PHYLLIS J. HAMILTON, District Judge.
Plaintiffs' motion for summary judgment came on for hearing before the court on March 7, 2012. Plaintiffs Swi-Co Construction, Inc., Swi-Co Construction, and Joe Swicegood (collectively "Swi-Co" or "plaintiffs") appeared through their counsel, Marc Sherman. Defendant Nationwide Mutual Insurance Company ("Nationwide" or "defendant") appeared through its counsel, Stephen Libertore, and Julian Pardini. Having read all the papers submitted and carefully considered the relevant legal authority, the court hereby GRANTS plaintiffs' motion for summary judgment, for the reasons stated at the hearing, and as follows.
This action arises out of an insurance coverage dispute. The court previously heard and decided defendant's motion for summary judgment with respect to coverage issues. Plaintiff's corresponding motion is now before the court.
Plaintiff Swi-Co Construction is a partnership entity between general partners plaintiff Joseph Swicegood and nonparty Michael Cote. In February 2004, Swi-Co contracted with non-parties Pete and Caroline Kerston (the "Kerstons") to construct their home in Santa Rosa, California (the "project"). Swi-Co entered a written standard form contract with the homeowners dated July 2, 2004 (the "contract").
The Kerstons also hired an architect and civil engineers, who were not controlled or employed by Swi-Co, to determine the site of the house in relationship to a nearby creek.
The contract required Swi-Co to "complete the Work described in the Contract Documents for the project."
Sometime during the course of construction of the project, water was discovered in the subfloor area of the house.
On October 4, 2005, when a hole was cut into the master bathroom subflooring to prepare for installation of a bathtub, mold was discovered on the underside of the subflooring.
By letter dated November 11, 2005, Nationwide formally denied the claim, citing various policy exclusions. Declaration of Nancy Klein ("Klein Decl.") ¶ 4 and Def. Index, Ex. H. Swicegood spoke to Ms. Klein who emphasized that the claim was denied because it included mold damage. Swicegood Decl. ¶ 4.
Defendant Nationwide
The policy provides liability coverage for qualifying "bodily injury" and "property damage," as follows:
Def. Index, Ex. A at 10013, 100025, 100027-28.
The Policy also carved out a variety of exclusions from coverage. The three exclusions which are highlighted by the parties as relevant to the present motion are the j5 exclusion; the j6 exclusion; and the exclusion for fungi or bacteria contained in the endorsement to the policy. Those exclusions preclude coverage for "damage to property" as follows:
Finally, the Policy included the following relevant definitions:
"
In May 2006, the underlying homeowners — the Kerstons — filed suit against Swi-Co Construction, Inc., as well as the architect and engineers who were involved in the project. The homeowners alleged claims for breach of contract, breach of express warranty, breach of implied warranty, negligence, and negligence per se against Swi-Co Construction, Inc. Def. Index, Ex. F. The Kerstons alleged that the site had been improperly graded, water intrusion had damaged subflooring and structural and framing members, and mold had damaged components of the home.
On June 6, 2006 Swi-Co tendered defense of the homeowners' action to Nationwide. The claim was then assigned to litigation consultant Greer Malone to determine whether Nationwide had any coverage obligation to defend Swi-Co. Ms. Malone sought advice from in-house counsel with respect to Swi-Co's tender of defense. Barbara Ochsner, one of Nationwide's in-house attorneys, directed Ms. Malone to contact Michael Cote to learn whether the construction project had been completed. Def. Index, Ex. J. Ms. Malone spoke to Mr. Cote and noted in her file diary that Mr. Cote told her that "the construction on the house is not complete as the floor coverings have not been installed & cannot be installed until the mold problem is resolved.
On August 18, 2006, Ms. Malone sent a denial letter to Joe Swicegood of Swi-Co, declining Swi-Co's tender of defense in the [Kerston] homeowners' lawsuit. Def. Index, Ex. M. Mr. Swicegood subsequently spoke to Ms. Malone and informed her that more than mold was involved in the claims: the damage included saturation to insulation and degradation of pipes, HVAC and other duct work that needed to be replaced. Mr. Swicegood contends that no Swi-Co operations were occurring on the subfloor, ducts, piping and other locations on which water damage was alleged.
Swi-Co entered a settlement with the homeowners after paying over $60,000 of company funds to defend the action. As part of the settlement, Swi-Co paid remediation costs, cancelled a $101,000 promissory note owed by the homeowners, waived over $100,000 in unpaid invoices and interest, and paid its own attorneys' fees and costs. The Swi-Co partnership dissolved by the time of the settlement.
Plaintiffs filed this action against defendant Nationwide in the Superior Court for Sonoma County on June 21, 2010. Defendant removed the action to this court on July 16, 2010. On August 30, 2010, plaintiffs filed a first amended complaint ("FAC") which alleges two causes of action against defendant: (1) breach of contract for failure to defend Swi-Co in the [Kerston] homeowners' action under the policy; and (2) breach of the implied covenant of good faith and fair dealing.
On April 25, 2011, Nationwide filed its motion seeking summary judgment on both claims, or, in the alternative, partial summary judgment. The court held the hearing on June 22, 2011, and subsequent to that, requested further briefing.
On September 19, 2011, the court issued its ruling granting summary judgment in part and denying it in part.
Turning to the j5 exclusion — which excluded coverage for property damage arising out of the insured's ongoing operations — the court noted that there was no genuine dispute that Swi-Co had not completed the construction project to build the home at the time the water intrusion and mold damage was discovered. In other words, there was no dispute that the water intrusion and mold development occurred while plaintiffs and/or their subcontractors were performing `ongoing operations' on the property as a whole.
The court determined that the j5 exclusion is ambiguous as to whether the work excluded under j5 incorporates the entire project, or only a part or component of the project. In so ruling, the court discussed and relied upon three California cases that had construed similar exclusions:
Those cases, noted the court, recognized that exclusionary language that was similar to that contained in the j5 exclusion here created an ambiguity as to whether the work being excluded under the policy was the entire project, or only the component part of the project that failed. And because any ambiguity must be resolved against the insurer, the earlier court cases held that the "work product exclusion" excluded only damages to the failed work itself, not to the entire project. Following this reasoning, the court concluded that plaintiffs's proposed construction of the j5 exclusion — to exclude only damage to a particular part of construction on which the contractor is performing operations and not to the whole house until the entire project is complete — was reasonable and supported by the ordinary and plain meaning of the exclusionary language. Thus, in construing the ambiguous language of the j5 exclusion, the court held that it does not apply to the entire construction project, and Nationwide's motion for summary judgment on the ground that it had no duty to defend pursuant to the j5 exclusion was denied.
Turning to the j6 exclusion — which precluded coverage for "that particular part of any property that must be restored, repaired or replaced because `your work' was incorrectly performed on it" — the court noted that the parties disputed whether plaintiffs' vicarious liability for the alleged negligence by the architect and engineers hired by the Kerstons is covered by "your work." The court found, however, that for similar reasons to those discussed in connection with the j5 exclusion, the j6 exclusion does not apply to the work of others, such as architects and engineers, who are not subcontractors of Swi-Co or otherwise under plaintiffs's direction. MSJ Order at 16.
The court then noted that, although Nationwide argued that the allegations of the Kerston complain established that certain portions of the project had to be restored, repaired or replaced because Swi-Co's work was allegedly incorrectly performed, the question whether Swi-Co's work was in fact incorrectly performed and caused the property damage was a disputed issue of material fact. The court further noted that Swi-Co pointed out that another disputed factual issue existed over which particular part of the property, if any, had to be restored, repaired, or replaced — a contention to which Nationwide did not respond. For these reasons, the court determined that the "question whether Swi-Co, the architects or the engineers incorrectly performed their work raises genuine issues of disputed fact as to whether the j6 exclusion applies to the claimed damage." The court then denied Nationwide's motion for summary judgment on the ground that it owed no duty to defend pursuant to the j6 exclusion, but specified that its ruling that the j6 exclusion does not apply to the work of others who are not plaintiffs' subcontractors, is deemed established for purposes of trial. MSJ Order at 17.
Finally, with respect to the mold exclusion, the court noted that the policy plainly and clearly excludes damages arising from the presence of mold, but held that plaintiffs had demonstrated that the Kerston complaint alleged damage other than mold, presenting a factual dispute as to whether any part of the claim against plaintiffs is potentially covered, thereby triggering Nationwide's duty to defend. The court also denied Nationwide's motion with respect to the duty to defend against claims for non-mold damage. MSJ Order at 17.
While the court thus denied Nationwide's motion for summary judgment with respect to the breach of contract/duty to defend claim, for all the foregoing reasons, the court subsequently went on to grant Nationwide's motion for summary judgment as to plaintiffs' claim for the breach of the implied covenant of good faith and fair dealing. The court also granted Nationwide's motion with respect to plaintiffs' prayer for punitive damages. MSJ Order at 18-19.
Following defendant's motion for summary judgment, and because the court noted at the hearing on defendant's motion that the case would still be viable absent plaintiffs' own motion for summary judgment allowing the court to dispose of the issues presented, plaintiffs filed the present motion.
In it, plaintiffs seek summary judgment with respect to the remaining breach of contract claim alleged in its complaint. Namely, plaintiffs seek a ruling that it is entitled to judgment with respect to its claim that Nationwide breached its duty to defend.
Summary judgment shall be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FRCP 56(c). Material facts are those which may affect the outcome of the case.
The party moving for summary judgment bears the initial burden of demonstrating the absence of a genuine issue of fact for trial.
Plaintiffs' motion for summary judgment raises two overriding issues for disposition: (a) whether plaintiffs are entitled to a judgment that Nationwide breached its duty to defend plaintiffs against the claims asserted in the underlying Kerston action; and (b) if so, whether there is any dispute as to plaintiffs' resulting damages. As already noted by the court in connection with defendant's earlier motion for summary judgment, the duty to defend arises whenever an action alleges any claim that "potentially" or "possibly" could be covered by the policy in question.
Preliminarily, the court addresses the scope of the present motion, in view of its prior order addressing defendant's motion for summary judgment. Plaintiffs contend that the court's prior order already determined that exclusion j5 is ambiguous, such that a construction in plaintiffs' favor was appropriate, and furthermore that the mold exclusion does not apply, thereby leaving only one issue for substantive resolution here: whether the j6 exclusion applies to preclude coverage for the Kerston allegations.
As stated at the hearing on plaintiffs' motion, the court declines defendant's invitation to reconsider those items which it has already ruled upon. Furthermore, although defendant explains its failure to seek reconsideration earlier on grounds that plaintiffs' motion was filed before defendant had a chance to do so, the court finds this an insufficient excuse to discharge defendant's responsibility to seek formal reconsideration pursuant to applicable local rules. Moreover, and no doubt because defendant has pressed its reconsideration argument by way of the instant motion rather than through a more appropriate motion for reconsideration, the majority of the arguments defendant makes were not only already argued by defendant in its original motion and in the supplemental briefing to that motion, but have also been set forth without any attempt to distinguish for the court any additional law or facts that might warrant affirmative reconsideration of the court's prior ruling.
All of which compels the court to confirm that its prior ruling in connection with issues raised in defendant's motion for summary judgment will be treated as law of case, and control the discussion here where applicable.
With this understanding in mind, the court turns to the following substantive contentions raised by plaintiffs: (1) that Nationwide has conceded that the Kerston complaint's allegations fall within the definition of affirmative coverage; (2) that the mold exclusion does not apply; (3) that the j5 exclusion does not apply; (4) that the j6 exclusion does not apply; and (5) that it is undisputed that plaintiffs suffered damages in the amount of $301,334.41.
With respect to the question of affirmative coverage, the court's prior order previously considered whether the underlying Policy "covers the claims asserted in the homeowners' complaint."
This holding still controls. Although defendant now asserts that it made no such concession, and that plaintiffs' contention that the Kerston complaint alleges damages caused by independent third parties precludes liability — and therefore, affirmative coverage — for plaintiffs, the fact remains that Nationwide did concede, at the time the issue of affirmative coverage was first raised, that the Kerston complaint's allegations fell within the coverage provisions of the Policy. Moreover, however, even if the court were to revisit this argument, defendant's position is unpersuasive. It is undisputed that the Kerston complaint does allege that plaintiffs, as well as third parties, are responsible for causing property damage to the home.
Turning to the question whether the mold exclusion applies, the court's prior order held that plaintiffs had demonstrated that the Kerston complaint's allegations alleged damage other than mold, triggering a factual dispute as to whether any part of the claim against Swi-Co is potentially covered, and furthermore triggering Nationwide's duty to defend (since there was at least the "possibility" that coverage resulted for non-mold claims).
Similarly, plaintiffs also rely on the court's prior ruling concluding that exclusion j5 is ambiguous, that it should therefore be interpreted in the insured's favor, and that plaintiffs' proposed construction — i.e., that the j5 exclusion does not apply to the entire construction project — is reasonable and consistent with the plain and ordinary meaning of the language.
As plaintiffs note, the true substantive issue for the court to resolve is whether the j6 exclusion applies. Exclusion j6 excludes coverage for "[t]hat particular part of any property that must be restored, repaired or replaced because `your work' was incorrectly performed on it." Def. Index, Ex. A at 100017. Previously, the parties disputed whether plaintiffs' alleged vicarious liability for the purported negligence by the architect and engineers hired by the Kerston homeowners (as alleged in the Kerston complaint) was covered by "your work." Nationwide contended that all of the work at the project is considered the work of Swi-Co as the general contractor, whereas plaintiffs contended that it was not. The court ruled in plaintiffs' favor on this point in its MSJ Order, and furthermore noted that its "interpretation of the j6 exclusion not to apply to the work of others who are not Swi-Co's subcontractors is deemed established for purposes of trial" on the question whether the j6 exclusion applies to the claimed damage.
Based on the foregoing, as long as the Kerston complaint alleges that plaintiffs were responsible for the work performed incorrectly by others — including the architect and engineers who were hired by Kerston and not by plaintiffs — then exclusion j6 does not apply, and can provide no basis for Nationwide's refusal to defend.
In support of the argument that the Kerston complaint alleges work performed incorrectly by others, and plaintiffs' liability therefor, plaintiffs point out: that paragraph 14 of the Kerston complaint establishes that the damage for which the Kerston plaintiffs were suing was due to the placement of the house and/or its grading; and that water intrusion occurred and components and elements of the house were damaged because of the placement and/or grading.
Defendant, however, points out that plaintiffs were responsible for the grading and siting on the property. They rely on plaintiffs' mediation statement in the underlying Kerston action, in which plaintiffs' counsel stated: that Swi-Co, with the assistance of its grading subcontractor, built the compacted dirt building pad, and put grade beam foundations in place; poured pier and grade beans; and that Mr. Swicegood (of Swi-Co's partnership) obtained permission from the owners to build the house in a different location after he discovered siting irregularities.
The parties' dispute with respect to the grading and siting performed on the property — i.e., whether Swi-Co in fact performed the grading and siting work alleged to have caused the damage referenced in the Kerstons' complaint, and whether any of this work was done incorrectly — properly constitutes a material dispute of fact.
Accordingly, plaintiffs' motion for summary judgment with respect to the inapplicability of exclusion j6 is GRANTED.
Finally, plaintiffs argue that they are entitled to damages in the amount of $301,334.41, plus prejudgment interest, as a result of their defense and settlement of the Kerston action. Plaintiffs more specifically itemize their damages amounts as follows: $107,444.88 in construction costs and invoices that had not been paid by the Kerstons; a $101,000.00 promissory note that Swi-Co agreed to cancel (plus another $14,886.46 in interest charges on the note); remediation costs of $13,218.43; and $4,067.00 in "Standards of Excellence," Interest and Attorneys Fees.
Defendant objects to the inclusion of the promissory note's value in plaintiffs' damages calculation, on grounds that plaintiffs relinquished their right to collect on the note, and furthermore objects that all other components of plaintiffs' damages claim are extra-contractual and barred by the court's prior entry of summary judgment on the good faith/fair dealing claim. The problem for defendant, however, is that defendant submits no controlling or persuasive legal authority for its assertions. As such, it has failed to meaningfully oppose plaintiffs' argument that they are entitled to these amounts. Moreover, the court is persuaded that the amounts submitted by plaintiffs do, in fact, adequately correspond with the amounts that plaintiffs were required to pay or forego, in order to dispose of the claims asserted against them in the underlying Kerston action. Such amounts are appropriately considered as part of plaintiffs' damages claim.
In sum, the court concludes that plaintiffs have adequately discharged their burden to demonstrate damages resulting from defendant's failure to tender a defense, and summary judgment as to damages is accordingly GRANTED.
For all the foregoing reasons, the court hereby GRANTS plaintiffs' motion for summary judgment on grounds that no exclusion applies to excuse defendant's failure to provide a defense in connection with the allegations of the Kerston complaint, resulting in defendant's breach of the duty to defend regarding the same. Summary judgment is furthermore GRANTED to the extent plaintiffs seek damages in the amount of $301,334.41, plus interest.
