Allstate Ins. Co. v. Smith
| Decision Date | 09 April 1991 |
| Docket Number | No. 89-56183,89-56183 |
| Citation | 929 F.2d 447 |
| Parties | ALLSTATE INSURANCE COMPANY, Plaintiff-Appellee, v. Dwight H. SMITH, M.D., Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Christopher Ashworth and Jonathan M. Turner, Garfield, Tepper, Ashworth & Epstein, Los Angeles, Cal., for defendant-appellant.
Alan G. Buckner and Howard S. Vallens, Simon, Buckner & Haile, Marina del Rey, Cal., for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before FLETCHER, BOOCHEVER and WIGGINS, Circuit Judges.
In this diversity action, Dwight H. Smith, M.D. (Smith) appeals from the district court's declaratory judgment, finding that Allstate Insurance Co. (Allstate) was not required to reimburse Smith pursuant to his "all risk" insurance policy for damage to his business equipment and improvements, and for his loss of earnings. We reverse.
Smith rented space in a Los Angeles office building for his medical practice. In the fall of 1988, he bought an "all risk" insurance policy from Allstate covering his business property for "loss or damage resulting from direct physical loss" with certain enumerated exclusions including those for losses caused by faulty workmanship and rain.
On December 18, 1988, a roofing contractor was working on the building pursuant to an earthquake standards compliance order Subsequently, Smith filed a claim with Allstate for the repair and replacement of his business property and for his lost earnings due to disruption of business. Allstate filed a declaratory judgment action, requesting that the court find that Smith's losses were not covered by his policy. The district judge, based on a stipulated factual record, ruled that Allstate had no duty to reimburse Smith because his losses were caused by "faulty workmanship." Smith timely appealed.
issued by Los Angeles's Department of Building & Safety. During the day, the contractor removed most of the roof but did not put a temporary cover over the exposed premises. Unfortunately, that night it rained and Smith's office equipment and improvements were damaged.
Because this diversity case arises in California, California law applies. See Hampton v. Gebhardt's Chili Powder Co., 294 F.2d 172, 172 (9th Cir.1961).
As the facts are undisputed, we review the district court's interpretation of the insurance policy de novo. Kilroy Indus. v. United Pac. Ins. Co., 608 F.Supp. 847, 850 (C.D.Cal.1985). The first issue we must face is whether the contractor's failure to cover the exposed premises constituted "faulty workmanship" within the meaning of the policy's relevant exclusion clause, which states:
3. We do not cover any loss or damage caused by any of the following. However, any ensuing loss not excluded or excepted in this policy is covered.
. . . . .
c. Faulty, inadequate or defective:
. . . . .
ii. design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; ...
Under California law, ambiguities in insurance policy provisions are resolved in favor of the insured. Price v. Zim Israel Navigation Co., 616 F.2d 422, 426 (9th Cir.1980). Smith argues that the term "faulty workmanship" is ambiguous because it is susceptible to different reasonable interpretations.
An insurance contract is ambiguous if the court finds that the language is susceptible to different interpretations. But the court must construe the clause with regard to the contract as a whole, and its meaning is to be derived from the circumstances of the particular case and not in the abstract. "Ambiguity cannot be based on a strained instead of reasonable interpretation of a policy's terms."
Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338, 1340 (9th Cir.1989) (citations omitted). Smith contends that "faulty workmanship" is susceptible to at least two different interpretations: (1) the flawed quality of a finished product, or (2) a flawed process. Failing to put a temporary cover over the exposed premises would not be "faulty workmanship" under the flawed product interpretation as that interpretation necessarily requires the presence of an object to evaluate. As the roofer had not completed any portion of the new roof when the damage occurred, there is no object to evaluate to determine whether the workmanship was faulty. Under the flawed process interpretation, however, failing to put a temporary cover on while replacing a roof may constitute "faulty workmanship." 1
Interpreting the clause, "faulty workmanship," as the flawed quality of the product worked upon makes sense in the context of the policy as a whole. Another section of the policy provides coverage for losses "involving collapse of a covered building ... caused by ... use of defective The flawed product interpretation also is bolstered by the provision in the "faulty workmanship" exclusion that "any ensuing loss not excluded or excepted in this policy is covered." It is easy to imagine a situation where a flawed product could cause ensuing losses. For example, a leaky roof could lead to water damage to Smith's property. Presumably, water damage would be an ensuing loss covered by the policy but repairing the roof would not be covered. On the other hand, it is difficult to imagine what covered "ensuing losses" could flow from a flawed process, because "any loss or damage caused" by the process would be excluded. In other words, if the broader "flawed process" interpretation is accepted as the only reasonable interpretation of the policy, the "ensuing loss" language is seemingly rendered meaningless. 2
materials or methods of construction". (Emphasis added). Thus, if Allstate meant "faulty workmanship" to include losses resulting from flawed processes of construction, it could have borrowed language from the collapse section and stated, "We do not cover any loss or damage caused by ... faulty ... methods of construction." Its failure to do so leads to a reasonable inference that Allstate did not intend for "faulty workmanship" to mean faulty methods of construction
Moreover, there are at least two dictionary definitions of "workmanship":
1: something effected, made, or produced: WORK
2: the art or skill of a workman: CRAFTSMANSHIP.
Webster's Ninth New Collegiate Dictionary 1359 (1984). The first definition supports a product interpretation, while the second definition supports a process interpretation.
In addition to the surrounding language of the policy and the dictionary definitions, the reasonableness of the flawed product interpretation is supported by numerous cases where courts found "faulty workmanship" based on a defect in the object of the workmanship. See, e.g. Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338 (9th Cir.1989) (); U.S. Indus., Inc. v. Aetna Casualty & Sur. Co., 690 F.2d 459 (5th Cir.1982) (defective steel tower); Kroll Constr. Co. v. Great Am. Ins. Co., 594 F.Supp. 304 (N.D.Ga.1984) (poorly waterproofed walls). While these cases did not consider the flawed process/flawed product distinction, they support the...
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