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The Sunset Landmark Investment, LLC v. Chubb Custom Insurance Co.

United States District Court, C.D. California

August 29, 2019

THE SUNSET LANDMARK INVESTMENT, LLC, Plaintiff,
v.
CHUBB CUSTOM INSURANCE COMPANY, Defendant.

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

          MICHAEL W. FITZGERALD, UNITED STATES DISTRICT JUDGE.

         This matter came on for trial before the Court sitting without a jury between May 28 and June 7, 2019.

         On May 28, 2019, Jayesh Patel appeared on behalf of Plaintiff The Sunset Landmark Investment, LLC (“Sunset”) and gave an opening statement. Sunset is the corporate form of the Hollywood Athletic Club (“HAC”), the property at issue in this action. Curtis D. Parvin then appeared on behalf of Defendant Chubb Custom Insurance Company (“Chubb”) and gave an opening statement.

         The following witnesses were called and examined by the parties in the order recited below:

         On the same day, following opening statements, Mr. Patel examined Saeed Nourmand, the HAC's owner. Mr. Parvin cross-examined Mr. Nourmand; Mr. Patel conducted a redirect examination; and Mr. Parvin conduced a recross.

         Next, Michael S. Wilde, appearing on behalf of Chubb, examined William Runyan, a licensed civil engineer self-employed for Runyan Engineer, Inc. and was retained by Chubb's insurance adjustor to produce repair plans for water damage to the HAC. Mr. Patel cross-examined Mr. Runyan and Mr. Wilde conducted a redirect examination.

         On May 29, 2019, Neil Thakor, appearing on behalf of Sunset, examined Mohamed Iravani, the HAC's property manager. Mr. Parvin cross-examined Mr. Iravani and Mr. Thakor conducted a redirect examination.

         Next, Mr. Patel examined Dr. Jose Andrade, Sunset's structural integrity and sulfate attacks expert. Mr. Parvin cross-examined Dr. Andrade; Mr. Patel conducted a redirect examination; and Mr. Parvin conducted a recross.

         On May 30, 2019, Mr. Wilde examined Edmon Badmagharian, a licensed civil engineer employed by Erkel and Greenfield and Associates (“EGA”) and was retained by Mr. Nourmand to conduct an assessment of the structural damages of the HAC. Mr. Patel cross-examined Mr. Badmagharian and Mr. Wilde conducted a redirect examination.

         Next, Mr. Thakor examined Jeremy Callister, Sunset's cost estimation expert. Mr. Parvin cross-examined Mr. Callister; Mr. Thakor conducted a redirect examination; and Mr. Parvin conducted a recross.

         Next, Mr. Parvin examined Scott Richard Petersen, Chubb's claims adjustor assigned to the HAC. Mr. Patel cross-examined Mr. Petersen; Mr. Parvin conducted a redirect examination; Mr. Patel conducted a recross; and Mr. Parvin conducted a re-redirect examination.

         On May 31, 2019, Mr. Parvin examined Scott Cushing, a building consultant retained by Mr. Petersen to estimate reconstruction costs of the HAC. Mr. Thakor cross- examined Mr. Cushing; Mr. Parvin conducted a redirect examination; and Mr. Thakor conducted a recross.

         Next, Mr. Parvin examined Geoff Hichborn, Chubb's sulfate attacks expert. Mr. Thakor cross-examined Mr. Hichborn and Mr. Parvin conducted a redirect examination.

         On June 5, 2019, Mr. Parvin examined Dr. John Osteraas, Chubb's structural integrity expert. Mr. Patel cross-examined Dr. Osteraas and Mr. Parvin conducted a redirect examination.

         Next, Mr. Patel examined Dr. Andrade as a rebuttal expert. Mr. Parvin cross-examined Dr. Andrade; Mr. Patel conducted a redirect examination; and Mr. Parvin conducted a recross.

         On June 7, 2019, Mr. Patel made a closing argument on behalf of Sunset and Mr. Parvin made a closing argument on behalf of Chubb. Mr. Patel also made a rebuttal argument on behalf of Sunset.

         Following the presentation of evidence and the parties' closing arguments, the matter was taken under submission.

         Having carefully reviewed the record and the arguments of counsel, as presented at the trial and in their written submissions, the Court now makes the following findings of fact and reaches the following conclusions of law under Rule 52 of the Federal Rules of Civil Procedure. Any finding of fact that constitutes a conclusion of law is also hereby adopted as a conclusion of law, and any conclusion of law that constitutes a finding of fact is also hereby adopted as a finding of fact.

         I. FINDINGS OF FACT

         A. The Parties and the Property

         1. Plaintiff Sunset is a California limited liability corporation with its principal place of business in Los Angeles. (Ex. 161). Sunset is the corporate form of the HAC, a property located at 6525 Sunset Boulevard, Los Angeles, California 90028. Mr. Nourmand testified that he is the sole owner of the HAC. Mr. Nourmand was a dignified and intelligent witness who clearly loves his beautiful building, as well he might. Dropping the third person for a moment, as an Angeleno I'm grateful he ignored an architect's suggestion to cover the historic structure in gunite. But as explained below, neither his understandable pride of ownership nor his own training as a structural engineer allow him, in fact or law, to dictate to Chubb that the HAC be repaired to his unreasonable specifications.

         2. The HAC, built in 1923, consists of several structures: (1) a nine-story tower (and the core subject of this action), (2) a two-story leased space, (3) a barrel roof gymnasium event space, (4) a club area, (5) a two-story office space, (6) a site residence, and (7) a storage building. (Ex. 161). The interior walls of the nine-story tower are made up of dry walls and hollow clay tiles (“HCTs”) bound together by mortar composed of lime, sand, and Portland cement.

         3. Defendant Chubb, a Delaware corporation with its principal place of business in New Jersey, is an insurance provider.

         B. The Policy

         4. Chubb issued a Commercial Property Policy (the “Policy”) to insure the HAC for $10, 100, 000.00. (Ex. 20). In connection with the Policy, Chubb valued the nine-story tower at $6, 326, 288.11. (Ex. 16).

         5. The Policy-in effect between July 17, 2009, and July 17, 2010-has several relevant provisions in the Building and Property Coverage Form (the “Building Coverage Form”). (Ex. 20).

         6. First, Section A of the Building Coverage Form is the insuring provision and provides the scope of coverage as follows:

We [Chubb] will pay for direct physical loss of or damage to Covered Property [e.g., the HAC] at the premises described in the Declarations caused by or resulting from any Covered Caused of Loss.

(Id.).

         7. Section A(4)(e) also describes additional coverage under the Policy where there is an increased in cost of construction incurred “to comply with enforcement of an ordinance or law in the course of repair, rebuilding or replacement of damaged parts of that property.” (Id.). The additional coverage is limited to the lesser of $10, 000 or 5%. The actual amount payable is available if “repairs and replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years.” 8. Second, Section D of the Building Coverage Form provides that the Policy includes a $5, 000 deductible. (Id.).

         9. Third, Section E of the Building Coverage Form provides the loss conditions under the Policy. (Id.). Section E(4) states the loss payment options, as follows:

In the event of loss or damage covered by this Coverage Form, at our option, we [Chubb] will either:
(1) Pay the value of lost or damaged property;
(2) Pay the cost of repairing or replacing the lost or damaged property, subject to b. below [non-coverage for increased cost attributable to enforcement of an ordinance or law];
(3) Take all or any part of the property at an agreed or appraised value; or
(4) Repair, rebuild or replace the property with other property of like kind and quality, subject to b. below.
We will determine the value of lost or damaged property, or the cost of its repair or replacement, in accordance with the applicable terms of the Valuation Condition in this Coverage Form or any applicable provision which amends or supersedes the Valuation Condition.

         10. Section E(7) also states the loss payment valuation, as follows:

We [Chubb] will determine the value of Covered Property in the event of loss or damage as follows:
(1) At actual cash value as of the time of loss or damage [subject to some conditions] . . .

(Id.).

         11. Section E(3) further states the duties required of Sunset in the event of a loss, as follows:

You [Sunset] must see that the following are done in the event of loss or damaged to Covered Property:
. . .
(5) At our request, give us complete inventories of the damaged and undamaged property. Include quantities, costs, values and amount of loss claimed.
. . .
(7) Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request. We will supply you with the necessary forms.
(8) Cooperate with us in the investigation or settlement of the claim.

(Id.).

         12. Fourth, Section F of the Building Coverage Form provides additional conditions that apply to the Policy, including a coinsurance obligation. (Id.). The coinsurance obligation states that the full amount claimed is not payable where the value of the covered property multiplied by the coinsurance percentage (or 90%) is less than the insurance limit of the property (or $10, 100, 000). If a coinsurance obligation applies, Chubb is required to cover an amount, pre-deductible, that is proportional to the amount the property is underinsured.

         13. In addition to physical damage to the property as set forth in the Building Coverage Form, the Policy also covers certain loss of business income as set forth in the Business Income (and Extra Expense) Coverage Form (the “Business Income Coverage Form”). (Id.).

         14. Section A(1) of the Business Income Coverage Form states that Chubb “will pay for the actual loss of Business Income you [Sunset] sustain due to the necessary suspension of your operations during the period of restorations” caused by direct physical loss of or damage to the HAC. (Id.). The limit of the business income loss is no greater than $930, 000.

         15. Section (C)(3) states that the amount of business income loss will be determined based on the net income of the business before the direct physical loss or damage occurred, the likely net income had no physical loss or damage occurred, the operating expenses of the HAC, and other relevant sources of information such as financial records and accounting procedures. (Id.). Business income, however, is reduced by the extent to which Sunset can operate, in whole or in part, the damaged or damaged portions the HAC.

         16. Sections (C) and (D), similar to sections in the Building Coverage Form, provide duties required of Sunset in the event of a loss and apply a coinsurance obligation to business income. (Id.).

         17. In addition to the Building Coverage Form and the Business Income Coverage Form, the Policy finally contains a form called the Common Policy Conditions. (Id.). The Common Policy Conditions exhibit provides that the Policy's terms and conditions “can be amended or waived only by endorsement issued by us [Chubb] and made a part of this [P]olicy.” The Common Policy Conditions exhibit further provides that Chubb is “not obligated to make any inspections, surveys, reports, or recommendations” and that any such actions that Chubb undertakes “relate only to insurability and the premiums to be charged.”

         C. The Loss

         18. At some point between the close of business on Friday, January 25, 2010, and Saturday, January 26, 2010, a galvanized water supply pipe in the southeast corner of the tower between the eighth and ninth floor burst. Water from the burst pipe flowed from the eighth floor all the way down to the basement, primarily through a plumbing chase behind the closet wall.

         19. On the morning of January 26, the maintenance crew turned off the water supply and notified Mr. Iravani, the property manager. When Mr. Mr. Iravani arrived at the HAC, he did not immediately examine all of the floors. Instead, he focused on cleaning the water that was on the first floor. On the morning of Monday, January 28, 2010, he eventually examined all of the floors for water damage.

         20. Also on January 28, 2010, Sunset notified Chubb of the water damage.

         D. The Remediation Efforts

         21. After being notified of the loss, Chubb retained Koning & Associates (“Koning”), an independent insurance adjustor, to handle the claim. On February 3, 2010, Koning visited the tower, took numerous photographs of the water damage, and prepared an estimate of the cost to restore the tower to pre-water damage condition. (Ex. 119). Koning estimated that the cost of repairing every floor, from the eighth to the basement, would total $71, 742.43. Koning retained KB Construction to obtain various bids for the estimated cost of repairs.

         22. Koning also recommended, which Sunset approved, that Advanced Restoration Specialists (“ARS”), a remediation company, be retained to dry out the areas affected by the water prior to repairing the walls. To dry out the affected areas, ARS performed “demolition services, ” which included removing some of the cement plasters on the walls with heavy equipment. As a result, some of the HCTs were damaged or were entirely taken out of the walls. ARS sent multiple status reports to Sunset and Chubb during the drying out process.

         23. On February 12, 2010, ARS sent a status report indicating that it had inspected the property earlier that day, controlled demolition services were scheduled to begin on the third and fifth floor that afternoon, and work was “progressing as per our estimate and scope.” (Ex. 26). ARS also indicate that controlled demolition services on the seventh and eighth floors had been performed the previous day, on February 11, 2010. ARS finally recommended further investigation by a third-party specialized expert such as a structural engineer who has experience with concrete, brick, and mortar construction.

         24. On February 17, 2010, ARS sent another status report indicating that the tower was drying well and the drying equipment was being reduced. (Ex. 27). ARS also stated that it had spoken with Mr. Iravani, who stated that most tenants were satisfied with the drying process and that he had received no complaints as to dust buildup. ARS further stated that it was still waiting on an answer as to the structural engineer to assess the integrity of the walls.

         25. On February 19, 2010, ARS sent one more status report indicating that most of the exposed plaster and brick were registering dry on its moisture meters. (Ex. 28). There was no comment about conducting an assessment of the structural integrity of the walls.

         26. Around the same time as ARS' status reports, Mr. Nourmand, himself a structural engineer, also requested an assessment of the structural integrity of the walls from Chubb.

         27. Chubb denied the request, objected to the cost of hiring a structural engineer, and questioned the necessity of such an assessment, noting that the water damage was largely cosmetic. Both Koning and KB Construction also believed that hiring a structural engineer was not necessary and excessive.

         28. At some point between February 19 and February 25, 2010, Mr. Nourmand hired Mr. Badmagharian, a structural engineer with the engineering firm EGA, to assess the structural integrity of the walls. On February 25, Mr. Badmagharian inspected the tower with ARS's representative and took numerous photos from various angles on all floors, except for the third. Mr. Badmagharian testified that in the areas that he observed, he did not see anything of concern that would make the building unsafe. He eventually produced a report on May 10, 2010, discussed beginning on paragraph 32.

         29. On February 26, 2010, ARS sent a status report to Sunset and Chubb, noting the site inspection with Mr. Badmagharian from the day prior and indicating continued progress on drying the tower. (Ex. 29). It appears that ARS completed drying out the tower in late March 2010. (Ex. 101).

         30. On April 15, 2010, ARS sent Sunset and Chubb a final report, including invoices for the work performed, status updates on the building, photographs taken during the drying out process, and psychrometric readings of the moisture on various floors. (Ex. 101). Though ARS' invoices total $94, 835.51, Chubb's estimate of ARS' costs for drying out the tower (and what Chubb ultimately paid) was $91, 398.09.

         31. On May 6, 2010, Sunset's insurance agent, Meslee Insurance Services, Inc. (“Meslee”), sent a letter to Chubb. (Ex. 60). In that letter, Meslee stated that while ARS advised Mr. Nourmand that the affected walls were dry and that its task was complete, Mr. Nourmand was “completely unsatisfied” with the outcome of the work. Meslee stated that the affected walls were still not dry and some affected areas smelled of unpleasant odors. Meslee also wrote that, according to Mr. Badmagharian's inspection and report, whole sections of certain walls need to be rebuilt in order to preserve the structural integrity of the tower.

         32. On May 10, 2010, Sunset sent the EGA report to Chubb. (Ex. 2). In the EGA report, Mr. Badmagharian noted that “the primary purpose of [his] visit was to make an assessment of the structural damages to the building, if any, that were caused by water and moisture due to a broken pipe on the eighth floor.” Mr. Badmagharian observed the damages as follows:

The damages were mainly to the hollow clay tile with cement plaster finish partition walls between the office, bathroom and closet area. The damages were mostly some removed cement plaster from walls, exposed hollow clay tiles with numerous locations with broken, displaced and/or missing tiles, as well as some damages to grouted joints. . . . The most severe damages that [he] observed were in the 8th, 6th, 4th, 2nd floors and the lobby area, where not only plaster was removed but also some of the tiles were damaged, and/or missing.

         Mr. Badmagharian also observed damages to the first and fifth floors, but not the third. He was not able to observe the extent of damages to the basement because the wall was covered in telephone jacks and power lines.

         33. In the EGA report, Mr. Badmagharian concluded that the effect of the damaged walls on the lateral load resisting system of the tower is unclear. (Id.). To have an accurate evaluation, a computer model of the existing building's frames would need to be created. Mr. Badmagharian, however, recommended as follows:

[I]n the absence and in lieu of such an extensive and expensive study and evaluation [i.e., computer modeling], we [EGA] recommend that all damaged walls be repaired and reconstructed to their original condition, including removing the damaged tiles and replacing with new tiles, repairing the joints and applying new cement plaster, etc. . . . [T]he damaged walls can be replaced with similar materials that have the same weight and same shear strength and stiffness.

         34. Mr. Badmagharian recommended that one possible solution to repair the damaged walls between the first to eight floors would be to replace those damaged walls with light gauge metal stud walls. (Id.). He did not recommend the damaged walls be replaced with solid brick or masonry walls because those are heavier and may cause further complications. At trial, he also testified that if the damaged walls were ...


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