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The Insurance Company of The State of Pennsylvania v. Gemini Insurance Co.

United States District Court, S.D. California

December 30, 2014

THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, Plaintiff,
v.
GEMINI INSURANCE COMPANY, ET AL., Defendants.

ORDER: (1) DENYING DEFENDANT'S MOTION TO DISMISS (ECF NO. 8); AND (2) DIRECTING PLAINTIFF TO FILE AN AMENDED COMPLAINT

CYNTHIA BASHANT, District Judge.

On December 6, 2013, Plaintiff The Insurance Company of the State of Pennsylvania ("Plaintiff") commenced this action against Defendants Gemini Insurance Company ("Gemini"), La Jolla Pacific Development Group, and Montecito Foothills, LLC seeking declaratory judgments pursuant to 28 U.S.C. §§ 2201(a) and 2202, and Rule 57 of the Federal Rules of Civil Procedure, and equitable subrogation and equitable indemnity. On February 20, 2014, Gemini moved to dismiss Plaintiff's complaint for failure to join all necessary and indispensable parties pursuant to Rule 12(b)(7) of the Federal Rules of Civil Procedure.

The Court finds this motion suitable for determination on the papers submitted and without oral argument. See Civ. L.R. 7.1(d)(1). For the following reasons, the Court DENIES Gemini's Motion to Dismiss. However, pursuant to Rule 19(a)(2) of the Federal Rules of Civil Procedure, the Court ORDERS Plaintiff to file an amended complaint adding Lyon Realty Advisors, Inc., Lyon Management Group, Inc., Provence Apartments LLC, Deca, LP, and Midwest General, Inc. as parties.

I. BACKGROUND

Gemini provides primary liability insurance coverage for construction projects in California. (ECF No. 1 ("Compl.") at ¶¶ 5, 12, 25.) Gemini issued a primary commercial general liability policy to Montecito Canyons & Provence, LLC ("Montecito Canyons"), No. CNGP001092, related to two projects, the Provence Project and The Canyons Project (hereinafter the "Gemini Montecito Policy"). ( Id. at ¶ 12 & Ex. A.) Montecito Canyons is the First Named Insured under the Gemini Montecito Policy. ( Id. ) Other Named Insureds on the Gemini Montecito Policy for the Provence Project in Foothill Ranch, California include: Montecito Investment Company, LLC; Montecito Property, LLC; Montecito Acquisition Corporation; Lyon Management Group, Inc.; Lyon Realty Advisors, Inc.; Lyon Capital Ventures, LLC; all contractors and subcontractors enrolled in the Owner Controlled Insurance Program; Montecito Foothills, LLC; Montecito Foothills I, LLC; Provence Apartments, LLC; Montecito Provence Limited Partnership; and Montecito Provence, LLC. ( Id. at Ex. A (ISOP 0023).) The Gemini Montecito Policy provides limits in the amount of $2 million per occurrence, $2 million general aggregate, $2 million Products-Completed Operations aggregate, and includes a $100, 000 per occurrence Self-Insured Retention ("SIR"). ( Id. at ¶ 12 & Ex. A (ISOP 0003, 0059-61).)

On or about May 5, 2011, legal proceedings were commenced against Montecito Foothills, LLC in Orange County Superior Court related to the Provence Project, and Gemini was notified of the claim ("Montecito Action"). ( Id. at ¶¶ 11, 14-16.) The plaintiff in the Montecito Action is seeking damages in excess of $17 million. ( Id. at ¶ 22.) Gemini exercised its right to defend, appointed defense counsel, and has been defending the Montecito Action since at least June 2011. ( Id. at ¶ 17.) Gemini has been defending its insureds in the Montecito Action "subject to the right to obtain reimbursement of or seek an offset for the policies'... $100, 000 per occurrence SIR." ( Id. at ¶ 18.)

Gemini issued a separate Commercial General Liability policy to La Jolla Pacific Development Group, Inc. ("La Jolla Pacific"), No. CNGP001023, related to the La Jolla Project (hereinafter "Gemini La Jolla Policy"). ( Id. at ¶ 25 & Ex. C.) La Jolla Pacific is the First Named Insured on the Gemini La Jolla Policy. ( Id. at ¶ 25 & Ex. C (ISOP 0106).) Other Named Insureds include Ninth Avenue Joint Venture, LP, Deca, LP, and all contractors and subcontractors enrolled in the Owner Controlled Insurance Program. ( Id. at ¶ 25 & Ex. C (ISOP 0106, 0172).) The Gemini La Jolla Policy provides limits in the amount of $2 million per occurrence, $2 million general aggregate, $2 million Products-Completed Operations aggregate, and includes a $100, 000 per occurrence SIR. ( Id. at ¶ 25, Ex. C (ISOP 0103, 0140-42).)

At some point prior to July 2010, the Deca Owners Association, Deca 34, and James Dax (collectively the "Deca HOA") notified La Jolla Pacific of alleged defects in the La Jolla Project ("La Jolla Action"). ( Id. at ¶¶ 24, 27.) The Deca HOA seeks damages from La Jolla Pacific and Deca, LP in excess of $4 million. ( Id. at ¶ 32.) Gemini acknowledged notice of the constructive defect action and agreed to defend La Jolla Pacific. ( Id. at ¶ 29.) Gemini appointed defense counsel and has been defending the La Jolla Action since at least July 2010. ( Id. at ¶ 30.)

Plaintiff issued its own excess liability policies to Montecito Foothills, LLC and to La Jolla Pacific. ( Id. at ¶¶ 13, 26.) These policies provide coverage in excess of Gemini's policies. ( Id. ) Montecito Foothills, LLC and other named insureds seek indemnification from Plaintiff related to the Montecito Action. ( Id. at ¶ 13.) La Jolla Pacific and Deca, LP seek indemnification from Plaintiff related to the La Jolla Action. ( Id. at ¶ 26.) Plaintiff contends that it has no duty to defend under the policies, but must pay defense costs upon proper exhaustion of the policy limits for covered claims set forth in Gemini's policies. ( Id. at ¶¶ 13, 26.) Plaintiff asserts that its policies "only respond[] if, and only if, the underlying Gemini Policy properly exhausts its Limits for covered claims." ( Id. at ¶ 39.)

Plaintiff alleges that Gemini's liability limits apply only in excess of the SIR and the SIR required under the policies "cannot be insured or reinsured or be paid for by any entity other than the insured responsible for the SIR." ( Id. at ¶¶ 42-43.) Plaintiff alleges that under Gemini's policies the First Named Insured is the party responsible for paying the SIR and that other insureds "are prohibited from paying SIRs on behalf of the First Named Insured." ( Id. at ¶ 43.) Plaintiff also contends that "Gemini only has a duty and obligation to defend its insureds once the applicable SIR amounts have been satisfied by the First Named Insured for each and every occurrence." ( Id. ) Plaintiff alleges that "[i]n the Montecito Action, neither the First Named Insured or any other insured has satisfied even one SIR, and in the La Jolla Action, an insured other than the First Named Insured placed $100, 000 in a trust account, even though the First Named Insured is an active entity." ( Id. at ¶ 43.)

Plaintiff asserts that the policies state that upon receiving notice of an occurrence or claim, Gemini has "the right, but no obligation, in all cases, at [its] own expense, to assume control or defense of any claim, and upon [its] written request the implicated insured shall pay to [Gemini] all or any portion of the [SIR it] deem[s] reasonable or necessary." ( Id. at ¶¶ 42, 44.) Plaintiff further alleges that in the two underlying actions, "Gemini exercised its right to defend and assumed control of the defense prior to satisfaction of the applicable number of SIRS, but is eroding its Limits by the payment of defense expenses as if it had a duty to defend." ( Id. at ¶ 44.) Plaintiff contends that the applicable SIR must be satisfied for each and every occurrence before Gemini has any obligation to defend its insured and each separate proximate cause of property damage for which the plaintiffs in the Montecito Action and La Jolla Action seek damages constitutes a separate occurrence. ( Id. at ¶ 46.)

By this lawsuit, Plaintiff seeks a determination regarding proper exhaustion of Gemini's limits. ( Id. at ¶ 47.) Specifically, Plaintiff asks the Court to determine and declare that (1) Gemini has no duty or obligation to defend its insureds unless and until the applicable per occurrence SIR amounts are satisfied by the responsible insured, pursuant to the express provisions of Gemini's policies; (2) Gemini's duty to defend has yet to arise in the Montecito Action and La Jolla Action; (3) until such time as Gemini has a duty to defend, it may exercise its right to defend, but while exercising its right to defend, all defense expenses and indemnity payments made by Gemini are at Gemini's own expense and do not erode Gemini's Limits, pursuant to Gemini's policies; (4) Plaintiff never has a duty to defend any insured, and only has a duty to pay defense expenses and/or a duty to indemnify its insureds for damages because of property damage caused by an occurrence upon proper exhaustion of the underlying Gemini policy and all other available insurance; (5) the First Named Insured's bankruptcy, insolvency or inability to pay the SIR does not require Plaintiff to drop down and pay defense expenses and/or make indemnity payments that are within Gemini's insurance area, including its per occurrence SIR requirement; (6) Gemini may not withdraw from the defense of its insureds based on the alleged exhaustion of its Limits during the course of this litigation, which seeks a determination regarding proper erosion and/or exhaustion of Gemini's policies; and (7) each distinct proximate cause of alleged property damage in the Montecito Action and La Jolla Action for which the plaintiffs seek recovery constitutes a separate occurrence. ( Id. at ¶¶ 52-53, 57, 61-62, 65, 69.)

Plaintiff further asks the Court to determine and declare the specific number of occurrences alleged to have caused property damage for which the plaintiffs in the Montecito Action and La Jolla Action seek recovery. ( Id. at ¶ 74.) Plaintiff also asserts claims for equitable subrogation and equitable indemnity. ( Id. at ¶¶ 77-87.)

Prior to this action, Plaintiff filed a similar complaint against Gemini in the United States District Court for the District of Connecticut. ( Id. at ¶ 3.) The Connecticut district court dismissed the case allegedly due to failure to join the First Named Insureds as necessary and indispensable parties. ( Id. ) Plaintiff then re-filed its complaint with this Court and named as additional defendants the First Named Insured under the Gemini La Jolla Policy and a named insured under the Gemini Montecito Policy. ( Id. at Exs. A & C.) Plaintiff seeks no relief from these defendants. ( Id. at ¶ 3.)

Gemini now moves the Court to dismiss Plaintiff's complaint for failure to join indispensable parties. Gemini argues that Lyon Realty Advisors, Inc., Lyon Management Group, Inc., Provence Apartments LLC, Deca, LP, and Midwest General, Inc. are necessary and indispensable parties. ...


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