In F & H Construction v. ITT Hartford Ins. Co. (2004) 118 Cal.App.4th 364, the court rejected coverage for defective construction incorporated into a property.
The insured contractor supplied defective steel pile caps that were welded onto driven piling on a construction project.
Upon discovery of the defect, the general contractor sued the insured for costs to modify the caps to conform to specifications and for loss of bonus for early completion of the project.
As explained in F & H Construction:
"The prevailing view is that the incorporation of a defective component or product into a larger structure does not constitute property damage unless and until the defective component causes physical injury to tangible property in at least some other part of the system. ... Under these cases property damage is not established by the mere failure of a defective product to perform as intended. Nor is it established by economic losses such as the diminution in value of the structure or the cost to repair a defective product or structure. These cases are consistent with the basic purpose of liability policies, which, as explained by the court in Maryland Casualty Co. v. Reeder (1990) 221 Cal.App.3d 961, 'are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Rather liability coverage comes into play when the insured's defective materials or work cause injury to property other than the insured's own work or products. ...' " (F & H Construction, supra, 118 Cal.App.4th at pp. 372-373.)