A commercial general liability insurer was not obligated to defend its insured, a steel subcontractor, against a suit arising from the insured’s installation of allegedly inadequate seismic tie hooks in an apartment building. ( Regional Steel Corp. v. Liberty Surplus Ins. Corp. (2014) 2014 WL 2643242)
Facts
JSM Construction, Inc. (JSM) was the general contractor for construction of a 14-story apartment building that included several floors of garage parking. In June 2004, JSM hired a subcontractor, Regional Steel Corporation (Regional), to provide the reinforcing steel for the columns, walls and floors at the project. Regional prepared shop drawings that called for both 90 degree and 135 degree seismic tie hooks in concrete shear walls.
In October 2004, Regional began construction on the project, using both the 90 degree and 135 degree tie hooks as approved in the shop drawings. Thereafter, JSM had another subcontractor pour concrete that encased the rebar and tie hooks.
In January 2005, a city building inspector issued a correction notice requiring the exclusive use of 135 degree tie hooks. In April 2005, JSM informed Regional that it could only use 135 degree tie hooks, and Regional immediately began fabricating 135 degree tie hooks. Further, in June 2005, city officials notified JSM that the 90 degree tie hooks that had previously been installed in the garage levels were inadequate and would have to be replaced.
Subsequently, on August 5, 2005, Liberty Surplus Insurance Corporation (Liberty) issued a “wrap” commercial general liability policy which listed the general contractor, JSM, as the named insured, and the rebar subcontractor, Regional, as an additional named insured. The policy provided that Liberty would indemnify and defend an insured against suits seeking damages because of “property damage” caused by an “occurrence” taking place on or after the policy’s “retroactive date” of August 5, 2005. The policy defined “property damage” as “physical injury to tangible property” and “loss of use of tangible property that is not physically injured,” and defined an “occurrence” as an “accident.” The policy included a “wrap endorsement” which provided among other things that “[t]his insurance applies only to … ‘property damage’ … that occurs at a project site.”
In August 2007, Regional sued JSM for amounts JSM allegedly owed to Regional under the subcontract. JSM responded by filing a cross-complaint against Regional for breach of contract, breach of warranties and negligence. JSM alleged that Regional failed to comply with the subcontract and building code by installing 90 degree tie hooks in the garage levels. JSM alleged that as a result of Regional’s failures, JSM had to open up numerous locations in the concrete walls, weld reinforcements to the steel placed by Regional, and otherwise strengthen Regional’s inadequate installation.
After JSM filed its cross-complaint against Regional, Regional tendered defense of the cross-complaint to Liberty. However, Liberty rejected Regional’s tender, asserting that the Liberty policy did not potentially cover Regional’s alleged liability to JSM.
Regional later filed a breach of contract / bad faith action arising from Liberty’s refusal to defend Regional against JSM’s cross-complaint in the underlying lawsuit. However, the trial court ruled that JSM’s claims against Regional were not potentially covered under the Liberty policy, and that Regional was therefore not entitled to a defense from Liberty. Regional appealed.
Holding
The Court of Appeal affirmed the judgment in favor of Liberty, for several reasons.
First, city officials had discovered the alleged tie hook problem in January 2005 , and Regional had become aware of the problem by April 2005 . The Liberty policy, however, only applied to property damage resulting from an occurrence on or after the policy’s retroactive date of August 5, 2005 . Thus, any occurrence and property damage happened before the policy’s retroactive date. The appellate court rejected Regional’s argument that the policy’s “wrap endorsement” replaced the requirement that property damage result from an occurrence “on or after the retroactive date” with a requirement that the property damage merely occur “at a project site.” Although the wrap endorsement made certain changes to the policy, that endorsement did not modify the requirement that coverage only applied to property damage resulting from an occurrence on or after the policy’s retroactive date.
Second, JSM did not make any claim against Regional in the underlying lawsuit that would fall within the “physical injury to tangible property” prong of the definition “property damage.” In the underlying lawsuit, JSM only alleged that Regional failed to install proper tie hooks, and that Regional’s omission required demolition and repair of the affected areas. The appellate court held that, at least in the context of allegedly defective construction, “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.”
Third, even if JSM made a claim against Regional for “loss of use of tangible property that is not physically injured” under the second prong of the definition of “property damage,” any such claim was excluded from coverage under the Liberty policy. In particular, policy exclusion m. barred coverage for property damage to “property that has not been physically injured, arising out of … a defect, deficiency, inadequacy or dangerous condition in ‘your product’ or ‘your work.'” According to the appellate court, “[u]nder that exclusion, there is no coverage for property damage to ‘property that has not been physically injured’ arising out of Regional’s negligent failure to perform its contractual obligations based on installation of defective tie hooks.”
In short, because JSM’s claims against Regional were not potentially covered under the Liberty policy, Regional was not entitled to a defense from Liberty.
Comment
Where an insured supplies an inherently hazardous product which is incorporated into other property, courts have generally found “physical injury” to the other property at the moment the incorporation occurs. (See, e.g., Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1 [coverage found where insured supplied asbestos-containing materials that were incorporated into buildings]; Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847 [coverage found where insured supplied contaminated almonds that were incorporated into nut clusters used in cereal].) These courts have basically reasoned that when the inherently hazardous product is incorporated into the larger whole, the hazardous product immediately “contaminates” and thus “physically injures” the larger whole.
On the other hand, where the insured merely supplies a defective component which is incorporated into a construction project, courts have been more inclined to hold that there is no property damage “unless and until the defective component causes physical injury to tangible property in at least some other part of the system.” (See, e.g., F&H Construction v. ITT Hartford Ins. Co . (2004) 118 Cal.App.4th 364 [no coverage where insured contractor supplied defective steel pile caps that were welded onto pilings].) This approach is consistent with the idea that general liability policies are not “performance bonds” and are not designed to cover contractors against claims that their work is inferior or defective.