Are Insurers Required to “Make Good” on their Promises of Coverage? A California District Court is Poised to Interpret the Novel Issue of a “Making Good Provision”

When a policy contains a “cost of making good provision,” is an insurer able to wholly deny coverage falling under its purview, even if it just applies to a small part of the claim? This question was recently brought to the Central District Court of California in The Haven at Ventura, LLC v. General Security Indemnity Company of Arizona, et al. In this case the Plaintiff, Ventura, brought suit against the Defendant, General Security, alleging an improper denial of benefits under a $69 million “builders risk policy.” The underlying circumstances giving rise to a claim for coverage in this action began in September of 2020, and concern mold damage to new, incomplete buildings on the Plaintiff’s property. After expert evaluation, it was determined that the buildings needed “detailed remediation,” a request for the cost of repairs subsequently filed with the Plaintiff’s insurer. During this period, the correction of the damage sustained caused the opening of the residential property to be delayed, thus resulting in additional financial damages to the Plaintiff. The claims brought by the Plaintiff under the builders risk policy included “faulty workmanship” and “excluded dampness of atmosphere.” Coverage was subsequently denied by the named Defendant and several other involved insurance providers.

The Plaintiff states that multiple attempts were made to avoid the process of litigation, but upon the inability to come to an agreement, they felt it necessary to file suit. The Plaintiff brought their claim against the Defendants for breach of contract and is asking the Court for upwards of $5 million as a result of the loss of income from their inability to collect rent during the period that the damaged buildings were undergoing repairs. An interesting aspect of this litigation is the novelty of the “cost of making good provision” at issue in the policy, as it is not yet as common in the United States as in foreign courts in Europe and Canada. This kind of provision essentially requires the insurer to cover the costs of making a covered property “good” or in other words, back to its original condition after damage as occurred. The Plaintiff’s argument relies on the intent and purpose of such a provision, and states that a complete denial of coverage is in opposition with the intended results of its inclusion in the policy. The Plaintiff further argues that in order to determine how the “make good” provision should be interpreted the Court should look to the example set by countries that have applied them for decades. The Plaintiff asserts that under this method of interpretation, their argument that the “make good” provision did not apply to the entirety of the claim and thus cannot be relied upon to deny the claim in full must prevail.

Counsel for the Plaintiff states that an argument blaming “damp atmosphere” for the mold damage is not based on adequate evidence, and thus the Defendants’ assertion that this was the underlying cause of the mold damage is incorrect. Further, the Plaintiff contends that the relevant provision applies to damages from “faulty workmanship” taking place directly adjacent to a loss, and not the kind of damages at issue in this circumstance, therefore the Defendant’s justification for denial under the “make good” provision is invalid. The Defendants have not yet responded to the allegations, though the next steps in this case will undoubtedly be cause for attention due to the novelty of the provision at issue.