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Ted Gaylord and Sheri Gaylord, As Individuals and Dba J&T v. Nationwide Mutual Insurance Company

March 4, 2011

TED GAYLORD AND SHERI GAYLORD, AS INDIVIDUALS AND DBA J&T CATTLE COMPANY, PLAINTIFFS,
v.
NATIONWIDE MUTUAL INSURANCE COMPANY, AN OHIO CORPORATION, AMCO INSURANCE COMPANY, AN IOWA CORPORATION, ALLIED GROUP, INC AN IOWA CORPORATION, AND DOES 1 THROUGH 100,
DEFENDANTS.



ORDER ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

This is an insurance coverage case that arises out of the death of cattle. Plaintiffs Ted and Sheri Gaylord ("Plaintiffs") brought suit against Defendants Nationwide Mutual Insurance Company ("Nationwide") and Amco Insurance Company ("Amco") (collectively "Defendants") because Defendants refused to cover the loss and defend Plaintiffs against the claims of a third party. Plaintiffs allege claims for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. Defendants now move for summary judgment on all claims. For the reasons that follow, Defendants' motion will be granted in part, and denied in part.

FACTUAL BACKGROUND

Plaintiffs own and operate a livestock operation known as J&T Cattle Co., whereby they raise beef cattle owned by them as well as beef cattle owned by others. PUMF 1; see also DUMF 4. Plaintiffs' livestock operation is principally located at 27552 Lake Road, La Grange, California. PUMF 2. *fn1 Individuals bring cattle to Plaintiffs' farm, where their cattle is fed and cared for by Plaintiffs until the cattle reach a certain weight and are ready for slaughter. JUMF 21.

Nationwide issued a farm-owners insurance policy ("the Farm Policy") to Plaintiffs on March 26, 2008. JUMF 1. Plaintiffs' livestock operation at 27552 Lake Road is listed as an insured location, and J&T Cattle Company is listed as an additional insured. PUMF 4, 5. The Farm Policy states in part, "You should read your policy and review your declarations page for complete information on the coverages you are provided." JUMF 2. Similarly, Coverage E of the Farm Policy reads in part, "Various provisions of this policy restrict coverage. Read the entire policy carefully to determine rights, duties, and what is and is not covered." JUMF 3.

The Farm Policy also includes two "Farm Property Schedules," but neither schedule lists "livestock." JUMF 5, 6. The term "farm personal property" is defined to include "livestock," and "livestock" is defined to include "cattle." See JUMF 7; Davis Dec. Ex. A at p. 60. Coverage E of the Farm Policy states that Nationwide "will pay for direct physical loss of or damage to Covered Property at the 'insured location' described in the Declarations . . . caused by or resulting from any COVERED CAUSES OF LOSS." PUMF 6. Coverage E also states in part, "All of the following are Covered Property under Coverage E of this Coverage Form, provided a limit of insurance is shown in the Declarations for the specific type of property . . . (b) 'livestock,' 'poultry,' and other animals covered against BROAD Covered Causes of Loss . . . ." JUMF 4. Coverage E defines "Broad" covered causes of loss as: BASIC plus the following: m. breakage of glass or safety glazing material, n. falling objects, o. weight of ice, snow or sleet, p. sudden and accidental tearing apart, q. accidental discharge or leakage of water or steam, r. freezing, s. sudden and accidental damage from electrical current, t. electrocution of covered livestock, u. attacks on covered livestock by dogs or wild animals, v. accidental shooting of covered livestock, w. drowning of covered livestock from external causes, x. loading/unloading accidents, y. collision causing death of covered livestock, z. earthquake loss to livestock, aa. flood loss to livestock. *fn2 JUMF 9.

Coverage E's "Loss Settlement Conditions" page for "Scheduled Farm Personal Property" states in pertinent part: "d. Livestock, Poultry, Bees, Fish, Worms, and Other Animals . . . With respect to 'livestock,' . . . the term loss means death or destruction caused by, resulting from, or made necessary by a covered cause of loss." JUMF 10.

The Farm Policy contains a "Form Liability Coverage Form" for claims made by third parties against the insureds, which is Coverage H. See JUMF 12. Like Coverage E, Coverage H states in part, "Various provisions in this policy restrict coverage. Read the entire policy carefully to determine rights, duties, and what is or is not covered." Id. Under the "Insuring Agreement," Coverage H states: "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. However, we will have no duty to defend the insured against any 'suit' seeking damages for 'bodily injury' or 'property damage' to which this insurance does not apply." JUMF 13. Coverage H's "Exclusions" provide in part: " b. Contractual Liability . . . 'Bodily injury' or 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. . . . q. Custom Farming, Custom Feeding, and Farm Management . . . 2) 'Custom feeding' of 'livestock' by an insured unless specifically endorsed . . . ." Id. Coverage H defined "property damage" to include loss of use or physical injury to tangible property. JUMF 15. Coverage H defined "Custom Feeding" to mean "the raising or feeding of 'livestock' for others on an 'insured location.'" Id. Coverage H also excluded "'property damage' that arises out of or is a result of any breach of a written or oral contract, any breach of any other written or oral agreement, or any breach of an express or implied warranty." JUMF 14.

The Farm Policy does not contain a "custom care and feeding" endorsement. DUMF 3. However, as part of Coverage H, there is a broad endorsement entitled "Livestock Operations Coverage Endorsement." PUMF 8. That endorsement states that it "modifies the insurance provided" under the "Farm Liability Coverage Form," and continues: "In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock operations. All terms and conditions of this policy apply unless modified by this endorsement. " Farm Policy at p. 94 (emphasis in original).

The Farm Policy has a clause regarding legal actions that states: " Legal Action Against Us . . . No one may bring a legal action against us under this form unless . . . b. The action is brought within 1 year after the date on which the direct physical loss or damage occurred." JUMF 11 (emphasis in policy).

Also on March 26, 2008, AMCO issued a farm umbrella policy ("the Umbrella Policy") to Plaintiffs. JUMF 16. The Umbrella Policy in part provides that it will not apply if the "underlying insurance" does not cover the "loss" for reasons other than exhaustion of an aggregate limit of insurance. See JUMF 17. The Umbrella Policy also adopts the exclusions of the "underlying insurance" as follows: "The exclusions applicable to the 'underlying insurance' also apply to this insurance." See JUMF 18. Like the Farm Policy, the Umbrella Policy includes an exclusion for "Contractual Liability" and "Custom Feeding of Livestock." See JUMF 19. "Custom Feeding" is defined as "the raising or feeding of livestock for others on an 'insured location' on an underlying policy." Id.

When Plaintiffs purchased the policies, they believed Brian Stewart ("Stewart") was their broker. PUMF 9. Stewart is identified as the agent on the subject policies. PUMF 10. Plaintiffs had a long-standing professional relationship with Stewart, who handled all of Plaintiffs' personal and business insurance needs since about 1998, and Stewart's father before him since about 1996. PUMF 11. Plaintiffs considered Stewart to be in a position of trust and confidence with them. PUMF 12. Stewart was very familiar with Plaintiffs' personal and business needs, having procured insurance for all of Plaintiffs' needs from medical and tenant insurance to the comprehensive farm-owner's package at issue in this case. PUMF 13. Plaintiffs relied entirely on Stewart to provide adequate and agreed upon coverage for Plaintiffs. PUMF 14. Plaintiffs relied entirely on Stewart to inform them of any contrary provisions in the policies. PUMF 15. Plaintiffs believed Stewart was responsible for explaining the policies to Plaintiffs. See PUMF 16. From March 1996 to March 2007, Plaintiffs purchased their farm policies from Fireman's Fund, which was selected and procured by Stewart and his father before him. PUMF 17.

During the 2006 heat wave, Plaintiffs suffered loss when they had to reimburse a client for the heat-related deaths of about 147 cattle at Plaintiffs' livestock operation. PUMF 18. Stewart informed Plaintiffs that their then existing insurance policy did not provide coverage for losses resulting from acts of God, like the heat wave. See PUMF 19.

When Stewart sought to renew Plaintiffs' policies in March 2007, he advised Plaintiffs to switch to the Nationwide policy because it provided better coverage for Plaintiffs' operation. PUMF 20. Plaintiffs expressed to Stewart their concerns about losses related to contaminated feed, since a local dairy suffered substantial loss after feeding cattle hay tainted with botulism. See PUMF 21. Plaintiffs discussed with Stewart that if such an event occurred on their livestock operation, they would not be able to sustain the losses, and therefore needed adequate coverage. See PUMF 22. Plaintiffs understood, based on Stewart's representations to that effect, that Stewart was researching the most suitable policy for Plaintiffs based on their needs and concerns. PUMF 23. Stewart specifically advised Plaintiffs to switch to Nationwide because, according to Stewart, Nationwide's Farm Policy would cover the damage to cattle excluded under the Fireman's Fund, including damage from consumption of poisonous or contaminated feed. *fn3

PUMF 24. *fn4 Based on Stewart's representations, and because they trusted him, Plaintiffs purchased the policies selected by Stewart. PUMF 25.

Stewart did not disclose or explain to Plaintiffs the meaning or existence of the terms "custom care and feeding" in the Policies or that the Policies contained a "custom care and feeding" exclusion, and neither did Defendants. PUMF 26. Nor did Stewart or Defendants inform Plaintiffs that there was a specific exclusion in the Policies for losses resulting from Plaintiffs' "business pursuits" or for harm assumed by Plaintiffs pursuant to a contract. PUMF 27. Nor did anyone, including Stewart, advise Plaintiffs of any "custom care and feeding coverage endorsement." PUMF 28. The only additional coverage that Stewart mentioned to Plaintiffs prior their purchase of the Policies was a catchall-type endorsement that Stewart said would cover every other eventuality no typically covered, but that such a policy was expensive ($5,000 to $6,000 per month), more typical for mid-western states, and was not something Plaintiffs really needed. PUMF 29.

Parvis Kamangar was a client of Plaintiffs. JUMF 22. Between March 18, 2008, and May 8, 2008, Plaintiffs and Kamangar purchased 1,154 Holstein steer calves, with an average weight of 290 lbs. per head. See DUMF 5; PUMF 30. The cattle were branded with Kamangar's cattle brand. DUMF 6. The 1,154 head of cattle were transported to Plaintiffs' livestock operation on the insured premises for care and feeding. See DUMF 7; PUMF 31. Kamangar paid Plaintiffs "for care and feeding" of the cattle. DUMF 8.

Around June 2008, some of the cattle began dying suddenly, and cattle were dying at alarming rates by September and October 2008. PUMF 32. When the cattle initially started dying, the death rates were still not above the normal rates for Plaintiffs' operation for the time of year. PUMF 35. Around July 2008, cattle that Plaintiffs were raising for Kamangar at Plaintiffs' feed yard became ill, and many of the cattle died. JUMF 23. Plaintiffs believe the death and illness of the cattle was the result of feed that was purchased locally and fed to the cattle in May 2008. JUMF 24. Plaintiffs immediately began trying to save any potentially infected animals while investigating the cause of the harm. PUMF 34. Plaintiffs immediately sought medical attention for the sick and dying animals and had four of carcases evaluated by a veterinarian. PUMF 36.

Plaintiffs were actively investigating the cause of their progressive cattle loss and began receiving necropsy reports in September and October 2008 that were performed by the University of Arizona and the University of California at Davis. PUMF 49. The necropsies established that the cattle sustained severe damage to their livers, consistent with chronic poisoning by toxic plants containing pyrrolizidine alkaloids ("PA"). PUMF 51. During the relevant time period, Plaintiffs purchased all of their alfalfa from Associated Feed & Supply Company, a substantial portion of which was traced to the Stokes Ranch. PUMF 52. A forensic agronomist, who was retained by Plaintiffs, inspected Stokes Ranch and found large quantities of plants containing PA. PUMF 52, 53. The agronomist informed Plaintiffs that, once ingested, PA typically results in progressive liver failure, which is consistent with the necropsy report. PUMF 55. In October 2008, because there is no known remedy for PA poisoning, for mitigation purposes, Plaintiffs obtained clearances from the Department of Agriculture in order to sell the cattle in November 2008. PUMF 56.

By November 2008, nearly 2,000 head of cattle had been affected, of which about 320 died and 810 were sent to early slaughter at a low butcher price. PUMF 37. Three-quarters of the affected animals were contracted for sale at specified prices and were expected to be slaughtered in Spring/Summer 2009 at an average weight of 1,312 lbs. PUMF 38. Plaintiffs observed damage to older cattle (weighing 800 to 900 lbs.) in November 2008. PUMF 39. Sixteen animals owned by Jason Roth died, and Plaintiffs reimbursed him about $16,000. PUMF 40. The cattle suffered a continuing and deteriorating type of injury. PUMF 47. Plaintiffs' contend that their damages did not become appreciable until they determined there was no way to stop the deaths, forcing them to slaughter a majority of the cattle as calves in November 2008, at below market cost and well below their target weight. See PUMF 48. Plaintiffs were still trying to treat and save any infected animals through November 2008. PUMF 50.

On October 2, 2008, Plaintiffs made a claim with Nationwide under the Farm Policy for the loss of cattle under Plaintiffs' care. JUMF 25; PUMF 41. Plaintiffs informed Nationwide that they were still investigating the damage and the cause of death, but that they believed that the loss was due to the ingestion of contaminated feed. PUMF 42, 43. *fn5

On October 3, 2008, Nationwide sent a letter to Plaintiffs denying the first party property claim on the grounds that injury to cattle is not covered unless the cattle are specifically scheduled in the declarations page. JUMF 26; Davis Dec. Ex. C. Nationwide's letter stated that, "if you believe that our understanding of the facts underlying the claim is incorrect, or should you have any additional information that you feel may alter our decision, please advise our office immediately." PUMF 44. The letter also informed Plaintiffs that Coverage E contained a one year limit to file a lawsuit challenging the claim determination. See JUMF 27. Nationwide specifically informed Plaintiffs that they had until May 21, 2009, in which to file a legal action against Nationwide. See JUMF 28; PUMF 45. The May 21, 2008 accrual date used by Nationwide does not correspond to when the cattle began to show signs of injury. See PUMF 46.

Despite denying Plaintiffs' first party claim, Nationwide continued to investigate the third party claim (including the claims of Kamangar and Jason Roth, another owner of cattle cared for by Plaintiffs). JUMF 30. On October 30, 2008, Nationwide sent Plaintiffs' attorney a letter requesting: copies of any contracts between Plaintiffs and Kamangar, verification of location of the feedlot, documents supporting the amount of damages, and contact information for the feed suppliers. See JUMF 31. On January 8, 2009, Nationwide sent a follow-up letter to Plaintiffs' attorney advising that Nationwide had not received a response to its previous request for information. See JUMF 32.

In addition to the two letters identified above, Nationwide left telephone messages with Plaintiffs' counsel on October 15, October 16, October 28, November 14, and December 2, 2008, seeking the same information as the two letters. See DUMF 9-14. It does not appear that Plaintiffs' counsel responded to these telephone message. See id. In 2009, Nationwide again attempted to obtain information and left telephone messages with Plaintiffs' counsel on January 21, February 5, and February 20. See DUMF 15-17.

On March 25, Stewart left a voice-mail with Nationwide that requested Nationwide forward to him any correspondences that Nationwide had sent to Plaintiffs' counsel in order to assist Nationwide in gathering information. See DUMF 18. Nationwide e-mailed the correspondences to Stewart. See DUMF 19.

On April 1, 2009, Plaintiffs filed suit against Associated Feed & Supply and Stokes Ranch. PUMF 57.

On April 6 and 7, 2009, Nationwide left voice-mail messages for Plaintiffs' counsel. See DUMF 20, 21.

On April 9, 2009, Plaintiffs' attorney told Nationwide that Plaintiffs were in the process of suing the supplier and grower of the feed that caused injury to the cattle. JUMF 33.

On April 13, 2009, Nationwide conducted a telephone interview of Ted Gaylord and obtained a recorded statement (Gaylord's attorney was present). See JUMF 34.

Between October 2, 2008, and April 13, 2009, Plaintiffs were compiling information in preparation for their lawsuit against the feed suppliers, which included not only examination of the dead and dying animals, but also investigation, tracing, and sampling (among other things) of the feed. PUMF 58. Promptly upon completion of the investigation and the filing of the lawsuit against the feed suppliers, Ted Gaylord submitted to the recorded telephone interview on April 13, 2009. See PUMF 59. Plaintiffs were engaged in extensive fact-gathering up to and including April 2009 and beyond. See id.

On April 29, 2009, Nationwide sent a correspondence to Plaintiffs that denied Kamangar's liability claim on the grounds that the injury to the cattle was excluded from coverage under both the Farm Policy and the Umbrella Policy. JUMF 35. The letter included a statement that Defendants "will reconsider its coverage position based on the allegations of the suit and any additional and/or different information provided to [Defendants] at that time." PUMF 60.

On September 11, 2009, Kamangar filed a lawsuit against Plaintiffs in state court. See JUMF 36.

On October 29, 2009, Plaintiffs made a tender of defense and request for indemnity to Defendants regarding Kamangar's lawsuit. See DUMF 22.

On November 6, 2009, Nationwide acknowledged receipt of Plaintiff's request and mailed a letter to Plaintiffs' counsel. DUMF 23. The same day, Defendants asked an attorney to review the Farm Policy and the Umbrella Policy in order to determine whether there was coverage. See DUMF 24.

On January 12, 2010, an attorney for Defendants sent Plaintiffs' counsel a twenty-two page letter advising that Plaintiffs' tender of defense and indemnity for the Kamangar claim was not covered under the policies. JUMF 37.

On March 4, 2010, Plaintiffs filed this lawsuit. JUMF 29.

SUMMARY JUDGMENT FRAMEWORK

Summary judgment is appropriate when it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Fortyune v. American Multi-Cinema, Inc., 364 F.3d 1075, 1080 (9th Cir. 2004). The party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and of identifying the portions of the declarations (if any), pleadings, and discovery that demonstrate an absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). A fact is "material" if it might affect the outcome of the suit under the governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986); Thrifty Oil Co. v. Bank of America Nat'l Trust & Savings Assn, 322 F.3d 1039, 1046 (9th Cir. ...


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