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Daniels v. Allstate Insurance Co.

United States District Court, N.D. California, San Jose Division

June 5, 2014

JENNY K. DANIELS and MARK M. DANIELS, Plaintiffs,
v.
ALLSTATE INSURANCE COMPANY, an Illinois corporation, and DOES 1 through 25, inclusive, Defendants.

ORDER GRANTING MOTION TO DISMISS WITH LEAVE TO AMEND

LUCY H. KOH, District Judge.

Plaintiffs Jenny and Mark Daniels ("Plaintiffs") initiated this litigation against their insurer, Allstate Insurance Company ("Defendant"), for breach of insurance contract and breach of the implied covenant of good faith. See ECF No. 2. Plaintiffs claim that Defendant had a duty to defend Plaintiffs in underlying litigation in Santa Cruz County Superior Court. See ECF No. 8. Defendant has filed a Motion to Dismiss, in which Defendant contends no potential for coverage existed under the insurance policy as a matter of law. See id. Plaintiffs have filed an Opposition, see ECF No. 16, and Defendant has filed a Reply, see ECF No. 18. The Court finds this motion suitable for decision without oral argument pursuant to Civil Local Rule 7-1(b) and hereby VACATES the hearing set for June 19, 2014 at 1:30 p.m. The Court further CONTINUES the Case Management Confernece set for June 19, 2014 to October 8, 2014 at 2 p.m. Having considered the briefing, the record in this case, and applicable law, the Court GRANTS Defendant's Motion to Dismiss with leave to amend for the reasons stated below.

I. BACKGROUND

A. The Insurance Policy

Plaintiffs purchased a homeowner's insurance policy from Defendant in September 2012. The policy was renewed effective September 2013 and remains in force. ECF No. 2 ¶ 5. Pursuant to the policy, Defendant agreed to indemnify and defend Plaintiffs for damages as follows:

Subect to the terms, conditions and limitations of this policy, Allstate will pay damages which an insured person becomes legally obligated to pay because of bodily injury or property damage arising from an occurrence to which this policy applies, and is covered by this part of the policy.

ECF No. 8 at 2. The policy defined "occurrence" as an "accident, including continuous or repeated exposure to substantially the same general conditions during the policy period, resulting in bodily injury or property damage." Id. at 3.

B. The Underlying Litigation

The instant case arises out of a dispute between Plaintiffs and their neighbors, Joyce and Edward Kennedy ("the Kennedys"), the plaintiffs in the underlying litigation. The Kennedys and Plaintiffs own adjacent property lots in Santa Cruz, California. Because of the hillside topography of the land, the Kennedys' property is situated below Plaintiffs' property, separated by a shared property line. ECF No. 2 Ex. B ¶ 9. The underlying dispute concerned the removal of a twenty-year-old man-made wooden retaining wall located on Plaintiffs' property along the boundary line shared with the Kennedys. Id. at ¶ 8. The retaining wall, which was built by previous owners of Plainitffs' property, supported large amounts of fill soil that kept Plaintiffs' backyard level. Id. at ¶ 11. In addition, two large fir trees, one located at the end of the retaining wall ("Tree 1") and the other about five feet upslope from the center of the wall ("Tree 2"), had root systems embedded in the fill soil. Id. at ¶¶ 13-15.

From their own property, the Kennedys noticed that Plaintiffs' retaining wall was collapsing in various places. This prompted the Kennedys to hire Geotechnical engineers and an arborist to examine the condition of the wall and trees. Id. at ¶ 10. The experts' reports confirmed that the wall was severely distressed and posed a threat of collapsing from "poor construction, age and/or damage caused by tree roots." Id. at ¶ 11. The wall's failure would result in a landslide from the fill soil on Plaintiffs' property that would inundate the Kennedys' property below. Id at. ¶ 20. In addition to the tree roots aggravating the threat of the wall's collapse, there was also some risk that the trees might fall onto the Kennedys' property should the wall fall and release the fill soil that supported the trees. Id. at ¶¶ 17-20.

Throughout 2012, the Kennedys repeatedly expressed their concerns to Plaintiffs, seeking a solution to the risks the wall and trees posed to the Kennedys' safety and property. Id. at ¶ 18. The Kennedys made multiple visits and requests to Plaintiffs to rebuild the wall and remove the trees, and even suggested alternative dispute resolution. ECF No. 8-1, Ex. A at 3. The Kennedys also sent a copy of the arborist report, which detailed the dangers posed by the trees, to Plaintiffs. ECF No. 2, Ex. B ¶ 18. Despite having knowledge of the condition of the wall and trees and the distress these hazards caused the Kennedys, Plaintiffs refused to take any corrective action. Id.

Unable to resolve the issue with Plaintiffs directly, the Kennedys initiated the underlying litigation against Plaintiffs on February 15, 2013 in Santa Cruz County Superior Court, seeking declaratory and injunctive relief as well as damages. The Kennedys' complaint alleged that the wall and trees on Plaintiffs' property constituted a private nuisance. ECF No. 2 Ex. B. ¶ 20. The complaint further alleged that Plaintiffs acted unreasonably by failing to remedy these hazards. Id at ¶ 21. The Superior Court held a three-day bench trial starting on October 15, 2013. Plaintiffs conceded at trial that the wall needed to be replaced and Tree 1 needed to be removed. ECF No. 8-1, Ex. A at 4. Plaintiffs testified that they did not like the Kennedys' approach and therefore "decided not to do anything in response" to the Kennedys' request to repair the wall and remove the trees. Id. at 3. On November 8, 2013, the Superior Court ruled in favor of the Kennedys, declaring the retaining wall to be a nuisance. The Court required Plaintiffs to replace the wall and remove the trees and granted $8, 000 in monetary damages to the Kennedys for discomfort and annoyance. Id. at 8-9.[1]

C. The Insurance Dispute and This Litigation

In February or March 2013, Plaintiffs tendered defense of the underlying litigation to Defendant. Defendant denied coverage in a response letter dated March 22, 2013. See ECF No. 2, Ex. C. In the letter, Defendant stated that the insurance policy did not cover the allegations of the underlying complaint because the policy only covered "accidents" resulting in "bodily injury" or "property damage, " and that the policy excluded coverage for damage to property owned or used by an insured. See id. Defendant gave Plaintiffs the opportunity to provide additional information or considerations if Plaintiffs believed Defendant had unfairly or erroneously denied coverage. See id. Plaintiffs have not alleged that they supplied additional information to Defendant or pursued the paths to relief offered to them by Defendant.

Rather, on January 19, 2014, Plaintiffs brought the instant litigation in Santa Cruz County Superior Court against Defendant for breach of written contract and breach of implied covenant of good faith and fair dealing, seeking compensatory and punitive damages, prejudgment interest, and attorneys' fees. See ECF No. 1 ¶¶ 1-2. Attached to the complaint were the insurance policy, the Kennedys' complaint in the underlying litigation, and Defendants' letter denying coverage. See ECF No. 2. On February 24, 2014, Defendant removed the action to this Court. See id. On March 3, 2014, Defendant filed the instant Motion to Dismiss and Motion to Strike Plaintiffs' ...


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