LIBERTY BUILDING CO., a corporation, Plaintiff and Appellant, v. ROYAL INDEMNITY COMPANY, a corporation, Defendant and Respondent.
Plaintiff seeks to recover on a products liability insurance policy. A general demurrer was sustained with leave to amend, to each cause of action in plaintiff's amended complaint but plaintiff declined to further amend. As a consequence, a judgment of dismissal was duly entered from which plaintiff appeals.
Plaintiff is a subdivider and building contractor. At all times relevant to this action, plaintiff was covered by a products liability insurance policy issued by defendant Royal Indemity Company. Plaintiff constructed a large number of dwelling houses upon its own property, most of which were sold prior to completion. After the buyers took possession, many of the houses developed defects in the outside stucco walls. The buyers then brought suit (or made claims) against plaintiff alleging breach of warranty, and plaintiff gave notice to defendant to defend the suits. Defendant refused to defend and plaintiff settled the claims out of court. Plaintiff thereupon brought this action to recover the costs of defense and compromise and also to recover the amounts paid in settlement of the buyers' claims.
Plaintiff's amended complaint is framed in two separate causes of action. After pleading the policy of insurance, the first cause of action is in substance as follows:
That the plaintiff constructed and sold the subject dwellings and that after completion, the outer stucco covering became cracked, discolored and flaked away; that the property owners brought suit or lodged claims against plaintiff; that defendant refused to defend the suits; that plaintiff settled the claims upon advice of counsel that the claimants had substantial evidence that the defects in the stucco were due to an improper mixture which allowed water absorption into the stucco; that plaintiff was therefore justified in settling; and, that defendant refused to pay the amounts incurred in settlement and defense of the claims.
The crux of the purchasers' claims against plaintiff is found in paragraph XII of its first cause of action which reads, in part, as follows: ‘That the third cause of action alleged in said Complaint so filed and maintained against plaintiff herein was founded upon the grounds: that plaintiff had, as a matter of law, impliedly warranted to said ‘Suing Purchasers', and each of them, that, among other things, upon the completion of the Dwelling Unit purchased by each said ‘Suing Purchaser’, the exterior stucco thereof would and did conform, as to mix and application, to the standards and requirements provided by law, and that such Dwelling Unit had been and would be constructed in conformity with good building practices as practiced within the County of Los Angeles and were of good quality; and that plaintiff had breached its said implied warranties.'
The second cause of action alleges all the material parts of the first cause but added that the damage to the stucco was caused by a high concentration of salt in the soil which was dissolved by water and absorbed into the stucco by capillary action.
The pertinent provisions of the insurance policy are as follows: Defendant is obligated under Coverage C to pay ‘* * * on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including the loss of use thereof, caused by accident.’ The policy includes liability arising out of the ‘products hazard’ which is defined under Conditions 3(f), (1) as ‘the handling or use of, the existence of any condition in or warranty of goods or products manufactured, sold, handled or distributed by the named insured * * * if the accident occurs after the insured has relinquished possession thereof to others and away from premises owned, rented or controlled by the insured * * *’ However, the above coverage is limited by the exclusion. Exclusion (f) reads: ‘This policy does not apply: (f) under coverage C, to injury to or destruction of * * * (3) any goods or products manufactured, sold, handled or distributed or premises alienated by the named insured, or work completed by or for the named insured, out of which the accident arises.’ (Emphasis added.) The insurer is required under paragraph II(a) to ‘defend any suit against the insured alleging such injury * * * or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; * * *’ (Emphasis added.)
Plaintiff urges on appeal (1) that the complaints filed in the prior actions stated a claim of liability covered by the policy under Coverage C and that therefore defendant was bound to defend the suits, and (2) that the damage to the stucco was not excluded under Exclusion (f) since the cause of the damage was not a defect in the stucco, but rather was a defect in the soil upon which the buildings were built.
We have concluded that defendant's general demurrer was properly sustained for the basic reason that the damage to the stucco was excluded from the coverage of the policy. In arriving at this conclusion, we have examined the complaint both as to its claim for damages for refusal to defendant the prior suits and as to its claim that defendant is liable under the policy for the amounts paid in settlement.
It is true that defendant was bound to defend actions brought against plaintiff alleging liability under Coverage C even if the suits be ‘groundless, false or fraudulent.’ However, if the liability alleged by the complaints was excluded under Exclusion (f), defendant had no duty to defend. Thus the obligation to defend is measured by comparing the terms of the insurance policy with the pleadings of the claimants who sued plaintiff. Ritchie v. Anchor Casualty Co., 135 Cal.App.2d 245, 250, 286 P.2d 1000; Remmer v. Glens Falls Indemnity Co., 140 Cal.App.2d 84, 90, 295 P.2d 19, 57 A.L.R.2d 1379; Lamb v. Belt Casualty Co., 3 Cal.App.2d 624, 630, 40 P.2d 311. The complaints in the prior actions pleaded a breach of implied warranty in the construction of the buildings in that the stucco was improperly mixed or applied. (See paragraph XII of plaintiff's complaint, supra.) This breach was assigned as the cause of the damage to the stucco, and defendant argues that such damage is excluded under the policy. In this connection, Exclusion (f) expressly excludes from liability under the policy, damage sustained by any ‘goods or products * * * or premises alienated * * * or work completed * * * out of which the accident arises.’ (Emphasis added.) This Exclusion means that if the insured becomes liable to replace or repair any ‘goods or products' or ‘premises alienated’ or ‘work completed’ after the same has caused an accident because of a defective condition, the cost of such replacement or repair is not recoverable under the policy. However, if the accident also caused damage to some other property or caused personal injury, the insured's liability for such damage or injury becomes a liability of the insurer under the policy, and is not excluded. For example, if a contractor builds a house and as a result of an improper mixture of the stucco, water is absorbed into the walls and the stucco cracks and falls off and a child is injured by the falling stucco, the injury to the child would not be excluded under Exclusion (f) but the replacement cost of the stucco would be excluded. Also, if the water absorbed into the walls should reach the interior walls and injure a valuable painting hanging there, the damage to the painting would be recoverable under the policy while the damage to the walls would not. The principle here applicable is well stated in Heyward v. American Casualty Company of Reading, Pa., D.C., 129 F.Supp. 4. At page 8 the court said: ‘This Exclusion means that the policy will not protect the insured if he has to repair or replace some product or work which proved defective and caused an accident. The Exclusion has no reference to liability for damage to other property or personal injury arising out of such accident.’ In accord are Volf v. Ocean Accident and Guarantee Corp., Ltd., 50 Cal.2d 373, 325 P.2d 987; Geddes & Smith, Inc. v. Saint Paul-Mercury Indemnity Co., 51 Cal.2d 558, 334 P.2d 881.
The plaintiff's first cause of action and the complaints filed by the suing purchasers chasers in the prior suits allege a factual situation which is excluded under the above rule from the coverage of the policy. The stucco was alleged to have been damaged, not by any external cause, but by an internal defect. Thus, the stucco was the ‘goods or product * * * or premises alienated * * * or work completed * * * out of which the accident’ arose. Hence there was no liability under the policy. (Volf v. Ocean Accident and Guarantee Corp., Ltd., supra.)
Since, under the rule of the Ritchie case, supra, defendant was not obligated to look beyond the specific liability alleged in the complaints and since that liability was expressly excluded by Exclusion (f) of the policy, defendant had no duty to defend the suits. For these reasons, the demurrer to the first cause of action was properly sustained.
We come now to a consideration of the second cause of action. It is our conclusion that it is essentially a restatement of the basic facts of the first with the addition of the inconsequential allegation of the presence of salt in the soil. In the first cause of action plaintiff alleges the cause of the damage to the stucco to be as follows: ‘* * * then, as a result of the failure and omission on the part of the subcontractor to have used a mix conforming to law and the omission of the Superintendent of Construction to observe or discover or prevent and assure thereagainst, the brown and scratch coats did allow the absorption of water and were not sealed thereagainst, which, in turn, did damage the finished coat and cause it to crumble and fall away, become discolored and generally unfit as an exterior covering for said Dwelling Units * * *’ (Emphasis added.) In the second cause of action, plaintiff pleaded the cause of the damage to the stucco in this language: ‘That it was established by laboratory tests made at the instance of said counsel that said soil contained unusually high amounts of water soluable salts; that it was the opinion of experts consulted by said counsel that, in the presence of moisture, said water soluable salts were dissolved and by capillary action, were carried into the plaster and exterior stucco to a height of approximately two (2) feet above ground level; that all of the foregoing caused the said plaster and exterior stucco to crumble and fall away, to become discolored and generally unfit as an exterior covering for said Dwelling Units * * *’ (Emphasis added.)
From the above allegations it is apparent that the cause of the damage to the stucco is the same in each cause of action, viz., the defective condition of the stucco which permitted the absorption of water into the walls. In the first cause of action this is specifically alleged. In the second such is the effect of the allegation for it states that the ‘salts were dissolved and by capillary action were carried into the plaster and exterior stucco. * * *’ In Webster's New International Dictionary, unabridged (2d Ed.) capillarity is defined as follows: ‘2. Physics. The action by which the surface of a liquid, where it is in contact with a solid, is elevated or depressed; capillary attraction.’ Thus plaintiff has alleged, in effect, that the damage was caused by the absorption of water which incidentally contained some salt. It is the moisture rather than the salt that assertedly caused the damage. If the stucco had been properly mixed so as to prevent the absorption of water no damage would have occurred. Thus the real cause of the damage to the stucco was the internal defect in the stucco itself. As we have previously pointed out, such damage is excluded under Exclusion (f). The court therefore properly sustained the demurrer to this cause of action, also.
The judgment is affirmed.
FOX, Presiding Justice.
ASHBURN and HERNDON, JJ., concur.