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RQ Construction, Inc. v. Executive Risk Indemnity, Inc.

United States District Court, S.D. California

February 17, 2014

RQ CONSTRUCTION, INC., a California corporation; RQ MANUFACTURING, LLC, a California limited liability company; ECOWALL MANUFACTURING, LLC, a Nevada limited liability company; and GEORGE H. ROGERS, III, an individual, Plaintiffs,
v.
EXECUTIVE RISK INDEMNITY, INC., a Delaware corporation; and DOES 1 through 20, Defendants.

ORDER DENYING DEFENDANTS' MOTION TO DISMISS AND GRANTING DEFENDANTS' MOTION FOR A MORE DEFINITE STATEMENT

LARRY ALAN BURNS, District Judge.

This is an insurance coverage dispute. Plaintiffs allege that Executive Risk Indemnity ("ERI") improperly withdrew its defense in an underlying civil case and then improperly refused to contribute to the settlement of that case. Now before the Court is ERI's motion to dismiss.

I. Factual Background

The factual allegations in Plaintiffs' ("RQC") complaint are somewhat thin, but are supplemented considerably in the parties' respective briefs. The Court will do its best here

- 1 - to summarize only those facts that are either uncontested or come from supplemental documents that it may consider for the purposes of a motion to dismiss.

A. The Policy

On March 18, 2011, RQ Construction applied for Directors and Officers Liability Coverage with ERI. (Mot. to Dismiss, Ex. C.) ERI then issued a policy, with a period of January 25, 2011 through January 25, 2012 and a coverage limit of $3, 000, 000 per claim. (Compl. ¶¶ 8-9; Policy, Declarations, Items 2, 4.) The policy covered RQ Construction, certainly, but RQC argues that it also covered RQC's subsidiary RQ Manufacturing ("RQM"), RQM's subsidiary EcoWall, and RQC's CEO George Rogers. That seems to be right. (Policy, General Terms and Conditions, Sections II(H)-(I).) The policy had a $25, 000 deductible, and covered only claims first made during the policy period. (Policy, Declarations, Item 8.)

B. The SFIP Lawsuit

Several years prior to the policy being issued, in December 2007, EcoWall signed a lease for commercial property in Moreno Valley, California owned by Moreno SFIP Buildings, LLC ("SFIP"). (Compl. ¶ 10.) There were no other signatories to the lease. (Lease at 1, 18.) At some point EcoWall stopped making payments, and in October 2010 SFIP filed an unlawful detainer action, naming it and RQC as defendants. The action sought possession of the property and past-due rent of $153, 274.32-and nothing more.

EcoWall vacated the property that month, and soon after the unlawful detainer action became a straightforward civil case in which SFIP was only seeking past-due rent. (Compl. ¶ 12.) RQC alleges in its complaint that it didn't tender the unlawful detainer action to ERI because it wasn't covered under its policy, which is a little confusing considering that RQC didn't even have a policy with ERI at the time. (Compl. ¶ 11.) RQC clears this up in its opposition brief, explaining that in October 2010, when the unlawful detainer action was filed, RQC had two policies with Travelers-a commercial general liability policy and a directors and officers policy-neither of which covered SFIP's action insofar as it sought only

- 2 - possession of the property and past-due rent. It's for this reason that RQC didn't tender the action to Travelers initially. (Opp'n Br. at 5.)

In any event, the following year, in September 2011, SFIP filed a first amended complaint. This added claims for waste, conversion, fraudulent transfer, constructive fraudulent transfer, fraud, and negligent misrepresentation, and it added RQM and George Rogers as defendants. (Compl. ¶ 14, 19.) The filing of the first amended complaint didn't come as a surprise; SFIP informed counsel for EcoWall and RQC in May 2011 that it intended to file an amended complaint, in July 2011 it filed a motion to amend its complaint, and in August 2011 the parties stipulated to the amended complaint being filed.[1] (Compl. ¶¶ 13-15, 18-19.)

As RQC tells it, the new claims in SFIP's first amended complaint were unrelated to EcoWall's breach of the lease agreement, and SFIP sought damages that were wholly separate from past-due rent. For example, in its motion to amend its complaint SFIP explained:

The UD Complaint was a simple unlawful detainer case, using a form complaint. It sought possession of the Property, recovery of unpaid rent, forfeiture of the Lease, and attorneys' fees. It named two parties: EcoWall and RQC.
After the filing of the UD Complaint, and as a result of investigation and due diligence, Plaintiff has learned of additional unlawful conduct and damages caused by EcoWall, RQC, and other related entities. As a result, the FAC adds not only additional parties, but also additional claims. Specifically, the FAC seeks damages for breach of contract, waste, conversion, fraudulent transfer, constructive fraudulent transfer, fraud, and negligent misrepresentation.... (Opp'n Br., Ex. 2.)

ERI, for its part, points out that when RQC moved to dismiss SFIP's complaint, it said "The instant action arises out of a lease entered into, on December 7, 2007, between SFIP and EcoWall...." (Opp'n Br., Ex. B.)

C. RQC's Tender of SFIP Lawsuit and ERI's Initial Defense

On August 5, 2011, before SFIP filed its first amended complaint, RQC tendered the unlawful detainer action to ERI and requested indemnification. (Compl. ¶ 16.) RQC alleges that its tender included a copy of the unlawful detainer action, which showed the date it was filed, along with an explanation that SFIP intended to file a first amended complaint. (Compl. ¶ 16.) Just over one month later, on September 16, RQC provided ERI with that first amended complaint. (Compl. ¶ 20.)

ERI accepted RQC's tender in a letter dated October 3, 2011, and began paying its defense costs. This is what that October 3 letter said, in relevant part:

The FAC appears to qualify as a D&O Claim first made against Rogers and Stevens during the Policy Period for a Wrongful Act as is necessary to trigger coverage under insuring Clause I(B), Individual Indemnified Liability Coverage, of the D&O Coverage Section of the Policy. The FAC also appears to qualify as a Insured Organization Claim first made against RQC, RQM and EcoWall during the Policy Period for a Wrongful Act as is necessary to trigger coverage under the Insuring Clause I(C), Corporate Liability Coverage, of the D&O Coverage Section of the Policy. Accordingly, Executive Risk reiterates its acceptance of coverage as to Rogers, Stevens, RQC, RQM, and EcoWall, subject to the following reservation of rights and the applicable $25, 000 Deductible Amount. (Mot. to Dismiss, Ex. D.)

The letter, as RQC alleges in its complaint, made it very clear that ERI understood the original complaint SFIP filed against EcoWall and RQC was an unlawful detainer action in October 2010. (Mot. to Dismiss, Ex. D.) It said:

Executive Risk first received notice of this matter on August 13, 2011 from Arthur J. Gallagher. The notice included a copy of a Notice of Motion and motion for Leave to File a First Amended Complaint, and a copy of the original Complaint filed on October 22, 2010. The original Complaint was an unlawful detainer action filed against RQC and EcoWall. (Mot. to Dismiss, Ex. D.)

ERI also concluded that EcoWall and RQC weren't entitled to indemnification for the underlying unlawful detainer action, nor were SFIP's updated claims for waste and conversion ...


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