STONELIGHT TILE, INC., v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION

Filed 3/29/07; pub. order 4/24/07 (see end of opn.)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

In this insurance coverage dispute, appellants Stonelight Tile, Inc. (Stonelight) and David G. Anson (Anson), Stonelights controlling shareholder, (hereafter jointly Plaintiffs) contend that the trial court erred when it granted respondent California Insurance Guarantee Associations (CIGA) motion for summary judgment. In its summary judgment motion, CIGA had argued that it was prohibited from contributing toward the payment of a judgment Plaintiffs had obtained against Diversified Recycling Services, Inc. (Diversified) in an action for damages due to repeated exposure to dust generated by Diversifieds recycling operations, on the grounds that there was other insurance available to cover the judgment (Ins. Code,[1]  1063.1, subd. (c)(9)).

Plaintiffs contend there was no other insurance available to them because CIGAs scope of coverage was different from that of the other insurers whose policies were triggered in this continuous loss case. Plaintiffs also contend that the continuous trigger of coverage that obligates the other insurers to pay the judgment in the underlying action in full, subject to a right of contribution, does not apply to Plaintiffs claims for nuisance and trespass. We find no error and affirm the summary judgment.

Facts

I. Underlying Action[2]

Stonelight had operated a tile manufacturing business in San Jose since 1947. At the time of the events giving rise to the underlying lawsuit, Anson was Stonelights president and controlling shareholder. In 1987, Stonelight relocated to 1651 Pomona Avenue in San Jose. The following year, Diversified began recycling operations at an adjacent property at 1675 Pomona Avenue.

A. The Dust Problem

Diversifieds recycling activities sent dust flying into the surrounding neighborhood. Some of the offending dust came from Diversifieds tub grinder, a large machine that reduced recyclable wood products to splinters and fine particles. Tub grinding generated a significant amount of light brown dust that blew and settled onto neighboring properties, including Stonelights property. The tub grinder occasionally spewed out metal fragments as well. Concern over Diversifieds tub grinding operations prompted the City of San Jose (the City) to intervene in 1991. As a result of the Citys legal action, a temporary restraining order issued, forcing Diversified to cease tub grinding as of July 23, 1991.

The termination of Diversifieds tub grinding operations put an end to the light brown grinder dust, but did nothing to relieve the dark brown dust created by Diversifieds other activities. Dust on materials accepted for recycling at the site was released into the air when the imported materials were unloaded, piled up, moved around, bulldozed, or loaded into trucks for transport off-site. A court-ordered watering and monitoring program proved ineffective in controlling the dust. At times, dust plumes rose 20 to 30 feet in the air. At other times, the blowing dust looked like a blizzard. Sometimes, the dust layer was so heavy that footprints could be seen in it.

Anson and others complained about the dust to the Bay Area Air Quality Management District (Air Quality). Written reports documenting more than two dozen complaints over a three-year period were admitted into evidence at trial. In at least six instances, Air Quality inspectors confirmed that Diversifieds operations generated dust that violated air quality standards.

Plaintiffs and their neighbors also complained to the City. City code inspectors concluded that Diversifieds generation of dust created a nuisance that affected the neighbors and should be abated. The Citys efforts to shut down Diversifieds operations resulted in a stipulated permanent injunction requiring defendant to obtain permits or cease operating by March 1, 1993. Despite the injunction and the lack of permits, defendant did not cease operations on Pomona Avenue until June 1, 1994.

B. The Impact on Stonelight

Stonelight made custom, high quality art tiles for an international market. Stonelights product was vulnerable to contamination by wind-driven dust particles at each step of the manufacturing process, from initial clay preparation through drying, glazing and firing.

During clay preparation, clay was transported on open conveyor belts from a mixer to partially exposed storage silos, to a pug mill, where water was added. The clay was chunked out of the pug mill in sections and conveyed to a tile extruder. The extruded clay was cut into tiles of varying shapes and sizes. Decorative tiles might be pressed with a plate. Next, the tiles were dried, first in the open air and then in a large gas dryer. Stonelights product was vulnerable to dust contamination whenever it was exposed during the manufacturing process.

Dried tiles were susceptible to dust intrusion during the glazing process. Special custom art tiles were glazed by hand in a partially exposed art room. Other tiles were exposed to dust contamination while traveling along the glazing line. Dust particles that settled on the tiles during glazing showed up as pock marks or pits on the tile.

The glaze itself was subject to contamination. Foreign substances dropping into the open glaze barrels could result in discoloration, a defect that would not be apparent until after firing. Contamination in the glaze barrels fouled the glaze nozzles, causing them to clog or spray the glaze unevenly, which affected the finish of the tile. Dust also created problems during firing, the last step in the production process.

Dust from Diversifieds operations permeated the factory, covering tools and equipment, burning out motors, and creating physical problems for Stonelights workers. As a result, Stonelight was compelled to clean its facility more often than usual. In addition, the company had to manufacture twice as many tiles to ensure sufficient quantities of undamaged tiles. More of Stonelights finished product went into its boneyard, where it was offered for sale at reduced prices. Stonelight lost customers because of manufacturing problems caused by the dust contamination. Gross sales declined dramatically between 1990 and 1994, and Stonelight suffered financial losses. Stonelight attempted to stage a recovery in June 1994, after Diversified ceased operations. However, that attempt was unsuccessful and Stonelight filed for bankruptcy protection in 1995.

C. The Impact on Anson

Stonelights failure was an enormous blow for Anson, both financially and emotionally. As Stonelights manager, Anson was present at the Pomona Avenue property on a day-to-day basis. He even lived there for a time. While living there, Anson was directly and personally affected by the dust. Although he disavowed any claim of physical or psychological impairment, Anson testified that he went to the hospital, as did his workers who were experiencing physical problems as a result of the dust. Anson lost both his initial personal investment in the company and the accumulated salary he had deferred during the companys slide toward bankruptcy.

D. Procedural History of Underlying Action

Stonelight, Anson, and Andrew Bonett (Bonett), the owner of a neighboring business that also claimed damages as a result of Diversifieds recycling operations, sought compensation for their losses by suing Diversified. Their first amended complaint stated causes of action for public and private nuisance, negligence, battery, trespass to land, and intentional and negligent infliction of emotional distress.

Prior to the trial of the underlying action, Diversified brought a successful in limine motion that restricted the plaintiffs to proof of events within the applicable statutes of limitations. As a result, Plaintiffs were not allowed to offer: (1) evidence of nuisance or trespass damages or claims arising before July 11, 1991 or (2) evidence of personal injury tort claims or damages incurred prior to July 11, 1993.

In December 1997, a jury returned general verdicts in favor of all three plaintiffs, with special findings that Diversified had not acted with malice or oppression toward any plaintiff. The jury awarded $990,000 to Stonelight, $200,000 to Anson, and $6,624 to Bonett.

Diversified appealed, challenging the sufficiency of the evidence to support the verdicts. It also argued that Stonelight had failed to mitigate its damages and that Anson was not entitled to emotional distress damages. In May 2000, we affirmed the judgment in an unpublished opinion (Stonelight Title, Inc., et al. v. Diversified Recycling, Inc., et al., supra, H018625).

II. The Instant Coverage Dispute

A. Pleadings

In October 2003, Plaintiffs filed a complaint pursuant to section 11580[3] to recover the amount of the judgments from the insurance companies that had provided liability coverage to Diversified between July 11, 1991 and June 1, 1994. The named defendants included three insurance companies (Transamerica Insurance Company, CIGNA Property and Casualty Company, and Continental Insurance Company, hereafter the Solvent Insurers) and the California Insurance Guarantee Association (CIGA). The operative pleading, the first amended complaint, alleges that the Solvent Insurers and Superior National Insurance Company (Superior National) provided liability coverage to Diversified during the period of time at issue in the underlying action, that after the issuance of its policy, Superior National became insolvent, and that CIGA administered the claims of the insolvent Superior National.

CIGAs demurrer to the first amended complaint based on the statute of limitations was overruled.

B. Settlement with Solvent Insurers

Plaintiffs settled with the Solvent Insurers in December of 2004. Although the amounts and terms of the settlements are not reflected in the record, the parties have stipulated that the amount of each settlement neither exhausted [each individual insurers] policy limits nor fully satisfied the underlying judgment of $990,000 and $200,000.

C. CIGAs Motion for Summary Judgment

In February 2005, CIGA filed a motion for summary judgment arguing that under section 1063.1, subdivision (c)(9), CIGA has no statutory duty to pay the judgment because Plaintiffs had not exhausted the other insurance that was available to them. It argued that Plaintiffs claim was not a covered claim within the meaning of section 1063.1 because other insurance was available to Plaintiffs and that CIGA cannot violate statutory restrictions by paying claims that are not covered claims. CIGA argued that each of the Solvent Insurers was liable for the entire amount of the judgment, because it was a continuous loss and under the policy language and the rule stated in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 678 (Montrose), each of the Solvent Insurers was responsible to pay the entire loss as long as some of the damage occurred during their policy periods. CIGA asserted that since the Solvent Insurers had policy limits that were sufficient to pay the entire judgment, Plaintiffs could not recover from CIGA. CIGA contended that Plaintiffs had settled too cheaply when they accepted amounts that were less than the Solvent Insurers policy limits and did not cover the entire judgment and that Plaintiffs could not rely on CIGA to make up the difference.

The motion for summary judgment was based in part on stipulated facts, including the following insurance coverage information for Diversified:

Plaintiffs opposed the motion, arguing that there were triable issues whether the events that caused damages between July 11, 1991, and June 1, 1994, were separate, intermittent events that caused separate damages or whether the damages were progressive and continuous through each policy period. Plaintiffs argued that the trespasses of dust occurred daily and ended each night, when Diversifieds operations shut down. They argued that different tiles were damaged each day. Plaintiffs argued it was undisputed that the damages caused by the tub grinder occurred only during Superior Nationals policy period, since the tub grinder ceased operation on July 23, 1991. Plaintiffs asserted that under the personal injury coverage provisions of the policy, which covered the trespass and nuisance causes of action, each insurer was only responsible for the offenses committed during its policy period.

In reply, CIGA argued that this was a continuous loss case and the fact that Diversified did not operate 24 hours per day, seven days per week does not create separate losses or events. CIGA argued that the underlying losses did not fall within the insurance policies personal injury coverage and that even if they did, the trespass and nuisance offenses were continuous. CIGA also observed that the underlying judgment did not allocate to or determine whether any damages were due solely to tub grinding. It contended that Plaintiffs damages were due to continuous or repeated exposure to Diversifieds normal operations that generated dust and that the continuous and repeated exposure to substantially the same condition is a single occurrence under the policy.

The court granted CIGAs motion for summary judgment. The court concluded that Plaintiffs suffered from continuously triggered injury and that [e]ach insurer could have been held liable for the entire loss. Accordingly, other insurance was available to Plaintiffs. Since other insurance was available, Plaintiffs could not recover from CIGA. Plaintiffs appeal.

Discussion

I. Contentions on Appeal

Plaintiffs contend there was no other insurance available to them to cover losses incurred during Superior Nationals policy period because the Solvent Insurers did not have the same scope of coverage as Superior National. Plaintiffs contention is based on the undisputed fact that tub grinding, which was responsible for creating some of the dust, only occurred during Superior Nationals policy period. Plaintiffs argue that the damages due to tub grinding, which created a light brown dust and metal projectiles, were unique from the damages caused by Diversifieds other operations and thus were not covered by the Solvent Insurers. Plaintiffs also argue there are triable issues whether the Solvent Insurers had the same scope of coverage as Superior National.

Plaintiffs contend the court erred in granting summary judgment because there is no other insurance for their trespass and nuisance claims because the continuous injury trigger of coverage, which provides that each policy triggered by a continuing or progressive loss claim has an independent obligation to respond to the loss in full, does not apply to their nuisance and trespass claims.

II. Standard of Review

We review an order granting summary judgment de novo, considering all the evidence set forth in the moving and opposition papers, except that to which objections have been made and sustained. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860 (Aguilar); Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334.) In undertaking our independent review of the evidence submitted, we apply the same three-step analysis as the trial court. First, we identify the issues framed by the pleadings. Next, we determine whether the moving party has established facts justifying judgment in its favor. Finally, in most cases, if the moving party has carried its initial burden, we decide whether the opposing party has demonstrated the existence of a triable, material fact issue. (Varni Bros. Corp. v. Wine World, Inc. (1995) 35 Cal.App.4th 880, 886-887.)

A summary judgment motion shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. (Code Civ. Proc., 437c, subd. (c).) To be entitled to judgment as a matter of law, the moving party must show by admissible evidence that the action has no merit or that there is no defense thereto. (Id., 437c, subd. (a).) A defendant moving for summary judgment meets this burden by presenting evidence demonstrating that one or more elements of the cause of action cannot be established or that there is a complete defense to the action. (Id., 437c, subd. (o)(2); Aguilar, supra, 25 Cal.4th at pp. 849-850, 853-854.) Once the defendant makes this showing, the burden shifts to the plaintiff to show that a triable issue of material fact exists as to that cause of action or defense. (Code Civ. Proc., 437c, subd. (p)(2); see Aguilar, supra, 25 Cal.4th at p. 850.) Material facts are those that relate to the issues in the case as framed by the pleadings. (Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67.) In this case, Defendants argued they were entitled to summary judgment because Plaintiffs could not establish one or more essential elements of each of their causes of action. They also requested summary adjudication in the alternative.

In ruling on the motion, we must consider the evidence and inferences reasonably drawn from the evidence in the light most favorable to the party opposing the motion. (Aguilar, supra, 25 Cal.4th at p. 843.) In performing our de novo review, we view the evidence in a light favorable to the losing party (Plaintiffs), liberally construing their evidentiary submission while strictly scrutinizing the moving partys (CIGAs) own showing and resolve any evidentiary doubts or ambiguities in the losing partys favor. (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768-769.)

III. Scope of Coverage

A. History and Purpose of CIGA

CIGA was created by the Legislature in 1969 to protect policyholders of insolvent insurers and third parties claiming under policies issued by insurers that become insolvent. (California Ins. Guarantee Assn. v. Liemsakul (1987) 193 Cal.App.3d 433, 438-439 (Liemsakul); Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 784 (Isaacson).) CIGA is a compulsory association requiring most state regulated insurance companies to be members, and provides insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its policies. (Liemsakul, supra, 193 Cal.App.3d at p. 437, fn. 2, citing Central National Ins. Co. v. California Ins. Guarantee Assn. (1985) 165 Cal.App.3d 453, 458.) CIGA assesses its members when another member becomes insolvent, thereby establishing a fund from which insureds whose insurers become insolvent can obtain financial and legal assistance. [Citation.] Member insurers then recoup assessments paid to CIGA by means of a surcharge on premiums to their policy holders. ( 1063.14, subd. (a).) In this way the insolvency of one insurer does not impact a small segment of insurance consumers, but is spread throughout the insurance consuming public, which in effect subsidizes CIGAs continued operation. (R. J. Reynolds Co. v. California Ins. Guarantee Assn. (1991) 235 Cal.App.3d 595, 600 (R. J. Reynolds).) CIGAs role is similar to that of the Federal Deposit Insurance Corporation in banking and serves to enhance public confidence in the insurance industry. (Liemsakul, supra, at pp. 438-439.)

While CIGAs general purpose is to pay the obligations of an insolvent insurer, it is not itself an insurer and does not stand in the shoes of the insolvent insurer for all purposes.  (R. J. Reynolds, supra, 235 Cal.App.3d at p. 600.) CIGA is not, and was not created to act as, an ordinary insurance company. [Citation.] It is a statutory entity that depends on the Guarantee Act for its existence and for a definition of the scope of its powers, duties, and protections. (Isaacson, supra, 44 Cal.3d 775, 786.) CIGA issues no policies, collects no premiums, makes no profits, and assumes no contractual obligations to the insureds. (Id. at p. 787.) CIGAs duties are not co-extensive with the duties owed by the insolvent insurer under its policy. [Citation.] Instead, CIGAs authority and liability in discharging its statutorily circumscribed duties are limited to paying the amount of covered claims.  (Industrial Indemnity Co. v. Workers Comp. Appeals Bd. (1997) 60 Cal.App.4th 548, 556-557 (Industrial Indemnity).)

B. CIGA Pays Covered Claims

CIGA is authorized by statute to pay only covered claims of an insolvent insurer, those determined by the Legislature to be in keeping with the goal of providing protection for the insured public. [Citation.] [Citation.] CIGA has the statutory authority to deny a noncovered claim. (. . .  1063.2, subd. (b).) (Industrial Indemnity, supra, 60 Cal.App.4th 548, 557.) Thus, CIGAs first duty is to determine whether a claim placed before it is a covered claim. Moreover, the scope of CIGAs rights and duties turns on the definition of covered claim. (Id. at p. 557.)

Section 1063.1, subdivision (c)(1), defines [c]overed claims in relevant part as the obligations of an insolvent insurer . . . imposed by law and within the coverage of an insurance policy of the insolvent insurer . . . which were unpaid by the insolvent insurer . . . for which the assets of the insolvent insurer are insufficient to discharge in full.

In section 1063.1, subdivisions (c)(3) through (c)(12), the statutory scheme lists 10 categories of claims or obligations that are not covered claims. Subdivision (c)(9) of section 1063.1, the subdivision at issue in this case, provides:  Covered claims does not include (i) any claim to the extent it is covered by any other insurance of a class covered by this article available to the claimant or insured . . . . Cases interpreting section 1063.1, subdivision (c)(9) have established that where an insured has overlapping insurance polices and one insurer becomes insolvent, the other insurer, even if only a secondary or excess insurer, is responsible for paying the claim. In other words, CIGA is an insurer of last resort and does not assume responsibility for claims where there is any other insurance available. (R. J. Reynolds, supra, 235 Cal.App.3d at p. 600.) The legislative intent was to create a protection for the public against insolvent insurers when no secondary insurer is available. [Citation.] The secondary insurer has received a premium for the risk and thus the secondary insurer, and not CIGA, should be responsible for the coverage of the loss.  (Id. at pp. 600-601.)

CIGAs statutory duty is to provide insolvency insurance to pay some (but not all) claims arising out of an insurance policy of an insolvent insurer. [Citation.] Further, in creating CIGA, the Legislature chose to provide a limited form of protection for the public, not a fund for the protection of other insurance companies from the insolvencies of fellow members. [Citations.] Accordingly, as noted by one appellate court, various subdivisions of . . . section 1063.1 express the statutory intent not to use CIGA funds to pay the insolvents obligations to other insurers . . . .  (Industrial Indemnity, supra, 60 Cal.App.4th 548, 558.)

In applying the pertinent statutes, we must decide whether Plaintiffs are claimant[s] asserting covered claims that do not fall within any of the excluded categories. (CD Investment Co. v. California Ins. Guarantee Assn. (2000) 84 Cal.App.4th 1410, 1419.) There is no dispute that Plaintiffs are claimant[s] for the purposes of section 1063.1, subdivision (h). Claimant means any insured making a first party claim or any person instituting a liability claim . . . . ( 1063.1, subd. (h).) Plaintiffs, who obtained a judgment in the underlying action, clearly meet the latter definition. There is also no dispute that the judgment in the underlying action falls within the definition of a covered claim in section 1063.1, subdivision (c)(1). The issue here is whether Plaintiffs claims are excluded by section 1063.1, subdivision (c)(9) on the grounds that there was other insurance available to Plaintiffs.

C. Nature of the Loss: Continuous Exposure to Same Harmful Condition

Plaintiffs argue there was no other insurance that precluded CIGA from participating in the case because Superior Nationals scope of coverage was different from that of the Solvent Insurers because the damages that occurred during Superior Nationals policy period were different from the damages that occurred during the other policy periods.

Story continued as Part II .

Publication courtesy of California pro bono legal advice.

Analysis and review provided by La Mesa Property line Lawyers.

[1] All further statutory references are to the Insurance Code.

[2] The statement of facts regarding the underlying action is based on the statement of facts in this courts unpublished opinion on the appeal in the underlying action, Stonelight Tile, Inc., et al. v. Diversified Recycling, Inc., et al. (May 8, 2000, H018625).

[3] Insurance Code section 11580, otherwise known as the direct action statute, provides in relevant part that a liability insurance policy shall not be issued or delivered to any person in this state unless it contains a provision that whenever judgment is secured against the insured . . .  in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment. (Ins. Code,  11580, subd. (b)(2).)

[4] If we add together the insurance policy limits of the Solvent Insurers, the total insurance available from the Solvent Insurers was $3.5 million per occurrence and $7 million aggregate.