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Food Pro International, Inc. v. Farmers Insurance Exchange

December 30, 2008


(Santa Clara County Super. Ct. No. CV050506). Trial Judge: Honorable Joseph Huber.

The opinion of the court was delivered by: Mihara, J.


An injured construction worker brought a tort action against appellant Food Pro International, Inc. (Food Pro), relating to an injury at a food processing plant. Food Pro tendered defense of both the worker's action and a related action to its insurance carrier, respondent Farmers Insurance Exchange (Farmers). Farmers denied coverage, and this action against Farmers for breach of contract and breach of the implied covenant of good faith and fair dealing followed. The trial court entered judgment for Farmers following a court trial on Farmers' duty to defend. On appeal, Food Pro contends the trial court erred in finding that Farmers did not have a duty to defend Food Pro pursuant to a commercial general liability (CGL) insurance policy. Food Pro also appeals from the trial court's earlier summary adjudication of Food Pro's claim for punitive damages. We find no merit to Food Pro's punitive damages argument, but conclude that the trial court erred in finding that Farmers had no duty to defend Food Pro. We therefore reverse the judgment.

I. Background

A. Factual Background

Food Pro is a consulting firm that prepares and implements "plans for food processing and distribution operations." Its personnel are "food production and distribution specialists" that "offer a complete range of consulting engineering services from studies (e.g., long range planning, feasibility, site selection) to construction and equipment installation management."

Mariani Packing Company (Mariani), a fruit processor, hired Food Pro to assist the company in the relocation of its operations from San Jose to a new Vacaville plant. According to Food Pro's proposal and contract with Mariani, Food Pro's work for Mariani was divided into three phases: (1) a preliminary design phase involving the development of "the conceptual plan and design criteria," (2) a final design phase involving the development of "detailed plans and specifications," and (3) an equipment installation phase involving the coordination of "the implementation of the plans to help insure that the final result conforms to the plans and specifications and is completed on time and within budget[.]" During the final phase, Food Pro's duties were to include acting as Mariani's representative vis-à-vis the contractors and suppliers, coordinating contractor activities on the project, updating the schedule, and "mak[ing] on-site inspections of the work in progress as required to determine, in general, if the work is proceeding in accordance with the contract documents." Food Pro's efforts during this phase were to be "directed toward providing assurance that the completed Project will conform to the contract documents and that the major elements of work are carried out in proper sequence." Food Pro was not required under the contract with Mariani to take action to protect workers from injury or to otherwise ensure the safety of the site.

In February and March of 2001, Steve Aamold, a processing specialist with Food Pro, was at the Mariani plant in San Jose to ensure that the relocation was proceeding smoothly and that the contractors were acting within the schedule. As part of Food Pro's role in observing the process and reporting progress to Mariani, Aamold kept a daily log with notes recording which contractors were working on which projects and how the work was proceeding. As Mariani's day-to-day production operations were ongoing alongside the relocation of equipment, a full complement of Mariani employees was often on the site as well. Food Pro helped facilitate the simultaneous work, but was merely a consultant on the site. Mariani acted as its own general contractor. Although Food Pro was involved in the bid process for contractors, the contractors, once chosen, contracted directly with Mariani.

Walther Electric Company (Walther Electric), an electrical contractor, was hired by Mariani to disconnect equipment at the San Jose plant. Roy Pettigrew was a Walther Electric employee. In February 2001, Walther Electric disconnected the electrical for a fruit extruder machine that spanned the mezzanine level of the plant to the main floor below. Valley Welding and Machine (Valley Welding), a mechanical contractor, dismantled and removed the machine. The removal of the extruder left a large hole in the floor of the mezzanine, with a six-inch high curb around it, that Valley Welding failed to secure prior to leaving the site. Aamold recognized a danger, and apprised Mariani's mechanics so that they would address the problem. Mariani's employees placed sheet metal and a plastic pallet over the opening, but did not bolt down the materials. The hole was in this condition for about a week prior to the incident at issue.

On March 5, 2001, Walther Electric's crew returned to the San Jose plant after a stint at the new Vacaville facility. The crew arrived at the site about 90 minutes before their foreman did, and began some electrical mapping work. Around 8:00 a.m., while Aamold was talking to the newly-arrived foreman, Pettigrew fell through the extruder opening in the mezzanine to the floor below. He was severely injured. Pettigrew said he was tracing electrical lines on the ceiling when he fell, but there were no eyewitnesses.

Pettigrew knew the opening was there, having seen it when the machine was removed, but had been absent from the site for about a week.

B. Insurance Background

At the time of the Pettigrew incident, Food Pro was covered by a $1 million CGL insurance policy issued by Farmers.*fn1 The CGL policy states generally that Farmers "will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies" and "will have the right and duty to defend the insured against any 'suit' seeking those damages." The CGL policy is modified by the following endorsement entitled "EXCLUSION-ENGINEERS, ARCHITECTS OR SURVEYORS PROFESSIONAL LIABILITY: [¶] . . . [¶] This insurance does not apply to 'bodily injury,' . . . arising out of the rendering or failure to render any professional services by or for you, including: [¶] 1. The preparing, approving, or failing to prepare or approve maps, drawings, opinions, reports, surveys, change orders, designs, specifications; and [¶] 2. Supervisory, inspection or engineering services."

In July 2001, Explorer Insurance Company (Explorer), the insurer responsible for Pettigrew's workers' compensation benefits, notified Food Pro of a claim against Food Pro for reimbursement of the benefits paid to Pettigrew. Upon receipt of the letter from Explorer, Food Pro notified Farmers of the claim and Farmers began an investigation. Farmers' representative obtained a recorded statement from Aamold and William Washburn, Food Pro's president, on August 3, 2001. The representative also received a copy of the Mariani contract and Aamold's log notes for the relevant period of time. On October 18, 2001, Farmers notified Food Pro that it believed Farmers had "no obligation to indemnify" Food Pro for the Pettigrew incident, citing the professional services exclusion. Food Pro requested reconsideration of Farmers' position, explaining that the incident was not connected to Food Pro's rendering or failing to render professional services.

In November 2001, Farmers referred the matter to outside counsel, Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (Berger Kahn) for a coverage opinion. Berger Kahn agreed with Farmers' initial assessment and further found no duty to defend. Before Farmers had communicated this position to Food Pro, Farmers received notice that Pettigrew and Explorer had filed suit against Food Pro. Pettigrew's complaint against Food Pro, Mariani, and others, filed on March 4, 2002, alleged general negligence and premises liability. Pettigrew claimed that the defendants "failed to properly cover or guard the hole and/or place warnings around the hole creating a dangerous condition" and "negligently allowed and/or required and ordered [Pettigrew] to work in the area of the dangerous hole." Explorer, in a separate action, asserted a single cause of action against Food Pro for general negligence.*fn2 Food Pro tendered the defense of these actions to Farmers, which then forwarded the complaints to Berger Kahn to re-examine Farmers' duties in light of the complaints' allegations. Berger Kahn reiterated its recommendation to deny coverage.

On May 6, 2002, Farmers informed Food Pro that it had "concluded that it has no obligation or duty to defend or indemnify" Food Pro in regard to the Pettigrew or Explorer actions and again cited the professional services exclusion. Food Pro objected to the denial of coverage on at least two subsequent occasions, providing additional information regarding the incident. Additional correspondence between the parties followed, but Farmers did not change its position. Farmers' asserted rationale was that the only reason that Food Pro was present at the site was to perform a contract for consulting engineering services; thus, the claims sought by Pettigrew and Explorer were not covered.

In January 2003, Farmers sought a second coverage opinion from Gordon & Rees regarding the claims against Food Pro. Gordon & Rees likewise concluded that Farmers had no duty to defend or to indemnify Food Pro due to the application of the professional services exclusion. Additional correspondence with Food Pro and its counsel followed as Food Pro continued to assert that the allegations involved only ordinary negligence, not professional negligence, and stressed that Food Pro had no responsibility for the removal of the extruder. In July of 2003, Farmers offered $25,000 to settle with Food Pro without admission of coverage or liability. The offer was left open until March 2005, through settlement talks in the underlying actions, but Food Pro did not accept the offer to compromise.

Initially, Food Pro retained counsel to defend the Pettigrew and Explorer actions, but Food Pro's counsel eventually received permission to withdraw for nonpayment of fees. In March 2005, unable to continue to defend the action due to a lack of funds, Food Pro agreed to have its answer stricken and a default judgment entered. After the default hearing on March 15, 2005, judgment was entered in favor of Pettigrew in the net amount of $1,621,627 and in favor of Explorer in the net amount of $114,681. Food Pro tendered the judgments to Farmers for payment. Farmers denied the tender on September 13, 2005.

C. Current Action

Food Pro filed a complaint against Farmers on October 11, 2005, asserting breach of contract based on Farmers' refusal to defend Food Pro in the Pettigrew and Explorer actions and tortious breach of the implied covenant of good faith and fair dealing. The complaint seeks both compensatory and punitive damages.

Farmers moved for summary judgment. The trial court's order, filed on November 2, 2006, states in relevant part: "The exclusion in [the policy] does not apply to [Food Pro's] failure to render professional services that it was not obligated to render. [¶] In this case, there was an underlying factual dispute concerning whether [Food Pro] was responsible for creating or correcting the dangerous condition or for generally maintaining the safety of the San Jose facility. Until this underlying factual dispute was resolved, a legal determination could not be made as to: (1) whether Pettigrew's injuries occurred during [Food Pro's] performance of professional services; and (2) whether Pettigrew's injuries were caused by the deliberate and intentional act of the rendering of professional services or advice. [¶] . . . [Farmers] had a duty to defend [Food Pro] until this potential for coverage was eliminated. . . ." The court further denied Farmers' motion for summary adjudication of the second cause of action, noting that an insurer's reliance on the advice of counsel does not insulate it from a ...

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