United States: Global Modular, Inc. V. Kadena Pacific, Inc.

In Global Modular Inc. v. Kadena Pacific, Inc., __________ Cal.App.5th ____ (September 8, 2017), the California Fourth District Court of Appeal affirmed in part, and reversed in part, the trial court's entry of judgment in connection with a coverage dispute arising out of the repair of modular units manufactured and installed by subcontractor, Global Modular, Inc. ("Global"), pursuant to a subcontract with general contractor, Kadena Pacific, Inc. ("Kadena"). The parties' dispute arose out of an underlying claim, wherein, Kadena had entered into a contract with the United States Department of Veterans Affairs ("VA") to oversee construction of its Center for Blind Rehabilitation in Menlo Park, California. Kadena hired Global to build, deliver and install 53 modular units that would comprise the rehabilitation center. Because Kadena had hired a different subcontractor to install the roofing, Global agreed to deliver the units covered only by a roof deck substrate – a three quarters of an inch base sheet of plywood. The roof would be installed on the units after the units had been installed in place at the project site. Originally, the units were supposed to have been installed by Global during the Summer of 2010. However, for various reasons, including delays in manufacturing by Global, the units were not installed until October 2010. Shortly after installation, it rained and the units sustained water intrusion damages in otherwise non-defective portions of the units, including drywall and insulation. Thereafter, Global attempted to prevent further water intrusion by affixing thick plastic tarps on the roofs of the units. Unfortunately, the plastic tarps failed to prevent further water intrusion over a four-month period. Notwithstanding Global's attempts to repair the interior damage sustained by the units, such attempts failed. At that point, Kadena terminated its contract with Global and hired other contractors to repair the damaged units.

Subsequently, Kadena sued Global for breach of contract. Thereafter, a jury held that Global was contractually liable for a total of $1,068,541.91 in water intrusion damages, broken down as follows:

  • $617,332.86 for drywall and insulation repairs;
  • $113,020.05 for carpentry repairs;
  • $46,125.00 for mechanical duct repairs; and
  • $292,064 for delay damages.

Subsequently, Global's insurer, North American Capacity Insurance Company ("NAC") filed a declaratory relief action arguing that it was not obligated to indemnify Global and Kadena for the water intrusion damages because they were not covered under its commercial general liability ("CGL") policy. The CGL policy covered "property damage" caused by an "occurrence," which is defined as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." The CGL policy also included exclusions j.(5) and j.(6). Exclusion j.(5) excludes coverage for "that 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."

Exclusion j.(6) applies to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it."

In response to cross-motions for summary judgment, the trial court held that exclusions j.(5) and j.(6) did not apply to bar coverage of the cost of repairing the modular units. In addition, the trial court held that the delay damages assessed against Global were also covered by the NAC CGL policy. However, the trial court found that a prior settlement between Global and Kadena in the amount of $321,975 could be offset against the jury's award of water intrusion damages against Global. In addition, the trial court held that the attorneys' fees awarded against Global in the Kadena action were released pursuant to the parties' prior settlement for non-insurance related damages.

The Court of Appeal affirmed the trial court's entry of judgment in favor of Kadena in connection with its determination that exclusions j.(5) and j.(6) did not apply to bar coverage of the judgment rendered against Global in the Kadena lawsuit as well as the delay damages awarded in conjunction with the water intrusion damages in favor of Kadena. The Court of Appeal reversed the trial court's decision in connection with the set-off of Kadena's prior settlement with Global for coverages not covered by the NAC policy as well as the award of attorneys' fees.

The Court of Appeal reasoned as follows in connection with exclusions j.(5) and j.(6):

The parties' dispute concerns the meaning of the phrase "are performing operations." NAC argues the phrase refers to works in progress and therefore exclusion j(5) applies when the property damage occurs before construction is complete. Kadena argues the phrase is more narrow, referring only to the particular component Global was physically working on at the time of the property damage. Under that interpretation, the exclusion does not apply to the water intrusion damages because the intrusion occurred during heavy rains when Global was not working on the units.

We 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." The drafters use this kind of broad language elsewhere in the policy, such as in exclusion l, which excludes "'[p]roperty damage' to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" This provision precludes coverage for damage to any of the insured's work once it has been completed or abandoned. We find it telling exclusion j(5) employs a much more narrow construction, restricting the excluded damage to only that particular part on which the insureds are performing operations.

. . .

Like the Missouri Supreme Court, we view the most reasonable interpretation to be the one that applies a word's ordinary definition and gives meaning to every word in the provision. NAC's interpretation would broadly apply to any period before an insured's work on a project is complete—whether or not the damage occurred while the insured was physically present and working on the project at the time of damage. In our view, that interpretation overlooks the present tense of the phrase "are performing operations" and the active aspect of "perform" and "operate." But, even if we were inclined to find NAC's interpretation reasonable, we would be required to resolve the ambiguity in favor of coverage. (E.g., Western Employers Ins. Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027, 1030 [194 Cal. Rptr. 688] ["It is well-known that any ambiguities in an insurance policy will be construed against the insurer"]; Producers Dairy Delivery Co. v. Sentry Ins. Co., supra, 41 Cal.3d at p. 912 [any doubts as to the application of insurance exclusions are resolved in favor of coverage].)

NAC argues Kadena's interpretation is irrelevant because Kadena is not a party to the policy and, as a result, it is improper to construe policy ambiguities in Kadena's favor. NAC asserts the proper inquiry is what Global, the insured, understood the policy to mean and points out that Global argues on appeal the jury's damage award is not covered under the policy. Contrary to NAC's contention, our interpretation is not based on Kadena's understanding of the contract. Instead, we base our interpretation on the objectively reasonable meaning of the policy's plain language—in other words, what Global should have understood the policy to mean at the time of contracting. (See, e.g., Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1265 [10 Cal. Rptr. 2d 538, 833 P.2d 545] [applying a policy's "objectively reasonable" meaning protects the insured's reasonable expectations over the "subjective beliefs of the insurer"].) Global's position on appeal is irrelevant to that inquiry. We therefore affirm the court's determination that exclusion j(5) does not apply to the repair/replacement costs.

The Court of Appeal addressed exclusion j.(6) as follows:

NAC argues the exclusion applies to the repair/replacement costs as they are a result of Global's inadequate efforts to waterproof the units. In other words, Global's waterproofing is the incorrectly performed work and the units are the particular part that must be repaired because of that work. Kadena contends this interpretation is too broad. To begin with, Kadena disagrees Global's waterproofing efforts were incorrectly performed and instead argues the severe weather simply overcame the plastic tarps and plywood substrate. Even assuming Global's waterproofing efforts were subpar, Kadena argues they do not constitute incorrect work as the phrase is used in exclusion j(6). Kadena contends the phrase refers to a product, such as warped or uneven floors, not a process like covering the units with plastic tarps. Finally, assuming Global's waterproofing efforts are incorrect work, the "particular part" Global performed the incorrect work "on" was the plywood substrate, not the interior parts of the units for which Kadena sought repair/replacement costs. Those parts — the drywall, insulation, framing, and ducting — were not defective and were not the subject of Global's incorrect work, and as a result, their repair and replacement costs do not fall under exclusion j(6). We agree with Kadena that the exclusion applies narrowly.

Merriam-Webster defines "particular" as "of, relating to, or being a single person or thing," "distinctive among other examples or cases of the same general category," and "one unit or element among others." (Webster's 9th New Collegiate Dict. (1991) p. 858.) The same source defines "part" as "one of the often indefinite or unequal subdivisions into which something is or is regarded as divided and which together constitute the whole." (Id. at p. 857.) These definitions indicate the phrase is intended to be a narrowing element, one that limits the provision's application to a distinct part of a construction project. That the incorrect work must have been performed "on" that particular part is an additional narrowing element. Had the policy drafters not intended the exclusion to apply narrowly, they easily could have left out the prepositional phrase and written the exclusion to apply to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed." Were this how the exclusion read, NAC's interpretation would be objectively reasonable. As written, however, the exclusion's narrowing language demonstrates it refers to the specific part of the insured's work on which the insured performed faulty workmanship and not, more broadly, to the general area of the construction site affected by the insured's work.

. . .

Based on the above, we conclude exclusion j(6) applies only to the particular component of the insured's work that was incorrectly performed and not to the insured's entire project. Here, based on the undisputed facts from trial, the only arguably defective components or parts of Global's work are the plastic tarps, as they failed to keep the water out. However, because the jury was not asked to decide whether Global's waterproofing efforts were incorrect or simply overcome by heavy rains, it is by no means an undisputed fact the tarps were faulty or Global's placement of them incorrect. But more importantly, there was no allegation the items for which Kadena sought repair and replacement costs — the drywall, insulation, framing, and ducting — were defective. Those items were acceptable until it rained and they suffered water damage. We therefore conclude the trial court was correct in determining exclusion j(6) does not preclude coverage for the repair/replacement costs as a matter of law.

As respects the issue of delay damages, the Court of Appeal found as follows:

Here, the 131 days of remediation was time Kadena could have spent completing the project had the units' interiors not been damaged. That delay constitutes a consequential loss (a loss occasioned by the water intrusion) and as such, is part of the damages NAC must pay "because of" property damage. (Cf. AIU, supra, 51 Cal.3d at pp. 829–830 [interpreting "damages" in CGL insuring clause broadly to include all of the government's "expenses" attributable to "actual cleanup, mitigation of damage, or investigation and monitoring"].) We therefore affirm the trial court's determination that Kadena's delay damages are covered under the policy.

In addition, the Court of Appeal rejected NAC's argument that Kadena's settlement with Global for non-insurance related damages acted as a setoff against the covered damages awarded in the Kadena construction defect lawsuit against Global.

Lastly, the Court of Appeal held that the release of non-insurance related damages did not encompass an award of attorneys' made in the Kadena construction defect lawsuit against Global.

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