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Ausmus v. Lexington Insurance Co.

April 22, 2009


The opinion of the court was delivered by: M. James LorenzUnited States District Court Judge


On December 22, 2008, Defendants filed a motion to dismiss the action. (Doc. No. 2.) On January 26, 2009, Plaintiffs filed their response in opposition to the motion to dismiss. (Doc. No. 5.) Defendants filed their reply in support of their motion on February 2, 2009. (Doc. No. 7.) The Court concludes that this matter is appropriate for resolution without oral argument and submits the motion on the papers under Civil Local Rule 7.1(d)(1). For the following reasons, the Court dismisses Plaintiffs' complaint and denies leave to amend.


Plaintiffs' complaint alleges causes of action against Defendants for breach of contract, breach of the implied covenant of good faith and fair dealing in connection with damage to their home caused by Defendants' insured, American Coatings, Inc. (Doc. No. 1.)

Plaintiffs own the residence located at 1644 Stratford Way, City of Del Mar, California. (Compl. ¶ 2.) American Coatings, Inc., along with several other subcontractors, provided materials and labor used in the construction of plaintiffs' home. American Coatings completed its work on the residence in approximately 1998. (Compl. ¶ 7.) In November 2005, the residence suffered damage due to leaks in and through the foundation walls. These leaks were allegedly caused by defects in construction attributable to the negligence of the subcontractors, including American Coatings. (Compl. ¶ 8.)

Subsequently, Plaintiffs filed a complaint against the developer and subcontractors in San Diego Superior Court. (Compl. ¶ 9.) Plaintiffs allege that Defendants initially appointed their in-house attorneys to defend American Coatings in the litigation, but later withdrew from representation. (Compl. ¶ 10.) Before trial, Plaintiffs settled with all defendants, with the exception of American Coatings, in the amount of $850,000 for the below grade water intrusion damage. (Id.) As part of the settlement, the developer and certain subcontractors assigned to Plaintiffs their rights for contribution and indemnity against American Coatings. (Compl. ¶ 12, 13.) American Coatings then settled with the Plaintiffs. The settlement agreement provided for a stipulated entry of judgment against American Coatings in the amount of $537,575 and an assignment by American Coatings of its indemnification rights against Defendants Lexington Insurance Company ("Lexington") and American International Group, Inc. ("AIG"). (Compl. ¶ 15.)

On February 1, 2001, Lexington issued a comprehensive insurance policy to American Coatings. (Compl. ¶ 16; Kurz Decl. in Opp. to Mot. to Dismiss ["Kurz Decl."] Ex. 1.) This policy covered work performed by American Coatings with no date restrictions. (Id.) The policy was renewed April 1, 2002 and again on April 1, 2003 -- each time with no date restrictions on covered work. (Kurz Decl. Ex. 2, 3.) On April 1, 2004, Lexington once again renewed American Coatings's policy. (Kurz Decl. Ex. 4.) This new policy contained an endorsement entitled "Exclusion - Designated Work." (Id. at 224.) That endorsement states that the insurance does not apply to property damage arising out of American Coatings's work completed prior to April 1, 2001. (Id.) The following year, on April 1, 2005, Lexington issued another renewed policy, which also contained the endorsement limiting the time period for covered work. (Id. at 288.)

Based on this exclusionary endorsement, nominally in effect when the Residence was damaged, Defendants move for dismissal of Plaintiffs' case under Federal Rule of Civil Procedure 12(b)(6).

I. Legal Standard

Rule 12(b)(6) provides that a complaint may be dismissed for "failure to state a claim upon which relief may be granted." FED. R. CIV. P. 12(b)(6). A complaint fails to state a claim when it lacks a cognizable legal theory or states insufficient facts under a cognizable legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984). The Supreme Court has stated that the factual allegations of a complaint must be "enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007). If the complaint fails to "state a claim for relief that is plausible on its face," it should be dismissed. Twombly, 127 S.Ct. at 1960.

In general, the scope of review on a motion to dismiss for failure to state a claim is limited to the contents of the complaint. Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006). However, a court may consider evidence on which the complaint "necessarily relies" as long as: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion. Id.

II. Lexington's Exclusionary Endorsement

As an initial matter, the Court notes that Plaintiffs' complaint necessarily relies on the language of its insurance policy with Defendant Lexington. The complaint refers to the policy and it is central to the Plaintiffs' breach of contract claim. (Compl. ¶ 16-20.) Plaintiffs have not challenged the authenticity of the policy copies submitted along with Defendants' motion to dismiss. Accordingly, under Marder, the Court may properly rely on its contents in evaluating Defendants' motion. 450 F.3d at 448.

If Lexington's coverage exclusion is binding on the parties, Defendants are not liable for the damage to the Residence and Plaintiffs will have no cognizable legal theory to support their claim. Plaintiffs argue that the exclusion is void for two reasons. First, Plaintiffs assert that Lexington failed to adequately notify American Coatings of the reduction in coverage in the April 1, 2004 policy as required by California state law. Second, Plaintiffs ...

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