In January 1997, a general contractor entered into a contract with the City of Los Angeles Harbor Department for the construction of a community center. A subcontractor on the project had a liability policy with a policy period running from Sept. 5, 1997, to Sept. 5, 1998. The policy had an endorsement making the general contractor an “insured” for any liability arising out of the subcontractor's work for the general contractor.

The subcontractor obtained premium financing for the policy. As part of the financing agreement, the subcontractor assigned its right to cancel the policy to the finance company, in the event the subcontractor did not pay its premium. On Nov. 25, 1997, on instructions from the premium finance company, the carrier canceled the policy for nonpayment of the premium. The general contractor was not informed of the cancellation.

The subcontractor continued to work on the project until July 8, 1998, when the general contractor terminated it. In November 1998, the general contractor terminated its contract with the city and left the project. The city had another general contractor finish construction. In March 1999, the original general contractor sued the city, contending that the city's plans were defective. The city filed a cross-complaint, alleging among other things that the general contractor breached its contract and that its negligent work caused many defects in construction. The general contractor then filed a cross-complaint against its subcontractors, alleging that the construction defects the city had identified had been caused by the subcontractors' negligence.