Opinion
B151340.
7-24-2003
NATIONAL TECHNICAL SYSTEMS, INC., Plaintiff and Appellant, v. HARTFORD FIRE INSURANCE COMPANY, Defendant and Respondent; MICHAEL K. MAHER, Objector and Appellant. NATIONAL TECHNICAL SYSTEMS, INC., Plaintiff and Appellant, v. HARTFORD FIRE INSURANCE COMPANY, Defendant and Respondent.
Maher & Maher and Michael K. Maher for Plaintiff and Appellant. Maher & Maher and Michael K. Maher for Objector and Appellant. Michelman & Robinson and Dean B. Herman; Gabriel & Herman, Dean B. Herman and David Simantob for Defendant and Respondent.
National Technical Systems, Inc. (NTS) sued its insurance carrier, Hartford Fire Insurance Company, for refusing to defend or indemnify it in an action brought against it by one of its customers, Tecstar, Inc. Tecstar had alleged its solar panels were damaged during thermal testing conducted by NTS and had sought nearly $ 2.5 million in damages from NTS. The trial court granted Hartfords motion for summary judgment, concluding the Tecstar action was not covered by NTSs insurance policy. We affirm. We also affirm the sanctions order against NTS and its counsel for violation of a court order and misuse of the discovery process.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Thermal Testing Incident and Alleged Loss
NTS "is in the business of testing products for military, space and commercial applications." In June 1998 Tecstar hired NTS to perform thermal testing on four solar panels owned by Tecstar. Tecstars customer planned to install the panels on a satellite. Tecstar asked NTS to expose the panels to a specific range of temperatures, the upper range being an average temperature of +80 degrees Celsius (+5/-0 degrees Celsius).
NTS placed the solar panels in a "test chamber" to conduct the testing. During the testing performed on two of the four panels, the temperature in the test chamber exceeded Tecstars specifications. According to NTS, the panels were exposed to a temperature of approximately 185 degrees Celsius. On July 17, 1998, the same day NTS discovered what it has referred to as "the over-temperature anomaly," NTS terminated the testing, notified Tecstar of the incident and returned the solar panels to Tecstar. Tecstar claimed the solar panels were damaged during the testing due to the over-temperature condition and its customer had refused to use the panels or pay for them.
2. The Insurance Policy and Investigation of the Claim
NTS had purchased from Hartford an insurance policy that included both special property coverage and mechanical, electrical and pressure equipment (boiler and machinery) coverage. The special property coverage was in the nature of an all-risk policy, while the boiler and machinery coverage was in the nature of a "specific" or "named" peril policy. The policy was in effect at the time of the July 17 incident.
On August 31, 1998 NTS notified Hartford of a potential claim for policy benefits arising out of the incident. Hartford acknowledged receipt of notice of the potential claim, requested information about the incident and represented it would investigate the alleged loss. Hartford received a copy of NTSs agreement with Tecstar concerning testing of the solar panels and copies of correspondence between NTS and Tecstar regarding the investigation of the incident.
Hartford also obtained a document NTS described as "the final report from NTS[s] investigation of the incident and our determination as to the root cause of the failure." NTS defined "root cause" as "the basic condition that allowed the deficiency or non-conformance to occur/exist." According to NTS, "The forensic evaluation results indicate the MicRIstar controller was the root cause, and specifically a malfunction of the ROM and/or RAM 5517-6E within the MicRIstar CPU . . . ." NTS explained: "The MicRIstar controller stores all recipe cycle programming information entered by the user in the battery backed up RAM . . . . The data that is stored by the battery backed up RAM is the cure cycle recipe, controller PID settings and control loop alarms. The parameters entered by the operator are stored even when the unit is unplugged or turned off as long as the MicRIstar is in []Auto Restart mode. Data is only deleted when the MicRIstar is set to Cold Start. [P] . . . [P] The MicRIstar had a soft fault. Since the MicRIstar stores all operator programmed information in battery backed RAM, it is possible that the RAM memory held an altered bit of information. Test [sic] revealed that if such a situation occurs, the MicRIstar can malfunction and unpredictable operation is possible. The soft fault will modify the display after a program has been entered." NTS reiterated, "The root cause identified is the MicRIstar controller and specifically ROM RAM 6-D and/or RAM 5517-6E within the MicRIstar CPU . . . ."
NTS identified in its report seven other "possible root causes" of the incident. With respect to five of them — lack of training, act of God, deliberate sabotage, solar panel self-heating and solar panel manufacturing — NTS concluded the probability any of these possible causes contributed to the incident is "very low." With respect to the other two possible causes — procedural failure and operator error — NTS concluded the probability either contributed to the incident is "low."
NTS also explained the "action required to correct the identified root cause is to clear the MicRIstar Controller unit memory (COLD START) and reprogram the MicRIstar recipe program." Moreover, it stated: "A personal computer (PC) will be installed to input the temperature segments into the MicRIstar controller. The PC monitor will display the programmed temperature ramp segments and programmed constant temperature segments. The numerical value and temperature scale will be displayed alongside each other. [P] The PC will be programmed to permit the upper and lower limits of each ramp segment and each constant temperature segment to be inputted at the keyboard and to be displayed on the monitor. . . . Any deviation from the test plan will cause the SCR power relay to shut off power to the lamps. These temperature-limiting features will duplicate the alarm system of the Omega Temperature Limiting Device already present in the system." NTS indicated it had completed "all corrective actions" by December 16, 1998.
NTS sent Hartford a copy of a demand letter from Tecstar. Hartford acknowledged receipt of this correspondence and of Tecstars $ 2,437,350 demand.
Hartford "retained a technical consultant to advise it with respect to . . . NTSs conclusions and data regarding the Incident." The consultant issued a report based on its review of NTSs root cause analysis and other documentation relating to the incident and a meeting he had conducted with NTS personnel. The report states: "If we accept the possibility that the controller did experience an intermittent failure, as suggested by NTS, we would have expected to see corrective action that was consistent with this type of fault. If the RAM memory did not function properly and was capable of altering programmed data, it would seem to us that this component should have been replaced. The users manual for the Micristar [sic] controller recommends that the CPU board be repaired or replaced if a RAM related error occurs. Although NTS changed their procedures for test setup and protection, they made no hardware changes to the subject controller: They simply state that the necessary action required to correct the identified root cause is to clear the Micristar controller unit memory (Cold Start) and reprogram the Micristar recipe program. Although they believe the controller experienced a malfunction, no action was taken to remove and replace any of the suspect components within the controller. NTS continues to operate the subject controller in their lab."
The report concludes: "Following our review of NTSs root cause analysis, they have reported that causation was due to a fault with the Micristar controller. NTS reports that it was the most probable cause for why the temperature exceeded the specified limit and rejected the other possibilities that were analyzed. Although there is no conclusive evidence to precisely determine causation, we believe there is another possibility that has probable merit. We believe that the possibility of operator error can not [sic] be conclusively eliminated. In other words, we believe there is a possibility that the Micristar controller was not programmed with the correct temperature recipe. [P] Although NTSs test data log documents that the technician appeared to have started the test correctly, it is not certain as to what the actual temperature was that he entered into the controller. The log just notes start ramp to 85 degrees C for 1st hot cycle. It is possible he may have inadvertently entered 185 degrees C. No alarms were incorporated into the test setup so this type of error could have gone unnoticed. The corrective action that was later implemented added these features to the test setup."
3. The Tecstar Action and Hartfords Denial of Coverage
Tecstar asked NTS to indemnify it for all damage resulting from the incident, but NTS apparently refused. Tecstar then filed a complaint against NTS, asserting causes of action for breach of contract, breach of implied warranty, breach of bailment agreement, negligence, negligent bailment and professional negligence. Tecstar alleged NTS had failed to meet the test specifications and to perform its contractual obligations with reasonable care. Tecstar asserted NTS had "improperly set[] the controller that would regulate the test, failed to supervise the test, failed to use fail-safe back-up systems that would have recognized the over-temperature condition as soon as it occurred, and failed to maintain properly the equipment used to conduct or monitor the test." Tecstar also alleged its customer had "directed" it to "scrap" the damaged solar panels. Tecstar sought to recover from NTS not less than $ 2,448,700, representing the cost to replace the two panels ($ 2,340,200), plus the amount Tecstar spent investigating the incident and testing the damaged panels ($ 148,500).
NTS tendered the defense of the Tecstar action to Hartford. Hartford first denied NTSs request for a defense of the Tecstar action under the boiler and machinery coverage portion of the policy. Hartfords counsel explained: "The Boiler and Machinery coverage part of the referenced policy provides that Hartford will pay for direct damage to Covered Property caused by a Covered Cause of Loss. A Covered Cause of Loss is defined in relevant part as an Accident, meaning a sudden and accidental breakdown of equipment, that manifests itself by physical damage necessitating repair or replacement of the equipment. The policy provides that the Company will defend the insured against a suit brought due to an Accident that caused damage to property of another in the insureds care, custody or control." According to Hartfords counsel, Hartford "concluded that it is not obligated to defend the insured against the suit brought by Tecstar, for the following reasons: [P] (1) There is no evidence or allegation that the damage to the solar panels resulted, or may have resulted, from an Accident, that is, the breakdown of any covered equipment that necessitated repair or replacement of the equipment. NTS has informed Hartford that none of the equipment used in the testing procedure was repaired or replaced as a result of the incident. For this reason, the suit was not brought as a result of an Accident as defined in the policy. [P] (2) The definition of Accident specifically excludes the breakdown of any equipment for . . . testing . . . purposes."
Later Hartford told NTS it also would not defend or indemnify NTS in the Tecstar action because the action fell within the exclusions from coverage in the special property coverage portion of the policy. Hartfords counsel explained: "The Special Property Coverage part of the referenced policy provides that Hartford will pay for direct physical loss of or damage to Covered Property caused by a Covered Cause of Loss. Covered Causes of Loss are defined as risks of direct physical loss unless excluded or limited in the policy." According to counsels letter, Hartford "concluded that the damage to Tecstars solar panels did not result from a Covered Cause of Loss, for the following reasons: [P] (1) The immediate cause of damage to the solar panels was excessive heat, described in Tecstars complaint as the over-temperature condition. The policy provides that Hartford will not pay for loss or damage caused by or resulting from changes in or extremes of temperature. [P] (2) The insureds technical personnel attributed the over-temperature condition to a soft fault in a MicRIstar controller, the device which controlled the temperature applied to the panels. This soft fault is described as allowing instructions programmed into the controller to be displaced by stray bits of data in the controllers memory. If the failure is determined to have resulted from a soft fault, it is Hartfords position that this cause is subject to the policys exclusion for disturbance or erasure of media and data. [P] (3) An alternative possibility is that the exposure of the solar panels to excessive heat may have been caused by operator error in programming the MicRIstar controller. If so, the loss is excluded because the policy provides that Hartford will not pay for loss or damage caused by or resulting from faulty, inadequate, or defective . . . instructions, programming or data entry. [P] (4) A third possibility suggested by the findings of Hartfords consultants is that a defect in the controller caused the failure. Based on all the information provided to Hartford to date, Hartford has concluded that such a defect, if it existed, was hidden or latent and therefore is subject to the policys exclusion for loss or damage caused by or resulting from hidden or latent defect."
According to Hartford, within a week after a settlement conference in the Tecstar action, NTS demanded Hartford pay $ 1,020,000 to settle the case. Apparently Hartford refused, and NTS paid $ 1,100,000 to settle the action.
4. NTSs Action Against Hartford
NTS sued Hartford for breach of contract and breach of the implied covenant of good faith and fair dealing based on Hartfords refusal to defend or indemnify NTS in the Tecstar action.
During the litigation the trial court issued an order imposing $ 750 in sanctions against NTS and its counsel, Michael K. Maher, for failure to comply with a prior court order requiring the parties to meet and confer in-person before filing any discovery motion. In the same order the trial court imposed $ 7,558 in sanctions against NTS and Maher after granting Hartfords four motions to compel responses to written discovery requests. NTS appealed from this sanctions order.
5. Hartfords Summary Judgment Motion
Hartford moved for summary judgment/summary adjudication, arguing it had no duty to defend or to indemnify NTS under the insurance policy. Hartford cited the same coverage provisions and exclusions its counsel had relied on to deny coverage.
NTS opposed the motion, arguing (1) the cause of loss is a question of fact for the jury; (2) the exclusions Hartford relies on to defeat coverage under the special property coverage portion of the policy are not applicable to the loss; (3) coverage exists under the boiler and machinery coverage portion of the policy; and (4) triable issues of fact exist as to whether Hartford acted in good faith. NTS also requested a continuance of the motion on the ground "the objections asserted by Hartford to the deposition of its adjuster have made it impossible for NTS to complete this deposition and present a full record to the Court."
NTS relied on declarations from its chief financial officer, chief technical officer and trial counsel. Hartford objected to portions of these declarations. The trial court sustained some of Hartfords objections, concluding portions of each of the declarations lack foundation and one of the declarations contains a legal conclusion. We need not address NTSs challenge to the trial courts ruling. None of the information the trial court excluded is pertinent to our analysis. Nor would it create a triable issue of material fact.
NTS urges this court to reverse the summary judgment based on the trial courts failure to grant a continuance. (Code Civ. Proc., § 437c, subd. (h) ["If it appears from the affidavits submitted in opposition to a motion for summary judgment . . . that facts essential to justify opposition may exist but cannot, for reasons stated, then be presented, the court shall deny the motion, or order a continuance to permit affidavits to be obtained or discovery to be had . . . ."].) But NTS has not demonstrated an additional session of the adjusters deposition might have uncovered facts essential to opposing summary judgment.
The trial court granted Hartfords motion. The courts minute order states: "Plaintiff claims that the cause has not yet been established. This position is a bit curious since the case is a mere two (2) months to trial. Defendant provides evidence that the cause was either a soft fault or program error. [P] Plaintiff has failed to produce evidence. Plaintiff has had the opportunity to establish its case in this case as well as the underlying PAGE CONTAINED FOOTNOTES case. [P] There being no disputed issue of fact that the claim is excluded under the policy, the motion is granted. It is further granted for plaintiffs failure to file a proper response to defendants separate statement." NTS appealed from the ensuing judgment.
NTS argues the trial court improperly failed to specify its reasons for granting summary judgment. (Code Civ. Proc., § 437c, subd. (g) ["Upon the grant of a motion for summary judgment, on the ground that there is no triable issue of material fact, the court shall, by written or oral order, specify the reasons for its determination. The order shall specifically refer to the evidence proffered in support of, and if applicable in opposition to, the motion which indicates no triable issue exists"].) The requirements of the summary judgment statute, however, are satisfied by the reporters transcript from the hearing and the minute order, which indicate the trial court concluded the exclusionary clauses relied on by Hartford apply and NTS failed to present any evidence to defeat Hartfords claim the loss is excluded under the policy.
DISCUSSION
1. The Trial Court Properly Granted Summary Judgment For Hartford On Both The Breach Of Contract And Bad Faith Causes Of Action
a. Standard of Review
The standard of review on appeal after an order granting summary judgment is well settled. "A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).)[ ] We review the trial courts decision de novo, considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports. (Artiglio v. Corning Inc. (1998) 18 Cal.4th 604, 612, 957 P.2d 1313.) In the trial court, once a moving defendant has shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established, the burden shifts to the plaintiff to show the existence of a triable issue; to meet that burden, the plaintiff may not rely upon the mere allegations or denials of its pleadings . . . but, instead, shall set forth the specific facts showing that a triable issue of material fact exists as to that cause of action . . . . (Code Civ. Proc., § 437c, subd. (o)(2); see Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 854-855.)" (Merrill v. Navegar,Inc. (2001) 26 Cal.4th 465, 476-477.)
All statutory references are to the Code of Civil Procedure unless otherwise specified.
The interpretation of an insurance policy is a question of law. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18, 900 P.2d 619 (Waller); Brodkin v. State Farm Fire & Casualty Co. (1989) 217 Cal. App. 3d 210, 216, 265 Cal. Rptr. 710 (Brodkin) ["The interpretation of an insurance policy presents a question of law when the underlying facts are undisputed. [Citation.] An appellate court is not bound by the trial courts interpretation of the policy and . . . must independently review [the policy]"].) Courts look first at the language of the policy "to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it." (Waller, at p. 18.) "Where the policy is clear and unequivocal, the only thing the insured may reasonably expect is the coverage afforded by the plain language of the mutually agreed-upon terms." (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2000) P 4.9, pp. 4-3 to 4-4 (rev. # 1, 2002); see VTN Consolidated, Inc. v. Northbrook Ins. Co. (1979) 92 Cal. App. 3d 888, 892, 155 Cal. Rptr. 172 [insurance policy "must be construed from the language used and . . . where . . . its terms are plain and unambiguous, the courts have a duty to enforce the contract as agreed upon by the parties"].)
"When an insurer seeks summary judgment on the ground the claim is excluded, the burden is on the insurer to prove that the claim falls within an exclusion. [Citation.]" (Brodkin, supra, 217 Cal. App. 3d at p. 216.) Clauses identifying insurance coverage are interpreted broadly; exclusionary clauses are interpreted narrowly. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406, 257 Cal. Rptr. 292, 770 P.2d 704; State Farm Fire & Casualty Co. v. East Bay Municipal Utility Dist. (1997) 53 Cal.App.4th 769, 776.)
b. Hartford Had No Duty to Defend or Indemnify NTS in the Tecstar Action Under the Special Property Coverage Portion of the Policy
Hartford contends it had no duty to indemnify NTS for the alleged loss under the special property coverage portion of the policy because several policy exclusions apply to defeat coverage.
The evidence on summary judgment reveals two potential causes of the incident — a soft fault and operator error.
NTS does not dispute Hartford had no duty to defend NTS in the Tecstar action under the special property coverage portion of the policy. The relevant provision states: "We may elect to defend you against suits arising from claims of owners of property. We will do this at our expense." (Italics added.)
In the event the cause of the incident
The fact the cause cannot be definitively determined does not necessarily mean summary judgment is inappropriate. "Even where the parties may disagree over the factual question of proximate cause, summary judgment is still proper if all of the alleged causes of the loss are excluded under the policy." (Brodkin, supra, 217 Cal. App. 3d at p. 217.) was a soft fault, Hartford argues its denial of coverage was proper based on an exclusion in the policy for "electrical or magnetic injury to, or disturbance or erasure of media and data. This exclusion does not apply to loss or damage caused by or resulting from the specified cause of loss." The policy defines "Media and Data" as "a. Electronic data processing, recording or storage media such as films, tapes, cards, discs, drums or cells; and [P] b. Data and programming records used for electronic data processing or electronically controlled equipment stored on such media." The policy defines "Specified Cause of Loss" as "fire; lightning; explosion; windstorm, or hail; smoke; aircraft or vehicles (other than vehicles carrying Covered Property); riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water or other liquid, powder, or molten material damage; theft, attempted theft; or accident to a vehicle carrying Covered Property."
In denying NTSs claim for indemnification and in support of its motion for summary judgment, Hartford asserted a potential cause of the incident was "excessive heat." There is an exclusion in the policy for "changes in or extremes of temperature." We agree with NTS that excessive heat cannot be the cause of the incident. Excessive heat in the test chamber was the result of whatever went wrong. On appeal Hartford seems to agree, stating in its brief: "The change or extreme in temperature could not have occurred independently of the soft fault or operator error. The temperature change was not a contributing cause. Instead, it was merely the physical manifestation of the soft fault or operator error." (Italics added.)
Hartford is correct that "the alteration of the programmer entered recipe program data already in the MicRIstar controllers memory is certainly a disturbance of data." NTSs position that "disturbance in context must refer to some external action, such as a magnetic force, which causes direct impact on media and data . . ." lacks merit. Based on the plain language of the exclusion, "disturbance or erasure" stands alone, unmodified. Nothing indicates an excluded disturbance or erasure of media and data must be caused by electrical or magnetic injury.
NTS also argues no evidence suggests there was a "disturbance." But, based on its own forensic evaluation, NTS concluded a "soft fault will modify [i.e., interfere with or alter] the display after a program has been entered." Hartfords consultant interpreted NTSs analysis to mean "the RAM memory . . . was capable of altering programmed data." Thus, there is evidence in the record of a "disturbance," which demonstrates the loss if caused by a soft fault is excluded by the special property coverage portion of the policy.
Hartford points out "disturb," as defined in the dictionary, means "to interfere with; disrupt," or "to put out of order; disarrange." (American Heritage Dict. (2d college ed. 1982) p. 411.) Another dictionary defines the word "disturb" as "to alter the position or arrangement of." (Merriam-Websters Collegiate Dict. (10th ed. 1995) p. 338.) "Words in an insurance policy, unless given special meanings by the policy itself, must be understood in their ordinary sense. [Citations.] In seeking to ascertain the ordinary sense of words, courts in insurance cases regularly turn to general dictionaries. (Scott v. Continental Ins. Co. (1996) 44 Cal.App.4th 24, 29.)
In the event the cause was operator error, Hartford argues its denial of coverage was proper based on an exclusion in the policy for "faulty, inadequate or defective . . . [P] instructions, programming or data entry." NTS does not dispute this exclusion applies if the cause was operator error. NTS argues, however, coverage exists based on an exception to this exclusion, which provides: "But if loss or damage by Covered Cause of Loss results, we will pay for that resulting loss or damage." The term "Covered Causes of Loss" is defined as "RISKS OF DIRECT PHYSICAL LOSS unless the loss is" excluded or limited by some other provision of the policy.
The exception to the exclusion, which operates only when the original peril triggers a subsequent non-excluded peril that causes a separate injury or loss, does not apply. (See Acme Galvanizing Co. v. Firemans Fund Ins. Co. (1990) 221 Cal. App. 3d 170, 180, 270 Cal. Rptr. 405 ["We interpret the ensuing loss provision to apply to the situation where there is a peril, i.e., a hazard or occurrence which causes a loss or injury, separate andindependent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues"].) If the loss (damage to the solar panels) was caused by operator error — an excluded cause — no other separate and independent covered cause resulted from the operator error, and no other loss occurred. Accordingly, to the extent the cause of the incident was operator error, the loss is excluded by the special property coverage portion of the policy.
In any event, an interpretation of the exclusion for faulty, inadequate or defective instructions, programming or data entry appears to be a moot point. NTS vehemently denies there is any evidence of operator error. NTS presented evidence of only one potential cause of the incident — a soft fault — and, as discussed, that cause is excluded by the special property coverage portion of the policy. Moreover, NTSs speculation on appeal that a cause other than a soft fault may exist is not evidence and does not create a triable issue of fact.
In sum, whether the cause of the incident was a soft fault or operator error, coverage is excluded under the special property coverage portion of the policy.
c. Hartford Had No Duty to Defend or Indemnify NTS in the Tecstar Action Under the Boiler and Machinery Coverage Portion of the Policy
Because boiler and machinery coverage in NTSs policy is in the nature of a "named peril" or "specific peril" policy, the controlling question on summary judgment as to this type of coverage is whether there is some evidence, creating a triable issue of material fact, that the cause of NTSs loss falls within the scope of the coverage. (See Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1190, 959 P.2d 1213; Garvey v. State Farm Fire & Casualty Co., supra, 48 Cal.3d at p. 406.) Hartford argues no triable issue of fact exists because NTSs loss does not constitute a covered "accident" within the meaning of the policy.
For the first time on appeal, Hartford also cites an exclusion in the boiler and machinery coverage portion of the policy for the "breakdown of any computer or data processing equipment (unless used only to control or operate other equipment covered by this Coverage Form)." Hartford, however, does not explain why this provision would exclude coverage for the alleged loss. It is axiomatic the MicRIstar controller was used to control other equipment. Hartford presented no evidence demonstrating the controller had some other stand-alone function.
Only "accidents," as specifically defined in the boiler and machinery coverage portion of the policy, constitute covered causes of loss. "Accident means a sudden and accidental breakdown of [covered equipment] [P] . . . [P] which manifests itself at the time of its occurrence by physical damage that necessitates repair or replacement of the covered equipment or part thereof." (Italics added.) According to the plain meaning of this language, therefore, not all sudden and accidental breakdowns of covered equipment are within the policy. In addition, the breakdown must produce immediate, visible physical damage requiring replacement or repair of the covered equipment.
If the cause of the incident was operator error, no coverage exists under the boiler and machinery coverage portion of the policy because there was no breakdown of equipment and thus no "accident" as defined by the policy. NTS acknowledges programming or operator error by one of its employees would fall outside the boiler and machinery coverage.
As to a soft fault as the cause of the incident, the policys definition of "accident" is also not satisfied. The parties describe the occurrence of a soft fault as follows: The MicRIstar controller (essentially a computer) contains both a hardware memory chip and software instructions. In the normal course of events, an NTS employee inputs the parameters of temperature to be used in the test; and the controller sends the appropriate signals to the refrigeration and heating elements of the test chamber to raise or lower the temperature. Post-incident investigations in this case indicated the RAM memory card in the controller unit might have contained an "altered bit of information." Such an "altered bit of information," which NTS contends resulted from manufacturing error or defect, not programming error by NTS, could have caused the incident by modifying or disrupting the instructions (the temperature parameters) entered into the unit for the specific test being conducted.
The MicRIstar controller unit is "covered equipment" under the boiler and machinery coverage portion of the policy because it qualifies as a "mechanical or electrical machine or apparatus used for the generation, transmission or utilization of mechanical or electrical power." Moreover, after the incident NTS conducted repairs to its controller system to prevent a future soft fault problem. However, even assuming a soft fault in the controller qualifies as a "sudden and accidental breakdown," the record is simply devoid of evidence that the defect in the RAM memory card manifest itself at the time of its occurrence by physical damage to the MicRIstar controller itself — an essential component of the definition of "accident." As a result, no "accident" occurred to trigger boiler and machinery coverage.
Because our decision that no covered "accident" within the meaning of the policy occurred is based on the fact that the incident did not cause physical damage to the controller, we need not address Hartfords argument that it properly denied coverage based on the policy provision that excludes "the breakdown of any equipment for communication, lighting, advertising, display, testing, experimental research, diagnostic, therapeutic, surgical, dental or pathological purposes" from the definition of "accident."
In sum, whether the cause of the incident was operator error or a soft fault, no covered "accident" occurred within the meaning of the policy and thus Hartford had no duty to defend or indemnify NTS in the Tecstar action under the boiler and machinery coverage portion of the policy.
d. Because Hartford Had No Duty to Defend or Indemnify NTS for the Alleged Loss, Summary Judgment on the Bad Faith Claim Was Proper
Because we hold Hartford did not breach the insurance policy, the bad faith cause of action necessarily fails as well. (Waller , supra, 11 Cal.4th at p. 36 ["Absent the contractual right [to policy benefits], the implied covenant has nothing upon which to act as a supplement, and should not be endowed with an existence independent of its contractual underpinnings [Citation.]"]; Love v. Fire Ins. Exchange (1990) 221 Cal. App. 3d 1136, 1151, 271 Cal. Rptr. 246 ["Where benefits are withheld for proper cause, there is no breach of the implied covenant"]; Brodkin, supra, 217 Cal. App. 3d at p. 218 ["Even if there was evidence the claim was improperly handled, there could be no cause of action for breach of the covenant of good faith . . . since [the insurer] correctly denied the claim"].
Because we hold Hartford did not breach the insurance policy and, therefore, did not act in bad faith, we obviously need not consider NTSs argument that the trial court erred by granting Hartfords motion to strike its claim for punitive damages.
2. The Trial Court Acted Within Its Discretion By Imposing Monetary Sanctions Against NTS And Its Counsel
a. Imposition of Sanctions for Violation of a Court Order Was Proper
After providing parties with notice and an opportunity to be heard, a trial court may on its own motion "impose reasonable money sanctions," in an amount not exceeding $ 1,500, "for any violation of a lawful court order by a person, done without good cause or substantial justification." ( § 177.5.)
The trial court sanctioned NTS and its counsel for violating its order requiring the parties to meet and confer in-person prior to the filing of any discovery motion. Contending the in-person meet and confer requirement is a "local rule" preempted by the California Rules of Court and the discovery statutes, NTS argues the order it violated was not "lawful" within the meaning of section 177.5.
Rule 981.1 of the California Rules of Court provides: "The Judicial Council preempts local court rules relating to pleadings, demurrers, ex parte applications, motions, discovery, provisional remedies, and form and format of papers. No trial court, or any division or branch of a trial court, shall enact or enforce any local rule concerning these fields. All local rules concerning these fields are null and void as of the effective date of this rule unless otherwise permitted or required by statute or Judicial Council rule."
All references to rules are to the California Rules of Court.
A "local rule" is "every rule, regulation, order, policy, form, or standard of general application adopted by a court to govern practice and procedure in that court or by a judge of the court to govern practice or procedure in that judges courtroom." (Rule 981, italics added.) "The phrase general application is not defined by rule 981, but that term does have a well-established legal meaning. For a rule to be of general application it does not have to apply to all the citizens of the state. [Citation.] It should, however, apply to all of the members of a class, kind or order. [Citations.]" (Volkswagen of America, Inc. v. Superior Court (2001) 94 Cal.App.4th 695, 703-704.)
The trial courts order in this case requiring an in-person meet and confer before the filing of any discovery motion was not an order of general application. The court issued its order based on the conduct of these particular parties. No evidence suggests the trial court imposes the same meet-and-confer requirement as a matter of course at the outset of every case. To the contrary, the court imposed this order at a status conference only after the parties brought to the courts attention their on-going discovery disputes, and Hartfords counsel represented he was waiting for NTSs counsel to respond to several meet-and-confer letters. The trial court was attempting to alleviate what it perceived to be a lack of communication between these parties. Moreover, NTSs counsel did not object to the order when the trial court imposed it.
"Courts have inherent power to control litigation before them and can formulate rules of procedure to manage their proceedings." (People v. Smith (2002) 95 Cal.App.4th 283, 301.) This inherent power, however, "may be exercised only if the procedure or practice of the court is not in conflict with a specified statutory procedure." (Motion Picture & Television Fund Hospital v. Superior Court (2001) 88 Cal.App.4th 488, 492.) The order requiring an in-person conference to attempt to resolve discovery disputes in the case is not inconsistent with the Code of Civil Procedure, which imposes a general meet-and-confer requirement before the filing of any discovery motion. ( § 2023, subd. (a)(9); cf. Pacific Trends Lamp & Lighting Products, Inc. v. J. White, Inc. (1998) 65 Cal.App.4th 1131, 1134-1135 [local rule of general application requiring parties to meet and confer, and file a declaration outlining the issues in dispute, prior to the filing of most motions is inconsistent with the statutory scheme pertaining to motions for new trial].) The fact the courts order required the parties in this case to meet in-person, while the Code of Civil Procedure also allows parties to confer by telephone or in writing, does not mean the two are "in conflict." The trial court determined it was not likely the parties would fulfill the codes requirement of a good faith meet and confer absent an in-person meeting. Accordingly, the order is "lawful" within the meaning of section 177.5.
Section 2023, subdivision (a)(9), provides that failing to confer "in person, by telephone, or by letter with an opposing party or attorney" in a good faith attempt to resolve discovery disputes is a "misuse of the discovery process" for which monetary sanctions may be imposed.
NTS also argues the trial courts ruling violates due process requirements because the court imposed sanctions "without any prior notice." The imposition of sanctions is not proper unless the trial court gives the parties notice "before findings are made and at a time preceding the trial judges decision whether, in fact, to impose sanctions. [Citation.]" (Barrientos v. City of Los Angeles (1994) 30 Cal.App.4th 63, 70.) A trial court may, on its own motion, impose sanctions at a hearing so long as all of the relevant facts are before the court, and the court provides the parties an opportunity to explain their conduct. (See Caldwell v. Samuels Jewelers (1990) 222 Cal. App. 3d 970, 976-977, 272 Cal. Rptr. 126 [notice of sanctions on trial courts own motion proper where "each [side] submitted detailed declarations setting forth his or her version of the events leading up to the thwarted deposition and each was given an opportunity to explain why he or she was not responsible for the deposition not having been taken within the time ordered by the court. Though counsel only learned at the hearing that the court was considering sanctions under section 177.5 . . ., the facts justifying the sanctions were the same facts relevant to their discovery act sanction motions"].) The trial court here imposed sanctions on its own motion after reviewing the parties declarations explaining why no in-person meet and confer had occurred and giving each side an opportunity to address the court at oral argument. The requirements of due process were satisfied.
Finally, NTS argues sanctions were not proper under section 177.5 because "there . . . [was] no intentional avoidance of" the trial courts order requiring an in-person meet and confer. The evidence belies this assertion. On two occasions NTSs counsel failed to appear for an in-person meet and confer after the parties had agreed on a date and time for the meeting. Moreover, NTSs counsel did not even call Hartfords lawyer to let her know he did not plan to appear. Nine letters and three telephone calls later — after Hartfords counsel had spent a month trying to schedule a meet and confer meeting — NTSs counsel agreed to meet and confer over the telephone but refused to meet in-person. During the telephonic meet and confer, NTSs counsel agreed NTS would provide supplemental discovery responses within four days. Nine days later, after NTS still had not served supplemental responses, and its counsel had not called or written to say when Hartford could expect the responses, Hartford filed its motions to compel. NTSs counsel obstructed the efforts of Hartfords counsel to ensure the parties complied with the courts order, rendering the imposition of sanctions proper.
Our summary of events does not include all the efforts Hartfords counsel made to resolve the parties discovery disputes.
JOHNSON, J., Concurring and Dissenting.
I agree with the majoritys conclusion Hartford Fire Insurance Company had no duty to defend or to indemnify National Technical Systems, Inc. (NTS) in the Tecstar action under the special property coverage portion of the insurance policy. I also agree with the majoritys affirmance of the trial courts sanctions orders against NTS and its counsel. I respectfully disagree, however, with the majoritys determination Hartford had no duty to defend or to indemnify NTS under the boiler and machinery portion of the policy, as a matter of law. I find triable issues of material fact concerning coverage under this portion of the policy. Accordingly, I would reverse the summary judgment.
Under the boiler and machinery portion of the insurance policy, only an "accident" constitutes a "covered cause of loss." The policy defines "accident," in pertinent part, as "a sudden and accidental breakdown of . . . [covered equipment] . . . which manifests itself at the time of its occurrence by physical damage that necessitates repair or replacement of the covered equipment or part thereof." If the cause of the incident (i.e., "the over-temperature anomaly" in NTSs test chamber) was operator error, I agree with the majoritys conclusion there was no breakdown of equipment, and thus no covered "accident." If the cause of the incident was a soft fault in the MicRIstar controller, however, I disagree with the majoritys determination there was no covered "accident" within the meaning of the policy.
The majority takes the position a soft fault in the MicRIstar controller does not qualify as an "accident" because there is no evidence a soft fault "manifested itself at the time of its occurrence by physical damage to the MicRIstar controller itself . . . ." The majority contends physical damage to the covered equipment is "an essential component of the definition of accident." I disagree with the majoritys interpretation of the definition. Nowhere does the policy state physical damage to the covered equipment is a necessary element of a covered accident. Instead, the policy clearly states any physical damage which necessitates repair or replacement of the covered equipment satisfies this element of the definition of accident.
NTS presented evidence indicating a soft fault in the MicRIstar controller caused physical damage to Tecstars solar panels. As a result of this physical damage, NTS was forced to repair its testing equipment so NTS could effectively operate the equipment in the future, and avoid further damage to its customers property. Thus, it is clear a soft fault qualifies as a covered "accident" under this portion of the policy.
On appeal, Hartford does not defend its denial of coverage under the boiler and machinery portion of the policy by arguing a soft fault does not qualify as an "accident" under the general definition discussed above. Instead, Hartford relies on an exclusion in the policy stating, "the breakdown of any equipment for communication, lighting, advertising, display, testing, experimental research, diagnostic, therapeutic, surgical, dental or pathological purposes" is not a covered accident. Hartford argues there is no coverage under the policy because NTS was using the covered equipment for "testing" purposes.
Hartford does not dispute NTS is in the testing business. In fact, Hartfords appellate brief opens with the following sentence: "As part of its business, National Technical Systems, Inc. (NTS) thermal tests sophisticated technical components." The insurance policy makes reference to several NTS "test labs." It would make no sense for NTS to purchase (or for Hartford to sell) boiler and machinery coverage excluding the very equipment NTS uses in the normal course of its business. Indeed, NTSs primary business is "testing products for military, space and commercial applications." Arguably all of the equipment NTS owns is used for testing purposes, based on the nature of NTSs business.
This exclusion renders coverage under the boiler and machinery portion of the policy illusory. It is as if an insurance company sold an automobile accident policy which contained an exclusion for any injury occurring in an automobile accident. Not surprisingly, the exclusion is buried within a list of 10 other types of equipment, which most likely are not an important part of NTSs business. There is no heading or bold text which would have alerted NTS to the content of this exclusion. An exclusion which is not conspicuous is not enforceable. "To be conspicuous, an exclusion must be positioned in a place and printed in a form which will attract the readers attention." Given the scope of this exclusion, I find it is not conspicuous and, therefore, not enforceable.
If the cause of the incident was a soft fault, I conclude Hartford had a duty to defend and to indemnify NTS under the boiler and machinery portion of the policy. Accordingly, I find triable issues of material fact with respect to NTSs cause of action for breach of the insurance policy. I therefore would reverse the summary judgment.
JOHNSON, J. Notes:
Italics added.
Travelers Insurance Company v. Lesher (1986) 187 Cal. App. 3d 169, 184, 231 Cal. Rptr. 791, disapproved on another ground in Buss v. Superior Court (1997) 16 Cal.4th 35, 50, 939 P.2d 766, footnote 12.
Assuming the cause of loss was a covered accident, Hartford had a duty to defend NTS in the Tecstar action, based on a provision in the boiler and machinery portion of the policy providing: "If a claim or suit is brought against you due to an Accident that caused damage to property of another in your care, custody or control, we will either: [P] (1) Settle the claim or suit; or [P] (2) Defend you against the claim or suit, but keep for ourselves the right to settle it at any point."
Based on my review of the record, I also find triable issues of material fact with respect to NTSs cause of action for breach of the covenant of good faith and fair dealing (i.e., whether Hartfords handling of NTSs claim under the boiler and machinery portion of the policy was reasonable). (Tomaselli v. Transamerica Insurance Company (1994) 25 Cal.App.4th 1269, 1280 [an unreasonable withholding of policy benefits will support a finding of bad faith]; Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 881 [a breach of the duty to defend may "violate the covenant of good faith and fair dealing where it involves unreasonable conduct or an action taken without proper cause"].
b. Imposition of Sanctions for Misuse of the Discovery Process Was Proper
A trial court "may impose a monetary sanction ordering that one engaging in the misuse of the discovery process, or any attorney advising that conduct, or both pay the reasonable expenses, including attorneys fees, incurred by anyone as a result of that conduct." ( § 2023, subd. (b)(1).) Misuses of the discovery process include "making an evasive response to discovery" and "making or opposing, unsuccessfully and without substantial justification, a motion to compel or to limit discovery." ( § 2023, subds. (a)(6) & (8).) The court "shall impose" a monetary sanction under section 2023 "unless it finds that the one subject to the sanction acted with substantial justification or that other circumstances make imposition of the sanction unjust." ( § 2023, subd. (b)(1).)
A trial courts exercise of discretion in discovery matters "is presumed correct, and the complaining party must show how and why the courts action constitutes an abuse of discretion in light of the particular circumstances involved." (Obregon v. Superior Court (1998) 67 Cal.App.4th 424, 432.) An order imposing sanctions will not be reversed unless it is arbitrary, capricious or whimsical. (Vallbona v. Springer (1996) 43 Cal.App.4th 1525, 1545.)
Hartford filed four motions to compel, seeking further responses to special interrogatories, form interrogatories, requests for admissions and requests for production of documents. NTS filed its oppositions to the motions four days late. The trial court determined each of the motions was "well taken" and NTS had "attempted to obstruct discovery." Hartford sought a total of $ 13,217 in sanctions for the four motions, representing the legal fees it had incurred. The trial court awarded Hartford $ 7,558.
The imposition of sanctions against NTS and Maher was appropriate based on the trial courts findings the responses to discovery were inadequate and the oppositions to the motions were without merit. ( § 2023, subds. (a)(6) & (8).) NTS argues the motions were not necessary because it had agreed to provide supplemental responses and had done so by the time of the hearing. But the trial court reviewed the supplemental responses and determined they also were "totally and completely inadequate."
NTSs contention the amount of the sanctions is "patently unreasonable" and "punitive" also lacks merit. The sanctions award represents about 40 hours of attorney time at $ 175 per hour. Given the extensive efforts Hartfords counsel made attempting to meet and confer with NTSs counsel (over a period of two months), and the number of discovery requests addressed in the four motions, the amount of sanctions awarded is reasonable.
DISPOSITION
The judgment is affirmed. The order imposing $ 750 in sanctions for violation of a court order and $ 7,558 in sanctions for misuse of the discovery process against NTS and Maher is affirmed. Hartford is to recover its costs on appeal.
I concur: WOODS, J.