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Fort Bragg Unified School District v. Solano County Roofing

April 27, 2011

FORT BRAGG UNIFIED SCHOOL DISTRICT, PLAINTIFF AND RESPONDENT,
v.
SOLANO COUNTY ROOFING, INC., DEFENDANT, CROSS-COMPLAINANT AND APPELLANT; STERLING ENVIRONMENTAL CORPORATION, DEFENDANT, CROSS-DEFENDANT AND APPELLANT; COLONIAL AMERICAN CASUALTY AND SURETY COMPANY, DEFENDANT, CROSS-COMPLAINANT AND APPELLANT.



(Mendocino County Super. Ct. No. SCUK CVG 04-92377) Trial Court: Mendocino County Superior Court Trial Judge: Hon. Leonard J. LaCasse

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

CERTIFIED FOR PUBLICATION

This action was brought by the Fort Bragg Unified School District (District) on behalf of two public agency self-insured risk pools that funded repairs to a District elementary school damaged by rain. The suit sought reimbursement of the repair costs from two contractors and a performance bond surety arising from the contractors' failure to properly secure the school while replacing portions of its roof. One of the contractor defendants, Solano County Roofing, Inc. (Solano), cross-complained against the second contractor, Sterling Environmental Corporation (Sterling).

Solano and its surety, Colonial American Casualty and Surety Company (Colonial), appeal on multiple grounds from a judgment on the complaint in favor of the District. Sterling appeals from an adverse judgment on Solano's cross-complaint. We reverse the District's judgment and award of prejudgment interest against Solano, affirm its judgment and interest award against Colonial, and vacate as moot the judgment on Solano's cross-complaint against Sterling.

I. BACKGROUND

A. The Redwood Elementary School Modernization Project

The District began a two-stage modernization project at Redwood Elementary School in 1998. In the first phase, contractors completely renovated the school's interior, including painting, carpeting, and installation of new telephone and computer systems. All planned interior renovations and remodeling were completed by the fall of 2000 at a cost in excess of $2.4 million. In the second phase of the modernization, the District contracted with Solano to re-roof the school. This required removal of the existing built-up roof membrane from the wooden roof deck structure and then attaching a new underlayment followed by a new metal roof. During phase I, the District contracted with Sterling to perform asbestos abatement work for the whole modernization project, including the removal in phase II of part of the roof membrane that contained asbestos. Solano's responsibilities in phase II included removing portions of the old roof membrane that did not contain asbestos, and re-roofing the entire building.

B. Breaches of Contractual Covenants and Damages

The District's contract with Sterling required Sterling to continuously maintain adequate protection of all of its work, protect the District's property from injury or loss arising from the contract, and hold the District harmless from any such damage, injury, or loss. Sterling was specifically required to make sure the roofing asbestos area was "not left uncovered at any time due to the possibility of rain or moisture entering the building."

Solano's contract contained numerous provisions requiring it to protect its work and the District's property from rain or moisture damage. Under the contract, Solano was required, among other things, to bear all costs for "replacement of damage to existing or new construction from weather effects," "[r]estore any improvements damaged by this work to their original condition," and repair or replace all existing finished work "damaged by operations under this contract . . . at no extra cost to the Owner." Solano also bore overall responsibility to coordinate its work with Sterling's, keep track of all of Sterling's activities, and ensure the entire structure was adequately covered at all times, both in the areas it was working on and those Sterling worked on. The contract also required Solano to obtain a bond in an amount at least equal to the base price of the contract "to guarantee the faithful performance of the Contract."

The phase II roof work began on Monday, June 18, 2001. Water penetration into the interior of the school--caused by three days of rain beginning on Monday, June 25, 2001--resulted in $389,968 of damage to the interior of the school. The trial court found the damage was proximately caused by Sterling's and Solano's breaches of their contractual covenants with the District to maintain the integrity of the school's roof covering against rain and moisture, and prevent damage to its interior, during the performance of their work.

C. Coverage of the Loss

The costs of repairing the rain damage to Redwood Elementary School were ultimately paid by three entities: the Northern California Schools Insurance Group (NCSIG) ($96,131.16), Northern California Regional Liability Excess Fund Joint Powers Authority (NCR) ($150,000), and Insurance Company of the West (ICW) ($150,493.45).*fn1 NCSIG is a joint powers authority formed pursuant to Government Code sections 990.4 and 990.8, for the purpose of pooling the "self-insured claims and losses" of a group of member school districts in Northern California. NCSIG is a member of NCR, which is also a joint powers authority formed to pool self-insured claims and losses of member "[p]ublic educational agencies" pursuant to sections 990.4 and 990.8.*fn2 The District paid NCSIG an annual contribution payment, and was afforded primary coverage for property damage up to the first $100,000 of loss after a $1,000 deductible. NCR provided secondary coverage up to $150,000 for any given loss. ICW, a private insurer, provided $10 million of reinsurance to NCR for payments by NCR in excess of its $150,000 limit.

The annual pool contribution for each public entity participating in NCSIG and NCR (collectively, the JPA's) is calculated pursuant to NCR's by laws. The bylaws provide that each member must pay an annual base contribution rate based upon, among other information, the member's prior year average daily attendance, loss history, unusual exposures, and total insured values. The base rate could be modified based on a member's claims experience according to methodology calculated by an actuary or consultant approved by the NCR's underwriting committee. The bylaws further provided: "Any Subrogation recoveries received by [NCR], or its Members, shall be credited to the amounts paid by the Authority for the Member, with the remainder, if any, remitted to the Member . . . ." Although considered the "property" of NCR, subrogation monies received are credited to the member's account for purposes of computing the member's annual contribution to the costs of the pool.

The application of the District's primary and excess coverage were also governed by a memorandum spelling out the scope of claims and losses covered and the rights and duties of the members and NCR with respect to claims. That memorandum states: "The Memorandum of Coverage is not an insurance policy. [NCR] is not a commercial insurer, nor is it subject to regulation under the California Insurance Code. (Gov. Code § 990.8(c); City of South El Monte v. Southern California Joint Powers Insurance Authority (1995) 38 Cal.App.4th 1629.)" The memorandum further provided: "In the event of any payment under this Memorandum, [NCR] shall be subrogated to all the rights of recovery against any person or organization . . . ."

D. Surety and Insurance Parties

Colonial issued a performance bond on Solano's behalf in the amount of $713,999 in connection with its phase II work on Redwood Elementary School. Solano maintained a $1 million liability insurance policy with Villanova Insurance Company (Villanova) for the policy period of January 1, 2001 to January 29, 2002. On July 25, 2003, Villanova was declared insolvent and ordered into liquidation. As a result of the liquidation, the California Insurance Guarantee Association (CIGA) assumed the administration of claims made in California against Villanova's insureds pursuant to Insurance Code section 1063 et seq. (the Guarantee Act).*fn3

Sterling maintained a $2 million liability insurance policy with Zurich American Insurance Company (Zurich) during the relevant policy period.

E. The District's Subrogation Action

The District filed this action in April 2004, asserting causes of action for breach of contract and negligence against Solano, Sterling, and Colonial. Solano and Colonial cross-complained against Sterling for indemnity, contribution, and declaratory relief.

Solano moved for summary judgment in November 2005, asserting all of the District's claims against it were barred under Insurance Code section 1063.1, subdivision (c)(5) (hereafter subdivision (c)(5)), since (1) Villanova was insolvent; (2) CIGA was handling the District's claims against Solano; and (3) the District's insurers-- NCSIG, NCR, and ICW--were bringing the complaint as a subrogation action for reimbursement on the amounts they had paid to the District.*fn4 In opposition to the motion, the District did not dispute Solano's characterization of its claims as subrogation claims brought on behalf of the JPA's, but denied these entities could be considered "insurers" or "insurance pools" for purposes of the Guarantee Act. The District's opposition did not address whether ICW was entitled to maintain a subrogation claim against Solano under the Guarantee Act.

The motion was heard by Judge Richard J. Henderson, who denied Solano's motion in part. The court accepted the premise of Solano's motion that the District's causes of action were based on subrogation, twice using that label to describe them in its written order. With respect to the District's subrogation claims on behalf of the JPA's, the court held these claims were not barred under the Guarantee Act because these entities were not insurers or insurance pools. With regard to ICW only, the court held the District could not seek recovery of its payment of $150,493.45 from Solano or CIGA under subdivision (c)(5), since there was no evidence ICW was anything other than a solvent insurer.*fn5

The District's claims proceeded to an eight-day bench trial before Judge Leonard J. LaCasse. Pursuant to an earlier off-the-record discussion, the parties agreed Judge Henderson's ruling that the JPA's were not insurance companies or insurance pools under the Guarantee Act would be treated as the law of the case for purposes of the trial, without prejudice to Solano challenging that ruling on appeal. The trial on the District's claims was followed by a half-day trial on Solano's and Colonial's cross-complaints against Sterling.

F. Statement of Decision and Judgment

Following lengthy posttrial proceedings, the trial court found in favor of the District on its breach of contract and negligence claims against Solano and Sterling, but sharply limited Solano's exposure to damages based on the court's interpretation of provisions of the Guarantee Act.*fn6 Based on a detailed and comprehensive statement of decision, the court found Solano (and Colonial, as discussed below) jointly and severally liable for the full amount ($389,968) of the District's damages. In reliance on Judge Henderson's summary judgment ruling, the court found that $150,493.45 of that amount--the amount funded by private reinsurer ICW--would not be enforceable against Solano.

Solano's exposure was further reduced by the court's findings with respect to Sterling's liability. Sterling was found to be jointly and severally liable along with Solano and Colonial for $252,800 or 64.8 percent of the $389,968 in damages incurred by the District. The lesser figure for Sterling's joint and several liability was based on the limited portions of the school's roof Sterling was working on--and for which it therefore shared responsibility with Solano--when the rain damage occurred. However, the court found on Solano's cross-complaint against Sterling that Sterling rather than Solano must satisfy the $252,800 portion of the judgment for which it was jointly and severally liable with Solano. Construing the Guarantee Act, the court reasoned Sterling must pay ahead of Solano because the latter's insurance carrier, Villanova, was insolvent whereas Sterling was fully covered for the loss by a solvent carrier, Zurich.

The court also partially shielded Solano from a posttrial ruling awarding prejudgment interest to the District. The District successfully sought prejudgment interest against Solano and Colonial on the theory that the total amount of its damages as to these defendants (but not as to Sterling) was certain for purposes of Civil Code section 3287, subdivision (a), because the amount had been uncontested at trial.*fn7 However, based on its interpretation of the Guarantee Act, the court ruled Sterling must be held responsible for prejudgment interest on $252,800 of the $389,968 in total damages even though the District had not claimed Sterling's share of liability for its damages was certain or capable of being made certain before trial.

Colonial was found jointly and severally liable for the full amount of the District's damages and award of prejudgment interest. The court found Colonial's performance bond incorporated all of the terms of Solano's contract with the District, including its covenants to maintain the integrity of the roof and restore improvements damaged by the work. The court rejected Colonial's claims that it was entitled to the benefit of Solano's defenses under the Guarantee Act.*fn8

G. Consolidated Appeals

We consolidated the ensuing appeals of Colonial (case No. A127186), Solano (case No. A127189), and Sterling (case No. A127244) for purposes of ...


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