Zurn Engineers v. Eagle Star Ins. Co.

• Decision Date: 25 August 1976
• Citation: 132 Cal.Rptr. 206,61 Cal.App.3d 493
• Court: California Court of Appeals Court of Appeals
• Parties: ZURN ENGINEERS, a corporation, Plaintiff and Appellant, v. EAGLE STAR INSURANCE COMPANY, LTD., Defendant and Respondent. Civ. 46947.

Page 206

132 Cal.Rptr. 206

61 Cal.App.3d 493

ZURN ENGINEERS, a corporation, Plaintiff and Appellant, v. EAGLE STAR INSURANCE COMPANY, LTD., Defendant and Respondent.

Civ. 46947.

Court of Appeal, Second District, Division 1, California.

Aug. 25, 1976.

As Modified on Denial of Rehearing Sept. 14, 1976.

Hearing Denied Oct. 21, 1976.

Monteleone & McCrory and Patrick J. Duffy, III, Los Angeles, for plaintiff and appellant.

Long & Levit and John B. Hook, Los Angeles, for defendant and respondent.

THOMPSON, Associate Justice.

The case at bench involves the bar of the statute of limitations of Insurance Code section 2071 requiring that an action on a fire or all risk policy of insurance be commenced within 12 months of the 'inception of the loss.' In particular, action of the trial court granting an insurer's motion for summary judgment must be tested by the meaning of the quoted phrase in the context of an all risk policy issued in 'A.L.S. Contractor's Installation or Builder's Risk Form' where: (1) the policy specifically excludes from its coverage 'loss or damage . . . caused by fault, defect, error or omission in design, plan or specifications'; (2) imposes a condition precedent to the insurer's liability requiring a verified proof of loss stating its cause; and (3) the insured reasonably maintained that damage to property for which it was responsible in the course of performance of a construction contract was due to a design deficiency, the loss from which was the responsibility of the third party, a public entity contracting for the construction, rather than due to a nonexcluded cause, and that contention was not disclaimed by the public entity.

We conclude that where the statute of limitations is, as required by Insurance Code section 2071, incorporated in an insurance policy, the phrase 'inception of the loss' must be construed in light of the other provisions of the policy, and that so construed in the context of the policy and factual situation which is here involved, the phrase does not mean the time at which the physical event causing damage to property occurred. Rather, it must be construed as occurring no earlier than the point at which the insured's reasonable belief of the third party's responsibility for the loss by reason of an uninsured cause is countered by the third party's assertion that it is not responsible. Accordingly, we reverse a summary judgment granted the defendant insurer on the basis of the bar of the 12-month statute of limitations.

Because the matter arises on summary judgment for defendant, we recite the record accepting as true the factual matter in plaintiff's declaration while drawing all permissible inferences in plaintiff's favor.

Plaintiff, Zurn Engineers, entered into a contract with the City of Palo Alto obligating Zurn to construct a waste water treatment plant. The plan of construction included the installation of large diameter pipe. Risk of loss for property installed on the job, including the pipe, was with Zurn until the project was finally accepted by the city.

Zurn obtained an all risk extended coverage 'Fire' insurance policy from defendant Eagle Star Insurance Company. The policy conforms to the standards of Insurance Code section 2071. Subject to exceptions and exclusions stated in the policy, it insures property used by Zurn in construction of the waste treatment plant against all risk of 'physical loss . . . or damage.' Excluded from the scope of coverage is the cost of faulty workmanship and 'loss or damage directly or indirectly caused by fault, defect, error or omission in design, plan or specifications.' ¹

The printed portion of the policy jacket requires that 'the insured shall give written notice to (the insurer) of any loss without unnecessary delay, protect the property from further damage . . . and within 60 days after the loss, unless such time is extended in writing by (the insurer), . . . shall render to (the insurer) a (verified) proof of loss . . . stating the knowledge and belief of the insured as to the following: the time and origin of the loss . . ..'

A separate section of the printed jacket provides that loss covered by the policy is payable 60 days after proof of loss is received and 'ascertainment of the loss is made.' The printed form states further: 'No suit or action on this policy for the recovery of any claim shall be sustainable in any court . . . unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss.' A typed portion of the policy states: 'In the event of loss or damage the assured shall: . . . (c) as soon thereafter as is practicable render a statement to the company signed and sworn to by the assured stating the knowledge and belief of the assured as to the time and cause of the loss or damage . . ..' ²

Zurn Engineers commenced work under the contract with Palo Alto. When over half of the job had been completed, it was discovered, on March 23, 1972, that a portion of the pipelines which were part of the job had settled so that pipes had become disconnected. Zurn and representatives of Palo Alto engaged in a series of discussions and correspondence to determine who was responsible for the damage to the pipe and who would pay for its repair. It was Zurn's position that the settling and damage was due to the pipe being laid in unstable soil, a condition of which Zurn had warned Palo Alto, and to a design defect in the coupling of the pipe. Palo Alto originally took the position that the settling and damage to the pipe was due to inadequate compaction of backfill of material surrounding the pipe.

Pending resolution of the question of cause of the damage to the pipe, Zurn Engineers and Palo Alto ageed to take necessary action to place the treatment plant in operation as soon as possible. A question arose concerning the release of impounded funds to Zurn. Soil tests were made. On August 2, 1972, Palo Alto issued its change order No. 29 authorizing Zurn to 'furnish materials, manpower and equipment to replace unstable soil under major plant pipelines and to repair pipeline damage created by unstable soils conditions.' Change order No. 29 increases the amount payable to Zurn Engineers by the original contract by cost of the new work plus 15 percent.

On August 24, 1972, Zurn wrote to Palo Alto stating that 'for information purposes only,' it was Zurn's position that the damage was caused by a design defect in the pipeline for which the general contractor should not be held responsible. Zurn repaired the pipeline break and was paid routinely under its contract with Palo Alto to the beginning of 1973. Further payment was questioned by a letter from Palo Alto to Zurn on April 13, 1973. By August 14, 1973, the Zurn-Palo Alto situation had deteriorated to communication between their respective lawyers. On that date, Palo Alto took the position that Zurn was responsible for loss caused by the settling of the pipe and that the amount of the loss was in excess of $600,000.

On September 6, 1973, approximately three weeks after the letter from counsel for Palo Alto, Zurn Engineers filed a 'Statement of Loss' with Eagle Star Insurance Company. The statement reports that the loss occurred '(o)n or about August 14, 1973,' and estimates the amount of damage as in excess of $600,000. It describes the cause of loss as 'the failure to design sufficient foundational support for certain underground pipelines, causing said pipelines to settle, deform, and open at the joints, after said pipelines were installed in accordance with plans and specifications.'

Eagle Star denied Zurn's claim for reimbursement, and on April 22, 1974, 25 months after the damage to the pipeline was discovered, almost 13 months after the letter from Palo Alto questioning further payment to Zurn, and about 9 months after the letter from Palo Alto's counsel definitively charging Zurn with the loss, Zurn filed the case at bench claiming reimbursement pursuant to its policy from Eagle Star.

Eagle Star answered Zurn's complaint asserting the bar of the 12-month statute of limitations of Insurance Code section 2071 as an affirmative defense. Eagle Star moved for summary judgment on its affirmative defense while Zurn moved for partial summary judgment...