Regional Steel Corporation v. Liberty Surplus Insurance Corp.

Second Appellate District (Los Angeles County)

Insurer had no duty to defend subcontractor alleged to have installed defective steel framing in an apartment building, where only alleged damage was to sub’s work, not to other property.

A subcontractor was hired to provide reinforcing steel for the columns, walls, and floors of an apartment project. The steel sub used both 90 degree and 135 degree seismic tie hooks in shear walls. However, after the tie hooks had been encased in concrete, a city inspector issued a correction notice requiring the exclusive use of 135 degree tie hooks. The general refused to pay the steel sub’s invoices and withheld $545,000. The steel sub sued the general for nonpayment, and the general filed a cross-complaint against the steel sub and others asserting contract, warranty, and negligence claims. The steel sub tendered defense of the matter to its insurer. The insurer denied the tender, asserting “no damage to property was alleged, and the purely economic losses caused by the need to reopen the poured concrete to correct the tie hook problem did not constitute property damage within the meaning of the Policy.”

The steel sub subsequently sued the insurer for its refusal to accept the tender and provide a defense and indemnity. However, the trial court granted the insurer’s motion for summary judgment, finding that “the Policy excluded coverage for property damage arising out of a defect, deficiency, inadequacy or dangerous condition of the insured’s work, or a delay or failure by an insured to perform a contract in accordance with its terms,” and that “coverage was excluded for impaired property because such property was defined as tangible property, other than the insured’s work known or thought to be defective deficient, inadequate or dangerous.”

The appellate court affirmed. It observed that where defective workmanship is incorporated into construction projects, “California cases consistently hold that coverage does not exist where the only property ‘damage’ is the defective construction, and damage to other property has not occurred.” (Italics original.) Here, the general contractor’s allegations against the steel sub were simply that it failed to install proper tie hooks, and that failure necessitated demolition and repair of the affected areas. Thus, the allegations fell “squarely within the ambit of the rule” set forth in F & H Construction v. ITT Hartford Ins. Co., 118 Cal.App.4th 364 (2004) that this type of repair work is not covered under a CGL policy. Thus, the steel sub’s defective work did not constitute property damage under the insurance policy. Further, under the policy’s “Impaired Property” exclusion, there was “no coverage for property damage to ‘property that has not been physically injured’ arising out of the [the steel sub’s] negligent failure to perform its contractual obligations based on installation of defective tie hooks.”

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