A commercial general liability policy’s “faulty workmanship” exclusions – exclusions j.(5) and j.(6) – did not relieve the insurer of a duty to indemnify its insured for property damage to the insured’s non-defective work occurring before the work was complete. ( Global Modular, Inc. v. Kadena Pacific, Inc. (2017) 15 Cal. App. 5th 127)
Facts
The United States Department of Veterans Affairs (“VA”) hired Kadena Pacific, Inc. (“Kadena”) as general contractor for construction of a rehabilitation center that would consist of 53 modular units. Kadena hired Global Modular, Inc. (“Global”) to partially build, deliver, and then install the modular units for the project. Because Kadena hired a different subcontractor to install the roofing for the modular units, Global agreed to deliver the modular units covered only by a roof substrate consisting of a 3/4″ base sheet of plywood. The Kadena-Global subcontract stated that Global assumed responsibility “for any loss or damage to the [units] … however caused, until final acceptance thereof by [Kadena].” The subcontract conditioned “final acceptance” upon the VA’s approval of the units.
Initially, the subcontract called for Global to deliver and finish the modular units during the summer of 2010. However, due to delays caused at least partially by Global, Global did not deliver the units until October and November 2010 (the beginning of the rainy season). Although Global tried to protect the units from rain by covering them with plastic tarps, the interiors suffered water damage from October 2010 through January 2011. As of mid-February 2011, Global was still in the process of trying to remediate the interior water damage and had not yet completed installing the units. However, by this time, the relationship between Kadena and Global had deteriorated, and Kadena and Global mutually terminated their contract. Kadena then oversaw remediation of the water-damaged interiors and completion of the project.
Global sued Kadena for alleged failure to pay under the subcontract. Kadena cross-complained against Global, alleging that Global had breached the contract by (1) failing to provide services and materials required under the contract in a timely manner, (2) failing to provide modular units which were constructed in a workmanlike manner, and (3) failing to deliver the modular units in a manner which would protect them from rain. The jury agreed with Kadena and found Global contractually liable for a total of $1,068,542, consisting of $776,478 for repair of the water-damage interiors and $292,064 for delay cause by the repairs.
Global had a commercial general liability policy with North American Capacity Insurance Company (NAC). The NAC policy covered damages Global owed because of “property damage” caused by an “occurrence” and not otherwise excluded. NAC filed a declaratory judgment action seeking a determination regarding its duty to indemnify Global for the underlying judgment in favor of Kadena. The trial court granted summary judgment in favor of Kadena, finding that the judgment Kadena obtained against Global in the underlying action was covered by the NAC policy. NAC appealed.
Holding
The Court of Appeal affirmed the summary judgment in favor of Kadena and against NAC.
The appellate court began by holding that to the extent Kadena’s judgment against Global was for the cost of repairing water damage to the interior of the units, the NAC policy provided coverage. Because the interior water damage clearly was “property damage” caused by an “occurrence,” the only issue was whether some exclusion applied.
The appellate court rejected NAC’s reliance on exclusion j.(5), which bars coverage for property damage to “that 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.” Italics added. According to the appellate court, the phrase “are performing operations” indicates that exclusion j.(5) applies “only to damage caused during physical construction activities.” Thus, exclusion j.(5) did not apply to the water intrusion damage “because the intrusion occurred during heavy rains when Global was not working on the units.”
The appellate court likewise rejected NAC’s reliance on exclusion j.(6), which bars coverage for property damage to ” that particular part of any property that must be restored, repaired or replaced because ‘ your work’ was incorrectly performed on it. ” Italics added. According to the appellate court, exclusion j.(6)’s reference to “that particular part” means that the exclusion applies “to the specific part of the insured’s work on which the insured performed faulty workmanship and not, more broadly, to the general area of the construction site affected by the insured’s work.” Thus, assuming Global’s waterproofing efforts constituted “incorrectly performed” work, the “particular part” of the property “on” which Global performed work was the plywood roof substrate, not the interior parts of the units for which Kadena sought repair/replacement costs. The units’ interior parts “were not defective and were not the subject of Global’s incorrect work, and as a result, their repair and replacement costs do not fall under exclusion j.(6).”
The appellate court also held that to the extent Kadena’s judgment against Global was for delay damages caused by the water intrusion, the NAC policy provided coverage. According to the appellate court, “delay damages arising from ‘property damage’ fall under the insuring clause, which obligates NAC to “pay those sums that the insured becomes legally obligated to pay as damages because of … ‘property damage’ to which this insurance applies.” Here, the delay damages constituted “a consequential loss (a loss occasioned by the water intrusion) and as such, is part of the damages NAC must pay ‘because of’ property damage.”
Comment
Some prior California appellate decisions contain broad language suggesting that exclusions j.(5) and j.(6) always preclude coverage for damage to an insured’s work while construction is ongoing. (See, e.g., Baroco West, Inc. v. Scottsdale Ins. Co. (2003) 110 Cal.App.4th 96 and Clarendon America Ins. Co. v. General Security Indemnity Co. of Arizona (2011) 193 Cal.App.4th 1311.) However, in Kadena , the appellate court distinguished those earlier decisions because “none of these decisions interpret the exclusionary language at issue here – ‘are performing operations,’ ‘that particular part,’ and ‘work … incorrectly performed.'” The Kadena court broke exclusions j.(5) and j.(6) down into constituent parts, and then narrowly construed each part. That is consistent with the general rule that courts resolve all doubts, uncertainties and ambiguities in exclusionary language in favor of the insured and against the insurer.