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Global Modular, Inc. v. Kadena Pacific, Inc. (4th Dist. Ct. App. 2017) ___ Cal. App. 5th ___, 2017 DJDAR 8880, Case No. E063551

Wednesday, November 22, 2017

UNDERLYING CLAIM 

The Veterans Administration ("VA") hired Kadena as general contractor to oversee the construction of a center for blind rehabilitation and Kadena subcontracted with Global Modular to build, deliver and install 53 modular units that would constitute the center.  Kadena hired a different contractor to install the roofing so Global agreed that the units would be delivered covered only by a substrate.  Although delivery was originally to take place during the summer, delays caused the roofless units to be delivered in October and November.  Global attempted to protect the units with plastic tarp but this proved insufficient and the interiors of the units suffered water damage due to exposure to the elements.  Kadena and Global subsequently mutually agreed to terminate their contract and Kadena oversaw remediation of the water damaged units.  Global sued Kadena for failure to pay under the contract and Kadena countersued alleging Global breached the contract in various ways, including failure to repair the damaged units.  The parties partially settled the action.  Global paid Kadena $321,975 to release all claims except those covered by Global's insurance policy with North American Capacity Insurance Company (NAC).  Kadena paid Global $153,025 in return for Global's dismissal of its failure to pay claims.  At trial, Kadena argued Global was contractually responsible to pay the costs of water remediation.  The jury awarded Kadena in excess of $1 million. Following the verdict, Global filed a motion to offset the damage award by the amount of its settlement payment.  The trial court found offset was appropriate and offset the jury award by the $321,975 Global paid in settlement.  It also found Global was contractually liable for Kardena's attorney's fees in the amount of $360,000.

NAC also filed a coverage action claiming that it had no obligation to indemnify Global for the water intrusion claims as they were not covered under Global's policy.  Kadena and NAC filed motions for summary judgment.  NAC argued that there was no coverage for the water remediation based on work product exclusions j(5) and j(6).  As to the delay damages, NAC argued they did not constitute "property damage" and therefore were not covered.  The trial court found in favor of Kadena, holding that the exclusions were ambiguous and could be reasonably interpreted to exclude damage only to that particular component of the work that was defective.  The evidence showed that the drywall, insulation, framing and ducting repaired or replaced by Kadena was not defective but had been damaged by the water intrusion. Therefore, the exclusions did not apply.   As to the delay damages, the court found that they fell within the insuring agreement and amounted to damages because of property damage. 

Global appealed the award of attorneys' fees, Kadena appealed the trial court's ruling allowing an offset, and NAC appealed the finding of coverage.

APPELLATE COURT'S RULING

First, the appellate court noted that the case is one of first impression in California as respects Exclusions j(5) and j(6).  Exclusion j(5) provides that coverage does not apply to "[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of those operations."    In holding that this exclusion did not apply to the rain water intrusion, the appellate court noted "[w]e conclude the use of the active, present tense construction 'are performing operations' indicates the exclusion applies only to damage caused during physical construction activities.  Had the policy drafters intended the exclusion to apply more broadly to damage to any of the insured's work in progress, we would expect the provision to say something along the lines of, 'property damage to that particular part of real property on which your operations are not yet complete' or even 'property damage to your work arising out of your operations.'" Because the damage occurred during rain storms when no work or operations were being performed, the exclusion did not apply. 

With respect to Exclusion j(6), the appellate court noted that the exclusion "applies to '[t]hat particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.'"  NAC contended that this exclusion applied because the repair and replacement costs resulted from Global's inadequate attempts to waterproof the units.  The appellate court concluded that the proper interpretation of this exclusion would be that it "applies only to the particular component of the insured's work that was incorrectly performed and not to the insured's entire project...[T]here was no allegation the items for which Kadena sought repair and replacement costs-the drywall, insulation, framing, and ducting-were defective.  These items were acceptable until it rained and they suffered water damage." (italics original.)  Therefore, the appellate court found Exclusion j(6) did not apply to preclude coverage.  

As to the delay damages, the appellate court agreed with the trial court's conclusion that these damages would be covered as consequential loss occasioned by the water intrusion and therefore amounted to damages "because of" property damage. 

With respect to the attorney's fee award against Global, Global and NAC contended that the award should be reversed because Kadena released its right to attorney fees under its settlement agreement with Global.  The court noted that the agreement contained two main provisions, one releasing all claims related to the VA project and another carving out an exception for claims related to property damage, personal injury, loss of use and other claims covered under the NAC policies.  This exception allowed Kadena to pursue the water damage claim.  Furthermore, according to the appellate court, the Kadena/Global contract, Civil Code section 1717 and CCP sections 1033 and 1033.5 allowed Kadena, as the prevailing party on the water damage claim, to recover its attorney's fees.  Global and NAC argued the carve out provision only applied to property damage, personal injury and loss of use claims and that attorney's fees would not fall within this exception.  The appellate court disagreed, noting that the carve out provision applied to claims "related to" covered property damage claims as well.

Finally, Global and NAC argued that the carve out provision applied only to claims covered by the policy and although NAC was obligated under the policy to pay attorney's fees taxed against the insured in any suit it defended, that obligation was a defense, rather than an indemnification, obligation.  In dismissing this argument, the appellate court noted that although the way in which attorney's fees are defined under the policy may be relevant if Global were to seek indemnification of such fees from NAC, it was irrelevant to Kadena's right to obtain such fees from Global which was the issue before the court.  Since the claim was within the carve out provision, Kadena was not barred from making the claim.

The appellate court next addressed the question of whether the trial court  erred in applying an offset to the judgment for the amount Global paid Kadena to settle a portion of the claims.  The appellate court noted that "to warrant an offset, Global's settlement payment to Kadena must have compensated Kadena for the same harm as the jury's damage award."  After reviewing the record, the appellate court found that "the trial court's conclusion that trial was not limited to insured claims is not supported by substantial evidence.  The court's ruling overlooks the fact Kadena settled its faulty workmanship and pre-rain delay claims after filing its cross-complaint and limited the evidence of its damages to the costs of remediating the water damage to the unit interiors.  The record demonstrates Global's settlement payment ...did not compensate for the water damage remediation costs."  Consequently, the appellate court reversed the order granting an offset and affirmed the judgment in all other respects.

EFFECTS OF THE  COURT'S RULING

This case is significant to the extent that, as the appellate court noted, it is a case of first impression in California as to the particular provisions of the exclusions at issue.  First, with respect to exclusion j(5), the court made the significant holding that the phrase "are performing operations" requires that the damage actually occur while operations are being performed.  It is not enough that operations have not yet been completed.  So, for example, is the insured acts negligently resulting in damage that occurs at night when the insured is not on the job site, it appears that this exclusion would not apply.  This is a very narrow reading of the exclusion.  The appellate court similarly provided a narrow interpretation of exclusion j(6), finding that by referencing "that particular part" of the property on which the insured's work was performed applies only to that component and not the whole project.  Therefore, if the item for which repair or replacement is necessary is not itself defective, even if it amounts to the insured's work, it will not be excluded under this exclusion.

This opinion is not final. It may be withdrawn from publication, modified upon rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

This publication is intended for informational purposes only and is not intended as legal advice or as a substitute for legal consultation in a particular case or circumstance. Transmission of this information is not intended to create, and receipt does not create, an attorney-client relationship.

Last Updated Wednesday, October 17, 2018 - 11:35 PM.