Employers Mutual Casualty Co. v. North American Specialty Flooring, Inc.

          ORDER GRANTING PLAINTIFFS AND COUNTER-DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (DOC. NO. 31)

         This matter is before the court on the motion for summary judgment brought by plaintiffs and counter-defendants Employers Mutual Casualty Company and Illinois Emcasco Insurance Company (collectively, “EMC”^[1]). (Doc. No. 31.) A hearing on the motion was held on December 3, 2019. Attorney Lisa Darling-Alderton appeared telephonically on behalf of EMC, and attorney Arthur Grebow appeared telephonically on behalf of defendants and counter-claimants North American Specialty Flooring and Sports Surfacing, Inc. (collectively, “Sports Surfacing”^[2]). Having considered the parties' briefs and oral arguments, and for the reasons set forth below, the court will grant EMC's motion for summary judgment.

         BACKGROUND

         In this declaratory relief action EMC seeks a declaration from this court that, as a matter of law, the damages sought against Sports Surfacing by a third-party in an underlying state court action are not covered under the insurance policies EMC issued to Sports Surfacing, and that EMC therefore has no duty to defend or indemnify Sports Surfacing in that underlying state court action. (See Doc. No. 2.) Sports Surfacing counter-claims that EMC has a duty to defend and indemnify it in the underlying action pursuant to the insurance policies that EMC issued it and seeks a declaration stating as much. (See Doc. No. 16.)

         The material facts of this case are undisputed and, as relevant to the pending motion, are set forth below.

         A. The Relevant Parties.

         Defendant Sports Surfacing is a contractor that “install[s] flooring and related products, including rubber sports flooring.” (Doc. No. 31 at 7.) EMC provided insurance coverage to Sports Surfacing under various insurance policies (collectively, the “EMC insurance policies”). (Doc. No. 2 (“Compl.”) at 2-3.) EMC is moving for summary judgment against each named defendant, but only Sports Surfacing has opposed the motion. Other named defendants-such as defendants S.C. Anderson, Inc. (“Anderson”) and Koster American Corporation dba Koster USA (“Koster”)-do not oppose the pending motion for summary judgment. Moreover, several entities who were initially named as defendants in this action have been dismissed after agreeing to be bound by the outcome of this litigation. (See Doc. Nos. 23, 27.) Included amongst that group are Roy's Flooring, Inc. and Jose Roy Garcia, formerly dba Roy's Flooring, (collectively “Roy's Flooring”) who were subcontracted into the project that gave rise to the underlying lawsuit, as well as Navigators Insurance Company (“Navigators”), an insurance company that insured Roy's Flooring. (Compl. at 12-13; Doc. No. 31-2, Ex. A) (Stipulation of Facts and Evidence Admissible for Cross Motions for Summary Judgment^[3] (“UF”) at ¶¶ 22, 23; Doc. Nos, 23, 27.)

         B. The Facts Giving Rise to the Underlying State Court Action.

         On May 15, 2017, defendant Anderson, a general contractor, entered into a written contract with California State University, Bakersfield (“CSU Bakersfield”) for a construction project referred to by the parties as the “Student Recreation Center project.” (UF at ¶ 22; see also Doc. No. 31-2 at 259.) On June 18, 2007, Anderson entered into a written subcontract with Roy's Flooring, whereby the latter agreed to “provide all labor, material, and equipment necessary to furnish and install wood flooring, rubber flooring, and sports flooring” for the Student Recreation Center project. (UF at ¶ 23.) At some point prior to the rubber flooring being installed in the Student Recreation Center's fitness room, it was discovered that excessive moisture was passing through the concrete slab upon which the rubber flooring was to be installed, requiring the application of a concrete sealant. (Id. at ¶ 25.) On January 8, 2009, Roy's Flooring entered into a written subcontract with defendant Sports Surfacing, whereby Sports Surfacing agreed to obtain and apply a specific sealant produced by defendant Koster. (Id. at ¶ 24.) Roy's Flooring subcontracted with Sports Surfacing because Roy's Flooring was not a “certified” installer of Koster products and Sport Surfacing asserted that it had the proper certification. (Id.; see also Doc. No. 31-2 at 260.) On July 15, 2009, Anderson and Roy's Flooring executed a “change order, ” whereby Roy's Flooring agreed to “provide all labor, material, and equipment necessary to install moisture sealer in” the fitness room and running track at the Student Recreation Center. (UF at ¶ 23.) Sports Surfacing installed a concrete sealant product manufactured by Koster to the concrete slab and then installed the rubber flooring. (Id. at ¶ 25.) The Student Recreation Center project was completed on or about August 12, 2009. (Id. at ¶ 26.)

         In or around February 2016, CSU Bakersfield notified defendant Anderson that the rubber flooring in the Student Recreation Center's fitness room had failed and needed to be removed and replaced. (Id. at ¶ 27.) Thereafter, representatives from CSU Bakersfield, Anderson, Roy's Flooring, and Sports Surfacing (and possibly Koster) scheduled and conducted a meeting “to discuss what needed to be done to effectuate repairs or replacement of the flooring.” (Doc. No. 31-2 at 265-66.) “It was determined at the meeting that core samples and analysis testing was necessary in order to ascertain the cause of the failure, the extent of the damage[, ] and the best method for correcting the problem.” (Id. at 266.) After samples were taken and tests were conducted, it was revealed that an insufficient layer of Koster sealant was applied, causing moisture to permeate through to the floor and causing it to fail. (Id. at 261, 266.) “The only recommended means to remedy the condition [wa]s to remove the floor and sealant, re-level the floor and replace the flooring.” (Id. at 261.)

         On November 8, 2016, counsel for Anderson reached out to Roy's Flooring, Sports Surfacing, and Koster via letters to notify them that CSU Bakersfield “ha[d] made a final demand on Anderson to commence the requisite corrective action . . . and to do so during the next semester break scheduled for December 15, 2016 through January 22, 2017.” (Id. at 261-62, 266.) Anderson in turn demanded that Roy's Flooring and its subcontractors, including Sports Surfacing, “confirm [their] respective intent and ability to immediately proceed with the removal and replacement of the defective flooring during the suggested period noted above or to refund to Anderson all sums previously paid to [them] . . . for the defective flooring.” (Id. at 262.) Anderson's letter warned Roy's Flooring and Sport Surfacing that their failure to timely comply with its demand would result in Anderson “undertak[ing] its own corrective action through an alternate subcontractor and suppliers and . . . seek[ing] to recover all expenses and damages caused by [their] refusal to perform that corrective work . . . .” (Id.)

         Ultimately, however, CSU Bakersfield removed and replaced the entire flooring in the Student Recreation Center's fitness room, and thereafter back-charged Anderson in the amount of $229, 345.71 for the costs that it incurred in doing so. (Id. at 395.) On July 19, 2017, Anderson sent another letter to Roy's Flooring, Sports Surfacing, and Koster, demanding that they reimburse Anderson for the amount that CSU Bakersfield had back-charged it. (Id.) On October 24, 2017, Anderson informed Roy's Flooring, Sports Surfacing, and Koster by way of another letter that it had not received a response to its July 19, 2017 correspondence and that it planned on filing a lawsuit against the subcontractors within the next ten days unless payment was received by Anderson within that timeframe. (Id. at 398.)

         C. The Underlying State Court Action and Subsequent Tenders to EMC.

         On November 16, 2017, defendant Anderson filed suit against Roy's Flooring, Sports Surfacing, and Koster in Kern County Superior Court, asserting claims for breach of contract, breaches of express and limited liability, and negligence (the “underlying action” or “Anderson Action”). (See Doc. No. 31-2, Ex. 18.) The complaint in the Anderson Action alleges that “core samples, testing and analysis of the . . . Flooring were conducted . . . [and] [t]he results . . . determined that an insufficient layer of the Koster sealer was applied to the concrete floor of the . . . Fitness Room which allowed and caused moisture to permeate through to the floor causing the adhesive to fail to remain bonded to the rubber flooring.” (Doc. No. 31-2 at 448.) The state court complaint further alleges that “the primary causes of the above-described failure were . . . [t]he Koster sealer layer was not applied thick enough or continuous enough to perform as an effective moisture mitigation membrane [and] . . . the acrylic adhesive likely never cured effectively and did not develop initial bond strength.” (Id. at 452.) Anderson seeks compensatory damages in the sum of $229, 345.71, an award of consequential, incidental, and/or other appropriate damages in amounts according to proof, and an award of costs of suit. (Id. at 461.)

         On March 20, 2018, Sports Surfacing tendered the underlying action to EMC for a defense and indemnification under the EMC insurance policies, and on April 12, 2018, Navigators, as insurer for Roy's Flooring, tendered Roy's Flooring's defense in the Anderson Action to EMC, contending that Roy's Flooring was an “additional insured” under the EMC insurance policies issued to Sports Surfacing. (Doc. Nos. 31 at 20; 31-2 at 293.) By way of letters dated August 8 and 17, 2018, EMC declined to defend both Sports Surfacing and Roy's Flooring in the Anderson Action. (See Doc. No. 31-2, Exs. 19 -21.) As relevant here, EMC argued that, “[t]o the extent Anderson asserts any claims against [Sports Surfacing or Roy's Flooring in the Anderson Action], those claims are for the costs that [CSU Bakersfield] ‘back charged' to Anderson for the purpose of correcting [Sports Surfacing and/or Roy's Flooring's] defective flooring work or products.” (Doc. No. 31-2 at 494, 515, 536.) EMC argued that these costs are not for “property damage” as that term is defined in the EMC insurance policies. (Id.) Moreover, EMC argued that, even if the costs incurred by CSU Bakersfield in removing and replacing the defective flooring constituted “property damage” as that term is defined in the EMC insurance policies, the “Damage to Your Product” and “Damage to Your Work” exclusions in those policies also negate coverage. (Id. at 501-03, 516-17, 537-39.) Accordingly, EMC requested that Sports Surfacing and Roy's Flooring withdraw their coverage requests and reserved all of its legal and equitable rights in connection with the matter, including its right to initiate a declaratory judgment action if necessary. (Id. at 507, 528, 551.)

         D. The EMC Insurance Policies.

         EMC issued commercial general liability and commercial umbrella policies to Sports Surfacing (the “CGL policies” and the “umbrella policies, ” respectively) (collectively, the “EMC insurance policies”).^[4] The EMC insurance policies were first issued in 2008 and renewed in 2009, 2010, and 2011. (UF at ¶¶ 1-16.)

         1. The CGL Policies.

         The CGL policies state in relevant part:

We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for . . . “property damage” to which this insurance does not apply.

(Doc. No. 31-2 at 25, 89.) As relevant here, the CGL policies define “property damage” as

Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or . . . Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

(Id. at 39, 103.) The CGL policies, however, explicitly “do[] not apply to”:

k. Damage To Your Product “Property damage” to “your product” arising out of it or any part of it.

l. Damage To Your Work “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

(Id. at 26-29, 90-93.) The CGL policies define “your product, ” “your work, ” and “products-completed operations hazard” as follows:

         21. “Your product”:

a. Means:

(1) Any goods or products, other than real property, manufactured, sold, handled, distributed or ...