The 9th Circuit, applying California law, reversed a district court’s grant of summary judgment to the insurer on the basis of a “known damages” provision, finding that an insurer had the duty to defend where the extent of an insured’s prior knowledge of problems that caused corrosion to the underlying steel structure and pipelines of a natural gas production project was unclear.

Ameron International Corp. supplied paint for various onshore and offshore facilities in a natural gas production project in Nova Scotia. The project’s owners sued Ameron for paint failure, alleging that it caused corrosion of the steel structure, both off-shore and on-shore, and pipelines. Ameron sought a defense in that action under the terms of a general liability policy issued by American Home Assurance. American Home Assurance declined to defend on the basis that there was no potential for coverage pursuant to the policy’s “known damages” provision because Ameron had knowledge of paint failure at the project.

On appeal, the 9th Circuit agreed with American Home Insurance that the record conclusively showed that Ameron had knowledge of paint failure at the offshore facilities prior to the policy’s inception, but held that there was an issue of fact as to Ameron’s knowledge of failure at the onshore facilities and pipeline. The court reasoned that there was testimony by Ameron employees that contradicted American Home Assurance’s evidence. The court also held that there was an issue of fact as to whether the corrosion at the other locations shared a common cause with the offshore facilities, rendering it a “continuation, change, or resumption” of “known damages,” as required for the exclusion to apply. Finally, the court held that the evidence did not conclusively show that Ameron intended to supply defective paint, rejecting American Home Assurance’s argument that there was no occurrence because Ameron acted intentionally. Therefore, due to these issues of fact, the court held that there was a “possibility of coverage” and granted partial summary judgment to Ameron as to the duty to defend.