Diamond Heights Homeowners Assn. v. National American Ins. Co.

• Decision Date: 06 February 1991
• Docket Number: No. A046045,A046045
• Citation: 277 Cal.Rptr. 906,227 Cal.App.3d 563
• Court: California Court of Appeals Court of Appeals
• Parties: DIAMOND HEIGHTS HOMEOWNERS ASSOCIATION, Plaintiff and Appellant, v. NATIONAL AMERICAN INSURANCE COMPANY et al., Defendants and Respondents.

Page 906

277 Cal.Rptr. 906

227 Cal.App.3d 563

DIAMOND HEIGHTS HOMEOWNERS ASSOCIATION, Plaintiff and Appellant, v. NATIONAL AMERICAN INSURANCE COMPANY et al., Defendants and Respondents.

No. A046045.

Court of Appeal, First District, Division 3, California.

Feb. 6, 1991.

Review Denied May 16, 1991.

Branden E. Bickel, William H. Curtis, Bickel & Coleman, San Francisco, for plaintiff and appellant.

Sedgwick, Detert, Moran & Arnold, George E. Sayre, Graziella Walsh Coggan, David H. Waters, Norman L. Chong, Tarkington, O'Connor & O'Neill, San Francisco, Stephen Acker, Charissa Dorian, Derek S. Goulding, Acker, Kowalick & Whipple, Los Angeles, for defendants and respondents.

STRANKMAN, Associate Justice.

I. Overview

The instant action follows the settlement of an underlying action filed by plaintiff and appellant Diamond Heights Homeowners Association (Association), a California corporation, against Diamond Heights Associates (Diamond Heights), the developer of a condominium project, and Alpha Land Company (Alpha), the general contractor, among other defendants, seeking damages for construction defects and deficiencies in the condominium project. The complaint stated causes of action for negligence, strict liability, and breach of warranty.

The parties ultimately entered into a settlement of the underlying litigation which provided for a stipulated judgment in favor of Association and against Diamond Heights and Alpha in the amount of $2,671,000. The total settlement included (1) the stipulated judgment; (2) cash contributions by Diamond Heights and Alpha in the sum of $1,607,781.82, representing the remaining limits of their insurance coverage under certain comprehensive liability policies, and a cash contribution of the architect and two subcontractors in the sum of $100,000, for a total cash payment of $1,707,781.82 in partial satisfaction of the judgment; and (3) an assignment of rights of Diamond Heights and Alpha to Association against their noncontributing insurance carriers for the balance of the judgment owing in the sum of $963,218.18. These noncontributing carriers were American Home Assurance Company (American), a New York corporation; National American Insurance Company (National), a Nebraska corporation; and Central National Insurance Company of Omaha (Central), a Nebraska corporation, the defendants and respondents in the instant action.

Diamond Heights and Alpha moved for order confirming good faith settlement. (Code Civ.Proc., § 877.6.) ¹ Central filed its objections thereto. Following a hearing, the trial court confirmed the settlement as made in good faith and free from collusion.

Following confirmation of the settlement, Association initiated this action against American, National, and Central to satisfy the balance of the stipulated judgment. Each of these defendants had issued a policy of liability insurance to Diamond Heights or Alpha. National had issued a "primary" general liability policy with a liability coverage limit of $1 million. Central had issued an "umbrella" policy, including excess coverage (i.e., all primary or underlying insurance must be exhausted before excess coverage becomes effective) with a $3 million per occurrence limit. American had issued an umbrella policy with a $2.5 million per occurrence limit. Following discovery, the three defendant insurance carriers moved for summary judgment/summary adjudication of issues. ( § 437c.) American and National sought summary judgment on the ground of certain exclusionary provisions in their policies. Central sought summary judgment on the ground of exclusionary provisions in its policy as well as its contention that the stipulated judgment, which had been entered into without its consent, violated a specific condition to coverage under the policy.

The trial court granted summary judgment in favor of all three defendant insurance carriers. Association moved for reconsideration as to the order granting summary judgment in favor of Central, offering additional documentation and evidence. The trial court reconsidered but then confirmed its order granting summary judgment.

In reviewing the orders granting summary judgment, weindependently review whether the papers filed in support of and in opposition to the motions for summary judgment show there were no triable issues of material fact, such that the moving parties were entitled to judgment as a matter of law. (Aarts Productions, Inc. v. Crocker National Bank (1986) 179 Cal.App.3d 1061, 1064, 225 Cal.Rptr. 203.)

We affirm the judgment in favor of National and American but reverse the judgment in favor of Central.

II. Summary Judgment in Favor of National Was Proper

A. Pertinent policy exclusions. National issued a comprehensive general liability policy to Diamond Heights and Alpha which contained the following exclusionary provision: ² "This insurance does not apply: ... (1) to property damage to the named insured's products arising out of such products or any part of such products; and ... (m) to 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."

These exclusions, referred to by the courts and commentators as the " 'work product' " exclusion, constitute standard exclusions in the standard form comprehensive general liability policy issued to a general contractor. (See Western Employers Ins. Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027, 1028, 194 Cal.Rptr. 688.) The exclusion precludes coverage for liability for damage to and deficiencies of the insured contractor's work product. It applies to the insured's defective work as well as to the insured's satisfactory work that is damaged by the insured's defective work. (Id., at p. 1029, 194 Cal.Rptr. 688.) The exclusion is consistent with the purpose of this type of policy which is neither a performance bond nor an all-risk policy. (Id., at p. 1031, 194 Cal.Rptr. 688.) The coverage afforded by such policy is for tort liability for physical damage to others; for example, liability for damage to an automobile caused by a falling wall defectively constructed by the insured. (Id., at p. 1032, 194 Cal.Rptr. 688.) The coverage is not for liability for economic loss based on a product or completed work which is not that for which the damaged person bargained. (Henderson, Insurance Protection for Products Liability and Completed Operations--What Every Lawyer Should Know (1971) 50 Neb.L.Rev. 415, 441.)

The Arciero court explained: "This makes sense from the standpoint of the insurer and the insured. By excluding repair and replacement losses, the insurer gives the contractor an incentive to exercise care in workmanship thereby reducing the risk that is covered: damage to property of third parties. Coverage of repair and replacement costs would undermine this incentive. If the work failed the insurer would end up holding the scrap. Excluding repair and replacement costs also reduces the cost of the policy. The insurer is freed from administering frequent claims for minor repairs and can set its rate based on the less frequent but potentially large claims for damage to the property of others." (Western Employers Ins. Co. v. Arciero & Sons, Inc., supra, 146 Cal.App.3d at pp. 1031-1032, 194 Cal.Rptr. 688.)

B. The work product exclusion precludes coverage for Association's claimed losses in the underlying action. Association's underlying action was brought pursuant to section 374, which grants owners' associations a limited right to bring actions on behalf of the individual owners, without joining the owners, to recover for damage to (1) common areas, or (2) the separate interests which the association is obligated to maintain or repair, or (3) the separate interests which arise out of damage to the common area.

Association's complaint in the underlying action alleged damages resulting from the defendants' negligence and faulty workmanship, as follows: "[D]efendants, and each of them, negligently and carelessly developed, designed, constructed, supplied, installed and repaired the subsoil, foundations, buildings, component parts, and other improvements to the project Common Area so as to cause the same to subside, crack, leak, deteriorate and fall into disrepair...." The damage was alleged as follows: "The subsidence, cracks, leaks and excessive deterioration have required extensive repairs throughout the Diamond Heights Condominiums. As a consequence plaintiff must retain consultants ... to advise it of the true nature and extent of ... any common defects in the development, design and construction of the Diamond Heights Condominiums."

In response to interrogatories propounded by defense counsel requesting an itemization of the damages claimed, Association's counsel listed deficiencies in roofing, drainage system, siding, structural elements, electrical system; as well as application of asbestos spray, water penetration, leaks, inadequate foundations, and wood fungal decay.

The foregoing itemized damages are covered by the plain language of the work product exclusion, in that all such items comprise part of the work product of the developer and general contractor.

Association argues that consequential damages resulting from but not part of the contractor's work product are not covered by the work product exclusion, citing Baugh Const. Co. v. Mission Ins. Co. (9th Cir.1988) 836 F.2d 1164. In Baugh, the Ninth Circuit held consequential damages such as damage to tenant improvements resulting from a contractor's faulty work are covered under a general liability policy, notwithstanding the work product exclusion. (Id., at p. 1172.) Association identifies the consequential damages allegedly suffered here as health hazards to individual owners, water damage to their personal property such as furniture and drapes, and relocation expenses during repair work.

Here, unlike the...