Maryland Casualty Co. v. Reeder

Decision Date27 June 1990
Docket NumberNo. D008755,D008755
Citation221 Cal.App.3d 961,270 Cal.Rptr. 719
CourtCalifornia Court of Appeals Court of Appeals
PartiesMARYLAND CASUALTY COMPANY, Plaintiff and Respondent, v. George Wayne REEDER et al., Defendants and Appellants.

Kenneth W. Kind, Joel M. Pressman, Brian P. Ballo, Kimberly Lewis, Kolodny & Pressman, Neil, Dymott, Perkins, Brown & Frank, James A. McFall, Robert D. Shoecraft, Joseph D. Oliva, Duckor & Spradling, Alan R. Johnston, Ann M. McMenomy and Duke, Gerstel, Shearer & Bregante, for defendants and appellants.

William R. Friedrich, Craig S. Meredith, Farella, Braun & Martel, James K. Eckmann, Evan C. McKenzie and Aguirre & Eckmann as amici curiae on behalf of defendants and appellants.

Robert P. Coffin, David H. Kidd and Ault, Deuprey, Jones, Danielsen & Gorman, for plaintiff and respondent.

Susan M. Goldbeck as amicus curiae on behalf of plaintiff and respondent.

BENKE, Acting Presiding Justice.

The purchasers of condominium units, their homeowners association, an individual developer and the entities which participated in the construction and sale of the condominium project appeal from a summary judgment entered in favor of a liability insurer. We reverse because we find the exclusions the insurance company relies upon do not apply as a matter of law to the claims made against the insureds.


Although the record in this case is voluminous, it does not definitively describe the relationship between the various entities who developed the condominium project. Generally the parties agree defendant Samuel Pearlman purchased three adjoining parcels of vacant land in Carlsbad in 1972. At the time Pearlman bought the parcels they had been graded. Thereafter Pearlman formed defendant Roundtree, Ltd., a partnership. The partnership in turn formed a joint venture with defendant Twelve Trees Corporation (Twelve Trees). The joint venture was named Roundtree Condominiums, also a defendant. Defendant DMF Construction, Inc. (DMF), was retained as a general contractor to construct condominiums on the three parcels. At various stages between 1980 and 1985, Pearlman, Roundtree, Ltd., Twelve Trees, Roundtree Condominiums and DMF were each named insureds on a series of comprehensive general liability policies issued by plaintiff Maryland Casualty Company (Maryland). Significantly some of the policies included a broad form property damage endorsement.

After the condominiums were completed, they were conveyed to various individuals. Between 1984 and 1987 separate purchasers of the condominiums and the homeowners association filed three complaints against Pearlman, Roundtree, Ltd., Roundtree Condominiums, Twelve Trees and DMF. The complaints alleged the plaintiffs' condominium units had been damaged by soil subsidence. The plaintiffs in the first complaint (case No. N26398) alleged their condominium was "suffering from severe cracks in the walls and settling of the slab." The plaintiffs in the second complaint (case No. N34499) alleged their units "have been damaged to the extent that they are rendered valueless." In the third complaint (case No. N38256) the homeowners association alleged the soil subsidence had caused "cracking and separation in the concrete floor slabs, foundations, retaining walls, interior and exterior walls and ceilings, and exterior concrete patio areas and walkways at affected Condominium Units and Common Areas within the Project." The homeowners association also alleged the roofing system had failed "causing rain water and moisture to penetrate the roofs, causing damage to the building structures and the contents of the affected Condominium Unit living spaces."

On June 23, 1987, Maryland filed three complaints for declaratory relief (case Nos. N38217, N38247, N38256). Maryland's complaints asked for declaratory relief against the plaintiffs in case Nos. N26398, N34499, N38256 and each of Maryland's insureds named as defendants in those cases. Maryland alleged it had no duty to either indemnify the plaintiffs in the underlying cases or defend its insureds.

The declaratory relief actions were consolidated and Maryland moved for summary judgment on the grounds the policies it issued relieved it from liability for the claims made against the contractor and the condominium developers. In the trial court Maryland argued the damage suffered by the plaintiffs in the underlying cases was not "property damage" within the meaning of its policies. Maryland further argued that even if property damage were involved, coverage was barred by the terms of four exclusions in its policies. Those exclusions eliminate coverage for property damage arising out of work performed by an insured, the products of an insured, premises alienated by an insured and participation in a joint venture which was not itself named as an insured under the policy.

The insureds also moved for summary judgment. The insureds argued the broad form endorsement covered the claims made against them as a matter of law.

Relying on what it viewed as the persuasive reasoning set forth in Knutson Const. v. St. Paul Fire & Marine Ins. (Minn.1986) 396 N.W.2d 229 (Knutson ), the trial court found the work performed exclusion applicable and granted Maryland's motion. Following entry of judgment in Maryland's favor, the named insureds, the individual condominium owners and the homeowners association filed timely notices of appeal.


Because we must affirm the trial court's ruling if there is any basis in the record for doing so (see Snider v. Snider (1962) 200 Cal.App.2d 741, 756, 19 Cal.Rptr. 709; 9 Witkin, Cal.Procedure, Appeal § 261, pp. 267-268), on appeal we must determine whether any of the grounds Maryland has urged either here or in the trial court entitled it to a summary judgment. We find no such grounds. The face of the underlying complaints discloses property damage within the meaning of Maryland's policy. Moreover the record here does not support application of any of the exclusions Maryland has asserted: the insurance industry's own interpretation of the broad form endorsement prevents application of the "work performed" exclusion in this case; similar industry interpretation of the "products" exclusion prevents its application as a matter of law; even under a broad interpretation the premises alienated exclusion only applies to one of the insureds, and, in light of later changes in the exclusion we are unwilling to accept such a broad interpretation; finally, the joint venture exclusion is unavailing because the Roundtree Condominiums joint venture may in fact have been a named insured under policies which include the broad form endorsement.

I Comprehensive Liability Policies

Generally liability policies, such as the ones in dispute here, are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. (See Rafeiro v. American Employers' Ins. Co. (1970) 5 Cal.App.3d 799, 808-809, 85 Cal.Rptr. 701.) The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. (See Volf v. Ocean Accident & Guar. Corp. (1958) 50 Cal.2d 373, 376, 325 P.2d 987 (Volf ); Western Employers Ins. Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027, 1031-1032, 194 Cal.Rptr. 688; Macaulay, Justice Traynor and the Law of Contracts (1961) 13 Stan.L.Rev. 812, 825-826.) Rather liability coverage comes into play when the insured's defective materials or work cause injury to property other than the insured's own work or products. As one commentator explained: "This distinction is significant. Replacement and repair costs are to some degree within the control of the insured. They can be minimized by careful purchasing, inspection of material, quality control and hiring policies. If replacement and repair costs were covered, the incentive to exercise care or to make repairs at the least possible cost would be lessened since the insurance company would be footing the bill for all scrap. Replacement and repair losses tend to be more frequent than losses through injury to other property, but replacement and repair losses are limited in amount since the greatest loss cannot exceed the cost of total replacement. If the insured will stand these losses, insurance can be provided more cheaply since the company will be freed from administering many small claims for repairs, and it can set a rate for the more unusual risk of injury to property other than the contractor's work or product. This risk can be the hazardous one since there are no natural limitations on the damage the contractor might do to a homeowner's or a neighbor's property." (Macaulay, supra, 13 Stan.L.Rev. at pp. 825-826.)

In actually articulating the risks which will be covered by a liability policy common practice is "to cover a broad risk at the beginning of the policy but to shift certain risks back to the insurance buyer by means of exclusions stated later." (Macaulay, supra, 13 Stan.L.Rev. at p. 822.) Such is the case here. At the outset Maryland's liability policy provides broad definitions of property damage and personal injury and states in its insuring clause the company will pay sums the insured becomes liable for as a result of property damage or personal injury. The insuring clause is then followed by no less than 17 exclusions which detail the myriad of circumstances in which Maryland will not cover personal injury or property damage claims.

Here, in addition to a basic policy with a broad coverage provision followed by exclusions designed to shift certain risks back to the insured, we have an additional risk altering mechanism. By paying an additional 20 percent of their basic premium some of the insureds in this case purchased an endorsement which narrowed the exclusions set...

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