Tred Eyerly – June 23, 2014
The California Court of Appeal affirmed the trial court’s holding that the insurer had no duty to defend claims arising out of the insureds’ installation of defective steel framing in an apartment building. Regional Steel Corp. v. Liberty Surplus Ins. Corp., No. B245961(Cal. Ct. App. May 16, 2014) [decision here].
Regional Steel was a subcontractor for providing reinforced steel to the columns, walls, and floors of an apartment building under construction. Regional used 90 degree and 135 degree seismic hooks as approved by the general contractor, JSM Construction, Inc. The City building inspector issued a correction notice, however, requiring the exclusive use of the 135 degree hooks. Levels one through three had defective tie hooks and required repair. JSM refused to pay Regional’s invoices and withheld $545,000. JSM had to make repairs that required opening up numerous locations in the concrete walls, welding reinforcements to the steel placed by Regional, and otherwise strengthening the inadequate installation.
Regional sued JSM for the withheld payment. JSM cross-claimed, asserting breach of contract and breach of express and implied warranties.
Regional was an additional named insured under JSM’s policy with Liberty. Liberty rejected Regional’s tender of JSM’s cross complaint, asserting there was no damage to property alleged. Further, the tie hook problem did not constitute an “occurrence” because the alleged damage was not caused by an accident.
Regional sued Liberty. Regional contended that JSM asserted claims for damage to property and loss of use of tangible property based on JSM’s allegations that it needed to repair damage to the garage by opening walls and floors to install support columns, which was “other property.” Therefore, this case was distinguishable from F&H Constr. v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364 (2004), which held that to bring defective construction within the insuring clause, the “damage” must be damage to property other than the property upon which the insured had worked.
The trial court granted summary judgment to Liberty. JSM only alleged facts arising out of the damage caused by the defective seismic hooks and did not allege any facts of any other damages attributable to Regional.
The Court of Appeals affirmed. The court was aware of a prior holding that installation of the insured’s asbestos material constituted physical injury to the building, even before any release of asbestos fibers. See Armstrong World Industries, Inc. v. Aetna Cas. & Surety Co., 45 Cal. App. 4th 1 (1996). Armstrong, however, noted the difference between the case before it (involving hazardous materials) and cases involving defective construction. California cases consistently held that coverage did not exist where the only property “damage” was the defective construction, and damage to other property had not occurred.
I do not agree with this reasoning. The court recognized that the faulty workmanship arose from an accident, i.e., Regional did not intentionally use the wrong tie hooks. Yet, the court determined there was coverage only if the property damage occurred to portions of the project not worked on by Regional. A better analysis would be to recognize there was an “occurrence” that caused property damage. Such property damage would be covered, however, only if the business risk exclusion hurdles could be cleared. See e.g., Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W. 2d 65, 76 (Wis. 2004).