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Public Service Mutual Insurance Co. v. Liberty Surplus Insurance Corp.

United States District Court, E.D. California

September 30, 2014

LIBERTY SURPLUS INSURANCE CORPORATION and DOES 1 through 10, inclusive, Defendants

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[Copyrighted Material Omitted]

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For Public Service Mutual Insurance Co., Plaintiff: Brian J. O'Connor, LEAD ATTORNEY, Diepenbrock and Cotter, Sacramento, CA.

For Liberty Surplus Insurance Corporation, Defendant: Patrick P. Fredette, LEAD ATTORNEY, Timothy R. Sullivan, McCormick Barstow Sheppard Wayte and Carruth LLP, Fresno, CA.

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Through the present action, Plaintiff Public Service Mutual Insurance Company (" PSMIC" or " Plaintiff" ) seeks equitable indemnification from another insurance carrier, Liberty Surplus Insurance Corporation (" LSIC" ) for amounts paid by PSMIC for the defense and indemnification of its insureds, Fair Oaks Fountains, LLC (" FOF" ) and FPI Management Company (" FPI" ). According to PSMIC's Complaint, LSIC was obligated to pay those amounts under its own policy, issued to Gala Construction, on grounds that both FOF and FPI were specifically designated as additional insureds under the LSIC policy, and because, according to PSMIC's Complaint, the LSIC policy was primary as to the underlying loss. That loss occurred when an injury occurred, allegedly as a result of Gala's negligence, while Gala effectuated repairs on an apartment complex owned by FOF and managed by FPI. Presently before the Court is Defendant LSIC's Motion to Dismiss Plaintiff's Complaint pursuant to Federal Rule of Civil Procedure Rule 12(b)(6),[1]

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which further includes a request that any reference to punitive damages be stricken in accordance with Rule 12(f). As set forth below, Defendant's Motion will be granted in part and denied in part.[2]


On August 21, 2008, Diana Balfour, a tenant at the Fountains of Fair Oaks, an apartment complex located in Fair Oaks, California, was injured when she slipped on standing water in her apartment. According to the Complaint, that water entered Ms. Balfour's apartment through the roof as a result of an irrigation pipe broken by Gala or its subcontractors while working on the complex. According to the Complaint, the injuries and damages claimed by Ms. Balfour arose out of the materials and/or services provided by Gala pursuant to a construction contract entered into between Gala and FOF, the entity that owned the complex. Compl., ¶ 21.

The construction contract's general conditions required Gala to indemnify FOF and its agents for liability arising out of Gala's work, providing in pertinent part as follows:

Contractor [Gala] shall indemnify and hold harmless the Owner [FOF and its agents or employees] from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Work.... but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them to anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

Compl., Ex. B., p. 17, § 3,18.1 of the General Conditions.

Additionally, the construction agreement itself required Gala to maintain general liability insurance coverage in specific amounts, and mandated that FOF be named as an additional insured on that policy by formal endorsement. Compl., Ex. A, Article 16. Consistent with that directive, the liability policy issued to Gala by LSIC contained a separate endorsement specifically adding FOF by name as an insured. Compl., Ex D. The endorsement further specified that the coverage provided to FOF as an additional insured was only with respect to FOF's liability arising from Gala's work on FOF's behalf. Id. Additionally, because FPI was FOF's real estate manager at the time of the subject loss, FPI was made an additional insured under the LSCI policy by virtue of language extending coverage to any organization acting as a real estate manager for an insured. Compl, Ex. C, p. 15, Section II 2.b. Perhaps most significantly, the LSIC policy specified that the coverage it provided would be primary with respect to any other insurance carried by additional insureds like FOF and FPI:

To the extent that this coverage is afforded to any additional insured under the policy, such insurance shall apply as primary and not contributing with any Insurance carried by such additional insured, as required by written contract.

Compl, Exhibit C. Endorsement No. 15, p. 59 (emphasis added).

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As the general liability carrier for FOF and FPI, Plaintiff claims that it tendered the defense of Ms. Balfour's action to LSIC on " no fewer than eight occasions between November 12, 2008 and April 8, 2011." Pl.'s Opp'n, 4:18-21. Plaintiff contends that LSIC has consistently refused to accept that tender, despite that fact that, according to Plaintiff, " the injuries and damages prayed for by Ms. Balfour in the Underlying Action arise of, or are directly and or indirectly connected with the work performed, materials furnished by, and/or services provided by GALA, its employees, subcontractors or agents to and/or on behalf of FOF and FPI" under the construction contract (Compl., 6:28-7:3) and despite the language of LSIC's own policy which described its coverage as primary. Given LSIC's refusal to defend and indemnify, PSMIC claims it was forced to provide a defense to FOF and FPI and to fund a settlement with Ms. Balfour reached in April of 2913, which included the sum of $50,000 paid by PSMIC on behalf of FOF and FPI. PSMIC initially filed a suit against LSIC in the name of FOF and FPI. That lawsuit was voluntarily dismissed after PSMIC confirmed in discovery that it had funded the defense and indemnification of FPF and FPI in the Balfour action such that FOF and FPI themselves sustained no damage. PSMIC then filed the present action on its own behalf to recover the expenses it had incurred by way of equitable subrogation. Plaintiff's complaint contains causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing and declaratory relief. LSIC's Motion to Dismiss now before the Court contests the validity of all three of those claims. LSIC further contends that even if Plaintiff's complaint for breach of the covenant survives pleading scrutiny at this juncture, any request for attendant punitive damages is improper and must be stricken.


A. Motion to Dismiss

On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co.,80 F.3d 336,337-38 (9th Cir. 1996). Rule 8(a)(2) requires only " a short and plain statement of the claim showing that the pleader is entitled to relief" in order to " give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, " a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (internal citations and quotations omitted). A court is not required to accept as true a " legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 555). " Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, ...

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