Robert V. HOGAN, Plaintiff and Respondent, v. MIDLAND NATIONAL INSURANCE COMPANY, Defendant and Appellant.
Defendant insured Diehl Machines, Inc. (Diehl) against a number of liability risks involving machines manufactured and sold by Diehl. William F. Kaufman and Evelyn Kaufman purchased a Diehl straight-line rip saw, which proved to be defective. Although personal injury did not result from the use of the defective equipment, the Kaufmans suffered substantial losses by their use of the machine. They sued Diehl for breach of warranty. Diehl called upon defendant to defend the action; defendant refused upon the ground the causes of action alleged in the Kaufman complaint were not covered by the policy. Diehl hired its own attorney and defended the action, which resulted in a judgment in Kaufmans' favor predicated upon breach of warranty. Diehl paid the judgment, and assigned to plaintiff its claim against defendant insurer arising from failure to defend the Kaufman action.
Plaintiff, as assignee of Diehl, brought this action in declaratory relief, alleging the terms of the policy, defendant's failure to defend Diehl, the resulting judgment and payment thereof by Diehl. Plaintiff sought reimbursement for the amount paid, together with attorneys fees and costs. The basic question raised is whether the insurance policy defendant issued to Diehl covered the risk that gave rise to the damages recovered by the Kaufmans. The trial court found that it did, and that defendant's refusal to defend Diehl in the action violated the terms of the contract of insurance.
The basic policy did not include products liability and, although this additional coverage was provided by endorsements, such coverage has no bearing upon the outcome of the case, for reasons hereinafter discussed. The printed form excluded certain risks, among them contractual liabilities other than those arising from a breach of warranty. Precisely, it excluded “liability assumed by the insured under any contract or agreement except a warranty of goods or products.” (Emphasis added.)
No personal injury resulted from the breach of warranty, so, basically, we are confronted with a claim for property damages which requires a determination of the conditions delineated in the policy under which the warranty risk as to property damage becomes effective. The pertinent provision reads:
“Coverage B—Property Damage Liability: 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 and arising out of the hazards hereinafter defined.” (Emphasis added.)
As we have emphasized, the critical language is “caused by accident.” Defendant points out that the products liability endorsements broaden the word “accident” to read “occurrence,” and define occurrence as an “event or continuous or repeated exposure.” However, since the endorsement applies only to bodily injury it cannot be employed to interpret the word “accident” in defining property damage liability.
Focusing upon the word “accident,” as thus limited by the terms of the policy, defendant argues that although there was an event or occurrence when Kaufman used the machine, there was no accident—Kaufman simply noticed that the machine did not properly cut the lumber. Not only does this argument rest upon a tort concept of an accident, while breach of warranty sounds in contract, but the word cannot be isolated and given a dictionary definition; it gains its meaning and scope from its use in the context of the policy which has reference to a particular kind of insurance risk the parties had in mind at the time they entered into the contract. (Insurance Co. of North America v. Electronic Purification Co., 67 Cal.2d 679, 63 Cal.Rptr. 382, 433 P.2d 174; Steven v. Fidelity & Cas. Co., 58 Cal.2d 862, 27 Cal.Rptr. 172, 377 P.2d 284.)
Looking at the policy as a whole, we find it covers two risks, one for breach of warranty, the other for damages resulting from products liability. Although in each instance the risk insured against is the sale of a defective product, the law governing liability and damages as to each risk differs markedly. (Seely v. White Motor Co., 63 Cal.2d 9, 18, 45 Cal.Rptr. 17, 403 P.2d 145.) Consequently, the word “accident” does not necessarily have the same meaning in relation to each risk, nor need the circumstances which create liability be the same as to each risk.
In a warranty concept the word “accident” refers to a breach of contract that occurs when a product does not meet a seller's or a manufacturer's representations. This meaning applies to a policy of liability insurance unless the contract specifies a different meaning. In the case at bench, the accident occurred when the machine failed to function according to the warranty. There was no accident in the sense that the machinery fell apart or broke down; it simply did not perform as warranted, but that was the kind of “accident” the policy covered under the breach of warranty provisions.
Defendant argues that, conceding arguendo that the word “accident” encompasses a failure of machinery to function properly, the accident occurred the first time Kaufman used the saw, and at that point his damages were minimal. It was clearly foreseeable that further use of the machinery would result in additional damages. Therefore, contends defendant, the major portion of the damages which occurred from Kaufman's continued use of the equipment was not the result of the accident. While it is true that Kaufman used the saw for some time after discovering the malfunction, he did so only after he consulted Diehl's agents and was advised to repair and readjust the machine. Later, Diehl's agents themselves attempted to repair or adjust the equipment. Therefore the question is whether Kaufman, in an attempt to mitigate damages, contributed to or increased his own damages by continued use of the defective article, damages which defendant contends are not attributable to the original use of the machine and therefore not within the scope of the term “accident.”
The essence of defendant's argument is that Kaufman should not have been allowed to recover losses incurred through his efforts to mitigate his damages. The answer is that under the law of warranty the issue of mitigation of damage is a question of fact. (Basin Oil Co. of California v. Baash-Ross Tool Co., 125 Cal.App.2d 578, 601, 271 P.2d 122; Green v. Smith, 261 Cal.App.2d 392, 397, 67 Cal.Rptr. 796.) In the primary action, Kaufman v. Diehl Machines, Inc., the issue was litigated, the court deciding that all of the damages flowed from the breach of warranty. This court, on appeal, affirmed the lower court's judgment (nonpublished opinion) and defendant cannot now go behind that final judgment and relitigate the same issue. (See Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 68 A.L.R.2d 883; Tomerlin v. Canadian Indemnity Co., 61 Cal.2d 638, 649–650, 39 Cal.Rptr. 731, 394 P.2d 571; Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168; 55 Cal.L.Rev. p.1110.)
As to damages, defendant makes the additional argument that if there is to be a judgment against it, certain items of economic loss included in the Kaufman judgment are not covered by the policy and should be excised along with a pro rata reduction in allowance for attorneys fees. Had defendant assumed Kaufman's defense in the primary action, it could have questioned coverage as to specific items of damage, but having refused to defend under the policy it cannot disclaim liability for various items of damage which are a part of the final judgment against its insured. A number of California cases hold that where an insurer wrongfully refuses to defend, it must pay the full amount of the consequent judgment against the insured. As we read the cases, an insurer that wrongfully refuses to defend its insured may not later question items of damage which are incidental to the basic cause of action that is covered by the policy. (See Comunale v. Traders & General Ins. Co., supra; Tomerlin v. Canadian Indemnity Co., supra; Gray v. Zurich Ins. Co., supra; 55 Cal.L.Rev. p. 1110.)
Moreover, we are satisfied that all of the items allowed by the trial court were within the scope of the policy. Defendant utilizes the rationale of Seely v. White Motor Co., supra, 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145, in arguing that business losses were erroneously included in the judgment. Seely does hold that recovery of economic or business losses is impermissible in a products liability action based upon property damage, but, as noted above, the Kaufman judgment was grounded upon breach of warranty, a risk insured against in the basic policy. The trial court, in this action, deleted two items from the Kaufman judgment, in accordance with the terms of the policy, namely, the cost of the saw and the freight, less salvage, and a $250 deductible payment. All other items of the original Kaufman judgment approved and allowed by the trial court, including economic or business losses, were recoverable under the law of warranty.
We need not dwell on the argument that Kaufman's complaint in the original action did not put the insurer on notice that the claim was covered by the policy. The complaint alleged a breach of warranty, the court found that there was a breach of warranty, and we conclude that the policy did cover breach of warranty.
The judgment is affirmed.
STONE, Presiding Justice.
GARGANO and COAKLEY, JJ., concur.