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Nordby Construction, Inc. v. American Safety Indemnity Co.

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

March 19, 2015

NORDBY CONSTRUCTION, INC., Plaintiff,
v.
AMERICAN SAFETY INDEMNITY COMPANY, et al., Defendants.

ORDER GRANTING IN PART AND DENYING DEFENDANT AMERICAN SAFETY'S MOTION TO DISMISS; GRANTING IN PART AND DENYING IN PART DEFENDANT AIG SPECIALTY'S MOTION TO DISMISS Re: Dkt. Nos. 23, 24

LUCY H. KOH, District Judge.

Plaintiff Nordby Construction, Inc. ("Plaintiff" or "Nordby") brings this action for breach of insurance contract against Defendants American Safety Indemnity Co. ("American Safety"), American International Specialty Lines Insurance Company ("AIG Specialty"), and Ace American Insurance Company ("ACE"). Before the Court are Defendants American Safety's and AIG Specialty's motions to dismiss Plaintiff's First Amended Complaint. Having considered the submissions of the parties, the relevant law, and the record in this case, the Court GRANTS IN PART AND DENIES IN PART American Safety's motion to dismiss and GRANTS IN PART and DENIES IN PART AIG Specialty's motion to dismiss.

I. BACKGROUND

A. Factual Background

Plaintiff Nordby was hired by Summit State Bank as the general contractor to construct the Summit State Project. First. Am. Compl. ("FAC"), ¶ 10. Plaintiff subcontracted with Kenyon Construction, Inc. ("Kenyon") to "furnish and install a complete weather tight and watertight' EIFS system on the exterior" of the Summit State Project. Id. Plaintiff's subcontractor agreement with Kenyon required Kenyon to:

(a) procure and maintain a policy of commercial general liability insurance, with minimum limits of $1 million per occurrence and $1 million in the aggregate for completed operations, naming [Plaintiff] as an additional insured...
(b) include, in the required insurance, a provision stipulating that the coverage provided to [Plaintiff] as an additional insured is primary and non-contributing with any other insurance available to [Plaintiff] or the owner of the Summit State Project;
(c) include, in the required insurance, completed operations coverage, broad form property damage coverage, and contractual liability coverage with respect to all operations by or on behalf of [Kenyon]; and
(d) defend and indemnify [Plaintiff] against any loss of liability arising out of, or in connection with, [Kenyon's] operations to be performing under the agreement.

Id. ¶ 11.

On or about July 26, 2002, Plaintiff received a certificate of insurance certifying Kenyon was insured by Defendant American Safety for the period from July 1, 2002 to July 1, 2003 under a policy of commercial general liability insurance with $1 million dollar limits per occurrence and in the aggregate. Id. ¶ 12. The certificate also certified that Plaintiff was an additional insured, and that the coverage was primary and non-contributing. Id. Plaintiff also alleges that it is "an additional insured under the terms of the policies issued by" Defendant AIG Specialty and ACE. Id. ¶ 13.

Plaintiff constructed the Summit State Project "largely in 2002, " which is the period of time during which Kenyon provided its services under the subcontractor agreement. Id. ¶ 14. The "Notice of Completion" was recorded on February 27, 2003. Id.

1. Underlying Litigation

Following the completion of construction, Summit State Bank "observed water intrusion" and filed suit against Plaintiff and its subcontractors. Id.; see also Summit State Bank v. Nordby Construct. Co., No. SCV-249420 (Sonoma Cnty. Sup.Ct.). Summit State Bank determined that the water intrusion was related to the EIFS exterior installed by Kenyon, and that the entire EIFS system had to be removed and replaced. Id. ¶ 17. Plaintiff filed a cross-complaint for indemnity against Kenyon. Id. ¶ 15. Plaintiff also tendered its defense to Kenyon. Id. Plaintiff alleges that "[t]he tenders of defense were all denied, " and Plaintiff had to defend itself in the state court action. Id.

Plaintiff settled the state court action with Summit State Bank for $3.4 million dollars, with Plaintiff responsible for $649, 000, Kenyon responsible for $285, 000, and the other subcontractors contributing the balance. Id. ¶ 18. The settlement did not resolve Plaintiff's claims against Kenyon. Id. Nordby avers that Kenyon was defended in the underlying state court action by American Safety under a policy of commercial general liability insurance. Id. ¶ 19. American Safety allegedly exhausted all but $256, 690.60 of the policy's limit at the time of settlement. Id. As Kenyon owed $285, 000 under the terms of the settlement, Nordby contributed the additional $19, 309.40 difference between Kenyon's settlement obligations and the remaining insurance funds. Id.

In or about August 2012, Nordby and Kenyon entered into a partial settlement agreement in which Kenyon assigned its rights against all of its liability insurers to Nordby, in exchange for "certain material concessions." Id. ¶ 33. Those concessions included Nordby's payment of the $19, 309.40 owed by Kenyon, crediting Kenyon for the $265, 690.60 contribution against any arbitration award entered in Nordby's favor, and Nordby's agreement not to execute any award against Kenyon's non-insurance assets. Id. ¶ 34. As a condition of settlement, Kenyon and Plaintiff agreed to arbitrate Plaintiff's claims for defense and indemnification. Id. ¶ 20. Kenyon and Nordby arbitrated the claims on September 12, 2012, and the arbitrator rendered a decision on September 18, 2012. Id. The arbitrator found that Kenyon had failed to properly install the EIFS system, resulting in "significant water intrusion." Id. ¶ 20. The arbitrator awarded Nordby damages in the amount of $924, 974.06, and attorney's fees and costs in the amount of $174, 808.10. Id. ¶ 21. According to Plaintiff, the Superior Court confirmed the arbitration award and entered the award as a judgment on January 9, 2013. Id. ¶ 23. The Superior Court credited Kenyon for the $265, 690.60 Kenyon contributed to the settlement of the underlying state court action with Summit State Bank, "resulting in a net judgment of $834, 091.50, plus interest on that amount at the legal rate of 10 percent per annum from September 12, 2012." Id. According to Plaintiff, the amount currently due exceeds $950, 000. Id.

2. Defendants' Insurance Policies and Tender Responses

Plaintiff alleges that Defendant American Safety insured Kenyon under two primary policies of commercial general liability insurance effective July 1, 2002 to July 1, 2003 (Policy XGI XX-XXXX-XXX), and July 1, 2003 to July 1, 2004 (Policy XGI XX-XXXX-XXX). Id. ¶ 25. American Safety allegedly agreed to defend Kenyon under the 2002-03 policy, but denied coverage under the 2003-04 policy. Id. Plaintiff believes both policies carried limits of $1 million dollars per occurrence, "exclusive of defense and other supplementary payments coverage, " and that both polices are now "exhausted with respect to [Kenyon's] legal obligation to pay damages." Id. Plaintiff further alleges that American Safety exhausted its policy limit under the 2002-03 policy before the arbitration, but only exhausted its policy limit under the 2003-04 policy after the arbitration. Id. ¶¶ 26-27.

Plaintiff first tendered its defense to American Safety under the 2002-03 and 2003-04 policies on or about June 2, 2011. Id. ¶ 35. According to Plaintiff, it was entitled to a defense and indemnification under these policies as an additional insured and a contractual indemnitee of the named insured, Kenyon. Id. American Safety "ignored" the tender. Id. Plaintiff again tendered its defense to American Safety on or about September 29, 2011, November 8, 2011, and January 2, 2012, and American Safety allegedly ignored these tenders as well. Id. On or about December 16, 2013, Nordby tendered the judgment entered against Kenyon, requesting payment of the attorney's fees and costs awarded against Kenyon. Id. ¶ 37.

As to Defendant AIG Specialty, Plaintiff alleges that AIG Specialty insured Kenyon under a primary policy of commercial general liability effective July 1, 2004 to July 15, 2005 (Policy GL XXX-XX-XX). Id. ¶ 29. Defendant AIG Specialty denied coverage to Kenyon, and declined Kenyon's tender of defense. Id. The AIG Specialty policy carried a liability limit of $1 million dollars per occurrence, "exclusive of defense and other supplementary payments coverage." Id. AIG Specialty also allegedly insured Kenyon under three policies of umbrella liability insurance effective July 1, 2002 to July 1, 2003 (Policy BE 7413924), July 1, 2003 to July 1, 2004 (Policy BE 9745186), and July 1, 2004 to July 1, 2005 (Policy BE 9745761). Id. ¶ 32. Plaintiff avers that AIG Specialty denied coverage under the umbrella policies, claiming that Kenyon had not exhausted its primary insurance coverage. Id. Each umbrella policy carries a liability limit of $5 million dollars. Id.

On or about January 20, 2014, Nordby tendered to AIG Specialty the judgment entered against Kenyon in the underlying state court action. Id. ¶ 39. AIG Specialty has refused to pay any portion of the judgment awarded against Kenyon. Id.

Defendant ACE allegedly insured Kenyon under three primary policies of commercial general liability insurance effective July 15, 2005 to July 15, 2006 (Policy HDO G205909097A), July 15, 2006 to July 15, 2007 (Policy HDO G21702390), and July 15, 2007 to July 15, 2008 (Policy HDO G2451027A). Id. ¶ 30. ACE denied coverage under all three policies and declined Kenyon's tender of defense. Id. Plaintiff alleges that each policy carries a limit of $1 million dollars per occurrence, exclusive of defense and other supplementary payments coverage. Id. Plaintiff further alleges that the 2005-06 and 2007-08 policies had "designated work exclusions precluding coverage for the Summit State Bank project, " but that the 2006-07 policy did not have such an exclusion. Id.

On or about January 20, 2014, Nordby tendered to ACE the judgment entered against Kenyon in the underlying state court action. Id. ¶ 40. ACE rejected the request for payment, claiming that its policies had an applicable designated work exclusion. Id. Plaintiff requested a copy of the exclusion for the 2006-07 policy, but received no response. Id.

B. Procedural Background

Plaintiff Nordby filed its complaint in Santa Clara County Superior Court on June 25, 2014. ECF No. 1. Defendant AIG Specialty removed the action to federal court on September 8, 2014. Id. Defendant American Safety filed its consent to removal on September 24, 2014. ECF No. 12. Defendant ACE filed its consent to removal on January 6, 2015. ECF No. 38.

Defendants AIG Specialty and American Safety filed motions to dismiss on September 15, 2014. ECF Nos. 7, 8. Plaintiff filed oppositions on September 29, 2014. ECF Nos. 13, 14. Plaintiff filed its First Amended Complaint ("FAC"), that same day. ECF No. 15. On October 6, 2014, the Court granted the parties' stipulation to the withdrawal of Defendants AIG Specialty's and American Safety's motions to dismiss in light of the FAC. ECF No. 20.

Defendants AIG Specialty and American Safety filed the instant motions to dismiss on November 5, 2014. ECF Nos. 23, 24. Plaintiff filed its oppositions on November 19, 2014, ECF Nos. 27, 28. Defendants AIG Specialty and American Safety replied on November 26, 2014. ECF Nos. 29, 30.

Defendant ACE filed its motion to dismiss on January 6, 2015. ECF No. 35. Plaintiff filed its opposition on January 20, 2015. ECF No. 45. Defendant Ace replied on January 27, 2015. The Court does not address ACE's motion to dismiss in the instant order, as ACE's motion is set for hearing on April 9, 2015. ECF No. 35.

II. LEGAL STANDARD

A. Rule 12(b)(6)

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss an action for failure to allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations omitted). For purposes of ruling on a Rule 12(b)(6) motion, the Court "accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the non-moving party." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).

Nonetheless, the Court need not accept as true allegations contradicted by judicially noticeable facts, and the "[C]ourt may look beyond the plaintiff's complaint to matters of public record" without converting the Rule 12(b)(6) motion into one for summary judgment. Shaw v. Hahn, 56 F.3d 1128, 1129 n.1 (9th Cir.), cert. denied, 516 U.S. 964 (1995); see Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002); Shwarz, 234 F.3d at 435. Nor is the Court required to "assume the truth of legal conclusions merely because they are cast in the form of factual allegations.'" Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (quoting W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981)). Mere "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss." Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004) (internal quotation marks and citations omitted); accord Iqbal, 556 U.S. at 663-64.

B. Leave to Amend

If the Court determines that the complaint should be dismissed, it must then decide whether to grant leave to amend. Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend "should be freely granted when justice so requires, " bearing in mind that "the underlying purpose of Rule 15... [is] to facilitate decision on the merits, rather than on the pleadings or technicalities." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (internal quotation marks omitted). Nonetheless, a court "may exercise its discretion to deny leave to amend due to undue delay, bad faith or dilatory motive on part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party..., [and] futility of amendment.'" Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 892-93 (9th Cir. 2010) (alterations in original) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).

III. DISCUSSION

Here, Plaintiff alleges claims for breach of insurance contract, direct action under California Insurance Code § 11580, insurance bad faith, and declaratory relief against all three Defendants. The Court begins by addressing American Safety's motion to dismiss, and then turns to AIG Specialty's motion to dismiss.

Before the Court turns to the substance of American Safety's motion to dismiss, the Court summarizes some basic principles of insurance law in California. Under California law, an insurer has a broad duty to defend insured entities against claims that create a potential for indemnity. See Montrose Chem. Corp. v. Sup.Ct., 6 Cal.4th 287, 295 (1993). The duty to defend is broader than the duty to indemnify. See Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081 (1993). While the duty to defend is broad, it is not unlimited. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 19 (1995). In determining whether there is a duty to defend, courts must look to the complaint in the underlying litigation and "all facts known to the insurer from any source." See Montrose Chem. Corp., 6 Cal.4th at 300. The ultimate question is whether the facts known to the defendant at the time it refused to defend the underlying lawsuit created the potential for coverage under the policy. See Gunderson v. Fire Ins. Exch., 37 Cal.App.4th 1106, 1114 (Ct. App. 1995).

If there was no potential for coverage under the insurance policy based on the underlying complaint and extrinsic facts made known to the insurer, then the insurer has not breached the insurance contract by refusing to defend. See Montrose Chem. Corp., 6 Cal.4th at 295. The insured has the burden of adequately alleging that there was an "occurrence." See Blue Ridge Ins. Co. v. Stanewich, 142 F.3d 1145, 1148 (9th Cir. 1998). Furthermore, "a bad faith claim cannot be maintained unless policy benefits are due." Love v. Fire Ins. Exchange, 221 Cal.App.3d 1136, 1153 (1990).

In interpreting an insurance policy, the Court first looks to the language of the policy itself. The "clear and explicit meaning" of the provisions "interpreted in their ordinary and popular sense... controls judicial interpretation unless [the disputed terms are] used by the parties in a technical sense, or unless a special meaning is given to them by usage." See Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 666 (1995). "If the meaning a layperson would ascribe to the language of a contract of insurance is clear and unambiguous, a court will apply that meaning." Id. at 666-67. "[I]f the disputed terms are ambiguous, a court must attempt to resolve the ambiguity by adopting the meaning that reflects the objectively reasonable expectations of the insured." Flintkote Co. v. ...


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