St. Paul Fire & Marine Insurance Company v. Vadnais Corporation et al, No. 1:2010cv01669 - Document 102 (E.D. Cal. 2012)
Court Description: SUMMARY JUDGMENT DECISION 44 , 45 , 46 , 47 , 53 , signed by District Judge Lawrence J. O'Neill on 3/5/12. CASE CLOSED. (Gonzalez, R)
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1 2 IN THE UNITED STATES DISTRICT COURT 3 FOR THE EASTERN DISTRICT OF CALIFORNIA 4 5 ST. PAUL FIRE & MARINE INSURANCE COMPANY, CASE NO. CV F 10-1669 LJO GSA 6 SUMMARY JUDGMENT DECISION (Docs. 44, 45-47, 53) Plaintiff, 7 8 9 10 11 vs. VADNAIS CORPORATION, CAWELO WATER DISTRICT, STEADFAST INSURANCE COMPANY, CLARENDON AMERICA INSURANCE COMPANY, and LEXINGTON INSURANCE COMPANY, Defendants. / 12 13 INTRODUCTION 14 This is a contribution action between plaintiff St. Paul Fire & Marine Insurance Company ( St. 15 Paul ) and, inter alia, defendants Steadfast Insurance Company ( Steadfast ) and Clarendon American 16 Insurance Company ( Clarendon ). St. Paul argues that it is entitled to contribution as a matter of law, 17 because Steadfast and Clarendon failed to defend the carriers mutual insured, Vadnais Corporation 18 ( Vadnais ), in the underlying action despite having a duty to do so. Steadfast and Clarendon filed 19 cross-summary judgment motions, arguing that they had no duty to defend Vadnais, because no 20 occurrence causing property damage occurred during their policy periods. Steadfast and Clarendon 21 further argue that any covered property damages were excluded under their policies, because they were 22 the result of Vadnais own work and business risk. For the reasons discussed below, this Court 23 GRANTS judgment in favor of Clarendon and Steadfast and against St. Paul. 24 25 BACKGROUND 26 The Underlying Action 27 The underlying action, styled Cawelo Water District v. Ameron International Water 28 Transmission Group, Kings County Superior Court case No. 07-203, is a construction defect lawsuit. 1 1 Cawelo Water District ( Cawelo ) alleged that an eight-mile-long pipeline, built to transport hot 2 wastewater through open land from a Chevron-Texaco oil field to a basin, was defective. The 3 underlying action is based, in part, on the following undisputed facts: 4 Vadnais entered into a contract with Cawelo to construct and install the pipeline on March 16, 5 1995. The pipeline was built to handle more than 450,000 barrels of wastewater that were produced 6 each day. The water was intended to be sold by Cawelo for agricultural use. Work began on the 7 pipeline in 1995. A notice of completion, dated May 25, 1996, was recorded on August 14, 1996. 8 On April 5, 2005, Cawelo filed its initial lawsuit against Vadnais and three other defendants. 9 The operative pleading asserted claims against Vadnais and others for strict products liability, breach 10 of express warranty, breach of written contract, negligence, breach of implied warranty, indemnity, and 11 res ipsa loquitur. Cawelo alleged that Ameron International Water Transmission Group ( Ameron ) was 12 in the business of inventing, designing, manufacturing, assembling, and selling C-303 pipe; Vadnais 13 purchased the C-303 pipe from Ameron for use in the pipeline; the C-303 pipe purchased from Ameron 14 for use in the pipeline was defective and unsafe for its intended purpose by reason of defect in the 15 design, manufacture, testing, and inspection ; and that such defects caused the pipeline to fail, 16 deteriorate, malfuction, and leak, allowing large quantities of produced water to escape. Cawelo further 17 alleged that Vadnais furnished nonconforming pipe; was negligent and careless in the installation of the 18 pipeline; and that such performance by Vadnais became apparent only after a failure of the pipeline was 19 discovered. Cawelo s complaint alleges that said breaches, due to their nature, only became apparent 20 to [Cawelo] when the pipeline began to leak, deteriorate, malfunction and fail, commencing in March 21 of 2004. 22 In the third amended complaint, Cawelo sought damages of not less than $8 million dollars, 23 including incidental and consequential damages, including property damages and payment of damages 24 to third parties consisting of property and personal injury damage payments. Cawelo alleged the 25 following damages: (1) pipeline repairs; (2) increased costs of pumping water to area farms; (3) cost of 26 water due to the leaks; (4) loss of access to credit from Chevron; and (5) loss of use of the pipeline as 27 an asset. Cawelo also alleged damages to third parties, including: (1) costs of settling the non-litigated 28 claims by the Vignolo family regarding a 2005 flooding of their home and resultant displacement of their 2 1 tenants; and (2) costs of settling a lawsuit filed by Marc Essary, who alleged he was injured in 2006 2 when he drove his car into a sinkhole created by one of the pipeline failures; and 3 St. Paul Policy and Defense 4 St. Paul received notice of Cawelo s claims and the underlying action on August 9, 2006. 5 Thereafter, St. Paul provided a defense for Vadnais in the underlying action pursuant to commercial 6 general liability insurance policy No. KK08300546 for the period between November 26, 1997 to 7 February 1, 1999. 8 Tender Of Defense 9 On January 25, 2007, St. Paul tendered the defense of Vadnais to Clarendon and Steadfast. On 10 March 19, 2007, Vadnais re-tendered Cawelo s claims against Vadnais to Steadfast. On May 7, 2007, 11 Clarendon declined coverage regarding Cawelo s claims against Vadnais. While initially sharing in the 12 defense of Vadnais, Steadfast withdrew its defense on August 1, 2009. 13 Clarendon Policy and Denial of Coverage 14 Clarendon issued a commercial general liability contract to Vadnais, policy No. 15 TCN0698/94/0184 for the period between November 25, 1995 to November 25, 1996. The Clarendon 16 policy provides in part: 17 18 We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend any suit seeking those damages. 19 The Clarendon policy provides that coverage applies to bodily injury and property damage provided: 20 21 (1) The bodily injury or property damage is caused by an occurrence that takes place in a coverage territory and, (2) The bodily injury or property damage occurs during the policy period. 22 Occurrence is defined as an accident, including continuous or repeated exposure to substantially the 23 same harmful conditions. Property damage is defined as: 24 /// 25 27 a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the occurrence that caused it. 28 The Clarendon policy includes several exclusions, setting forth circumstances in which there will 26 3 1 be no coverage for property damage. In particular, the Clarendon policy excludes coverage for 2 property damage : 3 j. That particular part of any property must be restored, repaired or replaced because your work was incorrectly performed on it. k. property damage to your product arising out of it or any part of it. l. property damage to your work arising out of it or any part of it and including in the products-completed operations hazard. m. Property damage to impaired property or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in your product or your work, or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. 4 5 6 7 8 9 The policy defines your work as: 10 a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations. 11 13 Your work includes: a. warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your work. b. The providing of; or failure to, provide warnings or instructions. 14 Clarendon denied coverage, asserting that there was no occurrence of property damage 15 during the policy period. Clarendon s denial to defend is based on the allegations of the complaint, 16 which alleges that the pipeline leaks and failures commenced in March 2004, years after the Clarendon 17 policy had elapsed. Clarendon also denied tender based on an argument that Cawelo s claims solely 18 concerned damages caused by the insured s own work, which are excluded from coverage under the 19 policy. 12 20 Steadfast Policy and Denial of Coverage 21 Steadfast issued to Vadnais commercial general liability insurance contract policy No. SCO 22 229487700 for the period between November 25, 1996 to November 25, 1997. The Steadfast policy 23 provides, in part: 24 /// 25 27 Subject to the exclusions, limitations, terms and conditions of the policy and in consideration of the premium stated in the declarations, the company agrees to pay on behalf of the named insured the ultimate net loss which the named insured shall become legally obligated to pay as damages for bodily injury or property damage caused by an occurrence to which this insurance applies, subject to the limits stated in the declarations. 28 With regard to such insurance as it is afforded by this policy, the company shall have the 26 4 1 2 right and duty to defend any suit against the named insured seeking damages on account of bodily injury or property damage, even if the allegations of the suit are groundless, false or fraudulent. 3 The Steadfast policy defines occurrence as: 4 5 6 an accident that takes place during the period of coverage provided by the policy, including continuous or repeated exposure to substantially the same general harmful conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the named insured or the victim thereof. 7 Property damage is defined as: 8 9 10 (1) Physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) Loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period. 11 The Steadfast policy includes a business risk exclusion, which excludes from coverage property 12 damage (including the loss of use or property) to work performed by the named insured arising out of 13 such work or any portion thereof, or out of materials, parts or equipment furnished in connection 14 therewith. 15 Steadfast denied coverage based on its position that there was no occurrence of property 16 damage during the policy period. Steadfast argues that, according to the underlying complaint, the first 17 break in the pipeline did not occur until March 10, 2004. Steadfast argues that even if the pipeline had 18 begun to corrode and leak during the policy period, Cawelo brought no claim for damage to any third19 party property occurring during the policy period. According to Steadfast, damage to the pipeline, 20 constructed and installed by Vadnais, is excluded under the policy as Vadnais business risk. 21 Expert Reports 22 St. Paul submits two expert reports to support its position that extrinsic evidence made clear that 23 there was a possibility of damages during the policy periods of both the Steadfast policy and the 24 Clarendon policy. 25 Richard O. Lewis, P.E. ( Mr. Lewis ), submits both a draft and a final report regarding the 26 pipeline failures. In both of these reports, Mr. Lewis notes that a series of failures occurred in the 27 pipeline between March 2004 and April 2006. Mr. Lewis opined that the results of his tests confirm 28 5 1 a chronic pattern of pipeline deterioration and distressed conditions. Those conditions developed during 2 an approximately 10 year service life of the pipeline prior to it being taken out of service and replaced. 3 Mr. Lewis concluded that the pattern of failures between March 2004 and April 2006 were the result 4 of a symptomatic, chronic pattern of corrosion induced deterioration of the pipeline. 5 David Niebuhr, Ph.D., P.E. ( Dr. Niebuhr ), submits a December 2, 2011 declaration, which 6 contains his opinions regarding the timing and causes of the pipeline leaks. In the declaration, Dr. 7 Niebuhr acknowledges that at least one report states that the pipeline would have begun to corrode 8 immediately upon installation in the ground due to a number of reasons. Presumably, Dr. Niebuhr is 9 referencing Mr. Lewis report. Dr. Niebuhr opines that, according to this report, the pipeline would 10 have begun leaking soon after the pipeline was put into use in May 1996 and water began to flow, due 11 in part to the fact that the pipeline was not designed or manufactured to carry water in that soil 12 environment, or to transport water with the temperature of 155" degrees. In Dr. Niebuhr s opinion, the 13 pipeline leaked water much sooner than March 2004, when the leak was first discovered. Dr. Niebuhr 14 concludes that based on review of documents from all parties there is strong evidence to support the 15 early failure of the pipeline. 16 Procedural History 17 St. Paul initiated this action against Clarendon, Steadfast and others for equitable contribution 18 and declaratory relief. St. Paul alleges that Clarendon and Steadfast owed Vadnais a duty to defend in 19 the underlying action, because (1) the Cawelo complaint contains allegations that establish the potential 20 for coverage under the Clarendon and Steadfast policies and (2) extrinsic evidence in the case establishes 21 the potential for body injury and property damage that took place during the Clarendon and 22 Steadfast policy periods. St. Paul alleges that as a result, Clarendon and Steadfast were obligated to 23 participate in Vadnais defense in the underlying action, but failed to do so. Because St. Paul paid all 24 costs in defending Vadnais, St. Paul alleges that it is entitled to reimbursement of its costs equivalent 25 to the fair and equitably proportionate share of the total defense cost. St. Paul also seeks declaratory 26 relief that: (1) Clarendon and Steadfast had a duty to defend Vadnais in the underlying litigation; (2) 27 Clarendon and Steadfast have an equitable duty to pay a fair and proportionate share of the defense cots 28 incurred on behalf of Vadnais; (3) Vadnais defense costs have been borne disproportionately by St. 6 1 Paul; and (4) Vadnais defense costs should be equitably proportioned between St. Paul, Clarendon, and 2 Steadfast. 3 Clarendon and Steadfast filed summary judgment motions on January 9, 2012. St. Paul moved 4 for summary judgment on January 20, 2012. All three motions have been fully briefed. Having 5 considered the parties arguments, exhibits (including those exhibits which are judicially-noticeable), 6 and the record, this Court found this motion suitable for a decision without oral argument. Accordingly, 7 this Court vacated the February 22, 2012 hearing pursuant to Local Rule 230(g) and issues the following 8 order.1 9 STANDARDS OF REVIEW 10 Fed. R. Civ. P. 56 permits a party against whom relief is sought to seek summary judgment 11 on all or part of the claim. In a summary judgment motion, a court must decide whether there is a 12 genuine issue as to any material fact. Fed. R. Civ. P. 56(c); see also, Adickes v. S.H. Kress & Co., 398 13 U.S. 144, 157 (1970). A party seeking summary judgment/adjudication bears the initial burden of 14 establishing the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 15 323 (1986). The moving party may satisfy this burden in two ways: (1) by presenting evidence that 16 negates an essential element of the nonmoving party s case; or (2) by demonstrating that the nonmoving 17 party failed to make a showing of sufficient evidence to establish an essential element of the nonmoving 18 party s claim, and on which the non-moving party bears the burden of proof at trial. Id. at 322. The 19 judgment sought should be rendered if the pleadings, the discovery and disclosure materials on file, and 20 any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled 21 to judgment as a matter of law. Fed. R. Civ. P. 56(c). If the party moving for summary judgment 22 meets its initial burden of identifying for the court those portions of the material on file that it believes 23 demonstrates the absence of any genuine issues of material fact, the burden of production shifts and the 24 nonmoving party must set forth specific facts showing that there is a genuine issue for trial. T.W. Elec. 25 1 26 27 28 This Court carefully reviewed and considered the record, including all evidence, arguments, points and authorities, declarations, affidavits, testimony, statements of undisputed facts and responses thereto, objections and other papers filed by the parties. Omission of reference to evidence, an argument, document, objection or paper is not to be construed to the effect that this Court did not consider the evidence, argument, document, objection or paper. This Court thoroughly reviewed, considered and applied the evidence it deemed admissible, material and appropriate for summary judgment. This Court does not rule on evidentiary matters in a summary judgment context, unless otherwise noted. 7 1 Serv., Inc. v. Pacific Elec. Contractors Ass n, 809 F.2d 626, 630 (9th Cir. 1987) (quoting Fed. R. Civ. 2 P. 56(e)). 3 To establish the existence of a factual dispute, the opposing party need not establish a material 4 issue of fact conclusively in its favor, but must do more than simply show that there is some 5 metaphysical doubt as to the material facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 6 574, 587 (1986). It is sufficient that the claimed factual dispute be shown to require a jury or judge to 7 resolve the parties differing versions of the truth at trial. First National Bank of Arizona v. Cities Serv. 8 Co., 391 U.S. 253, 289 (1968); T.W. Elec. Serv., 809 F.2d at 631. The nonmoving party must go 9 beyond the pleadings and by her own affidavits, or by depositions, answer to interrogatories, and 10 admissions on file, designate specific facts showing that there is a genuine issue for trial. Celotex, 477 11 U.S. at 324. Fed. R. Civ. P. 56(e) requires a party opposing summary judgment to "set out specific facts 12 showing that there is a genuine issue for trial." "In the absence of specific facts, as opposed to 13 allegations, showing the existence of a genuine issue for trial, a properly supported summary judgment 14 motion will be granted." Nilsson, Robbins, et al. v. Louisiana Hydrolec, 854 F.2d 1538, 1545 (9th Cir. 15 1988). 16 DISCUSSION 17 In the first cause of action, St. Paul seeks equitable contribution from Steadfast and Clarendon. 18 In insurance coverage litigation, the purpose of equitable contribution is to equalize the common burden 19 shared by co-insurers, and to prevent one insurer from profiting at the expense of others. Maryland Cas. 20 Co. v. Nationwide Mut. Ins. Co., 81 Cal. App.4th 1082, 1089 (2000). It is the right to recover, not from 21 the party primarily liable for the loss, but from a co-obligor who shares such liability with the party 22 seeking contribution. Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal. App.4th 1279, 1293 23 (1998). The right to contribution arises when several insurers are obligated to indemnify or defend the 24 same loss or claim, and one insurer has paid more than its share of the loss or defended the action 25 without any participation by the others. Truck Ins. Exchange v. Unigard Ins. Co., 79 Cal. App.4th 966, 26 974 (2000). Where multiple insurance carriers insure the same insured and cover the same risk, each 27 insurer has independent standing to assert a cause of action against its co-insurers for equitable 28 contribution when it has undertaken the defense or indemnification of the common insured. Fireman s 8 1 Fund Insurance Co., 65 Cal. App.4th. at 1293. Equitable contribution permits the reimbursement to the 2 insurer that paid on the loss for the excess it paid over its proportionate share of the obligation, on the 3 theory that the debt it paid was equally and concurrently owed by the other insurers and should be shared 4 by them pro-rata and proportionate to their respective coverage for the risk. In making its equitable 5 determination a Court considers the nature of the claim, the relation of the insured to the insurers, the 6 particulars of each policy and any other equitable consideration. Truck Ins. Exchange, 79 Cal. App. 4th 7 at 974. 8 To recover on its claim for equitable contribution, St. Paul must establish that it and the 9 defendant insurance carriers insured the same risk. If a defendant carrier does not have coverage for a 10 particular underlying claim, that is a complete defense to equitable contribution. Safeco Ins. Co. v. Sup. 11 Ct., 140 Cal. App. 4th 874, 880 (2006). As the Safeco court explained: 12 15 In an action by an insurer to obtain contribution from a co-insurer, the inquiry is whether the non-participating co-insurer had a legal obligation. .. to provide [a] defense [or] indemnity coverage for the claim or action prior to [the date of settlement], and the burden is on the party claiming coverage to show that a coverage obligation arose or existed under the co-insurer's policy. (citations omitted). This is what courts mean when they say they will not order a co-insurer to contribute to a loss that it had no obligation to pay under the terms of its policy (citation omitted). 16 Id. at 879-880 (brackets and ellipsis in original). Accordingly, St. Paul carries the burden to establish 17 that Steadfast and Clarendon had a legal duty to defend Vadnais in the underlying action. 13 14 18 St. Paul argues that both co-insurers had a duty to defend because the property damage began to 19 occur during the policy period under both policies. St. Paul contends that the potential for indemnity 20 was clear both from the allegations of the underlying complaint and from extrinsic evidence later 21 revealed through expert reports. 22 Steadfast and Clarendon both argue that they had no duty to defend Vadnais, because the 23 allegations of the complaint made clear that the pipeline began to leak, deteriorate, malfunction and fail 24 in March 2004, many years after the policies expired. Additionally, Steadfast and Clarendon each argue 25 that the damages to the pipeline were excluded under each policy. 26 Duty to Defend 27 The Court shall first consider whether the duty to defend arose before considering whether an 28 exclusion applied. Under California law, an insurer s duty to defend against litigation brought against 9 1 the insured by a third party arises whenever the insurer ascertains facts that give rise to even the potential 2 for indemnity under the policy. Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (2005). An 3 insurer must defend a suit which potentially seeks damages within the coverage of the policy. Gray 4 v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966) (italics in original). The duty to defend is determined 5 by reference to the Policy, the complaint, and all facts known to the insurer from any source. Montrose 6 Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993); Horace Mann Ins. Co. v. Barbara B., 4 7 Cal. 4th 1076, 1081 (1993). To determine whether an insurer s duty to defend has been triggered, the 8 Court considers the following: 9 If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance. 10 11 12 13 Scottsdale Ins. Co. v. MV Trans., 36 Cal. 4th 643, 655 (2005). The insured need only show that the 14 underlying claim may fall within policy coverage, the insurer must prove it cannot. Montrose, 6 Cal. 15 4th at 300. Any doubt as to whether the facts establish the existence of the defense duty must be 16 resolved in the insured s favor. Montrose, 6 Cal. 4th at 300; Horace Mann, 4 Cal. 4th at 1081. 17 When determining whether a particular policy provides a potential for coverage, the Court is 18 guided by the principle that interpretation of an insurance policy is a question of law. Powerine Oil 19 Co., Inc. v. Superior Court, 37 Cal.4th 377, 390 (2005). The insurer is entitled to summary 20 adjudication that no potential for indemnity exists ... if the evidence establishes as a matter of law that 21 there is no coverage. Id. (internal citations and quotations omitted). 22 The fact that one insurer may owe a duty to provide a defense will not excuse a second insurer's 23 failure to honor its separate and independent contractual obligation to defend. Emerald Bay Community 24 Ass'n v. Golden Eagle Ins. Corp., 130 Cal.App.4th 1078, 1089 (2005). 25 /// 26 27 28 March 2004 Allegation Steadfast and Clarendon argue that no duty to defend Vadnais in the underlying litigation arose, 10 1 because the allegations of the complaint clearly establish that no damages occurred until March 2004. 2 The Clarendon policy covered the time period of November 25, 1995 to November 25, 1996. The 3 Steadfast policy covered the time period of November 25, 1996 to November 25, 1997. According to 4 the operative pleading in the underlying action, the pipeline began to leak, deteriorate, malfunction and 5 fail, commencing in March of 2004. Based on these undisputed facts, Clarendon and Steadfast submit 6 that they had no duty to defend Vadnais. 7 St. Paul argues that the allegations of the complaint raised the potential for indemnity, because 8 the allegations establish a process occurring over time. St. Paul contends that Clarendon and Steadfast 9 focus exclusively on the allegation that the pipeline began to leak, deteriorate, malfunction and fail, 10 commencing in March of 2004, while ignoring the fact that deterioration does not occur 11 instantaneously. St. Paul argues that because the pipeline was buried eight feet underground, the 12 allegation that the first discovery of a pipeline failure in March 2004 makes it apparent that the pipeline 13 had begun to deteriorate and leak well before March 2004. St. Paul argues that the allegations of the 14 underlying complaint made clear that there was a continuing and progressive process of deterioration 15 of the pipeline and that, therefore, there was a possibility of damage occurring from the date of 16 installation of the pipeline. 17 This Courts agrees with St. Paul that the allegations of the complaint raised at least the potential 18 for coverage. Although the complaint alleges that the pipeline first began to leak, deteriorate, 19 malfunction, and fail in beginning in March of 2004, it further alleges that the breaches or negligent 20 acts due to their nature, only became apparent in March of 2004. The former language supports 21 Clarendon and Steadfast s positions that the occurrence took place in 2004; however, the latter language 22 supports St. Paul s position that the acts causing the damages were only discovered in March 2004. 23 When read into context, the allegations raise at least the potential that damages arose prior to when they 24 were first discovered in March 2004. The third amended complaint asserts a breach of written contract 25 claim against Vadnais based on, inter alia, the following allegations: 26 /// 27 28 On or about March 16, 1995...Vadnais entered into a written Contract Agreement for the construction of plaintiff s...Pipeline...That as part of said Contract Agreement, defendant VADNAIS...agreed to furnish all materials, equipment, tools, and labor and to construct 11 1 2 3 the...Pipeline in a good and workmanlike manner as required by the Contract Agreement...Plaintiff is informed and believed that the foregoing was breached by defendant by furnishing a defective nonconforming pipe and by its negligent and careless installation of said pipe. Said breaches, due to their nature, only became apparent to plaintiff when the pipeline first began to leak, deteriorate, malfunction and fail, commencing in March of 2004. 4 TAC, 30-33. Similarly, in its negligence claim against Vadanis, Cawelo alleges that Vadnais knew or 5 should have known that the Pipeline was not properly installed or constructed and Vadnais negligently 6 and carelessly installed, constructed, and inspected the defective pipe, causing the pipeline to leak, 7 deteriorate, malfunction, and fail. TAC, 36-37. These allegations make clear that Cawelo is alleging 8 a pattern of defective materials and defective installation that caused a latent leak that only became 9 apparent in March 2004. 10 Under similar facts and nearly identical insurance contract terms, courts have found that the duty 11 to defend was triggered. For example, in Pepperell v. Scottsdale Ins. Co., 62 Cal. App. 4th 1045, 1055 12 (1998), the court found a duty to defend arose based on allegations of defective design and construction 13 of a home, even though the damages were not manifested until years after the policy period expired. The 14 court reasoned: The clear implication of the complaint is that there existed at least potentially a 15 covered event, i.e., a continuing and progressively deteriorating process which began with defective 16 design and construction admittedly within the pertinent policy. Id. (emphasis in original). Similarly, 17 this Court finds that the third amended complaint raised the potential for a covered event during both 18 the Clarendon and Steadfast policies. Because it was alleged that the pipeline had defective design and 19 installation in May 1996, that it corroded and deteriorated, and that because of the nature of the injuries, 20 the damages were only discovered until later, there was a potential that damages arose during the 21 Clarendon policy(November 25, 1995 to November 25, 1996) and the Steadfast policy (November 25, 22 1996 to November 25, 1997). Accordingly, this Court finds that the allegations of the complaint 23 established a continuous injury, which triggered the duty to defend for both Clarendon and Steadfast, 24 unless there are exculpatory facts, such as policy exclusions on the duty to defend. Pepperell, 62 Cal. 25 App. 4th at 1055. 26 The expert report and declaration support this conclusion. In 2006, Mr. Lewis opined that the 27 results of his tests confirm a chronic pattern of pipeline deterioration and distressed conditions. Those 28 12 1 conditions developed during an approximately 10 year service life of the pipeline prior to it being taken 2 out of service and replaced. In 2011, Dr. Niebuhr concluded that based on review of documents from 3 all parties there is strong evidence to support the early failure of the pipeline. These opinions support 4 the possibility that damages began to occur shortly after the installation in mid-1996. Steadfast and 5 Clarendon point out that neither expert explicitly states that damages arose during their respective policy 6 periods. This position ignores, however, the applicable standards. The insurer is entitled to summary 7 adjudication that no potential for indemnity exists ... if the evidence establishes as a matter of law that 8 there is no [potential for ]coverage. Id. Powerine Oil, 37 Cal.4th at 390. Here, neither Steadfast nor 9 Clarendon provide evidence that there is no potential of damages occurring during the policy period. 10 On the other hand, the allegations of the third amended complaint and the expert reports provided by St. 11 Paul establish at least a potential for damages during the respective policy periods. 12 Damages During the Policy Periods 13 While there was a potential for a continuing injury during the policy periods, the Court must next 14 determine what injury, if any, potentially occurred during that policy periods. Steadfast and Clarendon 15 argue that although the pipeline may have been defective during the policy periods, there was no 16 damages to the pipeline or others until March 2004. Under the terms of these policies, the occurrence 17 of bodily injury or property damage during the policy period is the operative event that triggers 18 coverage. Montrose II, 10 Cal. 4th at 668. According to this well-settled rule, it is the property damage 19 that must occur during the policy period that triggers coverage. But Steadfast and Clarendon argue that 20 no damages arose for the pipeline repairs, loss of use of the pipeline, or from the third-party lawsuits 21 after the manifestation of the loss in March 2004. 22 The underlying complaint asserted various types of damages, including: (1) pipeline repairs; (2) 23 increased costs of pumping water to area farms; (3) cost of water due to the leaks; (4) loss of access to 24 credit from Chevron; (5) loss of use of the pipeline as an asset; (6) costs of settling the non-litigated 25 claims by the Vignolo family regarding a 2005 flooding of their home and resultant displacement of their 26 tenants; and (7) costs of settling a lawsuit filed by Marc Essary, who alleged he was injured in 2006 27 when he drove his car into a sinkhole created by one of the pipeline failures. 28 As explained above, St. Paul cannot rely on alleged damages that occurred after the policy period 13 1 expired. These damages include the loss of access to credit by Chevron, which did not occur until after 2 the March 2004 failures, and damages to third parties, including: (1) costs of settling the non-litigated 3 claims by the Vignolo family regarding a 2005 flooding of their home and resultant displacement of their 4 tenants; and (2) costs of settling a lawsuit filed by Marc Essary, who alleged he was injured in 2006 5 when he drove his car into a sinkhole created by one of the pipeline failures. Damages related to the 6 increased costs of pumping water to area farms area also not covered, as they were not alleged to have 7 taken place until after the March 2004 leaks were discovered. Accordingly, St. Paul cannot rely on these 8 damages to establish that duty to defend was triggered. 9 The damages that had a potential to have occurred during the policy period were damages to the 10 pipeline and the loss of the water. Based on the allegations of the complaint, damages to the pipeline, 11 including the corrosion, could have occurred during the policy periods. In addition, water could have 12 leaked out of the defective pipeline during the policy periods. Accordingly, these damages could have 13 occurred during the policy period. 14 Whether Loss of Water is Property Damage 15 The parties dispute whether the loss of water constitutes property damage under the policies. 16 Steadfast and Clarendon argue that the loss of water does not constitute property damage as defined 17 in the policies. The Steadfast policy defines property damage as follows: 18 19 (1) Physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) Loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period. 20 21 22 The Clarendon policy defines property damage as: 24 a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the occurrence that caused it. 25 Both parties point out that the third amended complaint sought damages for the replacement of the lost 26 water, not damages based on the loss of use of the water. Both parties point out that under the law, there 27 is a difference between damage to property and the loss of property. Indeed, conversion is not 28 property damage. Collin v. American Empire Ins. Co., 21 Cal. App. 4th 787, 817 (1994). 23 14 1 St. Paul argues that the policies insured against the loss of the water. Relying on Watts 2 Industries, Inc. v. Zurich American Ins. Co., 121 Cal. App. 4th 1029, 1041 (2004), St. Paul points out 3 that [w]ater becomes personal property when contained in artificial courses or conduits. Id. While 4 Watts stands for the position that water may be tangible property, Watts does not establish that the loss 5 of the water constitutes property damage pursuant to each policy. In Watts, the water was injured or 6 damaged because it was contaminated by a pollutant. The court found that the contamination of the 7 water constituted damage to the physical property, thereby falling within the definition of property 8 damage under the policy. This case is distinguishable, however, because Cawelo did not assert an 9 injury to the water. That is, Cawelo did not claim that the water was contaminated or otherwise injured. 10 Rather, Cawelo claimed damages for the loss of water. Thus, Watts provides no guidance on the relevant 11 issue in this case; to wit, whether the property damage provision of the general liability policies 12 covered a loss of water through leakage from a pipeline. 13 Each policy limited coverage to property damage. Property damage was defined as physical 14 injury to tangible property which included the loss of use of tangible property. Water is tangible 15 property, according to Watts. Whereas the definition of property damage included in the Clarendon 16 and Steadfast policies would cover damages related to the loss of use of the water, those policies do not 17 insure against the loss of water. This Court arrives at this conclusion based on the plain language of the 18 terms of the policy and the courts interpretation thereof. 19 In the Cawelo complaint, however, no allegations assert injury to the water or the loss of its use. 20 Cawelo was not alleged to have used the water in any capacity. Cawelo had no use for the water while 21 it was in the pipeline, and sought no damages for loss of its use. Instead, Cawelo alleges damages based 22 on the conversion of the water. Conversion is defined as the taking or deprivation of property. Collin, 23 121 Cal. App. 4th at 817. Cawelo alleged damages for the replacement value of the lost water that was 24 meant to be transported through the pipeline for sale and sought damages for the replacement value of 25 the water it lost. 26 Based on the allegations of the complaint, the loss of water was not covered as property 27 damages under either the Clarendon or Steadfast policies. Had the parties contemplated coverage for 28 loss of property, that provision would have been written into each policy. Instead, the parties agreed 15 1 to terms that covered property damage. But because loss of water is not included in the definition of 2 property damage, those damages were not covered under the policy. Accordingly, and pursuant to the 3 allegations of the underlying complaint, there was no property damage under the terms of each policy, 4 based on the loss of the water. 5 Exclusions 6 Coverage under each policy was triggered based on the covered damages that occurred during 7 the policy periods. Most of the damages alleged did not arise until after the policy periods expired. For 8 example, the damages to the third parties occurred after the pipeline leaked in March 2004. Also, as 9 discussed above, the loss of water was not a covered damage that would give rise to coverage under the 10 terms of the Clarendon or Steadfast policies. Based on the allegations of the complaint and extrinsic 11 evidence, however, there was a potential for injuries to have occurred to the pipeline during the policy 12 periods. The pipeline may have been corroding and deteriorating shortly after installation. Accordingly, 13 Steadfast and Clarendon had a duty to defend Vadnais (and therefore owe equitably contribution to St. 14 Paul), unless applicable exclusions applied. 15 Exclusions are narrowly construed and must be proven by the insurer. See Collin v. American 16 Empire Ins. Co., 21 Cal. App. 4th 787, 802-03 (1994). Clarendon contends that the damages are 17 excluded pursuant to the your product exclusion under the policy. Steadfast argues that the damages 18 were excluded under the business risk exclusion. The Court considers each exclusion below. 19 20 21 22 23 24 25 26 27 28 Clarendon s Exclusions The Clarendon policy excludes coverage for property damage under the following circumstances: j. That particular part of any property must be restored, repaired or replaced because your work was incorrectly performed on it. k. property damage to your product arising out of it or any part of it. l. property damage to your work arising out of it or any part of it and including in the products-completed operations hazard. m. Property damage to impaired property or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in your product or your work, or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. The policy defines your work as: 16 1 a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations. 2 4 Your work includes: a. warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your work. b. The providing of; or failure to, provide warnings or instructions. 5 The policy defines your product as a. Any goods or products, other than real property, manufactured, 6 sold, handled, distributed, or disposed by: (1) You. 3 7 St. Paul argues that this exclusion is inapplicable, because your product does not include real 8 property. St. Paul argues that the pipeline constituted real property under California real property law 9 because real property consists of that which is affixed to the land. Cal. Civ. Code §658. A thing is 10 deemed to be affixed to land when it is attached by its roots...or imbedded in it...or permanently resting 11 upon it...or permanently attached to what is thus permanent[.] Cal. Civ. Code §660. St. Paul contends 12 that because an exception to the your product exclusion includes real property, the injuries to the 13 pipeline are excepted from the exclusion. 14 St. Paul s argument ignores the your work exclusion, the exclusion upon which Clarendon s 15 arguments are based. The Clarendon policy excludes [t]hat particular part of any property must be 16 restored, repaired or replaced because your work was incorrectly performed on it. Clarendon correctly 17 argues that Cawelo sought damages to repair or replace the pipeline and that the pipeline needed to be 18 repaired or replaced based on Vadnais own work, which was allegedly negligent and deficient. These 19 facts are undisputed. Based on this exclusion, which does not rely on a definition of your product, the 20 alleged damages to the pipeline was excluded from coverage under the Clarendon policy. 21 Because the damages to the pipeline were excluded from coverage, and no other covered 22 damages could have occurred during the policy period, Clarendon has established that it is entitled to 23 judgment as a matter of law in its favor. This Court finds that Clarendon owed no legal duty to Vadnais 24 under its policy. Accordingly, St. Paul is not entitled to equitable contribution or declaratory judgment 25 on its claim against Clarendon. 26 Steadfast s Exclusions 27 The Steadfast policy includes a business risk exclusion, which excludes from coverage 28 property damage (including the loss of use or property) to work performed by the named insured arising 17 1 out of such work or any portion thereof, or out of materials, parts or equipment furnished in connection 2 therewith. Steadfast argues that this exclusion precludes coverage for any damage to the pipeline that 3 may have occurred during Steadfast s policy period. 4 Steadfast maintains that [general liability policies] are not designed to provide contractors and 5 developers with coverage against claims their work is inferior or defective. The risk of replacing and 6 repairing defective materials or poor workmanship has generally been considered a commercial risk 7 which is not passed on to the liability insurer. Maryland Cas. Co. v. Reeder, 221 Cal. App. 3d 961, 967 8 (1990). Based on these accepted purposes, liability coverage comes into play when the insured s 9 defective material or work causes injury to property other than the insured s own work or products. F 10 & H Construction v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364, 372 (2004). 11 This Court agrees that under this exclusion, Cawelo s alleged damages related to the pipeline 12 defect are excluded from coverage. Defective installation of a product is not property damage under a 13 general liability policy. New Hampshire Ins. Co. v. Viera, 930 F.2d 696, 700 (9th Cir. 1991). The cost 14 of correcting the insured s defective work is an economic loss, not physical injury to property. F&H 15 Const., 118 Cal. App. 4th at 371-72 . The excluded damages include pipeline repairs and loss of use of 16 the pipeline as an asset. St. Paul cannot rely on these excluded damages to trigger the duty to defend. 17 Because the damages to the pipeline were excluded from coverage, and no other covered 18 damages could have occurred during the policy period, Steadfast has established that it is entitled to 19 judgment as a matter of law in its favor. This Court finds that Steadfast owed no legal duty to Vadnais 20 under its policy. Accordingly, St. Paul is not entitled to equitable contribution or declaratory judgment 21 on its claim against Steadfast. 22 23 24 25 CONCLUSION AND ORDER 26 For the foregoing reasons, this Court: 27 1. DENIES St. Paul s summary judgment motion; 28 2. GRANTS Clarendon s summary judgment motion; 18 1 3. GRANTS Steadfast s summary judgment motion; and 2 4. DIRECTS the clerk of court to enter judgment in favor of Clarendon and Steadfast and 3 against St. Paul. 4 5 IT IS SO ORDERED. Dated: b9ed48 March 5, 2012 /s/ Lawrence J. O'Neill UNITED STATES DISTRICT JUDGE 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19
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