Economy Lumber Co. v. Insurance Co. of North America

• Decision Date: 25 June 1984
• Citation: 204 Cal.Rptr. 135,157 Cal.App.3d 641
• Court: California Court of Appeals Court of Appeals
• Parties: ECONOMY LUMBER COMPANY OF OAKLAND, INC., Plaintiff and Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant and Respondent. AO14532. Civ. 54522.

Page 135

204 Cal.Rptr. 135

157 Cal.App.3d 641

ECONOMY LUMBER COMPANY OF OAKLAND, INC., Plaintiff and Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant and Respondent.

AO14532.

Civ. 54522.

Court of Appeal, First District, Division 1, California.

June 25, 1984.

David Jay Morgan, San Mateo, for plaintiff and appellant.

Paul A. Conroy, Williams, Van Hoesen & O'Connor, San Francisco, for defendant and respondent.

HOLMDAHL, Associate Justice.

This is an appeal from a judgment holding that a general liability insurance policy issued to appellant does not cover its claim for property damage.

The judgment is reversed and remanded.

Statement of Facts

In December, 1976, plaintiff and appellant Economy Lumber Company of Oakland, Inc. (hereafter, Economy Lumber), contracted to sell 90,000 board feet of specially milled siding to Arlotta and Paradise Construction Company (hereafter, A & P). A & P was the general contractor on a construction project in Foster City and intended to use the siding on the exterior of homes it was building there. Economy Lumber contracted with D.L. Ford & Company (hereafter, Ford) to perform the milling and then to deliver the lumber to the construction site.

A & P received the siding from Ford and began to apply it to eight houses. Within a day or two, after about 25 percent of the total amount of the siding had been applied, it became apparent that the siding had been mismilled. The pieces were not of uniform size and caused the exterior of the homes to take on a very unsightly appearance, quite obvious to any onlooker. Apparently, the defect could not have been detected prior to the application of the siding. A & P soon thereafter notified Economy Lumber of the problem.

Economy Lumber estimated that it would incur a loss of $80,000 should A & P refuse to keep the lumber. The siding, of a kind rarely used in California, in addition to being defective, was worthless for resale purposes. Economy Lumber negotiated with A & P in order to mitigate the damages and they entered into an agreement on September 13, 1977. A & P agreed to use the defectively milled siding to finish the eight houses, because that was the cheapest solution. The remaining lumber was remilled at Economy Lumber's expense and was used by A & P as siding on another project. Economy Lumber paid to A & P a total of $16,318.30. In return, A & P released Economy Lumber from further liability.

During this period, Economy Lumber had been insured under a general comprehensive liability policy by Insurance Company of North America (hereafter, INA). Appellant notified INA that the siding was defective, and INA established a file for the claim.

On September 22, 1977, Economy Lumber filed suit for breach of warranty against Ford, which also happened to be insured by INA. INA initially defended Ford, but withdrew the defense upon its determination that Ford's policy afforded no coverage on the matter litigated. Economy Lumber eventually obtained a $20,000 default judgment against Ford, which had not been paid at the time of trial. On March 7, 1978, INA rejected Economy Lumber's claim for reimbursement of the $16,318.30 it had paid to A & P, on the ground that its policy did not cover the claimed damage.

Procedural History

On September 8, 1978, Economy Lumber filed a complaint for declaratory relief in San Francisco Superior Court against INA, claiming that its policy did provide coverage. After trial without a jury, the trial judge issued findings and conclusions, and judgment was entered in favor of INA.

Economy Lumber filed a timely appeal.

Policy Provisions

The case before us concerns the construction of an insurance policy. Its terms are ambiguous as applied to the facts of this case, rendering their interpretation difficult, indeed. In noting that INA wrote the policy, we are reminded and guided by the general rule that "[t]he test we must apply in construing the policy [is to] be summarized as follows: this court must resolve uncertainties in favor of the insured and interpret the policy provisions according to the layman's reasonable expectations. [Citations.]" (Russell v Bankers Life Co. (1975) 46 Cal.App.3d 405, 413, 120 Cal.Rptr. 627.)

We further note that the question presented, "[t]he construction of the instant policy[,] is one of law because it is based upon the terms of the insurance contract. Accordingly, we are not bound by the trial court's interpretation of the policy, and it is our duty to make the final determination in accordance with the applicable principles of law. (Parsons v. Bristol Development Co., 62 Cal.2d 861, 865 [44 Cal.Rptr. 767, 402 P.2d 839]; Estate of Platt, 21 Cal.2d 343, 352 .)" (Russell v. Bankers Life Co., supra, 46 Cal.App.3d 405, 413, 120 Cal.Rptr. 627.)

Economy Lumber was insured by INA under a comprehensive general liability insurance policy. The policy provides, in part:

"The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of

"A. bodily injury

"B. property damage

"to which this insurance applies, caused by an occurrence ...." The term "occurrence" is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the Insured."

The term "property damage" is defined as: "(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."

According to respondent, appellant's insurance policy does not apply:

"(m) To loss of use of tangible property which has not been physically injured resulting from ... (2) the failure of the Named Insured's products to meet the level of performance, quality, fitness or durability warranted or represented by the Named Insured;

"(n) To property damage to the Named Insured's products arising out of such products or any part of such products;

"(p) To damages claimed for the withdrawal, repair, replacement or loss of the use of the Named Insured's products ... or of any property of which such products are withdrawn from use because of any known or suspected defect or deficiency therein; and

"(y) To property damage ... (2) except with respect to liability under a written sidetrack agreement or the use of elevators to ... (d) that particular part of any property, not on the premises owned by or rented to the Insured, ... (iii) the restoration, repair or replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the Insured." The "Occurrence" as an "Accident"

The initial question is whether the application of the defective siding was an "occurrence" accidentally causing property damage to the houses. The trial court determined that there had been no occurrence, because A & P and Economy Lumber continued to use the siding even after the discovery of its defective condition.

The policy defines an "occurrence" as an "accident." The cases on point have interpreted an "accident" to be "an unexpected happening ..., an unforeseen unplanned event ...." (Cowman v. Department of Motor Vehicles (1978) 86 Cal.App.3d 851, 853, 150 Cal.Rptr. 559.) "It ' "includes any event which takes place without the foresight or expectation of the person acted upon or affected by the event." ' [Citations.] 'Accident, as a source and cause of damage to property, within the terms of an accident policy, is an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause.' [Citation.]" (Geddes & Smith Inc v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 563-564, 334 P.2d 881 (Geddes I ); italics in original.)

In Hauenstein v. Saint Paul-Mercury Indem. Co. (1954) 242 Minn. 354, 65 N.W.2d 122, 124, plaintiffs, who distributed plaster, were insured against "loss by reason of the liability imposed by law or contract upon the Insured for damages because of injury to or destruction of property, including the loss of use thereof, caused by accident." Plaintiffs sold plaster to a contractor who used it on a construction job. After its application, the plaster shrank, cracked, and had to be removed and replaced.

On appeal the court stated: "There is no doubt that the property damage to the building caused by the application of the defective plaster was 'caused by accident' within the meaning of the insurance contract, since the damage was a completely unexpected and unintended result." (Id., 65 N.W.2d at p. 126.)

In Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 91 Cal.Rptr. 153, 476 P.2d 825, the insured had sold a defective saw to a lumber business. The saw cut the lumber more narrowly than it should have. This fact, however, was not discovered until after a substantial amount of the lumber had been processed. Thereafter, the lumber was cut overwide to compensate for the defect in the saw.

The court, relying on Geddes I, supra, found that there had been an accident, inasmuch as the undercutting had been unforeseeable. Once the lumber company discovered the defect and deliberately began to cut the lumber more widely, however, it could no longer be said that an accident had occurred. "The deliberate nature of Kaufman's act (i.e., he contemplated the result of his act before he cut the boards) prevented the overcutting from constituting an accident." (Hogan v. Midland National Ins. Co., supra, 3 Cal.3d 553, 560, 91 Cal.Rptr. 153, 476 P.2d 825.) Recovery was allowed only for losses incurred before discovery of the defect.

In the present case, recovery for damage occurring after the discovery of the defects is precluded, because after that point it cannot be said that the damage caused by the...