United States District Court, N.D. California
March 12, 2004.
BALCH ENTERPRISES INC., Plaintiff,
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.
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.
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")
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
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.
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
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.
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
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.
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
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
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.
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.
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