Timothy M. Thornton, Jr. | Cal Lawyer | May 9, 2016<\/p>\n
In many scenarios involving allegedly defective construction<\/a>, the injured party\u2014be it a homeowner, a commercial project developer or a homeowners association\u2014asks that the issue be turned over to the contractor\u2019s insurance company.\u00a0 While this sounds prudent, it is often a dead end because in most instances, contractors (and subcontractors as well) are not insured for defective construction per se.\u00a0 In almost every case, they have purchased commercial\u00a0general\u00a0liability (CGL) insurance that requires an \u201coccurrence\u201d and \u201cproperty damage\u201d<\/a> in order to trigger coverage. And sadly for the homeowner, project developer or HOA, defective construction by itself, rarely constitutes either an \u201coccurrence\u201d or \u201cproperty damage.\u201d<\/p>\n Twenty seven years ago, a\u00a0California\u00a0appellate court explained that CGL\u00a0policies<\/a> \u201care not\u00a0designed to provide contractors and developers with coverage against claims their work is inferior or defective.\u201d\u00a0Md. Cas. Co. v. Reeder (1990)\u00a0<\/em>221 Cal.App.3d 961, 967.\u00a0 As another court noted:\u00a0 \u201cIn short, a liability insurance policy is not designed to serve as a performance bond or warranty of a contractor\u2019s product.\u201d\u00a0F & H Constr. v. ITT Hartford Ins. Co. (2004)<\/em>\u00a0118 Cal.App.4th 364, 373.<\/p>\n Two recent cases underscore this vital point.<\/p>\n In Regional Steel Corp. v. Liberty Surplus Ins. Corp.<\/em>, 226 Cal.App.4th<\/sup> 1377 (2014), the court found no coverage for construction defects<\/a> involving the installation of the wrong type of seismic tie hooks in rebar structures on which cement had been poured.<\/p>\n The Florentine Apartments were to be a 14-story mixed use development with ground floor retail space, four stories of parking and residential units on the upper floors. JSM Florentine was the owner, and JSM was the general contractor. Regional Steel subcontracted to provide reinforcing steel, while Webcor Construction, LP contracted to supply and pour concrete which encased the rebar structures built by Regional.<\/p>\n Regional prepared shop drawings, which were approved by JSM, using both 90-degree and 135-degree seismic tie hooks in shear walls. Regional began construction in October 2004 using both types of tie hooks. Webcor began pouring concrete on the reinforced steel structures.<\/p>\n In January 2005, a City of Los Angeles building inspector issued a correction notice requiring exclusive use of 135-degree seismic tie hooks.\u00a0 In April 2005, JSM became aware of this and stopped pouring concrete until this issue could be resolved. In June 2005, the City notified JSM that the garage had defective tie hooks and needed repair.<\/p>\n JSM asserted that Regional had failed to comply with the subcontract and building code when it installed 90-degree seismic hooks. Consequently, JSM alleged it was forced to open up numerous locations in the concrete walls, weld reinforcements to the steel and otherwise strengthen the installation. JSM alleged delayed completion resulting in loss of use, loss of rental income and other damages.<\/p>\n Liberty Surplus Insurance issued a claims-made commercial liability policy to JSM, modified by a wrap endorsement, and Liberty added Regional as an additional insured effective October 2005. The policy covered \u201cproperty damage\u201d caused by an \u201coccurrence\u201d on or after the retroactive date of August 5, 2005, and excluded damage to impaired property or property that has not been physically injured. That exclusion precluded coverage of damage to \u201cimpaired property\u201d or property that has not been physically injured arising out of a defect, deficiency, inadequacy or dangerous condition of \u201cyour work\u201d or \u201cyour product.\u201d \u201cImpaired property\u201d meant tangible property (other than the insured\u2019s work) known or thought to be defective, deficient, inadequate or dangerous, if that tangible property could be restored to use by repair, replacement, adjustment or removal of the insured\u2019s work, or the insured fulfilling the terms of its contract.<\/p>\n There is a conflict in the case law on whether construction defects that are incorporated into a whole property constitute property damage<\/a>. One line of cases finds no property damage where defective work is incorporated into, but does not damage, other property. F & H Construction v. ITT Hartford Ins. Co.,<\/em> 118 Cal.App.4th 364 (2004) (insured subcontractor provided inadequate steel pile caps to contractor; this did not cause the contractor a loss of use of tangible property, and was not covered as property damage; the only damages were the costs of modifying the pile caps to conform to the contractual specifications and a lost early completion bonus); St. Paul Fire & Marine Ins. Co. v. Coss,<\/em> 80 Cal.App.3d 888 (1978) (insured contractor\u2019s defective materials and workmanship in constructing a dwelling were not property damage, and were excluded by insured\u2019s work and other \u201cbusiness risk\u201d exclusions).<\/p>\n Another line of cases holds that incorporation of a defective part into other product or property constitutes property damage. Eljer Mfg v. Liberty Mut. Ins. Co.<\/em> (7th Cir.1992) 972 F.2d 805 (the court held that property damage occurred when toilets prone to leaking were incorporated into the construction) (note that in Travelers Ins. Co v. Eljer Mfg., Inc.<\/em>, 197 Ill. 2d 278, 303 (2001), the Illinois Supreme Court held that Eljer v. Liberty Mutual<\/em> was incorrectly decided under Illinois law);Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co.,<\/em> 45 Cal.App.4th 1 (1996) (the court found property damage based on the incorporation of asbestos tiles and insulation into a building because the potentially hazardous material was physically linked to the building); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc.,<\/em> 78 Cal.App.4th 847 (2000) (a roaster supplied roasted diced almonds which contained wooden splinters; the almonds were processed into nut clusters, that were incorporated into breakfast cereal; the court held that the splinters in the almonds caused property damage to the \u201cnut clusters\u201d and to the cereal into which they were incorporated).<\/p>\n The court found that the Regional Steel v. Liberty Surplus<\/em> case is like those involving defective materials or work incorporated into a construction project, and not like cases involving hazardous material incorporated into a whole. The court adopted the prevailing view that unless and until the defective component causes physical injury to tangible property or to some other part of the system, that mere defects or mere failure to perform are not property damage. Under that view, there was no coverage for Regional\u2019s use of defective tie hooks.<\/p>\n In a more recent case decided last year, a federal court, relying on California law, ruled that there was no \u201cproperty damage<\/a>\u201d and hence no coverage, when floor tiles were defectively installed in a luxury hotel and condominium project in Los Angeles. \u00a0American Home Assurance Co. v. SMG Stone Co., Inc.<\/em>\u00a0(N.D. Cal. 2015) 119 F.Supp.3d 1053. \u00a0\u00a0The court observed that the tiles themselves were not defective. Rather, it was the subcontractors\u2019 installation of those tiles that was flawed\u2014and the subcontractor\u2019s defective installation caused the tiles to crack.\u00a0 Even so, the court still did not find property damage as defined by the policy, as the tile cracking did not cause physical damage to any other part of the project.\u00a0 See 119 F.Supp.3d at 1061.<\/p>\n As these cases illustrate, it is crucial to review the precise policy language.\u00a0 It is also vital in construction cases…<\/p>\n To finish reading this article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"BACKGROUND OF INSURANCE COVERAGE FOR DEFECTIVE CONSTRUCTION<\/strong><\/h4>\n
WRONG SEISMIC HOOKS<\/strong><\/h4>\n
CRACKING TILES<\/strong><\/h4>\n
READ THE POLICY, KNOW THE CASES<\/strong><\/h4>\n