The federal district court applied California law to find there was no coverage when the subcontractor was sued for broken tiles on a project. Am. Home Assur. Co. v. SMG Stone Co., 2015 U.S. Dist. LEXIS 75910 (N. D. Cal. June 11, 2015).
The subcontractor installed stone floor tiles at the project. The developer discovered fractures in some of the tiles. The fractured tiles were removed and replaced. This remediation process required the removal and replacement of portions of drywall and concrete subfloor installed by other subcontractors. The developer sued the subcontractor, who tendered the defense to its insurer.
The insurer denied coverage and filed for a declaratory judgment that there was no coverage for the floor tile fracture claims.
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.