United States District Court, D. Arizona
HONORABLE CINDY JORGENSON, UNITED STATES DISTRICT JUDGE
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).
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.
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.
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.
“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).
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
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.
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.
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
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
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).
Was There an Occurrence?
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.”).
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.
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.
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
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.”).
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.
Are There Any Applicable Exclusions in the CGL
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).
j of the CGL Policy precludes “Property damage”
(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;
(2) Materials, parts or equipment furnished in connection
with such ...