Advise & Consult, Inc. | August 27, 2015
A California law applied in a federal district court in denying coverage for remediation work when defective tiles needed to be replaced in Am. Home Assur. Co. v. SMG Stone Co., 2015 U.S. Dist. LEXIS 75910 (N. D. Cal. June 11, 2015).
When a developer discovered fractures in some of the stone tile that was installed by a subcontractor, he requested that those tiles be removed and replaced. Due to the process of removing these tiles, portions of drywall and concrete subfloor that was installed by other subcontractors also needed to be replaced. The developer then sued the subcontractor, who then passed the claim on to its insurer, which denied the coverage and filed for declaratory judgement on the basis that there is no coverage for the floor tile fracture claims.
Tred Eyerly discusses this further in a recent article:
On cross-motions for summary judgment, the court first found that the fracturing of the stone floor tiles caused by the subcontractor’s defective installation was the result of an “occurrence.” There was no evidence that the subcontractor knew that its tile installation work was defective before the tiles fractured. Instead, the fracturing was an unexpected consequence of the defective installation.
But there was no “property damage.” For the subcontractor to prevail, the defective installation work had to be considered separate and distinct from the physical manifestation of the defective work. Under California law, coverage resulted from construction defects that involved physical injuries to other parts of the construction project. Here, damage to the subfloor and the drywall did not result from the defective floor tile work, but from the remediation of the defective floor tile work. Remediation work did not constitute property damage under California law.
Nor did loss of use create property damage. The case law indicated that a mere delay in the completion of the project and sale of the residences did not constitute “loss of use.”
Finally, even if the costs arising from the fractured floor tiles constituted “property damage,” Exclusions J (5), J (6) and (l) would bar coverage. Exclusion j (5) did not apply when faulty workmanship directly caused damage to other parts of the property that were not being worked on by the subcontractor. Such was not the case here. Exclusion j (6) did not apply when the subcontractor had to replace the tile because its “work” was “incorrectly performed on it.” Moreover, the products-completed operations hazard exception was not applicable because the units had not yet been put to their intended use when the fractured tiles were discovered.
Finally, Exclusion l, barring coverage for “your work” that is defective or actively malfunctions, applied because the tiles fractured when they were not installed properly. The “malfunction” of the tiles in the form of fracturing could not be separated from the subcontractor’s defective tile installation work.
Because there were no genuine issues of material fact as to the potential for coverage, there was no duty to defend.