The opinion of the court was delivered by: Marilyn Hall Patel, District Judge
On July 31, 2003, Jerome Sapiro, Jr. and Cornelia B. Sapiro ("plaintiffs") filed a complaint against Encompass Insurance ("Encompass") and Safeco Insurance Company of America ("Safeco") alleging breach of contract, bad faith, and fraud causes of action against both defendants. After removal of the action, defendants moved to dismiss plaintiffs' first amended complaint, and the court granted defendants' motion on April 30, 2004. Now before the court is defendants' motion pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss plaintiffs' second amended complaint. Having considered the parties' arguments fully and for the reasons set forth below, the court rules as follows.
Plaintiffs are owners and occupants of the residence located at 30 Balceta Avenue, San Francisco, California. Pls.' Second Amended Complaint ("SAC") ¶ 1. Defendant Safeco has provided plaintiffs with "all risks" insurance for their home from 1993 to the present date. Id. ¶ 4. Defendant Encompass' predecessor-in-interest, Continental Insurance Co., provided plaintiffs with homeowners insurance during the period from July 1, 1979 to June 1, 1982. Id. ¶ 3.
In 1980, plaintiffs hired a contractor to build a substantial addition to their home. Id ¶ 5. Work performed by the contractor included the construction of a new bathroom, the extension of a bedroom, the addition of a porch, and the construction of supporting walls. Id. The contractor subsequently completed the project, and plaintiffs continued to reside in the house through August 2002. Id. ¶¶ 1, 5. At that time, plaintiffs retained a second contractor to perform additional remodeling and renovation of their home. Id. ¶ 14. While performing roofing work related to the second remodeling project, a subcontractor discovered that the contractor that plaintiffs had hired in 1980 had left a gap between the stucco of the exterior walls and the flashing-- i.e., the material used in wall and roof construction to prevent water penetration. Id. Over time, moisture had infiltrated the gap, causing extensive structural damage to plaintiffs' home. Id. ¶ 13.
After discovering the damage to their home, plaintiffs filed claims with both Safeco and Encompass. Both claims were denied, and plaintiffs commenced this action in San Francisco County Superior Court on July 31, 2003, alleging that each defendant breached its contract of insurance, acted in bad faith, and engaged in fraud. On October 10, 2003, defendants removed the action to this court. On February 19, 2004, Safeco filed a motion pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss plaintiffs' complaint. Rather than opposing Safeco's motion, plaintiffs filed an amended complaint. On March 29, 2004, Encompass filed a motion requesting that the court strike plaintiffs' first amended complaint, or alternatively, enter judgment on the pleadings. On the same date, Safeco modified its motion to dismiss in light of plaintiffs' amended complaint. The court consolidated these motions for review, and on April 30, 2004, it issued an order denying Encompass' motion to strike, granting Encompass' motion for judgment on the pleadings, and granting Safeco's motions to dismiss. Order Granting Mot. to Dismiss First Amended Complaint ("FAC Order") at 7, 14. The court also granted plaintiffs leave to amend their pleadings. Id. at 14, 17 n.16.
On July 29, 2004, plaintiffs filed a second amended complaint, once again alleging causes of action for breach of contract, bad faith, and fraud against both defendants. As in the first amended complaint, plaintiffs allege that the 1980 contractor's negligently failed to close the gap between the flashing and the stucco, resulting in extensive damage to their home. Id. ¶¶ 12-13, 16. To this, plaintiffs add the claim, allegedly based on newly discovered facts, that the lumber installed during the 1980 remodel was infested with "brown rot," a wood-destroying fungus that thrived in the moist conditions created by the contractor's negligent workmanship. Id. ¶ 8. Plaintiffs now assert that "[t]he efficient and predominant cause of the damage to [their] home . . . was the negligent failure of the supplier or suppliers of the wood to warn [plaintiffs] of the risk that brown rot existed in the wood and of the risk that, if the wood were exposed to water, the brown rot would grow and destroy the wood." Id. ¶ 11. Now before the court are defendants' motions to dismiss plaintiffs' second amended complaint under Federal Rule of Civil Procedure 12(b)(6). In the alternative, Encompass moves to strike plaintiffs' claims for fraud, bad faith and punitive damages. The court considers the issued raised by defendants' motions below.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "[U]nless it appears beyond doubt that plaintiff can prove no set of facts in support of her claim which would entitle her to relief," a motion to dismiss must be denied. Lewis v. Telephone Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996) (citation omitted); see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957). When assessing the legal sufficiency of a plaintiff's claims, the court must accept as true all material allegations of the complaint, and all reasonable inferences must be drawn in favor of the non-moving party. See, e.g., Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996) (citations omitted). Dismissal is proper under Rule 12(b)(6) "only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory." Navarro, 250 F.3d at 732 (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988)).
I. Safeco's Motion to Dismiss
The court first addresses Safeco's motion to dismiss the third and fourth causes of action of plaintiffs' second amended complaint. As in the first amended complaint, plaintiffs allege that Safeco breached its contract of insurance with plaintiffs, as well as asserting claims of bad faith and fraud arising out of that breach. The parties agree that Safeco insured plaintiffs' home in August 2002, the date on which the damage to plaintiffs' home was discovered. See SAC 11 4 & Exh. 2. There is also no dispute that Safeco's policy is an "all risks, claims made policy"-i.e., a policy that covers all perils that are not expressly excluded. Id., Exh. 2. Safeco moves to dismiss based on several of these express exclusions. The first such exclusion upon which Safeco relies states in relevant part that the policy "do[es] not cover loss caused directly or indirectly by . . . faulty, inadequate, or defective . . . workmanship, repair, construction, renovation, [or] remodeling ... [or by] materials used in repair, construction, renovation or remodeling." Id,, Exh. 2 at 4 ¶ 14.
In its April 30, 2004 order, the court concluded that the plain meaning of this "faulty workmanship" exclusion compelled the dismissal of plaintiffs' claims against Safeco. The court observed that "[w]hat plaintiffs allege in their first amended complaint-namely, negligent construction resulting in a `gap' between the `flashing' and the stucco coating of their home--is exactly what Safeco's `faulty workmanship' clause unambiguously covers." FAC Order at 11. In their second amended complaint, plaintiffs seek to avoid the unambiguous terms of this exclusion through a two-prong strategy. First, they plead newly discovered facts that would establish the presence of brown rot in the lumber as an actual and proximate cause of the damage to their home. SAC ¶ S. Second, perhaps recognizing that the alleged defect in the lumber falls squarely within the "faulty materials" exclusion of Safeco's policy, see id., Exh. 2 at 4 ¶ 14, plaintiffs attempt to frame their claim as a cause of action arising out of an unnamed supplier's ...