SUSAN ILLSTON, District Judge.
On February 22, 2016 Plaintiff SWISS RE INTERNATIONAL SE, SUCCESSOR IN INTEREST TO ZURICH SPECIALTIES LONDON, LTD (HEREINAFTER ZSLL) filed its Complaint for Declaratory Relief, Reimbursement, Contribution, and Equitable Subrogation. On July 28, 2016 Plaintiff ZSLL filed its Motion for Partial Summary Judgment against defendant COMAC INVESTMENTS, INC. ("COMAC") and defendant 200-298 PORTOLA DRIVE HOMEOWNERS' ASSOCIATION ("PORTOLA"). The Motion for Partial Summary Judgment sought an order determining ZSLL does not have, and never did have a duty to defend or indemnify COMAC in an underlying action brought by PORTOLA against COMAC entitled 200-298 Portola Drive HOA v. Comac Investments, Inc., filed in San Francisco Superior Court Case No. CGC-14-541154 ("Underlying Action"). After consideration of the moving and opposing papers, and oral argument, the court issued an Order on September 27, 2016 determining ZSLL does not have, and never did have a duty to defend or indemnify COMAC for the claims made in the underlying case. A copy of the court's Order is attached hereto as Exhibit 1.
The parties to the case have now stipulated to resolve the remaining matters in dispute in this action and for entry of final judgment pursuant to the terms of this stipulation.
It is hereby stipulated between ZSLL and PORTOLA that a final judgment be entered on ZSLL's Complaint pursuant to the court's order on the Motion for Partial Summary Judgment. ZSLL stipulates it will not seek costs from PORTOLA, and PORTOLA stipulates that it will waive all rights to appeal or otherwise challenge or contest the court's order on the Motion for Partial Summary Judgment.
As to the Third Cause of Action for reimbursement of defense fees and costs against COMAC, ZSLL hereby dismisses the Third Cause of Action against COMAC, COMAC in exchange agrees to entry of Final Judgment pursuant to the court's order on the Motion for Partial Summary Judgment and agrees it will not appeal, challenge or contest the court's order on the Motion for Partial Summary Judgment. Further ZSLL and COMAC agree to waive any costs or fees they might otherwise be entitled to.
As to defendant SIRIUS AMERICA INSURANCE COMPANY AS SUCCESSOR IN INTEREST TO MUTUAL SERVICE CASUALTY INS. CO. ("SIRIUS"), ZSLL sued it on alternative claims for Contribution, Equitable Subrogation and Declaratory Relief in the event it was not successful on its action for Declaratory Relief against COMAC and PORTOLA. Pursuant to the court's order on the Motion for Partial Summary Judgment that claim is now moot, and ZSLL and SIRIUS have entered into a stipulation for a dismissal with prejudice of the Fourth, Fifth and Sixth Causes of Action, which named only SIRIUS, in exchange for a waiver of costs by SIRIUS.
ZSLL, COMAC, PORTOLA and SIRIUS stipulate to entry of this Final Judgment and order to resolve in this action between them.
NOW THEREFORE, plaintiff and defendants, having requested the court to enter this order and the court having considered the order, IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS:
1. The court has jurisdiction over this matter.
2. The Complaint alleges that ZSLL never had a duty to defend or indemnity COMAC as a matter of law in the Underlying Action.
3. Pursuant to the court's Order on the Motion for Partial Summary Judgment of ZSLL, ZSLL does not have and never did have a duty to defend or indemnify COMAC against the claims made in the Underlying Action.
4. COMAC and PORTOLA waive all rights to appeal, or otherwise challenge or contest the validity of this Order.
5. ZSLL hereby waives any claim for litigation costs or litigation fees against COMAC and PORTOLA.
6. COMAC agrees to waive any claim for litigation costs or litigation fees against ZSLL.
7. SIRIUS agrees to waive all litigation costs or litigation fees against ZSLL.
8. Each party shall bear its own attorneys' fees.
9. The Third, Fourth, Fifth and Sixth Causes of Action are hereby dismissed with prejudice and judgment is entered on the First and Second Causes of Action pursuant to the court's Order on the Motion for Partial Summary Judgment attached hereto as Exhibit 1.
On September 2, 2016, the Court held a hearing on plaintiff's motion for partial summary judgment. For the reasons set forth below, the Court GRANTS the motion.
Plaintiff Swiss Re International SE ("SRI"), successor in interest to Zurich Specialties London, Ltd. ("ZSLL") (hereinafter, SRI and ZSLL are jointly referred to as "ZSLL"), filed this lawsuit seeking declaratory relief concerning its duty to defend and indemnify defendant Comac Investments, Inc. ("Comac") under four commercial liability insurance policies ZSLL issued to Comac covering the time period of June 19, 1998 through June 19, 2002. This declaratory relief action arises from an underlying case filed on August 14, 2014 entitled 200-298 Portola Drive Homeowners' Association v. Comac Investments, Inc., San Francisco Superior Court Case No. CGC-14-541154 ("Underlying Action"). Dkt. No. 33-3.
Pursuant to California Code of Civil Procedure § 337.15, latent construction defect claims are subject to a ten-year statute of repose, which commences upon substantial completion of the construction. Cal. Code Civ. Proc. § 337.15. The statute of repose is not subject to equitable tolling. See Lantzy v. Centex Homes, 31 Cal.4th 363, 367 (2003). The only exception to the statute of repose is provided in subsection (f), which allows for "actions based on willful misconduct or fraudulent concealment" after the ten years have run. To avoid the ten-year statute of repose, the Association's first amended complaint in the Underlying Action alleges, inter alia, that the construction defects "would have been observable by any knowledgeable contractor or supervisor, [and that] any contractor who chose not to remedy them would be doing so with actual or constructive knowledge that injury was a probable result." Dkt. No. 33-6 at ¶¶ 53, 55.
In the Underlying Action, ZSLL is representing Comac subject to a complete reservation of rights. ZSLL reserved the right to assert that the terms of the insurance policies were not met, and that the Underlying Action was subject to the "expected or intended injury" policy exclusion and/or Cal. Ins. Code § 533, which precludes insurer liability for willful acts of insureds. ZSLL also reserved the right to file this action for declaratory relief and/or seek reimbursement of expenditures in the defense of the Underlying Action. The defendants in this case are Comac, the general contractor and/or developer for the subject premises; the Association; and Sirius America Insurance Company ("Sirius"), successor in interest to Mutual Service Casualty Insurance Company ("MSCI"), which also issued commercial liability insurance policies to Comac. Dkt. No. 1 at ¶¶ 4, 13. Sirius filed a Notice of Non-Opposition to ZSLL's Motion for Partial Summary Judgment. Dkt. No. 35. Comac filed a Notice of Joinder in the Association's Opposition. Dkt. No. 37.
ZSLL's complaint alleges the following causes of action: (1) declaratory relief that ZSLL does not have, and never did have, a duty to defend Comac in the Underlying Action as a matter of law; (2) declaratory relief that ZSLL does not have a duty to indemnify Comac in the Underlying Action as a matter of law; (3) reimbursement for fees and costs ZSLL has incurred to defend Comac for non-covered claims; (4) equitable contribution from Sirius in the event this Court determines ZSLL has an obligation to defend and/or indemnify Comac in the Underlying Action; (5) equitable subrogation from Sirius in the event this Court determines ZSLL has an obligation to defend and/or indemnify Comac in the Underlying Action; and (6) declaratory relief that Sirius is obligated to defend and indemnify Comac equally with ZSLL. Dkt. No. 1 at ¶¶ 39-72.
The policy's liability insuring clause for property damage provides as follows:
Dkt. No. 33-7 at 8. The word "occurrence" is defined in Section V as follows:
Id. at 19. The "expected or intended injury" exclusion in Coverage A, which covers bodily injury and property damages liability, states in relevant part:
This insurance does not apply to:
On August 14, 2014, the Association filed the Underlying Action against Comac in San Francisco County Superior Court, alleging Comac's responsibility for construction defects at the subject premises. On August 25, 2015, the Association filed its First Amended Complaint. In the First Amended Complaint, the Association alleges that Comac's Responsible Managing Officer ("RMO"), Brian Gerard McEvoy, observed defective workmanship of the subcontractors working on the subject premises, but did not correct the defects in order to not incur additional costs. Dkt. No. 33-6 at ¶¶ 33-55. Among the Association's allegations are:
Id. at ¶¶ 33, 35-36. The Association further alleges:
Id. at ¶¶ 53, 55.
Summary judgment is proper if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The moving party, however, has no burden to produce evidence showing the absence of a genuine issue of material fact. Id. at 325. Rather, the burden on the moving party may be discharged by pointing out to the district court that there is an absence of evidence to support the nonmoving party's case. Id.
Once the moving party has met its burden, the burden shifts to the non-moving party to "designate `specific facts showing that there is a genuine issue for trial.'" Id. at 324 (quoting then Fed. R. Civ. P. 56(e)). To carry this burden, the non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
In deciding a summary judgment motion, the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor. Id. at 255. "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge . . . ruling on a motion for summary judgment. . . ." Id. However, conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and defeat summary judgment. Thornhill Publ'g Co., Inc. v. Gen. Tel. & Elec. Corp., 594 F.2d 730, 738 (9th Cir. 1979). The evidence the parties present must be admissible. Fed. R. Civ. P. 56(c)(4).
ZSLL contends that it does not have a duty to defend or indemnify Comac in the Underlying Action because (1) Comac's alleged willful misconduct cannot constitute an "accident" under the policies, and (2) the policies exclude property damage "expected or intended from the standpoint of the insured." Relatedly, ZSLL contends that there is no coverage for willful acts, which are precluded from coverage in California under Cal. Ins. Code § 533.
"To prevail in an action seeking declaratory relief on the question of the duty to defend, `the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.'" Delgado v. Interinsurance Exchange of the Automobile Club of So. California, 47 Cal.4th 302, 308 (2009) (quoting Montrose Chemical Corp. v. Superior Court, 6 Cal.4th at 287, 300 (1993)). "The duty to defend exists if the insurer `becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement.'" Id. (quoting Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 19 (1995)).
The ZSLL policies require that "[t]he . . . `property damage' must be caused by an `occurrence,'" which is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." ZSLL argues that there is no coverage for the Underlying Action because the Association's complaint alleges willful misconduct, which by definition cannot be an "accident." ZSLL argues that insurance protects against contingent or unknown risks, and intentional acts are deemed purposeful, not accidental. ZSLL argues that the allegations that Comac intentionally covered up specific construction defects to avoid the cost of fixing them during construction cannot be labeled as "accidental," and thus there is no coverage.
The Association argues that the Association's complaint in the Underlying Action does allege an "accident" because the Association does not allege that Comac's principal McEvoy intended or expected to cause damage. The Association asserts that the cases cited by ZSLL are all distinguishable because they either involved the insured committing fraud or making misrepresentations, or insureds engaging in behavior which they intended to cause harm.
"An intentional act is not an `accident' within the plain meaning of the word." Royal Globe Ins. Co. v. Whitaker, 181 Cal.App.3d 532, 537 (1986). "Under California law, the word `accident' in the coverage clause of a liability policy refers to the conduct of the insured for which liability is sought to be imposed on the insured." Delgado, 47 Cal. 4th at 311. "An accident does not happen when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage." Fire Ins. Exchange v. Superior Court (Bourguignon), 181 Cal.App.4th 388, 392 (2010) (holding that "building a structure that encroaches onto another's property is not an accident even if the owners acted in the good faith but mistaken belief that they were legally entitled to build where they did"). "Where the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an `accident' merely because the insured did not intend to cause injury. The insured's subjective intent is irrelevant." Id. at 392 (internal citations omitted). "That does not mean, however, that coverage is always precluded merely because the insured acted intentionally and the victim was injured." State Farm Gen. Ins. Co. v. Frake, 197 Cal.App.4th 568, 580 (2011) (internal quotation marks omitted). "Rather, an accident may exist `when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity.'" Id. (quoting Merced Mut. Ins. Co. v. Mendez, 213 Cal.App.3d 41, 50 (1989)).
The Court concludes that the Association's complaint in the Underlying Action alleges that the property damage is the result of intentional actions by Comac's principal, and thus that the property damage is not caused by an "accident." The Association alleges that Comac's principal intentionally covered up various construction defects rather than correcting them in order to maximize profits for Comac, that "any contractor who chose not to remedy [the defects] would be doing so with actual or constructive knowledge that injury was a probable result," and that the property was in fact damaged as a result of the failure to correct the defects. See Dkt. No. 33-6 ¶¶ 30-53. The Association does not allege that there were any intervening, unexpected causes of the alleged property damage, but rather that Comac's deliberate acts caused the property damage.
The Association argues that the property damage qualifies as an "accident" because the Underlying Action does not allege that Comac intended to cause any property damage. However, the cases cited by both parties consistently hold that "the term `accident' does not apply where an intentional act resulted in unintended harm." Frake, 197 Cal.App.4th at 582 (discussing California law and holding that there was no "accident" when the insured intentionally struck his friend in the groin, even though the insured did not intend to cause injury); Merced, 213 Cal.App.3d at 48 ("[A]ppellants contend an accident occurs even if the acts causing the alleged damage were intentional as long as the resulting damage was not intended. The argument urged by appellants has been repeatedly rejected by the appellate courts"); Quan v. Truck Ins. Exch., 67 Cal.App.4th 583, 599 (1998) ("[W]hether the insured intended the harm that resulted from his conduct is not determinative. The question is whether an accident gave rise to claimant's injuries").
ZSLL also argues that Comac's alleged willful misconduct is subject to the policy's exclusion for property damage "expected or intended from the standpoint of the insured," as well as Cal. Insurance Code § 533, which prohibits indemnification for the willful acts of an insured.
Cal. Ins. Code § 533 provides,
Cal. Ins. Code § 533.
ZSLL relies on Acosta v. Glenfed Dev. Corp., 128 Cal.App.4th 1278 (2005), in which the Court of Appeal addressed the nature of "willful misconduct" under Cal. Code of Civil Proc. § 337.15(f), the statute of repose. In Acosta, the plaintiff homeowners alleged that the defendant developers and general contractors improperly prepared the soil and concrete foundations upon which their homes were constructed. Id. at 1287. The plaintiffs alleged that the structural framing in the houses was so negligently constructed as to constitute defective and dangerous conditions, and that as a result, substantial latent defects existed in the houses. Id. In order to avoid the ten-year statute of repose under § 337.15, the plaintiffs alleged that the acts and omissions that caused the defects were the result of the defendants' willful misconduct. Id.
The Court of Appeal reversed summary judgment in favor of the defendants, holding that the plaintiff homeowners had created a triable issue regarding the application of the willful misconduct exception because they had submitted expert declarations opining that the defects "appeared to be the result of willful misconduct by defendants in that they were `so serious and prevalent that they were either the result of [a] deliberate decision to cut corners for cost savings or the result of a near total, virtually reckless, failure by the developer to adequately supervise subcontractors.'" Id. at 1289 (quoting expert reports). In reaching its conclusion, the Court of Appeal discussed what constituted "willful misconduct" under Cal. Code of Civil Proc. § 337.15(f):
Id. at 1294-95.
The Association argues that Acosta is inapposite because that case discusses "willful misconduct" under Cal. Code Civ. Proc. § 337.15(f), and does not address willfulness under Cal. Ins. Code § 533. The Association argues that the standard for committing a "willful act" pursuant to § 533 is higher than the standard for "willful misconduct" under § 337.15(f) because § 533 requires a subjective intent to harm, whereas it is sufficient for "willful misconduct" under § 337.15(f) that a reasonable person under the same or similar circumstances would be aware of the highly dangerous character of his or her conduct.
The Association relies on Clemmer v. Hartford Life Insurance Company, 22 Cal.3d 865, 887 (1978), to contend that for an act to be "willful" pursuant to § 533, the insured must not only have intended the act that caused the harm, but must also have had a "preconceived design to inflict injury." In Clemmer, the widow and minor son of a murder victim sued to recover from the slayer's insurer the amount of a wrongful death judgment they had previously obtained against the slayer. Id. at 871-72. The insurance company defended the action on the ground that the killing of the deceased was a "willful act" and thus excluded from coverage under § 533. Id. at 872. The Clemmer court held that even an act which is "intentional" or "willful" within the meaning of traditional tort principles will not exonerate the insurer from liability under § 533 unless it is done with a "preconceived design to inflict injury." Id. at 887.
However, as the California Supreme Court later explained in J.C. Penney Casualty Insurance Company v. M.K., 52 Cal.3d 1009 (1991), "[t]he brief reference in Clemmer to a `preconceived design to inflict injury' must be read in context. The inquiry in Clemmer was limited to the unresolved mental capacity of the insured, i.e., whether he was legally sane when he committed the killing. There was no issue as to whether the insured intended to shoot his victim five times (including once in the head at close range) but not to harm the victim." Id. at 1023. The "preconceived design to inflict harm" requirement in Clemmer was thus only relevant to the issue of whether the insured intended to commit a wrongful act and does not apply "when the insured seeks coverage for an intentional and wrongful act if the harm is inherent in the act itself." Id. at 1025. "Subsequent decisions have made clear that the `preconceived design to injure' standard is relevant only when the insured's mental capacity is an issue or the insured's intent or motive might justify an otherwise wrongful act." Downey Venture v. LMI Ins. Co., 66 Cal.App.4th 478, 500 (1998) (discussing Clemmer and subsequent cases).
In Downey Venture, the California Court of Appeal held that "[a] `wilful act' under section 533 will include either `an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probable or substantially certain to result.' It also appears that a wilful act includes an intentional and wrongful act in which `. . . the harm is inherent in the act itself.'" Downey Venture, 66 Cal. App. 4th at 500 (quoting Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal.App.4th 715, 742 (1993), and J.C. Penney, 52 Cal.3d at 1025)). This standard is not meaningfully different from the Acosta court's articulation of "willful misconduct" under § 337.15(f) as "involv[ing] a more positive intent actually to harm another or to do an act with a positive, active and absolute disregard of its consequences" and "not invariably entail[ing] a subjective intent to injure. It is sufficient that a reasonable person under the same or similar circumstances would be aware of the highly dangerous character of his or her conduct." Acosta, 128 Cal.App.4th at 1294-95.
The Court concludes that the Association's allegations of Comac's willful misconduct bring the Underlying Action within the scope of the "intended or expected" exclusion and Cal. Ins., Code § 533. The Association alleges in the Underlying Action that the construction defects would have been observable by any knowledgeable contractor or supervisor and "any contractor who chose not to remedy [the defects] would be doing so with actual or constructive knowledge that injury was a probable result" and "any knowledgeable construction supervisor who chose not to direct the contractor to remedy the condition would have done so with actual or constructive knowledge that injury was a probable result." Dkt. No. 33-6 at ¶ 53. Under § 533, willful acts include those "intentionally performed with knowledge that damage is highly probable or substantially certain to result," not merely acts performed with the intent to cause injury. Downey Venture, 66 Cal. App. 4th at 500; see also Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal.App.4th 715, 746 (1993) (holding policy language excluding coverage for damage that is "expected or intended" "connotes subjective knowledge of or belief in an event's probability. We see no material difference if the degree of that probability is expressed as substantially certain, practically certain, highly likely, or highly probable.").
Accordingly, the Court concludes that ZSLL has no duty to defend or indemnify Comac in the Underlying Action, and therefore the Court GRANTS plaintiff's motion for partial summary judgment.