New Hampshire Ins. Co. v. Vieira, 89-16291

• Decision Date: 08 April 1991
• Docket Number: No. 89-16291,89-16291
• Citation: 930 F.2d 696
• Parties: NEW HAMPSHIRE INSURANCE COMPANY, Plaintiff-Counterdefendant-Appellee. v. Albert VIEIRA, and Vieira Drywall and Taping Company, Inc., Defendants-Counterclaimants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 696

930 F.2d 696

NEW HAMPSHIRE INSURANCE COMPANY, Plaintiff-Counterdefendant-Appellee. v. Albert VIEIRA, and Vieira Drywall and Taping Company, Inc. Defendants-Counterclaimants-Appellants.

No. 89-16291.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 15, 1991.

Decided April 8, 1991.

Stephen J. Kottmeier, Hopkins & Carley, San Jose, Cal., for defendants-counterclaimants-appellants.

Kathleen E. Hegen, Boornazian, Jensen & Garthe, Oakland, Cal., for plaintiff-counterdefendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before FLETCHER, NORRIS and TROTT, Circuit Judges.

TROTT, Circuit Judge:

New Hampshire Insurance Company ("New Hampshire") sought reimbursement from Albert Vieira and Vieira Drywall ("Vieira") for $300,000 it paid in settlement of a claim against Vieira. The district court found that the loss sustained--diminution of value--was not "property damage" covered under the applicable insurance contract, and granted summary judgment for New Hampshire. We affirm.

I

A general contractor hired Vieira to install drywall in the rooms and attics of three low-income housing projects. When the projects were completed, an investigation uncovered Vieira's failure (1) to nail the drywall properly to interior walls, using too few nails which were too small, and (2) to install drywall in the attics to prevent fire from spreading. The project owners sued the general contractor, who cross-claimed against Vieira. New Hampshire agreed to pay the general contractor $300,000 on Vieira's behalf, reserving its right to seek reimbursement.

After settlement, the owners installed a heat detection and monitoring system to reduce the increased fire risk caused by Vieira's defective drywall installation in the apartment interiors. The owners also decided to install additional drywall in the attics, which made it necessary to cut numerous holes in the roofs of the buildings. Despite these repairs, Vieira asserts the value of the finished projects actually diminished by $670,000 because of the increased fire risk and the burden of maintaining the electrical fire monitoring system. Vieira argues that this diminution constitutes property damage covered by his insurance contract with New Hampshire.

II

We review de novo the district court's grant of summary judgment. In re Kirkland, 915 F.2d 1236, 1238 (9th Cir.1990). We must determine, viewing the evidence in the light most favorable to the non-moving party, whether there are any genuine issues of material fact, and whether the district court correctly applied the relevant law. Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 546 (9th Cir.1991).

III

The insurance policy requires New Hampshire to pay for property damage, defined as "physical injury" to "tangible property." Pursuant to a work product exclusion, the policy expressly excludes property damage to the drywall installed by Vieira. The parties agree the damage to the drywall is not covered, but dispute whether the reduced value of the buildings is covered under the policy. New Hampshire argues it is not liable because diminished value is not property damage as defined by the policy.

In a comprehensive and well-reasoned order, the district court agreed with New Hampshire, relying on a recent Minnesota Supreme Court opinion, Federated Mutual Insurance Co. v. Concrete Units, 363 N.W.2d 751 (Minn.1985). We have scrutinized Judge Peckham's reasoning in this regard and find it to be sound. Accordingly, we adopt his analysis, which follows in his words:

DIMINUTION OF VALUE AS PROPERTY DAMAGE

The second and more significant issue concerns whether diminution in value constitutes property damage as defined in the policy under California law. As stated above, the New Hampshire policy states that property damage means:

"(1) physical injury to or destruction of tangible property ..., including the loss of use thereof ..., or (2) loss of use of tangible property which has not been physically injured or destroyed."

In this instance, we must therefore determine if the purported diminution of value in the housing projects due to the defective installation of the drywalling constitutes "physical injury to or destruction of tangible property."

Defendants advance two arguments in support of its contention that diminution in value does constitute property damage as defined in the policy. As stated in its original moving papers, defendants first argue that the courts have found property damage as defined in liability insurance policies to have occurred if a defective component or element causes a diminution in value to the property as a whole. In its supplemental memoranda, defendants make a more refined argument based particularly on Economy Lumber [Company of Oakland, Inc. v. Insurance Company of North America ] 157 Cal.App.3d 644 (1984), that a sub-contractor has caused property damage if its defective workmanship on an element of a project causes the overall project to diminish in value. In light of a recent restriction in the scope of the policy, we reject these arguments especially in a case such as this where Vieira can point to no physical or tangible damage to property other than that it [was] defectively installed.

To support its first argument, defendants cite three cases, St. Paul Fire and Marine Insurance Company v. Sears, Roebuck and Co., 603 F.2d 780 (9th Cir.1979), Eichler Homes v. Underwriters at Lloyd's London, 47 Cal.Rptr. 843 (1965), and Geddes and Smith, Inc. v. St. Paul Mercury Indemnity Company, 51 Cal.2d 558, 334 P.2d 881 (1959), that all trace an identical scenario and rely on the same Minnesota Supreme Court decision, Hauenstein v. St. Paul Mercury Indemnity Co., 242 Minn. 354, 65 N.W.2d 122 (Minn.1954). In each, the faulty installation of doors, roofs, or a heating system by a contractor reduces the value of a home by causing substantial damage. After the contractor was sued, the court determined that such diminution in value constitutes property damage covered by the liability insurance policy issued to the contractor by the insurer. In Eichler Homes, for example, the California Supreme Court determined that the decline in market value resulting from the negligently installed heating system constitutes "damage entirely unrelated to damage resulting from the cost of repairs and replacement of the defective heating system and hence is a loss or claim covered by the [liability] insurance." 47 Cal.Rptr. at 847. Like Justice Traynor's opinion in Geddes, the Eichler court relied on the Minnesota Supreme Court's interpretation of property damage in liability insurance policies in Hauenstein. In Hauenstein, the contractor used defective plaster in homes that later had to be removed. The court reasoned:

No one can reasonably contend that the application of a useless plaster, which has to be removed before the walls can be properly replastered, does not lower the market value of the building. Although the injury to the walls can be rectified by removal of the defective plaster, nevertheless, the presence of defective plaster on the walls and ceilings reduced the value of the building and constituted property damage.

65 N.W.2d at 125.

Despite the initial attractiveness these cases lend to defendants' argument, it fails to take into account that the insurance companies have since modified the definition of property damage to restrict the scope of coverage and that the Minnesota Supreme Court has found these changes legally significant. The current definition of property damage requires "physical injury to or destruction of tangible property ..., or loss of use of tangible property which has not been physically injured or destroyed." [emphasis added]. In contrast to the earlier policies, insurance coverage after 1973 requires that physical or tangible property be affected. Each of the cases referred to by defendant including Hauenstein involves the pre-1966 definition that does not include the above-highlighted language. ¹ Although the courts applying California law have not addressed the significance of the amended language, ² the Minnesota Supreme Court has determined that its prior holding that diminution in value does constitute property damage no longer applies in light of these changes. Federated Mutual Insurance Co. v. Concrete Units, Inc., 363 N.W.2d 751 (Minn.1985).

In Federated, both the general contractor and the owner of the building, an agricultural cooperative constructing a grain elevator, sued a sub-contractor responsible for supplying pre-mixed concrete for losses due to problems experienced with the cement. In contrast to the instant case, the sub-contractor denied any responsibility for the problems. Nonetheless, relying expressly upon the changes in the post-1973 liability insurance policy, the Minnesota Supreme Court held Hauenstein obsolete and concluded that the diminution in value of the grain elevator due to the incorporation of the defective concrete did not constitute property damage. It stated:

Although the "diminution in value" of property caused by incorporation of a defective component product may constitute "injury to ... property" under the pre-1966 revision CGL policy ..., we conclude that "diminution in value" is not property damage "when defined as either physical injury to ... tangible property " or as "loss of use of tangible property."

363 N.W.2d at 756. In light of the modification of the policy and the Federated holding, we conclude that defendant's argument that turns upon the above-cited cases must be rejected. ³

In its supplemental papers, defendant turns to more recent authority that interprets the newer policy to support the same conclusion: that diminution in value can constitute property damage as defined in the post-1973 policy. Economy Lumber, 204 Cal.Rptr. 135 (Cal.App. 1 Dist.1984). ⁴ In Economy Lumber the First District Court of Appeal emphasized the...