Valley Casework v. Lexington Ins. CA4/1 ( 2013 )

Filed 7/10/13 Valley Casework v. Lexington Ins. CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
VALLEY CASEWORK, INC., D060837
Plaintiff and Appellant,
v. (Super. Ct. No. 37-2010-00101021-
CU-BC-CTL)
LEXINGTON INSURANCE COMPANY,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Diego, Timothy Taylor,
Judge. Reversed and remanded with directions.
Yale & Baumgarten, David W. Baumgarten and Eugene P. Yale for Plaintiff and
Appellant.
Gordon & Rees, Peter Schwartz and Christopher R. Wagner for Defendant and
Respondent.
Plaintiff and appellant Valley Casework, Inc. (Valley), a cabinet maker and
installer, appeals from a summary judgment in favor of defendant and respondent
Lexington Insurance Company (Lexington) on Valley's second amended complaint for
breach of contract and breach of the implied covenant of good faith and fair dealing.
Valley alleged Lexington owed a duty to defend it against a claim of liability arising out
of Valley's installation of cabinets, after one cabinet fell from the wall and broke a faucet
causing water damage to a home in August 2008. Lexington had denied coverage under
a commercial general liability (CGL) insurance policy issued for the period February 20,
2007, to February 20, 2008. Valley contends Lexington cannot meet its burden of
proving there is no conceivable theory raised by the underlying lawsuit bringing it within
the operative provisions of the Lexington's CGL policy. Valley also contends there is a
triable issue of material fact as to whether a continuous loss endorsement in the policy
deems the alleged property damage to have occurred during the policy period.
We reverse the summary judgment on Valley's breach of contract cause of action
because Valley raised triable issues of material fact via the declaration of its founder
Ronald Raymond, which was erroneously excluded in its entirety by the trial court.
However we conclude Lexington is entitled to summary adjudication of Valley's claims
for breach of the covenant of good faith and fair dealing and punitive damages. We
remand with directions that the trial court enter a new order accordingly.
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FACTUAL AND PROCEDURAL BACKGROUND
The CGL Policy
Lexington issued a CGL policy to Valley effective February 20, 2007, to February
20, 2008 (the policy).1 The policy's insuring agreement provides in part: "We will pay
those sums that the insured becomes legally obligated to pay as damages because of . . .
'property damage' to which this insurance applies. We will have the right and duty to
defend any 'suit' seeking those damages . . . . [¶] . . . [¶] . . . This insurance applies to
. . . 'property damage' only if: [¶] (1) The . . . 'property damage' is caused by an
'occurrence' that takes place in the 'coverage territory'; and [¶] (2) The . . . 'property
damage' occurs during the policy period." As pertinent here, the policy defines "property
1 The CGL policy, which indicates on its face that it is a renewal of another policy,
is the only Lexington policy in the summary judgment record. According to Valley, it is
a renewal of policies first issued by Lexington on February 20, 2003, and renewed on an
annual basis until February 20, 2008, when Lexington elected to not renew the policy.
For this fact, Valley cites only its complaint's allegations; it did not submit in its
opposition evidence of the policies showing their effective dates, nor did it include those
facts in its opposing separate statement of material facts. To rebut a moving party's
showing on summary judgment, the opponent may not rely on allegations in the
pleadings, even if verified, but must instead "set forth the specific facts showing that a
triable issue of material fact exists . . . ." (Code Civ. Proc., § 437c, subd. (p)(1); Salma v.
Capon (2008) 161 Cal. App. 4th 1275, 1290; see College Hospital Inc. v. Superior Court
(1994) 8 Cal. 4th 704, 720, fn. 7.) We asked the parties to brief various questions
concerning Valley's proof of coverage periods, and conclude that because Lexington did
not raise any issue below about the factual question of the dates of effective coverage, it
forfeited the point on appeal. (See Fort Bragg Unified School Dist. v. Colonial American
Casualty & Surety Co. (2011) 194 Cal. App. 4th 891, 907 [new factual theories of defense
may not be raised for the first time on appeal].)
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damage" to mean "[p]hysical injury to tangible property, including all resulting loss of
use of that property."
The policy contains a "Continuous or Progressive Loss Endorsement" (the
continuous loss endorsement). It provides: " 'Occurrence' means an accident including
continuous or repeated exposure to substantially the same general harmful conditions. [¶]
In the event of continuing or progressive . . . 'property damage' over any length of time,
such . . . 'property damage' shall be deemed to be one 'occurrence[,'] and shall be deemed
to occur only when such . . . 'property damage' first commenced." The endorsement
further provides: "In the event of continuing or progressive . . . 'property damage' over
any length of time, we will have no duty to defend or investigate any 'occurrence', claim
or 'suit' unless such . . . 'property damage' first commenced during the policy period."
Events Giving Rise to This Litigation
Valley was hired to install cabinets in a newly constructed home in Carlsbad (the
property), which was eventually purchased by Danny Lampel in 2006. Lampel was the
first homeowner to occupy the property.
In August 2008, Lampel returned from a two-day trip and discovered her home
was flooded. She inspected the property and found that a cabinet in the utility room had
fallen off the wall and struck a faucet, causing a release of water seriously damaging the
property. Lampel's homeowner's insurer, California Capital Insurance (CCI), paid for
repairs.
In May 2009, CCI filed an action against Valley and others demanding it be
reimbursed for $50,848.37 in damages. In the Judicial Council form complaint, CCI
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alleged that on or about August 4, 2008, it was injured by a certain cabinet that the
defendants had designed, manufactured, sold and installed. It further alleged:
"Defendants owed a duty to erect a personal residence for the benefit of plaintiff's
insured, Danny Lampel, in a fit and workmanlike manner, including the installation of a
certain cabinet in that new residence in a fashion which would insure [sic] that the
cabinet would not fall off a wall in the residence by its own weight; defendants breached
that duty when they installed the cabinet by merely screwing the cabinet into the drywall
and without fasteners of any sort which would be sufficient to hold the cabinet up, so as
to allow the cabinet to fail and fall upon a faucet located immediately beneath the falling
cabinet, thereby resulting in a breakage of the faucet and the release of water throughout
the residence. Having paid to repair that water loss to the residence under the written
homeowners policy which the plaintiff issued to Danny Lampel, the plaintiff acquired
rights of subrogation to hold the defendants accountable and to secure reimbursement
from the defendants for those repair costs . . . ." (Some capitalization omitted.)
In July 2009, Valley's insurance broker submitted a loss notice to third party
claims administrator York Claims Service, Inc. (York), identifying August 4, 2008, as the
"time of [the] accident" and the damage as "water released throughout the residence[.]"
(Capitalization omitted.) Thereafter, York advised Valley's founder, Ronald Raymond,
that a question of coverage had arisen on preliminary review and it would conduct an
investigation under a reservation of its rights.
In October 2009, York on Lexington's behalf informed Raymond it had denied
coverage on grounds the CCI action did not allege property damage during the relevant
5
policy period. In part, the letter advised Valley of the definitions of "property damage"
and "occurrence," stating that the latter "means an accident including continuous or
repeated exposure to substantially the same harmful conditions." The letter also states:
"The [CCI complaint's] allegations do include a claim for damages that includes 'property
damage' that was caused by an 'occurrence' as those terms are defined by the policy.
However, the alleged damages occurred on August 4, 2008, which was outside of the
Lexington policy period, which ended on February 20, 2008. Accordingly, there is no
coverage for this lawsuit under the Lexington policy." The letter continues: "If you have
any additional information which you feel would either cause us to change our position or
would assist us in our investigation or determination, we ask that you advise us as soon as
possible."
The Present Lawsuit
Valley sued Lexington for breach of contract and breach of the implied covenant
of good faith and fair dealing. Valley voluntarily amended its complaint in the face of
Lexington's demurrer, and eventually filed a second amended complaint in which Valley
alleged for the first time that, prior to expiration of its policy on February 20, 2008, the
cabinet causing the flooding had started pulling away from the subject wall, damaging
paint and drywall. Valley alleged on information and belief that "such damage
continuously progressed to the point where the mechanical fastening system failed,
causing the cabinet to pull completely away from the wall and crash into the faucet
below, resulting in the additional damage claimed in the CCI suit. [Valley] contends that
under the amended definition of 'occurrence' contained in [the continuous loss
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endorsement], all of the damage—from the preliminary damage to the paint and drywall
through the damage to the faucet and the resulting flood—is 'deemed to be one
occurrence' and is 'deemed to [have] occur[ed]' when the cabinet first started pulling
away from the wall during the Lexington policy period."
Lexington moved for summary judgment or alternatively summary adjudication.
It argued Valley could not maintain its breach of contract cause of action because (1)
coverage was not triggered under the policy and (2) the continuous loss endorsement was
irrelevant because there was no evidence—but only speculation—that property damage
"first commenced" during the policy period. It submitted Lampel's declaration, in which
Lampel, who had a background in new construction real property sales, averred she never
saw the cabinet in the utility room pulling away from the wall before the damage
occurred on August 4, 2008, nor did she observe any evidence (paint chips, drywall dust)
indicating damage relating to the installation of the cabinets above the faucet. Lampel
stated: "The first time I observed any damage to the Property relating to the cabinet
installed above the faucet in the utility room was when I discovered the flood on or about
August 4, 2008." As for Valley's bad faith cause of action, Lexington argued it failed
absent coverage under the policy, it was precluded by the "genuine dispute" doctrine, and
the evidence showed Lexington had conducted an appropriate investigation. Finally,
Lexington sought summary adjudication of Valley's punitive damages claim, asserting
there was no evidence to support it.
Valley opposed the motion. It argued given the allegations in its second amended
complaint and Lexington's broad duty to defend, Lexington could not meet its threshold
7
burden of proving that the CCI action " 'can by no conceivable theory raise a single issue
which would bring it within the policy coverage[.]' " It further argued there was a triable
issue of material fact as to whether the property damage first commenced during the
policy period; that Lexington was required to look beyond the complaint's allegations
regarding when the cabinet fell off the wall, and had it conducted an adequate
investigation, it would have discovered that an improperly installed cabinet begins to fail
as soon as it is put under a load, damaging paint and drywall as it pulls away from the
wall. According to Valley, under the continuous loss endorsement, "all of the property
damage—from the preliminary damage to the paint and drywall through the damage to
the faucet and the resulting flood"—was deemed to be one occurrence and was deemed to
have occurred when it first commenced, i.e., when the cabinet started to "creep" shortly
after it was installed, approximately two years before expiration of the policy period on
February 20, 2008. Valley also argued triable issues existed as to whether Lexington
denied coverage in bad faith and acted fraudulently for purposes of recovering punitive
damages.
Valley submitted the declarations of Raymond, who started Valley in 1982, and
also architect and general contractor expert Norbert Lohse. Raymond averred that
homeowners with a falling cabinet would not notice damage occurring to the drywall,
paint, or caulking on the top of the cabinet because the top of upper cabinets is not readily
visible. He stated: "In all of the 'falling' cabinet claims I have investigated during my 49
year career, the weight of the lower shelves would result in the cabinet pulling away from
the top of the cabinet until eventually it would reach a point of no return and fall from the
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wall, with the top falling first and the bottom following. As soon as the cabinet starts
moving, immediately after being put to use, the bottom of the cabinet would begin to
damage the drywall by indenting it (the wood cabinet is harder than the soft drywall), and
the top of the cabinet would begin to separate, damaging the paint and the caulking across
the top of the cabinet." Raymond stated that based on his experience, the cabinet at issue
would have started to cause damage to drywall, paint and caulking immediately after
being put to use by the homeowner in 2006. Lohse reached the same conclusions, stating
that Lampel's cabinet exhibited a "classic situation commonly referred to as 'continuous
creep.' " He averred that paint chipping and drywall dust were not necessarily
manifestations of damage to paint, caulking and drywall in continuous creep cabinet
cases, nor were they determinative of when the damage commenced.
In reply, Lexington objected to the Raymond and Lohse declarations on numerous
grounds, including that their opinions lacked foundation, and were irrelevant and
improper. In part, it argued that the point of the continuous loss endorsement was to
trigger only one policy for a given loss, and the pertinent inquiry was whether the CCI
action involved a claim for property damage during the policy period. According to
Lexington, Valley could not make that showing because the CCI action alleged the
"property damage" occurred on August 4, 2008, which was consistent with Lampel's
statement that there was no indication of damage to the utility room before that date.
Lexington further argued the property damage testified to by Raymond and Lohse was so
negligible and immaterial that it did not fall within the policy's definition of property
damage.
9
Sustaining Lexington's objections to the Raymond and Lohse declarations, the trial
court tentatively granted Lexington's motion. In part, it ruled based on both the CCI
action's allegations and extrinsic evidence, Lexington met its burden to demonstrate
Valley could not establish the CCI action involved a claim for property damage that
occurred during the policy period.2 It further ruled that any property damage suggested
by Raymond and Lohse, assuming admissibility of their opinions and findings, was
"imperceptible" and did not qualify as "property damage" within the meaning of the
policy. Following oral argument, the court confirmed its ruling and entered judgment in
Lexington's favor. Valley timely appeals.
DISCUSSION
I. Summary Judgment Standard of Review
2 As to extrinsic evidence giving rise to a duty to defend, the court reasoned:
"When [Valley's second amended complaint] claimed for the first time that there was
unreported damage to paint and drywall at the Property [six] months before the water
incident, Lexington contacted the property owner Ms. Lampel. Her declaration avers she
saw nothing to suggest 'cabinet creep.' She was the only person in a position to observe
'property damage' before 8/4/08, yet she saw no such thing. The claim against [Valley]
did not involve a claim for 'property damage' during the Policy period. The opposing
declarations from [Valley], by Mr. Raymond and Mr. Lohse, lack foundation, as neither
has any personal knowledge of what took place at the home. Additionally, their
declarations speculate as to what may have occurred at the premises." Lexington asserts
in its respondent's brief on appeal that "as soon as [Valley] speculated about 'continuous
creep,' Lexington immediately interviewed the owner of the Property at the time of the
loss, Danny Lampel." But Lexington does not provide a record cite for this fact, and it is
not included in Lexington's separate statement. The Lexington claims management
analyst who approved the coverage denial, Thomas Del Monte, does not indicate in his
supporting summary judgment declaration that he or anyone on Lexington's behalf
interviewed Lampel before denying coverage, and because we strictly construe
Lexington's evidence, we can only infer that Lexington contacted Lampel for the first
time when it obtained her June 2011 declaration for purposes of its summary judgment
motion.
10
Summary judgment is appropriate "if all the papers submitted show that there is no
triable issue as to any material fact and that the moving party is entitled to a judgment as
a matter of law." (Code Civ. Proc., § 437c, subd. (c).) A defendant who moves for
summary judgment or summary adjudication bears the initial burden to show that the
cause of action has no merit—that is, "that one or more elements of the cause of action,
even if not separately pleaded, cannot be established, or that there is a complete defense
to that cause of action." (Code Civ. Proc., § 437c, subds. (a), (p)(2).)
If the defendant carries that burden, "the opposing party is then subjected to a
burden of production of his own to make a prima facie showing of the existence of a
triable issue of material fact." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal. 4th 826,
850 (Aguilar).) A triable issue of material fact exists " 'if, and only if, 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.' [Citation.]
Thus, a party 'cannot avoid summary [adjudication] by asserting facts based on mere
speculation and conjecture, but instead must produce admissible evidence raising a triable
issue of fact.' " (Dollinger DeAnza Associates v. Chicago Title Ins. Co. (2011) 199
Cal. App. 4th 1132, 1144-1145.)
On review of a summary judgment, we take the facts from the record before the
trial court when it ruled on the motion. (Yanowitz v. L'Oreal USA, Inc. (2005) 36 Cal. 4th
1028, 1037.) " ' "We review the trial court's decision de novo, considering all the
evidence set forth in the moving and opposing papers except that to which objections
were made and sustained.' " [Citation.] We liberally construe the evidence in support of
11
the party opposing summary judgment and resolve doubts concerning the evidence in
favor of that party." (Ibid.)
II. Insurer's Duty to Defend
An insurer's duty to defend its insured is very broad. "[T]he insured is entitled to a
defense if the underlying complaint alleges the insured's liability for damages potentially
covered under the policy, or if the complaint might be amended to give rise to a liability
that would be covered under the policy." (Montrose Chemical Corp. v. Superior Court
(1993) 6 Cal. 4th 287, 299 (Montrose I).) " '[O]nce the insured has established potential
liability by reference to the factual allegations of the complaint, the terms of the policy,
and any extrinsic evidence upon which the insured intends to rely, the insurer must
assume its duty to defend unless and until it can conclusively refute that potential.' "
(Ibid., italics added.) To protect an insured's right to call on the insurer's "superior
resources for the defense of third party claims . . . California courts have been
consistently solicitous of insureds' expectations on this score." (Id. at pp. 295-296.) Any
doubt as to whether the facts establish the existence of the defense duty must be resolved
in the insured's favor. (Id. at pp. 299-300.)
Accordingly, "[t]he insurer must defend any claim that would be covered if it were
true, even if it is 'groundless, false or fraudulent.' [Citation.] 'Implicit in this rule is the
principle that the duty to defend is broader than the duty to indemnify; an insurer may
owe a duty to defend its insured in an action in which no damages ultimately are
awarded. [Citations.]' [Citation.] 'Thus, when a suit against an insured alleges a claim
that potentially could subject the insured to liability for covered damages, an insurer must
12
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.' " (Palp, Inc. v. Williamsburg National
Ins. Co. (2011) 200 Cal. App. 4th 282, 288-289 (Palp); Aydin Corp. v. First State Ins. Co.
(1998) 18 Cal. 4th 1183, 1188 [plaintiff bears the burden to establish that the occurrence
"forming the basis of its claim is within the basic scope of insurance coverage"].)
" '[W]hether the insurer owes a duty to defend usually is made in the first instance
by comparing the allegations of the complaint with the terms of the policy' [citation] and
extrinsic facts 'known by the insurer at the inception of the third party lawsuit . . . .' "
(Palp, supra, 200 Cal.App.4th at p. 289.) The duty disappears "where the facts are
undisputed and conclusively eliminate the potential the policy provides coverage for the
third party's claim." (Ibid.) Stated another way, " ' "[t]he insurer need not defend if the
third party complaint can by no conceivable theory raise a single issue which could bring
it within the policy coverage." ' " (Advanced Network, Inc. v. Peerless Ins. Co. (2010)
190 Cal. App. 4th 1054, 1061.)
However, the assessment of potential coverage is not limited to the complaint's
allegations or extrinsic facts known to the insurer. The California Supreme Court has
emphasized: "To protect its insured's contractual interest in security and peace of mind,
'it is essential that an insurer fully inquire into possible bases that might support the
insured's claim' before denying it." (Wilson v. 21st Century Ins. Co. (2007) 42 Cal. 4th
713, 721; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 819.) " 'A trier of
13
fact may find that an insurer acted unreasonably if the insurer ignores evidence available
to it which supports the claim. The insurer may not just focus on those facts which
justify denial of the claim.' " (Wilson, at p. 721.) Thus, an insurer must undertake a
thorough, fair and reasonable investigation into the circumstances of the claim before
denying coverage. (Ins. Code, § 790.03, subd. (h)(3); Wilson, at pp. 720, 723; Aerojet-
General Corp. v. Transport Indemn. Co. (1997) 17 Cal. 4th 38, 58; Egan, at p. 819;
American Internat. Bank v. Fidelity & Deposit Co. (1996) 49 Cal. App. 4th 1558, 1571.)
III. Trigger of Coverage3
Where a summary judgment involves " 'a dispute over the interpretation of the
provisions of a policy of insurance, the reviewing court applies settled rules governing
the interpretation of insurance contracts.' " (Powerine Oil Co., Inc. v. Superior Court
(2005) 37 Cal. 4th 377, 390.) Ordinary rules of contract interpretation apply. (Ibid.;
County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal. 4th 406, 415.)
3 " 'A key inquiry under an occurrence-based policy is what fact or event triggers an
insurer's duty to defend and/or indemnify its insured.' " (St. Paul Mercury Ins. Co. v.
Mountain West Farm Bureau Mut Ins. Co. (2012) 210 Cal. App. 4th 645, 660.) "In the
third party liability insurance context, 'trigger of coverage' has been used by insureds and
insurers alike to denote the circumstances that activate the insurer's defense and
indemnity obligations under the policy." (Montrose Chemical Corp. v. Admiral Ins. Co.
(1995) 10 Cal. 4th 645, 655, fn. 2 (Montrose II).) The term is not a doctrine to be
automatically invoked by a court to conclusively establish coverage, but instead "is a
term of convenience used to describe that which, under the specific terms of an insurance
policy, must happen in the policy period in order for the potential of coverage to arise.
The issue is largely one of timing—what must take place within the policy's effective
dates for the potential of coverage to be 'triggered'?" (Ibid.) " '[I]f the policy expressly
provides when coverage is "triggered," such language will be determinative.' " (Westoil
Terminals Co., Inc. v. Industrial Indemnity Co. (2003) 110 Cal. App. 4th 139, 148.)
14
" 'The fundamental rules of contract interpretation are based on the premise that the
interpretation of a contract must give effect to the "mutual intention" of the parties.
"Under statutory rules of contract interpretation, the mutual intention of the parties at the
time the contract is formed governs interpretation. [Citation.] Such intent is to be
inferred, if possible, solely from the written provisions of the contract. [Citation.] The
'clear and explicit' meaning of these provisions, interpreted in their 'ordinary and popular
sense,' unless 'used by the parties in a technical sense or a special meaning is given to
them by usage' [citation], controls judicial interpretation." ' " (MacKinnon v. Truck Ins.
Exchange (2003) 31 Cal. 4th 635, 647-648; see also State of California v. Continental Ins.
Co. (2012) 55 Cal. 4th 186, 194-195.)
An insurance policy's coverage provisions must be interpreted broadly to afford
the insured the greatest possible protection. (MacKinnon, supra, 31 Cal.4th at p. 648.)
To prevail, the insurer must establish its interpretation of the policy is the only reasonable
one. (Id. at p. 655.) Even in the face of an insurer's reasonable interpretation, the court
must interpret the policy in the insured's favor if any other reasonable interpretation
permits recovery on the insured's behalf. (Ibid., citing State Farm Mut. Auto. Ins. Co. v.
Jacober (1973) 10 Cal. 3d 193, 202-203.)
In this case, the Lexington policy provides that property damage must be caused
by an occurrence, and the property damage must "occur[] during the policy period." The
insuring clause of Lexington's policy makes it "occurrence-based," which ordinarily
means that the policy covers property damage that occurred during the policy period. (St.
Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mut Ins. Co., supra, 210
15
Cal.App.4th at p. 660, citing Montrose II, supra, 10 Cal.4th at p. 668.) That conclusion
does not resolve the coverage question, because it is necessary to decide whether the
continuous loss endorsement affects activation of Lexington's defense duty. (See
Montrose II, at p. 677 [when deciding which trigger of coverage applies, the "precise
question . . . is what result follows under the language of the policies of insurance to
which the parties agreed, including the standardized definitions that were incorporated
into those policies"]; accord, Pennsylvania General Ins. Co. v. American Safety
Indemnity Co. (2010) 185 Cal. App. 4th 1515 (Pennsylvania General).)
Lexington's continuous loss endorsement added language to the definition of
occurrence "in the event" of continuing or progressive property damage over any length
of time. Furthermore, where property damage is continuing or progressive it is deemed
to be "one 'occurrence' " and "shall be deemed to occur only when such . . . 'property
damage' first commenced." Lexington's obligation to defend or investigate is eliminated
"unless such . . . 'property damage' first commenced during the policy period." This
additional language, as Lexington points out, is intended to circumvent the "continuous
injury trigger" established in Montrose II, allowing multiple policies to be triggered for
the same loss. (Montrose II, supra, 10 Cal.4th at p. 689 ["Where . . . successive CGL
policy periods are implicated, bodily injury and property damage which is continuous or
progressively deteriorating throughout several policy periods is potentially covered by all
policies in effect during those periods"]; Croskey et al., Cal. Practice Guide: Insurance
Litigation (The Rutter Group 2012) ¶¶ 7:175, p. 7A-88, 7:177.10, p. 7A-92, 7:1437.5, p.
7E-30.1.)
16
The Lexington CGL policy is akin to the CGL policy interpreted in Pennsylvania
General, supra, 185 Cal. App. 4th 1515, which had an insuring clause similar to
Lexington's policy at issue here,4 and also, like here, contained an endorsement refining
the definition of occurrence to focus on the commencement of property damage:
" ' "Occurrence" means an accident, including continuous or repeated exposure to
substantially the same general harmful conditions that happens during the term of this
insurance. "Property damage" . . . which commenced prior to the effective date of this
insurance will be deemed to have happened prior to, and not during, the term of this
insurance.' " (Pennsylvania General, supra, 185 Cal.App.4th at p. 1525.) This court
observed the language employed was designed to circumvent the continuous injury
trigger of the coverage rule laid down in Montrose II, and that construction "means the
appropriate focus for an occurrence is on when the damages caused by the negligent
causal acts of the insured first commenced, and is not on when the insured completed its
work." (Pennsylvania General, at p. 1532.) That CGL policy's amended definition of
occurrence was held in Pennsylvania General to be reasonably susceptible to the
interpretation that "resulting damage, not the [negligent act of the insured], is still a
4 The insuring clause at issue in Pennsylvania General provided it would indemnify
its insured for any amount the insured became obligated to pay as " ' "property damage"
to which this insurance applies,' and specified that '[t]his insurance applies to . . .
"property damage" only if: [¶] (1) The . . . "property damage" is caused by an
"occurrence" that takes place in the "coverage territory"; and [¶] (2) The . . . "property
damage" occurs during the policy period.' " (Pennsylvania General, supra, 185
Cal.App.4th at pp. 1524-1525.)
17
defining characteristic of the occurrence that must take place during the policy period to
create coverage." (Id. at p. 1526.)
In this case, the continuous loss endorsement's amended definition of "occurrence"
is implicated in the event of continuing or progressive property damage, and here, like in
Pennsylvania General, the "appropriate focus for an occurrence is on when the damages
caused by the negligent causal acts of [Valley] first commenced . . . ." (Pennsylvania
General, supra, 185 Cal.App.4th at p. 1532.) It is not enough, as Valley seems to
suggest, that some of the property damage take place "at any time prior to the expiration
of the policy . . . ." (Italics added.) Lexington's coverage obligation is eliminated even
where property damage occurs before the end of the policy period, if it does not first
commence within the policy's effective dates.
IV. Breach of Contract Cause of Action
A. Lexington's Threshold Summary Judgment Burden
With the above principles in mind, we assess whether Lexington met its initial
summary judgment "burden of production to make a prima facie showing of the
nonexistence of any triable issue of material fact." (Aguilar, supra, 25 Cal.4th at pp. 850-
851; see also MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co.
(2010) 187 Cal. App. 4th 766, 776-777.) Valley appears to address Lexington's initial
burden by contending, as it did below, that "Lexington cannot carry its burden of proving
that the CCI suit 'can by no conceivable theory raise a single issue which would bring it
within the Policy coverage.' " Valley then argues that summary judgment should be
denied because, "Under the operative provisions of the Policy, there is at least a triable
18
issue of material fact as to whether the alleged property damage is 'deemed' to have 'first
commenced' within the Policy period." Valley additionally argues that Lampel's
declaration does not establish the absence of a triable issue of material fact because her
assertion that she did not notice any paint chips or drywall dust does not negate other
damage to caulking or drywall. It maintains her statement is not determinative of
coverage because the policy is not a claims-made or "manifestation" policy,5 but only
requires property damage, no matter how slight, to commence during the policy period.
Lexington's threshold summary judgment burden is heavy, since, as discussed
above, it must defend Valley as long as it ascertains facts that raise the possibility that the
insured will be liable for losses covered by the policy. (Montrose I, supra, 6 Cal.4th at p.
295; Grey v. Zurich Ins. Co. (1966) 65 Cal. 2d 263, 276-277.) It is Valley's underlying
burden at trial to show the complaint's allegations, extrinsic facts known to Lexington, or
facts that were available to Lexington had it conducted a reasonable inquiry into possible
bases that would support Valley's claims, gave rise to potential coverage in that property
5 This court has explained that a " 'claims-made' policy[] ' "is one whereby the
carrier agrees to assume liability for any errors, including those made prior to the
inception of the policy as long as a claim is made during the policy period." ' " (Davis v.
Farmers Ins. Group (2005) 134 Cal. App. 4th 100, 106.) By a "manifestation" policy,
Valley presumably refers to a first party insurance policy (as distinguished from a CGL
third party liability policy as here) having a "manifestation of loss" rule, under which "the
insurer insuring the property at the time appreciable property damage first becomes
manifest [is] solely responsible for indemnification to the insured." (Montrose II, supra,
10 Cal.4th at p. 674; Prudential-LMI Com. Ins. v. Superior Court (1990) 51 Cal. 3d 674,
699; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2012)
¶ 6:232, p. 6B-17.) "[T]hird party CGL policies do not impose, as a condition of
coverage, a requirement that the damage or injury be discovered at any particular point in
time." (Montrose II, at p. 664.)
19
damage—defined as physical injury to tangible property—first commenced during the
policy period. (See Aydin Corp. v. First State Ins. Co., supra, 18 Cal.4th at p. 1188.)
Lexington must demonstrate Valley cannot meet its burden by presenting evidence
sufficient to show "that the underlying claim cannot come within the policy coverage by
virtue of the scope of the insuring clause" (Montrose I, supra, 6 Cal.4th at p. 301), and it
is therefore entitled to summary judgment as a matter of law. (Code Civ. Proc., § 437c,
subds.(c) & (f)(2); see also MRI Healthcare Center of Glendale, Inc. v. State Farm
General Ins. Co., supra, 187 Cal.App.4th at p. 778 [summary judgment affirmed in
insurer's State Farm's favor on ground State Farm demonstrated insured could not meet
its threshold burden of showing a claimed loss fell within the policy's insuring clause];
Monticello Ins. Co. v. Essex Ins. Co. (2008) 162 Cal. App. 4th 1376, 1385.)
We conclude Lexington met its threshold summary judgment burden. Looking
first to the underlying complaint's allegations, the CCI action alleges CCI suffered injury
on August 4, 2008, and describes its right to subrogation as arising after it had paid to
repair "water loss to the residence" occurring due to the falling cabinet; it sought
reimbursement "for those repair costs . . . ." Reasonably construed, the CCI action on its
face does not recite facts suggesting that the defectively installed cabinet had caused any
sort of gradual, progressive or continuing damage to Lampel's home preceding its fall and
the resulting broken faucet. There are no "fairly inferable" facts (Montrose II, supra, 10
Cal.4th at p. 655) indicating a potential that property damage first commenced during the
policy period, which ended approximately six months before the cabinet failed and
caused the ensuing flood damage in August 2008.
20
Nor does the record show or suggest that there was extrinsic evidence known to
Lexington at the time of Valley's tender that should have put Lexington on notice of
potential coverage. All indications at the time of tender were that the property damage
was caused by a sudden event: the flood caused by the falling cabinet, which resulted in
immediate damage to Lampel's home; those are not the sort of circumstances from which
Lexington should have suspected a defectively installed cabinet would cause gradual,
progressive or continual property damage months or years before falling from the wall.
Valley suggests Lexington's own evidence shows it did not conduct an adequate
investigation of coverage by reasonably available sources extrinsic to the CCI complaint,
including presumably by consulting with Raymond or other experts. It points out that in
denying coverage, Lexington did not reference the amended definition of "occurrence" in
the continuous loss endorsement, and that Lexington as a result did nothing to determine
whether property damage "first commenced" at some point before the policy's expiration
on February 20, 2008. We note that Lexington in its letter denying coverage invited
input from Raymond on the coverage question without any response. Under the
circumstances, Lexington reasonably concluded that no progressive or continuing
property damage was implicated by the sudden event of a defectively installed cabinet
falling from the wall, and that the amended definition of "occurrence" was not at issue.
Accordingly, we cannot say Lexington unreasonably ignored the policy language in
denying coverage.
In any event, where an insurer "has made an informed decision on the basis of the
third party complaint and the extrinsic facts known to it at the time of tender that there is
21
no potential for coverage, the insurer may refuse to defend the lawsuit. . . . [¶] An
insured may not trigger the duty to defend by speculating about extraneous 'facts'
regarding potential liability or ways in which the third party claimant might amend its
complaint at some future date. . . . Thus, the issues here are what facts [the insurer]
knew at the time [the insureds] tendered the defense of the [third party] lawsuit, both
from the allegations on the face of the third party complaint, and from extrinsic
information available to it at the time; and whether these known facts created a potential
for coverage under the terms of the Policy." (Gunderson v. Fire Ins. Exchange (1995) 37
Cal. App. 4th 1106, 1114; see also Shanahan v. State Farm General Ins. Co. (2011) 193
Cal. App. 4th 780, 786 [insurer has no duty to defend where under the facts of the
complaint or known extrinsic facts, the potential for liability is " ' "tenuous and
farfetched" ' "]; Griffin Dewatering Corporation v. Northern Insurance Company of New
York (2009) 176 Cal. App. 4th 172, 197-198 [facts from which potential for coverage is
gauged are those from the inception of the lawsuit, and such facts "do not include
speculative facts not in the complaint or otherwise unknown by the insurance
company"].)
Once Lexington reasonably determined there was no potential for coverage by
reference to the policy, the CCI complaint, and facts known to it, it had no "continuing
duty to investigate whether there is a potential for coverage." (Gunderson v. Fire Ins.
Exchange, supra, 37 Cal.App.4th at p. 1114.) In sum, the facts presented by Lexington in
its moving papers were sufficient to meet its prima facie summary judgment burden.
B. Valley's Opposing Summary Judgment Burden
22
In opposition to Lexington's motion, Valley had a burden of production of its own
to make a prima facie showing of the existence of a triable issue of material fact.
(Aguilar, supra, 25 Cal.4th at p. 850.) A triable issue of material fact exists " 'if, and only
if, 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.'
[Citation.] Thus, a party 'cannot avoid summary judgment by asserting facts based on
mere speculation and conjecture, but instead must produce admissible evidence raising a
triable issue of fact.' " (Dollinger DeAnza Associates v. Chicago Title Ins. Co., supra,
199 Cal.App.4th at pp. 1144-1145; see MRI Healthcare Center of Glendale, Inc. v. State
Farm General Ins. Co., supra, 187 Cal.App.4th at p. 777 [opposition to summary
judgment will be deemed insufficient when it is essentially conclusionary, argumentative,
or based on conjecture and speculation].) " 'If coverage depends on an unresolved
dispute over a factual question, the very existence of that dispute would establish a
possibility of coverage and thus a duty to defend.' " (Howard v. American Nat. Fire Ins.
Co. (2010) 187 Cal. App. 4th 498, 520.)
Here, Valley sought to meet its burden by proffering Raymond's and Lohse's
opinions, but the trial court excluded their declarations almost in their entirety on
foundation, speculation and relevance grounds, as well as on grounds they constituted
"improper opinion." In reviewing the propriety of summary judgment, we consider "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.) We review for abuse of
23
discretion the trial court's decision to exclude the experts' testimony. (DiCola v. White
Brothers Performance Products, Inc. (2008) 158 Cal. App. 4th 666, 679; Shugart v.
Regents of University of Cal. (2011) 199 Cal. App. 4th 499, 505; Avivi v. Centro Medico
Urgente Medical Center (2008) 159 Cal. App. 4th 463, 467.)
1. The Trial Court Abused its Discretion in Excluding Raymond's Declaration
Principles relating to the admissibility and foundation of expert testimony are well
established: "[T]he lack of foundation of an expert's testimony can be as to the expert
being qualified, the validity of the principles or techniques upon which the expert relied,
or as to the reliability and relevance of the facts upon which the expert relied. [Citation.]
"Evidence Code section 720, subdivision (a) provides, 'A person is qualified to
testify as an expert if he has special knowledge, skill, experience, training, or education
sufficient to qualify him as an expert on the subject to which his testimony relates.
Against the objection of a party, such special knowledge, skill, experience, training, or
education must be shown before the witness may testify as an expert.' '[T]he
qualifications of an expert must be related to the particular subject upon which he is
giving expert testimony.' [Citation.] Consequently, 'the field of expertise must be
carefully distinguished and limited' [citation], and '[q]ualifications on related subject
matter are insufficient' [citation].
"The foundation required to establish the expert's qualifications is a showing that
the expert has the requisite knowledge of, or was familiar with, or was involved in a
sufficient number of transactions involving the subject matter of the opinion. [Citations.]
'Whether a person qualifies as an expert in a particular case . . . depends upon the facts of
24
the case and the witness's qualifications.' [Citation.] '[T]he determinative issue in each
case is whether the witness has sufficient skill or experience in the field so his testimony
would be likely to assist the jury in the search for truth.' " (Howard Entertainment, Inc. v.
Kudrow (2012) 208 Cal. App. 4th 1102, 1114-1115.)
Further, "[a]n expert may rely upon hearsay and other inadmissible matter in
forming an opinion. (Evid. Code, § 801, subd. (b).)" (Howard Entertainment, Inc. v.
Kudrow, supra, 208 Cal.App.4th at p. 1115.)6 But the matter relied upon must
" ''provide a reasonable basis for the particular opinion offered, and . . . an expert opinion
based on speculation or conjecture is inadmissible.' " (Sargon Enterprises, Inc. v.
University of Southern Cal. (2012) 55 Cal. 4th 747, 770; Howard Entertainment, at p.
1115.) " '[T]he expert's opinion may not be based "on assumptions of fact without
evidentiary support [citation], or on speculative or conjectural factors . . . . [¶] Exclusion
of expert opinions that rest on guess, surmise or conjecture [citation] is an inherent
corollary to the foundational predicate for admission of the expert testimony: will the
testimony assist the trier of fact to evaluate the issues it must decide?' " (Sargon
Enterprises, at p. 770.) An expert's opinion given without a reasoned explanation of why
the underlying facts lead to the ultimate conclusion has no evidentiary value because such
6 Evidence Code section 801 provides: "If a witness is testifying as an expert, his
testimony in the form of an opinion is limited to such an opinion as is: [¶] (a) Related to
a subject that is sufficiently beyond common experience that the opinion of an expert
would assist the trier of fact; and [¶] (b) Based on matter (including his special
knowledge, skill, experience, training, and education) perceived by or personally known
to the witness or made known to him at or before the hearing, whether or not admissible,
that is of a type that reasonably may be relied upon by an expert in forming an opinion
upon the subject to which his testimony relates . . . ." (Evid. Code, § 801, subds. (a), (b).)
25
opinion is worth no more than the reasons and facts on which it is based. (Powell v.
Kleinman (2007) 151 Cal. App. 4th 112, 123.)
Our assessment of the adequacy of Valley's opposing summary judgment evidence
requires us to liberally construe Raymond's declaration. (Aguilar, supra, 25 Cal.4th at
pp. 844-845.) An opposing party's declaration does not need to be detailed, and it is
entitled to all favorable inferences. (Hanson v. Grode (1999) 76 Cal. App. 4th 601, 607;
Jennifer C. v. Los Angeles Unified School Dist. (2008) 168 Cal. App. 4th 1320, 1332;
Powell v. Kleinman, supra, 151 Cal.App.4th at p. 125.) In making a preliminary
determination as to whether an expert opinion is founded on sound logic, we must not
decide its persuasiveness, nor weigh the opinion's probative value or substitute our own
opinion for the expert's. (Sargon Enterprises, Inc. v. University of Southern Cal., supra,
55 Cal.4th at p. 772.) "Rather, the court must simply determine whether the matter relied
on can provide a reasonable basis for the opinion or whether that opinion is based on a
leap of logic or conjecture." (Ibid.)
Here, Raymond recited the documents on which he relied in expressing his
opinion: Valley's job file, demand letters, discovery, Lampel's declaration, and
"photographs of the alleged damage." Further, Raymond recounted special knowledge
and experience to support his opinions: 49 years of experience in the trade, familiarity
with "falling cabinet" claims by reason of having been directly involved in customer
service claims, and his experience since 1982 as the person at Valley who would inspect
every reported claim where a cabinet fell from the wall to which it was attached. "An
expert may rely upon experiences and conversations he or she has had and information he
26
or she has obtained without the necessity of providing the specifics of such experiences
and conversations." (Howard Entertainment, Inc. v. Kudrow, supra, 208 Cal.App.4th at
p. 1117.)
We conclude Raymond reasonably relied on these matters in reaching his
conclusions; such matters provide a sufficient basis for his opinion as to how and when
damage will occur from a defectively installed utility wall cabinet, and his reliance on
them did not result in him making a "leap of logic or conjecture." (Sargon Enterprises,
Inc. v. University of Southern Cal., supra, 55 Cal.4th at p. 772; accord, Jennifer C. v. Los
Angeles Unified School Dist., supra, 168 Cal.App.4th at p. 1332.) Raymond explained
the bases for his conclusions as to the mechanism and type of damage (the standard uses
of a utility cabinet, as well as relative softness and hardness of the cabinet versus the
drywall) and why a homeowner such as Lampel would not have observed damage to the
paint, caulking or and drywall (that the top of an upper cabinet, where the damage would
first occur, was not readily visible). We conclude Raymond had sufficient qualifications,
and provided an adequate foundation for his opinions.
Nor can we say Raymond's conclusions were speculative. On this point,
Lexington argues Raymond's opinions lacked foundation for the assumed facts, that
he engaged in conjecture as to what Lampel did or did not see, and he also contradicted
Lampel, who was assertedly the only person to observe "firsthand" the property damage.
Lexington criticizes Raymond's opinion for lacking a foundational "photograph or other
firsthand evidence of 'property damage' during the Policy period . . . ." It is true that an
expert's opinion that " 'something did occur, when unaccompanied by a reasoned
27
explanation illuminating how the expert employed his or her superior knowledge and
training to connect the facts with the ultimate conclusion, does not assist the [fact finder.]'
" (Shugart v. Regents v. University of California, supra, 199 Cal.App.4th at p. 508.) But
here, the complaint alleged (and neither party disputes) the cabinet at issue was
defectively installed, and, as explained above, Raymond provided sufficient foundation
and a reasoned explanation for his conclusions; he was not required to conduct an
independent investigation or view the damage firsthand to deduce how it developed. (See
Schreidel v. American Honda Motor Co. (1995) 34 Cal. App. 4th 1242, 1251-1253
[expert's testimony regarding cause of automobile accident not wild speculation or
inadmissible due to lack of scientific testing, product disassembly, or independent
investigation]; Jennifer C. v. Los Angeles Unified School Dist., supra, 168 Cal.App.4th at
p. 1332 [expert's opposing summary judgment opinions (that plaintiff special needs
student was vulnerable, it was unreasonable for school staff not to see two special needs
students walking across campus, and a particular sweep reasonably done would have
caught them) was not conclusory and defeated summary judgment where opinions were
based on experience, the facts surrounding the incident, reports prepared by the school
district, school records, and psychological assessment of the plaintiff].)
Raymond's observations are not like those of the expert in Mitchell v. United Nat.
Inc. Co. (2005) 127 Cal. App. 4th 457, relied upon by Lexington. In Mitchell, the expert
purported to testify about what representations in an insurance application a particular
underwriter did or did not find material, and his opinions were based on speculation
about what that underwriter knew, considered or concluded. (Id. at pp. 477-478.) Nor
28
does Raymond's declaration have the flaw observed by the court in Nardizzi v. Harbor
Chrysler Plymouth Sales, Inc. (2006) 136 Cal. App. 4th 1409, in which the expert failed to
take into account uncontested facts that made his view of causation both improbable and
physically impossible. (Id. at p. 1415; see Castillo v. Toll Bros., Inc. (2011) 197
Cal. App. 4th 1172, 1202, fn. 18.) Unlike in Nardizzi, Raymond gave a reasoned
explanation why Lampel might not have observed any damage, and Lampel's declaration
did not preclude with certainty the cause or existence of property damage that was not
readily detectable.
We need not resolve the propriety of the trial court's rulings on Lohse's declaration
because, as we explain below, Raymond's declaration alone was sufficient to raise triable
issues of material fact as to potential coverage under Lexington's policy.
2. Lexington's Claim of "Immaterial" Damage
Lexington argues that even assuming Valley's experts were qualified and their
declarations admissible, their opinions did not create a triable issue of fact. It maintains,
relying on F & H Construction v. ITT Hartford Insurance Company of the West (2004)
118 Cal. App. 4th 364 (F & H Construction) and Maryland Casualty Co. v. Reeder (1990)
221 Cal. App. 3d 961, that "courts have interpreted the term 'property damage' in an
insurance policy to require a material change in the affected property." Because,
Lexington asserts, the experts essentially admitted that the damage allegedly caused by
the cabinet may have been less significant than chipped paint or drywall dust, there was
no material change in the property amounting to property damage within the meaning of
the policy.
29
Neither case, however, stands for the asserted proposition. In F & H
Construction, the issue was whether the welding of inferior-grade steel caps onto another
product, steel composite piles, caused property damage—"physical injury to tangible
property"—to the piles within the meaning of a CGL policy. (F & H Construction,
supra, 118 Cal.App.4th at pp. 368, 371-372.) It was undisputed that the use of the lesser
grade caps produced structural units that were not damaged but were inadequate for their
intended purpose. (Id. at p. 368.) On review of a grant of summary judgment in the
insurer's favor, the appellate court explained that the prevailing view was that
"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." (Id. at p. 372.) In
reaching that conclusion, the appellate court, in distinguishing cases relied upon by the
appellant, agreed with the Illinois Supreme Court's definition of the term "physical
injury" as
" 'unambiguously connot[ing] damage to tangible property causing an alteration in
appearance, shape, color or in other material dimension.' " (F & H Construction, at p.
377, quoting Travelers Ins. Co. v. Eljer Mfg., Inc. (Ill. 2001) 197 Ill. 2d 278, 312.) The F
& H court used the word "material" to qualify the dimension (such as appearance, shape
or color), not the extent of the alteration; the court did not define physical injury to
require a material alteration in shape, appearance, color or other dimension. The F & H
Construction court merely held that where the only injury was in the form of a product's
failure to perform as intended and the damages were "intangible economic damages" (the
30
cost of modifying the caps and lost bonus for early project completion), there was no
physical injury to tangible property within the meaning of the CGL policy. (F & H
Construction, 118 Cal.App.4th at pp. 373-374.)
Maryland Casualty Co. v. Reeder, supra, 221 Cal. App. 3d 961 similarly involved a
circumstance in which the appellate court rejected the notion that mere inclusion of a
defective component in property, or mere allegations of inferior materials or
workmanship, constitutes "property damage" within the meaning of a policy defining
such damage as "physical injury to or destruction of tangible property . . . ." (Id. at pp.
968-970.) The court observed that a CGL policy does not provide contractors with
coverage against inferior or defective work, but "comes into play when the insured's
defective materials or work cause injury to property other than the insured's own work or
products." (Id. at p. 967.) Thus, "where the defect in fact has caused either physical
injury to or the lost use of tangible property, liability coverage has been found." (Id. at p.
970.) In that case, the homeowners had alleged soil subsidence caused physical harm to
tangible property consisting of cracked concrete floor slab, foundations, retaining walls
and other areas, as well as failure of the roofs, allowing rain water to damage the building
structures and living areas. (Id. at pp. 970-971.) This went beyond allegations of mere
defects in materials and workmanship, and was held sufficient to allege property damage
within the meaning of the CGL policy at issue. (Id. at p. 971.) Maryland Casualty does
not stand for the proposition that "property damage" means a "material change" in the
property at issue. Thus, Lexington is incorrect when it asserts generally that appellate
courts interpret the definition to require a "material change in the affected property."
31
Our focus is on a layman's understanding of the phrase "physical injury to tangible
property," in its ordinary and popular sense (E.M.M.I. Inc. v. Zurich American Ins. Co.
(2004) 32 Cal. 4th 465, 471) and whether the alteration of the drywall, caulk and paint
testified to by Raymond meets that standard. "[I]f the meaning a lay person would
ascribe to contract language is not ambiguous, we apply that meaning." (AIU Ins. Co. v.
Superior Court (1990) 51 Cal. 3d 807, 822.) As stated, Lexington's policy defines
property damage as "[p]hysical injury to tangible property." The term " '[t]angible
property' is not ambiguous, and . . . [c]onsistent with an insured's reasonable
expectations, 'tangible property' refers to things that can be touched, seen, and smelled."
(Kazi v. State Farm Fire and Cas. Co. (2001) 24 Cal. 4th 871, 880; Gunderson v. Fire Ins.
Exchange, supra, 37 Cal.App.4th at p. 1119 [" ' "Understood in its plain and ordinary
sense, 'tangible property' means 'property (as real estate) having physical substance
apparent to the senses' " ' "].) The Merriam-Webster Dictionary defines "physical" as
"having material existence: perceptible esp. through the senses" and defines "injury" as
"hurt, damage, or loss sustained." (Merriam-Webster's Collegiate Dict. (11th ed. 2006)
pp. 644, 935.) It defines "loss" as "destruction, ruin" and "the amount of an insured's
financial detriment by death or damage that the insurer is liable for." (Id. at p. 738.) The
word "physical" in the policy modifies the term "injury" and thus the policy covers only
physical loss or damage. (See Ward General Ins. Services, Inc. v. Employers Fire Ins.
Co. (2003) 114 Cal. App. 4th 548, 554.) The requirement that a loss be "physical," given
the ordinary definition of that term, is " 'widely held to exclude alleged losses that are
intangible or incorporeal, and, thereby to preclude any claim against the property insurer
32
when the insured merely suffers a detrimental economic impact unaccompanied by a
distinct, demonstrable, physical alteration of the property.' " (MRI Healthcare Center of
Glendale, Inc. v. State Farm General Ins. Co., supra, 187 Cal.App.4th at pp. 778-779
[defining phrase "direct physical loss" in business property insurance policy], quoting
10A Couch on Insurance (3d ed. 2010) § 148:46, p. 148-8.)7
Applying these plain, ordinary definitions, we conclude Valley's evidence raised a
material factual issue as to the existence—at least potentially—of a continuing and
progressively deteriorating process of property damage that began with normal use of the
defectively installed cabinet within the policy period. (Accord, Century Indemnity Co. v.
Hearrean (2002) 98 Cal. App. 4th 734, 739-741, 743 [allegations that contractors and
subcontractors negligently designed and constructed improvements at hotel, causing
7 In MRI Healthcare Center of Glendale v. State Farm General Ins. Co., supra, 187
Cal. App. 4th 766, an issue on the parties' cross-motions for summary judgment was
whether the insured suffered "direct physical loss" to an MRI (magnetic resonance
imaging) machine within the meaning of a business insurance policy. (Id. at pp. 769-770,
777-778.) Addressing the term "direct physical loss," the appellate court stated: "A
direct physical loss 'contemplates an actual change in insured property then in a
satisfactory state, occasioned by accident or other fortuitous event directly upon the
property causing it to become unsatisfactory for future use or requiring that repairs be
made to make it so.' [Citation.] . . . For loss to be covered, there must be a 'distinct,
demonstrable, physical alteration' of the property." (Id. at p. 779.) The court further
explained: "For there to be a 'loss' within the meaning of the policy, some external force
must have acted upon the insured property to cause a physical change in the condition of
the property, i.e., it must have been 'damaged' within the common understanding of that
term." (Id. at p. 780.) In that case, the insured's MRI machine did not suffer any "actual
physical 'damage' " by virtue of the fact that it was turned off and could not be turned
back on. (Ibid.) Of course, the Lexington policy here does not require a "direct" physical
loss or damage, but the MRI Healthcare court's definition of "physical loss" is
nevertheless instructive.
33
property damage including leaking windows and cracked exterior stucco, raised triable
issue as to whether continuing and progressive property damage occurring within the
policy period]; Pepperell v. Scottsdale Ins. Co. (1988) 62 Cal. App. 4th 1045, 1048-1049,
1055-1056 [implication of complaint was that continuing and progressively deteriorating
process began during policy period as a result of defective design and construction, even
though damage did not manifest itself until after expiration of the policy period, creating
a disputed issue of fact].) According to Raymond, upon Lampel's normal use of the
cabinet in 2006, the defectively installed cabinet would begin to separate from the wall,
breaking the caulking and indenting the drywall below the cabinet. Such alterations
would require repairs to both caulk, paint and drywall to return the property to a
satisfactory state. Thus, the evidence creates a triable issue as to whether the cabinet
caused "distinct, demonstrable, physical alteration" of tangible property—drywall, caulk
and paint—commencing at some point in 2006.
It is of no moment that Lampel did not observe such damage; at best her testimony
creates a conflict in the evidence that we do not resolve on summary judgment. Our role
is to find issues for the trier of fact, not resolve them. (Saldana v. Globe-Weis Systems
Co. (1991) 233 Cal. App. 3d 1505, 1510.) Further, we emphasize that we do not reach the
merits of whether Valley can ultimately establish coverage under Lexington's policy for
the alleged injury and damage alleged in the CCI lawsuit; whether the damages and
injuries alleged were in fact continuous and progressive is itself a matter for final
determination by the trier of fact. (Pepperell v. Scottsdale Ins. Co., supra, 62
Cal.App.4th at p. 1056, quoting Montrose II, supra, 10 Cal.4th at p. 694.)
34
The duty to defend "is a continuing one, arising on tender of defense and lasting
until the underlying lawsuit is concluded [citation], or until it has been shown that there is
no potential for coverage . . . ." (Montrose I, supra, 6 Cal.4th at p. 295.) Because Valley
has demonstrated facts raising the potential that Lexington's policy may cover CCI's
claims giving rise to Lexington's duty to defend, we reverse the summary judgment on
Valley's breach of contract cause of action.
V. Bad Faith Cause of Action
Breach of an insurance contract does not automatically subject an insurer to tort
damages for bad faith. (Chateau Chamberay Homeowners Assn. v. Associated Internat.
Ins. Co. (2001) 90 Cal. App. 4th 335, 345, disapproved on other grounds in Wilson v. 21st
Century Ins. Co., supra, 42 Cal.4th at p. 724, fn. 7; Shade Foods, Inc. v. Innovative
Products Sales & Marketing Inc. (2000) 78 Cal. App. 4th 847, 881.) Accordingly, it is
necessary to decide whether, notwithstanding our conclusion that Valley's evidence raises
issues of material fact as to a potential for coverage under Lexington's policy preventing
summary judgment on its breach of contract cause of action, Lexington is entitled to
summary adjudication of Valley's cause of action for breach of the covenant of good faith
and fair dealing. (See Nazaretyan v. California Physicians' Service (2010) 182
Cal. App. 4th 1601, 1614, fn. 6 [trial court may properly grant summary adjudication of
bad faith claim and request for punitive damages in a case alleging breach of an insurance
contract and breach of the implied covenant of good faith and fair dealing].)
" 'The law implies a covenant of good faith and fair dealing in every insurance
contract. [Citation.] Therefore, when an insurer unreasonably and in bad faith withholds
35
payment on a claim of its insured, it is subject to liability in tort. [Citation.] An insurer
may also breach the covenant of good faith and fair dealing when it fails to properly
investigate its insured's claim. [Citation.] Under this implied promise, in determining
whether to settle a claim, the insurer must give "at least as much consideration to the
welfare of its insured as it gives to its own interests." [Citation.]' [Citations] [¶] The
linchpin of a bad faith claim is that the denial of coverage was unreasonable. 'Before an
insurer can be found to have acted in bad faith for its delay or denial in the payment of
policy benefits, it must be shown that the insurer acted unreasonably or without proper
cause.' [Citation.] 'Where there is a genuine issue as to the insurer's liability under the
policy for the claim asserted by the insured, there can be no bad faith liability imposed on
the insurer for advancing its side of that dispute.' " (McCoy v. Progressive West Ins. Co.
(2009) 171 Cal. App. 4th 785, 792-793.)
The genuine dispute rule, however, does not relieve Lexington from its obligation
to thoroughly and fairly investigate, process and evaluate the insured's claim. "A genuine
dispute exists only where the insurer's position is maintained in good faith and on
reasonable grounds. [Citations.] Nor does the rule alter the standards for deciding and
reviewing motions for summary judgment. 'The genuine issue rule in the context of bad
faith claims allows a [trial] court to grant summary judgment when it is undisputed or
indisputable that the basis for the insurer's denial of benefits was reasonable—for
example, where even under the plaintiff's version of the facts there is a genuine issue as
to the insurer's liability under California law. [Citation.] . . . On the other hand, an
insurer is not entitled to judgment as a matter of law where, viewing the facts in the light
36
most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.'
[Citation.] Thus, an insurer is entitled to summary judgment based on a genuine dispute
over coverage or the value of the insured's claim only where the summary judgment
record demonstrates the absence of triable issues [citation] as to whether the disputed
position upon which the insurer denied the claim was reached reasonably and in good
faith." (Wilson v. 21st Century Ins. Co., supra, 42 Cal.4th at pp. 723-724, footnote
omitted.)
Asserting that bad faith claims are not amenable to summary adjudication, Valley
maintains the evidence shows Lexington conducted an inadequate and unreasonable
investigation and, consequently, cannot claim there was a genuine dispute as to coverage.
It sets out two reasons why Lexington assertedly failed to conduct a reasonable
investigation. First, it argues Lexington analyzed the allegations of the CCI complaint
under the wrong policy provisions, and then misrepresented the policy provisions in the
denial letter. The premise of this argument, however, is that the continuous loss
endorsement's amended definition of "occurrence" was the operative provision. We have
already held that Lexington reasonably concluded the continuous loss endorsement was
not implicated because CCI's complaint did not allege or suggest the presence of gradual,
continuing, or progressive property damage. The damage was alleged to stem from an
immediate release of water caused by the cabinet's failure on or about August 4, 2008.
Under these circumstances, there was a genuine issue as to Lexington's liability under the
policy for the claims against Valley under Lexington's policy expiring six months earlier.
We conclude Valley has not presented evidence raising a triable issue as to whether
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Lexington acted in an unreasonable or arbitrary manner by analyzing coverage under the
standard definition of occurrence, and not in light of the definition of occurrence applying
"[i]n the event of continuing or progressive . . . 'property damage' over any length of
time . . . ."
Second, Valley argues that had Lexington affirmatively investigated facts extrinsic
to the third party complaint, including by hiring an expert, it would have discovered the
facts recounted by Raymond and Lohse, which potentially trigger coverage under the
policy. It is not unreasonable per se for an insurer to decline to conduct further
investigation to collect additional information; "[i]n some cases, review of an insured's
submitted [information] might reveal an indisputably reasonable basis to deny the claim
without further investigation." (Wilson v. 21st Century Ins. Co., supra, 42 Cal.4th at p.
723; Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal. App. 4th
1208, 1240, fn. 27 [citing Wilson; insurer's failure to have insured examined by its own
doctors was not unreasonable as a matter of law].) Neither Raymond nor Lohse relate in
their declarations what they would have said if a Lexington representative had contacted
them before denying the claim, and Valley provides no other evidence as to what
Lexington would have discovered at the time of its investigation had it contacted an
expert. And, a trier of fact cannot reasonably infer that Raymond would have imparted
this information to Lexington, because it is undisputed that Valley did not raise the
continuous and progressive property damage theory until its second amended complaint
in the present action. Of course, had Lexington interviewed Lampel during the course of
its investigation (see footnote 3, ante), it would not have discovered any indication of
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damage caused by the cabinet apart from the flooding occurring in August 2008. Thus,
there is nothing from which a trier of fact may conclude that, if Valley had interviewed
Raymond or Lohse in connection with its investigation before reaching its coverage
decision, it would have learned that damage to paint and drywall from the failing cabinet
potentially commenced during the policy period, six months or more before the flood.
" '[T]he reasonableness of the insurer's decisions and actions may be evaluated as of the
time that they were made; the evaluation cannot fairly be made in the light of subsequent
events that may provide evidence of the insurer's errors.' " (Jordan v. Allstate (2007) 148
Cal. App. 4th 1062, 1073.)
In cases where an insurer is found to have unreasonably failed to investigate facts
outside the complaint's allegations, there was some indication that the insurer had actual
information available to it that suggested coverage under the policy. For example, bad
faith may be found where the insurer refuses to collect existing and "readily available"
records suggesting coverage. (E.g., Mariscal v. Old Republic Life Ins. Co. (1996) 42
Cal. App. 4th 1617, 1624 [insurer relied on a short statement in the insured's death
certificate that the immediate cause of death was heart failure to deny coverage under the
policy without investigating the facts showing the heart failure was the result of
complications caused by head injuries suffered in a car accident; it ignored medical
records existing at the time it denied the claim and "readily available" statements from
percipient witnesses to a car accident alleged to have contributed to insured's death].) It
may be found where an insurer " 'look[s] the other way when confronted with facts
revealing the possibility of . . . coverage . . . .' " (Shade Foods, Inc. v. Innovative
39
Products Sales Marketing, Inc., supra, 78 Cal.App.4th at pp. 877-879, 880-882 [bad faith
verdict upheld where insurer in part refused to evaluate statements made in "carefully
reasoned" letters of the insured's attorneys sent in response to coverage denial letter];
Frommoethelydo v. Fire Ins. Exch. (1986) 42 Cal. 3d 208, 220 [insurer breached its duty
to fairly investigate once it was advised of the presence of witnesses with factual
information undermining its prior conclusion that the insured had submitted a false
claim].) Triable issues as to bad faith may exist where an insurer's denial contradicts
percipient medical findings without supporting medical reports or opinions. (See Wilson
v. 21st Century Insurance Co., supra, 42 Cal.4th at pp. 721-722 [triable issue of material
fact as to bad faith presented where insured's examining physician concluded neck
injuries were probably due to a recent automobile accident and MRI confirmed bulging
discs, but claims examiner rejected coverage without any medical report or opinion on
which he could have ignored or disbelieved the doctor's conclusions or any medical basis
for the examiner's conclusion that the insured had preexisting disease].) Triable issues as
to bad faith likewise are found where an insurer ignores internal correspondence
revealing possible coverage under its policy language, refuses to follow the
recommendations of its own experts and others to consult a relevant expert, or declines to
interview the property owner, who has awareness of certain damage to her home that may
trigger coverage. (See Jordan v. Allstate, supra, 148 Cal.App.4th at pp. 1074-1076.)
Such facts can constitute evidence from which a jury could conclude an insurer failed to
conduct a full, fair, thorough and timely investigation of the insured's claim. (Id. at p.
1076.) Valley has not presented such evidence here.
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Accordingly, we conclude Lexington was entitled to summary adjudication of
Valley's cause of action for violation of the covenant of good faith and fair dealing. Our
conclusion also entitles Lexington to summary adjudication of Valley's claim for punitive
damages (see Code Civ. Proc., § 437c, subd. (f)(1)), which is premised on allegations that
Lexington acted in bad faith and without proper motives in denying the claim. Under the
circumstances, Lexington demonstrated that Valley cannot prove by clear and convincing
evidence that it acted out of oppression, fraud or malice. (Civ. Code, § 3294, subd. (a).)
41
DISPOSITION
The judgment is reversed and the matter remanded with directions that the trial
court enter a new order denying summary adjudication of Valley Casework, Inc.'s breach
of contract cause of action, granting summary adjudication of the cause of action for
breach of the covenant of good faith and fair dealing, and granting summary adjudication
of Valley Casework, Inc.'s claim for punitive damages. The parties shall bear their own
costs on appeal.
O'ROURKE, Acting P. J.
WE CONCUR:
AARON, J.
IRION, J.
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