Opinion
Case No. 2:22-cv-03757-SVW-MAA
10-11-2022
GONSALVES & SANTUCCI v. GREENWICH INSURANCE COMPANY
Miles C. Holden, Kamran Khakbaz, Hanson Bridgett LLP, San Francisco, CA, for Gonsalves & Santucci. Ronald D. Kent, Sabrina E. Chow, Dentons U.S. LLP, Los Angeles, CA, Samantha J. Wenger, Pro Hac Vice, Dentons U.S. LLP, Kansas City, MO, for Greenwich Insurance Company.
Miles C. Holden, Kamran Khakbaz, Hanson Bridgett LLP, San Francisco, CA, for Gonsalves & Santucci. Ronald D. Kent, Sabrina E. Chow, Dentons U.S. LLP, Los Angeles, CA, Samantha J. Wenger, Pro Hac Vice, Dentons U.S. LLP, Kansas City, MO, for Greenwich Insurance Company. Proceedings: ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [35] STEPHEN V. WILSON, UNITED STATES DISTRICT JUDGE
I. Introduction
Before the Court are motions for summary judgment filed by Plaintiff Gonsalves & Santucci Inc. d.b.a. Conco ("Conco") and Defendant Greenwich Insurance Co. ("Greenwich"). For the forthcoming reasons, Greenwich's motion is GRANTED and Conco's motion is DENIED. II. Factual and Procedural Background
All facts are undisputed unless otherwise stated.
1. The LAX Project
The underlying arbitration and litigation, and the instant insurance-coverage action, are related to the construction of a new airport concourse and related improvements at Los Angeles International Airport ("LAX") called Midfield Satellite Concourse North ("Project") for which Turner Construction/PCL Joint Venture a.k.a. Turner - PCL, a Joint Venhue ("TPJV") served as the Project's prime contractor. Plaintiff's Statement of Uncontroverted Facts ("UF") 1. TPJV subcontracted with Conco to provide construction services for the Project's foundation system, and Conco in turn subcontracted with Shoring Engineers to provide services related to the Project's foundation system, which involved the installation of the Torque Down Pile units at issue in this case. Id. ¶ 2.
Conco's subcontract with TPJV incorporated the requirements of the prime contract, including an express warranty that all work performed, including design work, would be free from defects. Shoring's subcontract, in turn, expressly incorporated the requirements of the Conco Subcontract.
2. Greenwich's Insurance Policy
In connection with the Project, Greenwich issued commercial general liability insurance policy no. GDR7445521 ("Policy") for the policy period from September 7, 2016 to November 7, 2020, the period in which the TDP units were to be installed. Id. 3. Greenwich issued the Policy as part of the Contractor Controlled Insurance Program for the Project, and Conco is enrolled as an insured under the Policy. Id.
The Policy contains an insuring agreement that provides in relevant part:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply.Id. ¶¶ 4-5; Defendant's Motion for Summary Judgment ("Defendant's MSJ") at 10-11.
The Policy includes the following definitions:
"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. In the event of continuous, progressive or deteriorating damage or injury, which exists over any length of time, such damage or injury shall be deemed one "Occurrence."
"Property damage" means:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it . . . .
"Suit" means a civil proceeding in which damages because of "bodily injury," "property damage" or "personal and advertising injury" to which this insurance applies are alleged. "Suit" includes:
UF ¶¶ 12-13. As discussed further below, the policy also contains several exclusions of coverage.a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.
3. The Trouble with the TDPs
In October 2017, the Project began to encounter delays arising from the installation of the foundation system using "Torque Down Pile" ("TDP") units, which consist of concrete-filled steel pipe piles with conical tips that are driven into the ground. Id. ¶ 4.
More specifically, TPJV, the prime contractor, hired Conco as a subcontractor. In turn, Conco engaged another firm, Shoring, as a pile subcontractor. TPJV's Project specifications required the pile subcontractor to have "successfully completed three projects minimum with piles of similar ultimate and allowable resistance, installed in similar soil conditions, similar pile dimensions and volume required for this Project." Conco apparently represented to TPJV that this was the case, stating that Shoring "has many years of experience with all types of pile and caisson systems and was the premier expert in the field." In fact, Shoring had performed only one other TDP project, conducted in "wholly dissimilar geotechnical conditions." Plaintiff's Mot. for Summary Judgment ("Plaintiff's MSJ"), ECF No. 32, Ex. E, at 65-70. Conco disputes these facts, asserting that "no one has established that Conco's work was incorrectly performed or constituted faulty workmanship." Id. at 17. Nevertheless, this is TPJV's basis for suing Conco in the underlying disputes.
TPJV alleges that, as a result of this inexperience, the TDPs were improperly installed after Shoring used an M-Pile tip for installation of the piles, rather than the original TDP pile tip, which is apparently customary to use when, as here, they will be driven into dense sand. Id. at 67. The tips could not be driven deeply enough into the ground and many piles were overheated during installation, with the "tips shearing off or being pushed into the pile." Id. at 68.
Some of the TDPs were deformed or broken during installation, leading some of them to be abandoned in the foundation soils. UF ¶ 4. Ultimately, 28 piles needed to be replaced and 127 piles needed to be retorqued to achieve the minimum pile embedment depth into the native soils. Plaintiff's MSJ, Ex. E, at 69. These issues caused the installation to take approximately nine months instead of the estimated one month. Id. TPJV also incurred a number of additional costs. Id.
4. The Underlying Arbitration and Litigation
As a result of these TDP issues, TPJV commenced the Underlying Arbitration, raising claims against Conco, as well as against other parties. UF ¶¶ 6, 10. TPJV's arbitration demand alleges that, due to Conco's acts or omissions, that
TDP were broken and deformed during installation: placement operations were interrupted as numerous TDP were replaced and retorqued in an attempt to meet minimum embedment depths; numerous broken TDP were abandoned in place when required depths could not be achieved; numerous TDP were installed at shallower than required embedment depths resulting in changes to grade beams and pile caps; work was slowed or stopped to allow for various changes during construction that were implemented to address the problems; because the TDP are a critical element of the foundation for the structure itself, the Project was damaged and all aspects of project scheduling, sequencing, and performance were disrupted and negatively impacted; the follow-on subcontractors and their work were damaged, substantially impacted, delayed, accelerated, and had to be completed on a piecemeal basis out of sequence at substantially greater cost; overall use and access to the facility was limited and impaired; and that subcontractors responsible for performing work such as structural steel, mechanical and electrical work, etc. have presented substantial claims totaling tens of millions of dollars.Id. ¶ 14.
In short, TPJV seeks the following damages in the Underlying Arbitration:
• Direct Costs - TDP, $2,353,102
• Direct Impact - Gateway, $915,916
• Ensuing Impacts on Trades - Global TDP Analysis, $5,688,828
• Ensuing Impacts on Trades - Individual Sub Analysis, $66,385,148
• TPJV Markups, $19,012,298
• Total With Markups, $94,355,292
• Professional and Expert Fees, $3,513,228Turner's Statement of Claims and Defenses, ECF No. 32-5 at 17.
Conco filed the Underlying Litigation in the Los Angeles Superior Court in connection with a payment dispute with TPJV. UF ¶ 7. TPJV crossclaimed, alleging, like in the Underlying Arbitration, that "problems arose with regard to the installation of concrete-filled rotary-installed displacement piles (the 'CFRID piles,' also referred to as 'Torque Down Pile' or 'TDP'). Following is a partial list of problems: (1) installation of the CFRID piles took significantly longer than accounted for in the schedule due to significant difficulties installing the piles to meet the project requirements, (2) numerous CFRID piles had to be replaced and/or retorqued due to piles not meeting the recommended minimum embedment depth and piles shearing off near the pile tip during installation, and (3) follow-on subcontractors were impacted by the delays and piecemeal completion of the foundation system and the resulting unavailability of work areas resulting in substantial delays, inefficiencies, and corresponding losses." Id. ¶ 15.
Conco informed Greenwich, the provider of its commercial general liability ("CGL") policy, of the Underlying Arbitration and Litigation, arguing that there was property damage via injury to the soils, other subcontractors' work, and the TDP units themselves, loss of use of physically injured tangible property, and loss of use of the surrounding soils, the entire concourse foundation area, and other subcontractors' materials. Plaintiff's MSJ at 13. Greenwich refused to defend Conco against any of the claims. UF ¶ 18. This lawsuit ensued.
5. Procedural History of the Instant Litigation
On June 2, 2022, Conco filed the instant suit, bringing three causes of action against Greenwich: (1) a request for a declaration that Greenwich has a duty to defend Conco in the Underlying Arbitration and Litigation; (2) for breach of the insurance policy by delating and failing to timely and properly investigate the Underlying Claims and deliver its coverage analysis, denying Conco the rights owed to it under the contract, such as the duty to defend, and taking coverage positions contrary to controlling law; and (3) for a breach of the implied covenant of good faith and fair dealing. ECF No. 1, Compl., at ¶¶ 30-48.
On September 7, Conco filed its Motion for Summary Judgment, at ECF No. 35. Conco alleges that three types of covered property damage occurred in connection with the TDP turmoil: first, physical injury to tangible property; second, all resulting loss of use of that property; and third, loss of use of tangible property that is not physically injured. Plaintiff's MSJ at 7-11.
Conco claims more specifically that the TDP units were broken and deformed, and thus abandoned; that as a result, the soils were broken and could not be used as a place to put the TDP units; and that the entire area of soils into which the TDP units were installed and its immediate surroundings, and the equipment and materials of other subcontractors, could not be used due to the loss of use of the entire TDP foundation area. Id. at 8-9. Conco also contends that the Underlying Proceedings are "suits"—which Greenwich does not seem to dispute—and that none of the policy exclusions apply. Id. at 12, 13-20.
On September 14, Greenwich filed its Cross-Motion for Summary Judgment, at ECF Nos. 37, 40, arguing that it has no duty to defend Conco in the Underlying Proceedings. Greenwich asserts that no claims for property damage, under the meaning of the policy, have been asserted against Conco in the Underlying Proceedings—in other words, that none of the following fall under the definition of property damage under California law: damages directly flowing from the TDP issues; damages to the dirt surrounding the TDPs; or damages to the dirt into which the TDPs were drilled. Defendant's MSJ at 13-25. Greenwich also asserts that, in any event, any broken dirt-related property damage or loss to tangible property not physically injured would be excluded from coverage under exclusions j.(5) and m, respectively. Id. at 26-28. Conco filed a reply to Greenwich's motion on September 21, purportedly distinguishing the authority upon which Greenwich relies, at ECF No. 40.
The Court heard oral arguments regarding the motion on October 3, 2022 and thereafter took the motions under submission.
III. Procedural and Evidentiary Rulings: Conco's Motion to Strike and Objection to the Samaniego Declaration
In its reply to Greenwich's opposition to Conco's motion for summary judgment, Conco first makes a motion to strike, and second, objects to certain paragraphs of the Declaration of Jamie Samaniego, which Greenwich appended to its motion as evidence. The Court shall discuss each in turn before proceeding to the substance of the parties' cross-motions.
a. Motion to Strike
In its motion, Conco asserts that Greenwich's motion should be stricken because it was improperly noticed under Local Rule 6-1 and was apparently untimely according to the parties' briefing schedule.
The Court does not believe there is anything to be gained by striking Greenwich's papers. Conco certainly does not present any compelling reason for doing so. Conco's motion is thus denied.
b. Evidentiary Objection to the Samaniego Declaration
Conco also asserts that the Declaration of Jamie Samaniego should be suppressed because it (1) "lacks evidence that would permit the Court to determine that [Ms. Samaniego] may be qualified as an expert related to the Motion or alleged Cross Motion concerning what third parties allege in the Underlying Claims" and (2) because her "statements are also improper as not 'helpful . . . to determining a fact in issue.' " Plaintiff's MSJ at 1-2. Conco argues, more specifically, that the following paragraphs of the declaration are improper:
12. None of the materials provided to Greenwich indicate anything about damages being claimed for soil at LAX, any claim by the City of Los Angeles for damages to its property, or any claim by subcontractors for damages to their material or equipment.Samaniego Decl., ¶¶ 12, 23.
23. To date, Conco has not provided Greenwich with any pleadings or extrinsic evidence showing that Turner or any other claimants are seeking recovery for losses to any tangible property other than the broken TDPs themselves.
The Court agrees with Greenwich that the declaration is sufficiently based on Samaniego's personal knowledge. All the above paragraphs state is that there is no evidence showing that TPJV or anyone else, such as the City of Los Angeles, have made claims regarding the damaged soil. Because Samaniego serves as a Senior Claims Specialists for the affiliate of Greenwich Insurance responsible for handling Greenwich's construction claims, and has handled Conco's claim personally since August 2020, Samaniego has sufficient personal knowledge to testify as to what claims have—or have not—been made against Conco. See Gilbert v. Infinity Ins. Co., 186 F. Supp. 3d 1075, 1078 (C.D. Cal. 2016) (overruling the insured's objections to the declarations of the insurer's claims handlers because "[t]he Special Claims Investigators can describe their findings from the investigation conducted from their own personal knowledge").
Thus, Conco's motion is denied.
IV. Legal Standard
a. Summary Judgment
Summary judgment should be granted where "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of . . . [the factual record that] demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party satisfies its initial burden, the non-moving party must demonstrate with admissible evidence that genuine issues of material fact exist. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ("When the moving party has carried its burden under Rule 56 . . . its opponent must do more than simply show that there is some metaphysical doubt as to the material facts.").
A material fact for purposes of summary judgment is one that "might affect the outcome of the suit" under applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact exists where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.
V. Application
a. Duty to Defend - In General
Under California law, a liability insurer "owes a broad duty to defend its insured against claims that create a potential for indemnity." Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993). "Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor." Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 299-300, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993). The insured party is required to show a "potential for coverage," in order to prove a duty to defend exists, while the insurer must "conclusively establish the absence of any such potential" in order to negate the duty to defend. Id. at 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (emphasis in original).
"In determining whether an insurer has a duty to defend under the terms of its policy, [courts] look both to the allegations in the complaint and to the extrinsic facts known to the insurer . . . ." Federal Ins. Co. v. Steadfast Ins. Co., 209 Cal. app. 4th 668, 680, 147 Cal.Rptr.3d 363 (2012) (citing Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654, 31 Cal. Rptr.3d 147, 115 P.3d 460 (2005)); see also Albert v. Mid-Century Ins. Co., 236 Cal. App. 4th 1281, 1290, 187 Cal.Rptr.3d 211 (2015) ("Facts extrinsic to the complaint may . . . be examined and may either establish or preclude the duty to defend.") (citing Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 19, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995)). "If, as a matter of law . . . there is no potential for coverage based on the allegations in the complaint or the extrinsic facts known to the insurer, then there is no duty to defend." Federal Ins. Co., 209 Cal. App. 4th at 680, 147 Cal. Rptr.3d 363 (quoting Scottsdale Ins., 36 Cal. 4th at 655, 31 Cal.Rptr.3d 147, 115 P.3d 460).
"[T]he insured may not speculate about unpled third-party claims to manufacture coverage, and the insurer has no duty to defend where the potential for liability is tenuous and farfetched." Albert, 236 Cal. App. 4th at 1290, 187 Cal.Rptr.3d 211 (citation omitted and cleaned up).
b. Interpretation of Insurance Contracts - In General
"Under California law, interpretation of an insurance policy is a question of law, subject to the ordinary rules of contractual interpretation." AXIS Reinsurance Co. v. Northrop Grumman Corp., 975 F.3d 840, 847 (9th Cir. 2020) (citations omitted). "[T]he fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties." Id. (quoting Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1264, 10 Cal. Rptr.2d 538, 833 P.2d 545 (1992)).
"When interpreting a policy provision, we must give terms their ordinary and popular usage, unless used by the parties in a technical sense or a special meaning is given to them by usage." Palmer v. Truck Ins. Exch., 21 Cal. 4th 1109, 1115, 90 Cal.Rptr.2d 647, 988 P.2d 568 (1999) (citation and quotation marks omitted).
"In the insurance context, we generally resolve ambiguities in favor of coverage." Sprinkles v. Associated Indemnity Corp., 188 Cal. App. 4th 69, 76, 114 Cal.Rptr.3d 887 (2010) (citation omitted). "Because the insurer writes the policy, it is held 'responsible' for ambiguous policy language, which is therefore construed in favor of coverage." Id.
However, "[i]f contractual language is clear and explicit, it governs." AXIS Reinsurance Co., 975 F.3d at 847 (quoting Bank of the West, 2 Cal. 4th at 1264-65, 10 Cal.Rptr.2d 538, 833 P.2d 545). "[Courts] will not strain to create an ambiguity where none exists or indulge in tortured constructions to divine some theoretical ambiguity in order to find coverage where none was contemplated." Fireman's Fund Ins. Co. v. Superior Court, 65 Cal. App. 4th 1205, 1212-13, 78 Cal.Rptr.2d 418 (1997) (citations omitted).
c. Defective TDP Installation does not Constitute "Property Damage" Within the Meaning of the Policy
1. Discussion of Relevant Precedent
Under California law, "the prevailing view is that the incorporation of a defective component or product into a larger structure does not constitute property damage unless and until the defective component causes physical injury to tangible property in at least some other part of the system." F & H Constr. v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364, 372, 12 Cal.Rptr.3d 896 (2004). In other words, there is only physical injury to property "when the insured's defective materials or work cause injury to property other than the insured's own work or products." Maryland Cas. Co. v. Reeder, 221 Cal. App. 3d 961, 967, 270 Cal.Rptr. 719 (1990). As discussed below, the principle that property damage arises from a defective component contaminates some other physical part of the system or structure in question has largely been applied only to cases involving hazardous or dangerous conditions arising from the defective workmanship.
Indeed, as other courts have pointed out, there are two primary lines of cases in California interpreting the meaning of a property damage clause. "The distinction between the two lines of cases is whether the insured's product contaminates the property with hazardous materials, or if it is merely defective or inferior such that it renders the property inadequate for its intended purpose. See Watts, 121 Cal. App. 4th at 1044-45, 18 Cal.Rptr.3d 61, ("Courts . . . generally agree that the incorporation of a defective component or product into a larger structure or system does not constitute physical injury to tangible property, unless and until the defective component physically injures some other tangible part of the larger system or the system as a whole . . . . However, where products or work containing hazardous materials have been incorporated into other products or structures, courts have found immediate harm and physical injury to other property at the moment the incorporation occurred.")." Travelers Prop. Cas. Co. of America v. Allwire, Inc., 508 F. Supp. 3d 736, 744 (C.D. Cal. 2020).
For instance, in F & H Construction Co., the insured claimed property damage when it improperly installed pile cap extensions welded into place on steel composite piles, which were to be driven into the ground. F & H Construction, 118 Cal App. 4th 364, 368, 12 Cal.Rptr.3d 896 (2004). The prime contractor advised the insured, a subcontractor, that the project required grade A-50 steel fabrication which had a load capacity of 50,000 pounds per square inch. Id. In fact, the subcontractor used grade A-36 steel caps instead of the requisite grade A-50 caps. Id. "The use of the lesser grade steel caps produced structural units which were not damaged but were inadequate for the intended purpose of supporting the pumping facility." Id. The prime contractor then had to modify the project, which was ultimately completed on time and did not result in the damage or weakening of any of the piles. Id. at 868-69.
The court concluded that this damage constituted neither physical injury to tangible property nor loss of use of tangible property as provided for under the comprehensive general liability insurance policy. Id. at 371-74, 12 Cal.Rptr.3d 896. Regarding the former, "The only damages alleged by F & H [were] the costs of modifying the pile caps and the lost bonus for early completion of the project. These [were] not recoverable as property damage because they are intangible economic damages rather than damages 'to tangible property.' " Id. at 373, 12 Cal.Rptr.3d 896. And as for the latter, the prime contractor did not seek damages for the rental value of the facility while the defective steel caps were being modified, and the project was completed on time. Id. at 377, 12 Cal. Rptr.3d 896. "The only costs claimed by F & H [were] the costs for repairing and modifying the defective caps and for loss of the early completion bonus. Those costs are unrelated to rental value." Id. at 377, 12 Cal.Rptr.3d 896. There was thus no duty to defend the insured in the underlying action.
And in Regional Steel Corp. v. Liberty Surplus Ins. Corp., 226 Cal. App. 4th 1377, 173 Cal.Rptr.3d 91 (2014), the insured subcontracted to build an apartment building with 14 stories as well as retail space and a parking garage. In connection with the project, the insured prepared and submitted shop drawings that used various types of seismic tie hooks, both 90 and 135 degrees, in shear walls. Regional Steel Corp. v. Liberty Surplus Ins. Corp., 226 Cal. App. 4th 1377, 1382, 173 Cal.Rptr.3d 91 (2014). The general contractor approved of the drawings and of the use of the seismic tie hooks. Id. Later, a city building inspector required the project to only use 135-degree hooks, not the 90-degree hooks. Id. Though the subcontractor began using the correct tie hooks, it came to light that three levels of the parking garage had defective tie hooks and had to be repaired. Id. The general contractor refused to pay the subcontractor's costs to bring the parking garage into compliance. Id. The general and sub-contractor then commenced underlying litigation to resolve the issue of payment in connection with the defective tie hooks. Id. at 1392-93, 173 Cal.Rptr.3d 91.
The insured then sued its general insurance policy provider, claiming it had a duty to defend. Id. at 1393, 173 Cal.Rptr.3d 91. The court found that there was no duty to defend. The insured argued that "the underlying action involved claims for loss of use and other damages resulting from delays in the completion of [the project]." Id. As is relevant to the case at hand, the court in Regional Steel stated that the insured's "attempts to bring the allegedly cracking concrete floors within the definition of "other" property in order to obtain coverage fail because [the prime contractor] made no allegations that [the subcontractor]'s installation of the tie hooks, other than [another subcontractor's] pouring of the concrete, was the cause of the out-of-level floors." Id. Indeed, "the only allegations that [the prime contractor' made against [the subcontractor] were that it failed to install the proper tie hooks, and its failure to do so necessitated demolition and repair of the affected areas—allegations squarely within the ambit of the rule of F & H Construction that this type of repair work is not covered under a CGL policy." Id. at 1394, 173 Cal.Rptr.3d 91.
Last, similarly, in American Home Assurance Company v. SMG Stone Company, Inc., a developer contracted with the defendant insured to construct a residential high-rise building. American Home Assurance Company v. SMG Stone Company, Inc., 119 F. Supp. 3d 1053, 1056 (N.D. Cal. 2015). The defendant further subcontracted with other defendants to install stone floor tiles in the building. Id. During installation, some tiles were fractured, so they had to be removed and replaced, as did the drywall and subfloor in the area surrounding the tiles. Id. The court determined that the drywall and subfloor damage did not result from the broken tiles themselves, but from the remediation. Id. at 1060-61.
On the other hand, in Armstrong, the court found that the insurance company had a duty to defend the insured in underlying proceedings where the insured subcontractor installed asbestos-laden building materials, which had to be removed. Armstrong World Industries, Inc., v. Aetna Cas. & Surety Co., 45 Cal. 4th 1, 87-88, 82 Cal.Rptr.3d 323, 190 P.3d 664 (1996). The court found that this constituted property damage even though none of the fibers were actually released. Id. at 88-98. In other words, the court apparently found a potential for the asbestos to be released, which triggered the insurance company's duty to defend against the claimed property damage. Id.; see also Watts Industries, Inc. v. Zurich, 121 Cal. App. 4th 1029, 1040-49, 18 Cal.Rptr.3d 61 (2004) (finding that there was property damage triggering a duty to defend where the insured installed lead pipes made of 81 metal that contained 40% more lead than permitted under the contract, posing a hazard to municipal water users); Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3d 1049, 1057-58 (9th Cir. 2002) (holding that the insurer had a duty to defend where the insured's defective circuit boards were incorporated into scanner products, which meant that the circuit boards, if exposed to heat, vibration, or electrical currents, prevented some scanners sold to consumers from working because "it is the risk of a loss worth more than the price of the component itself, i.e. to other property, against which these CGL policies mitigate").
Likewise, in Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., the court found that the insurance company had a duty to defend because the insured properly asserted property damage as covered by its CGL policy. Shade Foods, Inc. v. Innovative Prods. Sales & Marketing, Inc., 78 Cal. App. 4th 847, 864-65, 93 Cal.Rptr.2d 364 (2000). There, the insured was a nut roaster who provided a customer with roasted almonds, to ultimately be shaped into nut clusters and incorporated into breakfast cereal, that turned out to contain wood splinters. Id. at 866, 93 Cal.Rptr.2d 364. Following Armstrong, the court found that the wood splinters caused property damage to the nut clusters. Id. at 865, 93 Cal.Rptr.2d 364 (finding the contaminated nuts "distinguished from other cases finding property damage when a defective part causes injury to other property" and relying on Eljer Mfg., Inc. v. Liberty Mut. Ins. Co. (7th Cir. 1992) 972 F.2d 805, where "a defective plumbing system caused water leakage within a year or more after it was installed in houses and apartments. Finding property damages within the meaning of the standard-form definition at issue here, the court held that the term includes loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and . . . must be removed, at some cost, in order to prevent the danger from materializing") (cleaned up).
More recently, Travelers Prop. Cas. Co. of America v. Allwire, Inc. presented a case falling somewhere in the middle of the two lines of cases. Allwire, Inc., 508 F. Supp. 3d at 744. There, the insured claimed physical injury to tangible property after the insulation of the electrical cables it had installed eroded, exposing its interior wires. Id. The insured alleged that the damage threatened the employees and work product of another subcontractor, because the exposed wires presented a fire and electrocution risk. Id. The court thus questioned whether the case involved merely a non-covered defective work product, or whether it amounted to a hazardous material that had contaminated the surrounding area. Id.
The court determined that a factual question existed as to whether the damages stemming from the insured's defective product amounted to a contamination. Id. The court reasoned that exposed electrical wires were not "merely a defective product that delays or impedes future construction—or poses some future threat to the longevity of the structure" but was instead "a hazardous material that poses a threat to persons and property by its mere introduction into the system," as is asbestos or nuts mixed with wood splinters. Id. at 744-45. Because this question was unclear, and there was a possibility for coverage, the insurance company's duty to defend was triggered. Id.
Though it is true that cases such as Armstrong, Shade, and Anthem suggested that the physical linking of a defective product into a larger whole may constitute property damage that triggers a duty to defend, as Greenwich points out, the application of such a principle has seemingly been applied only in cases involving hazardous substances, even if the hazardous substances have not yet migrated beyond the defective product in question. These holdings align with F & H and analogous "shoddy workmanship" cases—in those cases, sometimes the damage did literally extend beyond the defective component itself, for instance, as in SMG Stone, but did not contaminate the rest of the structure at issue. This is particularly true in the ways California courts have interpreted construction cases.
Based upon this review of relevant precedent, Court shall next consider the two bases upon which a duty to defend may be triggered by Conco's CGL policy: physical injury to tangible property, and loss of use to tangible property not physically injured.
2. Physical Injury to Tangible Property: Damages to the TDPs and to the Broken Soil
Here, the damage to the TDPs and the surrounding soil is more akin to defective work product, for example, defective seismic tie hooks, cracked floor tiles, or defective steel pile caps than it is to asbestos, wood splinters mixed in nuts, or exposed electrical wires that present the possibility of electrocution or fire. As a threshold matter, as Greenwich notes, the duty to defend is not triggered by damage to the TDPs themselves. Webcor Construction, LP v. Zurich American Ins. Co., 372 F. Supp. 3d 1061, 1065-67 (N.D. Cal. 2019) ("Here, the undisputed evidence shows that the claims of the underlying action . . . concern[ ] only defects in the curtainwall system supplied by [the insured].").
Nor do the broken soils surrounding the defective TDPs, that apparently could not be used, amount to property damage under California law. Regional Steep Corp., 226 Cal. 4th at 1393 ("[A]ny loss of use was occasioned by the necessity of repairing [the rebar subcontractor's] defective tie hooks, a risk not covered by the CGL Policy."). In other words, the only reason that the area could not be used is because the TDPs were driven into the ground with an incorrect mechanism to pierce the dense sand of the LAX concourse site.
California courts have held "[a]n insured may not trigger the duty to defend by speculating about extraneous 'facts' regarding potential liability or ways in which the third party claimant might amend its complaint at some future date. This approach misconstrues the principle of 'potential liability' under an insurance policy." Gunderson v. Fire Ins. Exch., 37 Cal. App. 4th 1106, 1114, 44 Cal.Rptr.2d 272 (1995) (finding no "property damage" was alleged in the underlying action); Hurley Constr. Co. v. State Farm Fire & Cas. Co., 10 Cal. App. 4th 533, 538, 12 Cal.Rptr.2d 629 (1992) ("[T]he insured may not speculate about unpled third party claims to manufacture coverage.") Here, Conco has not provided evidence that the TDPs or broken soil are somehow leaching contaminants or posing a safety hazard to the concourse or any person using the concourse.
As Greenwich points out, the TDPs were eventually installed, and the concourse was built as a fully functional part of the LAX airport. This case is thus distinct from cases such as Anthem, where the defective scanner component rendered the entire scanner faulty, i.e., the final product that was sent to consumers. Though the immediately surrounding area to the TDPs—the soil—was apparently broken, the relevant "damage" is to the system being built or used as a whole, whether that is an apartment building, a field, a home, a municipal water system, or, as here, an airport concourse.
Thus, the Court does not find that the physical damage to the TDPs themselves, or physical breaking of soil arising from the defective installation of the TDPs, amounts to property damage under California law—even if TPJV sought damages for broken soil which the record does not reflect, according to Turner's arbitration demand and summary of damages sought.
3. Loss of Use to Tangible Property Not Physically Injured
"The law is clear that damages arising from loss of an investment, loss of goodwill, or lost profits do not have a direct nexus to "property damage" and are not covered by commercial liability policies [ ]. Kazi v. State Farm Fire & Cas. Co., 24 Cal. 4th 871, 879, 103 Cal.Rptr.2d 1, 15 P.3d 223 (2001) ("[I]t is important to note that the policies are not intended to cover intangible property losses, including loss of an investment, loss of goodwill or loss of intangible property use."); Continental Cas. Co. v. Superior Court, 92 Cal. App. 4th 430, 439, 111 Cal.Rptr.2d 849 (2001) ("Damage for lost profits, loss of investment or other harm to one's economic interest constitute injuries to intangible property which by definition fall outside the scope of the policy."); Lassen Canyon Nursery, Inc. v. Royal Ins. Co. of America, 720 F.2d 1016, 1018 (9th Cir. 1983) ("It is generally accepted that economic losses such as lost profit or good will are not property damage within the coverage of [liability] policies.")." Allwire, 508 F. Supp. 3d at 745.
For instance, in Hendrickson, the court found that the use of herbicide-laden strawberry plants used in an entire field did not constitute physical property damage; rather, the loss of use of the field for its intended crop yield constituted loss of use to tangible property not physically injured because the farmer could not recognize the anticipated profits from the crop. Hendrickson v. Zurich American Ins. Co. of Illinois, 72 Cal. App. 4th 1084, 1086-87, 85 Cal.Rptr.2d 622 (1999) (holding that the insurer had a duty to defend when defective strawberry plants were planted in a field, rendering the entire field incapable of producing a normal crop yield, though the "damaged plants themselves [did] not constitute property damage under the policy").
Conco asserts two types of property damage under this prong: loss of use of the entire area of soils into which the TDP units were installed in addition to the soils that suffered physical injury and its immediate surroundings; and loss of use of the material and equipment of other subcontractors.
i. Loss of Use of The Entire Area of Soils into Which the TDP Units Were Installed in Addition to Those Soils That Suffered Physical Injury and its Immediate Surroundings
The Court reiterates and agrees with Greenwich that TPJV is not seeking damages arising from the loss of use of the concourse. Though Conco's illustration was helpful at oral argument, likening the TDPs as having to be moved from the black squares to the white squares of a chessboard—the area of the concourse where construction was occurring—the Court also reiterates that the relevant inquiry is whether the concourse as a whole was rendered defective via Conco's workmanship. The parties do not dispute the concourse was ultimately built and functions for its intended purpose.
Loss of use of the "black squares" and the necessary shifting of the TDP units to the "white squares," delaying the construction project, is an intangible property loss. Unlike in cases where courts did find that the insured established a diminution in value of the entire property as a result of its loss of use for its intended purpose, here, the prime contractor is not seeking compensation from Conco for a diminution in value of the entire concourse; nor is it seeking compensation for the cost of remaining on the construction site longer than anticipated. Rather, it seeks compensation arising from the broken TDPs and the several-month delay in installing new piles.
This situation is unlike the cases Conco has cited, for instance, Thee Sombrero, where the insured lost the use of the entire property—a nightclub—for its intended purpose, or in Hendrickson, where the entire strawberry field was made unusable due to the introduction of the herbicide-laden strawberry plants that hindered the farm's crop yield. Conversely, here, the concourse ultimately was able to be used for its intended purpose. Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729, 737-38, 239 Cal.Rptr.3d 416 (2018) (holding that the insured, a nightclub owner, who lost a permit to run the property as a nightclub due to a third party's negligence adequately claimed loss of use of tangible property not physically injured, triggering the insurer's duty to indemnify); see also F & H Construction, 118 Cal. App. 4th 364, 376, 12 Cal.Rptr.3d 896 (2004) ("F & H does not seek damages for the rental value (or its equivalent) for the loss of the use of the Los Vaqueros facility during the time period the modifications were made, or even for a period of time caused by the delay").
While the Thee Sombrero court cautioned that a loss of value need not be total, that case is further distinguishable because the insured in that case had an ownership interest in the real property the nightclub was situated on. Here, Conco and TPJV have no ownership interest in the concourse or the areas surrounding the TDP units. This type of damage claimed by Conco is therefore not covered under the second prong of the definition of property damage under the insurance policy.
ii. Loss of Use of the Materials and Equipment of Other Subcontractors
Conco's claimed loss arising from the loss of use of the materials and equipment of other subcontractors, who had to wait for Conco and its subcontractor to complete the work with the TDPs, is likewise a non-covered intangible economic loss stemming from the time it took to properly install the TDPs in their new locations. The other subcontractors, moreover, are not seeking to recover against Conco for the loss of use of their property or any economic losses arising from the delay.
Thus, again, this type of damage claimed by Conco is therefore not covered under the second prong of the definition of property damage under the insurance policy.
d. Applicability of the Exclusions in Conco's Policy
An "insurer has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected." Regional Steel 226 Cal. App. 4th at 1394, 173 Cal.Rptr.3d 91 (internal quotation marks and citations omitted). While "the insured has the burden of proving his or her claim is within the basic scope of coverage," the "burden of proving exclusions to coverage" falls on the insurer. Id.
Even if Conco established that it claimed covered property damage under its CGL policy, policy exclusions would apply. Conco argues that, among other exclusions, see Plaintiff's MSJ at 13-19, the "faulty workmanship" exclusion, exclusion j(5), and the impaired property exclusion, exclusion m, are inapplicable. Greenwich argues that, even if Conco did establish actionable property damage, these two exclusions would apply to the case at hand and bar the duty to defend. We agree with Greenwich; accordingly, we limit our discussion below to these two exclusions.
1. Exclusion j(5) - Faulty Workmanship
This exclusion purports to preclude coverage for: " 'Property damage' to: . . . That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are directly performing operations, if the 'property damage' arises out of those operations . . . ."
Here, even if there was physical property damage as covered by the policy, all such property damage occurred to the TDPs and the surrounding area on the concourse where Conco and its subcontractors were working. Thus, this exclusion would apply. Compare SMG Stone, 119 F. Supp. 3d at 1063 (assuming that if the cracked floor tiles were property damage under the policy, that physical damage, which occurred via fracturing after the insured installed them, fell under an identical exclusion because it arose out of those operations), with Global Modular Inc. v. Kadena Pac., Inc., 15 Cal. App. 5th 127, 137-38, 222 Cal.Rptr.3d 819 (2017) (finding an identical exclusion inapplicable because the physical damage at issue in that case occurred in parts of the property not being worked on by the insured and other contractors).
2. Exclusion m - Impaired Property
This exclusion precludes coverage for:
"Property damage" to "impaired property" or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.
In Allwire, the policy at issue contained a similar "impaired property exclusion." The court clarified that such an exclusion is "only implicated when the property has not been physically injured." Allwire, 508 F. Supp. 3d at 746. So if there was a loss of use to tangible property not physically injured, this exception would apply, and thus would relieve Greenwich of the duty to indemnify—and therefore defend—Conco. Watts, 121 Cal. App. 4th at 1047, 18 Cal.Rptr.3d 61 ("The impaired property exclusion 'does not apply where the other property [which incorporates the allegedly faulty work or product] has been physically injured.' ") (citations omitted).
e. Greenwich's Duty to Defend
For the foregoing reasons, the policy does not cover the kind of "property damage" that prompted TPJV to sue Conco. Thus, because Conco's actions were not indemnified under the policy, Greenwich has no duty to defend Conco in the underlying proceedings.
VI. Conclusion
The Court hereby GRANTS Greenwich's Cross Motion for Partial Summary Judgment and DENIES Conco's Cross Motion for Summary Judgment. The Court thus enters summary judgment in favor of Greenwich as to Conco's first cause of action, for declaratory relief, regarding Greenwich's duty to defend. IT IS SO ORDERED.