Regional Steel Corp. v. Liberty Surplus Ins. Corp. CA2/1 , 226 Cal. App. 4th 1377 ( 2014 )

Filed 5/16/14 Regional Steel Corp. v. Liberty Surplus Ins. Corp. CA2/1
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
REGIONAL STEEL CORPORATION, B245961
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC464209)
v.
LIBERTY SURPLUS INSURANCE
CORPORATION,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County, Rolf M.
Treu, Judge. Affirmed.
George Chuang & Associates and George Chuang for Plaintiff and Appellant.
Sheppard, Mullin, Richter & Hampton, Frank Falzetta, James F. McShane and
Brenda Bissett for Defendant and Respondent.
——————————
Regional Steel Corporation (Regional) appeals judgment entered in favor of its
insurer, Liberty Surplus Insurance Corporation (Liberty). The trial court found that
Liberty had no duty to defend Regional against claims brought by JSM Construction, Inc.
(JSM) arising out of Regional’s installation of defective steel framing in an apartment
building JSM was constructing. We affirm.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
1. The Florentine Project
JSM Florentine, LLC (JSM Florentine) is the owner of an apartment building, the
Florentine Apartments, under construction in North Hollywood in 2004 (Florentine
Project). The Florentine Project complex consists of 14 stories, including retail space on
the ground floor, four floors of parking, and 180 residential units on the upper floors.
JSM was the general contractor on the project. Regional Steel was a subcontractor
engaged pursuant to a June 4, 2004 subcontract to provide reinforcing steel to the
Florentine Project’s columns, walls, and floors. Webcor Construction LP (Webcor) was
engaged to supply and pour concrete to encase Regional’s rebar skeleton.
From May through September 2004, Regional prepared and submitted shop
drawings that used both 90 degree and 135 degree seismic tie hooks in shear walls. JSM
and the structural engineer for the project, Babayan & Associates (Babayan), approved
the drawings. In October 2004, Regional began construction on the project, using both
the 90 degree and 135 degree seismic hooks as approved in the shop drawings. Webcor
poured concrete encasing the rebar and tie hooks.
In January 2005, a City building inspector issued a correction notice requiring the
exclusive use of 135 degree hooks. In April 2005, JSM became aware of the problem and
informed Regional that it needed to use 135 degree hooks. On May 3, 2005, JSM stopped
the pouring of concrete pending resolution of the hook issue. Regional Steel immediately
began to fabricate 135 degree hooks. In June 2005, the City notified JSM that garage
levels one through three, and some on level four, had defective tie hooks and required
repair. JSM refused to pay Regional’s invoices and withheld $545,000.
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2. The Policy1
In August 2005, JSM purchased a commercial liability policy from Liberty
(Policy) with an effective date of August 5, 2005. Liberty added Regional as an
additional named insured, effective as of October 5, 2005. The Policy consists of various
standard, preprinted ISO (Insurance Services Organization) forms, as well as several
endorsements, including a Wrap Endorsement converting the Policy into a “wrap” policy
specific to the Florentine Project. The Policy provides in relevant part that Liberty will
“pay those sums the insured becomes legally obligated to pay as damages because
of . . . ‘property damage’ to which this insurance applies.” The Policy applies to
“‘property damage’” caused by an “‘occurrence’” that takes place on or after the policy’s
“Retroactive Date” of August 5, 2005. Through a series of endorsements, the Policy was
extended to November 5, 2008.
The Policy excludes coverage for “‘[p]roperty damage’” to “‘impaired property’”
or property that “has not been physically injured, arising out of[] [¶] [] [a] defect,
deficiency, inadequacy or dangerous condition in ‘your product’ or ‘your work.’”
“‘Property damage’” is defined as “[p]hysical injury to tangible property, including all
resulting loss of use of that property. . . . [¶] [] Loss of use of tangible property that is
not physically injured. . . . shall be deemed to occur at the time of the ‘occurrence’ that
caused it.” “‘Impaired Property’” is defined as “tangible property, other than ‘your
product’ or ‘your work’ that cannot be used or is less useful because [] [¶] [] [i]t
incorporates ‘your product’ or ‘your work’ that is known or thought to be defective,
1 Wrap policies are used to insure large-scale construction projects. “Wrap
programs protect all the parties involved in the project (e.g., owner, general contractor,
subcontractors, architects and other design professionals) and thus provide coverage for
the entire project [citation]. [¶] . . . [¶] Wrap programs are designed to make insurance of
construction projects more equitable, uniform and efficient. Because everyone is covered
under the same policies, these programs reduce potential disputes among the contracting
parties. These programs eliminate the cost of overlapping and duplicative coverage that
otherwise would be provided by different members of the project team.” (Croskey, et al.,
Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) ¶ 7:1490–1491, p. 7E-
51.)
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deficient, inadequate, or dangerous; . . . [¶] if such property can be restored to use by[]
[¶] [] the repair, replacement, adjustment or removal of ‘your product’ or ‘your work.’”
An “‘[o]ccurrence’” is defined as “an accident, including continuous or repeated exposure
to substantially the same general harmful condition.”2
The Wrap Endorsement modified the ISO form by providing that “[t]his insurance
applies only to . . . ‘property damage’ . . . that occurs at a Project Site . . . and arises solely
out of that portion of operation performed: [¶] []by . . . an Additional Named Insured;
[¶] [] that are within the scope of a Designated Project listed in the Designated Project
Schedule; and [¶] [] at the Project Site listed for that Designated Project.”
The Wrap Endorsement did not specify a retroactive date or an occurrence date.
3. The Underlying Action
In August 2007, Regional Steel filed an action against JSM for payment of
$545,201.31.
On or about September 18, 2007, JSM filed a cross-complaint against Regional
Steel and other subcontractor entities, including Babayan, Webcor (the concrete
subcontractor), and Quality Assurance International, Inc. (the quality inspection
consultant), asserting claims against each entity for breach of contract and breach of
express and implied warranties. JSM contended that Regional Steel failed to comply with
the subcontract and building code when it installed horizontal reinforcement for the
parking garage by installing 90 degree tie hooks, and as a result JSM was required by the
City to make repairs that required it to open up numerous locations in the concrete walls,
weld reinforcements to the steel placed by Regional, and otherwise strengthen the
inadequate installation.
2 The Policy also excludes at paragraph 2, subsection (j) “(5) [t]hat particular part
of real property on which you or any contractors or subcontractors working directly or
indirectly on your behalf are performing operations, if the ‘property damage’ arises out of
those operations; or [¶] (6) [t]hat particular part of any property that must be restored,
repaired, or replaced because ‘your work’ was incorrectly performed on it.” The
applicability of this exclusion is not at issue in this appeal.
4
JSM’s claims against Webcor alleged that Webcor poured its concrete in and
around Regional’s reinforcing steel, which did not contain the required 135 degree hooks,
and JSM alleged that Babayan permitted Regional to install the defective hooks and failed
to prevent Webcor from pouring concrete around the defective hooks, and further that
Quality Assurance permitted Webcor to pour concrete without first verifying that the
proper tie hooks were used. JSM alleged that it was damaged because completion of the
project was delayed, resulting in loss of use, loss of rental income, and other damages.
On July 14, 2008, JSM filed a first amended cross-complaint in the underlying action
(FACC) adding claims based upon theories of negligence, negligent interference with
economic advantage, and asserted claims against the parties’ performance bonds.
In August 2009, Webcor filed a first amended cross-complaint seeking indemnity,
contribution, and declaratory relief against JSM, Regional and Babayan. Webcor’s
allegations were conclusory in nature: Webcor alleged its fault was passive and
secondary and sought to hold Regional liable for any and all damages for which Webcor
might be liable to JSM.
4. Regional’s March 2008 and August 2009 Tenders
By letter dated March 11, 2008, Regional tendered the defense of JSM’s cross-
complaint in the underlying action to Liberty. Liberty acknowledged the tender and by
letter dated April 25, 2008, declined coverage. Liberty asserted that no damage to
property was alleged, and the purely economic losses caused by the need to reopen the
poured concrete to correct the tie hook problem did not constitute property damage within
the meaning of the Policy. Further, the tie hook problem did not constitute an
“occurrence” within the meaning of the Policy because the alleged damage was not
caused by an accident. After receiving no response from Regional, Liberty closed the file
on the claim on June 5, 2008.
On August 26, 2009, Regional again tendered its claim to Liberty. The new tender
was based on Regional’s assertion that Webcor believed that JSM was asserting claims
based upon the out-of-level concrete floors and resulting cracks in the slabs at levels P1
5
through P3, and that was the basis on which Webcor sought indemnity in its FACC. In
support, Regional submitted discovery consisting of three deposition excerpts regarding
cracking of the concrete floors poured by Webcor.
Liberty reviewed the tender (which also included the subcontract, JSM’s FACC,
Webcor’s proposed FACC) and saw no evidence that JSM was asserting claims for out-
of-level floors. Liberty submitted the tender to outside counsel for further evaluation, and
Liberty obtained an opinion from independent counsel (Ropers Majesky Kohn Bentley)
that the second tender did not state a claim. Neither JSM nor its outside counsel was able
to confirm a claim for out-of-level floors based upon a review of the pleadings and
motions from the underlying action, as well as the discovery.
On February 4, 2010, Liberty denied Regional’s second tender. Liberty asserted
that it never received any evidence from Regional that supported its claim that it was
seeking damages for uneven floors, cracked concrete, or concrete edge curl. Rather, the
tender described concrete that set improperly and other problems with the floors, but did
not mention a claim by JSM against Regional for the cost of repairing out-of-level floors
or the tie hook problem.
Sometime in October 2009, Regional, JSM, Webcor and Babayan settled the
underlying action. In the settlement agreement (to which Liberty was not a party), the
recitals set forth that Regional “caused or was responsible for damage to, and loss of use
of, tangible property at the PROJECT, including but not limited to out-of-level, cracked
or otherwise damaged floors” and that the parties released all claims against Regional
including those for “damage to and/or loss of use of tangible property at the PROJECT,
out-of-level, cracked or otherwise damaged floors.”
5. Regional’s Complaint Against Liberty
Regional’s complaint against Liberty filed June 23, 2011 alleged claims for breach
of contract, breach of the implied covenant of good faith and fair dealing (duty to defend),
and breach of the implied covenant of good faith and fair dealing (duty to settle).
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6. Liberty’s Motion for Summary Judgment
On June 28, 2012, Liberty filed its motion for summary judgment or in the
alternative summary adjudication of issues against Regional. Liberty asserted that the
Policy’s insuring clause for property damage did not cover intangible economic loses or
nonperformance of contractual obligations based on a defective product or diminution in
value of the project caused by the defective tie hooks; damages from the tie hooks did not
arise from an “occurrence” as defined in the Policy because an occurrence could not arise
from the deliberate act of an insured; and even if Regional’s intentional placement of
improper 90 degree seismic hooks in the shear walls constitute “property damage” caused
by an “occurrence,” the Policy’s exclusions for damage to impaired property or property
not physically injured eliminated any potential for coverage.
Regional responded that JSM’s FACC asserted claims for damage to property and
loss of use of tangible property based on JSM’s allegations that it needed to repair
damage to the garage by opening walls and floors to install support columns. Regional
relied on Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45
Cal. App. 4th 1 (Armstrong), where the court found property damage within an insurance
clause based on the incorporation of asbestos tiles and insulation into a building because
the potentially hazardous material was physically linked to the building. Further, JSM’s
claims for damaged flooring and cracked concrete were damage to “other property”
sufficient to distinguish the case from F&H Construction v. ITT Hartford Ins. Co. (2004)
118 Cal. App. 4th 364 (F&H Construction), which held that to bring defective construction
within the insuring clause, the “damage” must be damage to property other than the
property upon which the insured had worked. Regional also contended that the Wrap
Endorsement omitted any mention of the Retroactive Date, and the impaired property
exclusion did not apply because the exclusion applies only where no other property was
damaged.
In support of its opposition, Regional submitted deposition testimony where JSM
questioned Jeffrey West of Webcor in deposition about floor repair. West testified that
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there were two areas where the floor needed repair because “the concrete went off.”
Webcor “bushed” it and “chipped” it, and put a material on top of it. West believed the
cause of the problem was that the concrete “set up too” fast. One area of the concrete had
set faster than another. There was a problem with the out-of-level floors where the
concrete had set in some places but not others. Scott Lansburg of JSM, testified in
deposition that some of the slab in level P2 of the garage was cracked. He was asked
about repair procedure, which involved a “common procedure called epoxy injection.”
Lansburg did not observe any cracking in the walls on P2.
7. Trial Court Ruling
The trial court found that Liberty had no duty to defend Regional. The court found
that the parties’ papers revealed there were no disputed material facts and thus any
evidentiary objections were overruled.3 The court found the Policy excluded coverage for
property damage arising out of a defect, deficiency, inadequacy or dangerous condition of
the insured’s work, or a delay or failure by an insured to perform a contract in accordance
with its terms. Further, coverage was excluded for impaired property because such
property was defined as tangible property, other than the insured’s work known or
thought to be defective deficient, inadequate or dangerous, “if such tangible property
[could] be restored to use by repair, replacement, adjustment or removal of the insured’s
product or work, or the insured fulfilling the terms of the contract.”
The court found the JSM FACC only alleged facts arising out of the damage
caused by the defective seismic hooks and did not allege any facts of any other damages
attributable to Regional. Under the terms of the Policy, the seismic hook issue and
Liberty’s costs to repair it did not constitute property damage under F&H Construction,
supra, 118 Cal.App.4th at pp. 371–373. The court disagreed that the Wrap Endorsement
removed the conditions regarding “occurrence” and “Retroactive Date” because the
Policy was to be construed as a whole. With respect to the Webcor FACC, the court
3Neither party has raised on appeal any contentions with respect to the trial court’s
evidentiary rulings.
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found that the JSM FACC asserted damages attributable to Webcor’s concrete which was
not asserted against Regional, and thus the Webcor FACC did not establish that JSM
asserted covered damages against Regional.
The court acknowledged that while the JSM FACC was broad enough to allege
facts apart from the seismic issue, the insured could not speculate about unpleaded third
party claims to manufacture coverage. Further, the deposition testimony did not establish
that JSM asserted claims against Regional based upon faulty concrete. Finally, the court
observed there was no evidence that the Settlement Agreement was ever submitted to
Liberty.
DISCUSSION
Regional contends that the Wrap Endorsement replaced the requirement that
property damage result from an occurrence prior to the retroactive date with the
requirement that the property damage occur “at a Project Site” and “arise solely out of
that portion of operation performed.” Second, Regional contends that the incorporation
of its seismic hooks into the Florentine Project constituted property damage and was an
occurrence within the meaning of the Policy and gave rise to the duty to defend,
principally relying on Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc.
(2000) 78 Cal. App. 4th 847, Armstrong, supra, 45 Cal. App. 4th 1, and Eljer Mfg. v.
Liberty Mut. Ins. Co. (7th Cir. 1992) 972 F.2d 805 (Eljer). Further, the underlying claims
involved damage to concrete flooring, slabs, and wall, which were the basis of Webcor’s
cross-complaint for indemnity and damage to Webcor’s work, and these underlying
claims constituted property damage apart from the defective tie hooks sufficient to qualify
for coverage. Regional argues the underlying action involved claims for loss of use and
other damages resulting from delays in the completion of the Florentine Project and thus
satisfied the “loss of use” portion of the policy. Addressing the impaired property
exclusion, Regional contends the exclusion applies only if no other property was damaged
and the insured’s product was in fact defective, which is not the case here because there
was additional damage because the floors were not level. Liberty responds that the
9
defective steel work is not “physical injury to tangible property” and the destructive work
required to repair it did not transform it into property damage caused by an occurrence;
neither the pleadings nor evidence support Regional’s contention that JSM alleged a
claim to property other than Regional’s own work; the Wrap Endorsement did not modify
the Policy because the endorsement must be construed with the Policy as a whole; and
Regional failed to establish an occurrence within the Retroactive Date of the Policy.
I. STANDARD OF REVIEW
In a motion for summary judgment, the moving party “bears the burden of
persuasion that there is no triable issue of material fact and that he is entitled to judgment
as a matter of law.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal. 4th 826, 850.)
“Once the [movant] has met that burden, the burden shifts to the [other party] to show
that a triable issue of one or more material facts exists as to that cause of action.”
(§ 437c, subd. (p)(1); Aguilar, at p. 850.) A triable issue of material fact exists where
“the evidence would allow a reasonable trier of fact to find the underlying fact in favor of
the party opposing the motion in accordance with the applicable standard of proof.”
(Aguilar, at p. 850.) Where summary judgment has been granted, we review the trial
court’s decision de novo, “considering all of the evidence the parties offered in
connection with the motion (except that which the court properly excluded) and the
uncontradicted inferences the evidence reasonably supports.” (Merrill v. Navegar, Inc.
(2001) 26 Cal. 4th 465, 476.) To defeat summary judgment, the plaintiff cannot rely on
allegations of the complaint and must show specific facts. (Spitzer v. Good Guys, Inc.
(2000) 80 Cal. App. 4th 1376, 1385–1386.)
II. DUTY TO DEFEND
An insurer has a duty to defend an insured if it becomes aware of, or if the third
party lawsuit pleads, facts giving rise to the potential for coverage under the insuring
agreement. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal. 4th 1, 19.) “Implicit in
this rule is the principle that the duty to defend is broader than the duty to indemnify; an
insurer may owe a duty to defend its insured in an action in which no damages ultimately
10
are awarded. [Citations.]” (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal. 4th 1076,
1081.) “Thus, when a suit against an insured alleges a claim that potentially could subject
the insured to liability for covered damages, an insurer must defend unless and until the
insurer can demonstrate, by reference to undisputed facts, that the claim cannot be
covered. In order to establish a duty to defend, an insured need only establish the
existence of a potential for coverage; while to avoid the duty, the insurer must establish
the absence of any such potential. [Citation.]” (Ringler Associates Inc. v. Maryland
Casualty Co. (2000) 80 Cal. App. 4th 1165, 1186.) Doubts concerning the potential for
coverage and the existence of duty to defend are resolved in favor of the insured.
(Montrose Chemical Corp. v. Superior Court (1993) 6 Cal. 4th 287, 299–300.)
Whether the insurer owes a duty to defend usually is made by comparing the
allegations of the complaint with the terms of the Policy. (Waller, supra, 11 Cal.4th at
p. 19.) The insurer’s defense duty is obviated where the facts are undisputed and
conclusively eliminate the potential the policy provides coverage for the third party’s
claim. (Ibid.) An insurer is entitled to summary judgment that no potential for indemnity
exists if the evidence establishes no coverage under the policy as a matter of law.
(County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal. 4th 406, 414.)
We review an order granting summary judgment de novo “‘“when, on undisputed facts,
the order is based on the interpretation or application of the terms of an insurance
policy.”’” (Id. at p. 414; see also Founding Members of the Newport Beach Country Club
v. Newport Beach Country Club, Inc. (2003) 109 Cal. App. 4th 944, 955 [“When no
extrinsic evidence is introduced, or when the competent extrinsic evidence is not in
conflict, the appellate court independently construes the contract”].)
“Interpretation of an insurance policy is a question of law and follows the general
rules of contract interpretation.” (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal. 4th
635, 647.) The principal rule of contract interpretation is to give effect to the parties’
intent as expressed in the terms of the contract. (Bay Cities Paving & Grading, Inc. v.
Lawyers’ Mutual Ins. Co. (1993) 5 Cal. 4th 854, 867.) Insurance policy terms will be
11
given the objectively reasonable meaning a lay person would ascribe to them. (AIU Ins.
Co. v. Superior Court (1990) 51 Cal. 3d 807, 822.) In addition, the context in which a
term appears is critical. ‘“[L]anguage in a contract must be construed in the context of
that instrument as a whole, and in the circumstances of that case . . . .’” (Bay Cities
Paving, supra, 5 Cal.4th at p. 867, italics omitted.) “While ‘reliance on [the] common
understanding of language is bedrock[,] . . . [e]qually important are the requirements of
reasonableness and context.’” (Ibid.)
An insurance policy provision is considered to be ambiguous when it is capable of
at least two reasonable constructions. If we cannot eliminate an ambiguity “‘by the
language and context of the policy, [we] invoke the principle that ambiguities are
generally construed against the party who caused the uncertainty to exist (i.e., the insurer)
in order to protect the insured’s reasonable expectation of coverage.’” (County of San
Diego, supra, 37 Cal.4th at p. 415.)
To that end, an insurance policy’s coverage provisions must be interpreted broadly
to afford the insured the greatest possible protection, while a policy’s exclusions must be
interpreted narrowly against the insurer. (MacKinnon, supra, 31 Cal.4th at p. 648.) The
exclusionary clause must be “‘conspicuous, plain and clear.’” (State Farm Mut. Auto.
Ins. Co. v. Jacober (1973) 10 Cal. 3d 193, 202.) “This rule applies with particular force
when the coverage portion of the insurance policy would lead an insured to reasonably
expect coverage for the claim purportedly excluded.” (MacKinnon, supra, 31 Cal.4th at
p. 648.) While the insured has the burden of establishing the claim comes within the
scope of coverage, and the insurer has the burden of establishing the claim comes within
an exclusion. (Ibid.) To prevail, the insurer must establish its interpretation of the policy
is the only reasonable one. (Id. at p. 655.) Even if the insurer’s interpretation is
reasonable, the court must interpret the policy in the insured’s favor if any other
reasonable interpretation would permit coverage for the claim. (Ibid.)
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III. CONSTRUCTION INSURANCE
A. Wrap Endorsement Did Not Eliminate the Requirement that the Claim
Occur During the Retroactive Period
Regional contends that the Wrap Endorsement replaced the requirement that
property damage result from an occurrence before to the “Retroactive Date” with the
requirement that the property damage occur “at a Project Site” and “arise solely out of
that portion of operation performed.” Liberty responds that JSM did not allege an
occurrence because Regional installed the tie hooks intentionally, not by accident.
Here, the alleged damages occurred outside of the Policy’s undisputed effective
date of August 5, 2005 because the City discovered the tie hook problem in January 2005.
The Wrap Endorsement does not modify this requirement; rather, it only modifies and/or
sets forth the six enumerated items (who is an insured, insuring agreement amendment,
products exclusion, products completed operations, other insurance, and additional named
insured schedule) that specifically modified the Policy. The remaining provisions of the
Policy were unchanged by the Wrap Endorsement. “Endorsements on an insurance policy
form a part of the insurance contract [citation], and the policy of insurance with the
endorsements and riders thereon must be construed together as a whole [citation].”
(Narver v. California State Life Ins. Co. (1930) 211 Cal. 176, 181; Adams v. Explorer Ins.
Co. (2003) 107 Cal. App. 4th 438, 451.)
B. Defective Tie Hooks Do Not Constitute “Property Damage” for
Purposes of Coverage Analysis
The law is in conflict on whether construction defects that are incorporated into a
whole property constitute property damages for purposes of a commercial general liability
(CGL) policy. One line of cases states the basic rule and denies coverage for the cost of
removing and replacing defective work or material, and considers such costs as economic
loss, not physical injury to the property. (See, e.g., F & H Construction, supra, 118
Cal.App.4th at pp. 372–373; see also St. Paul Fire & Marine Ins. Co. v. Coss (1978) 80
Cal. App. 3d 888, 892–893 [improper construction does not constitute physical injury to
13
the property because the loss is purely economic].) Another line of cases suggests that
incorporation of a defective part into a whole construction project constitutes property
damage within the meaning of a CGL policy. In Eljer, supra, 972 F.2d 805, damage
resulted to homes from the installation of defective plumbing systems, but no leaking had
occurred. The court in Eljer held that “the incorporation of a defective product into
another product inflicts physical injury in the relevant sense on the latter at the moment of
incorporation—here, the moment when the defective [plumbing] systems were installed
in homes.” (Id. at p. 814.)
In a case adopting the view of no coverage, F & H Construction, supra, 118
Cal. App. 4th 364, the court rejected coverage for defective construction incorporated into
a property. The insured contractor supplied defective steel pile caps that were welded
onto driven piling on a construction project. Upon discovery of the defect, the general
contractor sued the insured for costs to modify the caps to conform to specifications and
for loss of bonus for early completion of the project. As explained in F & H
Construction, “[t]he prevailing view is that the incorporation of a defective component or
product into a larger structure does not constitute property damage unless and until the
defective component causes physical injury to tangible property in at least some other part
of the system. [Citations.] [¶] . . . [¶] Under these cases property damage is not
established by the mere failure of a defective product to perform as intended. [Citations.]
Nor is it established by economic losses such as the diminution in value of the structure
[citations] or the cost to repair a defective product or structure. [Citations.] [¶] These
cases are consistent with the basic purpose of liability policies, which, as explained by the
court in Maryland Casualty Co. v. Reeder (1990) 221 Cal. App. 3d 961, ‘are not designed
to provide contractors and developers with coverage against claims their work is inferior
or defective. [Citation.] The risk of replacing and repairing defective materials or poor
workmanship has generally been considered a commercial risk which is not passed on to
the liability insurer. [Citations.] Rather liability coverage comes into play when the
insured’s defective materials or work cause injury to property other than the insured’s
14
own work or products. . . .’ [Citation.]” (F & H Construction, supra, 45 Cal.App.4th at
pp. 372–373.)
On the other hand, other cases hold that where the defective work or material must
be removed or repaired to comply with building code or health and safety standards, its
presence constitutes physical injury to the building—the physical linking of the defective
material to the building is the physical injury. In Armstrong, supra, 45 Cal. App. 4th 1, the
court held that installation of the insured’s asbestos material constituted physical injury to
the building, even before any release of asbestos fibers: “‘[P]hysical injury’ covers ‘a
loss that results from physical contact . . . , as when a potentially dangerous product is
incorporated into another and . . . must be removed, at some cost, in order to prevent the
danger from materializing.’ [Citations.] [¶] . . . [¶] [T]he damages allegedly suffered by
the building owners from the presence of [asbestos materials] cannot be considered solely
economic losses. . . . The fact that the measure of damages is economic does not preclude
a physical injury.” (Id. at pp. 91–93.) Similarly, in Shade Foods, supra, 78 Cal. App. 4th
847, a roaster supplied roasted diced almonds which contained wooden splinters. The
almonds were processed into nut clusters that were incorporated into breakfast cereal.
Shade Foods held that the splinters in the almonds caused property damage to the “nut
clusters” and to the cereal in which they were incorporated. (Id. at p. 868.)
However, Armstrong, supra, 45 Cal. App. 4th 1 noted the difference between the
case before it (involving hazardous materials) and cases involving defective construction:
“The insurers rely upon the rule that physical incorporation of a defective product into
another does not constitute property damage unless there is physical harm to the whole.
[Citations.] In our view, however, that rule is designed to limit the liability coverage of
contractors against claims of defective materials or poor workmanship, for such claims
are a commercial risk which is not passed on to the liability insurer. [Citations.]
Here, . . . [t]he claims against Armstrong go beyond allegations of defective work or
materials and allege injury to other property.” (Id. at pp. 92–93.) This view is consistent
15
with the holding of numerous other cases that defective construction is not covered under
a CGL policy unless there is damage to other property. (See ibid.)
Here, however, Armstrong and Shade are inapposite because they involved
contamination by hazardous materials that were incorporated into a whole, and did not
involve the incorporation of defective workmanship in to a construction project.
California cases consistently hold that coverage does not exist where the only property
“damage” is the defective construction, and damage to other property has not occurred.
Under that thesis, there is no coverage for Regional’s use of defective tie hooks. Indeed,
Regional’s attempts to bring the allegedly cracking concrete floors within the definition
of “other” property in order to obtain coverage fail because JSM made no allegations that
Regional’s installation of the tie hooks, rather than Webcor’s pouring of the concrete, was
the cause of out-of-level floors. The only allegations JSM made against Regional are that
it failed to install the proper tie hooks, and its failure to do so necessitated demolition and
repair of the affected areas—allegations squarely within the ambit of the rule of F&H
Construction that this type of repair work is not covered under a CGL policy. Further, in
its cross-complaint, Webcor nowhere alleged indemnity against Regional based upon out-
of-level floors; rather, its allegations were conclusory and sought indemnity based upon
JSM’s FACC that alleged claims for demolition, repair, and lost use based on the faulty
tie hooks. For the same reason Regional’s attempts to bring the defective work within the
“loss of use” provisions of the Policy fails: any loss of use was occasioned by the
necessity of repairing Regional’s defective tie hooks, a risk not covered by the CGL
policy. Finally, any recitals in the settlement agreement between JSM, Webcor, Babayan
and Regional in the underlying litigation that characterize the construction defects as
including the out-of-level floors cannot transform JSM’s construction defect claim
against Regional into property damage for purposes of the Policy where there is no
evidence that Liberty was aware of the settlement and concurred in this characterization.
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C. Policy Exclusions
Regional argues the impaired property exclusion, on its face, only applies if JSM is
able to conclusively establish that (1) no other property was damaged, and that (2) that the
insured’s product was in fact defective. Liberty responds that neither the pleadings nor
evidence support Regional’s contention that JSM alleged a claim to property other than
Regional’s own work, and the deposition excerpts do not trigger a duty to defend.
“[I]nsurers often limit coverage in exclusions despite broad general coverage
provisions.” (Westoil Terminals Co., Inc. v. Industrial Indemnity Co. (2003) 110
Cal. App. 4th 139, 149.) The insurer “has the right to limit the coverage of a policy issued
by it and when it has done so, the plain language of the limitation must be respected.”
(Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal. 2d 423, 432.) The insured
has the burden of proving his or her claim is within the basic scope of coverage, while the
insurer has the burden of proving exclusions to coverage. (Golden Eagle Ins. Corp. v.
Cen-Fed., Ltd. (2007) 148 Cal. App. 4th 976, 984.) Provisions that limit coverage
reasonably expected by an insured must be “‘conspicuous, plain, and clear.’” (Haynes v.
Farmers Ins. Exchange (2004) 32 Cal. 4th 1198, 1204.) Although we normally interpret
insuring clauses broadly and strictly construe exclusions, “‘where an exclusion is clear
and unambiguous, it is given its literal effect.’” (Westoil Terminals Co., at p. 146.)
The Policy excludes “‘[p]roperty damage’ to ‘your product’ arising out of it or any
part of it” and also provides, “[d]amage to Impaired Property or Property not Physically
Injured,” excludes “‘[p]roperty damage’ to ‘impaired property’ or property that has not
been physically injured, arising out of: [¶] (1) [a] defect, deficiency, inadequacy or
dangerous condition in ‘your product’ or ‘your work.’” The policies define “[y]our
product” to mean “[a]ny goods or products . . . manufactured, sold, handled, distributed or
disposed of” by the insured or those it controls. “‘Impaired property’” means ‘tangible
property, other than ‘your product’ . . . that cannot be used or is less useful” because it
“incorporates ‘your product’ . . . that is known or thought to be defective, deficient,
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inadequate or dangerous [¶] . . . [¶] if such property can be restored to use” by the
“repair, replacement, adjustment or removal of ‘your product’ or ‘your work.’”
The “Impaired Property” exclusion bars the possibility of coverage. Under that
exclusion, there is no coverage for property damage to “property that has not been
physically injured” arising out of the Regional’s negligent failure to perform its
contractual obligations based on installation of defective tie hooks. JSM’s action alleged
that Regional negligently installed improper tie hooks and thus the underlying suit arose
from deficiencies in Regional’s performance of its work or from Regional’s failure to
perform a contract in accordance with its terms, or both. (Watts Industries, Inc. v. Zurich
American Ins. Co. (2004) 121 Cal. App. 4th 1029, 1046–1047.)
DISPOSITION
The judgment is affirmed. Respondent is to recover its costs on appeal.
NOT TO BE PUBLISHED.
JOHNSON, J.
We concur:
CHANEY, Acting P. J.
MILLER, J.*
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant
to article VI, section 6 of the California Constitution.
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