Opinion
No. C02-2222P.
December 1, 2004
This matter comes before the Court on Plaintiff Commonwealth Insurance Co.'s ("Commonwealth") Motion for Summary Judgment, (Dkt. No. 95), Defendant Maryland Casualty Co.'s ("Maryland") Motion for Partial Summary Judgment, (Dkt. No. 81), and Defendants Western National Assurance Co. ("Western"), Valley Insurance Co. ("Valley"), and First National Insurance Co.'s ("First National") joint Motion to Dismiss Maryland's Cross-claims, (Dkt. No. 71). Having reviewed the pleadings and supporting materials, and having heard oral argument, the Court DENIES all three motions because there are material facts in dispute that preclude summary judgment and dismissal.
BACKGROUND
This case concerns disputes between various insurance companies that arise out of property damage to a residential house. In February, 1998, Sandra Yeater contracted with Ledcor Inc. ("Ledcor") to build a house for her in Kirkland, Washington. On March 2, 1998 Ledcor contracted with subcontractor Donovan Excavating, d/b/a/ JD Excavating ("Donovan") to perform "earthwork," including the installation of drainage systems. It is disputed when Donovan finished its work — either sometime in May, 1998 or as late as July, 1998.
The house subsequently experienced at least three separate incidents of water intrusion. Sometime between May and August, 1998, there was a small amount of seepage, which affected the drywall of the basement. Ledcor and/or Donovan repaired the problem. In August, 1998, Ms. Yeater received a certificate of occupancy and moved in a few days later. Sometime in the fall, she noticed small amounts of water on the floor in the mechanical room, which she assumed was from condensation. It is not clear from the record if this problem was ever fixed. In February, 1999, her house suffered a more severe water intrusion incident, in which hundreds of gallons of water flooded her basement living area, causing substantial damage to the house and her personal property.
Commonwealth insured Ledcor from December, 1997 until December, 1998. A series of different companies provided insurance coverage to Donovan:
1) Western May 1, 1997 — May 1, 1998 2) Valley May 1, 1998 — July 8, 1998 3) First National July 8, 1998 — December 5, 1998 4) Maryland December 5, 1998 — December 5, 1999
The contract between Ledcor and Donovan required that Donovan obtain Commercial General Liability insurance on an occurrence basis, among other types of insurance, and that Ledcor be named as an "additional insured" on this policy. (Sparling Decl., Ex. A (hereinafter "Ledcor-Donovan Contract") at 8, 20). In a separate clause, it required that Donovan maintain "completed operations liability insurance" for one year after completion or acceptance of the work. (Id. at 9).
In January, 2000, Ms. Yeater filed an arbitration action against Ledcor. It is not clear from the record whether Ledcor defended itself in this action or whether Commonwealth defended the action on behalf of Ledcor. In any event, Ledcor/Commonwealth settled with Ms. Yeater in October, 2000 for $650,000.
Commonwealth then filed suit in state court against Donovan and other subcontractors for subrogation, demanding $1.3 million dollars. Donovan and the other subcontractors settled and paid Commonwealth a total of $508,000, of which $437,500 came from Donovan. (Maryland, as Donovan's insurer, defended Donovan in this action and paid the settlement amount on behalf of Donovan.)
Commonwealth also filed suit in this Court against Western, Valley, First National, and Maryland for indemnification, arguing that Ledcor was an "additional insured" on each of Donovan's Commercial General Liability insurance policies and therefore Donovan's insurers are required to reimburse Commonwealth for the amount it paid to settle the claims against Ledcor (in addition to and separate from the amount Maryland paid as Donovan's insurer in the subrogation action). Maryland brought cross-claims against Western, Valley, and First National for reimbursement of any amount it owes to Commonwealth.
Maryland now moves for partial summary judgment dismissing Commonwealth's indemnification claim against Maryland, on the grounds that 1) Ledcor is not "an insured" under Maryland's policy because the damage occurred after Donovan's work for Ledcor was complete, which means that Maryland owes nothing to Ledcor under the terms of Maryland's policy, or in the alternative 2) Western, Valley, and First National's respective policies provided for primary coverage, and Maryland's policy was only for excess coverage, which has not been triggered because neither Western, Valley, or First National have paid the maximum promised under their respective policies.
Commonwealth moves for summary judgment against Maryland on the grounds that Ledcor was an insured under Maryland's policy, which triggers a duty to defend, and which Commonwealth contends Maryland breached in bad faith. Consequently, Commonwealth argues, Maryland is estopped from denying coverage.
Lastly, Western, Valley, and First National have all settled with Commonwealth for various amounts. Valley has paid its amount, but Western's and First National's respective payments are conditioned on dismissal of Maryland's cross-claims against them. Western, Valley, and First National, jointly move to dismiss Maryland's cross-claims against them on the grounds that they have settled for their fair share of any amounts owed to Commonwealth and therefore have no liability to Maryland for any amount Maryland may owe to Commonwealth.
ANALYSIS
Summary judgment is not warranted if a material issue of fact exists for trial. Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995), cert. denied, 516 U.S. 1171 (1996). The underlying facts are viewed in the light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). "Summary judgment will not lie if . . . the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The party moving for summary judgment has the burden to show initially the absence of a genuine issue concerning any material fact. Adickes v. S.H. Kress Co., 398 U.S. 144, 159 (1970). However, once the moving party has met its initial burden, the burden shifts to the nonmoving party to establish the existence of an issue of fact regarding an element essential to that party's case, and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). To discharge this burden, the nonmoving party cannot rely on its pleadings, but instead must have evidence showing that there is a genuine issue for trial. Id. at 324. Additionally, "at the summary judgment stage the judge's function is not . . . to weigh the evidence . . . but to determine whether there is a genuine issue for trial."Liberty Lobby, 477 U.S. at 249.
I. Duty to Defend and Extent of Coverage Under Maryland's Policy
A duty to defend a claim against an insured arises whenever "a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy's coverage." Truck Ins. Exchange v. Vanport Holmes, Inc., 147 Wa.2d 751, 760, 58 P.3d 276 (2002) (quotations and citation omitted). Thus, the duty to defend is triggered if the damage is arguably covered under the policy. Ambiguities in the complaint against the insured are to be liberally construed in favor of triggering the duty to defend. Id. In such situations, the insurer must investigate the claim and give the insured the benefit of the doubt. Id. at 761. The insurer cannot summarily conclude that there is no coverage and therefore no duty to defend. Rather, "[i]f the insurer is unsure of its obligation to defend in a given instance, it may defend under a reservation of rights while seeking a declaratory judgment that it has no duty to defend." Id. The only instance in which an insurer is relieved of its duty to defend is when the claim is "clearly not covered by the policy. . . ." Kirk v. Mt. Airy Ins. Co., 134 Wa.2d 558, 561, 951 P.2d 1124 (1998) (citation omitted).
Here, Maryland had no duty to defend Ledcor if Ms. Yeater's claim against Ledcor was clearly not covered by Maryland's policy. Maryland's policy, which ran from December 5, 1998 through December 5, 1999, states in relevant part:
SECTION II — WHO IS AN INSURED . . .
2. Each of the following is also an insured:
. . .
f. Any person or organization other than an architect, engineer, or surveyor, which requires in a "work contract" that such person or organization be made an insured under this policy. However, such person or organization shall be an insured only with respect to covered . . . "property damage" . . . which results from "your work" under that "work contract."
The coverage afforded to such person or organization does not apply to . . . "property damage" occurring after the earliest of the following times:
(1) When "your work" under the "work contract" (other than service, maintenance, or repairs) has been completed.
(2) When that portion of "your work" under the "work contract" out of which any injury or damage arises has been put to its intended use. . . .
. . .
SECTION V — DEFINITIONS
. . .
22. "Work contract" means a written agreement into which you enter for work performed by you or on your behalf.
. . .
24. "Your work" means:
a. Work or operations performed by you or on your behalf . . . and
b. Material, parts or equipment furnished in connection with such work or operations.
(Lautrup Decl., Ex. A (hereinafter "Maryland Policy") at 10-11, 15, 19). "You" and "your" referred to the Named Insured, which was Donovan. (Id. at 3).
The contract between Ledcor and Donovan required that Ledcor, which is not an architect, engineer, or surveyor, be made an insured under Donovan's policy. Ledcor was therefore an insured under Maryland's policy, but its status as an insured extended only to "covered" property damage that resulted from Donovan's work under its contract with Ledcor. Covered property damage is damage that occurred before Donovan's work under the Ledcor-Donovan contract was compete or Donovan's work under that contract was put to its intended use, whichever happened earlier.
First, there are disputed facts as to when Donovan's work under the contract was complete. Because the Ledcor-Donovan Contract does not specify the exact scope of the work beyond "earthwork," it is impossible to determine the completion date based on the language of the contract. Maryland cites a deposition statement by James Donovan, in which he states that he assumes that the work was completed by May 31, 1998 because the last payment was received on that date. (Silk Decl., Ex. 4 at 43). Commonwealth presents a deposition statement by a Donovan employee, Dwain Britton, that his work included "beatification" of the site and a final grading, and that he did this sometime "close to the summer," May, June, or July, 1998, at which point the house was almost finished. (Carr Decl., Ex. 1 at 8, 11, 30, 32).
Maryland moves to strike the Carr declaration and all its attached exhibits. The only basis asserted for excluding the exhibits is lack of authentication. "A deposition or an extract therefrom is authenticated in a motion for summary judgment when it identifies the names of the deponent and the action and includes the reporter's certification that the deposition is a true record of the testimony of the deponent." Orr v. Bank of America, NT SA, 285 F.3d 764, 774 (9th Cir. 2002). This extract of Mr. Britton's deposition is accompanied by a cover sheet identifying his name and the action, as well as the requisite reporter's certification.
While it is true that the February, 1999 flood occurred after the latest possible date Donovan's work was complete, the flood may have been due to on-going or continuing damage that first began before Donovan's work was complete. Under a continuing loss theory, Washington courts have held that an insurer is liable for unexpected damage that is discovered during the policy period but which is a continuation of damage that first began prior to the policy period. See Gruol Constr. Co., Inc. v. Ins. Co. of N. Am., 11 Wa. App. 632, 524 P.2d 427 (1974); Wellbrock v. Assurance Co. of Am., 90 Wa.App. 234, 241-42, 951 P.2d 367 (1998) (citing Gruol and subsequent cases). In Gruol, a contractor's negligence caused dry rot that had been progressing undetected for years. It was finally discovered years after construction was finished. The contractor had a series of three insurers: one during construction, a second after construction but before the discovery of the dry rot damage, and a third when the dry rot damage was discovered. The two later insurers had policies that defined occurrence similarly to Maryland's policy. The Court held that the damage was continuous, thus occurring within all three insurers' policy periods, and therefore all three insurers were liable regardless of the fact that the initial negligent act took place during the first insurer's policy period. Id. at 636.
The Maryland policy applies to property damage that is caused by an "occurrence" that occurs during the policy period. An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (See Maryland Policy at 2, 16).
A key fact in Gruol was that the damage caused by the negligence was on-going — the dry rot was progressively worsening over time. 11 Wa. App. at 635. See American National Fire Ins. Co. v. B L Trucking and Constr. Co., Inc., 134 Wa.2d 413, 425-26, 951 P.2d 250 (1998) (arsenic leached into the groundwater over a period of years); Castle Cooke, Inc. v. Great American Ins. Co., 42 Wa. App. 508, 517, 711 P.2d 1108 (1986) (racial discriminatory conduct continued for years, continually injuring employees). In contrast, the mere presence of a hazard or defect that may give rise to an accident or property damage does not trigger coverage. Wellbrock, 90 Wa. App. at 242 (citing 11 Couch, § 44.286). Courts interpreting Gruol have made clear that occurrence triggering coverage is the injury or damage, not the negligent act itself. In Wellbrock, negligent construction damaged the roots of a tree next to plaintiff's house. Sometime after that negligent construction, the tree fell and killed plaintiff's husband. An arborist determined that the negligent act damaging the tree's roots accelerated a disease within the tree, causing it to fall. The contractor's insurance policy was in effect when the negligent construction occurred but expired before the tree fell. The court, interpreting Gruol, held that the insurer was not liable because the occurrence triggering coverage was the felling of the tree, not the negligent act damaging the trees roots, even if it hastened the tree's demise. As such, the occurrence happened after the policy expired. Id. at 242-43. Similarly, in Villella v. Public Employees Mutual Ins. Co., 106 Wa. 2d 806, 725 P.2d 957 (1986), a negligently installed drainage system caused continuous soil degradation, eventually causing damage to the foundation of plaintiff's house. Plaintiff's policy covered the period of the drainage system installation and the soil destabilization, but expired before the foundation was actually damaged. The Court held that, under Gruol, there was no liability because there was not damage during the policy period. In sum, these cases show that continuing loss liability is for continuing damage, not a series of incidents each causing damage that are all due to the same negligent act but that are not part of an on-going damage.
Here, Commonwealth presents evidence that the damage first occurred in the summer of 1998 and that this damage was caused by the same problem that caused the major flooding in February, 1999. Ms. Yeater stated in a deposition that she first became aware of the small amount water infiltration sometime in the summer of 1998, before she occupied the house in early August, 1998. (Silk Decl., Ex. 5 at 17, 21). The Ledcor manager of construction on the Yeater project declared that Ledcor had become aware of water intrusion problems in May, 1998 and notified Donovan of this problem on June 3. (Carr Decl., Ex. 15, ¶ 5). Thus, there is evidence that this leak occurred sometime before June 3, which is before the latest possible date that Donovan completed its work. The major water infiltration incident occurred in February, 1999. (Silk Decl., Ex. 5 at 23). After the February, 1999 flood, Commonwealth hired an expert to investigate. His opinion was that all of the water infiltration and resulting property damage was attributable to the improperly installed drainage system. (Carr Decl., Ex. 9, ¶¶ 2-3). Commonwealth maintains that, under Maryland's policy, such continuing or repeat damage is covered when the damage is due to the same harmful conditions, even if the later damage occurred after the work was complete or the work was put to its intended use.
A June 3, 1998 fax from Ledcor to Donovan refers to water leaks in the basement. (Carr Decl., Ex. 7). This exhibit, however, has not been properly authenticated.
However, two incidents of property damage resulting from the same defect, in this case the improperly installed drainage system, is not the same thing as on-going or continuing damage. The May, 1998 incident was apparently due to a crushed pipe. Commonwealth's expert who investigated the site identified the crushed pipe as one of many defects, all of which caused the February, 1999 flood. However, Commonwealth has not presented evidence, for instance, that the water intrusion, which was first discovered in May, 1998, was causing structural damage or a buildup of standing water, such that the damage was on-going and culminated in the February, 1999 flood. Absent evidence that there was on-going or continually worsening damage, Commonwealth has not proven that this is a continuing loss. At the same time, however, Maryland has not presented any evidence that this was not an on-going problem (Maryland did not argue this issue one way or the other).
In sum, Gruol implies that Ledcor would be covered 1) if Donovan finished its work after the first water intrusion incident in May, 1998, and 2) if the May, 1998 incident was a manifestation of damage that was an on-going problem culminating in the February, 1999 flood, and 3) if neither Ledcor nor Donovan knew of this on-going problem such that the February, 1999 flood was unexpected. If all of these facts were true, Ledcor would be covered under a continuing loss theory, despite the fact that the first incident of damage occurred before Maryland's policy period began. The limited scope of "covered property damage" established in Maryland's policy does not require a different result. "Covered property damage" extends only to damage that occurred before Donovan completed his work; the May, 1998 water intrusion occurred before the latest date that Donovan could have completed his work. However, there are disputed material facts as to when Donovan's work was complete. There are insufficient facts alleged as to whether the February, 1999 flood was the result of on-going damage, which first manifested itself in May, 1998, and if so, whether the February, 1999 flood was unexpected. Therefore, the Court cannot conclude as a matter of law that Ledcor was "clearly not covered" under Maryland's policy as an additional insured. Consequently, the Court cannot conclude that Maryland had no duty to defend. For this reason, Maryland's Motion for Partial Summary Judgment that Ledcor is not "an insured" under Maryland's policy is DENIED.
Commonwealth contends that the February, 1999 flood was unexpected because when Ledcor discovered the May, 1998 problem, it believed that the extent of the problem was the crushed pipe and that it had no way of knowing that the entire drainage system had not been properly installed. At oral argument, Maryland countered that if the May, 1998 incident was an example of on-going damage, then Ledcor knew about the damage and/or the cause of the damage and therefore the February, 1999 flood was not unexpected. However, Maryland has not presented any evidence to support this factual assertion.
II. Breach of Duty to Defend in Bad Faith
Failing to defend does not in and of itself constitute bad faith. Rather, to establish bad faith, the insured must show that the failure was "unreasonable, frivolous, or unfounded." Kirk, 134 Wa.2d at 560. Bad faith will not be found if the failure to defend is "based upon a reasonable interpretation of the insurance policy." Id. (citation omitted).
Here, there are genuine issues of disputed fact as to whether Maryland breached it duty and, if it did, as to whether its failure to defend was based on a reasonable interpretation of the policy. As the above discussion demonstrates, a fact finder could reasonably find that Maryland's conclusion that the property damage at issue was not covered under its policy was a reasonable interpretation of the policy, even if it is not necessarily clear from the policy. Further, the evidence the parties present regarding Commonwealth's and Maryland's conduct in handling the Yeater claim demonstrate that there are genuine issues of material fact as to whether Maryland acted in bad faith. Consequently, the Court DENIES Commonwealth's Motion for Summary Judgment that Maryland breached its duty to defend in bad faith and is estopped from denying coverage.
III. Excess Versus Primary Coverage
Maryland argues that even if it had a coverage obligation to Ledcor, the other defendant insurers (Western, Valley, and First National) provided primary coverage to Ledcor and it (Maryland) provided only excess coverage. As such, Maryland argues, its duty to pay has not been triggered because the other defendant insurers' primary policies have not been exhausted. Maryland bases its argument on its interpretation of the language in the "other insurance" clauses in the policies of all four insurers. This issue relates to Western, Valley, and First National's joint motion to dismiss Maryland's cross-claims against them because Maryland asserts this same argument in opposition to that motion. Western, Valley, and First National all maintain that Ledcor is not covered under their respective policies.
The threshold question is whether Ledcor is covered for the property damage at issue under Western's, Valley's, or First National's respective policies. As outlined below, there are genuine issues of material fact as to whether Ledcor is an additional insured under Western's, Valley's, and First National's respective policies. Western asserts that Ledcor was not covered as an additional insured for the Yeater construction project. Western presents evidence that it issued certificates of insurance to Ledcor as an additional insured on Donovan's policy for other projects, but that it never issued such a certificate for the Yeater project. (Gallacher Decl., ¶ 3 and Ex. 2 ("Western Policy")). Even if Ledcor were an additional insured, Western contends that it would be so only for Donovan's on-going operations. (Id., Ex. 3). Western's policy began May 1, 1997 and ended May 1, 1998. No party has presented evidence that the property damage occurred prior to May 1. However, under a continuing loss theory, it is not impossible that Western could be liable since Donovan performed his negligent work during Western's policy period and there are insufficient facts in the record as to when the damage actually began. Thus, the Court cannot conclude that, as a matter of law, Ledcor was covered under Western's policy.
Valley provided Donovan insurance coverage from May 1, 1998 through July 8, 1998. Valley concedes that its policy made Ledcor an additional insured for the Yeater project. (Silk Decl., Ex. 6 ("Valley Policy")). Pursuant to Valley's policy, Ledcor was included as an insured only for liability arising out of Donovan's on-going operations for Ledcor. (Id.) As noted above, the date that Donovan completed its work for Ledcor is in dispute, with some evidence suggesting that the work was not complete until sometime in May, June, or July of 1998. While Valley asserts that the alleged property damage occurred after Donovan's work was complete, there is evidence indicating that the first incident of property damage occurred before June 3, 1998. If the facts show that this was the beginning of on-going damage leading up to the February, 1999 flood, Ledcor may be covered under a continuing loss theory. Thus, the Court cannot conclude that, as a matter of law, Ledcor was covered under Valley's policy.
First National provided Donovan insurance coverage from July 8, 1998 through December 5, 1998. First National asserts that Ledcor was not explicitly made an additional insured. However, under the "who is insured" clause of its policy, Ledcor is possibly an insured because the Ledcor-Donovan Contract required making Ledcor an insured so long as that contract was in effect during the policy period. (DeYoung Decl., Ex. 1 ("First National Policy")). As shown above, there is a genuine dispute as to when Donovan's work under the contract was complete; it may not have been finished when the First National's policy began on July 8, in which case the contract would still be in effect and Ledcor would be an insured. Even if not, First National may owe Ledcor coverage under the same continuing loss theory asserted by Commonwealth against Maryland. Therefore, the Court cannot conclude that, as a matter of law, Ledcor was covered under Valley's policy.
The policy states that "an insured" includes:
Any person or organization for whom you are required by written contract . . . to provide insurance is an insured, subject to the following additional provisions: a. The contract . . . must be in effect during the policy period shown in the Declarations, and must have been executed prior to the . . . "property damage" . . .
(DeYoung Decl., Ex. 1).
Because there are disputed issues of material fact regarding this question, the Court need not reach the merits of Maryland's arguments regarding which insurer provided primary versus excess coverage. Accordingly, the Court DENIES Maryland's Motion for Partial Summary Judgment that Western, Valley, and First National provided primary coverage and Maryland provided only excess coverage. Likewise, the Court cannot conclude that Western, Valley, and First National have paid their equitable share such that Maryland's cross-claims against them should be dismissed. As such, Western, Valley, and First National's joint Motion to Dismiss Maryland's Cross-claims is DENIED.
CONCLUSION
Because there are genuine issues of material fact in dispute, the Court denies Commonwealth's Motion for Summary Judgment, Maryland's Motion for Partial Summary Judgment, and Western, Valley, and First National's joint Motion to Dismiss Maryland's Cross-claims.
The clerk is directed to provide copies of this order to all counsel of record.