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Aig Specialty Insurance Co. v. Phoenician LLC and Everest Indemnity Insurance Co.

United States District Court, E.D. California

September 24, 2014

AIG SPECIALTY INSURANCE COMPANY, f/k/a/CHARTIS SPECIALTY INSURANCE COMPANY, f/k/a/ AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY Plaintiff,
v.
PHOENICIAN LLC and EVEREST INDEMNITY INSURANCE COMPANY, Defendants.

MEMORANDUM AND ORDER RE: MOTION TO DISMISS

WILLIAM B. SHUBB, District Judge.

Plaintiff AIG Specialty Insurance Company brought this action against defendants Phoenician LLC ("Phoenician") and Everest Indemnity Insurance Company ("Everest"). Presently before the court is Everest's motion to dismiss plaintiff's complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure Rule 12(b)(6).

I. Allegations of the First Amended Complaint

In 2001, Phoenician began developing a fifteen-unit apartment complex in Roseville, California known as "The Phoenician." (First Am. Compl. ¶ 4 (Docket No. 11).) The apartments were later converted to condominiums. (Id.) Phoenician took out two insurance policies on the property, a primary policy from Everest and an excess policy from plaintiff. (Id. ¶ 7.) Plaintiff's policy was subject to a $2 million retained limit per occurrence. (Id.)

Severe rainfall damaged several of the property's units in October 2009. (Id. ¶ 13.) The Phoenician Homeowner Association ("Association") tendered a claim to its insurer, which denied coverage on the grounds that design and construction defects caused the damage. (Id.) The Association contacted Phoenician, which tendered a claim to Everest under its primary policy. (Id.) Everest retained counsel to represent the matter. (Id.) Thereafter, the Association hired a consultant who conducted an investigation of the Phoenician property. (Id. at 14.) The consultant discovered further construction defects, and to evaluate these issues, it conducted destructive testing on the property between 2010 and 2012. (Id.) Plaintiff contends that during this time, the Association informed Phoenician and Everest about the destructive testing, but they declined to participate. (Id.)

In September 2012, the Association provided notice to Phoenician, pursuant to California's "Right to Repair Act, " that it planned to commence litigation regarding alleged construction defects at The Phoenician. (Id. ¶ 15.) Plaintiff contends that, by failing to acknowledge the claim in writing within fourteen days after receipt, both Phoenician and Everest waived Phoenician's right to avail itself of defenses and pre-litigation remedies available under the Act. (Id. ¶ 16.) Having failed to resolve the issues, on October 10, 2012, the Association filed a lawsuit against Phoenician in Placer County Superior Court. (Id. ¶ 17.) Arbitration of the Association's claims was set for January 2014. (Id. ¶ 26.)

Plaintiff alleges that neither Phoenician nor Everest advised it of the destructive testing, the Association's "Right to Repair" notice, or the underlying lawsuit the Association brought against Phoenician. (Id. ¶ 18.) Plaintiff further alleges that it did not become aware of the underlying lawsuit between the Association and Phoenician until late 2012, through a communication from the Association's counsel. (Id. ¶ 19.) Plaintiff contacted Everest and Klinedinst for Phoenician's contact information and was allegedly misinformed by Everest that Phoenician was defunct. (Id. ¶ 20.) Plaintiff's independent investigation of the Secretary of State's corporation database corroborated this information. (Id. ¶ 21.) However, plaintiff later learned in October 2013 that Phoenician was not defunct and had been in contact with Everest, Klinedinst, and the Association during the period leading up to the lawsuit. (Id. ¶¶ 24-25.) Plaintiff now alleges that by the time of this discovery, it was unable to participate meaningfully in the arbitration process. (Id. ¶¶ 25-26, 46.) The arbitrator nevertheless denied plaintiff counsel's motion to continue the proceedings. (Id. ¶ 26.)

As a result of its late discovery of Phoenician's status as an existing entity and the Association's action against Phoenician, plaintiff now contends that it lacked adequate time to investigate and discover facts directly relevant to its defense. (Id. ¶ 25.) It also asserts its confusion over Phoenician's status prevented it from contacting other parties and insurers that might have contributed toward the settlement amount. (Id. ¶ 46.)

Prior to the date set for arbitration, the Association tendered a demand for settlement to Phoenician's counsel, who in turn forwarded the correspondence to plaintiff and Everest. (Id. ¶ 27.) The Association gave the parties two options. "Option A" proposed a full settlement involving all three parties. (Id. ¶ 28.) Everest would pay the remaining limits of its policy- approximately $1.8 million-in addition to a payment of $200, 000 by Phoenician, which would ostensibly trigger plaintiff's excess coverage. (Id. ¶ 28.) "Option B" was a partial settlement, proposing that Phoenician would sign a release from liability with Everest in exchange for Everest's $1.8 million payment. (Id. ¶ 29.)

Plaintiff contends both of these options disregarded its available defenses and erroneously presumed that the $2 million combined disbursements from Phoenician and Everest would trigger its excess policy. (Id. ¶ 30.) It declined to participate in the proposed settlement on the basis that most of the defects fell outside the scope of the coverage of its issued policy; that, in the alternative, the defects were overvalued by the Association and actually fell below the policy's retained limit; and that the defects belonged to multiple occurrences such that no single "occurrence" exceeded the $2 million retained limit. (Id. ¶¶ 32-36.)

On December 12, 2013, plaintiff filed its Complaint for declaratory relief, seeking a declaration that it had no duty to defend or indemnify Phoenician in connection with certain claims brought by the Association and that the partial settlement executed by Everest did not reduce or exhaust the retained limit of its excess insurance policy. (Compl. (Docket No. 1).)

Despite plaintiff's protests, Everest and Phoenician moved forward with "Option B" and entered into two separate partial settlements with the Association for $1, 776, 368.87 and $230, 000, respectively. (First Am. Compl. ¶¶ 38-39.) Plaintiff nevertheless agreed to assume Phoenician's defense subject to a reservation of rights to seek reimbursement. Plaintiff, Phoenician, and the Association reached a conditional joint resolution one week prior to the January arbitration date. (Id. ¶ 42.)

II. Procedural Background

Plaintiff filed its First Amended Complaint ("FAC") on March 28, 2014, asserting claims for cost recovery against Phoenician and Everest.[1] Default judgment was entered against Phoenician for having failed to appear or answer plaintiff's Complaint within the time allowed by law. (Clerk's Entry of Default (Docket No. 21).) Against Everest, plaintiff seeks reimbursement for sums it paid in the defense of Phoenician and the January 2014 settlement with the Association. Plaintiff argues those sums were attributable to negligence and breach of duty by Everest in the defense and settlement of the Association's underlying claim. (Id. ¶ 54.) Everest now moves to ...


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