STEPHEN V. WILSON, District Judge.
On June 6, 2012, Plaintiff Arrowood Indemnity Company ("Plaintiff") filed this action against Defendant Insurance Company of Pennsylvania ("Defendant"), seeking a declaration that Defendant has a duty to defend the parties' common insured, the City of Santa Clarita ("City"). (Dkt.1). On August 30, 2012, the Court granted Defendant's Motion to Dismiss with leave to amend, holding that Plaintiff had failed to allege that the City exhausted the retained limits as set forth in its policies with Defendant. (Dkt.16). On September 5, 2012, Plaintiff filed its First Amended Complaint ("FAC"), alleging exhaustion of the retained limits, as well as its original causes of action for declaratory relief and equitable contribution. (Dkt.17).
On September 20, 2012, Defendant filed the instant Motion to Dismiss. (Dkt.18). Defendant argues that it does not have a duty to defend because certain exclusions under its insurance policies foreclose the possibility of coverage for the City. For the reasons set forth below, Defendant's Motion to Dismiss is DENIED.
Defendant is an excess insurance provider for the City. Defendant issued three special excess liability policies to the City: (1) Policy No. 4204-4265 for the period of March 1, 2003 to March 1, 2004 (FAC, Ex. A); (2) Policy No. 4204-1295 for the period of March 1, 2004 to March 1, 2005 (FAC, Ex. B); and (3) Policy No. 4205-2156 for the period of March 1, 2005 to March 1, 2006 (FAC, Ex. C) (collectively, "Policies"). (FAC ¶ 6). Each policy provides excess coverage either (1) for an "occurrence" under the "Bodily Injury and Property Damage Liability" coverage or (2) for a "wrongful act" under the "Errors and Omissions Liability" coverage. (FAC ¶ 7). The Policies obligate Defendant to defend the City when the applicable retained limit has been "exhausted by payment to a third party of judgments, settlements or defense costs." (FAC ¶ 8).
Plaintiff seeks contribution on the ground that Defendant has a duty to defend the City in three consolidated lawsuits brought by residents of the City: (1) Kim v. City of Santa Clarita, No. BC407614 (Def. Request for Judicial Notice ("RJN"), Ex. 1); (2) Canyon Gate Maint. Assoc. v. City of Santa Clarita, No. BC415663 (RJN, Ex. 2); and (3) Warrick v. City of Santa Clarita, No. PC046442
On or about November 28, 2000, the City approved the proposed development of Canyon Gate, a project consisting of 150 detached single-family homes. (RJN, Ex. 1, ¶ 10).
According to the residents, the Developers "cut corners in the geotechnical engineering, design, grading, and excavation for these tracts, in an effort to minimize the estimated cost ..., and to maximize their profits." (Id. ¶ 21). Specifically, in 1999, Zephyr was advised by its geotechnical consultant that a large landslide complex, consisting of several shallow and deep-seated landslides, lay beneath the tract. The consultant recommended Zephyr, inter alia, to install "drilled shear pins" to stabilize the complex. (Id. ¶ 23). Instead of heeding this warning, Zephyr hired a new consultant that recommended eliminating the "drilled shear pins" and changing the design of the shear keys (the "Modified Plan"). (Id. ¶ 25).
In March 2002, the City's independent geotechnical consultant reviewed the Modified Plan and recommended its denial, citing safety concerns with the revised shear key design. (Id. ¶ 36). However, not only did the Developers continue their construction, but the City soon replaced its consultant in February 2003. (Id. ¶ 44). The residents allege that the City fired its original consultant "due to political pressure by the Mayor and City Council to complete the extension of Golden Valley Road." (Id. ¶ 45). In sum, the residents allege that the City ignored the warnings of its original consultant and instead permitted the Developers to execute the Modified Plan despite its known risks. (Id. ¶ 48).
As these events were unfolding, and as early as March 2002, "multiple backcut failures, earth movement, and fissures and cracks in the ground surface occurred during the implementation of the unapproved design change for the shear keys by" the Developers. (Id. ¶ 38). In January 2003, the City began receiving claims from homeowners whose properties were situated above the landslides in the Canyon Gate project. (Id. ¶ 49). The residents further allege that despite the City and the Developers' knowledge of these geological dangers, the Developers began selling homes in Canyon Gate to new homeowners in late 2004. (Id. ¶ 53).
Based on the foregoing allegations, the residents have brought four causes of action against the City: (1) inverse condemnation; (2) dangerous condition of public property; (3) private nuisance; and (4) governmental negligence. The gist of each claim is that the City's approval of and participation in the faulty Modified Plan resulted in damage to the residents. Particularly relevant to the instant coverage dispute is the nature of the claimed damages against the City:
On January 22, 2010, the City tendered its defense to Defendant. (FAC ¶ 15). On May 17, 2012, Defendant issued a letter denying its obligation to defend the City. (FAC ¶ 25). Thus, Plaintiff filed its original complaint on June 6, 2012, seeking equitable contribution and a declaratory judgment that Defendant owes a duty to defend the City. (Dkt.1). However, the Court granted Defendant's Motion to Dismiss on the ground that the pleadings failed to allege that the City had exhausted its retained limits on one or more of its Policies with Defendant. (Dkt.16). The Court's ruling did not reach whether the City's coverage was subject to any policy exclusions.
On September 4, 2012, Plaintiff filed its First Amended Complaint alleging the same claims, but supplementing the pleadings with respect to the retained limits. The FAC now alleges that the City has exhausted the retained limit as stated in one or more of the Policies, and that the City has notified Defendant of this fact. (FAC ¶¶ 17-23). Defendant does not dispute this, but filed a Motion to Dismiss on the ground that it has no duty to defend the City in the Underlying Actions. (Dkt.17).
A motion to dismiss under Rule 12(b)(6) challenges the legal sufficiency of the claims stated in the complaint. Fed. R. Civ. Proc. 12(b)(6). To survive a motion to dismiss, a complaint "must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. A
California law governs this diversity case. As the Ninth Circuit has explained:
The Upper Deck Co., LLC v. Fed. Ins. Co., 358 F.3d 608, 612 (9th Cir.2004) (internal citations and quotation marks omitted) (emphasis in original). See also Reese Travelers Ins. Co., 129 F.3d 1056, 1060 (9th Cir.1997) ("[W]hen a suit against an insured alleges a claim that `potentially' or even `possibly' could subject the insured to liability for covered damages, an insurer must defend unless and until the insurer can demonstrate by reference to `undisputed facts' that the claim cannot be covered." (internal quotation marks omitted)).
Conversely, "`[t]his obligation can be excused only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.'" Id. (quoting Lebas Fashion Imports v. ITT Hartford, 50 Cal.App.4th 548, 59 Cal.Rptr.2d 36, 40 (Ct.App.1996)). In other words, "[w]here the policy provides no potential for coverage, the insurer is under no duty to defend in the underlying action." Id. (citing Waller v. Truck Ins. Exch., 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619, 627 (1995)). "An insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds." Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017, 123 Cal.Rptr.2d 256, 272 (Ct.App.2002). "To determine whether the insurer owes a duty to defend, the court must compare the allegations of the underlying complaint with the terms of the policy." Reese, 129 F.3d at 1060 (citing Montrose Chem. Corp. v. Super. Ct., 6 Cal.4th 287, 24 Cal.Rptr.2d 467, 861 P.2d 1153, 1157 (1993) (en banc)). "Any doubt as to whether there is a duty to defend must be resolved in favor of the insured." Id. (citing Montrose, 24 Cal.Rptr.2d 467, 861 P.2d at 1160)). Thus, to prevail on its Motion to Dismiss, Defendant must demonstrate that the FAC fails to plausibly allege a potential for coverage.
Defendant does not contend that the allegations of the Underlying Actions fail to trigger coverage under the Policies. Indeed, the parties agree that all the underlying claims against the City allege wrongful acts that trigger coverage under the "Errors and Omissions Liability" provision of the Policies. (See Pl. Opp. at 13); (Def. Mot. at 10). Rather, Defendant argues that coverage is foreclosed by two exclusions in the Policies: (1) the land subsidence exclusion; and (2) the wrongful acts exclusion.
First, the "Land Subsidence Exclusion" states that "[Defendant] will not defend or
Second, the "Wrongful Acts Exclusion" states that "[Defendant] will not defend or pay under this Policy for claims or suits against [the City]: ... [f]or
As stated above, the parties do not dispute that all the underlying claims against the City are based on the City's allegedly wrongful acts. Therefore, the Land Subsidence Exclusion is superfluous because any liability for property damage would also be excluded by the Wrongful Acts Exclusion. Accordingly, the question is to what extent the Wrongful Acts Exclusion precludes coverage for the damage claims against the City.
Here, Plaintiff does not dispute that to the extent the underlying claims subject the City to liability for physical property damage and bodily injury, coverage is excluded by the Wrongful Acts Exclusion. (See Pl. Opp. at 15-16 ("Rather, [Defendant] can only establish that the Wrongful Acts Exclusion applies to eliminate a defense obligation
Instead, Plaintiff argues that the Wrongful Acts Exclusion does not apply to the underlying claims for private nuisance insofar as they seek damages for "diminution in value of [the] residential real properties." (RJN, Ex. 1 ¶¶ 87-90). Plaintiff contends that because diminution in value does not constitute "property damage" as defined in the Policies, it does not fall within the ambit of the Wrongful Acts Exclusion.
Plaintiff is correct that diminution in value does not necessarily constitute "property damage" as defined in the Policies. In New Hampshire Ins. Co. v. Vieira, 930 F.2d 696 (9th Cir.1991), the Ninth Circuit addressed whether the diminution in value of housing resulting from the defective installation of drywall constituted "property damage" within the meaning of the parties' insurance policy. The policy in Vieira, much like those at issue here, defined "property damage" as "(1)
This conclusion comports with a common-sense reading of the Policies. To reiterate, "property damage" is defined by the Policies as "[p]hysical injury to or destruction of tangible property, including all resulting loss of use of that property" or "[l]oss of use of tangible property that is not physically injured or destroyed." (Id. § II.AA). While "loss of use" might be similar to diminution in value, it is not the only form of diminution in value. Specifically, it is not difficult to infer that the land subsidence allegedly caused by the City's misfeasance could have reduced the market value of the properties on the affected tract. Thus, even a Canyon Gate home that had not yet sustained physical injury, or resulting loss of use, could have lost value solely on the basis of the known geological risks attendant to the property. Such diminution in value, therefore, is a harm that is distinct from physical damage to, or loss of use of the property.
Defendant argues that diminution in value cannot be distinct from "property damage" because it is nothing more than a measure of "property damage." In particular, Defendant relies on Pruyn v. Agricultural Ins. Co., 36 Cal.App.4th 500, 42 Cal.Rptr.2d 295, 300 n. 6 (Ct.App.1995), for the statement that "[i]n the liability policy context, diminution in market value is accepted as a proper method of measurement of any property damages which may have been sustained." This comment does not alter the Court's conclusion, for several reasons. First, the question of whether diminution in value constitutes property damage was not the issue before the court in Pruyn, so the statement is pure dicta. Further, Pruyn is unhelpful because it never stated the policy's definition of "property damage." Thus, the court had no occasion to decide whether diminution in value was synonymous with "property damage" as defined in the policy in that case. Pruyn, 42 Cal.Rptr.2d at 300. Second, the cases relied on in Pruyn both involved insurance policies that defined "property damage" as injury or damage to property, without cabining the term to
In sum, the Court concludes that diminution in value of the residents' homes is a type of damage that does not necessarily fall within any exclusion set forth in the Policies.
For the reasons set forth in the Order, Defendant's Motion to Dismiss is DENIED.
