Low, Ball & Lynch’s

WEEKLY LAW RESUME

September 2, 2004 Issue      By: Raymond Coates

Coverage - Property Damage - Duty to Defend

Watts Industries, Inc. v. Zurich American Insurance Company

Court of Appeal, Second District

(August 24, 2026)

A common question in lawsuits against manufacturers of products is whether claims against them for defective products are covered.  This case confronts that common issue.

Watts Industries, Inc. (Watts), and James Jones Company (Jones) manufactured parts used in municipal water systems.  Various municipalities alleged injury to their water systems and lead contamination of water flowing through their systems resulting from substandard parts sold by Watts and Jones.  Watts and Jones had commercial general liability policies issued by Zurich American Insurance Company.  The lawsuit alleged the cost of replacement of the manufactured parts, including the cost of labor, materials and appropriate replacement parts.  Damages were also sought for the diminished service life of the faster-corroding substandard parts, as well as  indemnification for any lawsuits based upon claims made against the municipalities.

The lawsuit was tendered to Zurich, which declined the tender of defense.  It based its denial on the basis that the damages alleged were purely economic and not due to bodily injury or property damage.  Watts and Jones sued Zurich for breach of contract and bad faith denial of insurance benefits.  On Watts' motion for summary adjudication, Zurich was held to have a duty to defend the underlying lawsuits.  Zurich was further ordered to pay past defense costs and interest.  Zurich appealed.

The Court of Appeal affirmed.  The Court stated that in requesting costs for replacement of Jones' parts and for water quality monitoring, the municipalities were seeking court-ordered monetary payments due to alleged harm caused by Watts and Jones.  The Court held these claims constituted "damages" under California law.  The requested damages were at least partly remedial and mitigative and not entirely prophylactic.  The Court further held that any alleged "damage" to water constituted property damage for coverage purposes.  The allegations were that the water was damaged and would require costly action to address the harm.  The Court found the allegation of lead contamination of water sufficient to raise the possibility of coverage and to require a duty to defend.

As to the claim of Zurich that no other property other than the parts manufactured by the insured was damaged, the Court relied on prior case law to hold that where products or work contains hazardous materials that have been incorporated into other products or structures, physical harm and injury occurs at the moment of incorporation.  Here, the allegations of the complaint alleged physical injury to tangible property by alleging that the Jones parts were hazardous products incorporated into the water system.  Thus, the possibility of covered property damage to the municipal water system was alleged.

The Court agreed that claims for damage to the Jones parts themselves were removed from coverage.  However, the Court stated that physical injury to the water systems from the incorporation of the Jones part was not excluded.  Further, the allegation of the claim for costs for lead monitoring and abatement was not excluded.

Because Zurich had not negated the possibility of coverage for the claims made, the Court affirmed the trial court ruling holding that there was a duty to defend.

COMMENT

There is a debate among the courts as to whether the incorporation of a defective product into another product constitutes "property damage."  This opinion states there is coverage when the product incorporated contains hazardous materials.

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