Appellate Decision Clarifies Insurer's Duty To Defend
LGC Staff
Mon June 16, 2014
3:34 PM UTC

In the new case of Regional Steel Corporation v. Liberty Surplus Insurance Corporation, the California Court of Appeal confirmed that an insurer has no duty to defend its insured whose work did not cause damage to other property.  The case involved a 14-story apartment building covered by a wrap policy.  Regional Steel, one of the wrap enrollees, provided and installed reinforcing steel at the project.

As part of its work, Regional Steel used 90-degree and 135-degree seismic tie hooks in shear walls, which were then encased in concrete by another contractor, Webcor Construction.  Ultimately, the building inspector determined that only 135-degree hooks could be used, and ordered replacement of the 90-degree hooks (which would have required removal of some of the concrete encasement).  When the developer, JSM, withheld payment to Regional Steel to cover the repairs, Regional sued JSM, which in turn cross-complained against Regional Steel and others for construction defects.

Regional Steel tendered its defense to the wrap insurer, Liberty, which denied the tender based on lack of resultant damage arising from Regional's work.  Regional settled the underlying action and sued Liberty.  Liberty filed a Motion for Summary Judgment, which the trial court granted, finding there was no duty to defend Regional, and the Court of Appeal affirmed.

In reaching its conclusion, the Court of Appeal recognized two divergent lines of cases.  The first (such as F&H Construction v. ITT Hartford Insurance) clearly held that removing and replacing defective work or materials is purely an economic loss, and does not constitute physical injury to property under a commercial general liability policy.  Several other cases, however, held that where defective work or material must be removed or repaired to comply with building code or health and safety standards, its presence constitutes physical injury to the building (e.g. Armstrong World Industries, Inc. v. Aetna).  In other words, those cases held the physical linking of the defective material to the building was the physical injury.

Ultimately, the Court held that the latter line of cases, such as Armstrong, were unique in that they involved hazardous materials that were incorporated into a whole, not simply defective workmanship.  Armstrong, for instance, involved asbestos material that was incorporated into the building.  Regional Steel's situation did not involve hazardous materials, but simply allegedly defective workmanship in the form of non-compliant seismic tie hooks.  Because the defective workmanship did not cause damage, there was no duty to defend Regional under the policy.

This is a significant decision for insurers of contractors, as it helps eliminate the doubt created by Armstrong and its progeny, and confirms a general liability carrier has no duty to defend an insured for claims of defective workmanship that has not caused damage to other property.

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