Schaefer/Karpf Productions v. CNA Insurance Cos.

SCHAEFER/KARPF PRODUCTIONS, Plaintiff and Appellant, v. CNA INSURANCE COMPANIES, et al., Defendants and Respondents. No. B109989 (Super. Ct. No. SC038792) California Court of Appeal Second Appellate District Division Seven Filed June 18, 1998
CERTIFIED FOR PARTIAL PUBLICATION*
        APPEAL from a judgment of the Superior Court of Los Angeles County. Richard Neidorf, Judge. Affirmed.
        Jason Forge for Plaintiff and Appellant.
        Timothy A. Gonzalez and Brian J. Gladstone for Defendants and Respondents.
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        Plaintiff Schaefer/Karpf Productions (Schaefer) appeals from the judgment in favor of defendant CNA Insurance Companies (CNA) determining Schaefer did not suffer "property damage" within the terms of the comprehensive general liability policies CNA issued to its insureds. We affirm.

FACTS AND PROCEEDINGS BELOW         Schaefer produced a television special for children entitled "The Best Christmas Pageant Ever." After the show was aired on network television it was released on videotape for sales to schools, religious and civic organizations and the general public.
        In 1992, Scholastic, Inc., a leading marketer of children's educational materials, ordered 32,500 videotapes of the "The Best Christmas Pageant Ever." Schaefer contracted with The Video Company (TVC) to duplicate the show onto videotapes. TVC duplicated the show on tapes it purchased from the Matrix Video Duplication Corporation (Matrix). Some of the tapes Matrix sold to TVC were used tapes returned to Matrix by Cinderella Distributors, Inc., a distributor of pornographic films. TVC proceeded to produce the 32,500 videotapes of "The Best Christmas Pageant Ever" on the stock provided by Matrix and shipped the tapes to Scholastic. Scholastic in turn sold approximately 25,000 tapes of the show before Christmas 1992.
        A few days before Christmas 1992, in Salt Lake City, Ms. Natay's fourth graders were enjoying a Christmas party in their classroom. As part of the festivities, Ms. Natay showed the children a videotape of "The Best Christmas Pageant Ever" which she had obtained from Scholastic. Because she was trying to serve refreshments to 38 nine-year olds and things were "chaotic," Ms. Natay did not stop and rewind the tape when the program ended. "All of a sudden the class got quiet" and "the kids were nudging each other." When she looked up Ms. Natay saw to her shock her students were watching a graphically explicit scene in which a couple was engaged in sexual intercourse. Students and teachers had similar experiences at the Moline Christian School in Moline, Michigan, the second grade at Rocky Branch School in Walland, Tennessee, and the Manchester Elementary School in Perry, Ohio, to name a few. In Philadelphia, Mississippi, Ms. Cheeks left to run an errand while her young children remained at home watching "The Best Christmas Pageant Ever." When she returned she was "horrified" to find her children were watching not a Christmas movie but "a hard-core pornography scene" in which a couple was engaged in oral sex. The sexually explicit material at the end of the videotapes was seen by other children across America that Christmas, giving a new meaning to the term "kiddie-porn."
        While the students who watched the videotape may have been confused by this "best Christmas pageant ever," parents, teachers and principals were not. Nor were they amused. Scholastic recalled all the videotapes of the show and refused to pay Schaefer.
        Schaefer brought an action against TVC and Matrix for breach of contract, negligence and breach of warranty seeking damages for lost profits and loss of goodwill (the underlying action). Both companies were insured by CNA under standard comprehensive general liability (CGL). Both companies tendered defense of Schaefer's action to CNA. CNA disclaimed any obligation to defend or indemnify the companies on the ground Schaefer's claims were not covered by the policies.
        TVC did not defend the underlying action. Matrix retained counsel and provided its own defense.
        Prior to trial, Schaefer and Matrix entered into an agreement which provided in pertinent part: (1) Matrix would not contest liability but the trier of fact would make its own determination as to liability and damages based upon the evidence introduced at trial; (2) Schaefer would not execute on the assets of Matrix to satisfy any judgment against it resulting from the trial; (3) Matrix assigned to Schaefer its rights, claims and entitlements to indemnity from CNA relating to Schaefer's claims and Matrix's claims for bad faith and all other tort and contract claims against CNA.
        The underlying action was tried to the court which awarded Schaefer a judgment in the sum of $1 million against Matrix and TVC "as the measure of damages resulting from physical injury to or the loss of use of tangible property, the videotapes of "The Best Christmas Pageant Ever."
        Thereafter, Schaefer commenced the present action against CNA to enforce its judgment against Matrix and TVC under Insurance Code section 11580 and to enforce Matrix's claims for fraud and breach of contract.
        Schaefer and CNA filed cross-motions for summary judgment. The trial court granted CNA's motion on the grounds CNA was not a party to the underlying action therefore it was not bound by the trial court's finding in that action Schaefer suffered "property damage" and, further, any damage to the videotapes of "The Best Christmas Pageant Ever" resulting from the inclusion of the pornographic material was not "property damage" as the term is defined in the CNA policies. A judgment in favor of CNA was entered in due course and Schaefer filed a timely appeal.
        The two principal issues on appeal are (1) whether the incorporation of a defective or harmful product into the product of another causes "physical injury" within the meaning of property damage coverage in the standard comprehensive general liability policy ¹ and (2) if so, whether Schaefer suffered physical injury to "tangible property" as the result of the linkage of a pornographic movie to its production "The Best Christmas Pageant Ever." We reach those issues after resolving some preliminary matters.

DISCUSSION         I. IN THIS CASE, THE DUTY TO DEFEND AND THE DUTY TO INDEMNIFY ARE THE SAME.

        The ultimate question in this case is whether Schaefer's injury was covered under the policies CNA issued to Matrix and TVC. If it was, then Schaefer can recover from CNA on its judgment against Matrix and TVC as well as on Matrix's assigned claim against CNA for breach of the duty to defend. If Schaefer's injury was not covered under the policies it can recover nothing from CNA. This is not a case in which Schaefer could lose on the issue of CNA's duty to indemnify Schaefer for its losses but win on the issue of CNA's broader duty to defend Matrix. Although as a general rule CNA owed a duty to defend Matrix against claims which contained even a potential for indemnity (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295), this duty does not apply to claims where the only potential for indemnity turns on a question of policy interpretation. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 25-26; A-Mark Financial Corp. v. CIGNA Property & Casualty Companies (1995) 34 Cal.App.4th 1179, 1191-1192.) In the present case there has never been any issue as to the basis for Schaefer's claim and CNA's letters denying coverage show it was fully aware of the material facts. CNA's position is and always has been Schaefer's loss did not constitute "property damage" within the terms of the polices and, even if it did, the loss was excluded under other policy provisions.

        II CNA WAS NOT ESTOPPED FROM LITIGATING THE COVERAGE ISSUE.

        Schaefer initially argues CNA was estopped from denying coverage because the coverage issue was adjudicated against it in the underlying liability action between Schaefer, TVC and Matrix.
        Under the policies issued to TVC and Matrix, CNA promised to "pay those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." "Property damage" is defined as: "Physical injury to tangible property, including all resulting loss of use of that property; or loss of use of tangible property that is not physically injured." The judgment in the underlying action, drafted by Schaefer, contained a finding Schaefer's loss "result[ed] from physical injury to or the loss of use of tangible property, the videotapes of 'The Best Christmas Pageant Ever.'" According to Schaefer the effect of the judgment in the underlying action is the same as if the court had found "Schaefer's loss resulted from 'property damage' as defined in Section V, paragraph 12 of CNA's Commercial General Liability Coverage Form CG 1185." We reject this argument.
        One of the prerequisites for collateral estoppel is the "'identity of the issue presented in the second action with one necessarily decided [actually litigated] in the first.'" (Ceresino v. Fire Ins. Exchange (1989) 215 Cal.App.3d 814, 820.) This requirement is not met here.
        It is well-settled an insurer who is on notice of an action against its insured and refuses to defend on the ground the alleged claim is not within the policy coverage is bound by a judgment in the action, absent fraud or collusion, "as to all material findings of fact essential to the judgment of liability [and damages] of the insured." (Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 561 (Geddes I), (italics added); see also Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 884-886.) The insurer is not bound, however, as to issues "not necessarily adjudicated in the prior action and can still present any defenses not inconsistent with the judgment against the insured." (Geddes I, supra, 51 Cal.2d at pp. 561-562.)
        Generally speaking, in an action by an injured party against the party who allegedly caused the injury the court does not adjudicate the issue of insurance coverage. The only questions litigated are the defendant's liability and the amount of damages. The plaintiff is not concerned with the theory of liability which produces victory; only with procuring the largest possible judgment. Similarly, the defendant is concerned only with avoiding, or at least minimizing, a judgment for the plaintiff. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 279.) Whether the plaintiff's loss is covered by the defendant's insurance is not germane to the action and evidence on that issue would be excluded as irrelevant. (See Law Rev. Com. Comment, Evid. Code § 1155.)
        The present case is not an exception to the rule. It is clear from the record the issue of coverage under the CNA policies was not adjudicated in the underlying action.
        In determining what issues were "actually litigated" in the underlying action the court in the subsequent action cannot rely exclusively on the findings in the underlying action but must "carefully scrutinize" the pleadings and proof. (Clark v. Lesher (1956) 46 Cal.2d 874, 880-881.) This scrutiny includes looking behind the findings at the evidence presented to determine what was actually decided. (See, e.g., County of L. A. v. Continental Corp. (1952) 113 Cal.App.2d 207, 218-219.) The party asserting collateral estoppel must prove the issue was raised, actually submitted for determination and determined and that contrary evidence on the issue was not restricted. (Barker v. Hull (1987) 191 Cal.App.3d 221, 226.) ²
        We have reviewed the complaint in the underlying action, the trial transcript, the court's written ruling following trial and the judgment and have found nothing to support Schaefer's contention the court in the underlying action adjudicated the issue of insurance coverage. For example, we note the judgment recites the property damaged was the videotapes of "The Best Christmas Pageant Ever." As we explain below, the videotapes themselves cannot be the property damaged, for coverage purposes, because the damaging pornographic material was already on the tapes when they were sold to Matrix which in turn sold them to Schaefer. Schaefer may have suffered property damage for purposes of establishing liability but whether that property damage is covered by CNA's policies was not decided in the underlying action. ³

        III. THE PREMIUM SCHEDULE OF AN INSURANCE POLICY DESCRIBING THE INSURED'S BUSINESS ACTIVITIES DOES NOT CONFER COVERAGE FOR ALL INJURIES RESULTING FROM THOSE ACTIVITIES.
        In the premium schedules of the policies issued to Matrix and TVC, under the heading "Description of Hazards," are descriptions of the insureds' businesses. Matrix's business is described as "motion pictures-production-in studios or outside-all operations prior to the development of negatives including products and completed operations." TVC's business is described as "records or tape mfg.-prerecorded."
        Schaefer argues these descriptions of the insureds' businesses in the premium schedules mean that by paying the premiums the insureds are entitled to indemnity for any losses of any kind arising out of the conduct of those businesses. We do not accept this argument.
        The purpose of the declaration of hazards is to identify the activities to which the policy relates, e.g., motion picture production and tape manufacturing, as opposed to scuba diving instruction or transmission repairing. (American Policyholders' Ins. Co. v. Smith (N.H. 1980) 410.2d 749, 750-751; Robinson, Insurance Coverage Of Intellectual Property Lawsuits, (1989) 17 AIPLA Q. J. 122, 125.) The declaration of hazards does not expand the coverage of the policy from indemnity for physical injury and property damage to coverage for any and all loss no matter how caused.

[This Part Is Not Certified for Publication]
        IV. THE INCORPORATION OF A DEFECTIVE OR HARMFUL PRODUCT INTO THE PRODUCT OF ANOTHER CAUSES "PHYSICAL INJURY" TO THE LATTER WITHIN THE MEANING OF THE PROPERTY DAMAGE COVERAGE IN THE STANDARD COMPREHENSIVE GENERAL LIABILITY POLICY.
        As previously noted, the CGL policies obligate CNA to pay "those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." "Property damage" is defined as: "Physical injury to tangible property, including all resulting loss of use of that property; or loss of use of tangible property that is not physically injured." Thus, to establish the insurer's obligation to pay for property damage under the standard CGL policy the claimant first must show a "physical injury" to property or loss of its use. If the claimant satisfies either of these requirements, then it must show the physical injury or loss of use involved tangible property.
        CNA contends Schaefer cannot show a "physical injury" to its property because, at most, Schaefer suffered injury to its reputation and goodwill which are intangible assets not compensible under a CGL policy. Schaefer contends the incorporation of a defective or harmful product, i.e., a pornographic movie, into the product of another, i.e., Schaefer's Christmas program, caused "physical injury" within the meaning of the CGL property damage coverage.
        For the reasons explained below, we conclude incorporation of a harmful or defective product into the product of another can cause "physical injury" to the recipient product within the meaning of the standard CGL policy. CNA's argument fails to distinguish between a physical injury and the measure of damages for that injury.
        The first case to hold incorporating a defective or harmful product into another product results in covered property damage to the recipient product was Hauenstein v. Saint Paul-Mercury Indem. Co. (Minn. 1954) 65 N.W.2d 122.
        In Hauenstein, plaintiff, the insured, sold its customers a new type of plaster for use on walls and ceilings. Upon application, the plaster shrunk and cracked and had to be removed. The customers sued plaintiff for damages and plaintiff turned to its insurance company for indemnity under its standard CGL policy. The insurance company refused to assume any responsibility for the claims and plaintiff commenced a declaratory relief action against the company to determine coverage.
        Plaintiff's CGL policy provided coverage for "injury to or destruction of property" but did not define those terms. It excluded coverage for injury to "goods or products manufactured, sold, handled or distributed by the insured." (65 N.W.2d at p. 124.) The court held this exclusionary clause precluded recovery under the policy for damage to the plaster itself. But this did not end the case. The court went on to inquire whether the buildings to which the defective plaster was applied were "injured and damaged by its application[.]" (65 N.W.2d at p. 125.) The court concluded the buildings were damaged within the meaning of the policy:

"No one can reasonably contend that the application of a useless plaster, which has to be removed before the walls can be properly replastered, does not lower the market value of a building. Although injury to the walls and ceilings can be rectified by removal of the defective plaster, nevertheless, the presence of the defective plaster on the walls and ceilings reduced the value of the building and constituted property damage. The measure of the damages is the diminution in the market value of the building, or the cost of removing the defective plaster and restoring the building to its former condition plus any loss from deprival of use, whichever is lesser." (Ibid.; fn. omitted; italics added.)

        As the highlighted portion of the Hauenstein opinion demonstrates, the court held the plaintiff suffered two distinct injuries as a result of applying the defective plaster: injury to the walls and ceilings to which the plaster was applied and reduced value of the building so long as the defective plaster remained on it. The court then went on to hold one measure of the damages resulting from these injuries is the diminution in the market value of the building. In other words, according to the Hauenstein court, diminution in the market value of the building was both property damage and the measure of property damage.
        This unnecessary blurring of the distinction between the type of injury covered and the measure of damages for that injury has caused some courts, including the court that decided Hauenstein, to back away from the position incorporating a defective product into the product of another causes physical injury to the recipient product. (Federated Mut. Ins. Co. v. Concrete Units (1985) 363 N.W.2d 751, 756-757.) In California, however, where the distinction between an injury and the measure of damages for the injury has always been recognized, incorporation-related injuries continue to be covered under the current version of the standard CGL policy issued by CNA.
        The California Supreme Court recognized incorporation-related injuries as "property damage" under the standard CGL policy in Geddes I, supra. There the plaintiff, a building contractor, purchased doors from Aluminum Products for use in houses plaintiff was constructing. The doors began to warp and malfunction shortly after plaintiff installed them. Plaintiff sued Aluminum Products for breach of warranty and negligence alleging it incurred damages in excess of $100,000 for removing and replacing the defective doors, office overhead and lost profits. Aluminum Products tendered defense of the action to its insurer under its CGL policy. The insurer denied coverage and refused to defend. After obtaining an award of $100,000 against Aluminum Products, plaintiff brought an action against the insurer to recover on the judgment.
        The trial court ruled in favor of the insurer, but the Supreme Court, in an opinion by Justice Traynor, reversed. Quoting the same language from Hauenstein we quoted above, the court stated it could "see no reason for not following the Hauenstein case and permitting recovery for damages to the houses according to the rule stated therein." (51 Cal.2d at p. 565.) The court held, however, plaintiff was not entitled to recover damages for "handling the defective doors and their replacements, loss of profits, and loss of goodwill" because these costs were not a measure of the dollar amount of the injury to the houses. (Ibid.) Furthermore, anticipating a subsequent change in the standard CGL coverage terms, the court held plaintiff could not recover for injury to its good will or profits because "it is clear that the word property refers to physical or tangible property." (Id. at p. 566.) Although at one point in its opinion the court stated plaintiff was entitled to recover for damages to the houses "according to the rule stated [in Hauenstein]," suggesting it agreed reduction in the value of the houses itself constituted property damage under the policy, its later statement "property refers to physical or tangible property" suggests it was not following Hauenstein in all respects. The court clarified the extent of coverage for incorporation-related injuries in Geddes II, discussed below.
        Having determined the plaintiff was entitled to recover a portion of its judgment against Aluminum Products from the insurer, the court remanded the matter to the trial court to determine what portion of the judgment was covered by the policy. (51 Cal.2d at p. 566.) The trial court made its determination and the insurer appealed from certain portions of the judgment. (Geddes & Smith, Inc. v. St. Paul Mercury Indem. Co. (1965) 63 Cal.2d 602 (Geddes II).)
        The insurer, in Geddes II, objected to the inclusion in the judgment of overhead expenses plaintiff incurred while the doors were being replaced. It contended these overhead expenses represented an injury to the plaintiff's business like loss of good will and profits and therefore were not recoverable because they did not constitute "damage to physical or tangible property" under the holding in Geddes I. (63 Cal. 2d at p. 609.) The Supreme Court responded:

"This contention confuses two issues which should be carefully distinguished: the first concerns the type of injury covered by the policy, and it was in the context of this question that we stated that only damage to physical or tangible property was recoverable; the second is the method by which the damage to the physical property is to be measured in monetary terms." (Ibid.)

Overhead costs, the court explained,

"would seem to be as integral a part of the cost of restoring the houses as were the wages of the carpenters. Neither the salaries of the workmen nor the expenses of overhead are themselves physical property; they are recoverable because they provide a measure of the dollar amount of the injury to the houses. Overhead is distinguished from lost profits and goodwill in that it represents not a potential asset of the business but an essential expense incurred in the performance of the work." (Ibid.)

        Thus, in Geddes II, our Supreme Court made clear it was not following Hauenstein to the extent that case held reduced value itself constitutes property damage. Rather, it is the incorporation of a harmful or defective product into another product which produces the physical injury necessary for coverage under a CGL policy. Diminution in market value is a measure of property damage, not the damage itself.
        The distinction drawn in Geddes II between the nature of the injury and the measure of damages resulting from the injury became more significant when the definition of "property damage" in the standard CGL policy was amended in 1973.
        At the time Hauenstein and Geddes I and II were decided, the standard CGL policy contained no definition of property damage. In 1966, the policy was revised to define property damage as "injury to or destruction of tangible property." In 1973, this definition was revised to provide coverage for "physical injury to tangible property." (We will refer to this revision as "the 1973 definition.") Alternatively, coverage was provided for "loss of use of tangible property which has not been physically injured." (See discussion in Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 88 (Armstrong).) ⁴ As a result of the 1973 definition, some courts which had recognized incorporation-related injuries as property damage under Hauenstein's diminution-in-value theory held incorporation-related injuries were no longer covered unless the defective product caused loss of use of the recipient product. (E.g., Federated Mut. Ins. Co. v. Concrete Units, supra, 363 N.W.2d at pp. 756-757; and see cases cited in Incorporation and Liability Insurance, supra, at pp. 120-122.) ⁵
        California courts, however, have held coverage exists under the 1973 definition of property damage when a harmful or defective product is incorporated or linked to another product because this incorporation or linkage results in physical injury; diminution in the value of the recipient product is not the injury but one way to measure damages from the injury.
        In Armstrong, supra, the court addressed the question whether the installation of asbestos-containing building material (ACBM) constituted "physical injury" to the building under the 1973 CGL policy even if no asbestos fibers had actually been released into the building. (45 Cal.App.4th at p. 88.) In holding there was physical injury, the court explained:

"Once installed, the ACBM . . . is physically linked with or physically incorporated into the building and therefore physically affects tangible property. We agree with the formulation put forth by the Seventh Circuit Court of Appeals that the term 'physical injury' covers 'a loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and, because it is incorporated and not merely contained (as a piece of furniture is contained in a house but can be removed without damage to the house), must be removed, at some cost, in order to prevent the danger from materializing.' (Eljer Mfg. Inc. v. Liberty Mut. Ins. Co. (7th Cir. 1992) 972 F.2d 805, 810 . . .) . . .." (Id. at p. 92.) ⁶

        Responding to the insurers' argument the mere presence of ACBM results only in economic losses, not physical injury, the court stated:

"In our view, however, the damages allegedly suffered by the building owners from the presence of ACBM cannot be considered solely economic losses. Diminished market value or abatement costs or costs of inspecting, assessing and maintaining the in-place ACBM are not the 'property damage.' They are 'damages because of property damage.' That is, they are the alternative measures of the physical injury to the building. [Citations.] The fact that the measure of damages is economic does not preclude a physical injury. [Citations.]" (45 Cal.App.4th at p. 93.)

(See also Economy Lumber Co. v. Insurance Co. of North America (1984) 157 Cal.App.3d 641, 648 [finding coverage under the 1973 definition where application of mismilled siding resulted in physical injury ("very unsightly appearance") to houses].)
        Armstrong is significant in two ways. It not only held incorporation-related injuries are property damage under the 1973 definition, it did so on facts which emphasize it is the incorporation of the defective or harmful product itself which causes the injury, not the diminution of market value. Diminution of market value is one measure of damages in the case of an incorporation-related injury.
        CNA attempts to distinguish Armstrong on its facts. Armstrong is factually different from the present case, CNA points out, because it dealt with damage to property due to ACBM which could release fibers and contaminate the buildings.
        CNA does not explain why the difference in the harmful products-asbestos containing building materials versus pornography containing videotapes-should affect the outcome of the present case except to suggest that because of societal concern over the health hazards of asbestos the Armstrong court "departed from long-standing California case precedent in order to reach the result it did." We reject this reasoning.
        As we explained above, Armstrong is entirely consistent with the long-standing California Supreme Court precedent found in Geddes I and II. Furthermore, the present case is factually stronger than Armstrong on the injury aspect. As CNA correctly points out, the injury in Armstrong was the incorporation into buildings of harmful material which could release and cause harm to humans. In our case, the incorporated harmful material was released in classrooms and children's homes across America. ⁷
        CNA also argues Armstrong is factually distinguishable because it dealt with the physical linkage of a harmful product with another product in such a manner the harmful product could not be unlinked without damaging the other product and the products must be delinked in order to prevent property damage in the future. In our case, CNA maintains, "there was no bonding or physical linkage" of the pornographic movie and "The Best Christmas Pageant Ever." Reaching back to Judge Posner's distinction between a product incorporated into a house which cannot be removed without damage to the house and a product merely contained in a house which can be removed without damage to the house, CNA argues "[i]t is a simple matter to remove, or 'unlink,' offending recorded material from videotapes. This can be done quickly, inexpensively and in such a manner as to not even touch the programming of the Pageant. It is simply a matter of erasing the offending material which appears after the credits."
        Again, we disagree with CNA's analysis. Neither Armstrong, Geddes I nor II, nor Eljer for that matter, held incorporation-related injury only occurs when the harmful product cannot be delinked without damaging the other product. Each of these cases held directly or indirectly the injury occurs upon incorporation. In Armstrong, the court held "the mere presence of ACBM" caused physical injury to the buildings. (45 Cal.App.4th at p. 91.) In the Geddes cases, the court held the injury to the houses occurred when the defective doors were installed. The cost of removing the doors was an allowable item of damages but there was no discussion in either case of injury or damage to the houses as a result of removing the doors. (51 Cal.2d at p. 565; 63 Cal.2d at p. 609.) In Eljer, Judge Posner used the example of a chair which could be removed from a house without damaging the house to illustrate his distinction between incorporation and containment but he did not say an incorporation-related injury requires a showing removal of the defective product will damage the recipient product. To the contrary, his holding was "the incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation." (972 F.2d at p. 814; italics added.) Finally, we note the reference in Hauenstein to the injury to the walls and ceilings as one which "can be rectified," not exacerbated, "by removal of the defective plaster." (65 N.W.2d at p. 125; italics added.) ⁸
        In summary, we conclude "physical injury" within the meaning of the standard CGL policy includes the incorporation of a defective or harmful product into the product of another. Of course, the product affected must be "tangible property" for either the physical injury or loss of use provisions to apply. We turn to the "tangible property" issue next.

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        V. SCHAEFER DID NOT SUFFER PHYSICAL INJURY TO "TANGIBLE PROPERTY."
        CNA maintains Schaefer did not suffer physical injury to, or loss of use of, "tangible property." The only tangible property involved in this case was the videotapes themselves and, assuming they were defective by reason of containing pornographic material, then they were defective when Schaefer purchased them. The tapes did not cause injury through linkage to any tangible property of Schaefer's. They did not harm the "master tape" of the Pageant; it could still be used to make as many more copies of the Pageant as Schaefer wanted. Even if the defective tapes injured Schaefer's profits or its goodwill, these are intangibles not covered by a CGL policy. (Geddes I, supra, 51 Cal.2d at pp. 565-566; cf. Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, 284 [no property damage coverage for insured's sale of car with broken head gasket absent showing other parts of car damaged thereby].)
        Schaefer concedes there was no physical injury to its master tape but argues it suffered injury to, or loss of use of, its production of "The Best Christmas Pageant Ever" and the videotapes themselves.
        It is undisputed the videotapes were "tangible property," but Schaefer cannot base coverage on physical injury to the videotapes because they were defective when Schaefer bought them. (Cf. Geddes I, supra, 51 Cal.2d at 564-565 [no coverage for injury or destruction of the doors themselves].) Nor is there coverage for loss of use of the defective tapes. Exclusion (n) of the policies issued to Matrix and TVC excludes coverage for "[d]amages for any loss, cost or expense incurred by you or others for the loss of use . . . of your product." "Your product" is defined as "[a]ny goods or products . . . manufactured, sold, handled, distributed or disposed of by [you]."
        The only way we can conceive of Schaefer's loss being covered would be if its production of "The Best Christmas Pageant Ever" is "tangible property" separate and apart from the videotapes themselves. If the production (that is, Schaefer's concept of the story) is tangible property, then it could be said to have suffered physical injury from being linked in the public mind with pornography in the same way the concept of the hamburger was allegedly injured by being linked in the public mind with mad cow disease ⁹ or the buildings in Geddes, Economy Lumber Co., Armstrong, and Eljer suffered injury from being linked to defective building materials. But is a theatrical production like a hamburger or a building?
        "Tangible property," for purposes of a CGL policy is property "'having physical substance apparent to the senses.'" (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 219; citation omitted.) A concept is something invisible and incorporeal, having no substance or body until it is transmitted onto a medium. It is the medium which is the tangible property, not the concept.
        Yet, one might argue, when we speak of a painting, Van Gough's "Starry Night" for example, we are not speaking about the paint or the canvas on which the paint sits; we are speaking about Van Gough's concept or presentation of a starry night which to us has a physical substance apparent to our senses separate and apart from the paint and the canvas. Likewise, when we speak about the program "The Best Christmas Pageant Ever," we are not speaking about a black plastic box with a reel of tape inside; we are speaking about Schaefer's concept of a story about a Christmas pageant which has taken on a form, a substance, apparent to our senses. Here, the medium is not the message.
        Whatever might be said of this argument in the world of art or philosophy, we are dealing in this case with the world of insurance-a practical and prosaic world more Philistine than philosophical, more artisan than artistic. It is a bedrock principle of this world the provisions of insurance contracts are interpreted in their ordinary and popular sense. (Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. (1993) 5 Cal.4th 854, 867.) In this world, videotapes are tangible, concepts are intangible.
        Needless to say, given the unique facts of this case, we have found no case directly on point. Two federal circuit court opinions, however, support CNA's argument Schaefer did not suffer injury to tangible property.
        In Gulf Ins. Co. v. L.A. Effects Group, Inc. (9th Cir. 1987) 827 F.2d 574, the court, applying California law, held injury to the artistic value of a film was not injury to tangible property for purposes of CGL coverage. In Gulf, the defendant entered into a contract with Twentieth Century Fox to produce special effects for the film "Aliens." During the course of production, a dispute arose between Fox and defendant over defendant's performance and defendant quit. Fox brought an action against defendant asserting various legal and equitable claims. Included in the complaint was an allegation the special effects sequences defendant created for the film "were inexpertly produced and either excised from or detrimentally incorporated into the final cut." (Id. at p. 577.) Defendant tendered defense of Fox's action to Gulf, its CGL insurer. Gulf then brought this action against defendant seeking a declaration it had no duty to defend or indemnify defendant because Fox was not alleging damage to tangible property within the meaning of the 1973 definition. Defendant argued Fox's complaint could be construed as alleging damage to the "artistic value" of the film which, defendant contended, constituted a form of tangible property separate and distinct from a strip of celluloid and the reel on which it was spooled.
        The Ninth Circuit affirmed a judgment declaring Gulf had no duty to defend or indemnify defendant in the Fox action. The court found Fox's complaint did not allege damage to or destruction of property, tangible or otherwise. Even if it did, there would be no coverage for injury to artistic value. The court cited Giddings v. Industrial Indem. Co., supra, 112 Cal.App.3d at page 219 for the proposition "tangible property" for purposes of a CGL policy means "'property . . . having physical substance apparent to the senses.'" (827 F.2d at p. 578.) Artistic value, the court concluded, is not something which has physical substance apparent to the senses nor is there any objective means available to quantify in substantive economic terms any diminution in the artistic value of a film. Therefore, the court held, "the artistic value of a movie is [not] tangible property within the meaning and intent of the insurance policy." (Ibid.)
        In Lucker Mfg. v. Homes Ins. Co. (3rd Cir. 1994) 23 F.3d 808, the court held the design concept for a product, as opposed to the product itself, was not tangible property for purposes of CGL liability. In Lucker, the plaintiff contracted with the Shell Oil Company to design and manufacture an anchoring system for off-shore drilling platforms called a Lateral Mooring System (LMS). The design called for the use of castings, large metal objects which attach to the ocean floor and hold the cables connected to the platform. Lucker purchased a number of these castings from Grede Foundries. Prior to actually building the LMS, Lucker decided to test the strength of Grede's castings. Confident the test would be successful and impressive, Lucker invited Shell representatives to watch. The test turned out a disaster. One of Grede's castings failed. Had it been incorporated into the LMS and put into operation, Shell's drilling platform would have floated off in the sea. As a result of the casting's failure, Shell insisted Lucker make changes in the design of the LMS at a cost of $600,000. Lucker then sued Grede under contract and tort theories for the cost of the design changes. Grede tendered defense of the action to Home Insurance under its CGL policy. Home refused to defend Grede and disclaimed all liability under the policy on the grounds Lucker's injury did not constitute "loss of use" of "tangible property" as those terms are used in the 1973 definition. After obtaining a judgment against Grede, Lucker, as Grede's assignee, brought an action against Home for defense costs and indemnification. (Id. at pp. 810-811.)
        The Third Circuit affirmed a judgment for Home. The court agreed with Lucker "the decreased value of a product because of loss of customer acceptance of the product is a 'loss of use' within the meaning of the standard CGL policy." (23 F.2d at p. 816.) ^{10 1  2  3  4  5  6  7  8  9  10} use coverage, however, only applies to tangible property. Lucker conceded a design concept is not tangible property because an idea cannot be touched and is not materially existent. But, it argued, a design which is reduced to a tangible medium like a blueprint or a computer disk (or, presumably, a videotape) should be considered tangible property. Home, on the other hand, argued that where the real value of a design is in the idea, not in the physical plans that memorialize the idea, any loss in value of the design represents a loss in value of the idea, which is not a loss of use of tangible property. (Id. at p. 819.) The court concluded Home had the better argument:

"In this case, none of the losses Lucker sought from Grede represented a loss in the value of the storage medium in which the design for the LMS was embodied or in the costs in reducing the design to blueprints or computer tape (e.g. the costs of having engineers draw up the plans for the system). The recovery Lucker sought was for the loss of use of the design itself-for the loss in usefulness of the original concept of the LMS. The loss of use of this concept, however, was not loss of use of something which could be touched or felt. For this reason, we hold that Lucker's loss of use of the LMS design was not loss of use of tangible property." (Id. at p. 820.)

        For the reasons stated above, we conclude Schaefer did not suffer physical injury to or the loss of use of "tangible property" within the meaning of the CGL policies.

DISPOSITION         The judgment is affirmed.


I concur:
        LILLIE. P.J


NEAL, J., CONCURRING:

[This Part Is Not Certified for Publication]         I concur in the majority decision, but do not join in part IV of the majority opinion captioned "The Incorporation of a Defective Product or Harmful Product Into the Product of Another Causes 'Physical Injury' to Tangible Property Within the Meaning of Property Damage Coverage in the Standard Comprehensive General Liability Policy." This discussion is not necessary for the decision.
        Were it necessary to decide this issue to resolve the appeal, I am inclined to think the majority's conclusion is incorrect. There was no "damage" to the videotapes or to the artistic material. There was simply some offensive surplusage on the undamaged tapes. The injury was in the nature of lost profits or goodwill, not property damage.
        However, it is not necessary to decide the issue today, because, as the majority correctly concludes, there was in any event no physical injury to tangible property, as required for coverage under the policy. In my view we should assume for the sake of argument, without deciding, that there was property damage, and then correctly decide the case on the narrower ground that if there was damage, it was not to tangible property. This approach would eliminate many pages of dicta, and yet decide the case on sound ground.
        The utility of analyses on non-determinative points, even when both learned and correct, is dubious, because such analyses are not binding. As the California Supreme Court said in Hart v. Burnett (1860) 15 Cal. 530, 598:

"A decision is not even authority except upon the point actually passed upon by the court and directly involved in the case. But even then, the mere reasoning of the court is not authority. The point decided by the Court, and which the reasoning illustrates and explains, constitutes a judicial precedent. The books are full of cases in which learned judges have deprecated the attempt to urge that the mere dicta, or the arguments of judges, as authoritative expositions of the law." (Hart, p. 598, emphasis in original)

        I would save the question whether there is "property damage" under circumstances such as presented here for a day when the analysis is necessary to decide the case.

[End of Part Not Certified for Publication]


* Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of (1) part IV of the majority opinion and (2) the concurring opinion.
1 In the unpublished portion of this opinion the majority explains why it believes the incorporation of a defective or harmful product into the product of another causes "physical injury" to the latter within the meaning of the property damage coverage in the standard comprehensive general liability policy.
1 Where, as here, the party subject to a claim of collateral estoppel is the party moving for summary judgment it has the burden of showing the opponent cannot establish the prerequisites for collateral estoppel. (Code Civ. Proc., § 437c, subd. (o).) CNA met its burden.
1 Although CNA is not estopped from denying coverage it is bound by any material findings of fact essential to the judgment of liability of Matrix and TVC. (Geddes I, supra, 51 Cal.2d at p. 561.)
1 For a detailed history of these amendments and discussion of the intent behind them see Comment, Now You See It, Now You Don't: Defective Products, The Question Of Incorporation And Liability Insurance, (1993) 25 Loy. U. Chi. L.J. 109 (hereafter Incorporation and Liability Insurance).
1 In the Federated Mut. Ins. Co. case the Minnesota Supreme Court overlooked, or at least did not discuss, its finding in Hauenstein the defective plaster had caused "injury to the walls and ceilings" of the building not just injury to the building's market value. (Hauenstein, supra, 65 N.W.2d at p. 125.)
1 In Eljer, the issue was whether installation of a leak-prone plumbing system in numerous houses constituted physical injury to the houses under the 1973 definition even if leaks had not yet occurred. Writing for the majority, Judge Posner stated "[T]he drafting history of the [1973] property-damage clause, and the probable understanding of the parties to liability contracts, persuade us that the incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation-here, the moment when the defective Qest systems were installed in the homes. (972 F.2d ap p. 814.)
1 CNA does not dispute the proposition pornographic material is harmful if released to children.
1 Volf v. Ocean Accident & Guar. Corp. (1958) 50 Cal.2d 373 does not support CNA's contention removal of the defective product must cause injury. The facts in Volf were almost identical to those in Hauenstein except the plaintiff did not have to remove the defective plaster but merely applied new plaster over it. The court held the cost of this repair was excluded from coverage under the "own product" exclusion. (Cf. Hauenstein, supra, 65 N.W.2d at p. 125.) The court distinguished Hauenstein on the grounds "[i]n the instant case . . . the stucco did not have to be removed and there is no evidence and no finding that the house was injured by reason of the application of the defective stucco." (Volf, supra, 50 Cal.2d at pp. 375-376; italics added.) The court did not explain why the fact it was unnecessary to remove the stucco was relevant to the coverage issue. The finding the house was not injured by application of the defective stucco was sufficient enough reason to deny coverage under Hauenstein. In any event, even if both linking and delinking are required to establish physical injury, nothing in Volf suggests the delinking must cause damage to the recipient product.
1 In 1996, television personality Oprah Winfrey was sued by a Texas cattle producer under the state's agricultural disparagement statute after a guest on her show claimed American cattle were or could be contaminated by bovine spongiform encephalopathy (better known as "mad cow disease") and Oprah commented she would never eat another hamburger. (See Bederman, et al. "Of Banana Bills and Veggie Hate Crimes: The Constitutionality of Agricultural Disparagement Statutes" (1997) 34 Harv. J. on Legis. 135, 167-168.)
1 Similarly, in the present case, it is undisputed the value of Schaefer's production of "The Best Christmas Pageant Ever" plummeted when, as a result of the porno movie catastrophe, Scholastic refused to deal in that product and blackballed all other Schaefer products.


* Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of (1) part IV of the majority opinion and (2) the concurring opinion.