Regional Steel Corporation v. Liberty Surplus Insurance Corporation

(Incorporation of Defective Steel Hooks in Building Did Not Constitute “Property Damage” or Was Otherwise Excluded by the Impaired Property Exclusion Such That Insurer was Not Obligated to Defend Cross-Complaint for Damages As a Result of Defectively Installed Metal Hooks)

In Regional Steel Corp. v. Liberty Surplus Ins. Corp., 226 Cal.App.4th 1377 (June 13, 2014), the California Second District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of Liberty Surplus Insurance Corporation (“Liberty”) regarding the absence of the duty to defend Regional Steel Corporation (“Regional Steel”) against a cross-complaint filed by a general contractor in connection with the alleged defective construction of an apartment complex. The parties’ dispute arose out of a cross-complaint filed by the general contractor for the apartment project, JSM Construction, Inc. (“JSM”), in response to a complaint filed by Regional Steel for collection of monies owed by JSM on the apartment project. The JSM cross-complaint named Regional Steel and other subcontractor entities, including Babyan & Associates and Webcor Construction, LP (“Webcor”) (the concrete subcontractor) as defendants. JSM contended that Regional Steel failed to comply with the subcontract and building code when it installed horizontal reinforcement for the parking garage by installing 90 degree tie hooks, instead of 135 degree seismic hooks as approved in shop drawings for the apartment project. As a result of the incorrect installation, JSM was required by the City of Los Angeles to make repairs that required it to open up numerous locations in the concrete walls, weld reinforcements to the steel placed by Regional Steel, and otherwise strengthen the inadequate installation.

JSM alleged separate claims against Webcor for damages related to its defective pouring of concrete and failure to prevent Regional Steel from installing the defective hooks.

In response to JSM’s cross-complaint, Webcor filed a first amended cross-complaint seeking indemnity, contribution and declaratory relief against JSM and Regional Steel.

Subsequently, Regional Steel tendered the defense of JSM’s cross-complaint to Liberty. Thereafter, Liberty denied coverage contending that the cross-complaint did not allege potential property damage, but rather involved purely economic losses caused by the need to re-open the poured concrete to correct the tie hook problem. In addition, Liberty took the position that the tie hook problem did not constitute an “occurrence” and was otherwise excluded by the “impaired property” exclusion.

Subsequently, on August 26, 2009, Regional Steel again tendered its claim to Liberty. The new tender was based on Regional Steel’s assertion that Webcor believed that JSM was asserting claims based upon out-of-level concrete floors and resulting cracks in the slab at levels P1 through P3 in the parking garage of the apartment complex. In support of its tender, Regional Steel submitted discovery consisting of 3 deposition excerpts regarding cracking of the concrete floors poured by Webcor. In response, Liberty reviewed the tender and again denied coverage of Regional Steel based on determination that JSM was not asserting claims for damaged concrete against Regional Steel. Rather, such claims were directed against Webcor.

Thereafter, Regional Steel settled the JSM cross-complaint and filed a complaint for breach of contract and bad faith against Liberty. In response, Liberty filed a motion for summary judgment based on the absence of property damage and the impaired property exclusion. The trial court granted Liberty’s summary judgment and found that JSM’s cross-complaint 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 Steel. Pursuant to the terms of the policy, the seismic hook issue and JSM’s alleged costs to repair it did not constitute property damage. In particular, the trial court noted that JSM had failed to allege any claims against Regional Steel based upon the installation of faulty concrete. Rather, its claims were limited to the installation of non-conforming hooks only.

In affirming the trial court’s decision, the Court of Appeal held as follows:

Here, however, Armstrong and Shade are inapposite because they involved contamination by hazardous materials that were incorporated into a whole, and did not involve the incorporation of defective workmanship in to a construction project. California cases consistently hold that coverage does not exist where the only property “damage” is the defective construction, and damage to other property has not occurred. Under that thesis, there is no coverage for Regional’s use of defective tie hooks. Indeed, Regional’s attempts to bring the allegedly cracking concrete floors within the definition of “other” property in order to obtain coverage fail because JSM made no allegations that Regional’s installation of the tie hooks, rather than Webcor’s pouring of the concrete, was the cause of out-of-level floors. The only allegations JSM made against Regional are that it failed to install the proper tie hooks, and its failure to do so necessitated demolition and repair of the affected areas – allegations squarely within the ambit of the rule of F&H Construction that this type of repair work is not covered under a CGL policy. Further, in its cross-complaint, Webcor nowhere alleged indemnity against Regional based upon out-of-level floors; rather, its allegations were conclusory and sought indemnity based upon JSM’s FACC that alleged claims for demolition, repair, and lost use based on the faulty tie hooks. For the same reason Regional’s attempts to bring the defective work within the “loss of use” provisions of the Policy fails: any loss of use was occasioned by the necessity of repairing Regional’s defective tie hooks, a risk not covered by the CGL policy. Finally, any recitals in the settlement agreement between JSM, Webcor, Babayan and Regional in the underlying litigation that characterize the construction defects as including the out-of-level floors cannot transform JSM’s construction defect claim against Regional into property damage for purposes of the Policy where there is no evidence that Liberty was aware of the settlement and concurred in this characterization.

In addition, the Court of Appeal found that the impaired property exclusion in the Liberty policy applied to bar coverage of JSM’s cross-complaint against Regional Steel. The Court of Appeal stated as follows:

The Policy excludes “’if such property can be restored to use” by the “repair, replacement, adjustment or removal of ‘your product’ or ‘your work.’”

The “Impaired Property” exclusion bars the possibility of coverage. Under that exclusion, there is no coverage for property damage to “property that has not been physically injured” arising out of the Regional’s negligent failure to perform its contractual obligations based on installation of defective tie hooks. JSM’s action alleged that Regional negligently installed improper tie hooks and thus the underlying suit arose from deficiencies in Regional’s performance of its work or from Regional’s failure to perform a contract in accordance with its terms, or both. (Watts Industries, Inc. v. Zurich American Ins. Co. (2004) 121 Cal.App.4th 1029, 1046-1047.)