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Inc. v. Everest Indemnity Insurance Co.

United States District Court, S.D. California

April 22, 2014

350 WEST ASH URBAN HOME, INC., et al., Plaintiffs,


THOMAS J. WHELAN, District Judge.

On November 16, 2012, Plaintiffs 350 West Ash Urban Home, Inc. ("Urban Homes"), 350 W.A. LLC ("350 W.A."), B&H Property Systems, Inc. ("B&H"), and David A. Blackburn commenced this action against Defendants Everest Indemnity Insurance Company ("Everest") and the Insurance Company of the State of Pennsylvania ("ISOP") in the San Diego Superior Court. Thereafter, ISOP removed this action to this Court. Everest now moves to dismiss portions of Plaintiffs' First Amended Complaint ("FAC"). Plaintiffs oppose.

The Court decides the matter on the papers submitted and without oral argument. See Civ. L. R. 7.1(d.1). For the reasons discussed below, the Court GRANTS IN PART and DENIES IN PART Everest's motion to dismiss.


According to the FAC, on May 15, 2003, 350 W.A. acquired a commercial office building at 350 West Ash Street in San Diego. (FAC ¶ 10.) In preparation to convert the property into condominiums, 350 W.A. obtained two Owner Controlled Insurance Program ("OCIP") insurance policies, commonly known as "wrap" policies. (Id. ¶ 11.) Three-fifty W.A. purchased a primary OCIP policy from Everest and an excess OCIP policy from ISOP. (Id.) The policy from Everest had a $2 million limit, inclusive of defense and indemnity, and the policy from ISOP had a limit of $3 million. (Id.)

The Everest policy is a "burning limits" policy, meaning that the available policy limit of $2 million "would be depleted by defense expenses, including attorney fees and costs paid to defend insureds, ' as defined under the policy, against claims asserting an entitlement to damages covered by the Everest policy." (FAC ¶ 12.) In addition, "ISOP would only begin defending (and/or reimbursing Plaintiffs for defense costs incurred in their defense) claims against Plaintiffs only upon s showing by Everest that [Everest] actually paid its $2 million limits in defense and/or indemnity payments, such that the Everest policy had to be exhausted' before ISOP would begin defending Plaintiffs." (Id. ¶ 13.)

After 350 W.A. began the conversion process, Urban Homes purchased the property to complete it. (FAC ¶ 14.) Urban Homes was added as a named insured under both the Everest and ISOP policies. (Id. ¶ 15.) Mr. Blackburn, as a managing member of 350 W.A. and minority shareholder in Urban Homes, is also insured under both policies. In addition, B&H -initially engaged by 350 W.A. and later by Urban Homes to manage construction of the property and to market the units for sale-was named as an insured under both policies. (Id. ¶16.) Highland Home Builders, Inc. ("Highlands"), the contractor hired to perform construction, is also insured under both policies. (Id.)

In 2006, Highlands filed a lawsuit against 350 W.A. and Urban Homes, alleging a failure to pay for all of the work performed under its contract and change orders. (FAC ¶ 17.) In response to Highlands' complaint, 350 W.A. and Urban Homes filed a cross-complaint alleging property damage as a result of negligence and other wrongful conduct. (Id. ¶ 18.) That lawsuit ("Contractor Action"), entitled Highland Home Builders, Inc. v. 350 W.A. LLC, No. GIC864390, was litigated between 2006 and 2011. (Id.)

In April 2011, the parties settled the Contractor Action. (FAC ¶ 19.) Plaintiffs agreed to accept $800, 000 for their claims against Highland for damages covered by the Everest policy. (Id. ¶ 20.) They also agreed to pay Highlands $378, 000 to resolve Highlands' claims against Plaintiffs. (Id. ¶ 21.) Plaintiffs allege that during the Contractor Action, Everest misrepresented the remaining limits on the Everest policy, and based on those misrepresentations, "Plaintiffs accepted far less [to settle with Highlands] than they otherwise would have." (Id. ¶ 19.)

In 2010, Plaintiffs were named as defendants in another lawsuit, entitled 350 West Ash Association v. 350 West Ash Urban Homes, Inc., No. 37-2010-00094257-CU-CD-CTL ("HOA Action"). (FAC ¶ 22.) In this action, the 350 West Ash Homeowners Association ("HOA") sought damages covered by the terms of the Everest and ISOP policies. (Id.) When served with the HOA Action, Plaintiffs tendered their defense and indemnity to Everest and ISOP pursuant to their respective policies. (Id.) After tender, but before Everest appointed counsel, Plaintiffs "reasonably and necessarily incurred post-tender attorney fees and defense costs in defense of the HOA Action" through their own counsel. (Id.) These fees and costs allegedly totaled $191, 741.75. (Id. ¶ 26.) Before the Contractor Action settled, Plaintiffs demanded reimbursement of those post-tender fees and costs, but did not receive payment. (Id. ¶ 23.) After settling the Contractor Action, Plaintiffs again demanded reimbursement from Everest, only to be told that Plaintiffs' entitlement to those fees and costs was included in its settlement of the Contractor Action. (Id. ¶ 25.) Plaintiffs disagreed, pointing out that the settlement agreement contained no release of the post-tender claims and again forwarded all of its defense fees and costs to Everest in December 2011. (Id.) As of the time when the FAC was filed, Plaintiffs had not yet received reimbursement from Everest. (Id. ¶ 26.)

In July 2012, Everest informed Plaintiffs and Highlands-all of whom were insured under the two policies-that Everest's policy was "nearing exhaustion" and that Everest "would cease defending Plaintiffs and the Highland entities upon exhaustion of the policy." (FAC ¶ 29.) In light of this, Plaintiffs tendered their continuing defense to ISOP. (Id.) In response, ISOP informed Plaintiffs that ISOP disputed: (1) whether the Everest policy was actually exhausted; and (2) whether the Everest policy was "properly" exhausted. (Id. ¶ 30.) On these two bases, ISOP has refused to defend or indemnify Plaintiffs. (Id.)

On October 10, 2013, Plaintiffs filed the FAC. Everest now moves to dismiss Plaintiffs' causes of action for fraud, breach of contract, and breach of the implied covenant of good faith and fair dealing/insurance bad faith for failure to state a claim upon which relief can be granted. Plaintiffs oppose.


The court must dismiss a cause of action for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the complaint. Navarro v. Block , 250 F.3d 729, 732 (9th Cir. 2001). The court must accept all allegations of material fact as true and construe them in light most favorable to the nonmoving party. Cedars-Sanai Med. Ctr. v. Nat'l League of Postmasters of U.S. , 497 F.3d 972, 975 (9th Cir. 2007). Material allegations, even if doubtful in fact, are assumed to be true. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555 (2007). However, the court need not "necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Warren v. Fox Family ...

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