Filed 6/5/19

                            CERTIFIED FOR PUBLICATION

                COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                      DIVISION ONE

                                   STATE OF CALIFORNIA



MCMILLIN HOMES CONSTRUCTION,                     D074219
INC.,

        Plaintiff and Appellant,
                                                 (San Diego County Super. Ct.
        v.                                        No. 37-2016-00007136-CU-IC-CTL)

NATIONAL FIRE & MARINE
INSURANCE COMPANY,

        Defendant and Respondent.


        APPEAL from a judgment of the Superior Court of San Diego County,

Timothy B. Taylor, Judge. Reversed.

        Ryan & Associates and Greg J. Ryan for Plaintiff and Appellant.

        Summers & Shives, Martin L. Shives, and Peter B. Lightstone for Defendant and

Respondent.



        A general contractor was covered as an additional insured on a commercial

general liability (CGL) policy issued to its roofing subcontractor. The insurer refused to

defend the general contractor after it was sued by homeowners for construction defects
concerning roofing, prompting this lawsuit. After a bench trial, the trial court concluded

the insurer owed no duty to defend. It believed the exclusion in the additional insured

endorsement for damage to "property in the care, custody or control of the additional

insured" precluded any duty to defend the general contractor in construction defect

litigation.

       The general contractor disputes the insurer's interpretation of the policy and asserts

there was a duty to defend. We agree and reverse the judgment.1 As judicially

construed, the care, custody, or control exclusion requires exclusive or complete control.

(Home Indem. Co. v. Leo L. Davis, Inc. (1978) 79 Cal.App.3d 863, 872 (Davis).) The

facts indicate only shared control between the general contractor and its roofing

subcontractor. Because the insurer did not prove coverage for the underlying

construction defect litigation was impossible, it owed the general contractor a duty to

defend the homeowner claim.

                  FACTUAL AND PROCEDURAL BACKGROUND

       McMillin Homes Construction, Inc. acted as the developer and general contractor

on the Auburn Lane housing community project in the city of Chula Vista. It hired

Martin Roofing Company, Inc. to "render a complete roofing job." The subcontract

required Martin to obtain general liability insurance naming McMillin as an additional

insured.


1      After oral argument, the parties stipulated to a dismissal of this case. We elected
to proceed with the opinion given because the appeal was fully briefed and raised
important issues. (Cal. Rules of Court, rule 8.244(c)(2); Greb v. Diamond Internat. Corp.
(2013) 56 Cal.4th 243, 247, fn. 3.)
                                             2
       National Fire and Marine Insurance Company issued a CGL policy to Martin.

Effective from November 12, 2003 to November 12, 2004, the policy covered " 'property

damage' " or " 'bodily injury' " caused by an " 'occurrence' " during the policy period.

McMillin was covered as an additional insured under ISO endorsement form CG 20 09

03 97 (hereafter CG 20 09).2 National Fire broadly agreed to cover property damage or

bodily injury during the policy period arising out of Martin's ongoing operations at

Auburn Lane, or out of McMillin's general supervision of those operations. Central to

this appeal is the "care, custody or control exclusion" (hereafter CCC exclusion):

National Fire excluded coverage for damage to property in McMillin's "care, custody, or

control."3

       In 2014, homeowners in seven projects developed and built by McMillin,

including Auburn Lane, sued McMillin for construction defects. (Gabriel Galvan, et al.

v. McMillin Auburn Lane II, LLC, et al. (Super. Ct. San Diego County, 2014, No. 37-

2014-00007987-CU-CD-CTL) (Galvan).) The complaint alleged water intrusion and

damage caused by roofing defects. Two homes that Martin worked on were at issue in

Galvan.

2      The Insurance Services Office, or 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." (Montrose Chemical Corp. v. Admiral Ins. Co. (1995)
10 Cal.4th 645, 671, fn. 13.)

3     Most other subcontractors added McMillin to their policies under CG 20 10
endorsements or their equivalents, which lack the CCC exclusion.
                                             3
      McMillin tendered its defense of the Galvan action to National Fire in June 2014,

attaching a subcontract addendum for Martin's work; the additional insured endorsement;

the Galvan complaint; a matrix of homes at issue in Galvan; and a matrix of insurance

carriers McMillin believed owed a defense duty. National Fire refused coverage, noting

McMillin had not provided a copy of the McMillin-Martin subcontract. McMillin

submitted the subcontract and sought reconsideration. National Fire again denied owing

McMillin a duty to defend.

      McMillin sued National Fire in 2016 for declaratory relief, breach of contract, and

breach of the implied covenant of good faith and fair dealing. With respect to each cause

of action, the operative Third Amended Complaint alleged that National Fire breached its

duty to defend McMillin in Galvan.

      The parties agreed to bifurcate proceedings. (Code Civ. Proc., § 598.) Phase one

was a bench trial on the papers to decide whether National Fire owed McMillin a duty to

defend under the additional insured endorsement. Jointly submitted exhibits included

policy documents, the subcontract, Galvan pleadings, and communications between

McMillin and National Fire regarding coverage. National Fire also submitted deposition

excerpts and discovery responses, but the court sustained McMillin's objections to these




                                            4
on relevancy grounds because they were not known to National Fire when any defense

duty was triggered.4

       The parties offered competing interpretations of the CCC exclusion. Citing Davis,

supra, 79 Cal.App.3d 863, McMillin argued it applied only where control over the

damaged property was complete or exclusive. Disagreeing, National Fire noted those

words were missing from the text of the exclusion. It also claimed a separate

endorsement (CG 21 39 10 93 (hereafter CG 21 39)) intended to " 'close the loop' " by

eliminating indirect indemnity coverage to McMillin for construction defect litigation

pursuant to the subcontract.

       The court entered judgment in favor of National Fire. It acknowledged decisions

broadly construing the duty to defend for general contractors covered as additional

insureds. (Pulte Home Corp. v. American Safety Indemnity Co. (2017) 14 Cal.App.5th

1086 (Pulte); McMillin Management Services, L.P. v. Financial Pacific Ins. Co. (2017)

17 Cal.App.5th 187 (McMillin).) But those cases did not involve the CG 20 09

endorsement with its CCC exclusion. As the first to construe that exclusion in the GC 20

09 form, the court declined to require exclusive or complete control.

       The court stated the GC 20 09 endorsement was "specifically drafted to avoid

affording insurance to a general contractor in a construction defect setting where the



4      National Fire argues the court erred in sustaining McMillin's evidentiary
objections. Because it did not file a cross-appeal or show that review of the issue is
necessary to determine whether any error prejudiced McMillin, we decline to review this
issue and ignore these documents. (Code Civ. Proc., § 906; Building Industry Assn. v.
City of Oceanside (1994) 27 Cal.App.4th 744, 758, fn. 9.)
                                             5
[named] insured is a subcontractor." At the time National Fire refused to defend

McMillin, two things were clear: McMillin was the general contractor, and the Galvan

plaintiffs sued for construction defects in their homes. The court reasoned that these facts

triggered the CCC exclusion. Moreover, the court agreed with National Fire that the CG

21 39 endorsement to Martin's policy was designed to " 'close[] the loop' " and

demonstrated its intent to deny construction defect coverage to McMillin via indirect

means. As the court read the record, "McMillin did not carefully read the insurance-

related papers it received from Martin" or "consider the combined impact" of the CG 20

09 and CG 21 39 endorsements. It believed McMillin had no reasonable expectation of

coverage for construction defect litigation.

                                      DISCUSSION

       McMillin appeals the judgment, arguing the court misconstrued the CCC

exclusion and erroneously relied on an unrelated GC 21 39 endorsement to find no

defense duty. We agree and conclude National Fire owed McMillin a duty to defend.

1.     Legal principles

       a.     The duty to defend

       Broader than the duty to indemnify, a liability insurer's duty to defend is assessed

at the very outset of a case. (Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014)

59 Cal.4th 277, 287 (Hartford); Pardee Construction Co. v. Insurance Co. of the West

(2000) 77 Cal.App.4th 1340, 1350 (Pardee).) "An insurer owes a broad duty to defend

against claims that create a potential for indemnity under the insurance policy"; it must

defend even where the evidence suggests but does not conclusively show the loss is not

                                               6
covered. (Hartford, at p. 287.) Moreover, "the duty to defend is a continuing one,

arising upon tender and lasting until the underlying litigation is resolved, or until the

insurer has established there is no potential for coverage." (Pardee, at p. 1350.)

       To evaluate whether an insurer owes a duty to defend, we start by comparing the

allegations of the complaint to the terms of the policy. (Hartford, supra, 59 Cal.4th at

p. 287.) Extrinsic facts may give rise to a duty to defend where they reveal the possibility

of coverage. (Ibid.; Pardee, supra, 77 Cal.App.4th at p. 1350.) Doubt as to whether an

insurer owes a duty to defend is resolved in the insured's favor. (Hartford, at p. 287.)

       Although broad, the duty to defend is not limitless and is measured by the nature

and kinds of risks covered by the policy. (Hartford, supra, 59 Cal.4th at p. 288.) "In an

action seeking declaratory relief concerning a duty to defend, 'the 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.' " (Ibid.) In a mixed action

where only certain claims are potentially covered, the insurer has a duty to defend those

potentially covered claims. (Ibid.) An insurer has no obligation to defend " 'if the third-

party complaint can by no conceivable theory raise a single issue which could bring it

within the policy coverage.' " (Montrose Chemical Corp. v. Superior Court (1993)

6 Cal.4th 287, 300 (Montrose).)

       b.     Rules governing insurance policy interpretation

       The "interpretation of an insurance policy is a question of law." (Waller v. Truck

Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18 (Waller).) Insurance policies are contracts,

                                              7
and the ordinary rules of contract interpretation apply. (Maryland Cas. Co. v. Nationwide

Ins. Co. (1998) 65 Cal.App.4th 21, 28 (Maryland).) The same rules of interpretation

apply to endorsements, which are part of the insurance contract. (Id. at p. 29.)

       The mutual intent of the parties at contract formation governs. (Hartford, supra,

59 Cal.4th at p. 288; Civ. Code, § 1636.) We try to ascertain this intent from the policy

provisions alone. (Maryland, supra, 65 Cal.App.4th at p. 28.) Words in a policy are

construed in their ordinary and popular sense, unless the parties intended a technical

sense or special meaning. (Hartford, at p. 288; Civ. Code, § 1644.) We also consider

policy language in context to discern its intended function. (Hartford, at p. 288; Pulte,

supra, 14 Cal.App.5th at p. 1105.)

       Although we will not strain to create an ambiguity, a provision is ambiguous when

it is capable of two or more reasonable constructions. (Waller, supra, 11 Cal.4th

at pp. 18−19; Pardee, supra, 77 Cal.App.4th at p. 1352.) Where ambiguity exists, we

interpret the provision in the sense the insurer would believe the insured understood it at

the time of contract formation. (Pardee, at p. 1352; Maryland, supra, 65 Cal.App.4th at

p. 29.) This rule protects the objectively reasonable expectations of the insured, not the

subjective beliefs of the insurer. (Maryland, at p. 29.) If that does not resolve the

ambiguity, we will resolve it against the insurer, who created the uncertain language.

(Ibid.; Pardee, at p. 1352.)

2.     The parties' contentions

       National Fire's additional insured endorsement provides coverage to McMillin as

an "additional insured" on the Martin policy "with respect to liability arising out of
                                              8
          "A.[Martin's] ongoing operations performed for [McMillin] at
          [Auburn Lane], [and]

          "B. Acts or omissions of [McMillin] in connection with [its] general
          supervision of such operations."

Two recent decisions from this court broadly construe a general contractor-additional

insured's right to a defense under the "ongoing operations" coverage provision. (Pulte,

supra, 14 Cal.App.5th at p. 1113 [although property damage became evident after the

work was completed, it could have occurred within the policy periods while

subcontractor's operations were ongoing]; McMillin, supra, 17 Cal.App.5th at

pp. 204−205 [rejecting insurer's claim that liability could not "arise out of"

subcontractor's "ongoing operations" until after homeowners closed escrow, at which

point subcontractors had completed their work].) Although the endorsement here, like

the one in McMillin, excluded damages occurring after operations were completed,

damage could begin during a subcontractor's ongoing operations in the policy period,

triggering a duty to defend. (McMillin, at pp. 204−205.)

       National Fire does not dispute that the additional insured endorsement covers

McMillin for liability arising out of Martin's ongoing operations at Auburn Lane or out of

McMillin's supervision of those operations during the policy period. Martin's policy was

in effect from November 12, 2003 to November 12, 2004. It signed a roofing subcontract

with McMillin in July 2003 and signed contract addendums in July 2004 and September

2004. One home included in the Galvan action was completed on November 29, 2004;

the other was completed on March 15, 2005. The homeowners in Galvan alleged water

intrusion due to defects in the roofing systems. Property damage could have occurred

                                              9
while the subcontractor's operations were ongoing in the policy period. Under Pulte and

McMillin, the duty to defend was triggered based on the coverage provision. National

Fire does not suggest otherwise.

       Instead, National Fire argues the CCC exclusion in the additional insured

endorsement fundamentally distinguishes this case from Pulte and McMillin, which relied

on CG 20 10 forms without that exclusion. The additional insured endorsement

applicable to McMillin does not cover:

          " 'Property damage' to [¶] . . . [¶] Property in the care, custody, or
          control of the additional insured(s) or over which the additional
          insured(s) are for any purpose exercising physical control."

This exclusion, National Fire contends, "precluded a duty on the part of National Fire to

defend McMillin as an additional insured in the Galvan action." It argues that because

McMillin was the general contractor on the project, any damage alleged in Galvan while

the homes were being built would have been to property in McMillin's care, custody, or

control. Our question on appeal is whether the CCC exclusion, narrowly construed, is

reasonably interpreted to foreclose coverage to a general contractor for construction

defect liability. As we explain, we believe it is not.

       The arguments on appeal mirror those raised before the trial court. McMillin

argues that to read the insurance contract in the manner National Fire suggests would

effectively nullify coverage for an additional insured general contractor, which is clearly

not consistent with the reasonable expectations of either the named insured (Martin) or

the additional insured (McMillin). Relying on Davis, supra, 79 Cal.App.3d 863,



                                             10
McMillin contends the CCC exception applies only where the insured has exclusive or

complete control over the damaged property.

       National Fire responds that coverage under the additional insured endorsement is

not illusory in that there are some (albeit limited) situations in which a general contractor

could be covered for property damage from a subcontractor's ongoing operations.

Examples include property damage to a parked car or neighboring house caused by a

Martin employee accidentally starting a fire or breaking a hydrant during its work. It

claims the court, under the guise of interpretation, cannot insert words like " 'exclusive or

complete' " that are not part of the policy language.

3.     Having been judicially construed, the CCC exclusion is not ambiguous

       Where a policy term has been judicially construed, it is not ambiguous. (County of

San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 423 (County of

San Diego).) "[T]he judicial construction of the term should be read into the policy

unless the parties express a contrary intent." (Bartlome v. State Farm (1989) 208

Cal.App.3d 1235, 1239 (Bartlome), accord, Cunningham v. Universal Underwriters

(2002) 98 Cal.App.4th 1141, 1150; Norris v. Pacific Indem. Co. (1952) 39 Cal.2d 420,

424 (Norris) [provisions "should be given a meaning settled by judicial decision"].) This

rule is applied " 'with caution, first determining whether the context in which the

construed term is analogous . . . .' " (Qualcomm, Inc. v. Certain Underwriters at Lloyd's,

London (2008) 161 Cal.App.4th 184, 201.) As we explain, the CCC exclusion has been

judicially construed in a sufficiently analogous context to require exclusive or complete

control. (Davis, supra, 79 Cal.App.3d at p. 872.) The additional insured's mere status as

                                             11
general contractor—with overall responsibility for and nominal control of the entire

project—does not meet this standard.

       a.     The exclusion requires exclusive or complete control.

       Davis construed the CCC exclusion to apply only where the insured has exclusive

or complete control—and not shared control—over the property that is damaged. (Davis,

supra, 79 Cal.App.3d at p. 872.) Because the parties dispute the import of Davis, we

explore the case and the authorities it relies on at length.

       We begin with the California Supreme Court's decision in Volf v. Ocean Acci. &

Guarantee Corp. (1958) 50 Cal.2d 373 (Volf), where a contractor was hired to apply a

stucco exterior finish to a house. Cracks in the stucco appeared during construction,

before the homeowner took possession. (Id. at p. 374.) The contractor refinished the

stucco at his expense; its insurer denied coverage; and the contractor sued. (Ibid.) On

these facts, the insurer properly applied the exclusion for " 'injury to . . . property in the

care, custody or control of the insured' " to defeat coverage. (Ibid.) The damage arose

when the house exterior remained in the contractor's control. (Ibid.)

       In Silva & Hill Constr. Co. v. Employers Mut. Liab. Ins. Co. (1971) 19 Cal.App.3d

914 (Silva), the court also relied on the CCC exclusion to find no coverage on different

facts. The state contracted with an engineering firm to build a 10-mile stretch of

highway. (Id. at p. 928.) The contract required the firm to secure CGL coverage, and an

endorsement excluded coverage for injury to property "in the care, custody or control of

the insured or property as to which the insured for any purpose is exercising physical

control." (Ibid.) After the highway was nearly built, the firm hired a subcontractor to

                                               12
finish paving the two-foot shoulder. The subcontractor broke the concrete edge along the

full length of the 10-mile strip and over-sprayed an asphalt solution. (Ibid.) The firm

made repairs at its expense, delaying the project and triggering liquidated damages. (Id.

at pp. 928−929.) A payment dispute ensued between the engineering firm and the

subcontractor, and the insurer denied coverage.

       The court agreed that there was no coverage. (Silva, supra, 19 Cal.App.3d at

pp. 924–925.) The engineering firm's argument that the road was not within its "care,

custody or control" at the time of the accident was "clearly untenable" given the nature of

its contract with the state. (Id. at p. 924.) "The state's contract expressly provided that

plaintiff would at all times prior to completion of the project retain ultimate responsibility

over the work of its subcontractors. Indeed, it was this very requirement which caused

the plaintiff to repair the road even though plaintiff's subcontractors had caused the

damage." (Ibid.) In reaching this result, Silva suggested that there were limits to the

exclusion. Critically in discussing the Volf case, the Silva court remarked that if the

stucco contractor had damaged the house's structure in removing the defective stucco,

" '[t]he injury to the house would be covered, but the loss caused by having to remove the

defective stucco would not be.' " (Id. at p. 925.)

       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:

                                             13
          "Almost invariably where coverage is denied, physical control by the
          insured has been exclusive, even if such exclusivity was 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, with both 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 pp. 870−871.)

       Noting that the care, custody, or control exclusion had been deemed both

ambiguous and unambiguous, the Davis court believed "[t]he only consistency in these

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.)

       With the rule settled, Davis turned to the facts before it. The insured, Davis,

owned a 25-ton crane that was covered by a policy. Excluded from coverage was

"property damage to . . . property in the care, custody or control of the insured as to

which the insured is for any purpose exercising physical control." (Davis, supra, 79

Cal.App.3d at p. 867.) Two companies engaged in a road paving project rented the crane

(with an operator) to dismantle and transport a concrete batch plant. (Id. at p. 866.)

Davis's crane operator "was working completely blind" and relied on signals by the

company employees. (Id. at p. 867.) As he lifted a pugmill, the crane cable split, causing

the pugmill to fall and incur damage. (Ibid.) When the companies sued Davis, its insurer


                                             14
denied coverage on the ground the pugmill was within Davis's care, custody or control at

the time of the accident. (Ibid.) But on these facts, the court concluded there was

coverage. (Id. at p. 872.) The most that could be said was that Davis shared control of

the pugmill at the time of the accident with the companies that were guiding Davis's

crane operator. (Ibid.) Accordingly, the exclusion did not apply to defeat coverage.

(Ibid.)

          We recognize that Davis differs in some respects—the crane company is akin to a

subcontractor claiming it at most shared control with its general contractor. But the

crucial point is that for purposes of interpreting the exclusion, Davis announced a general

rule: the CCC exclusion is inapplicable where the facts at best suggest shared control.

(Davis, supra, 79 Cal.App.3d at p. 872.)5 Other courts have applied a similar standard.

(See Crane Service & Equipment Corp. v. United States Fidelity &Guaranty Co. (1986)

22 Mass.App.Ct. 666 [496 N.E.2d 833, 835] [the degree of supervision—that typical of a

general contractor over a subcontractor—was not enough to constitute custody or

control]; Eisenbarth v. Hartford Fire Ins. Co. (Wyo. 1992) 840 P.2d 945, 950 ["total (not



5      National Fire labels the Davis rule as dicta, arguing the crane operator had no
control, not shared control. As we read it, Davis held that where an insured at best has
shared control, the exclusion does not apply. Other courts applying California law also
interpret Davis in this manner. (See Legacy Partners, Inc. v. Clarendon American Ins.
Co. (S.D. Cal., Apr. 14, 2010, No. 08cv920 BTM (CAB)) 2010 U.S.Dist. Lexis 36966 at
p. *22 ["where the 'care, custody or control' is not exclusive, this exclusion does not
apply"]; Nationwide Agribusiness Ins. v. George Perry & Sons, Inc. (E.D.Cal. 2018) 338
F.Supp.3d 1063, 1076−1078 [fact issue precluded summary adjudication as to whether
the property owner had "exclusive and complete" control of bee hives maintained by
beekeepers].)

                                             15
shared) care, custody or control is necessary for the exclusion to apply"]; Hartford Cas.

Co. v. Cruse (5th Cir. 1991) 938 F.2d 601, 604 [exclusion is limited to property the

insured " 'totally and physically manipulates' "].)6 The Davis rule is further consistent

with insurance industry publications cited by McMillin. (Internat. Risk Management

Inst. Inc., Commercial Liability Insurance, CGH Damage to Property Exclusion

<https://www.irmi.com/online/cli/ch005/1l05d000/bl05110-damage-to-property.aspx>

[as of June 9, 2017] ["Property is not necessarily in the care, custody, or control of a

general contractor just because it is in the care, custody, or control of a subcontractor."].)

       Because the CCC exclusion has been judicially construed, it is not ambiguous.

(County of San Diego, supra, 37 Cal.4th at p. 423.) As the parties did not specifically

express a contrary intent, the Davis construction should control the meaning of the




6       National Fire cites a pre-Davis out-of-state case, claiming it offers a better
framework for interpreting the CCC exclusion. (Arrigo's Fleet Service, Inc. v. Aetna Life
& Casualty Co. (1974) 54 Mich.App. 482 [221 N.W.2d 206].) Because the law
interpreting the CCC exclusion was unsettled, the Arrigo court offered criteria to guide
the trial court on remand. (Id. at p. 493.) As National Fire notes, the court suggested the
CCC exclusion might defeat coverage where the damaged property was under the
insured's "immediate supervision." (Ibid.) But immediate supervision (contrasted with
general supervision) is not necessarily inconsistent with Davis's requirement of complete
or exclusive control.
                                              16
exclusion. (Bartlome, supra, 208 Cal.App.3d at p. 1239; Norris, supra, 39 Cal.2d at

p. 424.)7

       The trial court believed that requiring exclusive or complete control would insert

words into what it viewed as an unambiguous exclusion. Urging us to follow suit,

National Fire cites cases that did not permit words to be inserted into unambiguous policy

provisions. (Rosen v. State Farm Gen. Ins. Co. (2003) 30 Cal.4th 1070, 1075, 1080

[where policy covered physical loss due to collapse, defined as "actually fallen down or

fallen into pieces," court could not construe it to cover homeowner's repair of decks that

were in a state of imminent collapse]; Cal. Cas. Ins. Co. v. Northland Ins. Co. (1996) 48



7       For the first time at oral argument, National Fire claimed the CCC exclusion was
"very different" from the one in Davis, compelling a different interpretation. In Davis,
the exclusion applied to damaged property in the insured's care, custody, or control as to
which the insured exercises physical control. (Davis, supra, 79 Cal.App.3d at p. 867.)
Here, the exclusion applies to damaged property in the additional insured's care, custody,
or control or over which the additional insured exercises physical control. The difference
lies in whether "physical control" is required for the exclusion to apply. In Davis it was,
with physical control modifying the "care, custody, or control" language; here, it is not.
In effect, National Fire claims that by mandating physical control, the Davis exclusion is
narrower, resulting in broader coverage than envisioned here.
        It is not generally appropriate to consider a new contention raised for the first time
at oral argument. (Palp, Inc. v. Williamsburg National Ins. Co. (2011) 200 Cal.App.4th
282, 291, fn. 2.) But even if we did, Davis did not turn on whether the crane operator
exercised physical control—there was no dispute he did. The question instead was
whether his potentially shared control during the crane's operation eliminated coverage
for the damaged pugmill. That "physical control" modifies "care, custody, or control" in
Davis is a distinction without a difference. Davis indeed relied on Silva, which involved
an exclusion mirroring the one here, to articulate its rule. (Davis, supra, 79 Cal.App.3d
at pp. 870−871; Silva, supra, 19 Cal..App.3d at p. 923.) As a factual matter, National
Fire agrees McMillin exercised both physical control and general care, custody, and
control over the jobsite. To the extent there is any meaningful difference between the
exclusion in Davis and the one here, National Fire has not identified it in proceedings
before the trial court or on appeal.
                                             17
Cal.App.4th 1682, 1690−1692 [where policy excluded injury from a watercraft, court

would not strain to imply additional requirements that the watercraft have a transmission,

shaft, propeller, or rudder]; 21st Century Indemnity Co. v. Superior Court (2015) 240

Cal.App.4th 322, 331 [where auto insurance policy excluded coverage for vehicles

" 'available for regular use' " by a relative, court would not limit that term to vehicles

exclusively so used].) Simply put, we are not writing on a blank slate. The cases cited by

National Fire do not reference the same exclusion, risk, or subject matter, and for 40

years Davis's construction of the CCC exclusion has required exclusive or complete

control.8

       b.     National Fire effectively concedes shared control

       Davis highlighted "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.) National Fire's interpretation of the CCC

exclusion does not rest on facts. It instead rests on an assumption: "it is common

knowledge that a general contractor is ultimately and at all times responsible for all

aspects of the construction of residential housing which includes their components."

National Fire does not seem to dispute there was shared control here between McMillin

and Martin. Indeed, this conclusion is inescapable from the record.



8      The trial court noted it was the first to construe the CCC exclusion in the CG 20
09 endorsement. We see no reason to ignore Davis because the exclusion here appears in
an endorsement rather than the basic policy. "[E]ndorsements are part of the insurance
contract" and are interpreted in the same manner as other parts of a policy. (Maryland,
supra, 65 Cal.App.4th at p. 29.)
                                              18
       Martin agreed to furnish all labor, materials, and equipment needed "to render a

complete roofing job." It was "primarily and directly responsible for the activities and

conduct of its employees, subcontractors, agents and suppliers." All materials,

equipment, and tools remained Martin's property until they were integrated into the

structure and approved by McMillin. It was Martin's job to coordinate with other

subcontractors associated with its roofing work. Martin agreed to protect the building

from any damage by its employees. To be sure, all work had to be performed to

McMillin's "complete satisfaction." McMillin set schedules and could engage another

subcontractor, after notice, if Martin failed to meet deadlines. But McMillin could only

set schedules as needed to ensure "the proper and timely coordination and completion of

the entire project."

       In short, McMillin was responsible for the whole project and coordinating

schedules to ensure the project finished on time. But Martin was responsible for

controlling its jobsite and supervising the roofing work. Considering case-specific facts

"that bear on the nature and extent of the insured's control" (Davis, supra, 79 Cal.App.3d

at p. 872), Martin and McMillin shared control over Martin's roofing work. Accordingly,

National Fire did not prove the CCC exclusion rendered coverage for the Galvan

litigation an impossibility. (Hartford, supra, 59 Cal.4th at p. 288.)

4.     Assuming ambiguity, National Fire still owed a duty to defend

       "A policy provision is ambiguous when it is susceptible to two or more reasonable

constructions." (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470

(E.M.M.I.).) If we set aside Davis and presume the CCC exclusion is ambiguous, only

                                             19
McMillin's interpretation—that "control" requires something more than mere general

contractor status—comports with the reasonable expectations of an insured. The CG 21

39 endorsement does not change this conclusion.

       a.     The reasonable expectations of the insured

       A liability policy is presumed to include a defense duty unless it is excluded by

clear and unambiguous language. (Maryland, supra, 65 Cal.App.4th at p. 30.) Any

limitations on a promised duty to defend must accordingly be " ' "conspicuous, plain and

clear." ' " (Ibid. [collecting cases].) This rule applies with particular force when the

coverage provisions would lead an insured to reasonably expect coverage for the claim

purportedly excluded. (E.M.M.I., supra, 32 Cal.4th at p. 471.) While courts "generally

interpret the coverage clauses of insurance policies broadly, protecting the objectively

reasonable expectations of the insured" (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d

807, 822), exclusions are narrowly construed (Waller, supra, 11 Cal.4th at p. 16). Where

a term is ambiguous, we look to the policy, the circumstances of the case, and common

sense to infer the reasonable expectations of the insured. (Maryland, at p. 30.)

       McMillin was the general contractor of the Auburn Lane housing project. Its

subcontract required Martin to maintain CGL coverage with McMillin as an additional

insured. Consistent with that obligation, Martin added McMillin to the policy in effect

from November 2003 to November 2004. Since construction defect litigation "is

typically complex and expensive, a key motivation in procuring an additional insured

endorsement is to offset the cost of defending lawsuits where the general contractor's

liability is claimed to be derivative." (Maryland, supra, 65 Cal.App.4th at p. 33.) The

                                             20
CG 20 09 form included an express duty to defend as to Martin's "ongoing operations"

for McMillin at Auburn Lane and McMillin's acts or omissions "in connection with [its]

general supervision of such operations." This language unambiguously covers

construction defect litigation pertaining to Martin's ongoing operations and McMillin's

supervision of those operations during the policy period.

       Reading the CCC exclusion in a manner that nullifies the broad coverage

provision for a general contractor sued for construction defects is not consistent with an

insured's objectively reasonable expectations. (E.M.M.I., supra, 32 Cal.4th 465, 474

[insurer's expansive construction of an exclusion was inconsistent with the "broad

coverage language"].) 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.) Moreover, to the extent ambiguity remains after we consider the provision in

context, we construe it against the insurer. (Pardee, supra, 77 Cal.App.4th at p. 1352.)

       All that was required to trigger a defense duty was the potential of coverage.

(Hartford, supra, 59 Cal.4th at p. 288.) National Fire had to establish "the absence of any

such potential." (Ibid.) It did not meet its burden to prove the CCC exclusion rendered

coverage in the Galvan action an impossibility. Even if the provision is deemed

ambiguous, construing it to operate as a blanket denial of coverage to any general

                                              21
contractor-additional insured sued for construction defects does not meet the reasonable

expectations of the insured.

       Blackhawk Corp. v. Gotham Ins. Co. (1997) 54 Cal.App.4th 1090, cited by

National Fire, is inapposite. It stands for the proposition that coverage is not illusory

where there are potential risks a policy covers notwithstanding a broad exclusion. (Id. at

p. 1097.) Not only is the exclusion here less explicit than the exclusion for subsidence

damage in Blackhawk, the examples of coverage National Fire offers are more far-

fetched. A general contractor would not reasonably believe its additional insured

coverage extended only to property damage to a home or vehicle outside the scope of the

project. And even if coverage would not be illusory in a theoretical sense, we must

assess whether it meets the reasonable expectation of the insured.9

       An insurer need not defend if a third-party complaint cannot raise a single issue

that would bring it within the policy coverage under any conceivable theory. (Montrose,

supra, 6 Cal.4th at p. 300.) Although an insured only needs to show that an underlying

claim might be covered, the insurer must prove it cannot be. (Ibid.; Hartford, supra, 59

Cal.4th at p. 288.) Based on the foregoing, National Fire did not meet its burden and

therefore owed McMillin a duty to defend in the Galvan action.




9     "An agreement is illusory and there is no valid contract when one of the parties
assumes no obligation." (Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal.App.4th 86,
95.)
                                             22
       b.      The CG 21 39 endorsement

       Finally, we turn to National Fire's argument that limits to the named insured's

coverage " 'closed the loop' " on McMillin's coverage for construction defect litigation.

The somewhat convoluted argument goes as follows:

   1. A general contractor has two ways of getting an insurer to cover its
         defense fees in a construction defect lawsuit vis-à-vis its
         subcontractor. The first is by being named as an additional insured
         on its subcontractor's policy. This does not provide coverage here
         because of the CCC exclusion.

   2. Alternatively, the subcontractor's insurer could be responsible for
         defense costs based on an indemnity provision in the subcontract
         agreement. Martin's policy excludes coverage for property damage
         Martin is contractually obliged to pay. Although an exception
         allows coverage for liability assumed in an "insured contract," CG
         21 39 defines "insured contract" narrowly to exclude indemnification
         agreements like the one in the McMillin-Martin subcontract.

       The latter argument turns on the CG 21 39 endorsement. Martin's policy broadly

excluded coverage for " 'property damage' for which [Martin] is obligated to pay by

reason of the assumption of liability in a contract." An exception reinstates coverage for

liability Martin assumes in an "insured contract." "Insured contract" is elsewhere defined

to include:

            "That part of any other contract or agreement pertaining to your
            business . . . under which you assume the tort liability of another
            party to pay for 'bodily injury' or 'property damage' to a third person
            or organization."

If the policy were to stop there, it would cover tort liabilities Martin assumed in its

indemnity agreement with McMillin. However, Martin's contract also contains a CG 21

39 endorsement. That endorsement replaces the definition of "insured contract" in the


                                              23
policy with one that omits the paragraph quoted above. The net effect, National Fire

contends, is to eliminate coverage for obligations assumed in an indemnity agreement

between McMillin and Martin.

       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.




                                             24
                                      DISPOSITION

       The judgment is reversed, with directions to enter a new judgment in McMillin's

favor as to National Fire's duty to defend. McMillin is entitled to recover its costs on

appeal.


                                                                                  DATO, J.

WE CONCUR:



McCONNELL, P. J.



IRION, J.




                                             25
