TRUCK INSURANCE EXCHANGE et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent; PECK/JONES CONSTRUCTION CORPORATION et al., Real Parties in Interest.
Does a general contractor's commercial general liability policy afford coverage for the contractor's negligent failure to meet a contractual deadline for completion of a construction project? No.
Peck/Jones Construction Corporation entered a contract with Center West Limited, pursuant to which Peck/Jones agreed to build an office building and to complete it on or before July 30, 1989.1 When the project was not completed on time (it was eight months late), Center West sued Peck/Jones and others who had worked on the project, alleging breach of contract and negligence. Peck/Jones gave notice to its insurer (Truck Insurance Exchange) and Truck, reserving its rights, provided a defense in the Center West action. The case was tried to a private judge (Hon. Leon Savitch, ret.), who found that Peck/Jones had breached its contract and was negligent in failing to complete the project by the promised date. Judge Savitch apportioned Center West's damages among Peck/Jones and others, and entered a judgment against Peck/Jones for more than $2.2 million. Truck refused to pay the judgment, pointing to the language of the commercial general liability (CGL) policy it had sold to Peck/Jones. According to the negotiated policy, Truck had agreed to “pay on behalf of [Peck/Jones] all sums which [Peck/Jones] shall become obligated to pay by reason of the liability imposed by law, or assumed by contract, because of injury to or destruction of property, including the loss of use of property caused by an occurrence.” (Italics added.)
Peck/Jones sued Truck for breach of the insurance contract and bad faith. Truck answered and (at some point before trial) the action was trifurcated into coverage, bad faith, and damages phases. During trial of the coverage phase, Peck/Jones and Truck stipulated that the policy was broker-negotiated (and thus not a contract of adhesion), that the policy language was not ambiguous, and that Peck/Jones had completed the Center West project without defects, but not on time. The trial court (Hon. Harold I. Cherness) nevertheless concluded that Peck/Jones was covered for its breach of the Center West contract-because (according to Judge Cherness) Judge Savitch had found that Peck/Jones had been negligent (as well as that it had breached its contract). Truck then filed this petition for a writ of mandate.
Truck contends the policy covered Peck/Jones's liability “imposed by law” or “assumed by contract,” not its liability “imposed by contract” (or, stated differently, that the policy covered Peck/Jones for tort liability, not breach of contract liability). Peck/Jones contends the language of the policy is sufficiently broad to cover a “negligent breach of contract.” We agree with Truck.
Without reinventing the wheel, we summarize the governing rules. An insurer's duty to indemnify is measured by the nature and kind of risks covered by the policy, which is interpreted to effectuate the mutual intent of the parties and to give effect to their reasonable expectations. When the policy's language is clear and explicit, it will be interpreted in its ordinary and popular sense. When the language is arguably ambiguous but has been judicially construed, that construction replaces the ambiguity and becomes part of the policy. (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821-823, 274 Cal.Rptr. 820, 799 P.2d 1253; Wilmington Liquid Bulk Terminals, Inc. v. Somerset Marine Inc. (1997) 53 Cal.App.4th 186, 192-193, 61 Cal.Rptr.2d 727; Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 802-803, 810, 26 Cal.Rptr.2d 391; Bartlome v. State Farm Fire & Casualty Co. (1989) 208 Cal.App.3d 1235, 1239, 256 Cal.Rptr. 719; Highlands Ins. Co. v. Universal Underwriters Ins. Co. (1979) 92 Cal.App.3d 171, 174-176, 154 Cal.Rptr. 683.)
The policy uses standard CGL language intended and understood to provide coverage only for tort liability, not contract liability.2 Truck promised “[t]o pay on behalf of [Peck/Jones] all sums which [Peck/Jones] shall become obligated to pay by reason of the liability imposed by law, or assumed by contract, because of injury to or destruction of property, including the loss of use of property caused by an occurrence.” Plainly, liability “imposed by law” (tort liability) is covered, as is liability “assumed by contract” (tort liability that arises by reason of a contractual relationship, not contract liability assumed by contract). (Loyola Marymount University v. Hartford Accident & Indemnity Co. (1990) 219 Cal.App.3d 1217, 1225-1226, 271 Cal.Rptr. 528.) Liability “imposed by contract” (for a breach of contract) is not covered, and the reason for the breach is irrelevant. (International Surplus Lines Ins. Co. v. Devonshire Coverage Corp. (1979) 93 Cal.App.3d 601, 610-611, 155 Cal.Rptr. 870 [rejecting the contention that “liability imposed by law” covers liability arising ex contractu ]; Fireman's Fund Ins. Co. v. City of Turlock (1985) 170 Cal.App.3d 988, 995, 998, 216 Cal.Rptr. 796 [finding coverage “only where there is tort liability”]; Fragomeno v. Insurance Co. of the West (1989) 207 Cal.App.3d 822, 828, 255 Cal.Rptr. 111; Wilmington Liquid Bulk Terminals, Inc. v. Somerset Marine Inc., supra, 53 Cal.App.4th at p. 193, 61 Cal.Rptr.2d 727 [similar language covers “tort liability, not liability based upon an alleged failure to perform a contract”]; 2 Windt, Insurance Claims and Disputes (3d ed. 1995) § 11.07, p. 224.) 3
Peck/Jones insists the distinction between that which is ex delicto and that which is ex contractu is blurred and often overlapping, and contends the finding that it was “negligent” when it failed to complete the project on time triggers coverage under the Truck policy. Peck/Jones's conceptual scaffolding does not support its conclusions.
First, we reject Peck/Jones's reliance on a line of pleading cases. It is true, as Peck/Jones contends and as Division Three of our Court pointed out in North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, 69 Cal.Rptr.2d 466, that a contract to perform services may impose a duty on the service provider to do so reasonably and carefully, and that its failure to do so may subject it to liability to the other contracting party for both negligence and breach of contract. (Id. at pp. 769-770, 774-776, 69 Cal.Rptr.2d 466.) So what? The fact that Peck/Jones may have been liable to Center West for damages founded on negligence as well as those arising from a breach of the Center West contract has nothing to do with whether the insurance contract Peck/Jones made with Truck provides coverage for breach of contract damages. (See WDC Venture v. Hartford Accident and Indem. Co. (D.Hawai'i 1996) 938 F.Supp. 671, 679 [the fact that recovery is allowed for tortious breach of contract has no bearing on whether there is insurance coverage for contract-based actions].)
Second, we reject Peck/Jones's contention (unsupported by any authority) that the finding of “negligence” in the underlying action in itself triggers coverage under the Truck policy. A breach of contract may result from acts that are deliberate (intentional) or inadvertent (negligent) or beyond anybody's control (force majeure ), and Peck/Jones suggests no reason to afford insurance coverage for one kind of unintentional breach but not the other. The law is not that whimsical, and the only relevant question in this case “is whether the duty that gives rise to liability is independent of the contract or rests upon it. If liability stems from the contract, the policy will not cover any award even if some of the damages are based on tort claims arising from the contractual relationship.” (Stanford Ranch, Inc. v. Maryland Cas. Co. (E.D.Cal.1995) 883 F.Supp. 493, 496, italics added; see also Allstate Ins. Co. v. Morgan (N.D.Cal.1992) 806 F.Supp. 1460, 1464 [notwithstanding tort allegations, where the factual predicate of the claim is contractual in nature, there is no coverage under the policy]; Bernstein v. Consolidated American Ins. Co. (1995) 37 Cal.App.4th 763, 772, 43 Cal.Rptr.2d 817 [where the existence of the contract is a “but for” prerequisite to liability, the liability is in contract, not tort].) 4
Peck/Jones purchased and paid for coverage for tort liability, not contract liability. As a result, a finding of coverage for Peck/Jones's contract liability would “have the effect of making [Truck] a sort of silent business partner subject to great risk in the economic venture without any prospects of sharing in the economic benefit. The expansion of the scope of the insurer's liability would be enormous without corresponding compensation.” (Toombs NJ Inc. v. Aetna Cas. & Sur. (1991) 404 Pa.Super. 471, 591 A.2d 304, 306.) We will not rewrite the contractual terms accepted by both parties.
Let a peremptory writ of mandate issue commanding the trial court to (1) vacate its order and statement of decision, (2) enter a new order with a finding of no coverage, and (3) enter a final judgment in favor of Truck Insurance Exchange. Truck is awarded its costs of these writ proceedings.
1. The contract was guaranteed by Jerve Jones, who is included in our references to Peck/Jones.
2. “Tort obligations are in general obligations that are imposed by law-apart from and independent of promises made and therefore apart from the manifested intention of the parties-to avoid injury to others.” (Prosser and Keeton, Torts (5th ed. 1984) § 92, p. 655.) “Contract obligations” are those where the obligation to do something (or not to do something) exists solely because of a manifested intent to do that thing (or not do it). (Id. at p. 656.) But for Peck/Jones's contractual promise to complete the project by the date specified in the contract, Peck/Jones would not have incurred liability to Center West (and not even Peck/Jones suggests there is some independent duty of tort law that imposed on it an obligation to complete the project by July 30, 1989). Thus, Peck/Jones's obligation was ex contractu, not ex delicto.
3. Viewed differently, the distinction is one between “business risks” and “insurable risks.” “Business risks logically involve the success or failure of the particular business, based upon factors such as management's ability to gauge the market, product development/research, and logistics. In order to assure a profit and minimize losses, businesses employ experienced managers, accountants, and other skilled personnel. The risk of profit or loss is thus a distinguishable ‘business risk.’ [¶] Insurable risks do not hinge on management ability and success; rather, they turn on fortuitous losses. Insurable risks involve statistical loss probability. The application of a statistical abstract to certain factual parameters drives insurance underwriting. Insurance risks are thus fundamentally different from business risks. It follows that commercial general liability policies cover only ‘insurable risks' and exclude business risks.” (Franco, Insurance Coverage For Faulty Workmanship Claims Under Commercial General Liability Policies (1995) 30 Tort & Ins. L.J. 785.)
4. Peck/Jones's reliance on Ritchie v. Anchor Casualty Co. (1955) 135 Cal.App.2d 245, 286 P.2d 1000 is misplaced. Ritchie is a duty to defend case, not an indemnity case. It turns on the definition of “accidental.” (Id. at pp. 252-254, 258, 286 P.2d 1000.) The case before us arises solely out of a failure to complete the project on time. We also reject as legally irrelevant Peck/Jones's repeated references to and lengthy quotations from the trial court's comments about why it ruled as it did-this issue was decided on stipulated facts and the interpretation of an insurance policy is a question of law. (Wilmington Liquid Bulk Terminals, Inc. v. Somerset Marine Inc., supra, 53 Cal.App.4th at pp. 192-193, 61 Cal.Rptr.2d 727.) Under these circumstances, we review the trial court's ruling, not its reasons. (Tippett v. Terich (1995) 37 Cal.App.4th 1517, 1539, 44 Cal.Rptr.2d 862.)
MIRIAM A. VOGEL, Presiding Justice.
ORTEGA, Acting P.J., and MASTERSON, J., concur.