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BALCH ENTERPRISES v. INSURANCE COMPANY OF PENNSYLVANIA

United States District Court, N.D. California


March 12, 2004.

BALCH ENTERPRISES INC., Plaintiff,
v.
INSURANCE COMPANY OF PENNSYLVANIA, Defendant

The opinion of the court was delivered by: CHARLES BREYER, District Judge

MEMORANDUM AND ORDER

This diversity jurisdiction insurance coverage dispute arises from a lawsuit to foreclose on a mechanics lien. Now pending are the parties' cross-motions for summary judgment. After carefully considering the papers filed by the parties, including their supplemental memoranda, and having had the benefit of oral argument, plaintiffs motion for summary judgment is DENIED and defendant's motion is GRANTED.

BACKGROUND

  In April 2000, Balch Enterprises, Inc. ("BEI") purchased three parcels of land on Rock Avenue, San Jose, California for the purpose of building three warehouse-type buildings. Several months later BEI entered into a construction loan agreement with Fremont Bank. A 32,000 square foot building was constructed at 900 Rock Avenue from mid-2000 to February 2001. Jack Balch, BEI president, was construction manager for the warehouse building construction. Page 2

  On June 30, 2000, while the warehouse at 900 Rock Avenue ("the Building") was being constructed, BEI entered into a lease of the Building with 360networksUSA, Inc. ("360"). On March 5, 2001, 360 entered into a construction contract with Howard S. Wright Construction Co. ("Wright"), whereby Wright would construct certain improvements to the Building for the purpose of 360's occupancy. Wright actually began construction of the improvements between November 2000 and March 2001.

  During the year 2001, 360 became unable to pay Wright. Wright ceased work on the project and in June 2001 recorded a mechanics lien on the Building in excess of $3,000,000.00. In August 2001, Wright filed a lawsuit against BEI to foreclose the mechanics lien.

  "Mechanics, materialmen, contractors, and the like have an automatic lien on property upon which they have bestowed labor or furnished material as long as the work was done "at the instance of the owner' or the owner's agent. When the property is subject to a lease and the lessee orders the work to be done on the leased premises without the lessor's knowledge, then the lien attaches only to the lessee's leasehold interest. However, improvements constructed with the owner's knowledge are deemed to be at the instance of the owner — unless the owner gives notice of nonresponsibility." See Howard Wright Construction Co. v. Superior Court, 106 Cal.App.4th 314, 321 (2003).

  According to plaintiff the primary issue in the underlying lawsuit was the merits of BEI's affirmative defense: whether BEI properly recorded and posted the notices of nonresponsibility. The lawsuit settled before the issue was adjudicated. BEI claims that defendant owed it a duty to defend it in the Wright lawsuit.

  THE INSURANCE POLICY

  360's lease with BEI required 360 to obtain a Commercial General Liability Policy protecting BEI "against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises." Lease ¶ 8.2. In accordance with its obligations under the lease, 360 obtained a Commercial General Liability policy from defendant Insurance Company of Pennsylvania ("Insurance Company") Page 3 for the policy period November. 30, 2000 to November 30, 2001 ("the Policy"). Insurance Company also issued a Certificate of Insurance Additional Insured Endorsement in favor of BEL The Certificate provided that BEI is named as an insured with respect to its liability "arising out of' 360's operations performed for BEI.

  The Policy provides coverage on an occurrence basis for "bodily injury and property damage" liability. Property damage is defined as "physical injury to tangible property," as well as "loss of use of tangible property that is not physically injured."

  The Policy also contains "Design Professional Liability Coverage." The coverage provides:

The Company will pay on behalf of the Insured all sums in excess of the deductible that the Insured shall become legally obligated to pay as damages because of actual or alleged negligent acts, errors or omissions arising out of professional services rendered for others under contract by the Insured or any entity for whom the Insured is legally liable.
  Plaintiff moves for summary adjudication of its claim that Insurance Company was obligated to defend the Wright v. BEI lawsuit pursuant to the Design Professional Liability Coverage. Defendant opposes plaintiffs motion and makes its own cross-motion for an order that it had no duty to defend under any Policy provision.

  At oral argument defendant for the first time argued that plaintiff was not an additional insured with respect to the Design Professional Liability Coverage and therefore plaintiffs claim failed as a matter of law. Since the parties had not briefed this issue, the Court continued the motion to give the parties the opportunity to file supplemental memoranda. The parties have done so and their respective motions for summary judgment are now under submission.

  LEGAL STANDARD

  Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" only if there is a sufficient Page 4 evidentiary basis on which a reasonable fact finder could find for the nonmoving party, and a dispute is "material" only if it could affect the outcome of the suit under governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A principal purpose of the summary judgment procedure "is to isolate and dispose of factually unsupported claims." Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no "genuine issue for trial.'" Matsushita Elec. Ind. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986).

  "When parties submit cross-motions for summary judgment, `[e]ach motion must be considered on its own merits.'" Housing Council of Riverside County. Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001) (citation omitted). "[T]he filing of cross-motions for summary judgment, both parties asserting that there are no uncontested issues of material fact, does not vitiate the court's responsibility to determine whether disputed issues of material fact are present. A summary judgment cannot be granted if a genuine issue as to any material fact exists." Id.

  DISCUSSION

 A. Plaintiffs Motion For Summary Adjudication

  Plaintiff moves for summary adjudication that Insurance Company was required to defend the Wright v. BEI lawsuit as a matter of law pursuant to the Design Professional Liability Coverage.

  1. Plaintiff is an additional insured

  Defendant argues that plaintiff is not an additional insured with respect to the Design Professional Liability Coverage. Defendant has not proved as a matter of law that plaintiff was not an additional insured with respect to this coverage; accordingly, for purposes of both motions the Court will assume that plaintiff was an additional insured.

  2. The duty to defend

  Under California law, an insurer has "a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy." Gray v. Zurich Ins. Co., 54 Cal.Rptr. 104, 113 (Cal.1966). The insurer must look for potential coverage in Page 5 the complaint itself and also in extrinsic facts known to the insurer at the time defense is tendered. See Horace Mann Ins. Co. v. Barbara B., 17 Cal.Rptr.2d 210, 213 (1993).

  As is set forth above, the Design Professional Liability Coverage provides insurance for damages which the insured becomes legally obligated to pay "because of actual or alleged negligent acts, errors or omissions arising out of professional services rendered for others under contract by the Insured." Plaintiff contends that the Wright lawsuit created a potential for an award of such damages.

  Plaintiffs theory is that its President, Jack Balch, was BEI's construction manager and that as construction manager he is a design professional. As construction manager he was responsible for the postings and recordings of notices of nonresponsibility. If, as Wright claimed in its lawsuit, Balch had not posted or recorded the notices of nonresponsibility such that BEI's affirmative defense to Wright's action for foreclosure of mechanics lien would fail, then BEI would become legally obligated to pay damages as a result of its construction manager's negligence. Further, the negligence arose out of professional services (construction manager) rendered for others under contract with BEI because BEI's construction loan with Fremont Bank obligated BEI to keep the property free of liens.

  Plaintiffs creative argument does not persuade the Court that defendant had a duty to defend Wright's lawsuit against plaintiff. The Design Professional Liability Coverage encompasses "damages because of actual or alleged negligent acts, errors or omissions arising out of professional services rendered for others under contract by the Insured." Any damages potentially incurred by plaintiff as a result of that lawsuit, that is, foreclosure of the mechanics lien, would not arise from professional services rendered for others under contract by the insured. Page 6

  First, the construction manager's alleged responsibility to post notices of non-responsibility is not a professional service being rendered for others, and in particular, for Fremont Bank. Assuming posting and recording notices of nonresponsibility can even be characterized as a professional service, it was a service being performed by Batch for his company BEL It so happens that BEI's construction loan has as a condition that BEI keep the property free from liens. That loan condition does not transform Balch's work as a construction manager for the building of the warehouse into a professional service for Fremont Bank.

  Second, the Design Professional Liability Coverage applies to damages "arising from" the design professional's negligence.

 

California courts have consistently given a broad interpretation to the terms "arising out of or "arising from" in various kinds of insurance provisions. It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.
Fireman's Fund Ins. Cos, v. Atlantic Richfield Co., 94 Cal.App.4th 842, 849 (2001) (citations and internal quotations omitted). BEI's liability indisputably arises from 360's failure to pay for Wright's services and BEI's lease with 360. 360's failure, however, is not the negligence of a design professional; thus, BEI must argue instead that the liability arises from its construction manager's failure to post the notices of nonresponsibility. That failure, however, did not give rise to BEI's liability; BEI has an affirmative defense under the mechanics lien law, a defense which may not have succeeded because of Balch's alleged failure to properly post and record notices of non-responsibility. The unavailability of that defense, however, does not mean that the damages BEI might have to pay to Wright arose from Balch's negligence. While "arising out of is interpreted broadly, plaintiff does not cite any cases which hold that for the purposes of a duty to defend damages "arise out of Page 7 conduct that leads to the unavailability of an affirmative defense as opposed to the conduct that gave rise to the claim in the first place.

  Moreover, the Policy provides that BEI is an additional insured "but only with respect to liability arising out of your [360's] ongoing operations performed for that insured." Even assuming Batch's failure to properly post and record notices of non-responsibility was a professional service performed for Fremont Bank (and that Batch's negligence in the performance of that professional service gave rise to the action for foreclosure of mechanics lien), BEI's liability would not then arise from 360's ongoing operations performed for BEI, that is, under the lease. Instead, BEI's liability would arise from Batch's negligent performance of services for Fremont Bank. The plain language of the additional insured rider demonstrates that BEI is not an additional insured with respect to such liability.

  In sum, plaintiff has not proved as a matter of law that defend had a duty to defend plaintiff in the Wright lawsuit. Accordingly, plaintiffs motion for summary adjudication must be denied.

 B. Defendant's Motion For Summary Judgment

  Defendant moves for summary judgment on the ground that no provision in the Policy gave rise to a duty to defend the mechanics lien foreclosure action. In particular, defendant argues that since the mechanics lien action did not involve damages from bodily injury or property damage, the Policy does not apply.

  Plaintiff responds with the same argument that it makes in support of its motion for summary adjudication, namely, that defendant had a duty to defend pursuant to the Design Professional Liability Coverage. Since no reasonable jury could find, at a minimum, that Balch's duty to record notices of non-responsibility was a professional service performed for others, namely, Fremont Bank, the rider does not apply as a matter of law. Defendant is entitled to judgment as a matter of law. Page 8

  CONCLUSION

  No reasonable trier of fact could find that defendant had a duty to defend plaintiff in the Wright lawsuit for foreclosure of mechanics lien. Accordingly, plaintiffs motion for summary adjudication is DENIED and defendant's motion for summary judgment is GRANTED.

  IT IS SO ORDERED.

20040312

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