Schaefer/Karpf Productions v. CNA Ins. Co.

• Decision Date: 18 June 1998
• Docket Number: No. B109989,B109989
• Citation: 64 Cal.App.4th 1306,76 Cal.Rptr.2d 42
• Parties: , 98 Cal. Daily Op. Serv. 4716, 98 Daily Journal D.A.R. 6675 SCHAEFER/KARPF PRODUCTIONS, Plaintiff and Appellant, v. CNA INSURANCE COMPANIES, et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

Page 42

76 Cal.Rptr.2d 42

64 Cal.App.4th 1306, 98 Cal. Daily Op. Serv. 4716,

98 Daily Journal D.A.R. 6675

SCHAEFER/KARPF PRODUCTIONS, Plaintiff and Appellant, v. CNA INSURANCE COMPANIES, et al., Defendants and Respondents.

No. B109989.

Court of Appeal, Second District, Division 7, California.

June 18, 1998.

Certified for Partial Publication. ^*

Rehearing Denied July 14, 1998.

Review Denied Sept. 16, 1998.

[64 Cal.App.4th 1309] Jason A. Forge, Los Angeles, for Plaintiff and Appellant.

Hawkins, Schnabel, Lindahl & Beck, Timothy A. Gonzalez and Brian J. Gladstone, Los Angeles, for Defendants and Respondents.

JOHNSON, Associate Justice.

Plaintiff Schaefer/Karpf Productions (Schaefer) appeals from the judgment in favor of defendant CNA Insurance Companies (CNA) determining Schaefer did not suffer "property damage" within the terms of the comprehensive general liability policies CNA issued to its insureds. We affirm.

FACTS AND PROCEEDINGS BELOW

Schaefer produced a television special for children entitled "The Best Christmas Pageant Ever." After the show was aired on network television it was released on videotape for sales to schools, religious and civic organizations and the general public.

In 1992, Scholastic, Inc., a leading marketer of children's educational materials, ordered 32,500 videotapes of the "The Best Christmas Pageant Ever." Schaefer contracted with The Video Company (TVC) to duplicate the show onto videotapes. TVC duplicated the show on tapes it purchased from the Matrix Video Duplication Corporation (Matrix). Some of the tapes Matrix sold to TVC were used tapes returned to Matrix by Cinderella Distributors, Inc., a distributor of pornographic films. TVC proceeded to produce the 32,500 videotapes of "The Best Christmas Pageant Ever" on the stock provided by Matrix and shipped the tapes to Scholastic. Scholastic in turn sold approximately 25,000 tapes of the show before Christmas 1992.

A few days before Christmas 1992, in Salt Lake City, Ms. Natay's fourth graders were enjoying a Christmas party in their classroom. As part of the festivities, Ms. Natay showed the children a videotape of "The Best Christmas Pageant Ever" which she had obtained from Scholastic. Because she was trying to serve refreshments to 38 nine-year olds and things were "chaotic," Ms. Natay did not stop and rewind the tape when the program ended. "All of a sudden the class got quiet" and "the kids were nudging each other." When she looked up Ms. Natay saw to her shock her students were watching a graphically explicit scene in which a couple was engaged in sexual intercourse. Students and teachers had similar experiences at the Moline Christian School in Moline, Michigan, the second grade at Rocky Branch School in Walland, Tennessee, and the Manchester Elementary School in Perry, Ohio, to name a few. In Philadelphia, Mississippi, Ms. Cheeks left to run an errand while her young children remained at home watching "The Best Christmas Pageant Ever." When she returned she was "horrified" to find her children were watching not a Christmas movie but "a hard-core pornography scene" in which a couple was engaged in oral sex. The sexually explicit material at the end of the videotapes was seen by other children across America that Christmas, giving a new meaning to the term "kiddie-porn."

While the students who watched the videotape may have been confused by this "Best Christmas Pageant Ever," parents, teachers and principals were not. Nor were they amused. Scholastic recalled all the videotapes of the show and refused to pay Schaefer.

Schaefer brought an action against TVC and Matrix for breach of contract, negligence and breach of warranty seeking damages for lost profits and loss of goodwill (the underlying action). Both companies were insured by CNA under standard comprehensive general liability (CGL) policies. Both companies tendered defense of Schaefer's action to CNA. CNA disclaimed any obligation to defend or indemnify the companies on the ground Schaefer's claims were not covered by the policies.

TVC did not defend the underlying action. Matrix retained counsel and provided its own defense.

Prior to trial, Schaefer and Matrix entered into an agreement which provided in pertinent part: (1) Matrix would not contest liability but the trier of fact would make its own determination as to liability and damages based upon the evidence introduced at trial; (2) Schaefer would not execute on the assets of Matrix to satisfy any judgment against it resulting from the trial; (3) Matrix assigned to Schaefer its rights, claims and entitlements to indemnity from CNA relating to Schaefer's claims and Matrix's claims for bad faith and all other tort and contract claims against CNA.

The underlying action was tried to the court which awarded Schaefer a judgment in the sum of $1 million against Matrix and TVC "as the measure of damages resulting from physical injury to or the loss of use of tangible property, the videotapes of 'The Best Christmas Pageant Ever.' "

Thereafter, Schaefer commenced the present action against CNA to enforce its judgment against Matrix and TVC under Insurance Code section 11580 and to enforce Matrix's claims for fraud and breach of contract.

Schaefer and CNA filed cross-motions for summary judgment. The trial court granted CNA's motion on the grounds CNA was not a party to the underlying action therefore it was not bound by the trial court's finding in that action Schaefer suffered "property damage" and, further, any damage to the videotapes of "The Best Christmas Pageant Ever" resulting from the inclusion of the pornographic material was not "property damage" as the term is defined in the CNA policies. A judgment in favor of CNA was entered in due course and Schaefer filed a timely appeal.

The two principal issues on appeal are (1) whether the incorporation of a defective or harmful product into the product of another causes "physical injury" within the meaning of property damage coverage in the standard comprehensive general liability policy ¹ and (2) if so, whether Schaefer suffered physical injury to "tangible property" as the result of the linkage of a pornographic movie to its production "The Best Christmas Pageant Ever." We reach those issues after resolving some preliminary matters.

DISCUSSION

I. IN THIS CASE, THE DUTY TO DEFEND AND THE DUTY TO INDEMNIFY ARE THE SAME.

The ultimate question in this case is whether Schaefer's injury was covered under the policies CNA issued to Matrix and TVC. If it was, then Schaefer can recover from CNA on its judgment against Matrix and TVC as well as on Matrix's assigned claim against CNA for breach of the duty to defend. If Schaefer's injury was not covered under the policies it can recover nothing from CNA. This is not a case in which Schaefer could lose on the issue of CNA's duty to indemnify Schaefer for its losses but win on the issue of CNA's broader duty to defend Matrix. Although as a general rule CNA owed a duty to defend Matrix against claims which contained even a potential for indemnity (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153), this duty does not apply to claims where the only potential for indemnity turns on a question of policy interpretation. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 25-26, 44 Cal.Rptr.2d 370, 900 P.2d 619; A-Mark Financial Corp. v. CIGNA Property & Casualty Companies (1995) 34 Cal.App.4th 1179, 1191-1192, 40 Cal.Rptr.2d 808.) In the present case there has never been any issue as to the basis for Schaefer's claim and CNA's letters denying coverage show it was fully aware of the material facts. CNA's position is and always has been Schaefer's loss did not constitute "property damage" within the terms of the polices and, even if it did, the loss was excluded under other policy provisions.

II. CNA WAS NOT ESTOPPED FROM LITIGATING THE COVERAGE ISSUE.

Schaefer initially argues CNA was estopped from denying coverage because the coverage issue was adjudicated against it in the underlying liability action between Schaefer, TVC and Matrix.

Under the policies issued to TVC and Matrix, CNA promised to "pay those sums that the insured becomes legally obligated to pay as damages because of ... 'property damage' to which this insurance applies." "Property damage" is defined as: "Physical injury to tangible property, including all resulting loss of use of that property; or loss of use of tangible property that is not physically injured." The judgment in the underlying action, drafted by Schaefer, contained a finding Schaefer's loss "result[ed] from physical injury to or the loss of use of tangible property, the videotapes of 'The Best Christmas Pageant Ever.' " According to Schaefer the effect of the judgment in the underlying action is the same as if the court had found "Schaefer's loss resulted from 'property damage' as defined in Section V, paragraph 12 of CNA's Commercial General Liability Coverage Form CG 1185." We reject this argument.

One of the prerequisites for collateral estoppel is the " 'identity of the issue presented in the second action with one necessarily decided [actually litigated] in the first.' " (Ceresino v. Fire Ins. Exchange (1989) 215 Cal.App.3d 814, 820, 264 Cal.Rptr. 30.) This requirement is not met here.

It is well-settled an insurer who is on notice of an action against its insured and refuses to defend on the ground the alleged claim is not within the policy coverage is bound by a judgment in the action, absent fraud or collusion, "as to all material findings of fact essential to the judgment of liability [and damages] of the insured. " (Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 561, 334 P.2d 881 (Geddes I ), (italics added); see also Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 884-886, 151 Cal.Rptr. 285, 587 P.2d 1098.) The insurer is not bound, however, as to issues "not...