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Southwest Metalsmiths, Inc. v. Lumbermens Mutual Casualty Co.
Citation: 85 F. App'x 552Docket: Nos. 02-15732, 02-17098; D.C. No. CV-00-01453-JAT
Court: Court of Appeals for the Ninth Circuit; January 7, 2004; Federal Appellate Court
Lumbermens Mutual Casualty Company (LMC) appeals a summary judgment favoring Southwest Metalsmiths, Inc. (SMI) regarding the scope of insurance coverage under a Commercial General Liability (CGL) policy. LMC also contests the award of attorneys' fees to SMI. Arizona contract law governs this dispute. Upon de novo review, coverage is determined to exist under the policy, with LMC's exclusions found inapplicable. The district court's decision to award attorneys' fees is upheld as reasonable. SMI alleges that LMC breached the insurance contract by denying coverage for property damage related to work performed by its subcontractor on column covers for the State University of New York at Stonybrook, specifically due to severe paint delamination. LMC denied coverage, arguing that the delamination does not qualify as 'property damage' or an 'occurrence' as defined in the policy, claiming that mere diminution in value does not constitute 'physical injury' to tangible property. This argument is countered by the fact that the claim involved repair costs for actual physical damage to the column covers. LMC also disputes the district court's finding that faulty workmanship by a subcontractor can qualify as an 'occurrence.' While some Arizona appellate decisions suggest that faulty workmanship alone does not constitute an 'occurrence,' conflicting Arizona Supreme Court precedents indicate that such workmanship may qualify under certain circumstances. Four interpretations of the term 'occurrence' under a Commercial General Liability (CGL) policy in Arizona have been identified: (1) accidents involving the insured's faulty work that causes collateral damage to tangible property; (2) accidents involving the insured's faulty work alone; (3) unforeseen accidents caused by a subcontractor's faulty work; and (4) accidents excluding subcontractor's faulty workmanship. In line with Arizona contract interpretation principles, any ambiguity in policy provisions is construed against the insurer and in favor of the insured. The district court determined that the faulty work of SMI’s subcontractor constituted an unforeseen accident, qualifying as an 'occurrence' under the CGL policy, supporting the conclusion that coverage exists. The exclusions cited by LMC do not negate this coverage. The 'your work' exclusion applies to work done by SMI’s subcontractor, while the 'real property' exception applies since the issue of paint delamination occurred after the column covers were affixed to the columns, classifying them as real property under Arizona law. Additionally, coverage is triggered when the insured is 'legally obligated' to pay damages, which SMI was, despite no lawsuit being filed against it. The district court's summary judgment was deemed appropriate as no exclusions applied. Regarding the award of attorneys' fees, the district court exercised its discretion in interpreting local rules, finding no abuse of discretion in considering SMI’s memorandum as a motion for fees, thus providing due process for LMC. The district court's reasonable basis for the fee award was upheld. The decision is affirmed and not suitable for publication or citation under Ninth Circuit Rule 36-3.