and

additional facts known to Financial Pacific established the potential for coverage under

Financial Pacific's policies issued to A.M. Fernandez and J.Q. Drywall, and thus

triggered Financial Pacific's duty to defend McMillin as an additional insured under those

policies.

       Specifically, McMillin contends that the homeowners in the underlying action

complained of damages related to stucco installation and that there is evidence in the

record that J.Q. Drywall performed stucco work. McMillin also claims that Financial

Pacific had knowledge of facts extrinsic to the complaint in the underlying action that

demonstrated that the homeowners were potentially seeking damages related to drywall

installation covered under the policies.

       1. Additional factual and procedural background

       Financial Pacific filed a motion for summary judgment in which it contended that

it did not owe McMillin a duty to defend the underlying action. Financial Pacific argued

that there were no allegations in the complaint in the underlying action identifying either

A.M. Fernandez or J.Q. Drywall or "their work furnishing and installing drywall in the

homes." Financial Pacific further maintained that the homeowners in the underlying

action had made "no contention in their complaints or defect list that they had suffered

damage to other property [i.e., other than the drywall] due to A.M. Ferndandez . . . or J.Q.

Drywall's work." Financial Pacific maintained that damages related to the drywall on

                                             31
which its insureds were working did not constitute covered property damage under the

policies.

       In its opposition, McMillin contended that Financial Pacific was aware of facts

that gave rise to the potential for covered damages resulting from Financial Pacific's

insured's work. Specifically, McMillin cited to a notice of claim and a defect list

submitted by the homeowners in the underlying action that McMillin argued supported

the conclusion that improper drywall or stucco installation21 may have led to water

intrusion into the homes and damage to parts of the homes other than the drywall or

stucco.

       Financial Pacific filed objections to the evidence that McMillin offered in support

of its contention that J.Q. Drywall had performed stucco installation work on the Project.

       After further briefing and a hearing, the trial court granted Financial Pacific's

motion for summary judgment on the ground that Financial Pacific had established that it

did not owe McMillin a duty to defend the underlying action. As discussed below, in its

order granting Financial Pacific's motion, the court sustained Financial Pacific's

objections to McMillin's evidence offered in support of its contention that Financial

Pacific's insured had performed stucco installation. As to the merits of the motion, the

trial court noted that Financial Pacific issued policies to A.M. Fernandez and J.Q.




21     As discussed below, McMillin argued that one of Financial Pacific's insureds, J.Q.
Drywall, had performed stucco installation on the Project based on evidence that the trial
court later deemed inadmissible.
                                             32
Drywall that covered consequential property damage22 and that McMillin was named as

an additional insured on the policies. The trial court agreed with Financial Pacific that it

had established that there was no potential for coverage in the underlying action and that

Financial Pacific had established that it did not owe McMillin a duty to defend. The

court reasoned in part:

          "As in Monticello,[23] the complaints [in the underlying action] did
          not mention drywall or any problems caused by the installation of
          the drywall. The only damages the homeowners attributed to
          subcontractors' work was "drywall and corner bead cracks and
          separation' and 'drywall nail pops.' [Citation]. There is no reference
          to any damages the installation caused to other property.

          "McMillin cites to the homeowners' defect list submitted in April
          2010 as part of an SB 800 claim.[24] [Citation.] The cited portions
          refer to water intrusion in connection with windows, patio doors and
          deck doors, and improper installation of moisture barriers at doors,
          windows and sliding glass doors. [Citation.] McMillin also cites to
          drywall separation, window weeps clogged with stucco, drywall nail
          pops, and stains from water intrusion listed in revised SB 800
          claims. [Citation.] The subcontractors were hired to install drywall.
          There is no evidence that the subcontractors were responsible for
          installing windows and patio doors. There is also no indication that

22      The court explained that under California law, the meaning of "property damage,"
under the policy did not "cover claims that the work itself is defective," and that covered
property damage did not exist "unless and until the defective component causes physical
injury to tangible property in at least some other part of the system." (Quoting F & H
Construction v. ITT Hartford Ins. Co. (2004) 118 Cal.App.4th 364, 373.) Damage to
property other than the property worked on by the insured is commonly referred to as
"consequential property damage or resultant property damage . . . ." (Monticello Ins. Co.
v. Essex Ins. Co. (2008) 162 Cal.App.4th 1376, 1379 (Monticello).
23      We discuss Monticello in part III.C.3 and part III.C.4, post.
24      "SB 800" refers to Senate Bill 800, which, in 2002, adopted the Right to Repair
Act (Civ. Code, § 895 et seq.). The Right to Repair Act "establishes a set of building
standards pertaining to new residential construction and provides homeowners with a
cause of action . . . for a violation of the standards (§§ 896, 936)." (Acqua Vista
Homeowners Assn. v. MWI, Inc. (2017) 7 Cal.App.5th 1129, 1134.)
                                             33
           the homeowners claimed the drywall damaged other property. The
           water intrusion issues McMillin references were attributed to issues
           with windows and doors."

       2. Additional law governing an order granting summary judgment

       Where a party fails to challenge on appeal an evidentiary ruling sustaining an

objection to evidence, a reviewing court must "consider . . . such evidence to have been

properly excluded." (Lopez v. Baca (2002) 98 Cal.App.4th 1008, 1014–1015 (Lopez)

[where party fails to "challenge the trial court's ruling sustaining . . . objections to certain

evidence offered in opposition to the summary judgment motion," "any issues concerning

the correctness of the trial court's evidentiary rulings have been waived"].) A party is not

entitled to reversal on the basis of inadmissible evidence. (See Brown v. Ransweiler

(2009) 171 Cal.App.4th 516, 529 ["A motion for summary judgment 'must be decided

upon admissible evidence' "].)

       3. Additional relevant law concerning covered property damage and the duty to
          defend

       In Monticello, supra, 162 Cal.App.4th 1376, the Court of Appeal considered

whether the trial court erred in denying a plaintiff insurer (Monticello) summary

judgment in an equitable contribution action for defense costs against a second insured

(Essex). (Id. at pp. 1378, 1381–1383.) Monticello claimed that Essex had a duty to

defend a general contractor against construction defect claims as an additional insured to

a policy issued to a subcontractor that had installed drywall on the property at issue in the

underlying construction defect action. (Id. at p. 1378.) Monticello contended that the

pleadings in the underlying case established a possibility of consequential property


                                               34
damage related to the drywall installer's work sufficient to trigger Essex's duty to defend.

(Id. at pp. 1386–1387.)

       In considering this claim, the Monticello court noted that the homeowner plaintiffs

in the underlying case alleged " '[e]xcessive cracking in the interior and exterior of

the . . . property,' " " '[p]remature failure of painted surfaces,' " and " '[w]ater damage to

structure.' " (Monticello, supra, 162 Cal.App.4th at p. 1387.) The Monticello court

concluded that the "excessive cracking" allegation did not reveal a possibility of coverage

under the drywall installer's policy, reasoning:




                                              35
          "The word 'drywall' is not even mentioned in the underlying
          complaint. There was no allegation therein that the 'excessive
          cracking' was in any way related to the work of [the drywall
          installer] or to any drywall installation. 'Cracking' and 'drywall' are
          not synonymous. Essex was not required to speculate that the
          'excessive cracking' might be attributed to the work of [the drywall
          installer]." (Ibid.)

       The Monticello court also reasoned, "As for the allegations in . . . the complaint

relating to 'premature failure of painted surfaces' and 'water damage to structure,' the

complaint did not allege those damages were in any way related to drywall work."

(Monticello, supra, 162 Cal.App.4th at p. 1387.) Ultimately, the Monticello court

concluded that the complaint did not reveal a possibility that the action against the

general contractor might be covered by the drywall installer's policy. (Ibid.)

       4. The trial court properly concluded that Financial Pacific did not owe
          McMillin a duty to defend the underlying action

       McMillin contends that both the allegations in the underlying action and facts

extrinsic to the complaint in the underlying action established the possibility of

consequential damages arising from the work of Financial Pacific's insureds, A.M.

Fernandez and J.Q. Drywall.

       With respect to the allegations in the underlying action, McMillin contends that

the homeowners complained of defects related to stucco that permitted unintended

moisture to enter the homes. McMillin also asserts in its opening brief on appeal that one

of Financial Pacific's insureds, J.Q. Drywall, performed stucco work on the project.

McMillin argues:




                                             36
          "In their SB800 Written Notice of Claim,[25] the homeowners
          specifically alleged construction defects including 'improper
          installation of foundations, slabs, flatwork . . . gaps and missing
          plaster in stucco system, . . . stucco cracking allowing unintended
          moisture, . . . improper soil preparation and installation of exterior
          flatwork.' [Citation.] Financial Pacific's named insured, J.Q.
          Drywall performed stucco work on the Project. (7 CT 1778-81,
          1857, 1862, 1864, 1866, 1868–69.)" (Italics added.)

       Notwithstanding its assertion in its opening brief that J.Q. Drywall performed

stucco work on the Project, McMillin fails to identify any admissible evidence in the

record demonstrating this fact. Specifically, the only evidence that McMillin cites in

support of its contention that J.Q. Drywall performed stucco work on the Project is the

declaration of McMillin's employee, Les Leininger, authenticating various "Job Cost

Detail Reports," purportedly showing that J.Q. Drywall performed stucco work on the

Project and the Job Cost Detail Reports themselves. However, McMillin fails to address,

in any manner, the trial court's sustaining of Financial Pacific's objections to the

paragraphs of the Leininger declaration authenticating the Job Cost Detail Reports.

       The trial court's summary judgment order states, "[Financial Pacific's] objections

to paragraphs 6-9 of Les Leininger's declaration are sustained." While the citations in




25      Although not material for purposes of this appeal—since a duty to defend may
arise from facts extrinsic to the pleadings in the underlying action (see Hartford, supra,
59 Cal.4th at p. 287)—we note that while McMillin refers to this document in a section of
its brief entitled "[t]he allegations in the [underlying action]," it does not present any
authority in support of its suggestion that a SB800 Written Notice of Claim may properly
be considered as such.
                                             37
McMillin's brief are to Leininger's amended declaration, paragraphs six through nine in

both Leininger's original and amended declarations authenticate the same Job Cost Detail

Reports,26 and there is no indication in the record that the trial court considered

paragraphs six through nine of the amended declaration and the accompanying Job Cost

Detail Reports to be admissible.

       Indeed, the trial court's remarks at the summary judgment hearing, which took

place after McMillin filed Leininger's amended declaration,27 indicate that the court

ruled that paragraphs six through nine of the amended declaration, and the accompanying

Job Cost Detail Reports, were inadmissible. Specifically, at the hearing, after the trial

court questioned whether there was any evidence that the Job Cost Detail Reports had

been available "earlier,"28 McMillin's counsel provided a lengthy argument concerning

the admissibility of the Job Cost Detail Reports. Thereafter, Financial Pacific's counsel

stated, "I didn't know how much to talk about these job cost detail reports." The trial

court responded, "I sustained the objections and I haven't heard anything that would

change my mind."




26     The declarations differed in that Leininger's amended declaration referred to
relevant excerpts of the Job Cost Detail Reports pertaining to A.M. Fernandez and J.Q.
Drywall, while the original declaration referred to the entirety of all of the Job Cost
Detail Reports submitted with the original declaration.
27     McMillin filed the amended declaration on October 23, 2015, and the trial held the
summary judgment hearing seven days later on October 30.
28     Earlier in the hearing, McMillin's counsel stated that the "impression that I get
from the [tentative] ruling is that the Court believes that [the Job Cost Detail Reports
were] never available to Financial Pacific at the time of the tender."
                                             38
       Notwithstanding this record, McMillin fails to present any argument on appeal that

this court may properly consider the Leininger amended declaration and the

accompanying Job Cost Detail Reports in reviewing the trial court's summary judgment

order. Under these circumstances, we agree with Financial Pacific's contention that

McMillin's "fail[ure] to say a single word in its Opening Brief about the trial court's

evidentiary ruling," forfeits any contention that we may properly consider such evidence

on appeal. 29 (Lopez, supra, 98 Cal.App.4th at pp. 1014–1015 [party forfeits challenge

to trial court's exclusion of evidence in summary judgment proceeding by failing to raise

claim on appeal that trial court erred in excluding evidence]; see Bains v. Moores (2009)

172 Cal.App.4th 445, 455 [appellant has burden of demonstrating trial court erred in

granting summary judgment motion].)

       McMillin also contends that the trial court erred in relying on Monticello because

"[t]he allegations of construction defects in the . . . complaint [in the underlying action]

did not eliminate the possibility of resultant damage from those defects and did not defeat

Financial Pacific's duty to defend." McMillin reasons, "Monticello does not control here

because 'gaps and missing plaster in stucco system, . . . [and] stucco cracking allowing

unintended moisture,' are related to stucco in a way that 'excessive cracking' and 'drywall'

are not." However, without admissible evidence that J.Q. Drywall performed stucco

work, McMillin's attempt to distinguish Monticello is unpersuasive.




29    Further, despite Financial Pacific's extensive discussion of this issue in its
respondent's brief, McMillin did not discuss the issue in its reply brief.
                                              39
       McMillin also raises several arguments in support of its contention that the trial

court erred in determining that Financial Pacific did not have knowledge of any facts

extrinsic to the complaint in the underlying action that established the potential for

coverage. First, McMillin argues that the trial court "concluded that the defect list

information acquired by Financial Pacific after it decided to reject the tender is

irrelevant . . . ." The trial court reached no such conclusion. On the contrary, as quoted

above (see pt. III.C.3, ante), the trial court expressly considered whether the homeowners'

defect lists provided to Financial Pacific in connection with the homeowners SB 800

claims established the possibility of coverage. The trial court concluded that the defects

on the list on which McMillin relied in opposing the motion for summary judgment

referred to damages resulting from work that the drywall subcontractors had not

completed (i.e., "[t]here is no evidence that the subcontractors were responsible for

installing windows and patio doors"), and did not demonstrate that any of the work that

the subcontractors had performed resulted in damages (i.e., "[t]here is also no indication

that the homeowners claimed the drywall damaged other property"). On appeal,

McMillin fails to establish error with respect to either conclusion. (See Monticello,

supra, 162 Cal.App.4th at p. 1387 [concluding insurer owed no duty to defend under

liability policy issued to drywall installer where consequential damages referred to in the

complaint were not alleged to have been related to work of the drywall installer].)




                                             40
       McMillin also fails to address the trial court's conclusion that Financial Pacific

presented evidence in support of its motion for summary judgment by way of McMillin's

responses to special interrogatories that established that McMillin had no evidence of

potential consequential damages resulting from defective drywall installation.

Specifically, when asked to "identify the damage alleged [to have resulted] from

[Financial Pacific's named insured's] work," McMillin stated only, " 'drywall and corner

bead cracks and separation,' " and " 'drywall nail pops.' " As the trial court properly

concluded in citing these responses, "[t]here is no reference to any damage the

installation caused to other property."

       Finally, McMillin repeatedly suggests in its brief on appeal that Financial Pacific's

alleged failure to perform an adequate investigation into the potential for coverage under

the policies demonstrates that it breached its duty to defend. For example, McMillin

argues, "Financial Pacific made no investigation of the defect allegations or any extrinsic

facts before deciding to deny coverage." However, McMillin fails to point to any

evidence demonstrating that such an investigation would have revealed a potential for

coverage.30 Under these circumstances, any inadequacy of Financial Pacific's

investigation cannot create a duty to defend where none existed. (See American Internat.



30     While McMillin suggests that a reasonable investigation would have revealed the
Job Cost Detail Reports demonstrating that J.Q. Drywall performed stucco work, we
concluded in the text above that McMillin has forfeited any contention that the trial court
erred in excluding the evidence pertaining to the Job Cost Detail Reports by failing to
challenge the trial court's ruling on appeal. Absent admissible evidence of the Job Cost
Reports, McMillin cannot demonstrate that Financial Pacific would have discovered such
reports if it had performed an adequate investigation.
                                             41
Bank v. Fidelity & Deposit Co. (1996) 49 Cal.App.4th 1558 (American Internat. Bank).)

As the American Internat. Bank court explained:

          "AIB contends that whether or not Fidelity had a duty to indemnify,
          as an insurer it had a duty to thoroughly investigate AIB's claim
          before rejecting it. . . . As we understand it, AIB believes that a
          failure to conduct a reasonable investigation must result in
          imposition of liability on the insurer for defense costs whether or not
          a reasonable investigation would have revealed liability or potential
          for coverage.

          "AIB misunderstands the insurer's duty and the risk it runs if it fails
          to undertake an adequate investigation. The risk that an insurer
          takes when it denies coverage without investigation is that the
          insured may later be able to prove that a reasonable investigation
          would have uncovered evidence to establish coverage or a potential
          for coverage." (Id. at pp. 1570–1571.)

      Accordingly, we conclude that the trial court properly granted Financial Pacific's

motion for summary judgment on the ground that the undisputed evidence established

that Financial Pacific did not owe McMillin a duty to defend the underlying action

because there was no potential for coverage for McMillan under Financial Pacific's

policies.31




31     McMillin also contends that two exclusions in Financial Pacific's policies do not
preclude the possibility of coverage. In addition, McMillin maintains that certain
language in the relevant additional insured endorsements did not "preclude a defense
duty." (Capitalization omitted.) The trial court did not grant summary judgment on the
basis of either exclusion or the language in the endorsements. Further, in light of our
affirmance of the summary judgment on the ground stated in the text, we need not
consider McMillin's arguments with respect to these issues.
                                             42
                                             IV.

                                      DISPOSITION

       The summary judgment in favor of Lexington is reversed. The summary

judgment in favor of Financial Pacific is affirmed.

       McMillin is entitled to recover its costs in its appeal from the summary judgment

entered in favor of Lexington. Financial Pacific is entitled to recover its costs in

McMillin's appeal from the summary judgment entered in favor of Financial Pacific.



                                                                 AARON, J.

WE CONCUR:

BENKE, Acting P. J.

DATO, J.




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