The Second District Issues Useful Case Relative to Commercial General Liability for Construction Defects, Clarifying CA law on Concept of “Property Damage” and “Impaired Property”

June 17, 2014

The Second District has issued a useful case relative to Commercial General Liability for Construction Defects, clarifying California law on the concept of “property damage” and “impaired property”.

In this recent case, Regional Steel v Liberty Surplus, the subcontractor/steel fabricator, supplied steel seismic tie hooks that were the wrong angle (90 versus 135 degrees). The subcontractor sued the owner and GC for non-payment of the contract, which was followed by a cross complaint back against the subcontractor for damages due to the tie hooks. The subcontractor, Regional Steel, tendered the cross complaint to its CGL carrier, Liberty Surplus. The court reiterated some “familiar rules” but all in one place:

• The defective steel was discovered by the building inspector prior to the policy period, thus no incident of damage “during the policy period”.
• Supplying defective steel that is incorporated by others into the building is not “property damage” unless the defective product causes damage to some other property
• The costs of removing and replacing the defective product are not covered due the “impaired property” exclusion, even if other trades’ work is impacted.

The court held that “tear out and replacement” costs were not covered even where the defective product is incorporated and replacement is necessary. This makes California narrower than Washington on the subject. It is also important because it limits Armstrong World Enterprises v Aetna Case. & Sur. CO. (1995) 45 Cal.App.4th 1, to situations where the incorporated product actually causes damage to the host, and is not simply defective by itself.