Source: https://caselaw.lexroll.com/2019/04/12/the-insurance-company-of-pennsylvania-v-american-safety-indemnity-company-no-b283684-cal-app-3-1-2019/
Timestamp: 2019-04-20 06:22:54+00:00

Document:
APPEAL from a judgment of the Superior Court of Los Angeles County. Gregory Wilson Alarcon, Judge. Affirmed.
Chamberlin & Keaster, Robert W. Keaster and Michael A. Miller for Defendant and Appellant.
Herold & Sager, Andrew D. Herold, Michael D. Douglas and Brooke M. Finley for Plaintiff and Respondent.
This is a dispute between insurers. Under Insurance Code section 11580 (section 11580), when a judgment is obtained against an insured based upon property damage, the judgment creditor may bring an action on the policy against the insurer, to recover on the judgment. Here, plaintiff’s insured (a general contractor) secured a default judgment against defendant’s insured (a subcontractor), after a homeowner obtained an arbitration award of more than $1.1 million against the general contractor.
Plaintiff indemnified the general contractor for the arbitration award. Defendant refused to indemnify the subcontractor for the amount of the default judgment. In this lawsuit, plaintiff (as subrogee of its insured) sought recovery from defendant under section 11580 of the amount of the default judgment against the subcontractor.
Both parties filed summary judgment motions, and the trial court granted summary judgment for plaintiff. Defendant appeals on three principal bases. Defendant contends the default judgment was void because the underlying complaint failed to specify the amount of damages sought. (Code Civ. Proc., § 580.) Defendant further contends the default judgment was an award for economic loss rather than property damage, and therefore not recoverable under section 11580. And, defendant contends plaintiff did not prove the default judgment was covered under any of defendant’s policies. Defendant also raises other points not presented to the trial court before it granted summary judgment.
We find no merit in defendant’s principal contentions, and do not consider claims not presented to the trial court until after it heard and ruled on the summary judgment motions. Accordingly, we affirm the judgment.
Plaintiff is The Insurance Company of the State of Pennsylvania. Plaintiff was the excess liability insurer for New Millennium Homes LLC and NM Homes One, Inc. (collectively, NMH). NMH was the builder and developer of a housing development in Calabasas. Amir and Brenda Moghadam bought one of the homes from NMH in December 2005 (the Moghadam property).
In 2004, Camarillo performed “mass grading, compacting, and finish grading” of the soils at the Moghadam property under a November 2004 subcontract with NMH. The subcontract required Camarillo to indemnify and hold NMH harmless from claims (including attorney fees “incurred as a result thereof”) for property damage “arising out of or resulting from the activities of or work performed” by Camarillo.
In early 2009, the Moghadams “ ‘began to notice drywall and stucco cracks, separation and cracking of interior tiles, and lifting of exterior flagstones’ ” on their property. They complained to NMH “ ‘[i]n approximately May 2009.’ ” An ensuing geotechnical investigation found the distress to the Moghadam residence was due to “ ‘differential fill settlement, as well as expansive soil activity,’ ” and that “an inadequate design and construction of the post-tension slab foundation system are exacerbating the distress.” A construction engineer hired to prepare a repair estimate concluded the entire structure was compromised and should be demolished and rebuilt at a cost of almost $1.9 million.
In September 2011, the Moghadams filed a claim in arbitration against NMH for defective construction, alleging their total current damages were “at least $2,347,592.” Their claim alleged most of the stress features (the cracks and separations mentioned above) had occurred on the southeastern portion of the house, where the fill was deepest. The claim also described a floor tilted downward, as well as hairline wall and ceiling cracks throughout the house.
Camarillo did not answer NMH’s complaint or otherwise appear in the NMH lawsuit, and its default was entered in March 2012.
The final binding award gave the Moghadams “damages for diminution in value in the amount of $1,026,750, with interest at the legal rate accruing as of the date of the Interim Award dated August 13, 2012.” As the prevailing party under the purchase agreement and joint escrow instructions, the Moghadams were awarded attorney fees of $105,000 and costs of $8,840.38, with interest at the legal rate accruing as of the date of the final award (October 9, 2012).
The award was confirmed in December 2012, in the principal sum of $1,140,590.38, plus prejudgment interest of $28,417.84, for a total award of $1,169,008.22. The Moghadams recovered an additional $7,625 for attorney fees and costs incurred in preparation and filing of the petition to confirm the award, bringing their total recovery to $1,176,633.22.
Plaintiff fully indemnified NMH for the arbitration award to the Moghadams.
In July 2015, plaintiff brought this lawsuit against defendant. Plaintiff alleged causes of action for declaratory relief, subrogation, recovery of the judgment under section 11580, and breach of contract. The complaint alleged defendant’s policies provided coverage for the entire amount of the default judgment; defendant had a duty under those policies to indemnify Camarillo for the amount of the default judgment; and plaintiff was subrogated to NMH’s rights to recover the amount of the default judgment, from Camarillo and defendant, by virtue of having indemnified NMH for the arbitration award.
Both parties moved for summary judgment.
Defendant’s own summary judgment motion was based on the first two of defendant’s three contentions.
On November 22, 2016, the trial court entered an order denying defendant’s motion and granting plaintiff’s motion.
Plaintiff served defendant with a proposed judgment that awarded plaintiff damages of $1,532,973.87 (the amount of the default judgment). Defendant filed objections to the proposed judgment. In substance, defendant reiterated the arguments it made in its summary judgment papers, and added a few new ones, including a claim that the judgment exceeded the per occurrence limits of defendant’s insurance policies, and that plaintiff could not recover NMH’s attorney fees and costs awarded in the default judgment, or any interest on the judgment, on the theory that those were costs, not damages, and thus fell under the “supplementary payments” provision of defendant’s policies, which plaintiff could not enforce under section 11580. Plaintiff responded by asserting that no California authority permits a party to use objections to a proposed judgment as a mechanism for reasserting arguments already raised or asserting new arguments after the court has issued a dispositive order.
On May 23, 2017, defendant filed a motion for a new trial, or alternatively to vacate the ruling and judgment. Defendant asserted irregularities and abuse of discretion preventing defendant from having a fair trial; excessive damages; insufficient evidence; and error in law. Defendant complained the court’s ruling failed to address or make any findings on the property damage and coverage issues defendant raised, failed to specify the reasons for granting summary judgment or specifically refer to any evidence supporting that determination, and failed to rule on material evidentiary objections. Defendant’s motion repeated all the arguments previously made (both before and after the summary judgment ruling), and added an argument that a “wrap-up” exclusion in its policies excluded coverage.
Plaintiff’s response addressed defendant’s substantive claims, and also contended that defendant’s arguments had already been adjudicated or were waived by the failure to raise them during the extensive briefing and oral argument on the summary judgment motions.
Defendant filed a timely appeal from the judgment.
Defendant contends plaintiff did not establish any of the elements required by section 11580, because the default judgment NMH obtained was void; the underlying action was not based on property damage; and defendant’s policies did not provide coverage of the underlying claims. We disagree.
Despite all these factual allegations, defendant asks us to conclude the NMH default judgment was void for failure to allege “a specific amount of damages . . . in the body of the complaint” (Becker, supra, 27 Cal.3d at p. 494), thus violating the section 580 requirement that the relief granted in a default judgment “cannot exceed that demanded in the complaint” (§ 580, subd. (a)). We cannot do so, because the NMH complaint was quite plain that NMH sought indemnity “for the claims made in the Moghadam Claimants’ Arbitration Complaint,” and NMH properly incorporated by reference into the body of the complaint the Moghadam claim for damages of “at least $2,347,592.” The default judgment of $1,532,973.87 was significantly less than the amount demanded in the complaint.
Defendant does not dispute that “a copy of the Moghadam Claim was attached to NMH’s Complaint and incorporated therein by reference.” Instead, defendant contends that, as a matter of law, “incorporation by reference is inadequate to satisfy the strict and clearly worded statutory framework” of section 580 and related statutes. Defendant’s briefs cite no pertinent authority supporting this contention. While its argument on this point is opaque throughout, defendant concludes that “it would be contrary to the basic notions of due process and fairness to find that Camarillo was put on notice of damages sought against it based upon an arbitration claim not filed against Camarillo,” and “[t]herefore” the default judgment is void. All we can say is that defendant’s assertion has no support in law and is counter to the clear allegations of the NMH complaint.
After the briefs in this case were filed, the Fourth Appellate District decided the only case of which we are aware that concerns the principles of incorporation by reference in the context of section 580, Yu v. Liberty Surplus Ins. Corp. (2018) 30 Cal.App.5th 1024 (Yu). Yu rejected a claim of incorporation by reference, but did so under circumstances quite different from those in this case. Yu nowhere suggests that incorporation by reference of damage amounts is inadequate to satisfy section 580 as a matter of law. Yu merely held that the alleged incorporation by reference of the monetary demand in Yu was not “ ‘clear and unequivocal,’ ” as is required for incorporation by reference in other legal contexts. (Yu, at pp. 1032-1033.) That is not the case here.
As in this case, Yu involved a judgment creditor’s action under section 11580 to collect a default judgment against certain subcontractors (the Fitch entities) from their insurers. The question was whether a cross-complaint on which the Fitch entities defaulted incorporated by reference the amount of damages claimed in the initial complaint. The facts, briefly, were these.
Finally, in a two-paragraph argument, defendant asserts that the Moghadam arbitration claim “only sought unspecified attorneys’ fees, costs and interest”; the default judgment against Camarillo “included an award for these items”; and “[c]onsequently” the default judgment is void for violating section 580’s notice requirements. Again, there is no authority for defendant’s assertion. The default judgment entered against Camarillo was far less than the amount of damages identified in the arbitration claim, so there can be no legitimate claim of inadequate notice of Camarillo’s maximum liability.
Defendant contends the judgment against Camarillo is not recoverable under section 11580 because it was not a judgment “based upon . . . property damage” within the meaning of section 11580. We disagree. To reach that conclusion would require us to ignore the facts and interpret the law in an irrational fashion.
In the arbitration, it was “undisputed that the house is damaged due to differential settling resulting from improper soil compaction.” The arbitrator explained: “The Property is settling toward the area where soil compaction depth was near 50 [feet]. The post-tension slab is cracked entirely through near the mid section of the home at the approximate point of the fill transition. Floor level surveys demonstrated a differential from high to low of 1.8 [inches] in 2009, 2.4 [inches] in 2010 and 3.3 [inches] in 2012, contrasted to a normal of 3/4 [inch]. The parties also acknowledge that the residence walls contain numerous cracks on the interior and exterior and that posts and other structures are pulling away at points.” That is property damage. That is why the Moghadams sought arbitration, and it is why they obtained an award.
Defendant contends the judgment here was not for property damage, but rather was for indemnity of an arbitration award that awarded “economic loss for diminution in property value,” and that, “[a]s a matter of law, diminution in value is economic loss, not property damage.” We decline to adopt this constricted view of section 11580.
Second, the fact that the arbitrator measured the damages by diminution in value, rather than by the cost of repair, changes nothing. In statutory actions for construction defects (Civ. Code, § 895 et seq.), the homeowner’s “right to the reasonable value of repairing any nonconformity is limited to the repair costs, or the diminution in current value of the home caused by the nonconformity, whichever is less . . . .” (§ 943, subd. (b)). The arbitrator awarded the diminution in value because NMH’s proposed repair plans did not reflect the true value of the necessary repairs, and the claimants’ proposed repair costs exceeded the diminution in value – so the Moghadams’ damages were necessarily “limited to $1,026,750, the diminution in value.” To say the award was therefore not “based upon . . . property damage” is simply untenable.
In short, we are in no doubt that the NMH default judgment was secured “in an action based upon . . . property damage,” and none of the authorities defendant cites requires a contrary conclusion.
A judgment creditor’s direct action against the insurer under section 11580 is “on the policy and subject to its terms and limitations.” (Id., subd. (b)(2).) Defendant contends plaintiff did not prove the default judgment was covered under any of defendant’s policies. In the trial court, defendant asserted two bases for the claimed lack of coverage. We conclude defendant is mistaken on both points.
Defendant first contends plaintiff did not prove when property damage first occurred at the Moghadam property, and therefore the damage is not covered by any of the policies. We disagree with defendant’s construction of the policy. It is clear there is coverage under at least one of the policies: the sixth policy in effect from August 1, 2008, to August 1, 2009.
There is very little substantive difference in the six policies, but the sixth is slightly different from the others in the placement of some provisions. Where provisions differ, we use those in the sixth policy, since that is the one that definitively covers the property damage suffered by the Moghadams.
For sake of clarity, we note at the outset that there is no dispute that the property damage was “caused by an ‘occurrence’ that takes place in the ‘coverage territory’ ” (the United States) and that the causal act (Camarillo’s improper grading) need not have taken place during the term of the insurance policy that covers the damage. “Occurrence” in this context is construed to mean that what must happen “during the policy year to trigger coverage” is “damage to property, not the causal conduct.” (Pennsylvania General Ins. Co. v. American Safety Indemnity Co. (2010) 185 Cal.App.4th 1515, 1534 (Pennsylvania General).) Defendant does not contend otherwise.
Defendant tells us that, because none of the policies provides coverage “for property damage which commenced prior to the policy period,” and plaintiff did not offer evidence to establish when property damage first occurred, there is no coverage under any of the policies. We disagree.
No “[p]hysical injury” to the Moghadams’ residence occurred until May 2009, and they advised NMH at that time, during the term of the sixth policy. Defendant’s contention is based, in effect, on plaintiff’s argument that all the policies cover the property damage (a point we need not decide), and on defendant’s own mistaken view that, even if property damage first “manifested” during the policy period, the insured must also prove that the damage did not “first commence” at some earlier time. Defendant’s contention is contrary to the policy’s definition of property damage, without support in legal authority, and an unreasonable construction of the insured’s burden of proof.
Plaintiff made its required showing. The “basic scope of insurance coverage” in this case is as we have just described: the policy applies to “property damage” – “[p]hysical injury to tangible property” – that “occurs during the policy period.” Plaintiff submitted the arbitration award as evidence. That award established that in 2009, the Moghadams noticed “drywall and stucco cracks, separation and cracking along the mortar joint of interior tiles . . . and lifting of exterior flagstone work,” and complained to NMH in May 2009. This is plainly evidence of property damage – “[p]hysical injury to tangible property” – that first appeared during the term of defendant’s sixth policy. We do not see how any other conclusion is possible. Defendant’s constant refrain that plaintiff “did not offer any evidence to establish when property damage first occurred at the Property” is simply wrong.
Defendant’s challenge to this straightforward analysis draws upon plaintiff’s argument that all the policies in effect “from the time Camarillo completed its work at the Moghadams’ residence forward provide coverage for the damages in question.” Defendant may well be correct when it contends this is not so. But we need not decide that point, because coverage is established under the sixth policy.
Despite the evidence that physical injury to the Moghadam residence occurred in 2009 (and the lack of any evidence that there was earlier physical injury to the home), defendant, relying on Pennsylvania General, asks us to conclude plaintiff did not present evidence “of when property damage first occurred at the Property.” As just demonstrated, we cannot so conclude, and Pennsylvania General does not suggest otherwise.
We have no disagreement with Pennsylvania General’s conclusion, but it does not relieve defendant of liability on the sixth policy. The evidence showed physical injury to the property in 2009 (and not before). In its reply brief, defendant tells us, in effect, that it does not matter that the property damage “manifested” in 2009, because “it is the ‘occurrence’ of property damage during the policy period that triggers liability coverage under the policy,” not the “manifestation of loss.” That is simply a circular repetition of the same flawed argument, based on inapt authority.
Thus, Pennsylvania General itself puts the lie to defendant’s assertion that, despite the first appearance of actual property damage in 2009, plaintiff must prove something more. There is no legal support for that proposition. Defendant’s policy “deem[s]” property damage that commenced before the policy’s effective date (August 1, 2008) to have happened in its entirety before that date. The only reasonable construction of this clause is that it applies to circumstances where damage actually appeared before the effective date of the policy, in which case the damage “is deemed to have happened in its entirety” before that date. But once plaintiff showed property damage that first appeared in 2009, it was up to defendant to prove that property damage actually occurred before that date, and of course defendant did not and could not do so.
Defendant’s sixth policy by its terms covered the physical injury to the home in 2009, as well as any ensuing damage.
Defendant’s second basis for asserting no coverage under its policies is that plaintiff offered no evidence the applicable self-insured retention (SIR) or deductible was satisfied under any of the policies. (The SIR’s ranged from $15,000 to $50,000 per occurrence for various coverages, and the deductible in the sixth policy was $10,000 per occurrence.) Defendant says that satisfaction of the SIR’s (in the first five policies) and the deductible (in the sixth policy) was a condition precedent to its coverage obligation, and plaintiff offered no proof the applicable SIR or deductible was satisfied under any of the policies.
In its summary judgment papers, defendant presented no evidence that it ever requested Camarillo to “pay over and deposit with us all or any part of the deductible.” Under the plain terms of the endorsements, defendant’s request for payment is a part of the “condition precedent” to its indemnity obligation. Because there is no evidence defendant made a request for payment of the deductible, there is necessarily no merit to defendant’s claim it has no indemnity obligation. The same is true of the SIR’s.
In its reply brief, defendant cites Evanston Ins. Co. v. American Safety Indemnity Co. (N.D.Cal. 2011) 768 F.Supp.2d 1004 (Evanston), telling us the Evanston court “analyz[ed] the same language in [defendant’s] policies” and “rejected the argument that [defendant] must demand payment of the SIR to render the SIR endorsement enforceable.” If the court had done so, we would disagree, but that is not what the Evanston court said or did.
In short, Evanston does not involve the insurer’s failure to demand payment of the SIR; quite the opposite. Nothing in Evanston in any way contradicts our construction of defendant’s deductible and SIR endorsements.
Defendant contends coverage is also excluded under a “wrap-up” exclusion in its policies, which states the insurance does not apply to “any work insured under a consolidated (Wrap Up) Insurance Program.” Defendant argues that plaintiff’s excess policy follows form to the underlying policy Everest Indemnity issued to NMH (see fn. 1, ante), and the supplementary declarations in the Everest policy identifying “other named insureds” lists “[a]ll contractors and subcontractors enrolled in the Owner Controlled Insurance Program (OCIP).” From this, we are to conclude defendant’s policies do not cover Camarillo’s work.
Defendant protests that it briefed the issue in its motion for a new trial, and that in any event it is “strictly a question of law” that we may decide even if not raised in the trial court. First, defendant cites no authority for the claim that raising a new theory in a new trial motion preserves it for appeal. New theories that could have been raised, but were not, is not one of the causes that permits a new trial. (See Code Civ. Proc., § 657.) Second, while an appellate court may decide pure questions of law not raised below, defendant cites no authority requiring an appellate court to do so or explaining why we should depart from established appellate principles to do so here. And third, plaintiff suggests there are questions of fact relevant to defendant’s new contention, from which we infer defendant has not presented a pure question of law. Accordingly, we find this a particularly appropriate case for declining to review defendant’s new theory for excluding coverage under its policy.
Next, defendant contends the award of $1,532,973.87 is excessive because “it exceeds the $1,000,000 per occurrence limits of each of [defendant’s] Policies.” (Under defendant’s sixth policy, the limits of insurance include an “Each Occurrence Limit” of $1 million and a “Products-Completed Operations Aggregate Limit” of $2 million.) Defendant says plaintiff offered no evidence or argument that the Moghadam claim involved more than one occurrence; the Moghadam claim “was a discrete, soil related construction defect claim involving one residence”; and so there is no basis to conclude the Moghadam claim involved multiple occurrences.
Defendant’s opposition to plaintiff’s summary judgment motion did not raise policy limits as a defense to plaintiff’s claim for indemnification in the entire amount of the default judgment. Defendant did not raise its policy limits/single occurrence argument until after the trial court’s dispositive ruling on the summary judgment motions. There is some irony in defendant’s complaint that, “[i]ndeed, the trial court’s ruling does not make any finding with respect to the number of occurrence(s) in the Moghadam Claim.” The court did not do so, because no one raised the issue before the court ruled on the summary judgment motions.
Defendant again cites no authority for its assertion that raising a new theory in its objections to the proposed judgment, or in its new trial motion, preserves it for appeal. In short, for the same reasons we have discussed in connection with defendant’s wrap-up exclusion claim, we decline to review this new theory for reversal of the summary judgment.
Defendant contends that plaintiff cannot recover the portion of the default judgment – $356,340.65 – that represents NMH’s attorney fees and costs. Defendant offers two bases for this assertion.
Defendant first says that under its policies, attorney fees and costs are not “property damage,” despite legal authority to the contrary. (Golden Eagle Ins. Co. v. Insurance Co. of the West (2002) 99 Cal.App.4th 837, 842 [“the indemnitee’s defense costs are sums the insured is legally obligated to pay as damages because of property damage”].) Defendant makes an elaborate argument to the effect that its policy definition of “insured contract” is different from the standard definition in the policies in Golden Eagle, with the result (it claims) that NMH’s defense fees in the Moghadam claim are not covered. Then, defendant says the $356,340.65 in attorney fees and costs – as well as “pre-judgment interest on the entirety of the default judgment” – cannot be recovered in a direct action under section 11580. This is because attorney fees and prejudgment interest are “costs” under the “supplementary payments” provision of defendant’s policy, and, defendant claims, a judgment creditor’s right to recover does not extend to amounts payable under a policy’s supplementary payments provision.
Both of defendant’s contentions suffer from the same defect as defendant’s claims about the wrap-up exclusion and policy limits: They were not made during the summary judgment proceedings. Defendant raised these assertions only after the trial court’s summary judgment ruling. Moreover, defendant’s claim that prejudgment interest cannot be assessed on the amount of the default judgment misapprehends the law. NMH obtained the default judgment on August 7, 2013, and the judgment in this case assesses prejudgment interest calculated from August 7, 2013. Plaintiff is entitled to prejudgment interest under Civil Code section 3287, not because of any provision in defendant’s policy.
The judgment is affirmed. Plaintiff is to recover its costs on appeal.
Defendant relies on Schwab v. Southern California Gas Co. (2004) 114 Cal.App.4th 1308, which does not involve incorporation by reference. Schwab involved whether plaintiff timely served statements of damages as required in personal injury cases. Defendant cites Schwab’s statement that the statutes requiring a complaint to state the amount of damages “require formal notice of the amount of money damages or other relief sought by the party seeking relief.” (Id. at p. 1325.) Of course that is so, but NMH gave that notice to Camarillo here by incorporating the Moghadam claim by reference into the body of the complaint and expressly seeking indemnity for those very claims. We do not see anything in Schwab pertinent to or inconsistent with our resolution of this case.

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