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

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION


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 reimbursement, unjust enrichment, breach of contract, and declaratory relief. 25

II. LEGAL STANDARDS

Entry of summary judgment is proper "if the movant shows that there is no genuine dispute 27 as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Summary judgment should be granted if the evidence would require a directed verdict for 2 the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). Thus, "Rule 56[ ] 3 mandates the entry of summary judgment . . . against a party who fails to make a showing 4 sufficient to establish the existence of an element essential to that party's case, and on which that 5 party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). 6

"The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in 7 his favor." Anderson, 477 U.S. at 255. However, "[t]he mere existence of a scintilla of evidence in 8 support of the plaintiff's position will be insufficient; there must be evidence on which the jury 9 could reasonably find for the plaintiff." Id. at 252. "When opposing parties tell two different 10 stories, one of which is blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not adopt that version of the facts for purposes of ruling on a motion for 12 summary judgment." Scott v. Harris, 550 U.S. 372, 380 (2007). 13

III. DISCUSSION

14

KB Home seeks partial summary judgment that (1) Traveler's duty to provide KB Home a 15 defense was triggered from the date of tender, April 1, 2009; (2) Travelers breached its duty to provide KB Home a defense; and (3) belated payment of the costs of the defense in the Aldrich 17 action did not cure Traveler's breach of its duty to defend KB Home. 18 Travelers seeks summary judgment in its favor on KB Home's breach of contract claim 19 because (1) KB Home breached its duty to cooperate by refusing to accept Travelers' appointed 20 counsel; (2) KB Home cannot prove a duty was owed when Travelers denied coverage because 21

Travelers' duty to defend had not been triggered; (3) KB Home has not presented any evidence of 22 resulting damages. Travelers seeks summary judgment in its favor on KB Home's breach of 23 covenant of good faith and fair dealing because (1) Travelers never withheld benefits due under the 24 policy; (2) Any delay in paying benefits was based on a genuine dispute regarding coverage; and 25

(3) Travelers conducted a reasonable investigation of KB Home's tender. 26 27 Because the parties seek summary judgment or partial summary judgment on many of the

2 same issues, the court addresses the arguments as they relate to each cause of action instead of 3 addressing each motion separately. 4

A. Breach of Contract

5

The essential elements of a breach of contract claim are: "(1) the contract, (2) plaintiff's 6 performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages 7 to plaintiff." Hamilton v. Greenwich Investors XXVI, LLC, 195 Cal. App. 4th 1602, 1614 (2011) 8 (quoting Reichert v. General Ins. Co. 68 Cal. 2d 822, 830 (1968)). 9 1.Whether Travelers Owed KB Home a Duty To Defend From April 1, 2009 KB Home seeks summary judgment that Travelers' duty to provide KB Home a defense was triggered from the date of tender on April 1, 2009 of the Aldrich complaint, which created a 12 potential for covered damages. In opposition, Travelers argues that the complaint, as well as all the 13 other information available to Travelers at the time of its withdrawal on March 9, 2010, showed 14 that the only property damage related to the Norcraft cabinets alleged by the Aldrich plaintiffs was 15 damage to the cabinets themselves, and the plaintiffs had not alleged damage to other property caused by Norcraft's work. 17

"[W]hen a suit against an insured alleges a claim that potentially or even possibly could 18 subject the insured to liability for covered damages, an insurer must defend unless and until the 19 insurer can demonstrate, by reference to undisputed facts, that the claim cannot be covered." Borg 20 v. Transamerica Ins. Co., 47 Cal. App. 4th 448, 455 (1996). "To prevail, the insured must prove the 21 existence of a potential for coverage, while the insurer must establish the absence of any such 22 potential. In other words, the insured need only show that the underlying claim may fall within 23 policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is 24 not covered, or may not be covered, but [which] are insufficient to eliminate the possibility that 25 resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add 26 no weight to the scales. Any seeming disparity in the respective burdens merely reflects the 27 substantive law." Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993) 2

(emphasis in original). 3

"The determination whether an insurer owes a duty to defend is made in the first instance 4 by comparing the allegations of the complaint with the terms of the policy." Montrose, 6 Cal. 4th at 5

295 (quoting Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 276 (1966)). "The inquiry should first 6 focus on the allegations of the complaint, but the insured may rely on extrinsic evidence to give 7 rise to a duty to defend. Likewise, an insurer can rely on extrinsic facts to defeat a duty of defense, 8 if such facts conclusively eliminate the potential for coverage." Standun, Inc. v. Fireman's Fund Ins. Co., 62 Cal. App. 4th 882, 889 (1998). Where there is any doubt as to whether the duty to 10 defend exists, the doubt must be resolved in favor of the insured and against the insurer. Borg, 47

Cal. App. 4th at 455. 12

"For an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of 13 coverage under its policy of insurance, but upon those facts known by the insurer at the inception 14 of a third party lawsuit. Hence, the duty may exist even where coverage is in doubt and ultimately 15 does not develop." Saylin v. California Ins. Guarantee Assn. 179 Cal.App.3d 256, 263 (1986)

(internal quotation omitted). The defense duty is a continuing one, arising on tender of defense and 17 lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential 18 for coverage. Montrose, 6 Cal.4th at 297 (emphasis in original). Any doubt as to whether the facts 19 establish the existence of a duty to defend must be resolved in the insured's favor. Id. at 299-300. 20

The Norcraft policies provide coverage for "property damage," which the policies define as "[p]hysical injury to tangible property, including all resulting loss of use of that property . . . or 22

[l]oss of use of tangible property that is not physically injured." See, e.g., Carrillo Decl. Ex.A at 23

TRVC-581. The Norcraft polices do not cover property damage to Norcraft's work arising out of it 24 or any part of it. See, e.g., id. at TRVC-584. The policies only cover an additional insured for 25 bodily injury or property damage arising out of Norcraft's work for that additional insured 26 performed by Norcraft. See, e.g., id. at TRVC-615. Thus, the Norcraft polices cover physical injury 27 to, or loss of use of, tangible property that arises out of the work Norcraft did on the cabinets, but 2 the policies do not cover damage to the cabinets themselves. 3

On April 1, 2009, KB Home tendered the defense and indemnity of KB Home as additional

4 insureds under the Norcraft policies in the Aldrich action. Dlugokenski Decl. ¶6, Ex. D. KB Home 5 provided copies of the original Complaint, First Amended Complaint, KB Home's Cross-6 Complaint, a Stipulation and Order of Reference to the Special Master, the Subcontract and 7 additional insured documentation. Id. ¶¶6, 7, Exs. A, B, E, F, G. On April 6, 2009, KB Home 8 further provided the homeowner matrix and informed Travelers that the defect list had not yet been 9 provided to KB Home but that KB Home would forward the defect list as soon as it is received. Id. 10

Ex. J.

Here, both parties cite to the following language of the Aldrich complaint in support of their 12 positions. The complaint alleges, in part: 13

for its intended purpose because Defendants did not construct the PROPERTY in a workmanlike manner as manifested by, but not limited to, numerous defects which have resulted in damage to the homesand their component parts. The defects include, without limitation and to various degrees on the plaintiffs' respective residence, the following: . . . cabinet and wood trim defects.

17. At the time of the purchase by Plaintiffs, the PROPERTY was defective and unfit Dlubokenski Decl. Ex. C (emphasis added). 18

Travelers argues that the complaint does not allege that other property was damaged as a 19 result of the cabinets. Specifically, Travelers argues that the Aldrich complaint only alleges the 20 existence of cabinet and wood trim defects at the homes and that the cabinets were installed so as 21 to interfere with the cabinets' useful life. 22

Travelers reading of paragraph 17, however, appears to consider only the final sentence of

23 the allegation which list the defects, including cabinet and wood trim defects, to which the rest of 24 the paragraph makes reference. The immediately preceding sentence states that the "defects . . . 25 have resulted in damage to the homes and their component parts." Id. Thus, the complaint alleges 26 that cabinet and wood trim defects caused damage to the homes and their component parts, which 27 potentially includes parts of the homes other than the cabinets.

Travelers also argues that the FAC only seeks costs associated with investigation to identify

2 the claimed defects, repair costs to repair the defects, replacement costs to replace the 3 manufactured products, and loss of use expenses anticipated to be incurred during the repair and 4 replacement process. The prayer for relief in the FAC, however, does not support Travelers 5 assertions. See id. Ex. E. The FAC seeks "costs of restoration and repairs to the property," "for 6 diminution of value of the property," and "for loss of use of the property" among other damages. 7 Id. at 21. The FAC does not specify that these costs are to replace or repair the defects themselves 8 and not damage to other property caused by the defects. Rather, the FAC's claim that "Plaintiffs 9 will be forced to incur expenses for the restoration and repairs of the property to cure the damage, 10 defects, and/or deficiencies," contradicts Travelers interpretation that the relief sought is limited to only the defects themselves or the manufactured products. See id. ¶ 21(a) (emphasis added). 12

Finally, Travelers argues that the absence of information in the special master order and the 13 homeowners' matrix in the Aldrich action regarding damages to other property caused by the 14 cabinets suggests that the plaintiff homeowners were not alleging these damages. Travelers, 15 however, has not provided authority indicating that, where the Complaint alleges a potentially

covered claim, a reasonable jury could find that the lack of allegations of covered damage in the 17 homeowners' matrix or special master order could conclusively eliminate the potential for 18 coverage. 19

Thus, the Aldrich complaint alleged a claim that potentially could subject KB Home to 20 liability for physical injury to other, tangible property caused by Norcraft's cabinets, which is 21 property damage covered by the Norcraft policies. As a result of the Aldrich complaint tendered on 22

April 1, 2009, Travelers was required to defend KB Home unless and until Travelers could 23 demonstrate, by reference to undisputed facts, that the claim cannot be covered. KB Home's 24 motion for partial summary judgment that Travelers owed it a duty to defend as of April 1, 2009 is 25

GRANTED. 26 27

2. Whether Travelers Breached Its Duty To Defend

KB Home seeks summary judgment that Travelers breached its duty to provide an 3 immediate, full and complete defense by (1) withdrawing from KB Home's defense on March 9, 4 2010; (2) refusing to fund any portion of KB Home's defense; (3) refusing to consider extrinsic 5 evidence confirming Travelers' duty to defend; (4) and continuing to improperly limit its defense 6 obligations. 7

Travelers seeks summary judgment that KB Home cannot prove a duty was owed when Travelers denied coverage because Travelers' duty to defend had not been triggered at the time of 9 its March 2010 withdrawal. Additionally, Travelers opposes KB Home's motion that Travelers 10 breached its duty to defend by arguing that KB Home breached the duty to cooperate by withholding the Lot Files and Notices of Claim requested by Travelers.

a.Whether Travelers Owed a Duty To Defend at the Time of Its Withdrawal

Having determined that Travelers owed KB Home a duty to defend as of April 1, 2009, the

14 court begins by addressing Travelers' argument that it did not owe a duty to defend as of March 9, 15

2010 when it withdrew from KB Home's defense. In addition to the arguments discussed and

rejected above regarding the sufficiency of the April 2009 tender, Travelers argues that its March 17

9, 2010 withdrawal was proper because, despite requests by Travelers, KB Home failed to provide 18 the homeowners plaintiffs' defect list or any other information showing allegations of damage to 19 other property caused by Norcraft's work. 20 21 defect list twice from KB Home.*fn1 First, on April 6, 2009, Travelers requested the defect list and 22 KB Home responded that a defect list had not been provided yet. Dlugokenski Exs. H, J. After that 23 exchange, Travelers subsequently agreed to defend KB Home. The second time Travelers 24 requested the defect list was on October 20, 2009. Id. Ex. L. Again, KB Home told Travelers that 25

Travelers has submitted evidence that, prior to its March 9, 2010 withdrawal, it requested a no defect list was available. See id. Ex. I at Entry 10/22/2009. Thus, Travelers argues that its duty 2 to defend was not triggered until KB Home produced the defect list on August 4, 2010. 3 As discussed above, the Aldrich complaint triggered Travelers' duty to defend on April 1,

2009. Travelers has not cited any authority supporting its argument that failure to provide a defect 5 list or other information could conclusively establish the absence of coverage. Thus, the evidence 6 of KB Home's delay in producing the defect list is not sufficient to demonstrate a genuine issue of 7 fact regarding whether Travelers' duty to defend was terminated. 8

Travelers also argues that KB Home failed to produce or disclose the existence of Lot Files 9 and Notices of Claim. According to Travelers, the documents contained within the Lot Files 10 include, at a minimum, records detailing a two-year history of complaints by each homeowner with respect to defects and damages identified after the close of escrow for each residence. Travelers has 12 presented evidence that these Lot Files do not reference or document anything other than damage 13 to, or defects with, the cabinets themselves. See Decl. Gene Irizarry ¶¶ 9, 10, Docket No. 119; 14 Decl. Jennifer S. Marvin ¶ 13, Docket No. 120; Decl. Michael Panish ¶ 6, Docket No. 121. 15 Travelers, however, does not claim that it had reviewed these documents before it withdrew from KB Home's defense, and Travelers has not presented any authority to support an argument 17 that facts that were not known at the time of its withdrawal are relevant to determining whether an 18 insurer owed a duty to defend at that time. Additionally, Travelers has not presented evidence that 19 these Lot Files document all damages potentially sought by the Aldrich plaintiffs. Thus, Travelers 20 has not shown that the absence in the Lot Files of reported damage to other property caused by the 21 cabinets is sufficient to eliminate the possibility that resultant damages will fall within the scope of 22 coverage and is not merely a fact tending to show that the claim is not covered, or may not be 23 covered. This evidence therefore adds no weight to the scales. Montrose Chemical Corp., 6 Cal. 4th 24 at 300. 25

Thus, Travelers has failed to present evidence showing a genuine issue of fact regarding 26 whether, at the time of its March 9, 2010 withdrawal, there was no potential for a covered liability. 27

b.Whether KB Home Breached Its Duty To Cooperate By Withholding

Documents

Travelers also argues that KB Home failed to perform a condition precedent to obtaining

4 coverage because KB Home breached its duty to cooperate by withholding requested 5 documentation that would support Travelers' withdrawal. 6

The Norcraft policies obligate all insureds to "[c]ooperate with [Travelers] in the

States District Court For the Northern District of California

7 investigation or settlement of the claim or defense against the 'suit'" and to "[a]ssist [Travelers], 8 upon [Travelers'] request, in the enforcement of any right against any person or organization which 9 may be liable to the insured because of injury or damages to which this insurance may also apply." 10

See, e.g., Carrillo Decl. Ex. A at TRVC-577. Travelers argues that KB Home violated this clause by intentionally withholding the homeowner Lot Files which were in KB Home's possession since 12

2003, and the Notice of Claim documentation filed in the Aldrich action on July 31, 2009. 13

Travelers has also provided evidence that both of these documents listed only damages not covered 14 by the Norcraft policies. See Decl. Gene Irizarry ¶¶ 9, 10, Docket No. 119; Decl. Jennifer S. 15 Marvin ¶ 13, Docket No. 120; Decl. Michael Panish ¶ 6, Docket No. 121.

"Where an insured violates a cooperation clause, the insurer's performance is excused if its

17 ability to provide a defense has been substantially prejudiced." Truck Ins. Exch. v. Unigrad Ins. 18 Co., 79 Cal. App. 4th 966, 976 (2000). "The burden of proving that a breach of a cooperation 19 clause resulted in prejudice is on the insurer." Campbell v. Allstate Ins. Co., 60 Cal. 2d 303, 306 20

(1963). Thus, in order to be excused from its duty to defend by KB Home's alleged breach of the 21 duty to cooperate, Travelers must show prejudice that resulted from KB Home's withholding these 22 documents. Travelers has not identified any related prejudice, much less provided evidence upon 23 which a reasonable jury could find prejudice. 24

KB Home, however, has pointed to evidence that Travelers was not prejudiced by these

25 documents because, even if these documents had been produced earlier, Travelers would have 26 acted no differently. Travelers' expert, Gene Irizarry, declared that "even though KB [Home] did 27 not provide the Lot Files to Travelers, had it done so, no duty to defend would have been triggered." Decl. Irizarry ¶ 14. This evidence indicates that, with or without the documents, 2

Travelers still would have determined that it did not have a duty to defend. Thus, assuming that KB 3

Home withheld these documents, Travelers has not raised a genuine issue of fact regarding whether 4

Travelers was excused from its duty to defend as a result. 5

The undisputed facts demonstrate that Travelers breached its duty to provide KB Home

6 with a complete and immediate defense of the Aldrich action when it withdrew from KB Home's 7 defense on March 9, 2010. For the reasons discussed above, KB Home's motion for summary 8 judgment that Travelers breached its duty to defend KB Home therefore is GRANTED. Travelers' 9 motion for summary judgment that KB Home cannot prove a duty was owed when Travelers 10 denied coverage because Travelers' duty to defend had not been triggered is DENIED.

3. Whether Travelers Cured Its Breach By Its Belated Payment

KB Home moves for summary judgment that Travelers' belated acceptance of its duty to

13 defend does not cure its prior breaches. In opposition, Travelers argues that KB Home has not 14 provided any evidence of damages. In its reply brief, KB Home argues that this portion of its 15 motion does not pertain to damages and that whether KB Home suffered damages, and the amount

of those damages does not impact adjudication that Travelers had a duty to defend and breached 17 that duty. Rather KB Home seeks judgment that Travelers' failure to take up KB Home's defense 18 when its duty was triggered is not cured because Travelers did so after KB Home filed this action. 19

"[A] belated offer to pay the costs of defense may mitigate damages but will not cure the 20 initial breach of duty." Shade Foods, Inc. v. Innovative Products Sales, 78 Cal. App. 4th 847, 881 21

(2000). Travelers' only argument goes to whether KB Home has shown damages resulted from any 22 breach, and Travelers has not offered any argument or evidence showing that its late acceptance of 23 the duty to defend KB Home cures its initial breach of that duty. 24

Thus, KB Home's motion for summary judgment that Travelers did not cure its breach by

25 its belated payment for KB Home's defense is GRANTED. 26 27

4. Whether KB Home Breached the Cooperation Clause by Rejecting Counsel Travelers moves for summary judgment that KB Home breached the cooperation clause by 3 refusing to accept counsel chosen by Travelers on January 4, 2011 and thereby released Travelers 4 from liability under the insurance policies. See Chao Decl. ¶ 9, Ex. Y. KB Home argues that 5 Travelers lost any right to control KB Home's defense or enforce the cooperation clause when 6 Travelers breached its duty to defend. 7

"The insurer's right to control the insured's defense extends to the right to select legal 8 counsel." Travelers Property Cas. Co. of America v. Centex Homes, No. 11--3638--SC, 2012 WL 9 1657121, at *4 (N.D. Cal. May 10, 2012). However, "[w]hen an insurer wrongfully refuses to 10 defend, the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate." Eigner v. Worthington, 57 Cal. App. 12 4th 188, 196 (1997). 13

Here, the Aldrich action was tendered to Travelers on April 1, 2009 and triggered Travelers' duty to defend. On March 9, 2010, Travelers declined to participate in Aldrich defense. 15

Travelers, however, agreed to defend KB Home on December 17, 2010, after KB Home had provided Travelers with a defect list from the Aldrich plaintiffs on August 4, 2010 and after KB 17

Home filed this lawsuit. As Travelers' duty to defend arose immediately upon the April 1, 2009 18 tender, Travelers' withdrawal and delay in providing KB Home with a defense divested it of the 19 right to control KB Home's defense. See Travelers Property Cas. Co. of America, 2012 WL 20 1657121, at *4.

Thus, Travelers has failed to demonstrate that the undisputed evidence shows KB Home's 22 rejection of Travelers' chosen counsel was a breach of the cooperation clause. Travelers' motion 23 for summary judgment that KB Home breached its duty of cooperation therefore is DENIED. 24

5. Whether KB Home Has Presented Evidence of Damages

"Contract damages are generally limited to those within the contemplation of the parties 26 when the contract was entered into or at least reasonably foreseeable by them at that time; 27 consequential damages beyond the expectations of the parties are not recoverable." Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 515 (1994). "The general measure of 2 contract damages owed an insured due to an insurer's breach of the duty to defend are the 'costs 3 and attorney fees expended by the insured defending the underlying action.'" Richards v. Sequoia 4 Ins. Co., 195 Cal. App. 4th 431, 436 (2011) (quoting Emerald Bay Community Assn.v. Golden 5 Eagle Ins. Corp., 130 Cal. App. 4th 1078, 1088--1089 (2005)). "When the policy provides coverage 6 for the claim, an insured may also recover the amount of any reasonable, good faith settlement." Id. 7

Travelers moves for summary judgment that KB Home did not suffer damages as a result of Travelers' alleged breach of contract. In opposition, KB Home argues that Travelers cannot cure its 9 breaches by belatedly paying for KB Home's defense, and that KB Home has provided evidence of 10 damages through (1) David B. Simons' deposition; (2) Travelers' claim against KB Home seeking reimbursement for amounts it paid to KB Home; (3) its entitlement to Brandt fees. 12 In Shade Foods, the insurer rejected a tender of defense but reconsidered its denial shortly 13 before trial and paid all of its insured's legal expenses. Shade Foods, Inc., 78 Cal. App. 4th at 879. 14

During the time the insurer had rejected the tender of the defense, the insured arranged and paid for 15 its own defense. ld. at 883. The California Court of Appeals upheld the jury's finding that the

insurer breached the covenant of good faith and fair dealing. The court noted that the insurer "did 17 not fully remedy the harm caused by its refusal to defend by later paying [the insured's] attorney 18 fees, though this belated decision unquestionably mitigated its damages." Id. at 883. KB Home 19 correctly cites Shade Foods for the proposition that Travelers' belated offer to pay the costs of 20 defense may mitigate damages but will not cure Travelers' initial breach of duty. See id. at 881. 21

This rule affects the impact of Travelers' late payment on its liability for breach, but it does not 22 eliminate KB Home's burden to provide evidence that it sustained harm as a result of the breach. 23

Here, KB Home has not provided any evidence that it suffered damages before Traveler's 24 payment. KB Home only offers deposition of David B. Simons that "I don't know how much we 25 paid since April 1st of 2009. But if there were amounts that we did pay that we contend Travelers 26 should have paid, that is lost capital for KB Home that we could have put to another business use." 27

Simons 5/24/11 Dep. at 155:2-10, Decl. of C. Kendie Schlecht Ex. 31, Docket No. 132 (emphasis added). Simons' testimony does not claim that KB Home paid money that Travelers should have 2 paid; he merely states that it if that were true, KB Home would have damages beyond that initial 3 payment. Thus, Simons deposition testimony does not contain evidence that KB Home sustained 4 damages as a result of the breach. 5

Additionally, KB Home cites no authority in support of its argument that the fact that Travelers has a pending claim against KB Home for reimbursement, which might or might not be 7 successful, is evidence of damages for KB Home's breach of contract claim. Thus, Travelers' 8 claim for reimbursement is not evidence sufficient to establish a genuine issue that KB Home 9 sustained damages as a result of the breach. 10

Finally, KB Home argues that it has incurred over $390,840.05 in attorneys' fees and costs in this action in order to vindicate its rights under the Norcraft policies and that it is entitled to 12 recover this amount as Brandt fees. In Brandt, the court held that when an insurer's tortious 13 conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a 14 policy, it follows that the insurer should be liable in a tort action for that expense, because 15 attorneys' fees are an economic loss proximately caused by the tort. Brandt v. Superior Court, 37

Cal. 3d 813, 818 (1985). An erroneous, but good faith, interpretation of an insurance contract by an 17 insurer precludes the award of attorney's fees incurred in obtaining benefits that the insurer 18 withheld from the insured. Id. at 819. Brandt fees may be recoverable through KB Home's tort 19 claim for bad faith, but KB Home has not cited any authority showing that a claim to Brandt fees is 20 evidence of damages for purposes of establishing a breach of contract claim. Thus, KB Home's 21 evidence regarding the amount of attorneys' fees and costs paid in this action does not establish a 22 genuine issue of fact that KB Home suffered damages for purposes of KB Home's breach of 23 contract claim. 24

Thus, KB Home has provided no evidence that it paid for its defense in the Aldrich action

25 or suffered any other damage as a result of any breach by Travelers. "A plaintiff who cannot show 26 payment of legal expenses in defense of a claim does not show contract damages due to an 27 insurer's delay in assuming responsibility." Richards, 195 Cal. App. 4th at 438 (affirming summary judgment for insurer on breach of contract claim where insurer paid all attorneys' fees owed and 2 paid to settle the lawsuit and the insured sustained no legally cognizable damages for any alleged 3 breach of the insurance contract). The parties agree that Hartford paid $30,000 toward KB Home's 4 defense in February 2010. See Chao Decl. ¶ 4, Ex. U, CC. KB Home does not dispute Travelers' 5 evidence that Travelers paid all outstanding invoices relating to KB Home's defense in the Aldrich 6 action when it retook the duty to defend KB Home in December 2010. See Dlugokenski Decl. ¶ 17. 7

KB Home has not presented evidence that it paid for its own defense at any time or otherwise 8 incurred damages as a result of Travelers' alleged breaches of its duty to defend KB Home. 9

KB Home has not provided any evidence, much less evidence upon which a reasonable jury

10 could find in its favor, on an essential element of KB Home's breach of contract claim. Because

failure to prove resulting damages is fatal to KB Home's claim, Travelers' motion for summary 12 judgment is GRANTED as to KB Home's breach of contract claim. 13

B. Breach of Covenant of Good Faith and Fair Dealing

"In addition to the right to sue an insurer in contract, if the insurer acts unreasonably and 15 without proper cause in failing to investigate a claim, refusing to provide a defense, or either delaying or failing to pay benefits due under the policy, the insured can sue in tort for breach of the 17 covenant of good faith and fair dealing." Emerald Bay Community Assn., 130 Cal. App. 4th at 18

1093. Under California law, to establish breach of the implied covenant, "(1) benefits due under the 19 policy must have been withheld; and (2) the reason for withholding benefits must have been 20 unreasonable or without proper cause." Love v. Fire Ins. Exchange, 221 Cal. App. 3d 1136, 1151 21 (1990). 22

1. Whether Travelers Withheld Benefits Due Under the Policy

Travelers seeks summary judgment that no benefits due under the policy were ever 24 withheld because Travelers did not owe KB Home any benefits under the policy until the duty to 25 defend was triggered following the production and authentication of the defect list on August 4, 26 2010. Once the duty to defend was triggered, Travelers agreed to defend KB Home and paid the 27 balance of all defense fees and costs incurred to date. Dlugokenski Decl. ¶¶16, 17. As discussed above, Travelers' duty to defend was triggered on April 1, 2009, and Travelers breached its duty to 2 provide an immediate defense. For the same reasons, Travelers' motion for summary judgment that 3 it never withheld benefits due under the policy is DENIED. 4

2. Whether Travelers Withheld Benefits Unreasonably or Without Proper Cause

Travelers seeks summary judgment that it did not withhold benefits unreasonably or 6 without proper cause because (1) any delay in paying benefits was based on a genuine dispute 7 regarding coverage and (2) Travelers conducted a reasonable investigation of KB Home's tender. 8

In opposition, KB Home argues that (1) the genuine dispute doctrine does not absolve Travelers' 9 bad conduct; (2) Travelers' promise to defend KB Home was fraudulent at the time it was made; 10

(3) Travelers tortuously refused to reconsider its coverage position; and (4) Travelers' conduct in this litigation is further evidence of its bad faith. 12

Where there is a "genuine issue" or "genuine dispute" as to the "insurer's liability under the 13 policy for the claim asserted by the insured, there can be no bad faith liability imposed on the 14 insurer for advancing its side of that dispute." McCoy v. Progressive W. Ins. Co., 171 Cal. App. 15

4th 785, 793 (2009). "A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds." Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 723 17 (2007) (emphasis in original). Thus, summary judgment of a breach of the implied covenant of 18 good faith and fair dealing may only be granted "when it is undisputed or indisputable that the 19 basis for the insurer's denial of benefits was reasonable." Amadeo v. Principal Mut. Life Ins. Co., 20 290 F.3d 1152, 1161--62 (9th Cir. 2002). 21

"The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and 22 fairly investigate, process and evaluate the insured's claim." Wilson, 42 Cal. 4th at 723. In fact, the 23 adequacy of an insurer's investigation is "[a]mong the most critical factors bearing on the insurer's 24 good faith." Shade Foods, Inc., 78 Cal. App. 4th at 879. "Though some authority tends to equate a 25 bad faith failure to investigate with negligence, the better view appears to be that it must rise to the 26 level of unfair dealing." Id. at 880. "An unreasonable failure to investigate amounting to such 27 unfair dealing may be found when an insurer fails to consider, or seek to discover, evidence 2 relevant to the issues of liability and damages." Id. 3

Based on KB Home's initial tender, on July 6, 2009, Travelers' Claim Notes document

Traveler's decision to accept KB Home's defense because of a likelihood of covered damages. 5

Dlugokenski Decl. Ex. I at Entry of 7/6/09. The Claim Notes state that Norcraft "completed 6 installation and cabinet damages are pleaded in the complaint. Based on those facts, it is likely 7 some, although minor damages resulted from installation." Id. On that same day, July 6, 2009, 8

Dlugokenski issued a letter accepting KB Home's tender as additional insureds under the Norcraft 9 Polices. See id. ¶ 11, Ex. K. 10

Between Travelers' acceptance on July 6, 2009 when Dlugokenski noted there were likely some damages that resulted from installation and its withdrawal on March 9, 2010, Travelers has 12 only shown that it requested documentation from KB Home's counsel evidencing the Aldrich 13 plaintiffs were alleging covered property damage caused by Norcraft on one occasion. Id. Ex. L. 14

KB Home responded that no defect list was available. See id. Ex. I at Entry 10/22/2009. Travelers 15 has not presented evidence that it conducted any other investigation into the nature of the Aldrich plaintiffs' claims beyond that request and reviewing the materials KB Home provided. Travelers 17 claims that upon reviewing the file on November 5, 2009, it determined there was no indication 18 that the Aldrich plaintiffs were claiming covered damage and therefore withdrew from KB Home's 19 defense. See Frazier Decl. ¶ 5; Dlugokenski Decl. Ex. I. at Entry 11/05/2009, Entry 12/10/2009. 20

KB Home argues that Travelers's decision to withdraw from KB Home's defense was not 21 based on any new information, but rather was a result of Travelers' learning that it was the only 22 insurance company involved in KB Home's defense and would incur costs higher than anticipated. 23

In support of its argument, KB Home offers the Claim Notes as evidence. On July 14, 2009, the 24 Claim Notes entry indicates that Travelers anticipated that at least ten insurers would participate in 25 KB Home's defense and Travelers would only be required to fund 10% of the defense. Id. at Entry 26 of 7/14/09. On October 20, 2009, Travelers noted it had received a large allocation from defense 27 counsel. Id. at Entry of 10/20/09. On November 5, 2009, Travelers noted the "recent receipt of AI allocation" by developer. Id. at Entry 11/5/09. The very nextentry, on December 10, 2009, notes 2 that there is no documentation that any damages resulted from Norcraft's work and therefore 3

Travelers would withdraw its acceptance of KB Home's defense as an additional insured. Id. at 4

Entry 12/10/09. 5

KB Home also argues that Travelers refused to consider extrinsic evidence from plaintiffs'

6 counsel in the Aldrich Action confirming that the Aldrich plaintiffs sought covered damages. 7

"[T]he insurer's early closure of an investigation and unwillingness to reconsider a denial when 8 presented with evidence of factual errors will fortify a finding of bad faith." Shade Foods, 78 Cal. 9 App. 4th at 880. On July 8, 2010, Fred Adelman, counsel for the Aldrich plaintiffs, signed a letter 10 stating that "[t]he plaintiffs in this action are pursuing recovery for damages arising out of the cabinets." Chao Decl. Ex. W. Counsel for KB Home supplied this letter to Travelers and asked that 12

Travelers reconsider its withdrawal. Id. On July 23, 2010, Travelers informed KB Home that the 13 documentation provided, including the July 8, 2010 letter, was insufficient to trigger a duty to 14 defend. 15

KB Home has presented evidence sufficient to create a genuine issue of fact regarding

whether Travelers acted in bad faith in refusing to defend KB Home. Thus, Travelers' motion for 17 summary judgment that it never withheld benefits unreasonably or without a proper purpose is 18

DENIED. Similarly, Travelers' motion for summary judgment in its favor as to KB Home's claim 19 for breach of implied covenant of good faith and fair dealing is DENIED. 20

IV. CONCLUSION

For the reasons discussed above, the court orders as follows: KB Home's motion for partial summary judgment that (1) Traveler's duty to provide KB Home a defense was triggered from the date of tender, April 1, 2009; (2) Travelers breached its 24 duty to provide KB Home a defense; and (3) belated payment of the costs of the defense in the 25

Aldrich action did not cure Traveler's breach of its duty to defend KB Home is GRANTED. 26 Travelers' motion for summary judgment in its favor on KB Home's breach of contract 27 claim is GRANTED because KB Home has not presented any evidence of resulting damages. As to all other requests for summary judgment or partial summary judgment, Travelers' motion is 2

DENIED. 3

In light of this order, the court CONTINUES the preliminary pretrial conference set for July 20, 2012 to August 31, 2012. The parties shall submit an updated preliminary pretrial conference 5 statement no later than August 21, 2012. 6

Additionally, the parties are referred to Magistrate Judge Paul S. Grewal for a settlement 7 conference to occur no later than September 14, 2012. The parties are instructed to contact Oscar 8

Rivera, Judge Grewal's Courtroom Deputy, at (408) 535-5378 to arrange a date for the conference. 9

IT IS SO ORDERED.


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