Sunwestern Contractors Incorporated v. Cincinnati Indemnity Co.

          ORDER

          HONORABLE CINDY JORGENSON, UNITED STATES DISTRICT JUDGE

         Pending before the Court are the parties' Motions for Summary Judgment (Docs. 58 and 60), Responses (Docs. 67 and 69), and Replies (Docs. 72 and 73).

         Background

          In July 2012, Sunwestern Contractors Incorporated (“Sunwestern”) successfully bid on a project with the City of Tucson (the “City”) for the construction of a water main collector system (the “Project”). The Project involved the construction of over 17, 200 feet of pipeline, with pipe sizes ranging from 16, 24, 30, 36, 48, and 54 inches in diameter. In May 2013, Sunwestern conducted a pressure-test of the pipeline when several flanges (connections between pipe sections that include bolts and gaskets) came apart (the “Incident”). Although 10, 000 feet of pipeline was previously pressure tested and accepted by the City, during the May 2013 test, the 48 and 54-inch pipes began to leak. The flange failure caused water to tear out gaskets (seals which fill the space between pipes to prevent leakage), seriously damaging the pipeline, components of the pipeline, and surrounding areas.

         Although repairs on those damaged items were still necessary, the City terminated its contract with Sunwestern on November 21, 2013 and opted to complete necessary repairs with a new contractor. The City later claimed that Sunwestern had caused approximately $4, 000, 000.00 in damages. At this time, Sunwestern was covered by two separate polices from Cincinnati Indemnity Company (“Cincinnati”): a commercial general liability policy (the “CGL Policy”) and an umbrella policy (the “UMB Policy”). Sunwestern also secured a performance bond for $4, 852, 050.25, the full amount of the contract it had with the City.

         In January 2014, the City contacted Cincinnati and demanded that Cincinnati cover its claims. Cincinnati investigated the Incident in April 2014 and denied coverage on October 28, 2014, claiming that the Incident did not constitute an “occurrence.” (Doc. 59-7, pg. 2-13). The City later successfully made a claim against Sunwestern's performance bond for approximately $2, 600, 000.00. (Doc. 61-6, pg. 18). Sunwestern claims that Cincinnati improperly denied coverage. Cincinnati claims that Sunwestern is not entitled to coverage.

         Legal Standard

          “Summary judgment is appropriate when, viewing the evidence in the light most favorable to the nonmoving party, ‘there is no genuine dispute as to any material fact.'” United States v. JP Morgan Chase Bank Account No. Ending 8215 in Name of Ladislao V. Samaniego, VL: $446, 377.36, 835 F.3d 1159, 1162 (9th Cir. 2016) (citing Fed.R.Civ.P. 56(a)). “[W]here evidence is genuinely disputed on a particular issue - such as by conflicting testimony - that ‘issue is inappropriate for resolution on summary judgment.'” Zetwick v. Cty. of Yolo, 850 F.3d 436, 441 (9th Cir. 2017) (citing Direct Techs., LLC v. Elec. Arts, Inc., 836 F.3d 1059, 1067 (9th Cir. 2016)). “There is no such issue unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. In essence, the inquiry is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 243 (1986).

         Since this is a diversity case, the Court will apply Arizona law. See Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 416 (1996) (Pursuant to Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), “federal courts sitting in diversity apply state substantive law and federal procedural law.”). To the extent this case raises an issue of first impression, and “in the absence of controlling forum state law, a federal court sitting in diversity must use its own best judgment in predicting how the state's highest court would decide the case.” Takahashi v. Loomis Armored Car Serv., 625 F.2d 314, 316 (9th Cir. 1980). “In so doing, a federal court may be aided by looking to well-reasoned decisions from other jurisdictions.” Id.

         Analysis

         Sunwestern and the City dispute their respective responsibility for the Incident. Sunwestern claims that the Incident occurred due to the City's engineering deficiencies. See (Doc. 60, pg. 3) (“Sunwestern's position was that Tucson Water's engineering deficiency caused the problem, as it did not establish proper torque values for the bolts, and the red rubber gaskets it selected, were not adequate for the larger pipes.”); (Doc. 58, pg. 12) (The City's position is that Sunwestern's “improper torqueing of bolts” led to the flange failures). There is no dispute that the Incident resulted from the inadequate installation of pipe components. Whether that inadequate installation was due to the City's improper engineering or Sunwestern's own improper construction is immaterial for purposes of this summary judgment motion. Ultimately, the work was faulty and will be treated as such.

         As has been previously noted, Sunwestern was covered by two separate policies during the time of the Incident: the CGL Policy and the UMB Policy. The Court will first address coverage under the CGL Policy, then address coverage under the UMB Policy in a separate section.

         With respect to the type of damages covered, the CGL Policy provides, in pertinent part:

We 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.

This insurance applies to “bodily injury” and “property damage” only if: (1) The “bodily injury” or “property damage” is caused by an “occurrence.” “Property damage” is defined as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

“Occurrence” is defined as:

An accident, including continuous or repeated exposure to substantially the same general harmful conditions.

(Doc. 59-1, pg. 20).

         1. Was There an Occurrence?

         The threshold question is whether the Incident constitutes an occurrence as defined by the CGL Policy. If the Incident was not an occurrence, the Court need not analyze further since the CGL Policy only provides coverage for “occurrences.” Arizona courts have previously held that faulty workmanship, standing alone, is not an occurrence. See U.S. Fid. & Guar. Corp. v. Advance Roofing & Supply Co., 788 P.2d 1227, 1233 (Ariz.Ct.App. 1989) (“In our opinion, the better reasoned authorities hold that mere faulty workmanship, standing alone, cannot constitute an occurrence as defined in the policy, nor would the cost of repairing the defect constitute property damages.”).

         However, subsequent cases note the “distinction between faulty workmanship standing alone and faulty workmanship that causes damage to property.” Lennar Corp. v. Auto-Owners Ins. Co., 151 P.3d 538, 545 (Ariz.Ct.App. 2007), rev'd, 256 P.3d 635 (Ariz.Ct.App. 2011). Therefore, the relevant inquiry is whether the Incident was faulty workmanship, standing alone, or whether it was faulty workmanship that resulted in property damage.

         The Court finds it helpful to provide an illustrative example. Company X builds a home but installs the roof shingles in a careless manner. The roof eventually begins to leak, causing water damage to the house's wood flooring. Since the faultily constructed roof caused property damage (water damage to the floor), that incident is an occurrence. See Id. (“Thus, the damage caused by the faulty work, not the faulty work itself, constituted an occurrence, and where no property damage was alleged as a result of the faulty work, there was no occurrence.”). If the roof was faultily constructed, but never began to leak and never caused damage to the floor, it would not be an occurrence because “faulty workmanship, standing alone, cannot constitute an occurrence.” Advance Roofing & Supply Co., 788 P.2d at 1233.

         Cincinnati maintains throughout its briefing that the Incident does not constitute an occurrence because the “damages claimed by the City related only to the cost of repairing and completing faulty work performed by Sunwestern. There was no claim for damage to ‘other property' or for damage to other portions of the Project built by others. Thus, there was no ‘occurrence' and, if there were, the ‘your work' exclusion would apply defeating coverage.” (Doc. 58, pg. 9); see also (Doc. 72, pg. 7) (“Here, it is undisputed that the damages claimed by the City relate only to the cost of repairing faulty work performed by Sunwestern, and completing Sunwestern's unfinished work. There was no claim for damage to ‘other property' or for damage to other portions of the Project built by others. Thus, there was no ‘occurrence' under Sunwestern's CGL or UMB policies.”).

         Cincinnati's argument fails. The relevant inquiry is not whether there was damage to “other property” or damage to “other portions of the Project built by others.” The relevant inquiry is whether Sunwestern's faulty workmanship resulted in property damage - and it is uncontroverted that it did. Like Company X's faulty roof leading to water damage to the floor, here, improper installation of pipe components led to damage to the pipeline and surrounding areas. The record establishes that flanges - the connections between sections of pipe including bolts and gaskets - were improperly installed. See (Doc. 61, pg. 4) (“When Sunwestern tested the lines and started bringing up the water pressure, several flanges [pipe connections] came apart. Flanges are the connections between the sections of pipe and include the bolts and gaskets.”). Those flanges later failed, causing “damaged gaskets, damaged pipe bedding, and water infiltration. When a gasket would fail, the water in the pipeline would drain into the trench. The water would have to be pumped out and the bedding would need to be replaced.” (Doc. 61-6, pg. 47). Even Cincinnati acknowledges that the damage caused by the improperly installed flanges was not limited to the flanges itself. See (Doc. 59, pg. 2) (“There was damage to the pipes, flanges, pipe trenches, and pipe bedding, but no damage to property other than the Project.”).

         This is not a situation where Sunwestern is solely seeking to recover the cost of repairing its own defective work. Sunwestern has made a showing that serious property damage resulted from its defective work and consequential property damage resulting from faulty work is an occurrence under the CGL Policy. See Double AA Builders, Ltd., 386 P.3d 1277 at 1279 (“It is undisputed that Double AA sought to recover only the cost of repairing Advance's defective work, which occurred on premises owned or rented by Harkins. Because Double AA does not seek to recover for damage resulting from the defective work, the ‘your work' exclusion bars Double AA's recovery unless the ‘subcontractor exception' to the exclusion applies.”); Lennar Corp., 151 P.3d at 545 (“In this case, however, unlike in Advance Roofing, the Pinnacle Hill plaintiffs alleged damage resulting at least in part from faulty workmanship, including cracks in the walls, baseboard separation, and floor tile grout cracks and separation . . . The Pinnacle Hill plaintiffs, therefore, do not claim faulty work alone; they also claim that property damage resulted from the faulty work. This is sufficient to allege an occurrence under the policies at issue.”). The Court finds that the Incident is an occurrence under the CGL Policy.

         2. Are There Any Applicable Exclusions in the CGL Policy?

         Although the Incident is an “occurrence, ” coverage may still be precluded based upon any applicable policy exclusions. Cincinnati alleges that exclusions j(5), j(6), and (1) apply to defeat coverage. Sunwestern alleges that those exclusions, when read together, create an ambiguity, and that “[a]ny ambiguity should be read strictly in Sunwestern's favor.” (Doc. 60, pg. 8).

         Exclusion j of the CGL Policy precludes “Property damage” to:

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations;

(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard”.

“Your work” is defined as:

(1) Work or operations performed by you or on your behalf; and

(2) Materials, parts or equipment furnished in connection with such ...