Filed 8/30/13 Liberty Mutual Fire In. Co. v. Central Garden and Pet Co. CA1/3
                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.


              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                       FIRST APPELLATE DISTRICT

                                                DIVISION THREE


LIBERTY MUTUAL FIRE INSURANCE
COMPANY,
         Plaintiff and Respondent,                                   A131482

v.                                                                   (City & County of San Francisco
CENTRAL GARDEN AND PET                                               Super. Ct. No. CGC-09-493845)
COMPANY et al.,
         Defendants and Appellants.


         This appeal involves an insurance coverage dispute arising out of an insured‟s sale
of an inventory of pet birds allegedly exposed to an infectious disease. The trial court
granted summary judgment for the insurer after concluding it had no duty to defend its
insured in a lawsuit filed by the company that purchased the bird inventory. Because the
“your product” exclusion in the insurance policy precludes coverage for “property
damage” to the bird inventory, we shall affirm the judgment.
                              FACTUAL AND PROCEDURAL BACKGROUND
         The action below is a declaratory relief lawsuit filed by plaintiff and respondent
Liberty Mutual Fire Insurance Company (Liberty Mutual) against plaintiffs and
appellants Central Garden and Pet Company, Kaytee Products, Inc., and Pets
International, Ltd. (collectively Central Garden). Liberty Mutual sought a declaration
that it was not obligated to defend or indemnify its insured, Central Garden, in connection
with claims made against the insured in a federal court action filed in Texas (Perfect



                                                             1
Birds, LLC v. Kaytee Products, Inc. et al. (Feb. 11, 2007, W08CA042) [nonpub. order])
(the Perfect Birds lawsuit).
                                 The Perfect Birds lawsuit
       Before December 2007, a subsidiary of Central Garden operated a live pet bird
sales business through its “Preferred Birds” division. The primary customer of the
Preferred Birds division was PetSmart, a national chain of pet stores. The Preferred Birds
division supplied birds to approximately 789 PetSmart stores nationwide.
       Rainbow Exotics, Inc. (Rainbow Exotics) was the main competitor of Preferred
Birds. In late November 2007, Jack Graham, the owner of Rainbow Exotics, agreed to
purchase the business assets of Preferred Birds through a newly formed company, Perfect
Birds, LLC (Perfect Birds). The assets consisted primarily of an inventory of live pet
birds intended for resale to pet stores such as PetSmart. Following the asset sale, tests of
birds at PetSmart stores supplied by Perfect Birds showed some positive tests for
exposure to psittacosis, an infectious bird disease. PetSmart announced it was
quarantining all birds in its stores and would suspend purchases of birds from Perfect
Birds. PetSmart allegedly refused to buy any birds from Perfect Birds until June 2008,
and stopped buying one type of bird—cockatiels—altogether. Further, the state of
Florida announced it was placing a quarantine on a facility in Florida that Perfect Birds
had purchased from Central Garden. The state‟s quarantine remained in place for one
month.
       On February 11, 2008, Perfect Birds filed suit against Central Garden in federal
district court in Texas. The original complaint in the Perfect Birds lawsuit contained
causes of action for breach of contract, breach of implied warranty, and fraudulent
misrepresentation. Perfect Birds alleged that Central Garden was placed on notice as of
November 12, 2007—before the asset sale to Perfect Birds was finalized—that birds
delivered by Central Garden to multiple pet stores throughout the country had tested
positive for exposure to psittacosis. In the breach of contract cause of action, Perfect
Birds alleged that, “[a]s a direct result of [Central Garden‟s] failing to take steps which
were reasonable and customary in the industry to prevent the exposure of the [birds] . . .


                                              2
from being exposed or potentially exposed to a disease, [Perfect Birds] has been
prevented from selling any pet birds to its major purchaser(s) since December 13, 2007.”
As support for the breach of implied warranty cause of action, Perfect Birds alleged that
the pet birds sold by Central Garden were not “fit for the ordinary purposes for which
goods of that description are used” in light of the positive tests indicating exposure to
disease in November 2007. The fraud cause of action was supported by an allegation that
Central Garden had failed to disclose that birds it supplied to pet stores had tested
positive for exposure to psittacosis before the asset sale to Perfect Birds was finalized.
       Perfect Birds alleged it suffered damages because it was prevented from selling
pet birds to its primary customer during the period of the quarantine. In addition, Perfect
Birds allegedly incurred “substantial additional damages” in the form of “loss of
marketable inventory due to the age and lifespan of the pet birds, which [Perfect Birds]
has been prevented from selling in the regular course of its business; costs incurred as a
result of governmentally required health measures; the purchase of additional personal
protective equipment to be utilized by [Perfect Birds‟] employees; veterinary expenses;
the acquisition of additional facilities and equipment to accommodate a reproducing, live
inventory which is not being sold; legal fees; and interest on debt incurred to continue
[Perfect Birds‟] existence.”
       Central Garden settled the Perfect Birds lawsuit in September 2009. Under the
terms of the settlement, Central Garden agreed to pay Perfect Birds $946,308.92. At the
time of the settlement, the only remaining cause of action in the Perfect Birds lawsuit was
a fraudulent inducement cause of action after the federal district court dismissed the other
causes of action in a ruling on a summary judgment motion.
                                The Liberty Mutual policy
       Liberty Mutual issued a commercial general liability insurance policy to Central
Garden with a policy period of June 28, 2007, to June 28, 2008. The policy has a per
occurrence limit of $1 million, subject to a $250,000 deductible. In the policy‟s insuring
agreement, Liberty Mutual agreed to “[p]ay those sums that the insured becomes legally
obligated to pay as damages because of . . . „property damage‟ to which this insurance


                                              3
applies.” “Property damage” is defined in the policy as either “[p]hysical injury to
tangible property, including all resulting loss of use of that property” or “[l]oss of use of
tangible property that is not physically injured.” In order to be covered under the policy,
“property damage” must be caused by an “occurrence,” which is defined as “an accident,
including continuous or repeated exposure to substantially the same general harmful
conditions.”
         The Liberty Mutual policy contains an exclusion from coverage for “ „property
damage‟ to „your product‟ arising out of it or any part of it.” For purposes of the
exclusion, “your product” is defined in relevant part to include “[a]ny goods or products,
other than real property, manufactured, sold, handled, distributed or disposed of by” the
insured. The policy also contains an exclusion from coverage for property owned by the
insured.
                     Tender of Perfect Birds lawsuit to Liberty Mutual
         In January 2008, Central Garden made an insurance claim to Liberty Mutual
concerning potential liability arising from the asset sale to Perfect Birds. In the claim
form submitted to Liberty Mutual, the covered “occurrence” was described as: “product
liability—birds may have infected other birds.” By letter dated February 7, 2008, Liberty
Mutual denied coverage and called Central Garden‟s attention to exclusions in the policy
for property damage to “property you own” and “your product.” Liberty Mutual stated:
“ „Property damage‟ to the birds in question is excluded. Since the only physical injury
alleged is to your tangible property (the birds), the claim is excluded. Our coverage
would apply only to „property damage‟ to other tangible property.” Liberty Mutual also
stated that any “loss of business or loss of revenue” would be an uncovered “economic
loss.”
         By letter dated March 11, 2008, an attorney for Central Garden responded to
Liberty Mutual‟s denial of coverage and provided Liberty Mutual with a copy of the
original complaint in the Perfect Birds lawsuit. In its letter, Central Garden‟s counsel
stated that, before December 2007, PetSmart had purchased birds from two suppliers—
Central Garden (through the Preferred Birds division of one of its subsidiaries) and


                                              4
Rainbow Exotics. Central Garden supplied birds to approximately 789 PetSmart stores
while Rainbow Exotics supplied birds to approximately 220 PetSmart stores. According
to the letter, Central Garden sold all of the assets of its bird distribution business to
Perfect Birds, which was described by counsel as a “subsidiary” of Rainbow Exotics.
Central Garden‟s attorney further stated that “[t]he claim had its genesis on November 9,
2007, when 6 cockatiels in one PetSmart store tested positive for psittacosis.” The birds
in that store had been supplied by Central Garden. Nothing further was heard about the
matter until late December 2007, when PetSmart announced it would quarantine all stores
that had originally been supplied by “Rainbow Exotics/Perfect Birds.” By that time,
Central Garden had sold its bird inventory to Perfect Birds.
       Central Garden‟s attorney took the position that the Perfect Birds lawsuit alleged
property damage under the policy because of the physical injury to birds that tested
positive for psittacosis as well as the loss of use of those birds that could not be sold
during the quarantine. Counsel also argued that the “your product” exclusion was
inapplicable because all of the birds in Perfect Birds‟ inventory as of the time PetSmart
instituted the quarantine belonged to Perfect Birds and not Central Garden.
       In further correspondence, the attorneys for Central Garden and Liberty Mutual
continued to dispute the applicability of the “your product” exclusion. Liberty Mutual‟s
counsel pointed out that the language of the exclusion contemplates a sale of the
insured‟s products to a third party. Liberty Mutual also sought clarification as to which
birds PetSmart was refusing to buy and which birds were subject to a quarantine by the
state of Florida. The focus of these inquiries was on whether any of the damages
allegedly incurred by Perfect Birds related to birds other than the bird inventory sold to
Perfect Birds by Central Garden. In a letter dated June 13, 2008, counsel for Central
Garden responded that PetSmart suspended sales in all of its stores, including those
supplied by Rainbow Exotics. Counsel further clarified that the birds involved in the
quarantine by the state of Florida were part of the asset sale from Central Garden to
Perfect Birds.



                                               5
       By letter dated September 8, 2008, counsel for Liberty Mutual stated that,
“[a]lthough it appears that the claims Perfect Birds has asserted against [Central Garden]
are not covered under the terms of the Liberty Mutual policy, Liberty Mutual has elected
to participate in the defense, subject to a full and complete reservation of rights.”1 In the
letter, counsel referred to the representation by Central Garden that Perfect Birds is a
subsidiary of Rainbow Exotics, which purportedly also suffered damages as a result of
the PetSmart quarantine. Counsel stated that Liberty Mutual‟s preliminary investigation
indicated that the representation about the relationship between the two business entities
was inaccurate, citing to discovery responses in the Perfect Birds lawsuit establishing that
Rainbow Exotics and Perfect Birds are wholly separate companies. Counsel asked for
clarification as to whether any losses purportedly suffered by Rainbow Exotics were
encompassed within the Perfect Birds lawsuit.
       Central Garden‟s attorney responded by letter dated December 4, 2008. Counsel
clarified that “Liberty Mutual appears to be correct that Perfect Birds is not authorized to
assert a claim on behalf of Rainbow Exotics with respect to” the birds Rainbow Exotics
was unable to sell. Thus, Central Garden was “not contending at this time that Rainbow
Exotics‟ potential claim with respect to the birds that Rainbow Exotics supplied to
approximately 220 PetSmart stores are part of the damages claimed by Perfect Birds in its
lawsuit.” Nevertheless, counsel still asserted that the “your product” exclusion does not
apply, reasoning that live animals are not products for purposes of the exclusion. In a
March 2009 response, counsel for Liberty Mutual wrote: “Given the recent confirmation
that there were no claims based on the 220 stores Rainbow Exotics supplied, it appears
that the exclusion for property damage to your product applies to preclude coverage . . . .”




1
  Counsel for Liberty Mutual clarified that the terms of the policy did not impose an
immediate obligation to fund the defense but instead required Central Garden to “front
defense fees and expenses” subject to reimbursement by Liberty Mutual in proportion to
the amount of any covered damages.


                                              6
                         Liberty Mutual’s declaratory relief lawsuit
       Liberty Mutual filed the declaratory relief action giving rise to this appeal in
October 2009. Liberty Mutual sought a declaration that it was not obligated to defend or
indemnify Central Garden in connection with the Perfect Birds lawsuit. Central Garden
answered the complaint and filed a cross-complaint in which it asserted causes of action
for declaratory relief, breach of contract, and breach of the implied covenant of good faith
and fair dealing. Among other things, Central Garden alleged Liberty Mutual had not
paid (1) any portion of Central Garden‟s fees and costs incurred in defending the Perfect
Birds lawsuit, or (2) any portion of the settlement with Perfect Birds. According to
Central Garden, it incurred $402,853.04 in defense costs after tendering its defense of the
Perfect Birds lawsuit to Liberty Mutual.
       Liberty Mutual filed a motion for summary judgment on the ground it did not owe
Central Garden a defense or indemnification with respect to the Perfect Birds lawsuit.
Liberty Mutual argued it was entitled to judgment as a matter of law because (1) the
policy‟s “occurrence” requirement was not satisfied, (2) the Perfect Birds lawsuit did not
allege “property damage” but instead involved “economic losses flowing from a business
transaction,” and (3) “property damage” to “your product” was excluded from coverage.
Central Garden filed a cross-motion for summary adjudication on the ground Liberty
Mutual had a duty to defend it against the Perfect Birds lawsuit. Central Garden sought
recovery of its defense costs and also sought an adjudication that, as a consequence of the
breach of the duty to defend, Liberty Mutual was required to reimburse it for the amount
paid to settle the Perfect Birds lawsuit, less the $250,000 deductible. Liberty Mutual and
Central Garden agreed to a set of stipulated facts as support for the cross-motions.
       The trial court granted Liberty‟s Mutual‟s summary judgment motion and denied
Central Garden‟s cross-motion for summary adjudication. In the order granting summary
judgment, the court concluded that “Perfect Birds‟ lawsuit was based on purposeful
business conduct that did not satisfy the policy‟s „occurrence‟ (i.e., „accident‟)
requirement.” Following entry of judgment in favor of Liberty Mutual, Central Garden
filed a timely appeal.


                                              7
                                         DISCUSSION
1.       Standard of review
         A court properly grants summary judgment if the record establishes no triable
issue as to any material fact and the moving party is entitled to judgment as a matter of
law. (Code Civ. Proc., § 437c, subd. (c).) We review an order granting a summary
judgment motion de novo. (Yanowitz v. L’Oreal USA, Inc. (2005) 36 Cal.4th 1028,
1037.) The interpretation and application of an insurance policy to undisputed facts
presents a question of law subject to this court‟s independent review. (See Waller v.
Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18 (Waller) [whether policy gives rise to
duty to defend is question of law].)
         We review the trial court‟s rulings and not its reasoning. (Coral Construction, Inc.
v. City and County of San Francisco (2010) 50 Cal.4th 315, 336.) “Thus, a reviewing
court may affirm a trial court‟s decision granting summary judgment for an erroneous
reason.” (Ibid.; accord, Salazar v. Southern Cal. Gas Co. (1997) 54 Cal.App.4th 1370,
1376.)
2.       Legal principles governing the duty to defend
         “ „[A] liability insurer owes a broad duty to defend its insured against claims that
create a potential for indemnity. [Citation.] . . . “[T]he carrier must defend a suit which
potentially seeks damages within the coverage of the policy.” [Citation.] 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.‟ ” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295
(Montrose).)
         “[T]he determination whether the insurer owes a duty to defend usually is made in
the first instance by comparing the allegations of the complaint with the terms of the
policy. Facts extrinsic to the complaint give rise to a duty to defend when they reveal a
possibility that the claim may be covered by the policy.” (Waller, supra, 11 Cal.4th at p.
19; see also Montrose, supra, 6 Cal.4th at p. 295.) “Conversely, where the extrinsic facts
eliminate the potential for coverage, the insurer may decline to defend even when the


                                               8
bare allegations in the complaint suggest potential liability. [Citations.] This is because
the duty to defend, although broad, is not unlimited; it is measured by the nature and
kinds of risks covered by the policy.” (Waller, supra, at p. 19.) “The defense duty is a
continuing one, arising on tender of defense and lasting until the underlying lawsuit is
concluded [citation], or until it has been shown that there is no potential for
coverage . . . .” (Montrose, supra, 6 Cal.4th at p. 295.) The absence of a duty to defend
is established when the insurer demonstrates that “the underlying claim cannot come
within the policy coverage by virtue of the scope of the insuring clause or the breadth of
an exclusion.” (Id. at p. 301.)
       Insurance policies are generally interpreted in the same manner as any other
contract. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.) “The
fundamental goal of contractual interpretation is to give effect to the mutual intention of
the parties.” (Ibid.) “The rules governing policy interpretation require us to look first to
the language of the contract in order to ascertain its plain meaning or the meaning a
layperson would ordinarily attach to it.” (Waller, supra, 11 Cal.4th at p. 18.) The mutual
“intent of the parties is to be inferred, if possible, solely from the written provisions of the
contract.” (Ibid.) “A policy provision will be considered ambiguous when it is capable
of two or more constructions, both of which are reasonable. [Citation.] But language in
a contract must be interpreted as whole, and in the circumstances of the case, and cannot
be found to be ambiguous in the abstract.” (Ibid.)
3.     “Accident”
       The Liberty Mutual policy provides liability coverage for property damage caused
by an “occurrence,” which the policy defines as “an accident, including continuous or
repeated exposure to substantially the same general harmful conditions.” The trial court
concluded the accident requirement was not satisfied here because the Perfect Birds
lawsuit “was based on purposeful conduct.” For the reasons that follow, we disagree
with the trial court and conclude the Perfect Birds lawsuit potentially sought damages
caused by an accident.



                                               9
       Our Supreme Court has defined the term “accident” in the context of liability
insurance as “ „ “an unexpected, unforeseen, or undesigned happening or consequence
from either a known or an unknown cause.” ‟ ” (Delgado v. Interinsurance Exchange of
Automobile Club of Southern California (2009) 47 Cal.4th 302, 308 (Delgado); accord,
Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 563-564
(Geddes); Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 559 (Hogan).) An
accident does not result from a deliberate act of the insured “ „unless some additional,
unexpected, independent, and unforeseen happening occurs that produces the damage.‟ ”
(Delgado, supra, 47 Cal.4th at p. 315.)
       In this case, Perfect Birds alleged that it suffered damage as a direct result of
Central Garden‟s failure to take reasonable and customary precautions to prevent the bird
inventory from being exposed to disease. In essence, Perfect Birds alleged the birds were
unintentionally exposed to psittacosis as a result of Central Garden‟s negligence. This
allegation satisfies the requirement of an “accident.”
       Liberty Mutual contends the Perfect Birds lawsuit alleged “purposeful acts and
decisions that were part of a business transaction.” It argues that the focus should be on
the insured‟s deliberate conduct and not the “unanticipated consequences of purposeful
conduct.”
       The sale of Central Garden‟s business assets was unquestionably a deliberate and
intentional act. However, the mere fact Central Garden intended to sell its business assets
to Perfect Birds does not rule out the possibility that the harm suffered by Perfect Birds
resulted from an unintended consequence in the causal chain of events. (See Gray v.
Zurich Ins. Co. (1966) 65 Cal.2d 263, 273 [insured may carry out his intention and still
cause unintended harm]; Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41,
50 [coverage not precluded simply because insured acted intentionally and victim was
injured].) In Delgado, the Supreme Court cited the following example to explain that
there may be an “accident” within the meaning of a liability insurance policy even though
the causal chain of events included an intentional act of the insured: “ „When a driver
intentionally speeds and, as a result, negligently hits another car, the speeding would be


                                             10
an intentional act. However, the act directly responsible for the injury—hitting the other
car—was not intended by the driver and was fortuitous. Accordingly, the occurrence
resulting in injury would be deemed an accident.‟ ” (Delgado, supra, 47 Cal.4th at p.
316.) In this case, although Central Garden intended to sell its business assets, there is no
suggestion it intended to expose the birds to disease. It was the negligent exposure of the
birds to disease that allegedly caused Perfect Birds to suffer damages.
       Insofar as Liberty Mutual contends that coverage is precluded because any
damages result from a contractual relationship, the Supreme Court has rejected the notion
that losses pleaded as contractual damages are necessarily precluded from coverage under
a commercial general liability policy. (Vandenberg v. Superior Court (1999) 21 Cal.4th
815, 838.) The focus is not on the “fortuity of the form of action chosen by the injured
party” but instead on the nature of the injury and the risk that caused the injury. (Ibid.)
       The Supreme Court‟s decisions in Geddes, supra, 51 Cal.2d 558, and Hogan,
supra, 3 Cal.3d 553, are instructive. In Geddes, the insured intentionally constructed and
sold doors to a purchaser under a contract. (Geddes, supra, 51 Cal.2d at p. 561.) The
purchaser sued the insured, alleging the doors were discovered to be defective after
installation. (Ibid.) The court concluded the “door failures were unexpected, undesigned,
and unforeseen,” and were therefore an accident, even though the doors were
intentionally constructed and deliberately sold pursuant to a contract. (Id. at p. 564.) In
Hogan, a saw manufacturer sold a saw to a lumber company. (Hogan, supra, 3 Cal.3d at
p. 557.) The lumber company sued the manufacturer after it discovered the saw cut the
lumber too narrowly and its customers began rejecting the improperly cut lumber. (Id. at
p. 558-559.) Even though the lumber company deliberately sold the saw to its customer,
the court held the damages resulting from the undercutting resulted from a defect in the
saw—an unforeseen and unexpected event. (Id. at p. 560.) This case is indistinguishable
from Geddes and Hogan. Although Central Garden intended to sell its bird inventory to
Perfect Birds, it did not intend to expose the birds to psittacosis.
       One of Liberty Mutual‟s primary arguments rests on its characterization of the
Perfect Birds lawsuit as a fraud action. Liberty Mutual correctly contends there is no


                                              11
“accident” under a commercial general liability policy when an injured party‟s damages
result from an insured‟s misrepresentations about the condition of property sold to the
injured party. (See Miller v. Western General Agency, Inc. (1996) 41 Cal.App.4th 1144,
1150 [misrepresentations do not constitute accident regardless of whether they are
intentional or negligent].) If the sole basis for the Perfect Birds lawsuit were that Central
Garden misrepresented the condition of the birds its sold to Perfect Birds, we would be
inclined to agree with Liberty Mutual that there is no potential for coverage. However,
the Perfect Birds lawsuit also included an allegation indicating that Central Garden was
negligent in allowing the birds to become exposed to psittacosis. This allegation supports
a potential for recovery independent of the fraud and misrepresentation claims, because
any damages resulting from the alleged negligence of Central Garden do not turn on
whether it misrepresented the condition of the birds. Accordingly, the mere fact the
Perfect Birds lawsuit included fraud allegations does not rule out the potential for
coverage under the policy.
4.     “Property damage”
       The Liberty Mutual policy defines “property damage” as either “[p]hysical injury
to property, including all resulting loss of use of that property” or “[l]oss of use of
tangible property that is not physically injured.” Liberty Mutual contends the Perfect
Birds lawsuit involved economic losses and not “property damage” as that term is
defined in the policy. We disagree.
       Central Garden contends that Perfect Birds made two distinct types of damage
claims against it: “(1) damage to birds caused by physical injury (those birds testing
positive for exposure to psittacosis) and the loss of the use of those birds (PetSmart‟s
decision to stop selling them and the State of Florida‟s quarantine), and (2) loss of use of
birds that were not physically injured (i.e., birds that did not test positive for exposure to
psittacosis), but which PetSmart would not purchase and remained quarantined, and loss
of use of facilities and equipment to accommodate the birds that could not be resold.”
       It is undisputed that the inventory of birds constitutes property. Liberty Mutual
also does not seriously dispute that the exposure to psittacosis amounted to “physical


                                              12
injury” to that property. Indeed, Liberty Mutual effectively conceded the point in its
communications with Central Garden when it took the position that “the only physical
injury is to your tangible property (the birds).” Consequently, the Perfect Birds lawsuit
alleged “property damage” within the meaning of the Liberty Mutual policy. It is
unnecessary for us to consider whether Central Garden suffered property damage as a
result of a “loss of use” of either the birds or the facilities used to house them in order to
reach this conclusion.
       Liberty Mutual contends the damages in the Perfect Birds lawsuit resulted from
the inability to sell an inventory of birds and not from property damage. According to
Liberty Mutual, economic losses resulting from the inability to sell birds are not covered
under a commercial general liability policy. While we agree that purely economic losses
do not constitute damage or injury to tangible property (see Giddings v. Industrial
Indemnity Co. (1980) 112 Cal.App.3d 213, 219), coverage is not precluded simply
because the extent of the property damage can be expressed as an economic loss. (See
Anthem Electronics, Inc. v. Pacific Employers Insurance Co. (9th Cir. 2002) 302 F.3d
1049, 1057.) In any event, Perfect Birds alleged physical injury to the birds themselves
and not just damage resulting from the inability to sell the birds.
       Liberty Mutual also relies on cases establishing that lawsuits involving alleged
concealment or misrepresentation in connection with a sales transaction give rise to
economic losses that do not qualify as “property damage,” even if damaged property is
involved in the transaction. (See, e.g., Miller v. Western General Agency, Inc., supra, 41
Cal.App.4th at p. 1151 [no duty to defend where insured was sued for failing to disclose
defective plumbing]; Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149,
1158-1159 [misrepresentation concerning condition of property causes pecuniary loss
and not injury to tangible property].) These cases are inapposite. The rationale
underlying these cases is that “damages for fraud are ordinarily limited to recovery of
economic injuries [citation], which courts have repeatedly held are not injuries to
tangible property within the scope of coverage of a liability policy.” (Devin, supra, 6
Cal.App.4th at pp. 1158-1159.) As discussed above, the Perfect Birds lawsuit included


                                              13
more than just a fraud claim. Perfect Birds did not just allege that Central Garden
misrepresented the condition of the birds, but it also alleged that Central Garden
negligently caused the birds to be exposed to psittacosis. Thus, there was at least a
potential that damages would not be limited to economic losses resulting from fraud but
could also include damages for physical injury to the birds themselves.
5.     “Your product” exclusion
       If the “claim does fall within the insuring clause, the next question is whether any
exclusion applies. A conspicuous, unambiguous applicable exclusion will override the
insuring clause and eliminate coverage the policy might otherwise afford. [Citation.] [¶]
Insuring clauses and exclusions fulfill different functions [citation] and entail different
burdens of proof. The party claiming coverage has the burden to show a claim falls
within the scope of basic coverage; the insurer has the burden of showing a claim falls
within an exclusion.” (American Star Ins. Co. v. Insurance Co. of the West (1991) 232
Cal.App.3d 1320, 1325.)
       The Liberty Mutual insurance policy excludes coverage for “ „property damage‟ to
„your product‟ arising out of it or any part of it.” “Your product” is defined in relevant
part to include “[a]ny goods or products, other than real property, manufactured, sold,
handled, distributed or disposed of by” the insured. Liberty Mutual has consistently
taken the position that the “your product” exclusion precludes any potential for coverage
in the Perfect Birds lawsuit. We agree with Liberty Mutual.
       A leading insurance law treatise describes the standard “your product” exclusion
as barring “coverage for physical injury to or loss of use of whatever goods or products
the insured manufactures or sells. It is a business risk exclusion predicated on the notion
that insurers are not warrantors of their insured‟s products.” (2 Croskey et al., Cal.
Practice Guide: Insurance Litigation (The Rutter Group 2012) ¶ 7.2367, p. 7J-26 (rev. #1
2012).) In general, the exclusion precludes coverage for property damage to the
insured‟s own goods or products but does not apply when the insured‟s goods or products
cause damage to other property. (See Armstrong World Industries, Inc. v. Aetna
Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 111-112.)


                                              14
       Here, the claimed property damage to the bird inventory falls within the scope of
the “your product” exclusion. The birds were “goods or products” that were “sold” or
“disposed of” by Central Garden. The property damage alleged in the Perfect Birds
lawsuit was limited to the inventory of birds sold by Central Garden to Perfect Birds.
Indeed, during the course of the parties‟ communications following Central Garden‟s
tender of defense, Liberty Mutual confirmed that no birds other than those in the bird
inventory purchased from Central Garden were the subject of property damage allegedly
incurred by Perfect Birds. Further, the physical injury to, or loss of use of, the birds arose
out of the birds themselves in that they were allegedly exposed to psittacosis before the
asset sale was finalized. Under these conditions, extending coverage for property damage
to the bird inventory would effectively make Liberty Mutual the warrantor of the birds
Central Garden sold to Perfect Birds.
       Central Garden disputes the applicability of the “your product” exclusion, arguing
first that the property damage to the birds did not “arise out of the” birds but was
allegedly caused by something external to them—i.e., exposure to psittacosis. As an
initial matter, we disagree with Central Garden‟s characterization of psittacosis as
something that did not arise out of the birds purchased from Central Garden. The
gravamen of the Perfect Birds lawsuit was that Central Garden sold birds that had been
exposed to psittacosis. The bacterium that causes psittacosis was part and parcel of the
“product” that Perfect Birds purchased. It was not something “external” to the birds.
       Further, the phrase “arising out of” has been interpreted to have “ „much broader
significance than “caused by”. [The words] are ordinarily understood to
mean “ „ “originating from” “having its origin in,” “growing out of” or “flowing from”
‟ ” or in short, “incident to, or having connection with” . . . .‟ ” (Continental Cas. Co. v.
City of Richmond (9th Cir. 1985) 763 F.2d 1076, 1080; accord, Davis v. Farmers Ins.
Group (2005) 134 Cal.App.4th 100, 107.) Although we strictly construe policy
exclusions against the insurer, we interpret the exclusions according to their plain
meaning and will not engage in a “ „strained construction.‟ ” (Davis v. Farmers Ins.
Group, supra, at p. 107.) Nor will we “strain to create an ambiguity where none exists.”


                                              15
(Waller, supra, 11 Cal.4th at pp. 18-19.) Applying the phrase “arising out of” as it has
been interpreted by California courts, it is clear that the physical injury to the birds and
the loss of use of the birds grew out of or flowed from the birds themselves, which were
alleged to have been exposed to psittacosis before the asset sale.
        Central Garden argues that the “your product” exclusion does not apply to the
“loss of use” of birds that did not test positive for psittacosis, because any inability to sell
those birds did not arise out of the birds themselves. We disagree. As an initial matter,
the inability to sell an inventory of personal property for some period of time gives rise to
economic damages and not “loss of use” of that property. (See Cunningham v. Universal
Underwriters (2002) 98 Cal.App.4th 1141, 1156 [failure to provide car dealer with lot to
sell vehicles caused economic damages, not “loss of use” of vehicle inventory that could
not be sold].) At oral argument in this appeal, counsel for Central Garden argued that the
“your product” exclusion refers to the term “product” in the singular. According to
counsel, the product in this case is a bird, not an inventory of birds. Thus, counsel argued
the inability to sell a particular bird that was not exposed to psittacosis—i.e., the
purported loss of use of that bird—did not arise out of the healthy bird itself. There are a
number of problems with Central Garden‟s argument. First, “your product” is defined in
the policy as the plural “goods or products,” not as a good or a product. The “product”
Perfect Birds purchased from Central Garden was an inventory of birds, not just a single
bird. Second, the inability to sell a particular bird resulted from the concern that the
entire bird inventory had been exposed to disease. The “loss of use” as to any particular
bird arose from the potential exposure of that bird to disease, whether or not it actually
had been exposed to psittacosis. Thus, the inability to sell a particular bird arose from the
bird itself.
        As further support for its position, Central Garden contends the exclusion does not
apply to “property damage” to the facilities in which the birds were housed. The
“property damage” claimed by Central Garden is the purported “loss of use” of such
facilities during the period of the quarantine. We disagree with the proposition there was
any covered “loss of use” of the facilities within the meaning of the Liberty Mutual


                                               16
policy. A “loss of use” implies that the property cannot be used for its intended purpose.
(See Hendrickson v. Zurich American Ins. Co. of Illinois (1999) 72 Cal.App.4th 1084,
1091-1091 [strawberry growers lost use of land planted with defective plants because
they suffered loss of strawberry production]; Collin v. American Empire Ins. Co. (1994)
21 Cal.App.4th 787, 818 [loss of use damages exist when plaintiff is deprived of the use
of the property].) The facilities were, in fact, used for the purpose for which they were
designed during the period of the quarantine—to house birds. Any damage suffered by
Perfect Birds resulted from its inability to sell birds, not from an inability to use the
facilities to house birds.2
       Central Garden also disputes whether animals are “products” within the meaning
of the “your product” exclusion, citing out-of-state cases holding that live animals are not
“products” for purposes of strict products liability in tort. (See Malicki v. Koci (1997)
121 Ohio App.3d 723, 726-727 [700 N.E.2d 913]; Latham v. Wal-Mart Stores, Inc.
(Mo.App. E.D. 1991) 818 S.W.2d 673, 676 (Latham).) These cases have no bearing on
the contractual interpretation of the “your product” exclusion. As the Latham court
observed, there is a split of authority in the out-of-state cases on whether live animals are
products. (Latham, supra, 818 S.W.2d at pp. 675-676.) More importantly, the
contractual language of the exclusion is not limited to “products” as that term might be
applied in the strict liability context, but instead refers broadly to all “goods or products”
other than real property. Above all, California courts do not interpret or effectively
rewrite insurance policies to satisfy public policy concerns. (See Rosen v. State Farm
General Ins. Co. (2003) 30 Cal.4th 1070, 1077-1078.) As our Supreme Court has
succinctly explained, the determination of whether an insurance contract affords coverage
“is to be found solely in the language of the [policy], not in public policy considerations.”
(AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 818.) There is no reason here to
2
  The cost of storing defective products is more appropriately characterized as an
economic loss rather than a “loss of use” of the storage space. (See Sokol and Co. v.
Atlantic Mut. Ins. Co. (7th Cir. 2005) 430 F.3d 417, 422 [no “loss of use” caused by
defective peanut butter packets even though purchaser incurred costs to store defective
product].)


                                              17
look outside the policy (or to impose public policy considerations from other states‟ tort
laws) in order to interpret the “your product” exclusion.
       Finally, Central Garden contends the claimed property damage in the Perfect Birds
lawsuit includes birds supplied to Perfect Birds by parties other than Central Garden.
Thus, according to Central Garden, the “your product” exclusion is inapplicable because
the Perfect Birds lawsuit involved property damage to property other than birds sold by
Central Garden. In support of its contention, Central Garden submitted to the trial court a
five-page excerpt from a transcript of a deposition of Jack Graham, the owner of Perfect
Birds and its sister company, Rainbow Exotics. The import of the excerpt, as best we can
tell, is that Jack Graham took in or purchased additional birds between the time of the
asset purchase from Central Garden and the quarantine imposed by PetSmart. Based
upon the limited portion of the deposition transcript provided to the court, it is unclear
whether any additional birds belonged to Perfect Birds or Rainbow Exotics.
       Regardless of what the Jack Graham deposition excerpt may reveal or suggest,
Central Garden‟s reliance on the deposition excerpt is untimely. According to Liberty
Mutual, the transcript was not made available to Liberty Mutual until September 2, 2010,
two years after the Perfect Birds lawsuit was first tendered to Liberty Mutual and 12
months after the case was settled. Central Garden does not dispute that Liberty Mutual
was unaware of the transcript until September 2010 but claims the fault for the
nondisclosure lies with Liberty Mutual. According to Central Garden, Liberty Mutual
would have learned of the deposition earlier if it honored its duty to participate in the
defense.
       “[A]n insurer does not have a continuing duty to investigate whether there is a
potential for coverage. If it has made an informed decision on the basis of the third party
complaint and the extrinsic facts known to it at the time of tender that there is no potential
for coverage, the insurer may refuse to defend the lawsuit.” (Gunderson v. Fire Ins.
Exchange (1995) 37 Cal.App.4th 1106, 1114.) An insurer‟s “duty to defend is not
measured by hindsight . . . .” (We Do Graphics, Inc. v. Mercury Casualty Co. (2004) 124
Cal.App.4th 131, 136.) Here, Liberty Mutual made an informed decision based upon the


                                             18
information known to it at the time of tender that there was no potential for coverage.
This determination was reached after Liberty Mutual investigated whether the claimed
damages in the Perfect Birds lawsuit involved birds other than those supplied to Perfect
Birds by Central Garden. For reasons we have explained, Liberty Mutual was justified in
denying a duty to defend at the time of tender based upon the applicability of the “your
product” exclusion. Under the circumstances, Liberty Mutual did not have a continuing
duty to investigate the potential for coverage. (Gunderson v. Fire Ins. Exchange, supra,
37 Cal.App.4th at p. 1114.)
       Central Garden could have provided Liberty Mutual with the Graham deposition
transcript before the Perfect Birds lawsuit settled. It did not do so. In the absence of a
new tender of defense, Liberty Mutual had no way to know of the information contained
in the transcript and no obligation to seek out the transcript itself. (See Gunderson v. Fire
Ins. Exchange, supra, 37 Cal.App.4th at p. 1117.) We conclude the belatedly provided
deposition transcript is irrelevant to our determination of whether Liberty Mutual had a
duty to defend Central Garden.3
                                       DISPOSITION
       The judgment is affirmed. Liberty Mutual shall be entitled to recover its costs on
appeal.




3
  Because the duty to defend is broader than the duty to indemnify, our conclusion that
Liberty Mutual did not have a duty to defend is dispositive of Central Garden‟s claim that
Liberty Mutual had a duty to indemnify. (See Delgado, supra, 47 Cal.4th at p. 308, fn.
1.)



                                             19
                                 _________________________
                                 McGuiness, P. J.


We concur:


_________________________
Siggins, J.


_________________________
Jenkins, J.




                            20
