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Kaufman & Broad Monterey Bay, Et v. Travelers Property Casualty

July 18, 2012

KAUFMAN & BROAD MONTEREY BAY, ET
AL., PLAINTIFFS,
v.
TRAVELERS PROPERTY CASUALTY
COMPANY OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Edward J. Davila United States District Judge

ORDER GRANTING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, OR IN THE ALTERNATIVE, PARTIAL 15 SUMMARY JUDGMENT (Re: Docket Nos. 106, 113)

Pending before the court is Plaintiff Kaufman & Broad Monterey Bay and Plaintiff KB Home South Bay, Inc.'s (collectively "KB Home") Motion for Partial Summary Judgment and 19 Defendant Travelers Property Casualty Company of America's ("Travelers") Motion for Summary 20 Judgment or, in the Alternative, Partial Summary Judgment. For the reasons discussed below, KB 21 Home's motion is GRANTED and Travelers' motion is GRANTED IN PART and DENIED IN 22 PART. 23

I.BACKGROUND

A.Norcraft Policies

Travelers issued the following commercial general liability policies to Norcraft Companies,

L.P., ("Norcraft") a cabinet installer: TC2J GLSA 118D0207-TIL-02 (effective 12/31/02 to 2

10/21/03); TC2J GLSA 118D2170-TIL-03 (effective 10/21/03 to 10/21/04); TC2J GLSA 3

118D2170-TIL-04 (effective 10/21/04 to 10/21/05); and TC2J GLSA 118D2170-TIL-05 (effective 4

10/21/05 to 10/21/06) ("Norcraft policies"). See Decl. Richard J. Carrillo ¶5, Ex. A-D, Docket No. 5

107. The Norcraft policies provide coverage for "property damage" arising out of an occurrence 6 that takes place in the coverage territory and that occurs during the policy period. See id. Ex. A at 7

TRVC-000571, Ex. B at TRVC-000015, Ex. C at TRVC-000219, and Ex. D at TRVC-000400. The 8 policies define property damage as:

a. Physical injury to tangible property, including all resulting loss of use of that

property. All such loss of use shall be deemed to occur at the time of the physical injury

that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use

shall be deemed to occur at the time of the "occurrence" that caused it.

See id. Ex. A at TRVC-000581, Ex. B at TRVC-000025, Ex. C at TRVC-000233, and Ex. D at 13 The Norcraft policies, however, exclude coverage for "'[p]roperty damage' to 'your 15 product' arising out of it or any part of it" and "'[p]roperty damage' to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" Id. Ex. A at TRVC- 17 000573, Ex. B at TRVC-000017, Ex. C at TRVC-000223, and Ex. D at TRVC-000404. 18 19 reads in pertinent part:

1. WHO IS AN INSURED (Section II) is amended to include as an insured the person

or organization (called "additional insured") with whom you have agreed in a written contract, executed prior to loss, to name as an additional insured, but:

a. Only with respect to liability because of "bodily injury" or "property damage" arising

out of "your work" for that additional insured performed by you or for you; and

b. Subject to any limitations in the written contract regarding the scope of the additional

insured status. . . The Norcraft policies each contain a blanket additional insured endorsement form, which

Id. Ex. A at TRVC-000615, Ex. B at TRVC-000059, Ex. C at TRVC-000255, and Ex. D at TRVC-25

B.Subcontract and Aldrich Action

On or about January 22, 2003, and February 5, 2003, KB Home and Norcraft entered into 3 subcontracts to furnish, deliver and install cabinets at certain homes within two housing 4 developments in Monterey, California. Decl. Patricia E. Dlugokenski ¶2, Exs. A, B, Docket No. 5 108. The subcontracts required Norcraft to name KB Home as an additional insured under its 6 commercial general liability policies. Id. ¶2, Exs. A, B. 7

On October 21, 2008, a number of homeowners commenced a lawsuit in Monterey County

Superior Court against KB Home, Aldrich, et al. v. KB Home, et al. ("Aldrich 9 Action"). Id. ¶5, Ex. C. The homeowners alleged a number of construction defects, including 10 "cabinet and wood trim" defects, that resulted in damage to the homes and their component parts.

Id. Ex. C ¶ 17. KB Home filed a cross-complaint against various parties, including Norcraft, 12 alleging among other things that Norcraft is contractually required to defend and indemnify KB 13 Home with regard to the Aldrich action. See id. Ex. F. 14

C.Travelers' Acceptance, Withdrawal, and This Action

On April 1, 2009, Glaspy & Glaspy, counsel for KB Home, tendered the defense and indemnity of KB Home as additional insureds under the Norcraft policies in the Aldrich action. Id. 17 ¶6, Ex. D. This initial tender included copies of the original Complaint, First Amended Complaint, 18

KB Home's Cross-Complaint, a Stipulation and Order of Reference to the Special Master, the 19

Subcontract and additional insured documentation. Id. ¶¶6, 7, Exs. A, B, E, F, G. 20

On April 6, 2009, Patricia E. Dlugokenski ("Dlugokenski"), a senior technical specialist for Travelers acknowledged receipt of the tenders and requested additional information including: a 22 statement of claims or documentation related to the alleged defects and deficiencies; expert 23 investigation reports into defects or damages; current pleadings and any CMO or PTO documents; 24 and the location of any document depository. Id. Ex. H. at KB COV10097. On April 6, 2009, in 25 response, KB Home provided an updated Homeowner matrix, the amended complaint, and the 26 dismissal of one of the plaintiffs' homes. KB also informed Travelers that the PTO has not yet been 27 filed and there is no defect list but that KB Home would forward the defect list as soon as it is 2 received. Id. Ex. J. 3

On July 6, 2009, Dlugokenski noted in the internal Claims Notes that "it is likely some, 4 although minor damages resulted from [cabinet] installation. Damages to the walls or pulling away 5 from the walls could be attributed to installation." Id. Ex. I at Entry of 7/6/09. Also on July 6, 2009, 6

Dlugokenski issued a letter accepting KB Home's tender as additional insureds under the Norcraft 7 policies. Id. Ex. K. The letter also requested information that would assist Travelers in its 8 evaluation of the demand for payment of defense expenses, such as contact information for all 9 carriers who have been provided a tender of defense, their responses, the amounts they have paid, 10 the percentage they agreed to pay, a litigations budge, and an additional insured matrix showing the carriers tendered as well as their responses. Id. 12

On October 20, 2009, Dlugokenski sent an email to KB Homes' counsel requesting "documentation of damage caused by our named insured (defect report, etc.)" Id. Ex. L. KB 14

Home's counsel informed Travelers that no defect list was available to date. See Dlugokenski Decl. 15

Ex. I at Entry 10/22/2009.

On November 5, 2009, Tom Frazier ("Frazier"), Travlers' unit manager conducted a review 17 of KB Home's tenders and found that they lacked documentation of damage or liability arising out 18 of Norcraft's work. Decl. Tom Frazier ¶ 5, Docket No. 109; see id. Ex. I at Entry 11/05/2009. 19 On December 1, 2009, KB Home contacted Travelers about its outstanding balance and 20 requested payment. On December 10, 2009, Dlugokenski responded with a single-sentence email 21 stating, "We will be withdrawing our acceptance." Id. Ex. M. 22 On February 9, 2010, Hartford Casualty Company ("The Hartford"), another insurance 23 company, accepted KB Home's tenders of defense and issued a payment of $30,000 for KB 24 Home's defense in the Aldrich action. See Chao Decl. ¶4, Exs. U, CC. Despite repeated requests, 25 The Hartford made no further payments. Decl. Mary Kay Glaspy ¶ 11, Docket No. 13.

On March 9, 2010, Dlugokenski sent a letter to KB Home advising that Travelers was

2 withdrawing from KB Home's defense. Dlugokenski Decl. ¶14, Ex. N. In the letter Dlugokenski 3 states that,

"Our review of the information received to date reveals an absence of allegations that

give rise to a potential of 'property damage' sustained by plaintiffs arising out of the

product provided or the work performed by Norcraft. Absent the aforementioned potential of 'property damage," coverage cannot be extended to KB to the above action

under the Norcraft policies pursuant to the applicable endorsements. . . . if you have any information you believe might later Travelers' position, please send copies of said documentation."

On May 27, 2010, KB Home filed this action against Travelers for 1) declaratory relief; 2) 10 breach of contract; and 3) breach of the implied covenant of good faith and fair dealing. On June United 29, 2010, Travelers answered the complaint and removed the action to this court. 12 On July 8, 2010, Fred Adelman, counsel for the Aldrich plaintiffs, signed a letter stating 11 13 that "[t]he plaintiffs in this action are pursuing recovery for damages arising out of the cabinets." 14

Chao Decl. Ex. W. Counsel for KB Home supplied this letter to counsel for Travelers and asked 15 that Travelers reconsider its withdrawal. Id. On July 23, 2010, Travelers' counsel informed KB

Home that the documentation provided including the July 8, 2010 letter was insufficient to trigger a 17 duty to defend and requested documentation demonstrating the existence of covered property 18 damage, such as a preliminary defect list, a statement of claims, or relevant investigation reports. 19 Id. ¶ 7. 20

On August 4, 2010, KB Home provided the Aldrich plaintiffs' preliminary defect list 21 regarding cabinets, entitled "Aldrich, et al. v. KB Home, et al., Preliminary Defect List." Chao 22

Decl. X. This document consists of a list of defects and resulting damages from Norcraft's work 23 installing cabinetry. The "Defect List" includes damage and wearing to the base, door, drawer, and 24 finish of the cabinets. Id. The "Resulting Damage" includes gouging of drywall and interior 25 painting and cracking and separation of drywall and caulking. Id. 26

On December 17, 2010, based on the August 4, 2010 defect list, Travelers sent a letter to

KB Homes in which it "agree[d] to participate in the defense of KB Homes as an additional insured from August 4, 2010 forward." Dlugokenski Decl. ¶15, Ex. O. In this letter, Travelers informed KB 2

Home that it was appointing Christian Lucia of Seller Hazard Manning Ficenac & Lucia ("Sellar 3 Hazard") to represent KB Home in the Aldrich action. Travelers added that "[i]f KB Home wishes 4 to continue to retain Glaspy & Glaspy to provide it with a defense it may do so, but at its own 5 expense." Id.

On January 4, 2011, KB Home sent a letter to Travelers stating that Travelers has forfeited 7 any right to control KB Home's defense because it breached its duty to defend KB Home. Chao 8 Decl. ¶9, Ex. Y. KB Home also stated that Sellar Hazard had "a clear conflict of interest and is 9 currently representing a subcontractor directly adverse to KB Home in a pending construction 10 defect lawsuit entitled Chada v. KB Home, San Joaquin County Superior Court case No. 39-2009- 00232688-CU" and that "[u]nder no circumstances will KB Home waive this conflict." Id.

On January 28, 2011, Travelers issued payment of $73,654.54 to KB Home as payment for 13 its one-half share of KB Home's defense fees and costs in the Aldrich action pursuant to its equal 14 shares allocation with The Hartford. Dlugokenski Decl. ¶14, Ex. P. On July 19, 2011, Norcraft and 15 the Aldrich plaintiffs reached a settlement in the Aldrich action by the terms of which plaintiffs agreed to an issue release related to all cabinet issues, in exchange for the lump sum payment of 17 $30,000. Decl. Deborah Ann Taylor ¶ 3, Docket No. 117. Travelers claims that, as of August 25, 18 2011, it had paid in excess of$187,418 in the defense of KB Home in the Aldrich action, which it 19 claims is the amount of"all outstanding invoices presented." Dlugokenski Decl. ¶17. Travelers has 20 paid in excess of $187,418, and The Hartford has paid $30,000. Id.; Chao Decl. ¶4, Ex. CC. 21

On August 26, 2011, KB Home filed its Motion for Partial Summary Judgment. Also on August 26, 2011, Travelers filed is Motion for Summary Judgment or, in the Alternative, Partial 23 Summary Judgment. On September 16, 2011, Travelers filed counterclaims against KB Homes for 24 ...


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