Webcor Construction, LP et al v. Zurich American Insurance Company, et al
Filing
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ORDER GRANTING MOTORISTS' MOTION FOR SUMMARY JUDGMENT; DENYING OLD REPUBLIC'S MOTION FOR SUMMARY JUDGMENT by Judge Yvonne Gonzalez Rogers; denying 211 Motion for Summary Judgment; granting 212 Motion for Summary Judgment. Within five business days of this Order, Motorists shall submit a proposed form of judgment, approved as to form by Old Republic, which will be entered forthwith. (fs, COURT STAFF) (Filed on 3/12/2019)
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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WEBCOR CONSTRUCTION, LP, ET AL
Plaintiffs,
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v.
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Northern District of California
United States District Court
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ZURICH AMERICAN INSURANCE COMPANY,
ET AL.
Case No.: 17-cv-2220 YGR
ORDER GRANTING MOTORISTS’ MOTION
FOR SUMMARY JUDGMENT; DENYING OLD
REPUBLIC’S MOTION FOR SUMMARY
JUDGMENT
Dkt. Nos. 211, 212
Defendants.
--------------------------------------------------And Third Party Complaint
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OLD REPUBLIC GENERAL INSURANCE CORP.,
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Third Party Plaintiff,
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v.
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MOTORISTS MUTUAL INS. CO.,
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Third Party Defendant.
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Presently pending before the Court are cross motions for summary judgment by third-party
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plaintiff Old Republic General Insurance Corporation (“Old Republic”) and third-party defendant
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Motorists Mutual Insurance Company (“Motorists”) regarding the latter’s duty to defend in an
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underlying construction case. (Dkt. Nos. 211 and 212.) The Court heard oral argument on the
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motions on February 5, 2019. Having duly considered the parties’ written and oral arguments, and
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the admissible evidence submitted, and for the reasons set forth herein, the Court ORDERS as
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follows: (1) the cross-motion of Motorists for summary judgment is GRANTED; and (2) the motion of
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Old Republic for summary judgment is DENIED. The Court finds that the undisputed material facts
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show that there was no potential for coverage under the Motorists policy at issue with respect to
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additional insureds Architectural Glass and Aluminum Co., Inc. (“AGA”) and Webcor Construction,
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LP dba Webcor Builders (“Webcor”) for claims raised in the underlying litigation. Accordingly, a
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duty to defend did not attach.
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I.
SUMMARY OF FACTS1
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A.
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The instant third-party complaint stems from an underlying construction defect action filed in
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The Underlying Action
the Superior Court for the State of California, County of San Francisco captioned CDC San
Francisco LLC v. Webcor Builders. Inc. et al., Case No. CGC15-546222. The complaint in the
underlying action alleged that plaintiff therein, CDC San Francisco LLC, entered into a construction
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agreement with Webcor, the general contractor, to build a project known as the Intercontinental
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Hotel. (Old Republic Request for Judicial Notice, Exh. A [Complaint in Case No. CGC15-546222,
United States District Court
Northern District of California
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hereinafter “ORRJN Exh. A”].) The agreement, in part, called for Webcor to design and build an
exterior curtainwall system that would serve as the exterior wall of the hotel. The exterior
curtainwall system is “an interconnected system of azure-blue glass that forms the building’s entire
exterior such that the Hotel appears in the San Francisco skyline as a 32[-]story translucent blue
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tower of glass.” (Id. ¶ 12.) AGA was the “curtainwall contractor” for the project, and was
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responsible for designing, engineering, testing, fabricating, delivering, and installing the curtainwall
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system. (Motorists Fact2 4.)
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The underlying action, filed on June 9, 2015, alleged that the curtainwall glazing system was
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comprised of a structural frame into which insulated glass units (IGUs) were fastened. (ORRJN Exh.
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A ¶ 12.) The IGUs were comprised of two panes of glass, a spacer bar, structural silicone sealant to
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secure the panes of glass and metal spacer together, and polyisobutylene (“PIB”) sealant to form a
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vapor barrier or hermetic seal around the interior perimeter of the module. (Id.; Motorist Fact 7.)
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AGA also subcontracted with Viracon, Inc. to manufacture the IGUs. (Motorist Fact 6.) AGA
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subcontracted with Midwest Curtainwalls, Inc. (“Midwest”) to (1) design and manufacture the
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All facts are undisputed unless otherwise noted.
References to the parties’ “Facts” incorporate the evidence cited in their separate statements
and responses thereto.
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curtainwall frame; (2) glaze (or glue) the IGUs into the frame; and (3) ship the completed
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curtainwalls to San Francisco where AGA installed them at the project site. (Motorists Fact 9, 10.)
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The project included 6,400 IGUs. (Old Republic Fact 8.) The project was completed around
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February 27, 2008. (Old Republic Fact 9.)
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In the underlying action, CDC San Francisco LLC alleged that migration or movement of the
PIB sealant had caused a gray film or “mottling” in the interior space of the IGUs, as well as
discoloration of the structural silicon to a brownish color on the visible edges of the IGUs.
(Motorists Fact 12; ORRJN Exh. A ¶ 14.) The complaint therein alleged “there is no way to repair
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the PIB without damaging the [IGUs] and the exterior Curtain Wall glazing system to access the film
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formation.” (ORRJN Exh. A at ¶ 14.) The complaint explained in considerable detail the defects
United States District Court
Northern District of California
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with the curtain wall system and the warranties associated therewith. (See id. ¶¶ 14-25.) In addition
to these factual allegations, the underlying complaint alleged potential damages based upon the
“substantial costs to repair the deficient work” and the “costs to repair property damaged by deficient
work . . . .” (Id. ¶¶ 29, 34, 41, 45, 51, 57, 61, 67, 72, 77, 81, 86, 90, and 95 (emphasis supplied).)
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B.
The Policy
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Subcontractor Midwest obtained a commercial general liability policy from third-party
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defendant Motorists, with an effective policy period of June 30, 2006 to June 30, 2007 (Motorists
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policy number 33.261515- 90E or “the Policy”). (Motorists Fact 19.) The Policy included as
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additional insureds both AGA and Webcor. (Id.) The additional insured endorsement of the Policy
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stated:
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A. Section II- Who Is An Insured is amended to include as an additional insured
the person(s) or organization(s) shown in the Schedule, but only with respect to
liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’
caused, in whole or in part, by:
1. Your acts or omissions; or
2. The acts or omissions of those acting on your behalf;
In the performance of your ongoing operations for the additional insured(s) at the
location(s) designated above.
B. With respect to the insurance afforded to these additional insureds, the
following additional exclusions apply:
This insurance does not apply to ‘bodily injury’ or ‘property damage’ occurring
after:
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1. All work, including materials, parts or equipment furnished in
connection with such work, on the project (other than service,
maintenance or repairs) to be performed by or on behalf of the additional
insured(s) at the location of the covered operations has been completed; or
2. That portion of ‘your work’ out of which the injury or damage arises
has been put to its intended use by any person or organization other than
another contractor or subcontractor engaged in performing operations for a
principal as a part of the same project.
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(Motorists Fact 21.) The Policy covered “property damage” defined as “physical injury
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to tangible property, including all resulting loss of use of that property” and “loss of use
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of tangible property that is not physically injured.” (Motorists Fact 22.)
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United States District Court
Northern District of California
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Further, the Policy applied to property damage only if it “occur[ed] during the
policy period.” (Campo Decl., Exh. 3 at MM000226). Under the terms of the Policy,
property damage “will be deemed to have been known to have occurred at the earliest
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time when any insured . . . (1) Reports all, or any part, of the . . . ‘property damage’ to
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[the insurer]; . . . (2) Receives a written or verbal demand or claim for damages because
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of the . . . ‘property damage’; or (3) Becomes aware by any other means that . . .
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‘property damage’ has occurred or has begun to occur.” (Id.)
In pertinent part, the Policy specifically excluded from coverage:
j. Damage to Property
‘Property damage’ to . . . (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 . . .
[unless] included in the ‘products-completed operations hazard.’3
k. Damage to Your Product
‘Property damage’ to ‘your product’ arising out of it or any part of it.
l. Damage to Your Work
‘Property damage’ to ‘your work’ arising out of it or any part of it and
included in the ‘products-completed operations hazard.’ This exclusion does not
apply if the damaged work or the work out of which the damage arises was
performed on your behalf by a subcontractor.
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At the hearing on this matter, the parties conceded that the Policy included an additional
coverage limit for “Products-Completed Operations” (See Declaration of John R. Campo, Exh. 3,
MM000216). However, Old Republic does not argue that the Products-Completed Operations
coverage applied to AGA or Webcor as additional insureds.
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m. Damage to Impaired Property Or Property Not Physically Injured
‘Property 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’ after it has been put to its
intended use.
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(Id. at MM000229-30, 240-41.) The Policy also defined certain terms relevant here,
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including:
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Northern District of California
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8. ‘Impaired property’ means tangible property, other than ‘your product’ or ‘your
work,’ that cannot be used or is less useful because:
a. It incorporates ‘your product’ or ‘your work’ that is known or thought to
be defective, deficient, inadequate or dangerous; or
b. you have failed to fulfill the terms of a contract or agreement;
if such property can be restored to use by:
a. the repair, replacement, adjustment or removal of ‘your product’ or
‘your work’; or
b. Your fulfilling the terms of the contract or agreement.
***
21. ‘Your product’:
a. Means:
(1) Any goods or products, other than real property, manufactured, sold,
handled, distributed or disposed of by:
(a) You;
(b) Others trading under your name; or
(c) A person or organization whose business or assets you have
acquired; and
(2) Containers (other than vehicles), materials, parts or equipment
furnished in connection with such goods or products.
b. Includes:
(1) Warranties or representations made at any time with respect to the
fitness, quality, durability, performance or use of ‘your product’; and
(2) The providing of or failure to provide warnings or instructions . . . .
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22. ‘Your work’:
a. Means:
(1) Work or operations performed by you or on your behalf; and
(2) Materials, parts or equipment furnished in connection with such work
or operations.
b. Includes:
(1) Warranties or representations made at any time with respect to the
fitness. quality, durability, performance or use of ‘your work,’ and
(2) The providing of or failure to provide warnings or instructions . . . .
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(Id.) After the end of the effective period of the policy on June 30, 2007, Midwest was insured by
Acuity Mutual Insurance Company through June 30, 2014. (Motorists Additional Fact 6.)
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C.
Defense of the Underlying Action
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Both AGA and Webcor tendered their defense to Motorists, and Motorists denied a duty to
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defend them. (Old Republic Facts 39-41 and 45-47.) Motorists provided a defense to Midwest
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under the Policy, though it did so under a reservation of rights. (Old Republic Facts 29-30.) Old
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Republic provided a defense for AGA and Webcor in the underlying action. The underlying action
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settled on April 24, 2017. (Old Republic Fact 28.)4 Old Republic filed the instant third-party
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complaint against Motorists for contribution toward the costs of defense paid by Old Republic on
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behalf of Webcor and AGA on July 12, 2017. (Dkt. No. 69.)
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II.
APPLICABLE STANDARDS
A.
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United States District Court
Northern District of California
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Summary Judgment
The parties each have filed motions for summary judgment on the issue of whether Motorists
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had a duty to defend Webcor and AGA. Summary judgment is appropriate when “there is no
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genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
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Fed. R. Civ. P. 56(a). Summary judgment is mandated “against a party who fails to make a showing
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sufficient to establish the existence of an element essential to that party’s case, and on which that
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party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
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“[W]hen parties submit cross-motions for summary judgment, each motion must be considered on its
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own merits.” Fair Hous. Council of Riverside Cty., Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th
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Cir. 2001) (alteration and internal quotation marks omitted). Thus, “[t]he court must rule on each
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party’s motion on an individual and separate basis, determining, for each side, whether a judgment
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may be entered in accordance with the Rule 56 standard.” Id. (quoting Wright, et al., FEDERAL
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PRACTICE AND PROCEDURE § 2720, at 335–36 (3d ed. 1998)). If, however, the cross-motions are
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before the court at the same time, the court must consider the evidence proffered by both sets of
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motions before ruling on either one. Riverside Two, 249 F.3d at 1135–36.
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Old Republic paid a total of $3,000,000 toward the settlement, the total amount of which is
confidential. (Old Republic Fact 32, 34.) Motorists also paid money on behalf of Midwest to settle
the underlying action. (Old Republic Fact 29.) Whether either insurer was reimbursed for the
amounts paid into the settlement, and by whom, is not part of the record here nor is it relevant to the
issues before the Court.
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B.
Duty to Defend
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An “insurer has a duty to defend an insured if it becomes aware of, or if [a] third party
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lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement.” Waller
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v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 19 (1995), as modified on denial of reh’g (Oct. 26, 1995)
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(internal citations omitted). Under well-established California law, “the duty to defend is broader
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than the duty to indemnify.” Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 299–300
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(1993) (Montrose I); see also Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal.4th 277, 287
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(2014) (duty to defend interpreted broadly). “If any facts stated in or fairly inferable from the
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complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by
the policy, the insurer’s duty to defend arises.” Albert v. Truck Ins. Exch., 23 Cal.App.5th 367, 377–
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United States District Court
Northern District of California
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78 (2018) quoting McMillin Management Services, L.P. v. Financial Pacific Ins. Co.,17 Cal.App.5th
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187, 191 (2017).
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“Any doubt as to whether the facts establish the existence of the defense duty must be
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resolved in the insured’s favor.” Montrose I, 59 Cal.4th at 287; see also Hartford Casualty, 59
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Cal.4th at 287 (same). The insured need only show a mere possibility of coverage under the policy
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to establish a duty to defend, while an insurer is entitled to summary judgment only upon a showing
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that no potential for coverage exists under the policy as a matter of law. Regional Steel Corp. v.
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Liberty Surplus Ins. Corp., 226 Cal.App.4th 1377, 1389 (2014); see also County of San Diego v. Ace
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Property & Casualty Ins. Co., 37 Ca1.4th 406, 414 (2005) (“Ace Property”); Montrose I, 6 Cal.4th at
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300; Gray v. Zurich Ins. Co. 65 Cal.2d 263, 275 (1966). In other words, if the third-party complaint
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could not raise a single issue that would bring it within the policy’s coverage under any conceivable
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theory, the insurer need not defend. Gray, 65 Cal.2d at 276, fn. 15; see also Hyundai Motor Am. v.
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Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 600 F.3d 1092, 1097 (9th Cir. 2010) (obligation to
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defend excused only when the complaint can by no conceivable theory raise a single issue which
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could bring it within the policy coverage).
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“The duty to defend is determined by reference to the policy, the complaint, and all facts
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known to the insurer from any source.” Montrose I, 6 Cal.4th at 300 (emphasis in original). “The
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determination whether the insurer owes a duty to defend usually is made in the first instance by
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comparing the allegations of the complaint with the terms of the policy.” Id. “Facts extrinsic to the
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complaint also give rise to a duty to defend when they reveal a possibility that the claim may be
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covered by the policy.” Id. at 295, quoting Gray, 65 Cal.2d at 276. “An insurer that has issued an
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insurance policy that includes a duty to defend must defend any legal action brought against an
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insured that is based in whole or in part on any allegations that, if proved, would be covered by the
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policy, without regard to the merits of those allegations. RESTATEMENT OF THE LAW, LIABILITY
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INSURANCE § 13, Conditions Under Which the Insurer Must Defend (AM. LAW INST., Revised
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Proposed Final Draft No. 2, Sept. 7, 2018). “For the purpose of determining whether an insurer must
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defend, the legal action is deemed to be based on: (a) Any allegation contained in the complaint or
comparable document stating the legal action; and (b) Any additional allegation known to the
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United States District Court
Northern District of California
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insurer, not contained in the complaint or comparable document stating the legal action, that a
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reasonable insurer would regard as an actual or potential basis for all or part of the action.” Id.
“An insurer may rely on an exclusion to deny coverage only if it provides conclusive
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evidence demonstrating that the exclusion applies.” Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100
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Cal.App.4th 1017, 1038-1039 (2002). However, in determining whether a particular policy provides
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a potential for coverage, the Court is guided by the principle that interpretation of an insurance
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policy is a question of law. Ace Property, 37 Cal.4th at 414 (citing cases).
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III.
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DISCUSSION
Old Republic’s third-party complaint alleges a single claim for contribution against
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Motorists. “In the insurance context, the right to contribution arises when several insurers are
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obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share
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of the loss or defended the action without any participation by the others. Fireman’s Fund Ins. Co. v.
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Maryland Cas. Co., 65 Cal.App.4th 1279, 1293 (1998). “Equitable contribution permits
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reimbursement to the insurer that paid on the loss for the excess it paid over its proportionate share of
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the obligation, on the theory that the debt it paid was equally and concurrently owed by the other
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insurers and should be shared by them pro rata in proportion to their respective coverage of the risk.”
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Id. The claim for contribution here turns entirely on whether Motorists had a duty to defend AGA
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and Webcor in the underlying litigation.
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Old Republic contends that, at the time of tender, the facts known to Motorists regarding the
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underlying action established a potential for coverage based upon “property damage” resulting from
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Midwest’s work during the period of the Policy. Thus, Old Republic argues, Motorists had a duty to
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defend AGA and Webcor as additional insureds of Midwest under the Policy’s Additional Insured
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provisions, and now must contribute to the costs of the defense wrongly denied them. Motorists
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disagrees, contending for several reasons that no potential for coverage as to AGA and Webcor
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exists.
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A.
“Property Damage” Alleged In the Underlying Action
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Motorists argues first that the complaint in the underlying action, and the facts known to
Motorists regarding those claims, demonstrate that the underlying litigation did not concern
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Northern District of California
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“property damage” as defined by the Policy. Motorists argues the only purported “property damage”
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was Midwest’s defective work itself, not damage to other property. As such, Motorists contends,
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there was no “physical injury to tangible property” as defined by the Policy.
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Under California law, “the prevailing view is that the incorporation of a defective component
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or product into a larger structure does not constitute property damage unless and until the defective
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component causes physical injury to tangible property in at least some other part of the system.”
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F & H Constr. v. ITT Hartford Ins. Co., 118 Cal.App.4th 364, 372 (2004) (emphasis supplied).
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“California cases consistently hold that coverage does not exist where the only property ‘damage’ is
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the defective construction, and damage to other property has not occurred.” Regional Steel Corp. v.
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Liberty Surplus Ins. Corp., 226 Cal.App.4th 1377, 1393 (2014) (emphasis in original). “[P]roperty
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damage is not established by the mere failure of a defective product to perform as intended . . . [n]or
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is it established by economic losses such as the diminution in value of the structure or the cost to
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repair a defective product or structure.” F & H Constr., 118 Cal.App.4th at 372 (internal citations
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omitted).
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This understanding of the meaning of “property damage” arises from the principle that
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general liability policies, such as the Commercial General Liability (“CGL”) policy here, “are not
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designed to provide contractors and developers with coverage against claims their work is inferior or
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defective . . . [since t]he risk of replacing and repairing defective materials or poor workmanship has
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generally been considered a commercial risk which is not passed on to the liability insurer.”
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Maryland Cas. Co. v. Reeder, 221 Cal.App.3d 961, 967 (1990), modified (July 25, 1990). “Rather
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liability coverage comes into play when the insured’s defective materials or work cause injury to
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property other than the insured’s own work or products.” Id.; see also F & H Constr., 118
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Cal.App.4th at 372–73. Defective materials and construction do not themselves constitute “property
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damage.” Reeder, 221 Cal.App.3d at 969. In other words, “a liability insurance policy is not
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designed to serve as a performance bond or warranty of a contractor’s product.” F & H Constr., 118
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Cal.App.4th at 373 (internal citations omitted). In the absence of allegations or extrinsic facts
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suggesting that the defective work or materials caused damage to other property, or physically
harmed the whole of the structure, such as by introducing a hazardous contaminant, no potential for
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Northern District of California
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coverage exists. Regional Steel, 226 Cal.App.4th at 1392 (citing Armstrong World Industr. Inc. v.
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Aetna Casualty & Surety Co, 45 Cal.App.4th 1 (1996) and Shade Foods, Inc. v. Innovative Products
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Sales & Mktg., 78 Cal.App.4th 847 (2000)).
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The court in Regional Steel summarized the two lines of cases interpreting “property
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damage.” Regional Steel, 226 Cal.App.4th at 1391-93. The first arising from poor workmanship and
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the second from contamination. Regional Steel arose from the former. There, the court determined
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that no coverage existed for a claim arising from work on an apartment project in which the insured
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installed the wrong type of tie hooks as part of its installation of the steel framing. Regional Steel,
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226 Cal.App.4th at 1381-82. Regional was the subcontractor hired to design and construct the steel
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frame, including the seismic tie hooks. A separate subcontractor was engaged to supply and pour
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concrete to encase the steel frame. When a safety inspection found that the wrong seismic tie hooks
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were used, the construction was delayed and repairs undertaken, necessitating the “reopening” of the
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concrete encasing the steel frame. Id. at 1383-84. The court in Regional Steel held that the insurer
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had no duty to defend because the allegations of the underlying action did not constitute “property
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damage” but merely defective workmanship of the steel framing system. Id. at 1393. “The only
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allegations [the owner] made against Regional were that it failed to install the proper tie hooks, and
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its failure to do so necessitated demolition and repair of the affected areas—allegations squarely
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within the ambit of the rule . . . that this type of repair work is not covered under a CGL Policy.” Id.
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Other decisions interpreting California law are in accord, holding that defective products or
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workmanship, even when they require repairs that affect other physical structures, do not constitute
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“property damage” under a CGL policy. See F&H Construction, 118 Cal.App.4th 364, 373-74
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(defective pile caps installed at a project, which did not otherwise damage any other portions of the
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project did not constitute “property damage” under CGL policy); American Home Assurance Co. v.
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SMG Stone Company. Inc., 119 F.Supp.3d 1053, 1060-61 (N.D. Cal. 2015) (under California law,
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defective installation of floor tiles which cracked do not constitute ‘property damage’ for purposes of
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CGL policy because the defective installation did not cause damage to other parts of the project); see
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also New Hampshire Ins. Co. v. Vieira, 930 F.2d 696, 697 (9th Cir. 1991) (denying insurer’s claim
for reimbursement based on subcontractor’s failure to nail drywall properly to interior walls and
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United States District Court
Northern District of California
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install in attics as not constituting “property damage” under CGL policy despite repairs requiring
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holes to be cut in roof); see also 9A COUCH ON INSURANCE 3d ed.§ 129:7 (“The mere failure of a
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defective product to perform as intended also does not give rise to property damage. Likewise, the
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costs incurred to repair a defective product or defective work do not constitute property damage
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under a commercial general liability policy.”)
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Here, the undisputed evidence shows that the claims of the underlying action, and the facts
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known to Motorists regarding that action, concerned only defects in the curtainwall system supplied
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by Midwest. The purchase order between Midwest and AGA required Midwest to “furnish [a]
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complete factory[-]assembled and glazed curtain wall system . . . [including] all design, engineering
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calculations, system drawings, embed layout drawings and necessary coordination for all details.”
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(Midwest Exh. 2, Dkt. No. 212-9, at ECF p. 92.) Per the agreement, Midwest was “completely
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responsible for system design” and “responsible to coordinate all necessary sealant compatibility
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testing.” (Id.)5 The damage in the underlying action was limited to the curtainwall system itself.
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(Old Republic Facts 2, 3, 12, 13, 14, and response thereto.)
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The agreement between AGA and Midwest called for Midwest to provide insurance
certificates with AGA listed as an additional insured. (Midwest Exh. 2 at ECF pg. 92.) It further
required that the insurance include “completed operations coverage broad form contractual liability
coverage, and broad-term property damage coverage.” (Id. at ECF p. 100, ¶ 20.) Apparently,
Midwest did not obtain that coverage. However, there is no claim here that Old Republic should be
able to recover from Motorists because Midwest failed to obtain the level of coverage required by the
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Old Republic focuses on the second line of cases and argues that the potential for “property
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damage” under the terms of the Policy existed because the IGUs themselves were damaged due to
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Midwest’s faulty workmanship. More specifically, Old Republic argues that gluing the IGUs into
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the curtainwall frame irreversibly damaged them, resulting in property damage under the Policy.
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The IGUs were manufactured by Viracon and purchased by AGA for inclusion in the curtainwall
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system. Thus, Old Republic contends the IGUs constitute AGA’s “property” damaged by Midwest’s
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work, rather than an integral part of Midwest’s “work” or “product” itself.
8
For its proposition, Old Republic relies on Shade Foods, Inc. v. Innovative Prod. Sales &
Mktg., Inc., 78 Cal.App.4th 847, 861 (2000), as modified on denial of reh’g (Mar. 29, 2000). Shade
10
Foods does not persuade. That case concerned contamination of a food product by incorporation of
11
United States District Court
Northern District of California
9
one component, namely “defective almonds” or said differently, almonds pieces which included
12
wood splinters that were “sharply pointed and one-fourth inch to two or three inches long.” Id. at
13
861. The appellate court affirmed a finding of coverage under a general liability policy, holding that
14
“where a potentially injurious material in a product causes loss to other products with which it is
15
incorporated,” that loss is property damage under a general liability policy. Id. at 865. The court
16
analogized the defective, splinter-ridden almonds to asbestos-containing building materials, the
17
presence of which “causes injury to a building because the potentially hazardous material is
18
physically touching and linked with the building.” Id. at 866 (internal citation omitted). The court in
19
Shade Foods held that incorporation of a defective product causing such contamination qualifies as
20
property damage under the terms of a standard CGL policy. Id. at 865.
21
The Shade Foods court distinguished the circumstances there and in similar contamination
22
cases from those cases holding that “diminution in the value of a product by reason of a defective
23
part or faulty workmanship does not constitute property damage.” Id. at 865; see also Seagate Tech.,
24
Inc. v. St. Paul Fire & Marine Ins. Co., 11 F. Supp. 2d 1150, 1155 (N.D. Cal. 1998) (distinguishing
25
asbestos contamination liability in Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45
26
Cal.App.4th 1 (1996) from defective design or manufacture of a component product which
27
28
agreement. Moreover, it does not appear such a claim would be viable. Patent Scaffolding Co. v.
William Simpson Const. Co., 256 Cal. App. 2d 506, 511-12 (1967) (insurer cannot recover for loss
caused by contractor’s failure to obtain insurance that would have spread risk to another insurer).
12
1
constitutes a commercial risk not passed on to a liability insurer); New Hampshire Ins. Co. v. Vieira,
2
930 F.2d 696, 701 (9th Cir. 1991) (defective workmanship does not constitute “property damage”
3
and the nature of repairs required to fix those defects “cannot convert noncovered damage into
4
covered damage”). Moreover, Shade Foods did not establish an insured’s liability to the other
5
suppliers for “damage” to their non-hazardous components simply because of combination to form
6
the insured’s product. Shade Foods does not support the argument that one component of an
7
integrated whole can be found to have caused property damage to the other components with which
8
it was combined. Old Republic does not contend that curtainwall system “contaminated” any other
9
property outside the system itself, making Shade Foods inapposite. Thus, Old Republic has offered
no persuasive authority to support its theory that “damage” to a component of an integrated final
11
United States District Court
Northern District of California
10
product can constitute distinct “property damage” covered by a CGL policy like the one here.6
12
Pulte Home, also relied upon by Old Republic, is likewise distinguishable and offers no
13
support for its arguments. Pulte Home Corp. v. Am. Safety Indem. Co., 14 Cal.App.5th 1086, 1118
14
(2017), reh'g denied (Sept. 20, 2017), review denied (Nov. 15, 2017). In Pulte Home, the
15
construction defect complaints identified both defective materials and workmanship, as well as
16
overlapping forms of damage arising from concrete, electrical, and other work, all of which allegedly
17
had permitted moisture damage to occur over time. Id. At the time of tender, “there was no reliable
18
way shown for determining . . . which subcontractors' work had been substandard or whether it had
19
damaged its own or another’s adjacent work.” Id. Here, the underlying action offers no factual
20
allegations of damage other than to the curtainwall system itself.
21
The Court notes that Old Republic has not argued that any other property was damaged aside
22
from the IGUs. However, the Court is mindful that the underlying complaint alleged claims against
23
AGA, Webcor, and Midwest for “substantial additional costs to repair the deficient work, [and] costs
24
to repair property damaged by deficient work.” (See Old Republic RJN, Exh. A, CDC San Francisco
25
26
27
28
6
Old Republic also argued strenuously that Motorists’ defense of Midwest demonstrates that
Motorists must have recognized a potential for coverage of the additional insureds. However, that
tactical position, taken under a reservation of rights to dispute coverage, is wholly irrelevant to the
question of whether the underlying action and the facts known to Motorists gave rise to a potential of
a covered claim by AGA or Webcor. Further, the coverages provided to those insureds differed from
those applicable to the additional insureds. (Motorists Fact 21.)
13
1
complaint, at ¶¶ 29, 34, 41, 45, 51, 57, 61, 67, 72, 77, 81, 86, 90, and 95, emphasis supplied.) Old
2
Republic has not argued such allegations, without other factual allegations to support them, would
3
give rise to a duty to defend without more. The Court agrees with that tacit admission. The
4
underlying complaint did not include factual allegations of damage to property other than the
5
curtainwall system itself. It is the factual allegations of the underlying complaint, and not boilerplate
6
allegations of “costs to repair property damaged by deficient work” that are the basis for the Court’s
7
analysis. See Advent, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 6 Cal.App.5th 443, 460
8
(2016) (speculation about facts that “might naturally be supposed to exist along with the known
9
facts” insufficient to create a duty to defend); Albert v. Mid-Century Ins. Co., 236 Cal.App.4th 1281,
1290 (2015) (“the proper focus is on the facts alleged in the complaint, rather than the alleged
11
United States District Court
Northern District of California
10
theories for recovery . . . the insured ‘may not speculate about unpled third party claims to
12
manufacture coverage’”); Friedman Prof. Mgmt. Co. v. Norcal Mut. Ins. Co., 120 Cal.App.4th 17,
13
34–35 (2004) (“An insured is not entitled to a defense just because one can imagine some additional
14
facts which would create the potential for coverage”); Armstrong World Indus., Inc. v. Aetna Cas. &
15
Sur. Co., 45 Cal.App.4th 1, 110 (1996) (“as a general rule[,] conclusory allegations are not enough to
16
give rise to a duty to defend”).
17
In sum, there is no disputed issue of material fact that the matters alleged in the underlying
18
action or otherwise known to Motorists created a potential for property damage covered by the
19
Policy. Accordingly, Motorists is entitled to summary judgment that it had no duty to defend.
20
B.
Exclusions from Coverage Under the Policy
21
Even if the Court were to consider damage to the IGUs to be “property damage” under the
22
terms of the Policy, the exclusions in the Policy would have eliminated any potential for coverage
23
based upon Midwest’s defective construction of the curtainwall system. To demonstrate that an
24
exclusion eliminates the duty to defend, the insurer must provide “conclusive evidence [proving] that
25
the exclusion applies in all possible worlds.” Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100
26
Cal.App.4th 1017, 1039 (2002). Here, Motorists contends multiple exclusions in the Policy excluded
27
coverage for the property damage alleged in the underlying complaint and known to Motorists at the
28
time of tender.
14
1
First, the policy exclusions in paragraph (k) and (l) preclude coverage for damage to, and
arising out of, the insured’s “product” and the insured’s “work.” (Campos Decl. Exh. 2 at
3
MM000230-31.) The Policy defined the insured’s “work” as “(1) Work or operations performed by
4
you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work
5
or operations.” (Id. at MM000240-41.) It defines the insured’s “product” as “[a]ny goods or
6
products, other than real property, manufactured, sold, handled, distributed or disposed of by” the
7
insured including “[w]arranties or representations made at any time with respect to the fitness,
8
quality, durability, performance or use of” the product. Here, Midwest manufactured a curtainwall
9
system, using parts it manufactured itself as well as parts supplied by others. The complaint in the
10
underlying action alleged damage arising from Midwest’s “work” or “product.” California courts
11
United States District Court
Northern District of California
2
have interpreted nearly identical exclusions to “preclud[e] coverage for liability for damage to and
12
deficiencies of the insured contractor’s work product [and] applies to the insured’s defective work as
13
well as to the insured’s satisfactory work that is damaged by the insured’s defective work.”
14
Diamond Heights Homeowners Assn. v. Nat’l Am. Ins. Co., 227 Cal.App.3d 563, 571 (1991). Like
15
the “property damage” definition itself, “[t]he exclusion is consistent with the purpose of [a CGL]
16
type of policy which is neither a performance bond nor an all-risk policy.” Id.
17
Second, the Policy’s exclusions at paragraphs (j)(5) and (6) deny coverage for property
18
damage to “real property” that “arises out of” the insured’s operations, and damage to any property
19
“that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it . . .
20
[unless] included in the ‘products-completed operations hazard.’” (Campos Decl. Exh. 2 at
21
MM000229-30.)7 The Policy defined “your work” as “(1) Work or operations performed by you or
22
on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or
23
operations.” (Id. at MM000240-41.) Interpreting similar faulty workmanship exclusions, California
24
courts have held that such provisions preclude coverage for deficiencies in the insured’s work. See,
25
e.g., Clarendon Am. Ins. Co. v. Gen. Sec. Indem. Co. of Arizona, 193 Cal.App.4th 1311, 1325 (2011)
26
27
28
7
As noted in note 3, supra, the parties conceded that the Policy included an additional
coverage limit for “Products-Completed Operations.” (See Declaration of John R. Campo, Exh. 3,
MM000216.) However, Old Republic does not argue that the Products-Completed Operations
coverage applied to additional insureds AGA or Webcor.
15
1
(citing Maryland Casualty, supra, 221 Cal.App.3d at 967). In Clarendon, the court held that the
2
identical exclusion applied where the underlying action did not “reference any damage to the work of
3
others [but] simply list[ed] faulty work which must be repaired or replaced.” Clarendon, 193
4
Cal.App.4th at 1326. In the absence of any evidence of damage to the work of others that might
5
have been caused by the faulty work of the insured, the court found the exclusion precluded
6
coverage. Id.
7
Examining the same exclusion as in the Policy here, the court in Clarendon held that “[t]he
8
exclusion found in j(6) excludes coverage for the physical injury to, or loss of use of, that part of the
9
property that must be replaced” because the insured’s work was performed incorrectly. The
exclusion therefore eliminates the potential for coverage of claims for alleged defects and
11
United States District Court
Northern District of California
10
deficiencies ‘resulting from poor workmanship and/or materials.’” Id. Moreover, the inference that
12
other portions of the project here would be affected by repair or replacement of the curtainwall
13
system does not create coverage where none existed. See Regional Steel Corp., 226 Cal.App.4th at
14
1394 (“The only allegations JSM made against Regional were that it failed to install the proper tie
15
hooks, and its failure to do so necessitated demolition and repair of the affected areas—allegations
16
squarely within the ambit of the rule . . . that this type of repair work is not covered under a CGL
17
Policy”); New Hampshire Ins. Co. v. Vieira, 930 F.2d 696, 701-02 (9th Cir. 1991) (insured’s
18
defective installation of drywall in rooms and attics required remediation by cutting holes in roof to
19
install additional drywall in attics, but remediation costs were not covered due to work product
20
exclusions); Golden Eagle Ins. Co. v. Travelers Companies, 103 F.3d 750, 757 (9th Cir. 1996)
21
(where a CGL policy excluded the cost of repairing the insured’s own defective installation of
22
concrete floors, the court concluded the cost of removing and replacing non-defective floor coverings
23
was excluded from coverage); see also Blanchard v. State Farm Fire & Cas. Co., 2 Cal.App.4th 345,
24
348–49 (1991) (under similar exclusion, where “faulty workmanship in the framing or drywall led to
25
rainwater leaking in and damaging a homeowner’s furnishings, [insured] would be indemnified for
26
the damage to the furnishings, but not for the cost of repairing or replacing the faulty
27
workmanship.”)
28
16
1
Here, the undisputed facts evidence that the underlying litigation arose from claims that the
sealant in the IGUs was breaking down and the components of the curtainwall system were
3
comprised of incompatible materials, leading to discoloration to and possible breakdown of the
4
sealant. (Old Republic Facts 2 and 3.) The project owner only sought repair, namely by removing
5
and replacing the curtainwall system. (Motorists Fact 17.)8 Old Republic has offered no evidence that
6
the litigation raised the specter of damage other than to the curtainwall system. Indeed, the only
7
evidence cited by Old Republic in support of its own motion concerned damage to the curtainwall
8
system itself. (Old Republic Facts 5-24.) As in Clarendon, Old Republic’s failure to “cite to any
9
specific examples of damage to the work of others that might have been caused by [Midwest’s]
10
allegedly faulty work” fails to create a triable issue of fact. Clarendon, 193 Cal.App.4th at 1326.
11
United States District Court
Northern District of California
2
Finally, the Policy also excluded, under paragraph (m), coverage for property damage “to
12
‘impaired property’ or property that has not been physically injured, arising out of [¶ . . .] [a] defect,
13
deficiency, inadequacy or dangerous condition in ‘your product’ or ‘your work’. . . .” (Id. at
14
MM000229-30.) “Impaired property” includes property “that cannot be used or is less useful
15
because . . . [i]t incorporates ‘your product’ or ‘your work’ that is known or thought to be defective,
16
deficient, inadequate or dangerous” and can be restored to use by repairing or replacing that work or
17
product. (Id. at MM000240-41.) It defined “your product” as “goods or products, other than real
18
property, manufactured, sold, handled, distributed or disposed of by” the insured. (Id.) The
19
California Court of Appeal in Regional Steel held that a nearly identical “impaired property”
20
exclusion barred coverage because the underlying action alleged “arose from deficiencies in [the
21
insured’s] performance of its work or from [its] failure to perform a contract in accordance with its
22
terms, or both.” Regional Steel, 226 Cal.App.4th at 1394. “The only allegations [the owner] made
23
against Regional were that it failed to install the proper tie hooks, and its failure to do so necessitated
24
25
26
27
28
8
The Court notes that Old Republic purported to dispute this fact in its responsive separate
statement, but offered only argument that the repairs required cutting the damaged IGUs from the
curtainwall system, including removing the gasket, setting block, and sealant components of the
curtainwall system. (Old Republic Reply to Motorists Separate Statement, Fact 17.) Leaving aside
that Old Republic cited no evidence to support this argument, those enumerated repairs are limited to
the curtainwall system itself, which does not contradict Motorists’ statement of fact.
17
1
demolition and repair of the affected areas—allegations squarely within the ambit of the rule . . . that
2
this type of repair work is not covered under a CGL Policy.” Id. at 1393.
In sum, the undisputed facts here establish that the Policy’s exclusions would also preclude
3
4
coverage for the damage in the underlying action. Consequently, Motorists had no duty to defend
5
under the Policy.
6
IV.
7
CONCLUSION
Because Motorists has established by undisputed evidence that no potential for coverage of
8
the damage in the underlying action existed, the Court finds as a matter of law that it had no duty to
9
defend AGA and Webcor.9
10
United States District Court
Northern District of California
11
12
13
Therefore, Motorists’ motion for summary judgment is GRANTED and Old Republic’s motion
for summary judgment is DENIED.
Within five business days of this Order, Motorists shall submit a proposed form of judgment,
approved as to form by Old Republic, which will be entered forthwith.
14
This terminates Docket Nos. 211 and 212.
15
IT IS SO ORDERED.
16
Dated: _______ 2019
March 12,
____________________________________
YVONNE GONZALEZ ROGERS
UNITED STATES DISTRICT COURT JUDGE
17
18
19
20
21
22
23
24
25
26
27
28
9
Motorists argues additional bases for finding it had no duty to defend, including the lack of
an “occurrence” during the policy period and the additional insured endorsement specifically limiting
coverage to “ongoing operations.” (See, e.g., Campos Decl. Exh. 3 at MM000220, excluding
property damage occurring after “[a]ll work . . . to be performed by or on behalf of the additional
insured(s) at the location of the covered operations has been completed.”) Motorists cites convincing
authority for its position. See Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 669–70
(1995) (trigger for coverage under a CGL policy established at the time the complaining third party
was “actually damaged,” not when the wrongful act was committed). However, the Court need not
reach the merits of these additional arguments in light of the decision herein.
18
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