Tzung v. State Farm Fire and Cas. Co.

• Citation: 873 F.2d 1338
• Decision Date: 09 May 1989
• Docket Number: No. 88-5951,88-5951
• Parties: Fu-Kong TZUNG; Jean Tzung, Plaintiffs-Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, and Does 1 through 100, inclusive, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1338

873 F.2d 1338

Fu-Kong TZUNG; Jean Tzung, Plaintiffs-Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, and Does 1 through

100, inclusive, Defendant-Appellee.

No. 88-5951.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Feb. 7, 1989.

Memorandum April 4, 1989.

Decided May 9, 1989.

John F. McGuire and Neal H. Rockwood, Thorsnes, Bartolotta, McGuire & Padilla, San Diego, Cal., for plaintiffs-appellants.

Peter Abrahams and Kathy L. Eldredge, Horvitz, Levy & Amerian, Encino, Cal., William D. Hughes, Hughes & Campbell, San Diego, Cal., Jon A. Kodani, Los Angeles, Cal., for defendant-appellee.

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

Before CANBY, WIGGINS and O'SCANNLAIN, Circuit Judges.

WIGGINS, Circuit Judge:

Appellants Fu-Kong Tzung and Jean Tzung appeal from a summary judgment granted in favor of Appellee State Farm Fire and Casualty Company ("State Farm"). The Tzungs contend that there are material issues of fact regarding their right to receive benefits under an "all risk" insurance policy and therefore the district court erred in ruling that State Farm was entitled to judgment as a matter of law. We believe otherwise, and therefore we affirm.

I BACKGROUND

In July 1983 the Tzungs purchased a nine-unit apartment building located in San Diego, California. At the same time the Tzungs obtained through State Farm an "Apartment Special Form" insurance policy, which insured the apartment building "against all risks of direct physical loss" that were not otherwise specifically excluded. By April 1984 the Tzungs noticed a series of cracks in the drywall, driveway, and slab of the building, and by October 1985 the damage had become so serious that they filed a claim with State Farm. State Farm denied the claim, citing exclusions in the insurance policy for losses caused by, inter alia, earth movement; surface and sub-surface water; settling, shrinking, cracking, bulging, or expansion of pavements, walls, or floors; inherent defects; and faulty materials or workmanship.

The Tzungs filed suit in California state court, after which State Farm removed the action to federal district court based on the parties' diversity of citizenship. State Farm subsequently filed a motion for summary judgment based on the exclusions contained in the Tzungs' insurance policy. In defense the Tzungs submitted affidavits of two experts who stated that the damage suffered by the Tzungs would not have occurred had the city of San Diego properly tested the soil or had the contractor properly constructed the building to withstand expansion of the soil. One of these experts had admitted earlier, however, that the "triggering" cause of the damage was the expansion of the soil beneath the building due to sub-surface water. Notwithstanding this deposition testimony, the Tzungs argued that the apartment building was damaged on account of third-party negligence, which they asserted was an included peril, and not solely on account of any of the causes otherwise expressly excluded.

After considering the affidavits, deposition testimony, and all the other evidence in the record, the district court concluded that there were no material disputed issues of fact and that State Farm was entitled to judgment as a matter of law. The district court reasoned that each exclusion in the policy provided an independent basis for sustaining its judgment. The district court emphasized that the Tzungs' third-party negligence theory was precluded by the exclusion in the policy for losses caused by faulty workmanship. This timely appeal followed and we have jurisdiction pursuant to 28 U.S.C. Sec. 1291 (1982). ¹

II STANDARD OF REVIEW

A grant of summary judgment is reviewed de novo to determine whether, viewing the evidence in a light most favorable

to the nonmoving party, there are any genuine issues of material fact and whether the district court applied the relevant substantive law. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986).

III DISCUSSION

Neither party disputes that one cause of the Tzungs' loss, the expansion of the soil beneath the apartment building due to subsurface water, is expressly excluded from coverage by provisions stating, "THIS POLICY DOES NOT INSURE UNDER THIS FORM AGAINST: ... C. LOSS CAUSED BY, RESULTING FROM, CONTRIBUTED TO OR AGGRAVATED BY ANY OF THE FOLLOWING: 1. EARTH MOVEMENT, INCLUDING ... EARTH SINKING; ... [AND] 4. WATER BELOW THE SURFACE OF THE GROUND...." The Tzungs contend that they are nevertheless entitled to benefits because third-party negligence in the design and construction of the apartment building is a nonexcluded peril that was "a concurrent proximate cause" of their loss and for which they are entitled to benefits. State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 104-05, 514 P.2d 123, 130, 109 Cal.Rptr. 811, 818 (1973) (emphasis in original). State Farm, on the other hand, argues that third-party negligence is not an included peril and that, even if it were, it was not the "moving" or "efficient" cause of the Tzungs' loss. See Sabella v. Wisler, 59 Cal.2d 21, 31, 377 P.2d 889, 895, 27 Cal.Rptr. 689, 695 (1963). We conclude, as the district court concluded below, that losses caused by third-party negligence in the design and construction of the apartment building are specifically excluded from the Tzungs' policy by provisions for faulty workmanship and inherent defects. We thus do not reach the parties' arguments concerning coverage of third-party negligence in the absence of such exclusions, or concerning which causation analysis--proximate cause or moving and efficient cause--applies to circumstances such as these.

A. Exclusion for Faulty Workmanship

Under Part V of the insurance policy, entitled "EXCLUSIONS" in bold face print, appears a provision that states, "THIS POLICY DOES NOT INSURE UNDER THIS FORM AGAINST: ... D. LOSS CAUSED BY ... 8.... FAULTY MATERIALS OR WORKMANSHIP UNLESS LOSS BY FIRE OR EXPLOSION NOT OTHERWISE EXCLUDED ENSUES...." State Farm argues that this provision prohibits the recovery for losses caused by the poor design and construction of the Tzungs' apartment building. The Tzungs argue in rebuttal that this provision is both ambiguous and inconspicuous, and therefore should be construed according to their reasonable expectations. The Tzungs' argument evolves from the fundamental principle in insurance law that an exclusion clause "is subjected to the closest possible scrutiny," and any doubt about its validity is to be resolved "in favor of the insured." Ponder v. Blue Cross of S. Cal., 145 Cal.App.3d 709, 718, 193 Cal.Rptr. 632, 636 (1983).

1. Is the Workmanship Exclusion Ambiguous?

An insurance contract is ambiguous if the court finds that the language is susceptible to different interpretations. See State Farm Mut. Auto Ins. Co. v. Elkins, 52 Cal.App.3d 534, 538, 125 Cal.Rptr. 139, 141 (1975). But the court must construe the clause with regard to the contract as a whole, see Holz Rubber Co. v. American Star Ins. Co., 14 Cal.3d 45, 56, 533 P.2d 1055, 1061, 120 Cal.Rptr. 415, 421 (1975), and its meaning is to be derived from the circumstances of the particular case and not in the abstract, see Nabisco, Inc. v. Transport Indem. Co., 143 Cal.App.3d 831, 835, 192 Cal.Rptr. 207, 209 (1983). "Ambiguity cannot be based on a strained instead of reasonable interpretation of a policy's terms." Highlands Ins. Co. v. Universal Underwriters Ins. Co., 92 Cal.App.3d 171, 175, 154 Cal.Rptr. 683, 685 (1979) (citations omitted).

We believe that only a strained interpretation of the exclusion for faulty The Tzungs argue next that the several decisions which have construed exclusions for "faulty workmanship" have established the rule that only the "quality" of the product is excluded from coverage. E.g., City of Barre v. New Hampshire Ins. Co., 136 Vt. 484, 396 A.2d 121, 123 (1978). The Tzungs admit, however, that these cases relate to insurance contracts only in the context of builders' risk policies. The rule seems well settled in California that in that context losses caused to a product because of negligent workmanship are not covered, but damages caused by the negligently created product are covered. See, e.g., Economy Lumber Co. of Oakland v. Insurance Co. of N. Am., 157 Cal.App.3d 641, 649-51 & n. 3, 204 Cal.Rptr. 135, 139-40 & n. 3 (1984); Southern Cal. Edison Co. v. Harbor Ins. Co., 83 Cal.App.3d 747, 755-56, 148 Cal.Rptr. 106, 111 (1978). But this rule does not necessarily have any meaning in the context of this all risk policy, mainly because the exclusion here clearly states that damages caused by faulty workmanship are not covered unless a fire ensues.

workmanship would permit recovery for losses caused by the negligent design and construction of the Tzungs' apartment building. The Tzungs advance essentially two arguments in support of their interpretation of the exclusion. They argue first that State Farm's new all risk policy unambiguously excludes third-party negligence and therefore the previous policy, the one insuring the Tzungs' apartment building, does not. We...