Liberty Building Co. v. Royal Indemnity Co.

• Citation: 346 P.2d 444
• Court: California Court of Appeals
• Decision Date: 30 November 1959
• Parties: LIBERTY BUILDING CO., a corporation, Plaintiff and Appellant, v. ROYAL INDEMNITY COMPANY, a corporation, Defendant and Respondent. Civ. 23707.

Page 444

346 P.2d 444

LIBERTY BUILDING CO., a corporation, Plaintiff and Appellant, v. ROYAL INDEMNITY COMPANY, a corporation, Defendant and Respondent.

Civ. 23707.

District Court of Appeal, Second District, Division 2, California.

Nov. 30, 1959.

Rehearing Granted Dec. 30, 1959.

For Opinion on Rehearing see 2 Cal.Rptr. 329.

Samuel A. Miller and David M. Turner, Los Angeles, for appellant.

Dryden, Harrington, Horgan & Swartz, Vernon G. Foster, Los Angeles, for respondent.

FOX, Presiding Justice.

Plaintiff seeks to recover on a products liability insurance policy. A general demurrer was sustained with leave to amend, to each cause of action in plaintiff's amended complaint but plaintiff declined to further amend. As a consequence, a judgment of dismissal was duly entered from which plaintiff appeals.

Plaintiff is a subdivider and building contractor. At all times relevant to this action, plaintiff was covered by a products liability insurance policy issued by defendant Royal Indemity Company. Plaintiff constructed a large number of dwelling houses upon its own property, most of which were sold prior to completion. After the buyers took possession, many of the houses developed defects in the outside stucco walls. The buyers then brought suit (or made claims) against plaintiff alleging breach of warranty, and plaintiff gave notice to defendant to defend the suits. Defendant refused to defend and plaintiff settled the claims out of court. Plaintiff thereupon brought this action to recover the costs of defense and compromise and also to recover the amounts paid in settlement of the buyers' claims.

Plaintiff's amended complaint is framed in two separate causes of action. After pleading the policy of insurance, the first cause of action is in substance as follows:

That the plaintiff constructed and sold the subject dwellings and that after completion, the outer stucco covering became cracked, discolored and flaked away; that the property owners brought suit or lodged claims against plaintiff; that defendant refused to defend the suits; that plaintiff settled the claims upon advice of counsel that the claimants had substantial evidence that the defects in the stucco were due to an improper mixture which allowed water absorption into the stucco; that plaintiff was therefore justified in settling; and, that defendant refused to pay the amounts incurred in settlement and defense of the claims.

The crux of the purchasers' claims against plaintiff is found in paragraph XII of its first cause of action which reads, in part, as follows: 'That the third cause of action alleged in said Complaint so filed and maintained against plaintiff herein was founded upon the grounds: that plaintiff had, as a matter of law, impliedly warranted to said 'Suing Purchasers', and each of them, that, among other things, upon the completion of the Dwelling Unit purchased by each said 'Suing Purchaser', the exterior stucco thereof would and did conform, as to mix and application, to the standards and requirements provided by law, and that such Dwelling Unit had been and would be constructed in conformity with good building practices as practiced within the County of Los Angeles and were of good quality; and that plaintiff had breached its said implied warranties.'

The second cause of action alleges all the material parts of the first cause but added that the damage to the stucco was caused by a high concentration of salt in the soil which was dissolved by water and absorbed into the stucco by capillary action.

The pertinent provisions of the insurance policy are as follows: Defendant is obligated under Coverage C to pay '* * * on behalf of the insured all sums which the insured 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.' The policy includes liability arising out of the 'products hazard' which is defined under Conditions 3(f), (1) as 'the handling or use of, the existence of any condition in or warranty of goods or products manufactured, sold, handled or distributed by the named insured * * * if the accident occurs after the insured has relinquished possession thereof to others and away from premises owned, rented or controlled by the insured * * *' However, the above coverage is limited by the exclusion. Exclusion (f) reads: 'This policy does not apply: (f) under coverage C, to injury to or destruction of * * * (3) any goods or products manufactured, sold, handled or distributed or premises alienated by the named insured, or work completed by or for the named insured, out of which the accident arises.' (Emphasis added.) The insurer is required under paragraph II(a) to 'defend any suit against the insured alleging such injury * * * or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; * * *' (Emphasis added.)

Plaintiff urges on appeal (1) that the complaints filed in the prior actions stated a claim of liability covered by the policy under Coverage C and that therefore defendant was bound to defend the suits, and (2) that the damage to the stucco was not excluded under Exclusion (f) since the cause of the damage was not a defect in the stucco, but rather was a defect in the soil upon which the buildings were built.

We have concluded that defendant's general demurrer was properly sustained for the basic reason that the damage to the stucco was excluded from the coverage of the policy. In arriving at this conclusion, we have examined the complaint both as to its claim for damages for refusal to defendant the prior suits and as to its claim that defendant is liable under the policy for the amounts paid in settlement.

It is true that defendant was bound to defend actions brought against plaintiff alleging...