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Tokio Marine Speciality Insurance Co. v. Thompson Brooks, Inc.

United States District Court, N.D. California

April 26, 2017

TOKIO MARINE SPECIALITY INSURANCE COMPANY, Plaintiff,
v.
THOMPSON BROOKS, INC., et al., Defendants.

          ORDER DENYING MOTION FOR SUMMARY JUDGMENT AND STAYING THE CASE Re: Dkt. Nos. 20, 32

          William H. Orrick United States District Judge

         INTRODUCTION

         Plaintiff Tokio Marine Specialty Insurance Company (“Tokio”) moves for summary judgment claiming it owes no duty to defend or indemnify defendant Thompson Brooks, Inc. (“TBI”) in two underlying lawsuits pending in state court. Tokio contends the claims are excluded from coverage under the policy, thereby excusing Tokio from its duty to defend. I conclude that Tokio continues to have a duty to defend TBI since there are factual questions regarding TBI's potential fault and whether the products completed operations hazard applies. Therefore, I DENY Tokio's Motion for Summary Judgment.

         BACKGROUND

         Tokio moves for summary judgment seeking a declaration that Tokio owes no duty to defend TBI, or partial summary judgment that it owes no duty to indemnify TBI with respect to certain claims, in two underlying lawsuits pending in Marin Superior Court: Peterson, et. al. v. Thompson Brooks, Inc., Case No. CIV 1603427 (“Peterson action”), and Oak Grove Construction Company, Inc. v. First Republic Bank, et al., Case No. CIV 1502956 (“Oak Grove action”) (together “Underlying Actions”). Tokio's Mot. for Summ. J. (“Tokio's Mot.”) 1 (Dkt. No. 20).

         Tokio requests a judgment declaring: (i) it owes no duty to defend because most of the claims in the Underlying Actions seek non-covered economic damages; (ii) the remaining claims are barred by the “faulty-workmanship” exclusions; and (iii) Tokio owes no duty to indemnify 2nd and 6th-11th causes of the Peterson action.

         I. STATE COURT LITIGATION

         Both state court actions arise from TBI's 2010 engagement by Stuart and Gina Peterson as a general contractor to demolish and rebuild a house for the Petersons (“Project”) in Tiburon, California (“Property”). In the Peterson action, plaintiffs assert claims for: (1) breach of contract; (2) accounting; (3) breach of implied warranty; (4) breach of fiduciary duty; (5) negligence; (6) fraud; (7) negligent misrepresentation; (8) unfair business practices; (9) conversion; (10) constructive trust; and (11) unjust enrichment. Declaration of Laurie Cacciari, Ex. 11 (“Peterson Complaint”). Claims 2 and 6-11 generally concern TBI's alleged noncompliance with the accounting required under the contract, unlawful business and billing practices, fraud, and unjust enrichment resulting in economic harms to the Petersons.[1] Claims 1, 3, 4 and 5 concern some of the same conduct, but also refer to alleged damage done to the Property as a result of TBI's work.[2] Id.

         In the Oak Grove action, TBI's subcontractor for “site preparation” and “earthwork and mass excavation” sued TBI and later the Petersons for reimbursement of unpaid labor costs. The Petersons filed a cross complaint against TBI and Oak Grove alleging claims of: (1) negligence; (2) breach of implied warranty; (3) breach of contract; (4) equitable indemnity; and (5) unjust enrichment based again on the alleged misbilling by TBI and defects and damages caused to the Property by TBI's work on the Project. Cacciari Decl., Ex. 12 (“Oak Grove Cross-Complaint”) ¶ 10.

         The pleadings in the Underlying Actions are not currently settled. Declaration of David F. Feingold [Dkt. No. 24-1], ¶ 8. In addition, the Special Master appointed for the Underlying Actions recently issued Pre-Trial Order No. 1, governing discovery and other pre-trial matters. Declaration of Deborah L. Goodman [Dkt. No. 23-3], Ex. 3 at ¶ 15. Discovery in the Underlying Actions has been stayed, but the Petersons' expert is expected to produce a report by the end of April and the parties expect a site inspection will be conducted soon thereafter. Id. ¶¶ 16, 18-19.

         II. PROJECT TERMINATION

         The parties dispute the circumstances and legal effect surrounding the end of TBI's work on the Project. According to allegations in the Peterson Complaint, the Petersons “terminated” TBI's contract “for cause” effective April 24, 2015 as a result of TBI's repeated breach of its duties under the contract. Peterson Complaint ¶ 17.[3] The Petersons' formal April 17, 2015, Notice of Termination letter states that the Petersons terminated TBI because “TBI [held] the job hostage by a work stoppage . . . stopped work and completely demobilized the site.” Supplemental Declaration of Daniel Katibah [Dkt. No. 25-1], Ex. 1 at 5, 9. The Petersons considered this to be a “de facto abandonment of the job.” Id. at 9.

         According to Patrick Davis, TBI's executive vice president and the project manager on the Project, the Petersons struggled to pay construction costs in the last year of the Project. Declaration of Patrick Davis [Dkt. No. 23-1] ¶ 9. As a result, when TBI's January and February 2015 invoices were not paid, TBI notified the Petersons effective April 4, 2015, that TBI was discontinuing work until payment was received. Id. ¶ 12. The Petersons responded by declaring the contract was “constructively terminated.” Id. At the time TBI stopped work on the Project, it was “functionally complete” and only required a few “punch list” items to be serviced, maintained, corrected, repaired, or replaced. Id. ¶ 17. The only “incomplete” items were exterior landscaping and an outdoor water feature. Id. TBI asserts that the Petersons had prior to the termination, “commenced the process of occupying the buildings, as in hanging art on the wall.” Id.

         As to some of the damage alleged by the Petersons, including an instance of water intrusion, Davis believes that damage was caused by the Petersons' landscape architect who directed a change to the Project without TBI's knowledge. Id. ¶ 23. As to the damage to hard wood floors, Davis believes that may have been caused by deficient design by the Petersons or by failure of the contractor hired by the Petersons to install and configure the controls for that system. Id. ¶ 24.

         Tokio relies on a mediation statement, created by the Petersons in March 2016 and sent to Tokio by TBI, to argue that after TBI was terminated the Petersons had to pay their replacement contractor $3.6 million to finish the Project, as evidence that the Project could not be considered “complete” at the time TBI stopped work. Cacciari Decl., Ex. 9.[4]

         III. INSURANCE POLICIES AND NOTIFICATION

         From April 1, 2014 to April 1, 2017, Tokio covered TBI with three consecutive commercial general liability policies (“Policy”). Cacciari Decl. ¶ 4, Exs. 1-3.[5] Section 1, Coverage A, subsection 1 of the Policy provides that Tokio “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury' or ‘property damage' to which this insurance applies.” Policy at 026, 116, 189. Tokio also has “the right and duty to defend the insured against any ‘suit' seeking those damages.” Id. However, Tokio did not have a duty to defend against any suit seeking “property damage” to which the insurance does not apply. Id.

         Under “exclusions” listed in subsection 2j. “Damage to Property, ” the Policy provides that it does not apply to property damage to:

j(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or j(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
. . .
Paragraph (6) of this exclusion does not apply to “property damage” included in the “products completed-operations hazard”.

Id. at 030, 120, 193.

         The “Products-completed operations hazard” (“PCOH”) definition in Section V-16 provides:

Includes all “bodily injury” and “property damage” occurring away from premises you own or rent and arising out of “your product” or “your work” except . . .
(2) Work that has not yet been completed or abandoned. However, “your work” will be deemed completed at the ...

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