EMPLOYERS MUTUAL CASUALTY COMPANY and ILLINOIS EMCASCO INSURANCE COMPANY, Plaintiffs, v. NORTH AMERICAN SPECIALTY FLOORING, INC., SPORTS SURFACING, INC., S.C. ANDERSON, INC., and KOSTER AMERICAN CORPORATION dba KOSTER USA, Defendants. NORTH AMERICAN SPECIALTY FLOORING, INC. and SPORTS SURFACING, INC., Counter-Claimants, v. EMPLOYERS MUTUAL CASUALTY COMPANY and ILLINOIS EMCASCO INSURANCE COMPANY, Counter-Defendants.
No. 1:19-cv-00544-DAD-JLT
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA
December 27, 2019
DALE A. DROZD, UNITED STATES DISTRICT JUDGE
(Doc. No. 31)
BACKGROUND
In this declaratory relief action EMC seeks a declaration from this court that, as a matter of law, the damages sought against Sports Surfacing by a third-party in an underlying state court action are not covered under the insurance policies EMC issued to Sports Surfacing, and that EMC therefore has no duty to defend or indemnify Sports Surfacing in that underlying state court action. (See Doc. No. 2.) Sports Surfacing counter-claims that EMC has a duty to defend and indemnify it in the underlying action pursuant to the insurance policies that EMC issued it and seeks a declaration stating as much. (See Doc. No. 16.)
The material facts of this case are undisputed and, as relevant to the pending motion, are set forth below.
Defendant Sports Surfacing is a contractor that “install[s] flooring and related products, including rubber sports flooring.” (Doc. No. 31 at 7.) EMC provided insurance coverage to Sports Surfacing under various insurance policies (collectively, the “EMC insurance policies“). (Doc. No. 2 (“Compl.“) at 2–3.) EMC is moving for summary judgment against each named defendant, but only Sports Surfacing has opposed the motion. Other named defendants—such as defendants S.C. Anderson, Inc. (“Anderson“) and Koster American Corporation dba Koster USA (“Koster“)—do not oppose the pending motion for summary judgment. Moreover, several entities who were initially named as defendants in this action have been dismissed after agreeing to be bound by the outcome of this litigation. (See Doc. Nos. 23, 27.) Included amongst that group are Roy‘s Flooring, Inc. and Jose Roy Garcia, formerly dba Roy‘s Flooring, (collectively “Roy‘s Flooring“) who were subcontracted into the project that gave rise to the underlying lawsuit, as well as Navigators Insurance Company (“Navigators“), an insurance company that insured Roy‘s Flooring. (Compl. at 12–13; Doc. No. 31-2, Ex. A) (Stipulation of Facts and Evidence Admissible for Cross Motions for Summary Judgment3 (“UF“) at ¶¶ 22, 23; Doc. Nos, 23, 27.)
B. The Facts Giving Rise to the Underlying State Court Action.
On May 15, 2017, defendant Anderson, a general contractor, entered into a written contract with California State University, Bakersfield (“CSU Bakersfield“) for a construction project referred to by the parties as the “Student Recreation Center project.” (UF at ¶ 22; see also
In or around February 2016, CSU Bakersfield notified defendant Anderson that the rubber flooring in the Student Recreation Center‘s fitness room had failed and needed to be removed and replaced. (Id. at ¶ 27.) Thereafter, representatives from CSU Bakersfield, Anderson, Roy‘s Flooring, and Sports Surfacing (and possibly Koster) scheduled and conducted a meeting “to discuss what needed to be done to effectuate repairs or replacement of the flooring.” (Doc. No. 31-2 at 265–66.) “It was determined at the meeting that core samples and analysis testing was necessary in order to ascertain the cause of the failure, the extent of the damage[,] and the best method for correcting the problem.” (Id. at 266.) After samples were taken and tests were conducted, it was revealed that an insufficient layer of Koster sealant was applied, causing moisture to permeate through to the floor and causing it to fail. (Id. at 261, 266.) “The only recommended means to remedy the condition [wa]s to remove the floor and sealant, re-level the
On November 8, 2016, counsel for Anderson reached out to Roy‘s Flooring, Sports Surfacing, and Koster via letters to notify them that CSU Bakersfield “ha[d] made a final demand on Anderson to commence the requisite corrective action . . . and to do so during the next semester break scheduled for December 15, 2016 through January 22, 2017.” (Id. at 261–62, 266.) Anderson in turn demanded that Roy‘s Flooring and its subcontractors, including Sports Surfacing, “confirm [their] respective intent and ability to immediately proceed with the removal and replacement of the defective flooring during the suggested period noted above or to refund to Anderson all sums previously paid to [them] . . . for the defective flooring.” (Id. at 262.) Anderson‘s letter warned Roy‘s Flooring and Sport Surfacing that their failure to timely comply with its demand would result in Anderson “undertak[ing] its own corrective action through an alternate subcontractor and suppliers and . . . seek[ing] to recover all expenses and damages caused by [their] refusal to perform that corrective work . . . .” (Id.)
Ultimately, however, CSU Bakersfield removed and replaced the entire flooring in the Student Recreation Center‘s fitness room, and thereafter back-charged Anderson in the amount of $229,345.71 for the costs that it incurred in doing so. (Id. at 395.) On July 19, 2017, Anderson sent another letter to Roy‘s Flooring, Sports Surfacing, and Koster, demanding that they reimburse Anderson for the amount that CSU Bakersfield had back-charged it. (Id.) On October 24, 2017, Anderson informed Roy‘s Flooring, Sports Surfacing, and Koster by way of another letter that it had not received a response to its July 19, 2017 correspondence and that it planned on filing a lawsuit against the subcontractors within the next ten days unless payment was received by Anderson within that timeframe. (Id. at 398.)
C. The Underlying State Court Action and Subsequent Tenders to EMC.
On November 16, 2017, defendant Anderson filed suit against Roy‘s Flooring, Sports Surfacing, and Koster in Kern County Superior Court, asserting claims for breach of contract, breaches of express and limited liability, and negligence (the “underlying action” or “Anderson Action“). (See Doc. No. 31-2, Ex. 18.) The complaint in the Anderson Action alleges that “core samples, testing and analysis of the . . . Flooring were conducted . . . [and] [t]he results . . .
On March 20, 2018, Sports Surfacing tendered the underlying action to EMC for a defense and indemnification under the EMC insurance policies, and on April 12, 2018, Navigators, as insurer for Roy‘s Flooring, tendered Roy‘s Flooring‘s defense in the Anderson Action to EMC, contending that Roy‘s Flooring was an “additional insured” under the EMC insurance policies issued to Sports Surfacing. (Doc. Nos. 31 at 20; 31-2 at 293.) By way of letters dated August 8 and 17, 2018, EMC declined to defend both Sports Surfacing and Roy‘s Flooring in the Anderson Action. (See Doc. No. 31-2, Exs. 19 –21.) As relevant here, EMC argued that, “[t]o the extent Anderson asserts any claims against [Sports Surfacing or Roy‘s Flooring in the Anderson Action], those claims are for the costs that [CSU Bakersfield] ‘back charged’ to Anderson for the purpose of correcting [Sports Surfacing and/or Roy‘s Flooring‘s] defective flooring work or products.” (Doc. No. 31-2 at 494, 515, 536.) EMC argued that these costs are not for “property damage” as that term is defined in the EMC insurance policies. (Id.) Moreover, EMC argued that, even if the costs incurred by CSU Bakersfield in removing and replacing the defective flooring constituted “property damage” as that term is defined in the EMC insurance policies, the “Damage to Your Product” and “Damage to Your Work” exclusions in those policies also negate coverage. (Id. at 501–03, 516–17, 537–39.) Accordingly, EMC requested that Sports Surfacing and Roy‘s Flooring withdraw their coverage requests and reserved all of its legal and equitable rights in connection with the matter, including its right to
D. The EMC Insurance Policies.
EMC issued commercial general liability and commercial umbrella policies to Sports Surfacing (the “CGL policies” and the “umbrella policies,” respectively) (collectively, the “EMC insurance policies“).4 The EMC insurance policies were first issued in 2008 and renewed in 2009, 2010, and 2011. (UF at ¶¶ 1–16.)
1. The CGL Policies.
The CGL policies state in relevant part:
We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for . . . “property damage” to which this insurance does not apply.
(Doc. No. 31-2 at 25, 89.) As relevant here, the CGL policies define “property damage” as
Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or . . . Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
(Id. at 39, 103.) The CGL policies, however, explicitly “do[] not apply to“:
k. Damage To Your Product
“Property damage” to “your product” arising out of it or any part of it.
l. Damage To Your Work
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
(Id. at 26–29, 90–93.) The CGL policies define “your product,” “your work,” and “products-completed operations hazard” as follows:
21. “Your product“:
a. Means:
(1) Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:
(a) You;
. . .
b. Includes:
(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your product“; and
(2) The providing of or failure to provide warnings or instructions.
22. “Your work“:
a. Means:
(1) Work or operations performed by your or on your behalf; and
(2) Materials, parts, or equipment furnished in connection with such work or operations.
b. Includes:
(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work,” and
(2) The providing of or failure to provide warnings or instructions.
. . .
16. “Products-completed operations hazard“:
a. Includes all “bodily injury” and “property damage” occurring away from premises you own or rent and arising out of “your product” or your work” . . . .
(Id. at 39–40, 103–04.)
2. The Umbrella Policies.
EMC also issued Sports Surfacing “umbrella” policies, which provide that EMC “will pay on behalf of the insured the ‘ultimate net loss’ in excess of the ‘retained limit’ because of . . . ‘property damage’ to which this insurance applies.” (Id. at 166, 215.) In essence, these policies are meant to provide coverage “when the ‘underlying insurance’ does not provide coverage or the limits of any ‘underlying insurance’ have been exhausted.” (Id.) However, similar to the CGL policies, the umbrella policies also contain language that EMC “will have no duty to defend the insured against any ‘suit’ seeking damages for . . . ‘property damage’ to which this insurance does
E. This Action and the Pending Motion for Summary Judgment.
On April 26, 2019, EMC commenced this declaratory judgment action as a response to Sports Surfacing and Navigators tendering the claims asserted against Sports Surfacing and Roy‘s Flooring in the underlying action to EMC for defense and indemnity. (Doc. No. 1.) On June 4, 2019, Sports Surfacing answered and counterclaimed for declaratory relief, seeking a declaration that the claims made against in the underlying action are covered under the terms of the EMC insurance policies. (Doc. No. 16.) On October 4, 2019, EMC filed the pending motion for summary judgment. (Doc. No. 31.) On October 22, 2019, Sports Surfacing filed its opposition, and, on October 28, 2019, EMC filed its reply thereto. (Doc. Nos. 32, 34.)
LEGAL STANDARD
Summary judgment is appropriate when the moving party “shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
In summary judgment practice, the moving party “initially bears the burden of proving the absence of a genuine issue of material fact.” In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). The moving party may accomplish this by “citing to particular parts of materials in the record, including
In the endeavor to establish the existence of a factual dispute, the opposing party need not establish a material issue of fact conclusively in its favor. It is sufficient that “the claimed factual dispute be shown to require a jury or judge to resolve the parties’ differing versions of the truth at trial.” T.W. Elec. Serv., 809 F.2d at 631. Thus, the “purpose of summary judgment is to ‘pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.‘” Matsushita, 475 U.S. at 587 (citations omitted).
“In evaluating the evidence to determine whether there is a genuine issue of fact,” the court draws “all reasonable inferences supported by the evidence in favor of the non-moving party.” Walls v. Cent. Contra Costa Cty. Transit Auth., 653 F.3d 963, 966 (9th Cir. 2011). It is the opposing party‘s obligation to produce a factual predicate from which the inference may be
ANALYSIS
EMC moves for summary judgment, arguing that the undisputed evidence before the court establishes that it owes no duty to defend or indemnify Sports Surfacing in the Anderson Action because: (1) the damages claimed in the underlying action are not for “property damage,” as defined by the EMC insurance policies; and (2) even if the damages claimed were for “property damage,” the EMC insurance policies’ “Damage to Your Product” and “Damage to Your Work” exclusions preclude coverage. (Doc. No. 31 at 24–31.) In opposition, Sports Surfacing contends that: (1) because a potential for coverage exists under the EMC insurance policies, EMC is obligated to defend it in the Anderson Action; and (2) this court should decline to exercise its jurisdiction in this matter. (Doc. No. 32 at 6–14.)
A. EMC is Not Obligated to Defend or Indemnify Sports Surfacing in the Anderson Action.
1. Choice of Law.
Because the EMC insurance policies do not contain “choice of law” provisions, and because they were issued in the State of Illinois, the court must determine which state‘s law applies in resolving the pending motion. “In an ordinary diversity case, federal courts apply the substantive law of the forum in which the court is located, including the forum‘s choice of law rules.” Ins. Co. of N. Am. v. Fed. Exp. Corp., 189 F.3d 914, 919 (9th Cir. 1999). “In contract law, California has two different choice-of-law tests, either of which may apply to this action.” Costco Wholesale Corp. v. Liberty Mut. Ins. Co., 472 F. Supp. 2d 1183, 1197 (S.D. Cal. 2007). The first choice-of-law test is
Here, neither party has pointed to a material conflict between the laws of California and Illinois that would trigger application of either test. Indeed, in the pending motion, EMC notes that “the law of California and Illinois regarding interpretation of the coverage issues involved in this matter do not conflict.” (Doc. No. 31 at 23.) Sports Surfacing does not dispute this assertion and, in opposing the pending motion, has relied exclusively on California law. (See Doc. No. 32.) Moreover, at the December 3, 2019 hearing on the pending motion, neither party objected to the court applying California law in resolving the pending motion. Accordingly, the court will apply California law in this case. Hurtado v. Superior Court, 11 Cal. 3d 574, 582, 522 P.2d 666, 671 (1974) (“[W]e hold that where as here in a California action both this state as the forum and a foreign state (or country) are potentially concerned in a question of choice of law . . . and it appears that the foreign state (or country) has no interest whatsoever in having its own law applied, California as the forum should apply California law.“).
“It is . . . a familiar principle that a liability 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, 1081 (1993), as modified on denial of reh‘g (May 13, 1993). “[T]he [insurer] must defend a suit which potentially seeks damages within the coverage of the policy.” Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966). “The determination [of] whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.” Horace Mann, 4 Cal. 4th at 1081. In analyzing an insurance policy, “courts must consider both the [] language in the policy, and the endorsements or exclusions affecting coverage, if any, included in the policy terms.” Modern Dev. Co. v. Navigators Ins. Co., 111 Cal. App. 4th 932, 939 (2003), as modified (Aug. 29, 2003), as further modified (Sept. 18, 2003). “Facts known to the insurer and extrinsic to the third party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy.” Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 296 (1993).
To prevail in an action for declaratory relief regarding 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.” Id. at 300; see also Reg‘l Steel Corp. v. Liberty Surplus Ins. Corp., 226 Cal. App. 4th 1377, 1389 (2014) (“The insurer‘s defense duty is obviated where the facts are undisputed and conclusively eliminate the potential the policy provides coverage for the third party‘s claim.“) “Facts merely tending to show that the claim is not covered or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage . . . add no weight to the scales.” Montrose Chem., 6 Cal. 4th at 300. Accordingly, for Sports Surfacing to survive summary judgment here, it must show that the underlying claims may fall within the coverage of the policy. Montrose Chem., 6 Cal. 4th at 300. EMC, on the other hand, “is entitled to summary judgment that no potential for indemnity exists if the evidence establishes no coverage under the policy as a matter of law.” Reg‘l Steel, 226 Cal. App. 4th at 1389; see also Am. Star Ins. Co. v. Ins. Co. of the W., 232 Cal. App. 3d 1320, 1325 (1991) (“If the claim does not fall within the insuring clauses, there
As relevant here, the EMC insurance policies provide Sports Surfacing with coverage for “property damage.” EMC contends that it is not obligated to defend or indemnify Sports Surfacing in the underlying state court action because the damages claimed in that underlying action do not constitute property damage as defined by the EMC insurance policies. For the reasons explained below, the court agrees.
a. The Anderson Action Does Not Seek Damages for “Property Damage.”
The EMC insurance policies define property damage as “[p]hysical injury to tangible property, including all resulting loss of use of that property” or “[l]oss of use of tangible property that is not physically injured.” (Doc. No. 31-2 at 39, 103.) In the underlying state court action, however, Anderson is not seeking damages for physical injury to tangible property or loss of use of property. The Anderson Action asserts claims for breach of contract, negligence, breach of express and implied warranties, and “strict liability.” (Doc. No. 31-2, Ex. 18.) Moreover, the allegations of the complaint in that action do not claim that Sports Surfacing‘s actions or inactions lead to physical injury to tangible property or loss of use of that property. Instead, the complaint in the Anderson Action alleges that an “insufficient layer of the Koster sealer was applied [by Sports Surfacing] to the concrete floor of the Rec Center Fitness Room which allowed and caused moisture to permeate through to the floor causing the adhesive to fail to remain bonded to the rubber flooring.”6 (Doc. No. 31-2 at 448.) The only damages sought by Anderson in that underlying action are for the $229,345.71 that CSU Bakersfield back-charged Anderson after CSU Bakersfield demolished, removed, and replaced the defective flooring that Sports Surfacing installed in the college‘s fitness room.
A claim to recover expenses incurred to replace defectively installed flooring is not, however, a claim for “property damage.” In California, “the prevailing view is that the
are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Rather liability coverage comes into play when the insured‘s defective materials or work cause injury to property other than the insured‘s own work or products.
Id. at 373 (citations and internal quotation marks omitted). “In short, a liability insurance policy is not designed to serve as a performance bond or warranty of a contractor‘s product.” Id. (citations omitted).
Here, the undisputed facts on summary judgment establish that the damages claimed by Anderson in the underlying state court action “resulted from the remediation of the [fitness room], and remediation work does not constitute property damage under California law.” Am. Home Assurance Co. v. SMG Stone Co., Inc., 119 F. Supp. 3d 1053, 1060 (N.D. Cal. 2015); see also Reg‘l Steel, 226 Cal. App. 4th at 1393 (“California cases consistently hold that coverage does not exist where the only property ‘damage’ is the defective construction, and damage to other property has not occurred.“).7 The court therefore concludes that as a matter of law the damages claimed in the underlying action do not constitute property damage as defined by the EMC insurance policies.
Finally, Sports Surfacing contends that, “while the cost of repairing or replacing the insured‘s defective work may not be covered, damage to any other portion of the building would be covered.” (Doc. No. 32 at 7.) It argues that this court cannot yet determine whether a
Having determined that the damages claimed in the underlying action do not constitute property damage, the court finds that there is no genuine dispute as to whether or not the EMC insurance policies cover the causes of action asserted against Sports Surfacing in the underlying state court action. The court will therefore grant EMC‘s motion for summary judgment seeking a declaration that, pursuant to the EMC insurance policies, it has no duty to defend or indemnify Sports Surfacing in the underlying action. Moreover, having determined that the damages claimed in the underlying action do not fall within the scope of the EMC insurance policies, the court need not and will not analyze whether the policies’ “Damage to Your Product” or “Damage to Your Work” exclusions are applicable to the underlying action.
B. The Court Will Not Decline to Exercise its Jurisdiction over this Matter.
Finally, the court addresses Sports Surfacing‘s argument that this court should decline to exercise its jurisdiction under the
The district court should avoid needless determination of state law issues; it should discourage litigants from filing declaratory actions as a means of forum shopping; and it should avoid duplicative litigation. If there are parallel state proceedings involving the same issues and parties pending at the time the federal declaratory action is filed, there is a presumption that the entire suit should be heard in state court. The pendency of a state court action does not, of itself, require a district court to refuse federal declaratory relief. Nonetheless, federal courts should generally decline to entertain reactive declaratory actions.
However, there is no presumption in favor of abstention in declaratory actions generally, nor in insurance coverage cases specifically. We know of no authority for the proposition that an insurer is barred from invoking diversity jurisdiction to bring a declaratory judgment action against an insured on an issue of coverage . . ..
But these are considerations for the district court, which is in the best position to assess how judicial economy, comity and federalism are affected in a given case.
Id. at 1225–26 (internal quotation marks and citations omitted).
The court finds that consideration of the Brillhart factors do not compel this court to decline to exercise its jurisdiction in this case. While this action involves a question of state law, there is no indication that EMC is forum-shopping by seeking declaratory relief in this court, or that entering judgment in favor of EMC in this action would result in duplicative litigation. Indeed, EMC is not even a party to the Anderson Action, and the coverage questions presented in this action are not at issue in the Anderson Action. Accordingly, this court‘s conclusion that EMC is not obligated to defend or indemnify Sports Surfacing with respect to the Anderson Action will not resolve or in any way affect Anderson‘s claim that Sports Surfacing is liable to it for the repair costs that CSU Bakersfield back charged to Anderson.
Moreover, it appears that Sports Surfacing‘s argument may be brought in bad faith. As noted above, Sports Surfacing has counterclaimed for declaratory relief, seeking a declaration that
Indeed, attached to EMC‘s reply to Sports Surfacing‘s opposition to the pending motion is EMC attorney Lisa Darling-Alderton‘s declaration, which further supports the court‘s concern that Sports Surfacing‘s request may be brought in bad faith. Therein, attorney Darling-Alderton avers that the parties—including Sport Surfacing, by and through its counsel in this matter, attorney Arthur Grebow—“agreed [in June of 2019] to continue the trial in the Anderson Litigation to January or February 2020 to allow time for the coverage issue to be decided via MSJ in the Federal Court.” (Doc. No. 34-1 (“Darling Decl.“) at ¶ 5.) Attorney Darling-Alderton also declares that, during “a conference call with all parties to this action for purposes of the Rule 26f meeting and preparation of the joint report[,] . . . Mr. Grebow insisted that we include a date certain for the motion for summary judgment in this action, so that the coverage issue would be decided before trial commenced in the Anderson Action in January of 2020.” (Darling Decl. at ¶ 7.) Attorney Darling-Alderton further declares that between July of 2019 to when Sports Surfacing filed its opposition to the pending motion, attorney Grebow never indicated that he intended on filing a motion or opposition contesting this court‘s jurisdiction. (Id. at ¶¶ 7–14.) It therefore appears clear that the parties in the underlying action agreed to postpone trial in that
Accordingly, the court will not decline to exercise its jurisdiction over this matter.
CONCLUSION
For the reasons set forth above, EMC‘s motion for summary judgment (Doc. No. 31) is granted and the Clerk of the Court is directed to close this case.
IT IS SO ORDERED.
Dated: December 27, 2019
UNITED STATES DISTRICT JUDGE