Opinion
Case No.: 3:20-cv-00507-H-DEB
2021-05-12
ASSOCIATED INDUSTRIES INSURANCE COMPANY, a Florida Corporation, Plaintiff, v. MT. HAWLEY INSURANCE COMPANY, an Illinois Corporation; and Does 1 through 10, inclusive, Defendants.
Lisa G. Shemonsky, Hirsch Closson APLC, San Diego, CA, for Plaintiff. Matthew Joseph Hafey, Nemecek & Cole, APC, Sherman Oaks, CA, Bevin Ann Berube, Nemecek & Cole, Encino, CA, for Defendant Mt. Hawley Insurance Company.
Lisa G. Shemonsky, Hirsch Closson APLC, San Diego, CA, for Plaintiff.
Matthew Joseph Hafey, Nemecek & Cole, APC, Sherman Oaks, CA, Bevin Ann Berube, Nemecek & Cole, Encino, CA, for Defendant Mt. Hawley Insurance Company.
ORDER:
(1) DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT; AND
(2) GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, FOR PARTIAL SUMMARY JUDGMENT
MARILYN L. HUFF, District Judge On March 12, 2021, Plaintiff Associated Industries Insurance Co. ("Plaintiff") filed a motion for summary judgment. (Doc. No. 21.) The same day, Defendant Mt. Hawley Insurance Co. ("Defendant") filed a cross-motion for summary judgment or, in the alternative, for partial summary judgment. (Doc. No. 23.) On April 19, 2021, the parties filed their respective oppositions. (Doc. Nos. 28, 31.) On April 26, 2021, the parties filed their respective replies. (Doc. Nos. 33, 36.) The Court held a hearing on the cross-motions on May 10, 2021. (Doc. No. 43.) Robert Closson and Lisa Shemonsky appeared for Plaintiff, and Matthew Hafey appeared for Defendant. (Id. ) For the following reasons, the Court grants Defendant's motion for summary judgment and denies Plaintiff's motion for summary judgment.
Background
This is an equitable contribution action between two insurance companies. Both Plaintiff and Defendant issued commercial general liability ("CGL") policies to Jeff Gunnell Construction Co. ("JGCI"). In 2015, Sean Shimada filed a construction defect action against JGCI in Shimada v. Jeff Gunnell Construction, Inc., Yolo County Superior Court Case No. CV 15-710. (Doc. No. 23-3, Def's Req. for Judicial Notice ("Def's RJN") Exs. A, O; Doc. No. 25, Pl's Req. for Judicial Notice ("Pl's RJN") Exs. B-C; Doc. No. 29, Pl's Reply to Def's Statement of Uncontroverted Facts ("Pl's Reply to Def's SUF") at 8.) Defendant declined to defend JGCI in that case because, according to Defendant, the claims made against JGCI were not covered under its policies. (Doc. No. 21-3, Shemonsky Decl., Ex. 2 at 62-64.) Plaintiff argues that Defendant's coverage determination was erroneous, (Doc. No. 21, Pl's Mot. for Summ. J. at 18-19), and, with the instant action, seeks equitable contribution from Defendant for a portion of its funds expended in defending and settling Shimada, (Doc. No. 1, Compl. ¶¶ 30-40).
Each party asks the Court to take judicial notice of the initial and first amended complaints filed in the Shimada action, as well as the complaint filed in this case. (Def's RJN ¶¶ 1, 6, 15; Pl's RJN ¶¶ 1-3.) The Court grants the parties’ requests. See Fed. R. Evid. 201(b)(2) ; Harris v. County of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012) (taking judicial notice of "documents on file in federal or state courts"). Defendant also requests judicial notice of various certificates and permits issued by the City of Davis. (Def's RJN ¶¶ 2-5.) The Court grants these requests because they are undisputed matters of the public record. Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (explaining court can take judicial notice of public records). The Court denies the parties’ remaining requests for judicial notice as moot because the Court either does not rely on the remaining documents submitted in the parties’ requests or the documents are otherwise admissible.
In 2004, JGCI agreed to construct a building for Shimada pursuant to a written construction agreement. (Pl's Reply to Def's SUF at 2; see also Doc. No. 23-23, Hafey Decl., Ex. S.) On May 6, 2005, the City of Davis issued a certificate of occupancy for the building. (Def's RJN, Ex. E; Pl's Reply to Def's SUF at 5.) City of Davis permits also indicate that the building was "final" on May 6, 2005. (Def's RJN, Exs. B-C.; Pl's Reply to Def's SUF at 6.)
A few months later, in September 2005, Defendant issued its first CGL policy to JGCI. (Def's RJN, Ex. G at 62; Pl's Reply to Def's SUF at 11-12.) In total, Defendant issued several consecutive CGL policies (the "Policies") to JGCI, covering JGCI from September 2005 to September 2013. (Pl's Reply to Def's SUF at 11-12.) The Policies generally provide coverage for "those sums that [JGCI] becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ " and require Defendant "to defend [JGCI] against any ‘suit’ seeking those damages." (E.g., Def's RJN, Ex. G at 62; see also Pl's Reply to Def's SUF at 13.)
The Policies contain two exclusions relevant to this lawsuit. The first is a Continuous or Progressive Injury and Damage ("CPID") Exclusion that limits coverage for "any damages because of or related to ... ‘property damage’ " that was "caused, or [was] alleged to have been caused, by any defect, deficiency, inadequacy or condition which first existed prior to the [Policies’] inception date[s]." (E.g., Def's RJN, Ex. G at 108; see also Pl's Reply to Def's SUF at 14-17.) The Policies also include a Breach of Contract Exclusion that excludes "any claim or ‘suit’ for ‘bodily injury,’ ‘property damage,’ ‘personal injury,’ or ‘advertising injury’ arising directly or indirectly out of" a "[b]reach of [an] express or implied contract" or a "[b]reach of [an] express or implied warranty." (E.g., Def's RJN, Ex. G at 102; see also Pl's Reply to Def's SUF at 17-19.)
Defendant's policies issued after 2010 read "personal and advertising injury" rather than " ‘personal injury’ or ‘advertising injury.’ " (E.g., Def's RJN, Ex. L at 377.)
On May 22, 2015, Shimada filed a construction defect action against JGCI in the Superior Court of California for the County of Yolo. (Doc. No. 25, Pl's RJN, Ex. B.) Shimada alleged that JGCI constructed the property in a defective manner, causing various forms of damage. (See, e.g., id. ¶ 12.) The complaint asserted five claims against JGCI for (1) breach of the construction contract, (2) negligence, (3) unjust enrichment, (4) breach of an implied warranty that the property would be constructed free from defects and be fit for ordinary purposes, and (5) breach of an implied covenant to perform its work in a competent manner. (Id. ¶¶ 10-27, 32-34.)
On July 29, 2015, JGCI's insurance broker sent Defendant a copy of the Shimada complaint and asked Defendant to defend and indemnify JGCI from the action. (Doc. No. 23-21, Hafey Decl., Ex Q at 1-12; Pl's Reply to Def's SUF at 19.) On July 31, 2015, Defendant sent a request for information to JGCI, inquiring about when JGCI's construction work completed, among other things. (Hafey Decl., Ex. R at 56-57.) JGCI provided Defendant with a copy of its construction agreement with Shimada, copies of JGCI's subcontractor agreements, and various certificates and permits issued by the City of Davis. (Pl's Reply to Def's SUF at 20.) None of these documents indicated that JGCI performed any construction work after May 6, 2005. (See generally Hafey Decl., Ex. U.)
Based on this information, Defendant denied JGCI's request to defend and indemnify it from the Shimada action on August 12, 2015. (Doc. No. 21-3, Shemonsky Decl., Ex. 2 at 62-64.) As Defendant explained in its denial letter, the alleged defects stemmed from JGCI's construction, which Defendant claimed was completed in May 2005, before its initial policy became effective. (Id. at 62-63.) As a result, Defendant stated that the CPID Exclusion precluded coverage for each of Shimada's claims. (Id. at 63-64.) Defendant's denial letter also included the following disclaimer:
The portions of the policies cited above are not intended to be and are not a complete exposition of all the policy terms or conditions. By citing the policy
terms that we believe apply, and providing our rationale for this denial of coverage [Defendant] is not waiving any of the policy terms or conditions. In fact, [Defendant] is reserving all their rights, including the right to assert at a later time that other policy provisions or operation of statute or common law may also operate to preclude or limit coverage.
(Id. at 64.)
On December 9, 2015, Shimada filed a first amended complaint against JGCI. (Doc. No. 25, Pl's RJN, Ex. C.) The first amended complaint asserted the same five claims against JGCI based on JGCI's allegedly defective construction work. (Compare Pl's RJN, Ex B, with Pl's RJN, Ex. C.) Notably, however, the amended complaint contained an allegation that JGCI's construction "was not actually completed and ready for use until approximately February, 2006," (Pl's RJN, Ex. C ¶ 11), after Defendant's first policy became effective, (Doc. No. 23-10, Def's RJN, Ex. G at 59; Doc. No. 29, Pl's Reply to Def's SUF at 17-19).
On February 19, 2016, a representative of Navigators, one of JGCI's previous insurers that undertook JGCI's defense, re-tendered the defense of the Shimada action to Defendant, attaching the first amended complaint. (Pl's Reply to Def's SUF at 23.) Navigators followed up with Defendant on October 11, 2016, asking whether Defendant had taken a position on its tender. (Id. at 24.) The same day, Defendant sent Navigators a copy of its initial April 2015 letter denying coverage. (Id. ) Navigators and Plaintiff proceeded to defend JGCI in Shimada, and ultimately settled the case in late 2019. (See Doc. No. 21-3, Shemonsky Decl., Ex. 3.)
On March 17, 2020, Plaintiff filed the instant action against Defendant, seeking equitable contribution for its litigation and settlement costs. (Doc. No. 1.) On April 19, 2021, Plaintiff filed a motion for summary judgment, arguing that it is entitled to reimbursement as a matter of law because Defendant owed a duty to defend JGCI. (Doc. No. 21 at 2.) The same day, Defendant filed a cross-motion for summary judgment, or, in the alternative, for partial summary judgment, arguing in pertinent part that it owed no duty to defend JGCI pursuant to the Policies’ CPID and Breach of Contract Exclusions. (Doc. No. 23 at 12-23.)
Discussion
I. Standard of Review
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure if the moving party demonstrates that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) ; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ; Fortune Dynamic, Inc. v. Victoria's Secret Stores Brand Mgmt., Inc., 618 F.3d 1025, 1031 (9th Cir. 2010). "A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Fortune Dynamic, 618 F.3d at 1031 (internal quotation marks and citations omitted); accord Anderson, 477 U.S. at 248, 106 S.Ct. 2505. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).
A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to establish an essential element of the nonmoving party's case that the nonmoving party bears the burden of proving at trial. Id. at 322-23, 106 S.Ct. 2548 ; Jones v. Williams, 791 F.3d 1023, 1030 (9th Cir. 2015).
Once the moving party establishes the absence of a genuine issue of material fact, the burden shifts to the nonmoving party to "set forth, by affidavit or as otherwise provided in Rule 56, ‘specific facts showing that there is a genuine issue for trial.’ " T.W. Elec. Serv., 809 F.2d at 630 (quoting former Fed. R. Civ. P. 56(e) ); accord Horphag Research Ltd. v. Garcia, 475 F.3d 1029, 1035 (9th Cir. 2007). To carry this burden, the non-moving party "may not rest upon mere allegation or denials of his pleadings." Anderson, 477 U.S. at 256, 106 S.Ct. 2505 ; see also Behrens v. Pelletier, 516 U.S. 299, 309, 116 S.Ct. 834, 133 L.Ed.2d 773 (1996) ("On summary judgment, ... the plaintiff can no longer rest on the pleadings."). Rather, the nonmoving party "must present affirmative evidence ... from which a jury might return a verdict in his favor." Anderson, 477 U.S. at 256, 106 S.Ct. 2505.
When ruling on a summary judgment motion, the court must view the facts and draw all reasonable inferences in the light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372, 378, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007). The court should not weigh the evidence or make credibility determinations. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505. Further, the Court may consider other materials in the record not cited to by the parties, but it is not required to do so. Fed. R. Civ. P. 56(c)(3).
II. California Insurance Law
A. Policy Interpretation
In California, the interpretation of an insurance policy is a question of law for the court. Powerine Oil Co., Inc. v. Superior Court, 37 Cal.4th 377, 33 Cal.Rptr.3d 562, 118 P.3d 589, 597 (2005). Such interpretation must give effect to "the mutual intention of the parties at the time the contract is formed ...." Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619, 637 (1995), as modified on denial of reh'g (Oct. 26, 1995). To determine the intent of the parties behind an insurance contract, the Court "look[s] first to the language of the contract in order to ascertain its plain meaning," reading the language in its "ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage." Id. (internal citations and quotation marks omitted).
"An insurance company can choose which risks it will insure and which it will not, and coverage limitations set forth in a policy will be respected." Fidelity & Deposit Co. v. Charter Oak Fire Ins. Co., 66 Cal.App.4th 1080, 78 Cal. Rptr. 2d 429, 432 (1998) (citing Legarra v. Federated Mutual Ins. Co., 35 Cal.App.4th 1472, 42 Cal. Rptr. 2d 101, 105 (1995) ). Thus, if the "contractual language is clear and explicit, it governs." Minkler v. Safeco Ins. Co. of Am., 49 Cal.4th 315, 110 Cal.Rptr.3d 612, 232 P.3d 612, 616 (2010). Additionally, if a policy term has been "judicially construed" in a "sufficiently analogous context," the term is "not ambiguous." McMillin Homes Constr., Inc. v. Natl. Fire & Marine Ins. Co., 35 Cal.App.5th 1042, 247 Cal. Rptr. 3d 825, 833 (2019), review denied (Aug. 28, 2019). B. Equitable Contribution and the Duty to Defend
"Equitable contribution ... applies to apportion costs among insurers that share the same level of liability on the same risk as to the same insured." Maryland Cas. Co. v. Nationwide Mut. Ins. Co., 81 Cal.App.4th 1082, 97 Cal. Rptr. 2d 374, 377–78 (2000). It allows an insurer that defended and settled a suit against its insured to seek pro-rata reimbursement from nonparticipating coinsurers who refused to defend the insured. N. Am. Capacity Ins. Co. v. Claremont Liab. Ins. Co., 177 Cal.App.4th 272, 99 Cal. Rptr. 3d 225, 244 (2009). For a settling insurer to prevail on an equitable contribution action, the settling insurer must show that the nonparticipating coinsurer owed duty to defend the insured in the first place. Safeco Ins. Co. of Am. v. Super. Ct., 140 Cal.App.4th 874, 44 Cal. Rptr. 3d 841, 844 (2006) (citation omitted). In California, an "insurer owes a broad duty to defend its insured against claims that create a potential for indemnity." Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 17 Cal.Rptr.2d 210, 846 P.2d 792, 795 (1993), as modified on denial of reh'g (May 13, 1993). Additionally, if one claim made against the insured in an action is potentially covered, the insurer generally owes a duty to defend the insured against the entire action. Id., 17 Cal.Rptr.2d 210, 846 P.2d at 795-96.
"While [the duty to defend] is broad, it is not limitless, and California courts have warned against ‘misconstru[ing] the principle of "potential liability" under an insurance policy.’ " Los Angeles Lakers, Inc. v. Fed. Ins. Co., 869 F.3d 795, 805 (9th Cir. 2017) (alteration in original) (citing Gunderson v. Fire Ins. Exch., 37 Cal.App.4th 1106, 44 Cal. Rptr. 2d 272, 277 (1995) ). "[W]here there is no potential for recovery on a covered claim, there is no duty to defend." Tana v. Professionals Prototype I Ins. Co., 47 Cal.App.4th 1612, 55 Cal. Rptr. 2d 160, 162 (1996). Thus, an insurer does not owe a duty to defend if it conclusively demonstrates that a policy exclusion applies to preclude coverage. A. Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017, 123 Cal. Rptr. 2d 256, 272 (2002) ; see also S.B.C.C., Inc. v. St. Paul Fire & Marine Ins. Co., 186 Cal.App.4th 383, 112 Cal. Rptr. 3d 40, 44 (2010) ("[I]f, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance.").
In an equitable contribution action, the settling insurer first bears the burden of making a prima facie showing that a claim asserted in the underlying action was potentially covered under the nonparticipating insurer's policy. Axis Surplus Ins. Co. v. Glencoe Ins. Ltd., 204 Cal.App.4th 1214, 139 Cal. Rptr. 3d 578, 586 (2012). Then, "the burden shifts to the nonparticipating insurer to prove an absence of actual coverage under its policy." Id. Otherwise, the nonparticipating insurer is "presumptively liable for both the costs of defense and settlement." Safeco, 44 Cal. Rptr. 3d at 844. "If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend." Alterra Excess & Surplus Ins. Co. v. Snyder, 234 Cal.App.4th 1390, 184 Cal. Rptr. 3d 831, 838 (2015) (citation omitted).
III. The Breach of Contract Exclusion
Defendant argues that the Breach of Contract Exclusion is dispositive on the issue of duty to defend. The Court agrees. The exclusion provides the following:
BREACH OF CONTRACT EXCLUSION
This insurance does not apply, nor do we have a duty to defend any claim or
"suit" for "bodily injury," "property damage," "personal injury," or "advertising injury" arising directly or indirectly out of the following:
a. Breach of express or implied contract;
b. Breach of express or implied warranty ....
(E.g., Doc. No. 23-10, Def's RJN, Ex. G at 102; see also Doc. No. 29, Pl's Reply to Def's SUF at 17-19.)
At bottom, the parties dispute revolves around the scope of the Breach of Contract Exclusion. Plaintiff argues that the Breach of Contract Exclusion does not apply to the noncontractual claims asserted by Shimada. (Doc. No. 28, Pl's Opp. to Def's Mot. for Summ. J. at 20-23; Doc. No. 33, Pl's Reply re Pl's Mot. for Summ. J. at 8-10.) Therefore, Plaintiff reasons, Defendant should have defended JGCI because the noncontractual claims were covered under the Policies. (Pl's Opp. to Def's Mot. for Summ. J. at 20-23; Pl's Reply re Pl's Mot. for Summ. J. at 8-10.) On the other hand, Defendant argues that the Breach of Contract Exclusion precludes coverage for Shimada's noncontractual claims because they are sufficiently tethered to Shimada's contractual claims. (Doc. No. 23, Def's Mot. for Summ. J. at 19-23; Doc. No. 31, Def's Opp. to Pl's Mot. for Summ. J. at 19-23.)
Turning to the language of the exclusion, the Breach of Contract Exclusion eliminates coverage for all claims "arising directly or indirectly out of" a breach of contract or warranty. (E.g., Def's RJN, Ex. G at 102; see also Pl's Reply to Def's SUF at 17-19.) California courts broadly interpret the term "arising out of," even when used in an exclusion. See Southgate Recreation & Park Dist. v. California Assn. for Park & Recreation Ins., 106 Cal.App.4th 293, 130 Cal. Rptr. 2d 728, 733 (2003) ; see also Los Angeles Lakers, 869 F.3d at 801. " ‘[A]rising out of’ is ordinarily understood to mean ‘originating from, having its origin in, growing out of, or flowing from, or in short, incident to, or having connection with.’ " Crown Capital Securities, L.P. v. Endurance Am. Specialty Ins. Co., 235 Cal.App.4th 1122, 186 Cal. Rptr. 3d 1, 7 (2015) (citation omitted). "It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship." The Travelers Prop. Cas. Co. of Am. v. Actavis, Inc., 16 Cal.App.5th 1026, 225 Cal. Rptr. 3d 5, 21 (2017) (citation omitted).
To determine whether claims "arise out of" an excluded risk, California courts "examine the conduct underlying the ... lawsuit, instead of the legal theories attached to the conduct." Medill v. Westport Ins. Corp., 143 Cal.App.4th 819, 49 Cal. Rptr. 3d 570, 579 (2006) (citation omitted). Medill illustrates this principle. There, corporate directors were sued for negligence and breach of fiduciary duty for their actions associated with an underlying bond litigation. Id. at 573-575. The insurer refused to defend the directors from these claims, relying on a policy provision excluding coverage for "damages ‘arising out of’ [the] breach of any contract, whether oral, written or implied." Id. at 575-76. In line with California law, the policy at issue defined "arising out of" to mean "based upon, arising out of, or in connection with." Id. at 575. Ultimately, the Medill court held that the insurer did not owe a duty to defend the directors based upon this breach of contract exclusion. Id. at 579-80. It reasoned that the negligence and fiduciary duty claims were nonetheless excluded because "[a]ll of the allegations against the directors ... ar[ose] out of duties and obligations ... assumed under the bond contracts." Id. at 579.
Several federal authorities applying California law have interpreted breach of contract exclusions in a similar broad, fact-driven manner. See, e.g., Trenches, Inc. v. Hanover Ins. Co., SACV 12-627 AG-RNBX, 2012 WL 12507967, at *7 (C.D. Cal. Aug. 10, 2012), aff'd 575 Fed. App'x 741 (9th Cir. 2014) (unpublished). For example, Trenches dealt with an underlying litigation in which a plaintiff sued an insured for using its trademarks in breach of an agreement between the parties. Id. The underlying plaintiff asserted claims against the insured for breach of contract, trademark infringement, and unfair competition. Id. The Trenches court held that a policy exclusion limiting coverage for "personal advertising injur[ies] arising out of a breach of contract" not only barred coverage for the breach of contract claim, but also barred coverage for the trademark infringement and unfair competition claims because the claims shared the "same factual situation." Id. The district court reasoned that a contrary holding would allow claimants to recharacterize their breach of contract claims as noncontractual ones to pass liabilities from the insured to the insurer, manufacturing coverage where it would not ordinarily exist. See id. In a memorandum disposition, the Ninth Circuit specifically affirmed the district court on this issue. Trenches, Inc. v. Hanover Ins. Co., 575 Fed. App'x 741, 741-42 (9th Cir. 2014) (unpublished); see also Nestle USA, Inc. v. Travelers Cas. & Sur. Co. of Am., 10 Fed. App'x 438 (9th Cir. 2001) (unpublished) (likewise affirming district court's broad interpretation of breach of contract exclusion using the term "arising out of" to preclude coverage for claims involving the same "factual situation that constituted a breach of contract").
James River Insurance Co. v. Medolac Laboratories, 290 F. Supp. 3d 956 (C.D. Cal. 2018) arrived at a similar conclusion. In the litigation underlying James River, a business alleged that its competitor's owner, its former employee, disparaged the business in violation of a termination agreement between the parties. Id. at 960. The business asserted several claims against the owner, some for breach of contract and others based on noncontractual theories, such as unfair competition and intentional interference with prospective economic advantage. Id. The insurer argued that it owed no duty to defend the owner from these claims because the relevant policy contained a breach of contract exclusion providing that its coverage "did not apply to ... ‘Personal and advertising injury’ arising out of a breach of contract." Id. at 961 (omission in original). The James River court agreed, holding that the insurer did not need to defend the owner against any of the claims since they "all ar[ose] out of the same conduct alleged to constitute a breach of contract." Id. at 959 ; see also Penn-Star Ins. Co. v. Caden Companies, Inc., CV 17-02369 AB-PLAX, 2017 WL 6940535, at *4-5 (C.D. Cal. Dec. 28, 2017) (holding breach of contract exclusion precluded coverage for non-contractual claims predicated on same underlying facts as contractual ones).
Further, at least two district courts outside of the Ninth Circuit have applied Defendant's own breach of contract exclusion to preclude coverage for noncontractual claims arising out of construction defect allegations. Mt. Hawley Ins. Co. v. Slay Engr., 390 F. Supp. 3d 794, 801 (W.D. Tex. 2019) (applying Texas law and holding breach of contract exclusion applied to negligent construction claim arising from same alleged conduct used to support the contractor's breach of an express or implied warranty in construction contract), reconsideration denied, 5-18-CV-00252-OLG, 2019 WL 3315440 (W.D. Tex. June 27, 2019) ; Scottsdale Ins. Co. v. Mt. Hawley Ins. Co., CIV.A. M-10-58, 2011 WL 9169946, at *6-9 (S.D. Tex. June 15, 2011) (same), aff'd, 488 Fed. App'x 859 (5th Cir. 2012) (unpublished). These decisions are persuasive, even though they apply Texas law, because Texas and California give the term "arising out of" the same meaning. Compare Crown Capital, 186 Cal. Rptr. 3d at 7 (interpreting "arising out of" under California law to mean "originating from, having its origin in, growing out of, or flowing from, or in short, incident to, or having connection with" (citation omitted)), with Scottsdale Ins., 2011 WL 9169946, at *5-6 (noting that, under Texas law, "arising out of" means "originating from[,] having its origin in, growing out of or flowing from, or in short, incident to, or having connection with" (brackets in original) (internal quotation marks and citations omitted)).
With these standards in mind, the Breach of Contract Exclusion bars coverage for each claim alleged against JGCI in Shimada. Each claim shared the same operative factual allegations: that JGCI constructed Shimada's property in a defective manner. (See Doc. No. 25, Pl's RJN, Ex. B ¶¶ 15-16, 19-20; Pl's RJN Ex. C ¶¶ 15-16, 19-20.) As a result, each claim was, at a minimum, incident to or connected with Shimada's allegations that JGCI breached various contracts or warranties by constructing the building in a defective manner. In fact, Shimada's negligence and unjust enrichment claims, the only two claims that did not facially assert contract or warranty rights, both incorporated the construction contract. (Pl's RJN, Ex. B ¶¶ 15-16, 19-20; Pl's RJN, Ex. C ¶¶ 15-16, 19-20.) For example, Shimada alleged in its negligence cause of action that JGCI negligently constructed the property knowing "that the contract required all work to be performed in a workmanlike manner in accordance with local Building codes, industry standards and in conformance with the approved plans for construction, soils preparation, site preparation, engineering reports and similar documents." (Pl's RJN, Ex. B ¶ 16; Pl's RJN, Ex. C ¶ 16.) Further, Shimada's unjust enrichment claim sought disgorgement from JGCI because Shimada allegedly overpaid by paying JGCI the full contract price for its supposedly defective work. (Pl's RJN, Ex. B ¶¶ 20-21; Pl's RJN, Ex. C ¶¶ 20-21.) Accordingly, each of Shimada's claims against JGCI were not covered under the Policies.
Plaintiff's argument to the contrary is not persuasive. Specifically, Plaintiff argues that Shimada's negligence claim arises independently from any breach of contract because it is based upon common law duties, not contractual ones. (Doc. No. 28, Pl's Opp. to Def's Mot. for Summ. J. at 20-23; Doc. No. 33, Pl's Reply re Pl's Mot. for Summ. J. at 8-10.) Thus, Plaintiff reasons, the Breach of Contract Exclusion should not apply to the negligence claim because it "could have been raised independent of any prior contractual relationship." (Pl's Opp. to Def's Mot. for Summ. J. at 22.) This argument fails because, in California, "[i]t is not the underlying claims’ legal theories that control coverage and exclusions—it is their facts." See e.g., Southgate Recreation, 130 Cal. Rptr. 2d at 733. Additionally, in support its independent-legal-theory argument, Plaintiff relies on two inapplicable authorities, Saarman Construction, Ltd. v. Ironshore Specialty Insurance Co., 230 F. Supp. 3d 1068 (N.D. Cal. 2017) and Allan D. Windt, Insurance Claims and Disputes § 11:7A n.2 (6th ed. 2013). (Pl's Opp. to Def's Mot. for Summ. J. at 20-22; Pl's Reply re Pl's Mot. for Summ. J. at 8-9.) Saarman is not persuasive because it applied a "but for" test to determine that water damage claims were independent of mold claims because the water damage would have existed absent the mold. 230 F. Supp. 3d at 1081. California courts have made clear that "but for" causation is too narrow of a standard in this context. The Travelers Prop., 225 Cal. Rptr. 3d at 21 (explaining "arising out of" language in exclusionary clause "does not import any particular standard of causation or theory of liability" and, instead, "connotes only a minimal causal connection or incidental relationship"). Plaintiff's citation to Windt suffers from the same fallacy. The part of the treatise that Plaintiff cites to relies on Teletronics International, Inc. v. CNA Insurance Co., 302 F. Supp. 2d 442, 454 (D. Md. 2004), rev'd and remanded sub nom. Teletronics Intern., Inc. v. CNA Ins. Co./Transportation Ins. Co., 120 Fed. App'x 440 (4th Cir. 2005) (unpublished). That case also applied a "but for" causation inquiry. Teletronics Int'l, 302 F. Supp. 2d at 454.
Plaintiff actually cites to Saarman Construction, Ltd. v. Ironshore Specialty Insurance Co., 201 F. Supp. 3d 1136, 1149 (N.D. Cal. 2016). (Pl's Opp. to Def's Mot. for Summ. J. at 20; Pl's Reply re Pl's Mot. Summ. J. at 8.) But the Saarman court amended its order on reconsideration in Saarman Constr., Ltd. v. Ironshore Specialty Ins. Co., 230 F. Supp. 3d 1068 (N.D. Cal. 2017).
Finally, Plaintiff argues that Defendant waived its right to assert the Breach of Contract Exclusion in the first place. (Doc. No. 28, Pl's Opp. to Def's Mot. for Summ. J. at 20; Doc. No. 33, Pl's Reply re Pl's Mot. for Summ. J. at 8.) Yet Plaintiff does not meet its burden under California law to prove "by clear and convincing evidence" that Defendant knowingly and intentionally relinquished its right to rely on the Breach of Contract Exclusion. Waller, 44 Cal.Rptr.2d 370, 900 P.2d at 636. Plaintiff only points to Defendant's failure to initially raise the Breach of Contract Exclusion in its denial letter as a basis for waiver. (Pl's Opp. to Def's Mot. for Summ. J. at 20; Pl's Reply to Pl's Mot. for Summ. J. at 8.) This is insufficient as a matter of law. Waller, 44 Cal.Rptr.2d 370, 900 P.2d at 636. An insurer's "denial of coverage on one ground does not, absent clear and convincing evidence to suggest otherwise, impliedly waive grounds not stated in the denial." Id. After all, an automatic waiver rule "would be inconsistent with established waiver principles by erroneously implying an intent to relinquish contract rights where no such intent existed." Id., 44 Cal.Rptr.2d 370, 900 P.2d at 637. In its relevant moving papers, Plaintiff does not otherwise point the Court to any evidence suggesting that Defendant intended to relinquish its right to rely on the Breach of Contract Exclusion throughout this litigation. (Pl's Opp. to Def's Mot. for Summ. J. at 20; Pl's Reply to Pl's Mot. for Summ. J. at 3-4, 8.) In fact, Defendant's denial letter suggests the opposite; it contains a disclaimer reserving Defendant's right to utilize additional policy terms to support its determination should the need arise. (Doc. No. 21-3, Shemonsky Decl., Ex. 3 at 64.) As a result, Plaintiff does not raise a triable issue of fact as to whether Defendant waived its right to rely on the Breach of Contract Exclusion.
In summary, Defendant did not owe a duty to defend JGCI because the Breach of Contract Exclusion applies and conclusively precludes coverage for each claim made against JGCI in Shimada. Since each of Plaintiff's claims in this action are premised on Defendant's alleged breach of a duty to defend, Defendant is entitled to summary judgment. Consequently, the Court grants Defendant's motion for summary judgment and denies Plaintiff's motion for summary judgment. Conclusion
The parties’ various evidentiary objections are sustained where valid and are otherwise overruled.
For the foregoing reasons, the Court grants Defendant's motion for summary judgment and denies Plaintiff's motion for summary judgment.