Maryland Casualty Co. v. Reeder

Opinion

The purchasers of condominium units, their homeowners association, an individual developer and the entities which participated in the construction and sale of the condominium project appeal from a summary judgment entered in favor of a liability insurer. We reverse because we find the exclusions the insurance company relies upon do not apply as a matter of law to the claims made against the insureds.

Factual and Procedural Summary

Although the record in this case is voluminous, it does not definitively describe the relationship between the various entities who developed the condominium project. Generally the parties agree defendant Samuel Pearl-man purchased three adjoining parcels of vacant land in Carlsbad in 1972. At the time Pearlman bought the parcels they had been graded. Thereafter Pearlman formed defendant Roundtree, Ltd., a partnership. The partnership in turn formed a joint venture with defendant Twelve Trees Corporation (Twelve Trees). The joint venture was named Roundtree Condominiums, also a defendant. Defendant DMF Construction, Inc. (DMF), was retained as a general contractor to construct condominiums on the three parcels. At various stages between 1980 and 1985, Pearlman, Roundtree, Ltd., Twelve Trees, Roundtree Condominiums and DMF were each named insureds on a series of comprehensive general liability policies issued by plaintiff Maryland Casualty Company (Maryland). Significantly some of the policies included a broad form property damage endorsement.

After the condominiums were completed, they were conveyed to various individuals. Between 1984 and 1987 separate purchasers of the condominiums and the homeowners association filed three complaints against Pearl-man, Roundtree, Ltd., Roundtree Condominiums, Twelve Trees and DMF. The complaints alleged the plaintiffs’ condominium units had been damaged by soil subsidence. The plaintiffs in the first complaint (case No. N26398) alleged their condominium was “suffering from severe cracks in the walls and settling of the slab.” The plaintiffs in the second complaint (case No. N34499) alleged their units “have been damaged to the extent

On June 23, 1987, Maryland filed three complaints for declaratory relief (case Nos. N38217, N38247, N38256). Maryland’s complaints asked for declaratory relief against the plaintiffs in case Nos. N26398, N34499, N38256 and each of Maryland’s insureds named as defendants in those cases. Maryland alleged it had no duty to either indemnify the plaintiffs in the underlying cases or defend its insureds.

The declaratory relief actions were consolidated and Maryland moved for summary judgment on the grounds the policies it.issued relieved it from liability for the claims made against the contractor and the condominium developers. In the trial court Maryland argued the damage suffered by the plaintiffs in the underlying cases was not “property damage” within the meaning of its policies. Maryland further argued that even if property damage were involved, coverage was barred by the terms of four exclusions in its policies. Those exclusions eliminate coverage for property damage arising out of work performed by an insured, the products of an insured, premises alienated by an insured and participation in a joint venture which was not itself named as an insured under the policy.

The insureds also moved for summary judgment. The insureds argued the broad form endorsement covered the claims made against them as a matter of law.

Relying on what it viewed as the persuasive reasoning set forth in Knutson Const, v. St. Paul Fire & Marine Ins. (Minn. 1986) 396 N.W.2d 229 (Knutson), the trial court found the work performed exclusion applicable and granted Maryland’s motion. Following entry of judgment in Maryland’s favor, the named insureds, the individual condominium owners and the homeowners association filed timely notices of appeal.

Issues on Appeal

Because we must affirm the trial court’s ruling if there is any basis in the record for doing so (see Snider v. Snider (1962) 200 Cal.App.2d 741 , 756

Discussion

Comprehensive Liability Policies

Generally liability policies, such as the ones in dispute here, are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. (See Rafeiro v. American Employers’Ins. Co. (1970) 5 Cal.App.3d 799 , 808-809 [ 85 Cal.Rptr. 701 ].) 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. (See Volf Ocean Accident & Guar. Corp. (1958) 50 Cal.2d 373 , 376 [ 325 P.2d 987 ] (Volf); Western Employers Ins. Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027 , 1031-1032 [ 194 Cal.Rptr. 688 ]; Macaulay, Justice Traynor and the Law of Contracts (1961) 13 Stan. L. Rev. 812 , 825-826.) Rather liability coverage comes into play when the insured’s defective materials or work cause injury to property other than the insured’s own work or products. As one commentator explained: “This distinction is significant. Replacement and repair costs are to some degree within the control of the insured. They can be minimized by careful purchasing, inspection of material, quality control and hiring policies. If replacement and repair costs were covered, the incentive to exercise care or to make repairs at the least possible cost would be lessened since the insurance company would be footing the bill for all scrap. Replacement and repair losses tend to be more frequent than losses through injury to other property, but replacement and repair losses are limited in amount since the greatest loss cannot exceed the cost of total replacement. If the insured will stand these losses,

In actually articulating the risks which will be covered by a liability policy common practice is “to cover a broad risk at the beginning of the policy but to shift certain risks back to the insurance buyer by means of exclusions stated later.” (Macaulay, supra, 13 Stan.L.Rev. at p. 822.) Such is the case here. At the outset Maryland’s liability policy provides broad definitions of property damage and personal injury and states in its insuring clause the company will pay sums the insured becomes liable for as a result of property damage or personal injury. The insuring clause is then followed by no less than 17 exclusions which detail the myriad of circumstances in which Maryland will not cover personal injury or property damage claims.

Here, in addition to a basic policy with a broad coverage provision followed by exclusions designed to shift certain risks back to the insured, we have an additional risk-altering mechanism. By paying an additional 20 percent of their basic premium some of the insureds in this case purchased an endorsement which narrowed the exclusions set forth in the basic policy. Thus the endorsement returned to Maryland some of the risks it had shifted by way of the exclusions.

We also note that in drafting its policy and endorsement Maryland utilized standard form provisions prepared by the Insurance Services Organization (ISO). In addition to drafting standard form provisions, the ISO publishes circulars which describe the intent and effect of its standard provisions. As we shall explain in greater detail below, the ISO’s standard provisions are also the subject of interpretation and comment by other insurance industry organizations and publications. The presence of the standard provisions in the Maryland policy and the concomitant availability of interpretative literature is of considerable assistance in determining precisely what risks the Maryland policies cover.

With this background in mind we turn to the disputed provisions of the Maryland policies.

Property Damage

Under each of the policies Maryland issued, “property damage” is defined as “(1) physical injury to or destruction of tangible property which

Similar language was subject to interpretation by the court in St. Paul Fire & Marine Ins. Co. v. Coss (1978) 80 Cal.App.3d 888 , 892 [ 145 Cal.Rptr. 836 ] (Coss). In Coss the plaintiif homeowners sued a contractor because they believed he used defective products and workmanship in constructing their home. The homeowners sought the costs they incurred in engaging architects and contractors to correct the defective work of the contractor, for loss of use of the house, for the cost of renting a substitute residence and for attorney fees incurred in prosecuting their action against Coss. In holding these losses were not property damage within the meaning of the policy, the court relied upon Hamilton Die Cast, Inc. v. United States F. & G. Co. (7th Cir. 1975) 508 F.2d 417 , 419-420 (Hamilton Die Cast), where a manufacturer of tennis rackets tried to recover the cost of replacing defective frames from its insurer. In rejecting that claim the Hamilton Die Cast court said: “We do not think that the mere inclusion of a defective component, where no physical harm to the other parts results therefrom, constitutes ‘property damage’ within the meaning of the policy. For example, if an automobile crash results from the failure of its defective tire, the defective component can be said to have caused ‘property damage’ to the finished product. If, however, some of the tires purchased by the automobile manufacturer are found to be defective and the manufacturer therefore withdraws its cars from the market, there has not been ‘injury to or destruction of tangible property’ [within the coverage provisions].” (Id., at pp. 419-420.)

In applying the holding in Hamilton Die Cast to the case before it, the Coss court stated: “In our present case, the defective materials and workmanship concededly produced an inferior home, just as the poorly designed frame produced an imperfect tennis racket. Hamilton Die Cast concludes that poor workmanship on the delivered product is not ‘property damage’ within the terms of the general comprehensive liability policy, and we agree.” (St. Paul Fire & Marine Ins. Co. v. Coss, supra, 80 Cal.App.3d at p. 893.)

Like the courts in Coss and Hamilton Die Cast we do not believe inferior materials or workmanship themselves constitute “property damage.” We

Ill

Work Performed

By its terms exclusion “o” of Maryland policies eliminates coverage for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts, or equipment furnished in connection therewith.” (Italics added.) This language would eliminate coverage for most of the claims made by the homeowners and their association. (See Maryland Casualty Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712 , 723-724 [ 260 Cal.Rptr. 797 ].) However, as we have seen, in addition to its comprehensive general liability policy, on some of the policies Maryland issued a broad form property damage endorsement. The endorsement replaces exclusion “o” with the following language: “with respect to the completed operations hazard and with respect to any classification stated in the policy or in the company’s manual as ‘including completed operations,’ to property damage to work performed by the named insured arising out of such work or any portion thereof, or out of such materials, parts, or equipment furnished in connection therewith.” (Italics added.) The insureds and the plaintiffs in the underlying proceedings argue that by eliminating the phrase “on behalf of the named insured,” the endorsement provides coverage for claims arising out of work performed by subcontractors the developers and the contractor retained in developing the project. Because the insureds believe the claims made against them arise out of errors committed by soils engineers, graders and roofing subcontractors, they argue the policy provides them with coverage.

The insureds’ interpretation of the endorsement is supported by the insurance industry’s own construction of the broad form endorsement. As we have seen, the terms of the endorsement were drafted by the ISO, which also publishes circulars designed to explain the intent, purpose and effect of its standard form provisions. In one such circular the ISO explains the broad form endorsement is intended to “exclud[e] only damages caused by the named insured to his own work. Thus, . . . [t]he insured would have coverage for damage to his work arising out of a subcontractor’s work [and]

The effect of the endorsement was also explained in the August 1982, Fire Casualty & Surety Bulletin (FC & S bulletin) published by the National Underwriters Association. The FC & S bulletin is used by insurance agents and brokers to interpret standard insurance policy provisions. (Fireguard Sprinkler Systems v. Scottsdale Ins. (9th Cir. 1988) 864 F.2d 648 , 652 (Fireguard).) According to the FC & S bulletin the work performed exclusion as it appears in the broad form endorsement “eliminates coverage for property damage to work performed by the named insured if the property damage arises out of the named insured’s work or any portion of it. [fl]Thus, an insured has coverage for his completed work when the damage arises out of work performed by someone other than the named insured, such as a subcontractor .... The usual Completed Operations coverage (no Broad Form Property Damage endorsement attached) flatly excludes property damage to work performed by or on behalf of the named insured arising out of the work. Under the usual coverage, then, the insured has no insurance whatsoever for damage to a subcontractor’s work, or for damage to his own work for damage resulting from a subcontractor’s work. Therein lie the advantages of Broad Form Property Damage coverage including Completed Operations. Consequently, if an insured does not anticipate using subcontractors, the value of purchasing Broad Form Property Damage coverage with Completed Operations is questionable, in view of the additional premium required for it.”

In addition to the ISO circular and FC & S bulletin, insurance industry commentators have also concluded the broad form endorsement provides coverage for work done by subcontractors. (See Gibson, Broad Form Property Damage Coverage: Analysis, Application and Alternatives 12-15 (2d ed. 1982); Audet, Broad Form Completed Operations: An Extension of Coverage or a Trap?, Canadian Underwriter (Oct. 1984) at p. 36.)

Significantly, relying on these insurance industry interpretations, the court in Fireguard found that a general contractor who installed a sprinkler system at a sawmill could recover on its liability policy for damage caused when a landslide destroyed the sprinkler system, including a water tank which was installed by subcontractors. (Fireguard, supra, 864 F.2d at p. 655.) The landslide was allegedly the result of improper engineering, site preparation and installation performed by the water tank subcontractors. (Id. at p. 649.) In finding coverage under the broad form endorsement for damage to the completed project caused by the subcontractors’ work, the Fireguard court declined to follow two Minnesota cases, Knutson and Borson Bldg. Corp. v. Employers Com. Union (Minn. 1982) 323 N.W.2d 58

V

Alienated Premises

In the trial court Maryland also argued it was entitled to summary judgment because the claims made against its insureds were within the terms of exclusion “1” of its policy. Exclusion “1” excludes coverage for “property damage to premises alienated by the named insured arising out of such premises or any part thereof.” This exclusion, like the work performed and products exclusions, was also discussed in the August 1982 FC & S bulletin. According to the FC & S bulletin, in cases such as this, where in addition to the comprehensive general liability coverage an insured has purchased a broad form endorsement: “It is important to alert insureds— particularly those who buy land, build on it, and then sell the improved property—that the Broad Form Property Damage endorsement has no effect on the so-called Alienated Premises exclusion common to Premises

“Say, for example, that the named insured buys a lot and then, acting as general contractor, builds a house on the lot. If, after the house is completed and sold, a subcontractor’s faulty wiring causes the house to burn and the buyer sues the named insured for the costs of repairing the house, the named insured will have no coverage under Broad Form Property Damage (including Completed Operations) endorsement, due to the Alienated Premises exclusion. By the same token, if the same named insured had not been the owner of the property but only the general contractor, he would presumably have had coverage under his Broad Form endorsement for all property damage to the house other than, perhaps, the faulty work of the subcontractor or the ‘particular part’ of the subcontractors’ work in which the fire originated.”

Thus, under the insurance industry’s interpretation of Maryland’s alienated premises exclusion, coverage depends upon who owned the property. As the FC & S bulletin makes plain, where an insured is not an owner the exclusion does not apply. By way of a request for supplemental briefing we asked the parties to identify evidence in the record which would establish which insureds owned the property and when such insureds conveyed their interests. In response Maryland produced copies of recorded deeds which show a chain of title from Pearlman’s acquisition (1972) to Gerald Frankel (1979) to Twelve Trees (in 1980) to individual buyers (between 1980 and 1985).

Although we take judicial notice of the recorded deeds (Evid. Code, § 459; B & P Development Corp. v. City of Saratoga (1986) 185 Cal.App.3d 949 , 960 [ 230 Cal.Rptr. 192 ]), as to most of the insureds the deeds do not defeat coverage even under the 1982 FC & S interpretation. First the deeds do not show that DMF, the contractor, or Roundtree, Ltd., the partnership, were ever owners of the property. Even with respect to Roundtree Condominiums, the joint venture, the deeds only show the joint venture appeared as a co-grantor, along with Twelve Trees, to purchasers of individual units. The deeds Maryland produced do not show the joint venture was ever granted any interest in the property. If, in fact the joint venture was never an owner of the property and its appearance on the deeds was superfluous, arguably the alienated premises exclusion would not apply to it. Thus as to DMF, Roundtree, Ltd. and the joint venture, the alienated premises exclusion would not defeat coverage as a matter of law.

In the trial court Maryland also relied upon a partnership and joint venture exclusion in its policies. The exclusion states: “This insurance does not apply to bodily injury or property damage arising out of the conduct of any partnership or joint venture of which the insured is a partner or member and which is not designated in this policy as a named insured.” As Maryland pointed out in the trial court, the purpose of the exclusion is to protect the insurer from hidden risks it did not consider in calculating an appropriate premium. (See Austin P. Keller Const. v. Commercial Union (Minn. 1986) 379 N.W.2d 533 , 536 [ 57 A.L.R.4th 1147 ].)

Maryland argues that all the damage claimed by the homeowners arose out of the conduct of the Roundtree Condominium joint venture and that the joint venture is not named on any of the policies which include a broad form endorsement. However our review of two of the policies with the broad form endorsement discloses the insureds are identified as “Roundtree Ltd., a California partnership, & DMF Construction, Inc., A Joint Venture.” Whether this inartful reference to “a joint venture” was intended or sufficient to provide Maryland with notice of the risks posed by the condominium project is a matter we cannot resolve on this record. Resolution of that question may turn upon who was responsible for providing such a description of the named insureds, whether Maryland had other notice that its insureds were doing business as a joint venture, and perhaps most importantly, whether the joint venture form of doing business adopted by the insureds materially altered Maryland’s risk. (See Maryland Casualty Co. v. Imperial Contracting Co., supra, 212 Cal.App.3d at p. 725.)

Conclusion

Because claims for property damage were made against the named insureds and none of the exclusions Maryland relied upon eliminate coverage as a matter of law, the summary judgment entered in Maryland’s favor must be reversed.

Judgment reversed; appellants to recover their costs.

Huffman, J., and Froehlich, J., concurred.

Respondent’s petition for reiview by the Supreme Court was denied September 19, 1990.