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Schaefer/Karpf Productions v. CNA Insurance Companies6/18/1998
to be covered under the current version of the standard CGL policy issued by CNA.
The California Supreme Court recognized incorporation-related injuries as "property damage" under the standard CGL policy in Geddes I, supra. There the plaintiff, a building contractor, purchased doors from Aluminum Products for use in houses plaintiff was constructing. The doors began to warp and malfunction shortly after plaintiff installed them. Plaintiff sued Aluminum Products for breach of warranty and negligence alleging it incurred damages in excess of $100,000 for removing and replacing the defective doors, office overhead and lost profits. Aluminum Products tendered defense of the action to its insurer under its CGL policy. The insurer denied coverage and refused to defend. After obtaining an award of $100,000 against Aluminum Products, plaintiff brought an action against the insurer to recover on the judgment.
The trial court ruled in favor of the insurer, but the Supreme Court, in an opinion by Justice Traynor, reversed. Quoting the same language from Hauenstein we quoted above, the court stated it could "see no reason for not following the Hauenstein case and permitting recovery for damages to the houses according to the rule stated therein." (51 Cal.2d at p. 565.) The court held, however, plaintiff was not entitled to recover damages for "handling the defective doors and their replacements, loss of profits, and loss of goodwill" because these costs were not a measure of the dollar amount of the injury to the houses. (Ibid.) Furthermore, anticipating a subsequent change in the standard CGL coverage terms, the court held plaintiff could not recover for injury to its good will or profits because "it is clear that the word property refers to physical or tangible property." (Id. at p. 566.) Although at one point in its opinion the court stated plaintiff was entitled to recover for damages to the houses "according to the rule stated [in Hauenstein]," suggesting it agreed reduction in the value of the houses itself constituted property damage under the policy, its later statement "property refers to physical or tangible property" suggests it was not following Hauenstein in all respects. The court clarified the extent of coverage for incorporation-related injuries in Geddes II, discussed below.
Having determined the plaintiff was entitled to recover a portion of its judgment against Aluminum Products from the insurer, the court remanded the matter to the trial court to determine what portion of the judgment was covered by the policy. (51 Cal.2d at p. 566.) The trial court made its determination and the insurer appealed from certain portions of the judgment. (Geddes & Smith, Inc. v. St. Paul Mercury Indem. Co. (1965) 63 Cal.2d 602 (Geddes II).)
The insurer, in Geddes II, objected to the inclusion in the judgment of overhead expenses plaintiff incurred while the doors were being replaced. It contended these overhead expenses represented an injury to the plaintiff's business like loss of good will and profits and therefore were not recoverable because they did not constitute "damage to physical or tangible property" under the holding in Geddes I. (63 Cal. 2d at p. 609.) The Supreme Court responded:
"This contention confuses two issues which should be carefully distinguished: the first concerns the type of injury covered by the policy, and it was in the context of this question that we stated that only damage to physical or tangible property was recoverable; the second is the method by which the damage to the physical property is to be measured in monetary terms." (Ibid.)
Overhead costs, the court explained,
"would seem to be as integral a pa
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