Insurance Law News
Coverage, Litigation, Solutions

Insurance Law News - November 2015

< Return to News page

Liability Policy's Exclusion for "Subsidence" Resulting From Insured's "Operations" Bars Coverage for Landslide Allegedly Resulting From Insured's Maintenance and Construction Activities

A commercial general liability policy's exclusion for "subsidence" resulting from the insured's "operations" barred coverage for a landslide that allegedly resulted from the insured's maintenance and construction activities. (Philadelphia Indemnity Insurance Company v. Lakeside Heights Homeowners Association (2015) WL 3799576)

Facts

In 2013, a landslide caused extensive damage to property owned by various parties, including the Lakeside Heights Homeowners Association (HOA) and the County of Lake (County). The HOA subsequently filed a state court lawsuit against the County for inverse condemnation and dangerous condition of public property, apparently alleging that the landslide was caused by leaks in water pipes owned by the County. In response, the County cross-complained against the HOA, alleging that the landslide occurred because, among other things, the HOA: (1) negligently constructed improvements over an ancient slide area; (2) negligently failed to maintain its sprinkler system and private storm drain, causing water to saturate its property and surrounding properties; and (3) negligently failed to maintain its landscaping, causing loss of lateral support to surrounding properties.

The HOA tendered defense of the cross complaint to the HOA's general liability insurer, Philadelphia Indemnity Insurance Company (Philadelphia). In response, Philadelphia agreed to defend the HOA, but Philadelphia reserved its right to assert that the policy's "subsidence" exclusion barred coverage for any liability the HOA might have to the County. The policy's "subsidence" exclusion provided that there was no coverage for property damage "caused by, resulting from, attributable or contributed to, or aggravated by the subsidence of land as a result of landslide, mudflow, earth sinking or shifting, resulting from operations of the named insured or any subcontractor of the named insured."

Philadelphia then filed a federal court declaratory relief action seeking a determination that the policy's "subsidence" exclusion relieved Philadelphia of any duty to defend the HOA against the County's cross-complaint. Eventually, Philadelphia moved for summary judgment against the HOA based on the exclusion.

Holding

The federal district court, applying California law, granted Philadelphia's motion for summary judgment. The policy's "subsidence" exclusion barred coverage for property damage "caused by … subsidence … resulting from operations of the named insured …." According to the court, the HOA's "operations" included maintaining the HOA's common areas such as irrigation systems, drainage systems, landscaping, etc. Those "operations" in turn, allegedly led to the landslide that caused the property damage claimed by the County. All of the theories that the County alleged against the HOA were dependent upon the HOA's "operations," and thus fell within the Philadelphia policy's "subsidence" exclusion. As such, Philadelphia had no duty to defend or indemnify the HOA against the County's underlying cross-complaint.

Comment

In an earlier case, City of Carlsbad v. Insurance Company of the State of Pennsylvania (2009)180 Cal.App.4th 176, a California state appellate court upheld an arguably broader, simpler "subsidence" exclusion. The subsidence exclusion in City of Carlsbad applied to "any property damage arising out of land subsidence for any reason whatsoever."

In the above Lakeside Heights Homeowners Association case, the subsidence exclusion was perhaps narrower in that it only barred coverage for property damage caused by "subsidence … resulting from operations of the named insured or any subcontractor of the named insured." Nevertheless, according to the federal district court, all of the claims against the insured involved subsidence that allegedly resulted from the insured's "operations." As such, the exclusion defeated any potential for coverage.

 

Top of Page

Liability Insurer Has No Duty to Defend Tile Subcontractors Against Claims Arising from Fracturing of Tiles Caused By Alleged Improper Installation

A commercial general liability insurer had no duty to defend its insureds, two tile subcontractors, against claims arising from fracturing of floor tiles caused by alleged improper installation of the tiles. (American Home Insurance Company v. SMG Stone Company, Inc. (2015) WL 3638363)

Facts

Olympic & Georgia Partners LLC (Olympic), a developer, hired Webcor Construction LP (Webcor), a general contractor, to construct a 54-story hotel and condominium project in Los Angeles. Webcor, in turn, hired SMG Stone Company, Inc. (SMG) and Colavin & Son, Inc. (Colavin), both subcontractors, to install stone floor tiles at the project.

Before the project was completed, Olympic discovered that fractures had developed in some of the tiles which had been installed. An investigation showed that the fractures were caused by improper installation of the tiles. The fractured tiles were removed and replaced during a remediation process which required removing and replacing portions of the concrete subfloor and drywall installed by other contractors. Olympic contended that as a result of the floor tile problems, Olympic sustained delays in selling condominium units, which delays caused Olympic to incur over $39 million in damages.

Olympic subsequently initiated an arbitration proceeding against Webcor, SMG and Colavin. SMG and Colavin separately sued Webcor for failing to pay amounts allegedly owed to SMG and Colavin under the subcontracts, and Webcor in turn cross-complained against SMG and Colavin for damages caused by the alleged improper installation of the floor tiles.

SMG and Colavin tendered defense of the arbitration proceeding and lawsuit to their commercial general liability insurer, American Home Assurance Company (American Home). American Home asserted it had no duty to defend SMG and Colavin.

American Home subsequently filed a federal court declaratory relief action against SMG and Colavin, seeking a ruling that American Home did not have any duty to defend or indemnify SMG and Colavin in the construction defect arbitration proceeding and lawsuit. American Home then moved for summary judgment.

Holding

The federal district court granted American Home's motion for summary judgment, holding that under California law, American Home had no duty to defend or indemnify SMG and Colavin in the underlying arbitration proceeding and lawsuit.

The district court began by stating that it had "serious doubts" whether the underlying claims against SMG and Colavin constituted claims for "property damage," which the American Home policy defined as (1) "physical injury to tangible property" and (2) "loss of use of tangible property damage that is not physically injured." With regard to the first prong of the "property damage" definition (i.e., "physical injury to tangible property"), the court stated it was unlikely that either the fractures to the floor tiles themselves or the damage to the concrete subfloors and interior walls during the removal and reinstallation process could be deemed "physical injury to tangible property." With regard to the second prong of the "property damage" definition (i.e., "loss of use of tangible property that is not physically injured"), the court likewise believed it was unlikely that mere delay in completion of the project and sale of the units could be considered "loss of use of tangible property that is not physically injured."

However, the court found that even if any of the claims against SMG and Colavin could be considered claims for "property damage," various policy exclusions applied to defeat coverage. For example, exclusion j(5) barred coverage for property damage to "that particular part of real property on which you … are performing operations, if the property damage arises out of those operations." Similarly, exclusion j(6) precluded coverage for property damage to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it" (although this exclusion had an exception for property damage included in the "products-completed operations hazard"). Here, the facts indicated that SMG's and Colavin's tile work was not "complete" when the tiles fractured, which meant that exclusions j(5) and j(6) barred coverage. Further, even if SMG's and Colavin's and tile work was "complete" when the tiles fractured, coverage would be barred by exclusion l. That exclusion (as amended by endorsement) barred coverage for property damage to that part of "your work" that "is defective or actively malfunctions" even after the work is complete. Because the policy exclusions eliminated any possibility of coverage, American Home had no duty to defend SMG and Colavin in the underlying construction defect arbitration proceeding and lawsuit.

Comment

The federal district court's suggestion that there might not have been any "property damage" at all is perhaps debatable. The insureds' alleged improper installation caused fractures to floor tiles, which would appear to constitute "physical injury" to "tangible property." Nevertheless, it appears that any such property damage was indeed excluded from coverage by the "faulty workmanship" and "work" exclusions in the policy. Thus, while the district court may have conflated to some extent the issue of whether there was "property damage" in the first instance with the separate issue of whether any such property damage was "excluded," it appears that the district court reached the correct result.

Top of Page

 

 

Print Page    
Smith Smith & Feeley LLP
1401 Dove Street
Suite 610
Newport Beach, California 92660

Telephone: 949.263.5920
Facsimile: 949.263.5925

NEWSLETTER

Sign-up for Newsletter

News Archives

SEMINARS

Among the topics we have covered in recent seminars are the following:

  • The Foreclosure Process and Its Effect on Mortgagee/Loss Payee Claims
  • Contractual Limitation Periods in Property Insurance Policies
  • Intentional/Criminal Acts Coverage Issues
  • Condominium Coverage Issues
  • Responding to Policy Limit Demands
  • Conflicts of Interest Requiring Independent (Cumis) Counsel
  • Effective Use of Declaratory Relief Actions
  • Property and Liability Coverage for Mold Claims
  • Insurance Coverage for Loss of Computer Data
  • Advertising Injury/Personal Injury Coverage
  • Unfair Competition (Business & Professions Code Section 17200)
  • Alternative Dispute Resolution of Problem Claims
  • Genuine Issue Doctrine
  • Collapse Coverage Issues

Request Seminar information

 

 

 

 

 

Disclaimer, Privacy Statement, Terms of Use

Home | Practice Profile | Attorneys | News | Seminars | Careers | Contact

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your own situation.

Smith Smith & Feeley LLP
1401 Dove Street . Suite 610 . Newport Beach, California 92660
Telephone: 949.263.5920 | Facsimile: 949.263.5925

©2002-2017 Smith Smith & Feeley LLP All Rights Reserved

Lawyer Web Designers