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March 12, 2004.


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


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.


  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.


  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 ...

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