Hogan v. Midland National Ins. Co.

• Decision Date: 25 November 1970
• Docket Number: S.F. 22729
• Citation: 476 P.2d 825,91 Cal.Rptr. 153,3 Cal.3d 553
• Court: California Supreme Court
• Parties: , 476 P.2d 825 Robert V. HOGAN, Plaintiff and Respondent, v. MIDLAND NATIONAL INSURANCE COMPANY, Defendant and Appellant.

Page 153

91 Cal.Rptr. 153

3 Cal.3d 553, 476 P.2d 825

Robert V. HOGAN, Plaintiff and Respondent, v. MIDLAND NATIONAL INSURANCE COMPANY, Defendant and Appellant.

S.F. 22729.

Supreme Court of California In Bank.

Nov. 25, 1970.

Rehearing Denied Dec. 23, 1970.

Carroll, Davis, Burdick & McDonough and J. D. Burdick, San Francisco, for defendant and appellant.

Mayall, Hurley, Knutsen & Smith and Edwin Mayall, Stockton, for plaintiff and respondent.

MOSK, Justice.

Defendant Midland National Insurance Company issued a policy of insurance to Diehl Machines, Inc., a manufacturer of wood processing machinery, insuring it against liability for property damage caused by accident. William F. Kaufman and Evelyn Kaufman ¹ purchased a saw manufactured by Diehl for use in their lumber business and they suffered substantial monetary loss because of defects in the saw. They brought an action against Diehl, and Midland refused to defend the suit on the ground that the policy did not cover the claims asserted by Kaufman. Diehl defended the action at its own expense and judgment was rendered against it for $30,195.61.

Thereafter, Diehl assigned its cause of action against Midland to Robert V. Hogan, plaintiff here. He sued Midland for the damages which Diehl was required to pay, as well as for attorneys' fees and costs expended by Diehl in the prior action. The trial court rendered judgment in plaintiff's favor for $57,064.91. On this appeal by Midland the primary questions are whether particular items of damage suffered by Kaufman and awarded in the judgment against Diehl are within the coverage of the policy issued by Midland and whether it is liable for some or all of Diehl's attorneys' fees and costs of defense.

In the judgment against Diehl damages were awarded as follows: (1) $8,038.49 for lumber which the saw cut too narrow; (2) $7,850 for the cost of lumber deliberately cut wider than necessary in order to prevent rejection for undercutting and additional freight charges incident to such overcutting; (3) $6,793.88 for the cost of paying wages and other expenses for periods during which the saw failed to operate altogether; (4) $5,449.49 for the cost of leasing and cancelling the lease on a machine known as a finger jointer-scarfer, which was to be used in conjunction with the saw. ²

I

Midland contends that none of the foregoing items of damage was recoverable because they were not caused by an accident within the meaning of the policy. It asserts also that the last three items listed above are not within the policy coverage because they did not involve damage to tangible property, and, further, that these damages are excluded from coverage because they are attributable to the loss of use of the saw, an element specifically excluded by the policy. Finally, Midland insists it had no duty to defend the Kaufman action and that, therefore, it should not be liable for Diehl's costs and attorneys' fees.

We reach the following conclusions: The damage to the boards which were undercut resulted from an accident within the meaning of the policy, but the lumber deliberately cut too wide was not damaged as the result of an accident. The overhead costs for the period during which the saw was not operating are not recoverable because of the specific policy exclusion of coverage for loss of use. The cost of renting the jointer-scarfer does not represent damage to tangible property and is not within the policy's coverage. Finally, Midland was under a duty to defend Diehl in the Kaufman action and is liable for all costs and attorneys' fees expended by Diehl for this purpose.

The policy provides that Midland must pay all sums which Diehl 'shall become legally obligated to pay as damages because of injury to or destruction of property, including the loss of use thereof, Caused by accident and arising out of the hazards hereinafter defined.' (Emphasis added.) An endorsement entitled 'Inefficacy Clause' excludes liability for 'repairing or replacing any defective products * * * manufactured * * * by the Assured or any defective part * * * thereof,' and for the 'loss of use of any such defective product * * * or part * * * thereof.' The policy contains a clause requiring Midland to defend suits brought against Diehl seeking damages within the policy's coverage.

Kaufman purchased the saw to utilize in his cut stock operations in June 1961 and began to use it in September of that year. ³ There were defects in the product from the outset. Various parts of the machine did not function properly and over a period of many months Kaufman attempted, with the assistance of Diehl and the salesman who arranged the purchase of the saw, to make repairs. Some of the defects were in fact remedied while others could not be corrected. Fom the beginning there were problems with the size of the lumber that came through the saw, the widths cut being too narrow. However, these deficiencies were not sufficiently serious to cause customers to reject the lumber until the spring of 1962. On April 24 of that year a customer complained that an order shipped to him the previous month contained lumber which was too narrow. After April 24 other purchasers rejected shipments for the same reason. The lumber rejected for undercutting had been processed prior to April 24. After that date, in order to avoid complaints in the future, Kaufman deliberately cut lumber wider than specified in orders. No rejections resulted from such overcutting.

During the period from September 5, 1961, to April 30, 1962, for a total of 61 working days the Diehl saw failed to function by reason of defects. The cost of operating the business continued during this period since Kaufman was required to pay salaries to employees during the intermittent periods of idleness.

Kaufman rented a finger jointer-scarfer for further processing the lumber sawed by Diehl's machine. He was unable to use the finger-jointer because the Diehl saw did not operate properly.

II

In Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 563--564, 334 P.2d 881, hereinafter called Geddes I, a policy insured against liability for injury to property caused by accident. The insured manufactured aluminum doors which were installed in homes built by a contractor. The doors proved to be defective after installation. We stated, 'No all-inclusive definition of the word 'accident' can be given * * * 'as a source and cause of damage to property, within the terms of an accident policy, (accident) is an unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown cause.' The door failures were unexpected, undesigned and unforeseen. They were not the result of normal deterioration * * * they occurred suddenly * * * each door, when it failed, failed suddenly.'

Midland insists that the damage to the boards resulting from cutting the widths too norrow was not the result of an accident within this definition of the term. It is asserted that all of the damages assessed against Diehl were not only foreseeable and expectable but were in fact foreseen since Kaufman knew from the outset that the saw was defective and would not cut lumber to the precise size desired. There was testimony by Kaufman conceding that he had difficulty with the widths cut by the saw from the beginning of its operation.

However, the evidence establishes that with Diehl's help Kaufman attempted to remedy the defects in the saw, that it was working satisfactorily insofar as the widths were concerned some of the time, and that not until April 1962, more than seven months after the initial use, did Kaufman become aware the lumber cut by the saw was sufficiently defective to cause a customer to reject an order. Immediately thereafter, he commenced to cut all lumber overwide to avoid customer complaint. It thus appears that the narrow boards had been processed by the time Kaufman was aware that the defects in the saw were sufficiently serious to affect his clientele. Under the circumstances, there is no merit in Midland's assertion that damages resulting from undercutting were foreseeable and expectable under the Geddes I rule. ⁴

The circumstances, and the legal consequences, differ as to the boards cut too wide. By design Kaufman processed the boards wider than required for his orders in order to avoid rejection for undercutting. The damages awarded by the trial court were for the additional cost of the lumber necessary for the larger widths and the added freight cost. Whatever the motivation, there is no question that these boards were Deliberately cut wider than necessary; the conduct being calculated and deliberate, no Accident occurred within the Geddes I definition.

Plaintiff claims that in the Kaufman action the trial court by inference found that the damages due to overcutting were caused by accident because it found that Kaufman had not assumed the risk of using the saw with knowledge of its defects. It was established in the prior action that, due to Diehl's improper conduct in delivering a defective saw, Kaufman deliberately cut boards too wide in order to avoid damages from undercutting. One does not assume a risk of harm unless he voluntarily accepts the risk and acceptance is not voluntary if the defendant's tortious conduct reasonably requires him to undertake the risk in order to avert harm to himself. (Rest.2d Torts, § 496E.) 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, yet the trial court could find Kaufman did not assume the risk of overcutting because his conduct was reasonably induced by Diehl's negligence. Thus, there is no antagonism between our conclusion that the overcutting was not caused by an accident and the trial court's finding that Kaufman did not assume the risk of using a defective saw.

Plaintiff next contends that the manufacture and...