Filed 5/16/14 Certified for publication 6/13/14 (order attached)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

REGIONAL STEEL CORPORATION,

Plaintiff and Appellant,

v.

LIBERTY SURPLUS INSURANCE 

CORPORATION,

Defendant and Respondent.

 B245961

 (Los Angeles County

 Super. Ct. No. BC464209)

APPEAL from a judgment of the Superior Court of Los Angeles County, Rolf M. 

Treu, Judge. Affirmed.

George Chuang & Associates and George Chuang for Plaintiff and Appellant.

Sheppard, Mullin, Richter & Hampton, Frank Falzetta, James F. McShane and

Brenda Bissett for Defendant and Respondent.

——————————
2

Regional Steel Corporation (Regional) appeals judgment entered in favor of its 

insurer, Liberty Surplus Insurance Corporation (Liberty). The trial court found that 

Liberty had no duty to defend Regional against claims brought by JSM Construction, Inc. 

(JSM) arising out of Regional‘s installation of defective steel framing in an apartment 

building JSM was constructing. We affirm.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

1. The Florentine Project

JSM Florentine, LLC (JSM Florentine) is the owner of an apartment building, the 

Florentine Apartments, under construction in North Hollywood in 2004 (Florentine 

Project). The Florentine Project complex consists of 14 stories, including retail space on 

the ground floor, four floors of parking, and 180 residential units on the upper floors. 

JSM was the general contractor on the project. Regional Steel was a subcontractor 

engaged pursuant to a June 4, 2004 subcontract to provide reinforcing steel to the 

Florentine Project‘s columns, walls, and floors. Webcor Construction LP (Webcor) was 

engaged to supply and pour concrete to encase Regional‘s rebar skeleton.

From May through September 2004, Regional prepared and submitted shop 

drawings that used both 90 degree and 135 degree seismic tie hooks in shear walls. JSM 

and the structural engineer for the project, Babayan & Associates (Babayan), approved 

the drawings. In October 2004, Regional began construction on the project, using both 

the 90 degree and 135 degree seismic hooks as approved in the shop drawings. Webcor 

poured concrete encasing the rebar and tie hooks.

In January 2005, a City building inspector issued a correction notice requiring the 

exclusive use of 135 degree hooks. In April 2005, JSM became aware of the problem and 

informed Regional that it needed to use 135 degree hooks. On May 3, 2005, JSM 

stopped the pouring of concrete pending resolution of the hook issue. Regional Steel 

immediately began to fabricate 135 degree hooks. In June 2005, the City notified JSM 

that garage levels one through three, and some on level four, had defective tie hooks and 

required repair. JSM refused to pay Regional‘s invoices and withheld $545,000.
3

2. The Policy

1

In August 2005, JSM purchased a commercial liability policy from Liberty

(Policy) with an effective date of August 5, 2005. Liberty added Regional as an 

additional named insured, effective as of October 5, 2005. The Policy consists of various 

standard, preprinted ISO (Insurance Services Organization) forms, as well as several 

endorsements, including a Wrap Endorsement converting the Policy into a ―wrap‖ policy 

specific to the Florentine Project. The Policy provides in relevant part that Liberty will 

―pay those sums the insured becomes legally obligated to pay as damages because

of . . .  ̳property damage‘ to which this insurance applies.‖ The Policy applies to 

― ̳property damage‘‖ caused by an ― ̳occurrence‘‖ that takes place on or after the policy‘s 

―Retroactive Date‖ of August 5, 2005. Through a series of endorsements, the Policy was

extended to November 5, 2008.

The Policy excludes coverage for ― ̳[p]roperty damage‘‖ to ― ̳impaired property‘‖

or property that ―has not been physically injured, arising out of[] [¶] [] [a] defect, 

deficiency, inadequacy or dangerous condition in  ̳your product‘ or  ̳your work.‘‖ 

― ̳Property damage‘‖ is defined as ―[p]hysical injury to tangible property, including all 

resulting loss of use of that property. . . . [¶] [] Loss of use of tangible property that is 

not physically injured. . . . shall be deemed to occur at the time of the  ̳occurrence‘ that 

caused it.‖ ― ̳Impaired Property‘‖ is defined as ―tangible property, other than  ̳your 

product‘ or  ̳your work‘ that cannot be used or is less useful because [] [¶] [] [i]t 

incorporates  ̳your product‘ or  ̳your work‘ that is known or thought to be defective, 

 

1 Wrap policies are used to insure large-scale construction projects. ―Wrap 

programs protect all the parties involved in the project (e.g., owner, general contractor, 

subcontractors, architects and other design professionals) and thus provide coverage for 

the entire project [citation]. [¶] . . . [¶] Wrap programs are designed to make insurance 

of construction projects more equitable, uniform and efficient. Because everyone is 

covered under the same policies, these programs reduce potential disputes among the 

contracting parties. These programs eliminate the cost of overlapping and duplicative 

coverage that otherwise would be provided by different members of the project team.‖ 

(Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) 

¶ 7:1490–1491, p. 7E-51.)
4

deficient, inadequate, or dangerous; . . . [¶] if such property can be restored to use by[] 

[¶] [] the repair, replacement, adjustment or removal of  ̳your product‘ or  ̳your work.‘‖

An ― ̳[o]ccurrence‘‖ is defined as ―an accident, including continuous or repeated exposure 

to substantially the same general harmful condition.‖

2

The Wrap Endorsement modified the ISO form by providing that ―[t]his insurance 

applies only to . . .  ̳property damage‘ . . . that occurs at a Project Site . . . and arises 

solely out of that portion of operation performed: [¶] []by . . . an Additional Named 

Insured; [¶] [] that are within the scope of a Designated Project listed in the Designated 

Project Schedule; and [¶] [] at the Project Site listed for that Designated Project.‖

The Wrap Endorsement did not specify a retroactive date or an occurrence date.

3. The Underlying Action

In August 2007, Regional Steel filed an action against JSM for payment of 

$545,201.31.

On or about September 18, 2007, JSM filed a cross-complaint against Regional 

Steel and other subcontractor entities, including Babayan, Webcor (the concrete 

subcontractor), and Quality Assurance International, Inc. (the quality inspection 

consultant), asserting claims against each entity for breach of contract and breach of 

express and implied warranties. JSM contended that Regional Steel failed to comply with 

the subcontract and building code when it installed horizontal reinforcement for the 

parking garage by installing 90 degree tie hooks, and as a result JSM was required by the 

City to make repairs that required it to open up numerous locations in the concrete walls, 

weld reinforcements to the steel placed by Regional, and otherwise strengthen the 

inadequate installation.

 

2 The Policy also excludes at paragraph 2, subsection (j) ―(5) [t]hat particular part 

of real property on which you or any contractors or subcontractors working directly or 

indirectly on your behalf are performing operations, if the  ̳property damage‘ arises out of 

those operations; or [¶] (6) [t]hat particular part of any property that must be restored, 

repaired, or replaced because  ̳your work‘ was incorrectly performed on it.‖ The 

applicability of this exclusion is not at issue in this appeal.
5

JSM‘s claims against Webcor alleged that Webcor poured its concrete in and

around Regional‘s reinforcing steel, which did not contain the required 135 degree hooks, 

and JSM alleged that Babayan permitted Regional to install the defective hooks and failed 

to prevent Webcor from pouring concrete around the defective hooks, and further that 

Quality Assurance permitted Webcor to pour concrete without first verifying that the 

proper tie hooks were used. JSM alleged that it was damaged because completion of the 

project was delayed, resulting in loss of use, loss of rental income, and other damages. 

On July 14, 2008, JSM filed a first amended cross-complaint in the underlying action 

(FACC) adding claims based upon theories of negligence, negligent interference with 

economic advantage, and asserted claims against the parties‘ performance bonds.

In August 2009, Webcor filed a first amended cross-complaint seeking indemnity, 

contribution, and declaratory relief against JSM, Regional and Babayan. Webcor‘s 

allegations were conclusory in nature: Webcor alleged its fault was passive and 

secondary and sought to hold Regional liable for any and all damages for which Webcor 

might be liable to JSM.

4. Regional’s March 2008 and August 2009 Tenders

By letter dated March 11, 2008, Regional tendered the defense of JSM‘s crosscomplaint in the underlying action to Liberty. Liberty acknowledged the tender and by 

letter dated April 25, 2008, declined coverage. Liberty asserted that no damage to 

property was alleged, and the purely economic losses caused by the need to reopen the 

poured concrete to correct the tie hook problem did not constitute property damage within 

the meaning of the Policy. Further, the tie hook problem did not constitute an 

―occurrence‖ within the meaning of the Policy because the alleged damage was not 

caused by an accident. After receiving no response from Regional, Liberty closed the file 

on the claim on June 5, 2008.

On August 26, 2009, Regional again tendered its claim to Liberty. The new tender 

was based on Regional‘s assertion that Webcor believed that JSM was asserting claims 

based upon the out-of-level concrete floors and resulting cracks in the slabs at levels P1 
6

through P3, and that was the basis on which Webcor sought indemnity in its FACC. In 

support, Regional submitted discovery consisting of three deposition excerpts regarding 

cracking of the concrete floors poured by Webcor.

Liberty reviewed the tender (which also included the subcontract, JSM‘s FACC, 

Webcor‘s proposed FACC) and saw no evidence that JSM was asserting claims for outof-level floors. Liberty submitted the tender to outside counsel for further evaluation, and 

Liberty obtained an opinion from independent counsel (Ropers Majesky Kohn Bentley) 

that the second tender did not state a claim. Neither JSM nor its outside counsel was able 

to confirm a claim for out-of-level floors based upon a review of the pleadings and 

motions from the underlying action, as well as the discovery.

On February 4, 2010, Liberty denied Regional‘s second tender. Liberty asserted 

that it never received any evidence from Regional that supported its claim that it was 

seeking damages for uneven floors, cracked concrete, or concrete edge curl. Rather, the 

tender described concrete that set improperly and other problems with the floors, but did 

not mention a claim by JSM against Regional for the cost of repairing out-of-level floors 

or the tie hook problem.

Sometime in October 2009, Regional, JSM, Webcor and Babayan settled the 

underlying action. In the settlement agreement (to which Liberty was not a party), the 

recitals set forth that Regional ―caused or was responsible for damage to, and loss of use 

of, tangible property at the PROJECT, including but not limited to out-of-level, cracked 

or otherwise damaged floors‖ and that the parties released all claims against Regional

including those for ―damage to and/or loss of use of tangible property at the PROJECT, 

out-of-level, cracked or otherwise damaged floors.‖

5. Regional’s Complaint Against Liberty

Regional‘s complaint against Liberty filed June 23, 2011 alleged claims for breach 

of contract, breach of the implied covenant of good faith and fair dealing (duty to 

defend), and breach of the implied covenant of good faith and fair dealing (duty to settle).
7

6. Liberty’s Motion for Summary Judgment

On June 28, 2012, Liberty filed its motion for summary judgment or in the 

alternative summary adjudication of issues against Regional. Liberty asserted that the 

Policy‘s insuring clause for property damage did not cover intangible economic loses or 

nonperformance of contractual obligations based on a defective product or diminution in 

value of the project caused by the defective tie hooks; damages from the tie hooks did not 

arise from an ―occurrence‖ as defined in the Policy because an occurrence could not arise 

from the deliberate act of an insured; and even if Regional‘s intentional placement of 

improper 90 degree seismic hooks in the shear walls constitute ―property damage‖ caused 

by an ―occurrence,‖ the Policy‘s exclusions for damage to impaired property or property 

not physically injured eliminated any potential for coverage.

Regional responded that JSM‘s FACC asserted claims for damage to property and 

loss of use of tangible property based on JSM‘s allegations that it needed to repair 

damage to the garage by opening walls and floors to install support columns. Regional 

relied on Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 

Cal.App.4th 1 (Armstrong), where the court found property damage within an insurance 

clause based on the incorporation of asbestos tiles and insulation into a building because 

the potentially hazardous material was physically linked to the building. Further, JSM‘s 

claims for damaged flooring and cracked concrete were damage to ―other property‖

sufficient to distinguish the case from F&H Construction v. ITT Hartford Ins. Co. (2004) 

118 Cal.App.4th 364 (F&H Construction), which held that to bring defective construction 

within the insuring clause, the ―damage‖ must be damage to property other than the 

property upon which the insured had worked. Regional also contended that the Wrap 

Endorsement omitted any mention of the Retroactive Date, and the impaired property 

exclusion did not apply because the exclusion applies only where no other property was 

damaged.

In support of its opposition, Regional submitted deposition testimony where JSM 

questioned Jeffrey West of Webcor in deposition about floor repair. West testified that 
8

there were two areas where the floor needed repair because ―the concrete went off.‖ 

Webcor ―bushed‖ it and ―chipped‖ it, and put a material on top of it. West believed the 

cause of the problem was that the concrete ―set up too‖ fast. One area of the concrete had

set faster than another. There was a problem with the out-of-level floors where the 

concrete had set in some places but not others. Scott Lansburg of JSM, testified in 

deposition that some of the slab in level P2 of the garage was cracked. He was asked 

about repair procedure, which involved a ―common procedure called epoxy injection.‖ 

Lansburg did not observe any cracking in the walls on P2.

7. Trial Court Ruling

The trial court found that Liberty had no duty to defend Regional. The court 

found that the parties‘ papers revealed there were no disputed material facts and thus any 

evidentiary objections were overruled.3 The court found the Policy excluded coverage 

for property damage arising out of a defect, deficiency, inadequacy or dangerous

condition of the insured‘s work, or a delay or failure by an insured to perform a contract 

in accordance with its terms. Further, coverage was excluded for impaired property 

because such property was defined as tangible property, other than the insured‘s work 

known or thought to be defective deficient, inadequate or dangerous, ―if such tangible 

property [could] be restored to use by repair, replacement, adjustment or removal of the 

insured‘s product or work, or the insured fulfilling the terms of the contract.‖

The court found the JSM FACC only alleged facts arising out of the damage 

caused by the defective seismic hooks and did not allege any facts of any other damages 

attributable to Regional. Under the terms of the Policy, the seismic hook issue and 

Liberty‘s costs to repair it did not constitute property damage under F&H Construction,

supra, 118 Cal.App.4th at pp. 371–373. The court disagreed that the Wrap Endorsement 

removed the conditions regarding ―occurrence‖ and ―Retroactive Date‖ because the 

Policy was to be construed as a whole. With respect to the Webcor FACC, the court 

 

3 Neither party has raised on appeal any contentions with respect to the trial 

court‘s evidentiary rulings.
9

found that the JSM FACC asserted damages attributable to Webcor‘s concrete which was 

not asserted against Regional, and thus the Webcor FACC did not establish that JSM 

asserted covered damages against Regional.

The court acknowledged that while the JSM FACC was broad enough to allege 

facts apart from the seismic issue, the insured could not speculate about unpleaded third 

party claims to manufacture coverage. Further, the deposition testimony did not establish

that JSM asserted claims against Regional based upon faulty concrete. Finally, the court 

observed there was no evidence that the Settlement Agreement was ever submitted to 

Liberty.

DISCUSSION

Regional contends that the Wrap Endorsement replaced the requirement that 

property damage result from an occurrence prior to the retroactive date with the 

requirement that the property damage occur ―at a Project Site‖ and ―arise solely out of 

that portion of operation performed.‖ Second, Regional contends that the incorporation 

of its seismic hooks into the Florentine Project constituted property damage and was an 

occurrence within the meaning of the Policy and gave rise to the duty to defend, 

principally relying on Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. 

(2000) 78 Cal.App.4th 847, Armstrong, supra, 45 Cal.App.4th 1, and Eljer Mfg. v. 

Liberty Mut. Ins. Co. (7th Cir. 1992) 972 F.2d 805 (Eljer). Further, the underlying claims

involved damage to concrete flooring, slabs, and wall, which were the basis of Webcor‘s 

cross-complaint for indemnity and damage to Webcor‘s work, and these underlying 

claims constituted property damage apart from the defective tie hooks sufficient to qualify

for coverage. Regional argues the underlying action involved claims for loss of use and 

other damages resulting from delays in the completion of the Florentine Project and thus 

satisfied the ―loss of use‖ portion of the policy. Addressing the impaired property 

exclusion, Regional contends the exclusion applies only if no other property was 

damaged and the insured‘s product was in fact defective, which is not the case here 

because there was additional damage because the floors were not level. Liberty responds 
10

that the defective steel work is not ―physical injury to tangible property‖ and the 

destructive work required to repair it did not transform it into property damage caused by 

an occurrence; neither the pleadings nor evidence support Regional‘s contention that JSM 

alleged a claim to property other than Regional‘s own work; the Wrap Endorsement did 

not modify the Policy because the endorsement must be construed with the Policy as a 

whole; and Regional failed to establish an occurrence within the Retroactive Date of the 

Policy.

I. STANDARD OF REVIEW

In a motion for summary judgment, the moving party ―bears the burden of 

persuasion that there is no triable issue of material fact and that he is entitled to judgment 

as a matter of law.‖ (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) 

―Once the [movant] has met that burden, the burden shifts to the [other party] to show 

that a triable issue of one or more material facts exists as to that cause of action.‖ 

(§ 437c, subd. (p)(1); Aguilar, at p. 850.) A triable issue of material fact exists where 

―the evidence would allow a reasonable trier of fact to find the underlying fact in favor of 

the party opposing the motion in accordance with the applicable standard of proof.‖

(Aguilar, at p. 850.) Where summary judgment has been granted, we review the trial 

court‘s decision de novo, ―considering all of the evidence the parties offered in 

connection with the motion (except that which the court properly excluded) and the 

uncontradicted inferences the evidence reasonably supports.‖ (Merrill v. Navegar, Inc. 

(2001) 26 Cal.4th 465, 476.) To defeat summary judgment, the plaintiff cannot rely on 

allegations of the complaint and must show specific facts. (Spitzer v. Good Guys, Inc. 

(2000) 80 Cal.App.4th 1376, 1385–1386.)

II. DUTY TO DEFEND

An insurer has a duty to defend an insured if it becomes aware of, or if the third 

party lawsuit pleads, facts giving rise to the potential for coverage under the insuring 

agreement. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 19.) ―Implicit in 

this rule is the principle that the duty to defend is broader than the duty to indemnify; an 
11

insurer may owe a duty to defend its insured in an action in which no damages ultimately 

are awarded. [Citations.]‖ (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 

1081.) ―Thus, when a suit against an insured alleges a claim that potentially could 

subject the insured to liability for covered damages, an insurer must defend unless and 

until the insurer can demonstrate, by reference to undisputed facts, that the claim cannot 

be covered. In order to establish a duty to defend, an insured need only establish the 

existence of a potential for coverage; while to avoid the duty, the insurer must establish 

the absence of any such potential. [Citation.]‖ (Ringler Associates Inc. v. Maryland 

Casualty Co. (2000) 80 Cal.App.4th 1165, 1186.) Doubts concerning the potential for 

coverage and the existence of duty to defend are resolved in favor of the insured. 

(Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 299–300.)

Whether the insurer owes a duty to defend usually is made by comparing the 

allegations of the complaint with the terms of the Policy. (Waller, supra, 11 Cal.4th at 

p. 19.) The insurer‘s defense duty is obviated where the facts are undisputed and 

conclusively eliminate the potential the policy provides coverage for the third party‘s 

claim. (Ibid.) An insurer is entitled to summary judgment that no potential for indemnity 

exists if the evidence establishes no coverage under the policy as a matter of law. 

(County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 414.) 

We review an order granting summary judgment de novo ― ̳―when, on undisputed facts, 

the order is based on the interpretation or application of the terms of an insurance 

policy.‖‘‖ (Id. at p. 414; see also Founding Members of the Newport Beach Country 

Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 955 [―When no 

extrinsic evidence is introduced, or when the competent extrinsic evidence is not in 

conflict, the appellate court independently construes the contract‖].)

―Interpretation of an insurance policy is a question of law and follows the general 

rules of contract interpretation.‖ (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 

635, 647.) The principal rule of contract interpretation is to give effect to the parties‘

intent as expressed in the terms of the contract. (Bay Cities Paving & Grading, Inc. v. 
12

Lawyers’ Mutual Ins. Co. (1993) 5 Cal.4th 854, 867.) Insurance policy terms will be 

given the objectively reasonable meaning a lay person would ascribe to them. (AIU Ins. 

Co. v. Superior Court (1990) 51 Cal.3d 807, 822.) In addition, the context in which a 

term appears is critical.  ̳―[L]anguage in a contract must be construed in the context of 

that instrument as a whole, and in the circumstances of that case . . . .‘‖ (Bay Cities 

Paving, supra, 5 Cal.4th at p. 867, italics omitted.) ―While  ̳reliance on [the] common 

understanding of language is bedrock[,] . . . [e]qually important are the requirements of

reasonableness and context.‘‖ (Ibid.)

An insurance policy provision is considered to be ambiguous when it is capable of 

at least two reasonable constructions. If we cannot eliminate an ambiguity ― ̳by the 

language and context of the policy, [we] invoke the principle that ambiguities are 

generally construed against the party who caused the uncertainty to exist (i.e., the insurer) 

in order to protect the insured‘s reasonable expectation of coverage.‘‖ (County of San 

Diego, supra, 37 Cal.4th at p. 415.)

To that end, an insurance policy‘s coverage provisions must be interpreted broadly 

to afford the insured the greatest possible protection, while a policy‘s exclusions must be 

interpreted narrowly against the insurer. (MacKinnon, supra, 31 Cal.4th at p. 648.) The 

exclusionary clause must be ― ̳conspicuous, plain and clear.‘‖ (State Farm Mut. Auto. 

Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 202.) ―This rule applies with particular force 

when the coverage portion of the insurance policy would lead an insured to reasonably 

expect coverage for the claim purportedly excluded.‖ (MacKinnon, supra, 31 Cal.4th at 

p. 648.) While the insured has the burden of establishing the claim comes within the 

scope of coverage, and the insurer has the burden of establishing the claim comes within 

an exclusion. (Ibid.) To prevail, the insurer must establish its interpretation of the policy 

is the only reasonable one. (Id. at p. 655.) Even if the insurer‘s interpretation is 

reasonable, the court must interpret the policy in the insured‘s favor if any other 

reasonable interpretation would permit coverage for the claim. (Ibid.)
13

III. CONSTRUCTION INSURANCE

A. Wrap Endorsement Did Not Eliminate the Requirement that the Claim 

Occur During the Retroactive Period

Regional contends that the Wrap Endorsement replaced the requirement that 

property damage result from an occurrence before to the ―Retroactive Date‖ with the 

requirement that the property damage occur ―at a Project Site‖ and ―arise solely out of 

that portion of operation performed.‖ Liberty responds that JSM did not allege an 

occurrence because Regional installed the tie hooks intentionally, not by accident.

Here, the alleged damages occurred outside of the Policy‘s undisputed effective 

date of August 5, 2005 because the City discovered the tie hook problem in January 2005. 

The Wrap Endorsement does not modify this requirement; rather, it only modifies and/or 

sets forth the six enumerated items (who is an insured, insuring agreement amendment, 

products exclusion, products completed operations, other insurance, and additional 

named insured schedule) that specifically modified the Policy. The remaining provisions 

of the Policy were unchanged by the Wrap Endorsement. ―Endorsements on an insurance 

policy form a part of the insurance contract [citation], and the policy of insurance with 

the endorsements and riders thereon must be construed together as a whole [citation].‖

(Narver v. California State Life Ins. Co. (1930) 211 Cal. 176, 181; Adams v. Explorer 

Ins. Co. (2003) 107 Cal.App.4th 438, 451.)

B. Defective Tie Hooks Do Not Constitute “Property Damage” for 

Purposes of Coverage Analysis

The law is in conflict on whether construction defects that are incorporated into a 

whole property constitute property damages for purposes of a commercial general 

liability (CGL) policy. One line of cases states the basic rule and denies coverage for the 

cost of removing and replacing defective work or material, and considers such costs as 

economic loss, not physical injury to the property. (See, e.g., F & H Construction, supra, 

118 Cal.App.4th at pp. 372–373; see also St. Paul Fire & Marine Ins. Co. v. Coss (1978) 

80 Cal.App.3d 888, 892–893 [improper construction does not constitute physical injury 
14

to the property because the loss is purely economic].) Another line of cases suggests that 

incorporation of a defective part into a whole construction project constitutes property 

damage within the meaning of a CGL policy. In Eljer, supra, 972 F.2d 805, damage 

resulted to homes from the installation of defective plumbing systems, but no leaking had 

occurred. The court in Eljer held that ―the incorporation of a defective product into 

another product inflicts physical injury in the relevant sense on the latter at the moment of

incorporation—here, the moment when the defective [plumbing] systems were installed 

in homes.‖ (Id. at p. 814.)

In a case adopting the view of no coverage, F & H Construction, supra, 118 

Cal.App.4th 364, the court rejected coverage for defective construction incorporated into 

a property. The insured contractor supplied defective steel pile caps that were welded 

onto driven piling on a construction project. Upon discovery of the defect, the general 

contractor sued the insured for costs to modify the caps to conform to specifications and 

for loss of bonus for early completion of the project. As explained in F & H 

Construction, ―[t]he prevailing view is that the incorporation of a defective component or 

product into a larger structure does not constitute property damage unless and until the 

defective component causes physical injury to tangible property in at least some other 

part of the system. [Citations.] [¶] . . . [¶] Under these cases property damage is not 

established by the mere failure of a defective product to perform as intended. [Citations.] 

Nor is it established by economic losses such as the diminution in value of the structure 

[citations] or the cost to repair a defective product or structure. [Citations.] [¶] These 

cases are consistent with the basic purpose of liability policies, which, as explained by 

the court in Maryland Casualty Co. v. Reeder (1990) 221 Cal.App.3d 961,  ̳are not 

designed to provide contractors and developers with coverage against claims their work is 

inferior or defective. [Citation.] The risk of replacing and repairing defective materials 

or poor workmanship has generally been considered a commercial risk which is not 

passed on to the liability insurer. [Citations.] Rather liability coverage comes into play 

when the insured‘s defective materials or work cause injury to property other than the 
15

insured‘s own work or products. . . .‘ [Citation.]‖ (F & H Construction, supra, 45 

Cal.App.4th at pp. 372–373.)

On the other hand, other cases hold that where the 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—the physical linking of the defective 

material to the building is the physical injury. In Armstrong, supra, 45 Cal.App.4th 1, the 

court held that installation of the insured‘s asbestos material constituted physical injury to 

the building, even before any release of asbestos fibers: ― ̳[P]hysical injury‘ covers  ̳a 

loss that results from physical contact . . . , as when a potentially dangerous product is 

incorporated into another and . . . must be removed, at some cost, in order to prevent the 

danger from materializing.‘ [Citations.] [¶] . . . [¶] [T]he damages allegedly suffered by 

the building owners from the presence of [asbestos materials] cannot be considered solely 

economic losses. . . . The fact that the measure of damages is economic does not 

preclude a physical injury.‖ (Id. at pp. 91–93.) Similarly, in Shade Foods, supra, 78 

Cal.App.4th 847, a roaster supplied roasted diced almonds which contained wooden 

splinters. The almonds were processed into nut clusters that were incorporated into 

breakfast cereal. Shade Foods held that the splinters in the almonds caused property 

damage to the ―nut clusters‖ and to the cereal in which they were incorporated. (Id. at p. 

868.)

However, Armstrong, supra, 45 Cal.App.4th 1 noted the difference between the 

case before it (involving hazardous materials) and cases involving defective construction: 

―The insurers rely upon the rule that physical incorporation of a defective product into 

another does not constitute property damage unless there is physical harm to the whole. 

[Citations.] In our view, however, that rule is designed to limit the liability coverage of 

contractors against claims of defective materials or poor workmanship, for such claims 

are a commercial risk which is not passed on to the liability insurer. [Citations.] 

Here, . . . [t]he claims against Armstrong go beyond allegations of defective work or 

materials and allege injury to other property.‖ (Id. at pp. 92–93.) This view is consistent 
16

with the holding of numerous other cases that defective construction is not covered under 

a CGL policy unless there is damage to other property. (See ibid.)

Here, however, Armstrong and Shade are inapposite because they involved 

contamination by hazardous materials that were incorporated into a whole, and did not 

involve the incorporation of defective workmanship in to a construction project. 

California cases consistently hold that coverage does not exist where the only property 

―damage‖ is the defective construction, and damage to other property has not occurred. 

Under that thesis, there is no coverage for Regional‘s use of defective tie hooks. Indeed, 

Regional‘s attempts to bring the allegedly cracking concrete floors within the definition 

of ―other‖ property in order to obtain coverage fail because JSM made no allegations that 

Regional‘s installation of the tie hooks, rather than Webcor‘s pouring of the concrete, was

the cause of out-of-level floors. The only allegations JSM made against Regional are that 

it failed to install the proper tie hooks, and its failure to do so necessitated demolition and 

repair of the affected areas—allegations squarely within the ambit of the rule of F&H 

Construction that this type of repair work is not covered under a CGL policy. Further, in 

its cross-complaint, Webcor nowhere alleged indemnity against Regional based upon outof-level floors; rather, its allegations were conclusory and sought indemnity based upon 

JSM‘s FACC that alleged claims for demolition, repair, and lost use based on the faulty 

tie hooks. For the same reason Regional‘s attempts to bring the defective work within the 

―loss of use‖ provisions of the Policy fails: any loss of use was occasioned by the 

necessity of repairing Regional‘s defective tie hooks, a risk not covered by the CGL 

policy. Finally, any recitals in the settlement agreement between JSM, Webcor, Babayan 

and Regional in the underlying litigation that characterize the construction defects as 

including the out-of-level floors cannot transform JSM‘s construction defect claim against 

Regional into property damage for purposes of the Policy where there is no evidence that 

Liberty was aware of the settlement and concurred in this characterization.
17

C. Policy Exclusions

Regional argues the impaired property exclusion, on its face, only applies if JSM

is able to conclusively establish that (1) no other property was damaged, and that (2) that 

the insured‘s product was in fact defective. Liberty responds that neither the pleadings 

nor evidence support Regional‘s contention that JSM alleged a claim to property other 

than Regional‘s own work, and the deposition excerpts do not trigger a duty to defend.

―[I]nsurers often limit coverage in exclusions despite broad general coverage 

provisions.‖ (Westoil Terminals Co., Inc. v. Industrial Indemnity Co. (2003) 110 

Cal.App.4th 139, 149.) The insurer ―has the right to limit the coverage of a policy issued 

by it and when it has done so, the plain language of the limitation must be respected.‖

(Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 432.) The insured 

has the burden of proving his or her claim is within the basic scope of coverage, while the 

insurer has the burden of proving exclusions to coverage. (Golden Eagle Ins. Corp. v. 

Cen-Fed., Ltd. (2007) 148 Cal.App.4th 976, 984.) Provisions that limit coverage 

reasonably expected by an insured must be ― ̳conspicuous, plain, and clear.‘‖ (Haynes v. 

Farmers Ins. Exchange (2004) 32 Cal.4th 1198, 1204.) Although we normally interpret 

insuring clauses broadly and strictly construe exclusions, ― ̳where an exclusion is clear 

and unambiguous, it is given its literal effect.‘‖ (Westoil Terminals Co., at p. 146.)

The Policy excludes ― ̳[p]roperty damage‘ to  ̳your product‘ arising out of it or any 

part of it‖ and also provides, ―[d]amage to Impaired Property or Property not Physically 

Injured,‖ excludes ― ̳[p]roperty damage‘ to  ̳impaired property‘ or property that has not 

been physically injured, arising out of: [¶] (1) [a] defect, deficiency, inadequacy or 

dangerous condition in  ̳your product‘ or  ̳your work.‘‖ The policies define ―[y]our 

product‖ to mean ―[a]ny goods or products . . . manufactured, sold, handled, distributed 

or disposed of‖ by the insured or those it controls. ― ̳Impaired property‘‖ means  ̳tangible 

property, other than  ̳your product‘ . . . that cannot be used or is less useful‖ because it 

―incorporates  ̳your product‘ . . . that is known or thought to be defective, deficient, 
18

inadequate or dangerous [¶] . . . [¶] if such property can be restored to use‖ by the 

―repair, replacement, adjustment or removal of  ̳your product‘ or  ̳your work.‘‖

The ―Impaired Property‖ exclusion bars the possibility of coverage. Under that 

exclusion, there is no coverage for property damage to ―property that has not been 

physically injured‖ arising out of the Regional‘s negligent failure to perform its 

contractual obligations based on installation of defective tie hooks. JSM‘s action alleged 

that Regional negligently installed improper tie hooks and thus the underlying suit arose 

from deficiencies in Regional‘s performance of its work or from Regional‘s failure to 

perform a contract in accordance with its terms, or both. (Watts Industries, Inc. v. Zurich 

American Ins. Co. (2004) 121 Cal.App.4th 1029, 1046–1047.)

DISPOSITION

The judgment is affirmed. Respondent is to recover its costs on appeal.

JOHNSON, J.

We concur:

CHANEY, Acting P. J.

MILLER, J.*

 

*

Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant 

to article VI, section 6 of the California Constitution.
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

REGIONAL STEEL CORPORATION,

Plaintiff and Appellant,

v.

LIBERTY SURPLUS INSURANCE 

CORPORATION,

Defendant and Respondent.

 B245961

 (Los Angeles County

 Super. Ct. No. BC464209)

 CERTIFICATION AND

 ORDER FOR PUBLICATION

The opinion in the above-entitled matter filed May 16, 2014, was not certified for 

publication in the Official Reports. For good cause it now appears that the opinion 

should be published in the Official Reports and it is so ordered.

CHANEY, Acting P. J. JOHNSON, J. MILLER, J.*

 

*

Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant 

to article VI, section 6 of the California Constitution.