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Global Modular, Inc. v. Kadena Pacific, Inc.

California Court of Appeals, Fourth District, Second Division

September 8, 2017

GLOBAL MODULAR, INC., Cross-defendant and Appellant,
KADENA PACIFIC, INC. Cross-complainant and Appellant. NORTH AMERICAN CAPACITY INSURANCE COMPANY, Plaintiff and Appellant;
KADENA PACIFIC, INC., Defendant and Appellant.

         APPEAL from the Superior Court of Riverside County Nos. RIC1103551, RIC1304240. Daniel A. Ottolia, Judge. Affirmed in part; reversed in part with directions.

          Larson & Gaston, John B. Larson, and Gloria G. Medel for Cross-defendant and Appellant.

          K&L Gates, Timothy L. Pierce, and Kate G. Hummel for Defendant, Cross-complainant, and Appellant.

          Grimm, Vranjes & Greer, Mark Vranjes, and Charles A. Phillips for Plaintiff and Appellant.


          SLOUGH J.

         This case arises from an insurance dispute between a general contractor, its subcontractor, and the subcontractor's general liability carrier over water damage to a construction site caused by heavy rains. The United States Department of Veterans Affairs (VA) hired Kadena Pacific, Inc. (Kadena) as the general contractor to oversee construction of its Center for Blind Rehabilitation in Menlo Park. Kadena hired Global Modular, Inc. (Global) to build, deliver, and install the 53 modular units that would comprise the rehabilitation center. Because Kadena had hired a different subcontractor to install the roofing, Global agreed to deliver the units covered only by a roof deck substrate-a three-fourths of an inch base sheet of plywood.

         Kadena had originally scheduled delivery of the units for the summer months, but delivery was delayed until October and November. This meant the roofless units were exposed to the elements during the rainy season, equipped with only a plywood substrate. Despite Global's efforts to protect the units by covering them with plastic tarps, the interiors suffered water damage from October through January. In February, Kadena and Global mutually agreed to terminate their contract and Kadena oversaw the remediation of the water-damaged interiors and completion of the project.

         Global sued Kadena for failure to pay and Kadena countersued, alleging Global had breached the contract in various ways, including by failing to repair the water-damaged interiors. Before trial, the parties entered a partial settlement. Global paid Kadena $321, 975 to release all of Kadena's claims arising from the VA project except for claims covered by Global's insurance policy with North American Capacity Insurance Company (NAC), and Global received $153, 025 to dismiss its failure-to-pay claims. At trial, Kadena presented evidence on the scope and cost of its water remediation and argued Global was contractually responsible for the damage. The jury agreed and awarded Kadena slightly over $1 million.

         In a separate suit brought by NAC, Kadena and NAC filed competing motions for summary judgment on the issue of whether NAC's policy required it to indemnify Global for the jury's damage award. The trial court ruled in favor of Kadena, finding the damage award covered under NAC's policy as a matter of law. The court also ruled that the award must be offset by the $321, 975 Global paid in settlement and that Global was liable to Kadena for $360, 000 in attorney fees.

         On appeal, NAC contends the trial court erred in finding the water damages are covered under its policy; Kadena argues the court erred in offsetting those damages with Global's settlement payment; and Global and NAC argue the court erred in awarding attorney fees. We conclude the trial court properly determined NAC's policy covers the water damages and Kadena is entitled to attorney fees. However, we reverse the offset order because Global's settlement payment did not compensate Kadena for the costs of its water remediation; the parties agreed to reserve that issue for litigation.



         A. Trial on the Water Remediation Damages

         Global and Kadena presented the following evidence at trial. The VA's project specifications called for a modular design consisting of 53 units totaling over 37, 000 square feet. In October 2009, Kadena hired Global to build, deliver, install, and partially finish the modular units for the project, at a contract price of about $3.5 million. Global's scope of work included the units' frame, ceiling, drywall, interior finishes, the HVAC and plumbing systems, and some aspects of the roof design, such as the plywood substrate, parapets, and hatches. The scope of work excluded flooring and roofing. Article XIII of the Kadena-Global contract stated Global assumed responsibility “for any loss or damage to the [units]... however caused, until final acceptance thereof by [Kadena].” The contract conditioned “final acceptance” upon the VA's approval of the units.

         Under the overarching construction schedule, Kadena was to pour the concrete foundations, then Global would deliver the units partially constructed, set them in place on the foundation, perform the additional construction required under the contract, then align and fasten the units together to form one main segment and two side wings. After Global's work was complete, Kadena and other subcontractors would finalize the project, which included installing the roofs and flooring, stuccoing the exterior of the units, and finishing the driveways and sidewalks. The VA had selected an EPDM roof, a rubberized sheet that adheres to the plywood substrate. According to Kadena, the roofing for all 53 units had to be installed at the same time (as opposed to piecemeal, as the units were delivered) in order to ensure the roof manufacturer's extended warranty.

         Initially, the project schedule called for Global to deliver and finish the units during the summer months of 2010. But for various reasons, the schedule shifted significantly and Global did not deliver the units to the site until October and November. The parties spent a significant amount of trial time on the reasons for the delay in the delivery schedule. According to Kadena's witnesses, unexpected seismic and geological issues set the project back about 118 days and Global caused the rest of the delay by failing to timely build the units, submit designs, and install weld plates in the foundation.

         Shortly after Global delivered the first shipment of units in early October, it rained and the interiors suffered water damage. Kadena's project manager emailed Global's operations manager and informed him that despite Global's use of plastic tarps, “the units experienced rain leakage and damage to the drywall and insulation.” Over the next four months, the rains continued on and off and the units suffered additional water damage. Kadena's project manager sent several emails to Global's operations manager over this period, directing him to remediate the water damage and reminding him Global is responsible for the damage under their contract. Global's operations manager would respond to these emails by agreeing to address the issue. At trial, Global's operations manager testified that although his crew had tried to protect the units by covering them with heavy-duty plastic tarps, the fact the units were equipped with only a roof substrate made them impossible to fully waterproof and weatherproof. He said it was unusual for a client to exclude roofing from the scope of work and that Global was used to installing the roofs in their factory, prior to delivery, “to make sure that the building is protected.”

         In early January 2012, Global hired ServiceMaster, a company specializing in disaster response, to assist with the water intrusion remediation. Around that same time, the roofing contractor began installing the EPDM roof. By mid-February, Global was still in the process of trying to remediate the interior water damage and had not yet completed its work on the units. At that point, the relationship between Kadena and Global had deteriorated and the parties decided to terminate their contract. Kadena then took on the task of remediating the water damage and completing the units. Kadena used its own crew in addition to the services of four other companies to remove and replace water-damaged drywall, insulation, wood framing, and ducting.

         At trial, Kadena presented evidence on the scope and cost of this water remediation (the repair/replacement costs) and the number of days it delayed the project (the delay damages). Kadena argued Global bore the risk of loss for those damages under Article XIII of their contract because the units were not complete (that is, accepted by the VA) when they were damaged. Global argued Kadena was responsible for the water damage because, as the general contractor coordinating the project, it should have developed a plan to protect the units when it became evident rain was going to be an issue-for example, by renting a place to store the units or having the roof installed piecemeal instead of all at once.

         The jury agreed with Kadena and found Global contractually liable for a total of $1, 068, 541.91 in water intrusion damages, broken down as follows: $617, 332.86 for drywall and insulation repairs; $113, 020.05 for carpentry repairs; $46, 125 for mechanical duct repairs; and $292, 064 for delay.[1]

         B. Summary Adjudication of Insurance Coverage

         NAC sought a declaration it was not obligated to indemnify Global for the water intrusion damages because they were not covered under its commercial general liability (CGL) policy. That policy covers “property damage” caused by an “occurrence, ” which is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” From this broad, occurrence-based coverage the policy carves out a variety of exclusions. Relevant to this appeal are exclusions j(5) and j(6) and exclusion m.

         Kadena and NAC filed competing motions for summary judgment on the issue of coverage. NAC argued exclusions j(5) and j(6) apply to the costs of repairing and replacing the wet drywall, insulation, framing, and ducting. As to the delay damages, NAC argued they do not fall under the policy's insuring clause because they are not “property damage” and, even if they were, exclusion m applies to preclude coverage. Kadena argued exclusions j(5) and j(6) do not apply or are at the very least ambiguous, and thus should be interpreted in favor of coverage. It argued the delay damages fall under the insuring clause and exclusion m is inapplicable.

         The trial court ruled both types of damages are covered under the policy and granted Kadena's motion for summary judgment. As to the repair/replacement costs, the court held exclusions j(5) and j(6) are ambiguous and can reasonably be interpreted to exclude damage to only the particular component of Global's work that was defective. Applying this interpretation to the undisputed facts from trial, the court found none of the drywall, insulation, framing, or ducting Kadena repaired or replaced was defective, and thus concluded exclusions j(5) and j(6) did not apply. As to delay damages, the court determined they were covered by the insuring clause and exclusion m did not preclude coverage because, like exclusions j(5) and j(6), it applied only to defective work.

         C. Offset and Attorney Fees

         Following the jury's verdict, Global filed a motion to offset the damage award by the amount of its settlement payment to Global and Kadena filed a motion for attorney fees. The court granted both motions. It ruled offset was appropriate because it saw no distinction between the claims Kadena had settled and the jury's damage award. It found Kadena was entitled to attorney fees under the Kadena-Global contract and rejected Global's assertion Kadena had released its right to obtain attorney fees under the settlement agreement.



         A. The Summary Judgment Motions

         1. Standards of review

         “The purpose of the law of summary judgment is to provide courts with a mechanism to cut through the parties' pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 (Aguilar).) Summary judgment is proper when there are no triable issues of material fact and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) A plaintiff is entitled to summary judgment if it establishes there is no defense to the claim, and a defendant is entitled to summary judgment if it establishes a complete defense to the plaintiff's claim, or shows that one or more elements of the claim cannot be established. (§ 437c, subd. (o); Aguilar, at p. 849.) The moving party bears the burden of showing it is entitled to judgment as a matter of law. (Aguilar, at p. 850.)

         We review a grant of summary judgment de novo, and decide independently whether the facts not subject to triable dispute warrant judgment for the moving party as a matter of law. (Intel Corp. v. Hamidi (2003) 30 Cal.4th 1342, 1348.) We are not bound by the trial court's stated reasons for granting summary judgment. (Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, 878.)

         The interpretation of an insurance policy is a question of law we review de novo, applying the general principles of contract interpretation. (Clarendon America Ins. Co. v. General Security Indemnity Co. of Arizona (2011) 193 Cal.App.4th 1311, 1317 (Clarendon).) The goal of contract interpretation is to determine the mutual intent of the parties, “if possible, solely from the written provisions of the contract.” (Ibid.) When the words of an insurance contract are unambiguous, we give them their plain and ordinary meaning. (Ibid.[“‘If contractual language is clear and explicit, it governs'”].) “Courts will not strain to create an ambiguity where none exists.” (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18-19.) However, if the language is ambiguous, it “will generally be construed against the party who caused the uncertainty to exist.” (Clarendon, at p. 1317.)

         When it comes to interpreting a policy's exclusionary provisions, the burden is on the insurer “to phrase exceptions and exclusions in clear and unmistakable language.” (Harris v. Glens Falls Ins. Co. (1972) 6 Cal.3d 699, 701.) It is a “fundamental principle that an insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear.” (State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201.) As a result, we resolve all “doubts, uncertainties and ambiguities” in exclusionary language in favor of the insured. (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 912.) This rule of interpretation applies even when another construction, one that would exclude coverage for the risk in question, is equally reasonable. (Smith Kandal Real Estate v. Continental Casualty Co. (1998) 67 Cal.App.4th 406, 415-416.)

         With these principles in mind, we turn to the language of NAC's policy.

         2. The ...

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