Jacobsen Construction Co. v. Industrial Indemnity Co. , 1983 Utah LEXIS 936 ( 1983 )

HOWE, Justice:

This is an appeal of a subrogation case between the Insurance Company of North America (INA) and Structo-Lite Engineering, Inc. (Structo) and presents the issue of whether Structo was a subcontractor of plaintiffs, Jacobsen Construction Company, Inc. and Jelco Incorporated.

On February 21, 1972 plaintiffs entered into a written contract with the Central Utah Water Conservancy District for construction of the Jordan Water Purification Plant in southwestern Salt Lake County, Utah. Effective the same date, plaintiffs obtained from INA a transportation floater policy naming plaintiffs as insured. By endorsement to the policy, all “subcontractors” on the job were named as additional insureds. The policy was an inland marine, a physical damage type of policy, which insured the work of construction rather than the completed structure. It was not a liability policy. Plaintiffs obtained public liability insurance from Industrial Indemnity Company.

A part of the water purification plant consisted of six large fiberglass tanks to hold liquid alum. Structo entered into a contract with plaintiffs to furnish the tanks. The contract was denominated a Purchase Order. Under its terms, Structo was obligated only to furnish the six tanks and accessory materials F.O.B. job site. It had no obligation to install them or to perform any work on the construction site. It could either fabricate the tanks or obtain them from any source. Plaintiffs were not concerned how Structo obtained them so long as they met the contract specifications.

Structo fabricated the tanks and delivered them to the job site where it attached angle irons to the bottom of the tanks as a means of attaching them to the floor and also drilled holes in the tanks to accommodate necessary plumbing. They were then installed by plaintiffs.

On July 22,1974 while the District was in the process of starting up the plant, one of the alum tanks exploded causing substantial damage to the plant. The cause of that explosion was examined in a separate but related case where the jury in a special verdict found the District 10 percent negligent, plaintiffs 20 percent negligent, and Structo 70 percent negligent in causing the loss. Judgment was entered in favor of plaintiffs against Structo for the full amount of their damages, less the percentage (20%) attributable to their own negligence. That judgment was affirmed by this Court, Jacobsen Construction, Inc., et al, v. Structo-Lite Engineering, Inc., Utah, 619 P.2d 306 (1980).

INA and Industrial Indemnity Company both denied coverage for the mishap and the instant action was brought against them by plaintiffs. INA filed a third-party complaint against Structo for indemnity based on its subrogation rights. Structo counterclaimed against INA claiming that it was a “subcontractor” of plaintiffs and, as such, was an additional insured under the terms of INA’s policy. Therefore, Structo asserted it was not only immune from suit by INA on the policy, but was entitled to recover from INA any loss which it sustained as a result of an insured peril.

At the trial below judgment was entered in favor of plaintiffs against INA. INA promptly satisfied that judgment and the issues between plaintiffs and INA are not involved in this appeal. INA was awarded a judgment on its third-party complaint against Structo for 80 percent of the amount of plaintiffs’ judgment against INA (100% less 20% found by the jury to be attributable to plaintiffs’ negligence). Structo was found by a special jury verdict not to be a “subcontractor” of plaintiffs and consequently its counterclaim against INA was dismissed. Structo appeals and this appeal deals only with issues between INA and Structo.

At the close of the presentation of evidence, Structo moved for a directed verdict in its favor on INA’s third-party complaint arguing that as a matter of law Structo was a subcontractor. The trial court denied the motion. Structo renewed its motion by way of its motions for judgment notwithstanding the verdict and for a new trial. Both of these motions were also denied.

Structo assigns as error the refusal of the trial court to give to the jury the following proposed instruction:

Whoever shall do work or furnish materials by contract, express or implied, with the owner, shall be deemed an original contractor, and all other persons doing work or furnishing materials shall be deemed subcontractors.

This definition was taken from U.C.A., 1953, § 38-1-2. We find no error in the refusal to give this instruction. The statute cited is a part of our Mechanics’ Lien Law. In order to give a widespread application of the beneficence of that law, the legislature adopted a broad definition of subcontractor and included therein materialmen. It would be unwarranted to extend that broad definition to other contexts such as in the present case where an insurance contract is being examined which apparently intended to differentiate between subcontractors and materialmen. We find no support in the law for extending the application of a specially tailored statutory definition to other unrelated situations.

Instead, the trial court gave its Jury Instruction No. 16 defining a subcontractor as follows:

A subcontractor means one who has contracted with the original contractor for the performance of all or a part of the work or services which such contractor has himself contracted to perform.

We conclude that under this definition, which INA approves and asserts is founded on well established case law, Structo was a subcontractor as a matter of law and therefore was an insured under the policy. We reject INA’s contention that the jury could have reasonably found Structo to be a ma-terialman and not an insured under this definition. In support of this conclusion, we find helpful an opinion of the Supreme Court of California in the case of Theisen v. County of Los Angeles, 54 Cal.2d 170, 5 Cal.Rptr. 161, 352 P.2d 529 (1960). There the defendant county contracted with Theisen for the construction of a fire combat training center. Theisen contracted with Petterson Corporation to supply 64 custom made doors to conform to the architect’s specifications. Petterson then contracted with Durrand to supply 20 of such doors. Durrand fabricated and shipped the doors to Petterson, who in turn delivered them together with the other 44 doors to Theisen. Theisen installed the doors. Neither Durrand nor Petterson entered upon the job site. In defining who was a subcontractor, the court stated, not dissimilar to the instruction given the jury in the instant case, that “the essential feature which constitutes one a subcontractor rather than a materialman is that in the course of performance of the prime contract he constructs a definite, substantial part of the work of improvement in accord with the plans and specifications of such contract.” 5 Cal.Rptr. at 161, 352 P.2d at 537. The court held it immaterial that he did not enter upon the job site and do his part of the construction there. Further, said the court:

We are not here concerned with the mere furnishing of materials from which doors were to be constructed by the general contractor, nor are we interested in the sale of standard stock-in-trade doors. Specifically, we are dealing with a contract whereby the doors were to be fabricated according to the specifications of the prime contract and as a constitutent part of the construction of the public improvement which was the subject of the contract. We do not accept the view of some other jurisdictions (see annotation, 141 A.L.R. 321) that to be a subcontractor one must install work at the site of the improvement. Rather, we conclude that one who agrees with the prime contractor to perform a substantial, specified portion of the work of construction which is the subject of the general contract, in accord with the plans and specifications by which the prime contractor is bound ... is a subcontractor although he does not undertake to himself incorporate such portion of the projected structure into the building. 5 Cal.Rptr. at 161, 352 P.2d at 537.

The court accordingly held Petterson to be a subcontractor and cited in support of its position Holt & Bugbee Company v. City of Melrose, 311 Mass. 424, 41 N.E.2d 562, 141 A.L.R. 319 (1942), (fabricating and furnishing a special interior trim for a city hall in accordance with project plans and specifications); Illinois Steel Warehouse Company v. Hennepin Lumber Company, 149 Minn. 157, 182 N.W. 994 (1921) (fabrication of steel work for a building according to plans and specifications); Pittsburgh Plate Glass Company v. Sisters of the Sorrowful Mother, 83 Minn. 29, 85 N.W. 829 (1901) (manufacture of doors and windows and millwork for hospital building in accordance with plans and specifications).

A similar result was reached in Sparks Construction, Inc. v. Newman Brothers, 51 Ala.App. 690, 288 So.2d 749 (1974) (structural steel and ornamental iron for school building in accordance with plans and specifications), in Weyerhaeuser Company v. Twin City Millwork Company, 291 Minn. 293, 191 N.W.2d 401 (1971) (1107 custom made wood doors of various sizes, finishes and cores) and in a number of federal cases brought under the Miller Act. See U.S. v. M.S.I. Corp., 350 F.2d 285 (2d Cir.1965) (hydraulic system for opening and closing missile launcher roofs); J.W. Cooper Construction Company v. Public Housing Administration, 390 F.2d 175 (10th Cir.1968) (kitchen cabinets in accordance with plans and specifications); U.S. v. John A. Johnson & Sons, Inc., 137 F.Supp. 562 (W.D.Penn.1955) (millwork and related items according to plans and specifications). See also Tiffany Construction Company v. Hancock & Kelly Construction Company, 24 Ariz.App. 504, 539 P.2d 978 (1975) for an analysis of who is a subcontractor.

Under the definition of a subcontractor given the jury in the instant case, i.e., “one who has contracted with the original contractor for the performance of all or a part of the work or services which such contractor has himself contracted to perform” or the similar definition enunciated by the California Court in Theisen v. County of Los Angeles, supra, i.e., “one who in the course of the performance of the prime contract constructs a definite, substantial part of the work of improvement in accord with the plans and specifications of such contract,” Structo as a matter of law was a subcontractor and not merely a materialman. It is true, as INA points out, there is no direct evidence whether the tanks were available for purchase on the open market. However, other evidence leaves no doubt that they were not and could not have been so obtained. The tanks had to meet very detailed specifications furnished by plaintiffs and Structo had to furnish shop drawings for plaintiffs’ approval, followed by six copies of approved drawings. It is clear that such tanks were not shelf or stock-in-trade items which would ordinarily be furnished by a materialman, but were custom-fabricated for the District’s plant. INA does not claim the tanks could have been used in any other setting.

It is unimportant that the contract between plaintiffs and Structo was denominated a purchase order. Wyerhaeuser Company v. Twin City Millwork Company, supra; Sparks Construction, Inc. v. Newman Brothers, supra; U.S. v. John A. Johnson & Sons, Inc., supra. Nor is it material that Structo did not enter upon the job site and actually install the tanks in the District’s building. In all the cases cited above where that contention was made, it was expressly rejected. However, the evidence does indicate that after the tanks were delivered to the building Structo bored holes in them to allow for plumbing connections, and also applied a steel flange which attached the tanks to the floor.

The fabrication of the tanks was a substantial, essential and significant requirement of plaintiffs’ contract with the District. Without the tanks, the contract could not have been performed by plaintiffs. Reasonable minds could not differ that Structo met the requirements of Instruction No. 16 by its contracting with the plaintiffs “for the performance of all or a part of the work or services” which plaintiffs had contracted to perform. Structo was not merely a materialman. Since Structo was a subcontractor and an insured under INA’s policy, our rule in Board of Education of Jordan School District v. Hales, Utah, 566 P.2d 1246 (1977) precludes INA from recovering against its own insured.

Structo next contends that as an insured of INA, INA had a duty to defend the negligence action brought against Structo by the plaintiffs, the appeal of which is reported at 619 P.2d 306. In support of that argument, Structo cites American States Insurance Co. v. Walker, 26 Utah 2d 161, 486 P.2d 1042 (1971); Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (1966); Home Insurance Co. v. Pinski Brothers, Inc., 160 Mont. 219, 500 P.2d 945 (1972). Those cases are distinguishable from the instant case since they involved liability policies where the insurer had a duty to defend actions brought against the insured. As has been heretofore pointed out in this opinion, the policy here involved was not a liability policy but was a transportation floater which insured the work of construction. Structo has not referred us to any policy provision which imposed the duty on INA to defend Structo. Nor did Structo produce any evidence that it ever made demand on INA to defend the negligence action. We therefore reject this contention.

Nor is there any merit to Structo’s assertion that by initiating a third-party complaint in the instant case against its own insured (Structo), INA breached its duty to act in good faith with Structo and thus should be held liable for the latter’s costs and attorney’s fees in defending the third-party complaint. While we acknowledge that contracting parties owe each other the duty to deal in good faith, Zion’s Properties, Inc. v. Holt, Utah, 538 P.2d 1319 (1975), there is no evidence here of bad faith on the part of INA in seeking relief against Structo. The case of Johansen v. California State Automobile Assn. Inter-Insurance Bureau, 15 Cal.3d 9, 123 Cal.Rptr. 288, 538 P.2d 744 (1975), relied upon by Structo, involved the liability of an insurer who failed to accept a reasonable settlement offer within the policy limits and thereby subjected the insured to a judgment which exceeded the policy limits. The court held the insured liable for the full amount of the judgment even though no bad faith on the part of the insured was shown. We do not have that fact situation here, viz., exposure to liability, and thus that case is not applicable.

The judgment below entered on the third-party complaint is reversed and the case remanded to the trial court to enter judgment in favor of Structo in accordance with this opinion. The judgment on Struc-to’s counterclaim is affirmed. Costs are awarded to Structo.

STEWART, J., concurs. TAYLOR, District Judge, heard the arguments, but died before this opinion was filed. DURHAM, J., does not participate herein.