Philadelphia Indemnity Insurance Company v. TL Fab, LP et al, No. 3:2017cv00306 - Document 36 (S.D. Cal. 2018)
Court Description: ORDER Denying Plaintiff and Cross-Defendant Philadelphia Indemnity Insurance Company's 31 Motion for Summary Judgment or in the Alternative Motion for Partial Summary Judgment. Signed by Magistrate Judge Mitchell D. Dembin on 8/2/2018. (All non-registered users served via U.S. Mail Service)(mpl)
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Philadelphia Indemnity Insurance Company v. TL Fab, LP et al Doc. 36 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 10 11 12 PHILADELPHIA INDEMNITY INSURANCE COMPANY, Plaintiff, v. 13 14 15 16 17 18 19 20 21 TL FAB, LP, a limited partnership; RENO CONTRACTING, a California Corporation,; and DOES 1 to 25, inclusive 24 25 26 ORDER DENYING PLAINTIFF AND CROSS-DEFENDANT PHILADELPHIA INDEMNITY INSURANCE COMPANY’S MOTION FOR SUMMARY JUDGMENT OR IN THE ALTERNATIVE MOTION FOR PARTIAL SUMMARY JUDGMENT Defendants. RENO CONTRACTING, INC., a California Corporation; COYLE/RENO II, a California joint venture; and COYLE RESIDENTIAL, INC., a California corporation, [ECF No. 31] Cross-Complainants, 22 23 Case No.: 17cv306-MDD v. PHILADELPHIA INDEMNITY INSURANCE COMPANY; and DOES 1 through 100, inclusive, Cross-Defendants. 27 1 Dockets.Justia.com 1 Plaintiff Philadelphia Indemnity Insurance Company (“Philadelphia”) 2 moves the Court for summary judgment or, in the alternative, partial 3 summary judgment. (ECF No. 31). Defendant Reno Contracting, Inc. 4 (“Reno”) opposes. (ECF No. 33). Having carefully considered the matters 5 presented and the record, the Court DENIES Philadelphia’s motion for 6 summary judgment or, in the alternative, partial summary judgment. 7 I. FACTUAL & PROCEDURAL BACKGROUND 8 The evidence presented to the Court in conjunction with the parties’ 9 10 11 motions reflects as follows. A. Insurance Policy The building project at issue is a 612-unit apartment complex consisting 12 of two, five-story buildings located at 7777-7845 Westside Drive, San Diego. 13 (ECF No. 31-2 at ¶1). This project is both known as the West Park 14 Apartments or the Civita Project (the “Project”). (Id.). Philadelphia issued a 15 builders risk policy, Policy No. PHPK1027133, to QF Westpark, LLC covering 16 the Project from May 29, 2013, to January 29, 2016 (“the Policy”). (Id. at ¶3). 17 According to the Policy, Philadelphia “will pay for direct physical ‘loss’ to 18 Covered Property caused by or resulting from any of the Covered Causes of 19 Loss” except as limited or excluded in the policy. (Id. at 35). Exclusions to 20 the Covered Causes of Loss include: 21 22 23 24 25 26 27 3. We will not pay for “loss” caused by or resulting from any of the following. But if “loss” by any of the Covered Causes of Loss results, we will pay for that resulting “loss.” a. Faulty, inadequate, or defective materials, or workmanship. (Id. at 39-40). B. Damage to Buildings A and B Beginning on December 2, 2014, and ending on December 4, 2014, a storm brought significant rain and high winds to San Diego. (ECF No. 33-6 2 1 at ¶133). At the time of the storm, both buildings were incomplete, though 2 the parties disagree about the extent to which the buildings were finished. 3 (ECF Nos. 33-6 at ¶¶ 6, 134; 31-2 at ¶¶ 6, 7). Reno, in an effort to protect the 4 exposed buildings, installed Visqueen plastic sheeting over open windows and 5 doors. (ECF No. 33-6 at ¶ 135). 6 During the storm, high winds damaged, and in some cases, destroyed 7 the Visqueen and additional protective measures placed at the then-top-layer 8 of Building B. (Id. at ¶136). As a result, rain entered the construction sites, 9 damaging both Buildings A and B (“the Loss”). (ECF Nos. 31-2 at ¶19; 33-6 10 at ¶19). Water entered Building A through 1) the parking garage structure; 11 2) the roof assemblies; and 3) the window and exterior door openings. (Id.). 12 In Building B, water flowed down incomplete 3-hour fire rated wall 13 assemblies, pooling until it reached the gap between the non-combustible 14 cement fiber board and floor sheathing, where it continued downward to the 15 lower floors. (ECF No. 33-6 at ¶140). The total cost of the Loss, after the 16 deductible, is $491,128.33. (Id. at ¶139). 17 C. Philadelphia’s Denial of Reno’s Claim 18 According to Philadelphia, QF Westpark submitted a claim for water 19 damage to the interior of “buildings” on December 8, 2014. (ECF No. 31-2 at 20 ¶8). After their experts and consultants investigated, Philadelphia informed 21 the insured that the claim was denied under the Policy on September 1, 2015. 22 (Id. at ¶42). Philadelphia’s denial was based on the determination by an 23 independent engineering firm retained by the insurance company that 24 coverage for the Loss was excluded by “the Policy’s provisions including 25 specifically, the water exclusion, the error, omission or deficiency in design or 26 specification exclusion, the rain exclusion, and the faulty workmanship 27 exclusion.” (Id. at ¶43). According to Reno, Philadelphia’s first denial cited 3 1 the rain exclusion, to which Reno objected on March 16, 2016, arguing that 2 their experts had determined that the rain was not the proximate cause of 3 the loss. (ECF No. 33-6 at ¶141). Reno states that only then did 4 Philadelphia invoke the faulty workmanship exclusion in a response letter 5 sent March 29, 2016. (Id. at ¶142). Reno then responded on June 14, 2016, 6 citing Allstate v. Smith, to challenge Philadelphia’s use of the faulty 7 workmanship exclusion. (Id. at 143). On June 20, 2016, Philadelphia 8 responded that because “the Allstate decision is a Ninth Circuit decision,” it 9 “is not binding in California.” (Id. at 144). Reno sent its last demand for 10 Philadelphia to withdraw the denial on November 28, 2016. (Id. at ¶146). 11 Philadelphia then filed the instant lawsuit on December 1, 2016, for 12 reimbursement of money paid to QF Westpark for a previous fire loss. (Id. at 13 ¶147). II. DISCUSSION 14 15 16 A. Legal Standard Federal Rule of Civil Procedure 56(c) provides that summary judgment 17 shall be rendered “if the pleadings, depositions, answers to interrogatories, 18 and admissions on file, together with the affidavits, if any, show that there is 19 no genuine issue as to any material fact and that the moving party is entitled 20 to judgment as a matter of law. Fed. R. Civ. P. 56(c). An issue of fact is 21 genuine only if there is sufficient evidence for a reasonable jury to find for the 22 nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 23 (1986). “The mere existence of a scintilla of evidence … will be insufficient; 24 there must be evidence on which the jury could reasonably find for the 25 [nonmoving party].” Id. at 252. At the summary judgment stage, evidence 26 must be viewed in the light most favorable to the nonmoving party and all 27 justifiable inferences are to be drawn in the nonmovant’s favor. See id. at 4 1 255. 2 B. Breach of Contract 3 Reno contends that Philadelphia breached the insurance contract by 4 denying coverage for the claim. According to Reno, the claim was not 5 excluded pursuant to the Policy’s faulty workmanship clause. Philadelphia 6 disputes such. 7 “Because this diversity case arises in California, California law applies.” 8 Allstate Ins. Co. v. Smith, 919 F.2d 447, 449 (9th Cir. 1991). Under 9 California law, “interpretation of [insurance] policy language is a question of 10 law” and “follows the general rules of contract interpretation.” MacKinnon v. 11 Truck Ins. Exchange, 31 Cal 4th 635, 641 (2003). “The interpretation of a 12 contract … is solely a judicial function unless the interpretation turns on the 13 credibility of extrinsic evidence.” American Alternative Ins. Corp. v. Superior 14 Court, 135 Cal. App. 4th 1239, 1245 (2006). 15 “Policy language is interpreted in its ordinary and popular sense and as 16 a laymen would read it and not as it might be analyzed by an attorney or an 17 insurance expert.” E.M.M.I., Inc. v. Zurich Am. Ins. Co., 32 Cal. 4th 465, 471 18 (2004) (internal quotations omitted). On the other hand, a dictionary 19 definition of a word “does not necessarily yield the ‘ordinary and popular’ 20 sense of the word if it disregards the policy’s context.” MacKinnon, 31 Cal. 21 4th at 649. 22 “If contractual language is clear and explicit, it governs. Bank of the 23 West v. Superior Court, 2 Cal. 4th 1245, 1264 (1992). But, if there is 24 ambiguity, the “[a]mbiguity is resolved by interpreting the ambiguous 25 provisions in the sense the [insurer] believed the [insured] understood them 26 at the time of formation.” E.M.M.I., 32 Cal. 4th at 470 (internal quotations 27 omitted); see also Bank of the West, 2 Cal 4th at 1264 (“If the terms of a 5 1 promise are in any respect ambiguous or uncertain, it must be interpreted in 2 the sense in which the promisor believed, at the time of making it, that the 3 promisee understood it.” (internal quotations omitted). “If application of this 4 rule does not eliminate the ambiguity, ambiguous language is construed 5 against the party who caused the uncertainty to exist.” E.M.M.I., 32 Cal 4th 6 at 470 (internal quotation marks omitted). That is, the ambiguity is 7 “resolved against the insurer and … if semantically permissible, the contract 8 will be given such construction as will fairly achieve its object of providing 9 indemnity for the loss to which the insurance relates.” Merced Mut. Ins. Co., 10 v. Mendez, 213 Cal. App. 3d 41 (1989) (internal quotations omitted). “[S]o 11 long as coverage is available under any reasonable interpretation of an 12 ambiguous clause, the insurer cannot escape liability.” State Farm Mut. 13 Auto. Ins. Co. v. Jacober, 10 Cal. 3d 193, 197 (1973). 14 Philadelphia asserts that the Loss was caused by three probable 15 proximate causes: “faulty workmanship, deficient design, or the rain itself.” 16 (ECF No. 31-1 at 6). In response, Reno argues that through its experts, the 17 proximate cause of the loss was “inadequate securing and protection of the 18 work against the elements” and “inadequate provision and maintenance of 19 temporary protection measures.” (ECF No. 33-6 at ¶140). Of all potential proximate causes of the Loss, faulty workmanship is the 20 21 agreed upon common denominator, however the parties disagree as to 22 whether the faulty workmanship exclusion in the Policy bars coverage.1 23 24 Philadelphia argues that the Court should follow the holding in Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005), rather than Allstate, to exclude coverage. (ECF No. 31-1 at 15). Given that the Court need not address the presence of multiple efficient proximate causes, Julian is inapplicable to this discussion. 1 25 26 27 6 1 Accordingly, the only question that needs to be answered here is whether the 2 faulty workmanship exclusion bars coverage for the Loss. The answer to this 3 question turns on whether the Court must rely on Allstate vs. Smith. 929 4 F.2d 447 (9th Cir. 1991). Philadelphia argues that “California case law has 5 evolved and departed from” Allstate’s interpretation of faulty workmanship 6 exclusions. (ECF No. 31-1 at 6). Reno, however, argues that Allstate requires 7 finding that the exclusion is ambiguous and when resolved, does not bar 8 coverage for the loss. (ECF No. 33 at 18-19). 9 Allstate, simply stated, stands for the position that a faulty 10 workmanship exclusion open to multiple interpretations regarding a faulty 11 process or product is resolved in favor of the insured. 929 F.2d 447 (9th Cir. 12 1991). There, the insured’s failure to cover exposed parts of the building 13 before a storm resulted in significant losses. Id. at 449. The insurance 14 company denied coverage, invoking the policy’s faulty workmanship 15 exclusion. Id.. The Ninth Circuit found the policy’s exclusion to be 16 ambiguous as workmanship could be read to mean the final product or the 17 process by which the insured property was constructed. Id. at 450. As a 18 result, the Court adopted the interpretation most favorable to the insured, 19 finding that the faulty workmanship exclusion refers to the final product and 20 therefore coverage was not barred, as the loss occurred before construction 21 ended. Id. at 451. 22 Reno argues that because a faulty workmanship exclusion requires “the 23 presence of an object to evaluate,” there can be no exclusion for a loss that 24 occurred well before the Project (object) was finished. (ECF No. 33 at 18). To 25 support the use of Allstate, Reno cites Century Theaters, Inc. v. Travelers 26 Prop. Cas. Co. of Am., No. C-05-3146 JCS, 2006 WL 708667 (N.D. Cal. Mar. 27 20, 2006). There, heavy rains damaged an unfinished movie theater 7 1 construction project, the insurance claims for which were denied citing the 2 faulty workmanship exclusion. Id. at *3. Stating “…in light of the 3 similarities between the circumstances here and those in Allstate, the Court 4 considers itself bound by Allstate on the question of whether the Faulty 5 Workmanship Exclusion covers construction processes.” Id. at *9. 6 Philadelphia does not discuss the applicability of Century Theaters in their 7 motion or reply to Reno’s opposition. 8 Philadelphia attempts to rebut Allstate by citing a number of out-of- 9 state cases with varying background facts. (ECF No. 31-1 at 19). Further, 10 Philadelphia states that no California court has followed Allstate in twenty 11 years. While it is true that the two state court decisions that discuss Allstate 12 ultimately did not award benefits to the insured, neither of these cases 13 analyzed Allstate’s treatment of faulty workmanship exclusions. See, 14 Herman Weissker, Inc. v. Lexington Ins. Co., No. B168031, 2004 WL 2283937 15 (Cal. Ct. App. Oct. 12, 2004); Holesapple v. Aetna Cas. & Sur. Co., No. 16 C033615, 2002 WL 749198 (Cal. Ct. App. Apr. 29, 2002). In Herman 17 Weissker, endorsements to the insurance policy made the faulty workmanship 18 exclusion explicit, thus eliminating the need to consider Allstate’s holding. 19 Herman Weissker, No. B168031, 2004 WL 2283937, at *4. In Holesapple, the 20 court ultimately declined to follow Allstate’s efficient proximate cause 21 analysis, not the void for vagueness holding relevant to this case. Holesapple, 22 No. C033615, 2002 WL 749198, at *11. Additionally, several California 23 federal courts have followed Allstate’s reasoning. (See, Century Theaters, 24 supra; Berman v. Amex Assur. Co., 2011 U.S. Dist. LEXIS 23716 (C.D. Cal. 25 Feb. 22, 2011); Berman v. Amex Assur. Co., 2008 U.S. Dist. LEXIS 127228 26 (C.D. Cal. Nov. 14, 2008); and Schaber v. Allstate Ins. Co., 2007 U.S. Dist. 27 LEXIS 92942 (C.D. Cal. Dec. 18, 2007)). To the extent that Philadelphia is 8 1 asking the Court to establish a novel approach to faulty workmanship 2 exclusions, the Court declines. The “assertion that the Court need not follow 3 Allstate is unpersuasive in light of [insurer]’s failure to identify any 4 meaningful differences between this case and Allstate….” Century Theaters, 5 No. C-05-3146 JCS, 2006 WL 708667, at *8 (N.D. Cal. Mar. 20, 2006). 6 Philadelphia lastly argues that should the Court decide that Allstate applies, 7 the faulty product was actually the Visqueen itself and not the finished 8 Project. (ECF No. 31-1 at 19-21). Philadelphia’s “Visqueen as the product” 9 argument is not supported by any proffered facts or law. 10 Accordingly, the Court concludes that Allstate remains relevant and 11 applicable law, and that the faulty workmanship exclusion, as a matter of 12 law, does not justify a denial of coverage for the loss at issue in this case. As 13 a result, Philadelphia’s motion for summary judgment with respect to breach 14 of contract is DENIED. 15 C. Bad Faith 16 Philadelphia also moves for summary judgment on Reno’s claim of bad 17 faith. “In addition to the duties imposed on contracting parties by the 18 express terms of their agreement, the law implies in every contract a 19 covenant of good faith and fair dealing. The implied promise requires each 20 contracting party to refrain from doing anything to injure the right of the 21 other to receive the benefits of the agreement. The precise nature and extent 22 of the duty imposed by such an implied purpose will depend on the 23 contractual purposes.” Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 817 24 (1979). “[A]n insurer’s responsibility to act fairly and in good faith in 25 handling an insurer’s claim ‘is not the requirement mandated by the terms of 26 the policy itself-to defend, settle, or pay. It is the obligation under which the 27 insurer must act fairly and in good faith in discharging its contractual 9 1 responsibilities.’” California Shoppers, Inc. v. Royal Globe Ins. Co., 175 2 Cal.App3d 1, 54 (1985). 3 An insurer's denial of or delay in paying benefits gives rise to damages 4 only if the insured shows the denial or delay was unreasonable. 5 Frommoethelydo v. Fire Ins. Exchange, 42 Cal.3d 208, 214–215 (1998). 6 Further “an insurer denying or delaying the payment of policy benefits due to 7 the existence of a genuine dispute with its insured as to the existence of 8 coverage liability or the amount of the insured's coverage claim is not liable 9 in bad faith even though it might be liable for breach of contract.” Chateau 10 Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal. App. 11 4th 335, 347 (2001). 12 The genuine dispute rule does not relieve an insurer from its obligation 13 to thoroughly and fairly investigate, process and evaluate the insured's claim. 14 A genuine dispute exists only where the insurer's position is maintained in 15 good faith and on reasonable grounds. Chateau Chamberay, 90 Cal. App. 4th 16 at 348–349; Guebara v. Allstate Ins. Co. 237 F.3d 987, 996 (9th Cir. 2001). 17 Nor does the rule alter the standards for deciding and reviewing motions for 18 summary judgment. “The genuine issue rule in the context of bad faith 19 claims allows a court to grant summary judgment when it is undisputed or 20 indisputable that the basis for the insurer's denial of benefits was 21 reasonable.... On the other hand, an insurer is not entitled to judgment as a 22 matter of law where, viewing the facts in the light most favorable to the 23 [nonmovant], a jury could conclude that the insurer acted unreasonably.” 24 Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161-62 (9th Cir. 25 2002). Thus, an insurer is entitled to summary judgment based on a genuine 26 dispute over coverage only where there is an absence of triable issues as to 27 whether the disputed position upon which the insurer denied the claim was 10 1 2 reached reasonably and in good faith. In its motion for summary judgment, Philadelphia first argues that as 3 there is no coverage under the Policy, there can be no bad faith. (ECF No. 31- 4 1 at 25). Philadelphia asserts that should the Court find coverage under the 5 Policy, the genuine dispute doctrine should apply, and that their 6 investigation was “entirely reasonable.” Without citing to the record, 7 Philadelphia asserts that it was “only after conducting a thorough 8 investigation of the claim, and relying up on its cause and origin consultant’s 9 findings and conclusion” that the claim was denied. (Id. at 27). 10 Reno argues that denying the claim was unreasonable and that 11 Philadelphia’s behavior has been “rife with bad faith conduct” from the time 12 of the denial to the present. (ECF No. 33 at 25-29). Reno indicates that it 13 first challenged Philadelphia’s initial denial of coverage using the rain 14 exclusion, as that policy rationale was in direct conflict with Reno’s expert’s 15 findings that weather was not the proximate cause of the Loss. (ECF No. 33- 16 6 at ¶141). Only then did Philadelphia cite the faulty workmanship 17 exclusion. (Id. at ¶142). When Reno challenged Philadelphia’s use of the 18 faulty workmanship exclusion, Philadelphia communicated that “the Allstate 19 decision is a Ninth Circuit decision which is not binding in California” and 20 again refused to reopen the investigation. (Id. at ¶144). Further, Reno 21 argues that Philadelphia’s decision to ignore Reno’s demand to withdraw 22 Philadelphia’s lawsuit against Reno for reimbursement of money paid to QF 23 Westpark for a previous fire loss demonstrated bad faith as by law an 24 insurance company may not seek subrogation from its own insured. (Id. at 25 ¶¶148, 149). 26 27 Philadelphia insists that it acted reasonably while Reno asserts and points to facts in support of their contention that they did not. This is a 11 1 genuine dispute of material fact for the trier of fact to resolve. Accordingly, 2 Philadelphia’s motion for summary judgment with respect to Reno’s bad faith 3 is DENIED. 4 D. Punitive Damages 5 6 7 Finally, Philadelphia moves for summary judgment with respect to punitive damages on the bad faith claims. “Punitive damages are available if in addition to proving a breach of the 8 implied covenant of good faith and fair dealing proximately causing actual 9 damages, the insured proves by clear and convincing evidence that the 10 insurance company itself engaged in conduct that is oppressive, fraudulent, 11 or malicious.” Amadeo, 290 F.3d at 1164 (citing, inter alia, Cal. Civ. Code § 12 3294(a)). “‘Malice’ means conduct which is intended by the defendant to 13 cause injury to the plaintiff or despicable conduct which is carried on by the 14 defendant with a willful and conscious disregard of the rights or safety of 15 others.” Cal. Civ. Code § 3294(c)(1). “‘Oppression’ means despicable conduct 16 that subjects a person to cruel and unjust hardship in conscious disregard of 17 that person's rights.” Id. § 3294(c)(2). “An employer shall not be liable for 18 [punitive] damages ..., based upon acts of an employee of the employer, unless 19 the employer ... authorized or ratified the wrongful conduct for which the 20 damages are awarded or was personally guilty of oppression, fraud, or malice. 21 With respect to a corporate employer, the advance knowledge and conscious 22 disregard, authorization, ratification or act of oppression, fraud, or malice 23 must be on the part of an officer, director, or managing agent of the 24 corporation.” Id. § 3294(b). 25 “[T]he relationship of insurer and insured is inherently unbalanced; the 26 adhesive nature of insurance contracts places the insurer in a superior 27 bargaining position. The availability of punitive damages is thus compatible 12 1 with recognition of insurers' underlying public obligations and reflects an 2 attempt to restore balance in the contractual relationship.” Egan v. Mut. of 3 Omaha Ins. Co., 24 Cal. 3d 809, 820 (1979). “‘Determinations related to 4 assessment of punitive damages have traditionally been left to the discretion 5 of the jury.’” Amadeo, 290 F.3d at 1165 (quoting Egan, 24 Cal.3d at 821, 169 6 Cal.Rptr. 691, 620 P.2d 141). As discussed above, viewing the evidence in the light most favorable to 7 8 Reno, a reasonable jury could find that Philadelphia acted in bad faith in 9 denying Reno’s claim. Philadelphia’s designated deponent, John Kirby, 10 testified in deposition that Philadelphia’s consistent approach disregards 11 Allstate when applying the faulty workmanship exclusion to California losses. 12 (ECF No. 33-6 at ¶145). Viewing the evidence in the light most favorable to 13 Reno, a reasonable jury could find that Philadelphia’s actions were “willful 14 and rooted in established company practice.” Id. at 1165 (quotation omitted); 15 cf. id. (“Viewed most favorably to Amadeo, there is sufficient evidence that 16 the denial of her claim was not simply the unfortunate result of poor 17 judgment, but rather resulted from Principal's plainly unreasonable 18 interpretation of its policy and the deliberate restriction of its investigation in 19 a bad faith attempt to deny benefits due to Amadeo. Thus a jury might 20 conclude that Principal's actions were willful and rooted in established 21 company practice.”) (quotations omitted). Accordingly, Philadelphia’s motion 22 for summary judgment with respect to punitive damages is DENIED. 23 /// 24 /// 25 /// 26 /// 27 /// 13 III. CONCLUSION 1 2 Based on the foregoing, IT IS HEREBY ORDERED that the Motion 3 for Summary Judgment, or in the alternative Motion for Partial Summary 4 Judgment, is DENIED. 5 6 Dated: August 2, 2018 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 14
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