Sturla, Inc. v. Fireman's Fund Ins. Co.

• Citation: 67 Haw. 203,684 P.2d 960
• Decision Date: 15 June 1984
• Docket Number: No. 9033,9033
• Parties: STURLA, INC., fka Barwick Pacific Carpet Company, dba Medallion Carpets, Plaintiff-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, a foreign corporation, doing business in Hawaii, Defendant-Appellee.
• Court: Supreme Court of Hawai'i

Page 960

684 P.2d 960

67 Haw. 203

STURLA, INC., fka Barwick Pacific Carpet Company, dba

Medallion Carpets, Plaintiff-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, a foreign corporation, doing business in Hawaii, Defendant-Appellee.

No. 9033.

Supreme Court of Hawai'i.

June 15, 1984.

Syllabus by the Court

1. The "business risk" exclusions of a general liability policy are meant to negate coverage for the contractual liability of an insured as a source of goods or services to make good on a product or work which is defective or otherwise unsuitable because it is lacking in some capacity.

2. Because insurance policies are contracts of adhesion and are premised on standard forms prepared by the insurer's attorneys, this court has long subscribed to the principle that they are to be construed liberally in favor of the insured and the ambiguities resolved against the insurer.

3. The rule is that insurance policies are to be construed in accord with the reasonable expectations of a layperson. But the rule is not for application whenever insurer and insured simply disagree over the interpretation of the terms of a policy and there is an assertion of ambiguity.

4. Ambiguity is found to exist only when the contract taken as a whole is reasonably subject to differing interpretation.

5. What the courts are committed to enforce are the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts.

6. Among the risks insured by a standard form policy of general liability insurance are injury to people and damage to property caused by faulty products or workmanship.

7. The expansion of coverage on the basis of a proviso in an exclusion clause would run directly counter to the basic principle that such clauses subtract from coverage rather than grant it.

Michael L. Freed and Leslie A. Hayashi, Honolulu (Hamilton, Gibson, Nickelsen, Rush & Moore, Honolulu, of counsel), for plaintiff-appellant.

Roy F. Hughes, Honolulu (Libkuman, Ventura, Ayabe & Hughes, Honolulu, of counsel), for defendant-appellee.

Before LUM, C.J., NAKAMURA and PADGETT, JJ., and BURNS, Intermediate Appellate Court Chief Judge, in place of HAYASHI, J., Recused, and HEEN, Intermediate Appellate Court Associate Judge, in place of WAKATSUKI, J., disqualified.

NAKAMURA, Justice.

The question presented for our resolution by this appeal from the Circuit Court of the First Circuit is whether a comprehensive general liability policy issued to a carpet manufacturer by Fireman's Fund Insurance Company covered damages resulting from the rapid fading of carpet after its delivery and installation in a condominium-hotel project on Kauai. The seller of the allegedly defective product, Sturla, Inc., who was an "insured" by virtue of a Vendor's Endorsement to the policy, argues the insurer was obligated to defend the suits brought by the dissatisfied developer of the project and owners of condominium units therein and to pay all sums assessed as damages. But like the circuit court, we are convinced the policy did not provide the protection sought by the insured and the insurer had no duty to undertake the defense of the suits or to indemnify the insured in this situation.

I.

Sturla, a distributor of carpet products manufactured by E.T. Barwick Industries, Inc., ¹ furnished the carpeting for Phase III of the Kiahuna Beach and Tennis Resort development and the replacement carpeting for Phase II of the development. Shortly after the carpet had been delivered and installed, the developer and owners of condominium units observed uneven and excessive fading in the floor covering. Claiming it was not of merchantable quality and unfit for its intended purpose, they demanded of the seller that the cause of the apparent imperfection be investigated and that the faded carpet be replaced. Attributing the unanticipated discoloration to atmospheric conditions prevailing in the Poipu area, Sturla denied the product it sold was defective and took no steps to supply new carpeting.

Stymied by the disavowal of liability, the developer and condominium owners brought legal actions in the Circuit Court of the Fifth Circuit to enforce their claims against Sturla as well as the manufacturer and the installer, seeking the cost of replacing the purportedly defective product, "consequential damages, and interest on the damages." ² When the defense of the suits was tendered to Fireman's Fund, it acknowledged Sturla was insured pursuant to a Vendor's Endorsement to the policy written for Barwick, but denied the policy offered protection for either manufacturer or vendor in this instance. The insurer stood on several "exclusions" from coverage and the definition of "property damage" set forth in the policy in turning down the request for it to assume the defense of the damage suits. ³

Sturla countered with the instant suit, seeking "a declaration of coverage ... and a duty to defend" as well as "relief derivative thereto" from the Circuit Court of the First Circuit. By agreement of the parties the case was subsequently submitted for decision on the basis of evidence obtained during the discovery phases of the case at hand and of the suits brought against Sturla in the Circuit Court of the Fifth Circuit and on the legal memoranda prepared by counsel. The trial court after due consideration of the evidence and written argument made findings and reached conclusions favoring the position of the insurer. ⁴ Sturla's timely appeal to this court followed the entry of judgment for Fireman's Fund.

II.

A.

Our consideration of the issue before us begins as it must with the relevant provisions of the insurance policy. And since allegations of damage to property constitute the gravamen of the suits for which the defense was tendered and declined, our analysis starts with an examination of the policy provisions related thereto. We note at the outset that the insuring clause states Fireman's Fund

will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

....

B. property damage

to which this insurance applies, caused by an occurrence, and ... [Fireman's Fund] shall have the right and duty to defend any suit against the insured seeking damages on account of such ... property damage, even if any of the allegations of the suit are groundless, false or fraudulent

....

"Property damage" to which the insurance applies is defined by the policy as:

(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period ....

Read in conjunction with the definition above, the insuring clause gives an appearance of protecting the insured against property damage claims in the broadest terms. The coverage, however, is for "property damage to which this insurance applies," and it does not apply:

(a) to liability assumed by the insured under any contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner;

....

(m) to loss of use of tangible property which has not been physically injured or destroyed resulting from

(1) a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, or

(2) the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured;

but this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the named insured's products or work performed by or on behalf of the named insured after such products or work have been put to use by any person or organization other than an insured;

(n) to property damage to the named insured's products arising out of such products or any part of such products;

(o) to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith;

(p) to damages claimed for the withdrawal, inspection, repair, replacement, or loss of use of the named insured's products or work completed by or for the named insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

Exclusion clauses like the above serve "to restrict and shape the coverage otherwise afforded." Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 237, 405 A.2d 788, 790 (1979). In the situation confronting us, we think Exclusions (m), (n), (o), and (p) ⁵ were clearly meant to negate coverage for the contractual liability of the insured "as a source of goods or services ... to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity." Henderson, Insurance Protection for Products Liability and Completed Operations--What Every Lawyer Should Know, 50 Neb.L.Rev. 415, 441 (1971).

But Exclusion (a), which specifies that the insurance does not apply "to liability assumed by an insured under any contract or agreement except an incidental contract," further provides that it "does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner." Standing alone, the proviso appears repugnant to the other provisions excluding the...