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Shepardson Engineering Associates Inc. v. Continental Insurance Companies

filed*fn*: April 14, 1994.

SHEPARDSON ENGINEERING ASSOCIATES, INC., PLAINTIFF-APPELLANT,
v.
THE CONTINENTAL INSURANCE COMPANIES, DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Southern District of California. D.C. No. CV-92-00177-B. Rudi M. Brewster, District Judge, Presiding

Before: Tang, Pregerson, and Noonan, Circuit Judges.

MEMORANDUM

Shepardson Engineering Associates ("Shepardson") filed a bad faith action against its general commercial liability insurer, Continental Insurance Company ("Continental") for its failure to defend Shepardson in an action alleging negligent provision of construction-related services. Continental refused to defend Shepardson because the action fell within the professional services exclusion in the policy, and the district court granted summary judgment in favor of Continental. We affirm.

BACKGROUND

This lawsuit arises from property damage from plumbing leaks in an apartment building owned by Continental American Properties, Ltd. and ConAm San Diego Residential Properties Joint Venture (collectively, "ConAm"). ConAm alleged that the plumbing leaks were caused by the faulty construction and design of the plumbing system in the apartment building, including the improper backfilling of pipe trenches. ConAm sued its plumbing contractor, R & B Plumbing, which then filed a cross-complaint for indemnity against Shepardson and numerous other contractors involved in the project for negligent "construction-related services."

Continental refused to defend Shepardson under an exclusion in the policy:

ENGINEERS, ARCHITECTS OR SURVEYORS PROFESSIONAL LIABILITY

This insurance does not apply to "bodily injury", "property damage", "personal injury" or "advertising injury" arising out of the rendering or failure to render any professional services by or for you, including:

1. The preparing, approving, or failing to prepare or approve maps, drawings, opinions, reports, surveys, change orders, designs or specifications; and

2. Supervisory, inspection or engineering services. Continental stated that the allegations against Shepardson were for "professional liability in the manner in which they conducted their work." Shepardson bore the fees and costs for its defense and reached a settlement with R & B for $2,500.00. Shepardson then brought this action for breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, and breach of contract.

Discussion

Under California law,*fn1 "a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. . . . Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded." Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 17 Cal. Rptr.2d 210, 213, 846 P.2d 792 (Cal. 1993) (citations omitted). Whether a liability policy provides coverage is determined "by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy." Id.

The district court granted Continental's motion for summary judgment, holding that the cross-complaint fell within the "professional services" exception because Shepardson "was sued because it allegedly performed badly the work for which it was hired." [ER 229.] "This cross-complaint made it clear from the outset that no potential liability existed under the policy issued by the defendant; therefore the defendant insurance company had no duty to defend plaintiff in the indemnity suit." [ER 230.] This court reviews a grant of summary judgment de novo. Jones v. Union Pacific R. R. Co., 968 F.2d 937, 940 (9th Cir. 1992).

Shepardson argues that the cross-complaint raised the possibility of liability for its actions outside of any professional services provided on the project. First, Shepardson contends that it was uncontroverted that the alleged property damage did not arise from any work performed by Shepardson, and that any potential ...


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