Great America Insurance Company et al v. Chang et al

Filing 77

Order by Hon. Samuel Conti granting 64 Motion for Partial Summary Judgment.(sclc1, COURT STAFF) (Filed on 6/19/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court

For the Northern District of California

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GREAT AMERICAN INSURANCE
COMPANY, and GREAT AMERICAN
INSURANCE COMPANY OF NEW YORK,

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Plaintiffs,

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v.
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MICHAEL CHANG, d/b/a SUNRISE
CLEANERS, INC., and ROXANNE
CHANG, d/b/a SUNRISE CLEANERS,
INC.,

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Defendants.

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) Case No. 12-00833-SC
)
) ORDER GRANTING MOTION FOR
) PARTIAL SUMMARY JUDGMENT
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I.

INTRODUCTION
This case involves an insurance coverage dispute arising from

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underlying state court actions and government orders concerning the

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alleged contamination of a property owned by Defendant Michael

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Chang (the "Property").

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Defendant Roxanne Chang (collectively, the "Changs"), operated a

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dry cleaning business on the property from 1977 to 1981.

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this period, the Property was insured by the above-captioned

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plaintiffs (collectively, "Great American").

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Great American seeks a declaration that it does not owe a duty to

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defend or indemnify the Changs in the underlying actions.

Defendant Michael Chang and his wife,

During

Through this action,

Now

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before the Court is Great American's motion for partial summary

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judgment.

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Nos. 68 ("Opp'n"), 69 ("Reply"), and appropriate for determination

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without oral argument per Civil Local Rule 7-1(b).1

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reasons set forth below, Great American's motion for partial

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summary judgment is GRANTED.

ECF No. 64 ("MSJ").

The motion is fully briefed, ECF

For the

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II.

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BACKGROUND
The Property at issue in this case is located on Baldwin

United States District Court

For the Northern District of California

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Avenue in San Mateo, California.

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("Answer") ¶ 4.

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contaminated with PCE and stoddard solvent due to leaking

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underground storage tanks.

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1977, along with a dry cleaning business already located on the

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Property.

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from 1977 until about 1981 under the name Sunrise Cleaners.

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1981, Michael Chang sold the Sunrise Cleaners business, though he

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continued to own the Property and leased the premises to others.

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Soon after the Changs acquired the Property, Great American

ECF Nos. 16 ("Compl.") ¶ 4, 29

Various parties have alleged that the Property is

The Changs acquired the Property in

Michael Chang operated a dry cleaners on the Property
In

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issued a policy to Sunrise Cleaners for a policy period of December

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15, 1977 to December 15, 1980.

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policy to Michael Chang for a policy period of December 15, 1980 to

Great American later issued a

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1

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The Changs' opposition brief exceeds the page limits set forth in
Civil Local Rule 7-3(a). Further, the Changs filed a surreply
brief without seeking leave of the Court, in violation of Civil
Local Rule 7-3(d). ECF No. 73 ("Surreply"). The Surreply does not
present any evidence or authority that was previously unavailable
to the Changs. Nor does it respond to new arguments raised on
reply. In the interest of justice, the Court has reviewed all of
the arguments raised by the Changs. However, the Court advises the
Changs to comply with the Civil Local Rules going forward, as
future violations may have consequences.

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December 15, 1983.

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additional insured under the policies.

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the Changs retained a copy of the policies, but the parties have

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stipulated to some of the policy terms, including policy limits of

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$500,000 for property damage.

The Changs claim that Roxanne Change is an
Neither Great American nor

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The Changs later leased the Property to Bilal Kartal

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("Kartal"), who opened an Italian restaurant on the premises.

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2006, Kartal brought a nuisance action against the Changs in the

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California Superior Court for San Mateo County in connection with

In

United States District Court

For the Northern District of California

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an alleged solvent leak on the Property (the "Kartal Action").

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No. 65 ("RJN") Ex. 1 ("Kartal Compl.").

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following: At the time the Changs purchased the Property in 1977,

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they knew or should have known that one or more storage tanks

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containing dry cleaning solvent were buried under a previously

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unused portion of the Property behind what is now the restaurant.

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Id. ¶ 3.

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¶ 1.

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central to the restaurant's business.

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2003, customers began noticing a peculiar odor coming from the

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banquet area, which was caused by solvents leaking from the buried

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storage tanks.

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customers away from the restaurant.

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ECF

Kartal alleges the

In 1992, Kartal built a patio behind the restaurant.

Id.

The patio was later enclosed and became a banquet area

Id. ¶ 6.

Id.

In or around 2002 or

The odor became worse over time and drove
Id. ¶¶ 7-8.

At some unspecified time, the California Regional Water

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Quality Control Board (the "State Water Board") began to

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investigate the alleged contamination at the Property.

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Decl. Ex. 1.2

Zacharias

On December 28, 2007, the Changs tendered the Kartal

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2

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Catherine Zacharias ("Zacharias"), a claims manager at Great
American who has worked on the Changs' claims, filed a declaration

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Action, along with the state investigation, to Great American for

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defense and indemnity.

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the Changs informed Great American: "The local Environmental Health

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Department, [State Water Board] and federal Environmental

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Protection Agency are investigating the liability of your insured.

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Governmental agencies have ordered action on the part of the

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responsible parties to investigate the occurrence and mitigate the

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damages to groundwater and off-site properties."

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American initially denied the tender with respect to both the

United States District Court

For the Northern District of California

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Id.

As to the government investigation,

Id.

Great

Kartal Action and the government investigation.

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After Great American denied the tenders, the Changs filed

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cross-complaints in the Kartal Action against various third

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parties, including Grace Yamaguchi ("Yamaguchi"), who allegedly

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operated a dry cleaners on the property before the Changs, and

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Christopher Chang (no relation to the Changs), who allegedly

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operated a dry cleaners on the property after the Changs.

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3-4.

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Changs alleged that Yamaguchi and Christopher Chang caused the

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solvent contamination on the Property and asserted claims for

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negligence, indemnity, and contribution, among other things.

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Ex. 4.

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other damages incurred due to Cross-Defendants['] [conduct]," and

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"damages, defense costs and potential liability, if any."

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20-21.

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RJN Exs.

In their amended cross-complaint in the Kartal Action, the

RJN

The Changs prayed for "response costs, lost rents and all

Id. at

On February 11, 2009, the court in the Kartal Action entered
"Pre-Trial Order No. 5," which stated: "In order to avoid

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in support of Great American's motion for summary judgment.
No. 64-6 ("Zacharias Decl.").

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ECF

in this action, it shall be deemed that . . . [a]ll Defendants and

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Cross-Defendants have filed Cross-Complaints for implied equitable

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indemnity and for a determination of comparative negligence against

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all of the Defendants and Cross-Defendants."

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Chang then requested that Great American indemnify him with respect

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to the cross-complaints that were deemed filed in the Kartal

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Action.

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denied that the "deemed" affirmative cross-complaints gave rise to

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United States District Court

unnecessary filing of pleadings by Defendants and Cross-Defendants

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For the Northern District of California

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a duty to defend, but agreed to provide a defense subject to a full

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reservation of rights.

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Compl. ¶ 83; Answer ¶ 83.

RJN Ex. 10.

Michael

In response, Great American

Id.

Yamaguchi and Christopher Chang filed actual cross-complaints

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against the Changs in late 2010.

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6 ("Yamaguchi X-Compl.").

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defendant Eun Kyung Lee ("Lee"), who allegedly operated a dry

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cleaning business on the Property after Christopher Chang, from

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approximately 1989 until 1996.

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X-Compl. ¶ 21.

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essentially sought indemnity and contribution from the Changs for

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any damages for which they were held liable.

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also filed a cross-complaint for indemnity and contribution against

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the Changs, Yamaguchi, and Christopher Chang.

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Compl.").

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property damage, contents damage, loss of value, loss of use, loss

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of rents, repair costs, and other economic and non-economic

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damages."

RJN Exs. 5 ("C. Chang X-Compl."),

These cross-complaints also named as a

C. Chang X-Compl. ¶ 23; Yamaguchi

Yamaguchi and Christopher Chang's cross-complaints

In March 2011, Lee

RJN Ex. 7 ("Lee X-

Additionally, Lee sought "damages in the form of

Id. at 5.

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Apparently, the State Water Board continued to investigate

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contamination on the Property as the Kartal Action was ongoing.

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issued by the State Water Board.

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10, 2009 letter from the Changs' counsel, the Changs applied for

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funding from the California Underground Storage Tank Fund (the

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"Storage Tank Fund") for pollution clean-up on the Property.

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Zacharias Decl. Ex. 4.

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application, and the Changs requested that Great American pay for

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legal fees and costs incurred to challenge that denial.

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Subject to a complete reservation of rights, Great American agreed

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United States District Court

The parties have not filed with the Court any documents actually

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For the Northern District of California

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to pay, and has paid, certain fees and costs incurred by the Changs

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to prosecute the litigation against the State Water Board.

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Zacharias Decl. ¶ 10.

However, according to an April

The State Water Board denied the

Id.

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At some unspecified time, the Changs conducted a voluntary

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site investigation and recommended further investigation of alleged

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PCE contamination on the Property.

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Sometime in 2010, the State Water Board approved the proposed

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investigation and asked the Changs to submit a work plan.

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Changs requested that Great American pay the costs of the site

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investigation approved by the State Water Board.

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11, Ex. 5.

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connection with the investigation, subject to a full reservation of

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rights.

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Compl. ¶ 92; Answer ¶ 92.

Id.

The

Zacharias Decl. ¶

Great American agreed to pay certain costs in

Id. ¶ 11.

Great American brought this action against the Changs in

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February 2012.

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causes of action for, inter alia, declaratory relief, reimbursement

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of money paid, and breach of contract.

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seeks a declaration that it does not owe the Changs a duty to

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defend or indemnify as to the Kartal Action or the government

Great American's amended complaint asserts nine

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Great American essentially

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orders.

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will pay on behalf of the Changs.

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for breach of contract and tortious breach of the covenant of good

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faith and fair dealing.

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summary judgment on its claims and the Changs' counterclaims.

It also seeks reimbursement of the amounts it has paid or
The Changs have counterclaimed

Great American now moves for partial

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III. LEGAL STANDARD

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Entry of summary judgment is proper "if the movant shows that

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there is no genuine dispute as to any material fact and the movant

United States District Court

For the Northern District of California

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is entitled to judgment as a matter of law."

Fed. R. Civ. P.

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56(a).

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require a directed verdict for the moving party.

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Liberty Lobby, Inc., 477 U.S. 242, 251 (1986).

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mandates the entry of summary judgment . . . against a party who

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fails to make a showing sufficient to establish the existence of an

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element essential to that party's case, and on which that party

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will bear the burden of proof at trial."

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477 U.S. 317, 322 (1986).

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believed, and all justifiable inferences are to be drawn in his

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favor."

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of a scintilla of evidence in support of the plaintiff's position

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will be insufficient; there must be evidence on which the jury

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could reasonably find for the plaintiff."

Summary judgment should be granted if the evidence would
Anderson v.
Thus, "Rule 56[ ]

Celotex Corp. v. Catrett,

"The evidence of the nonmovant is to be

Anderson, 477 U.S. at 255.

However, "[t]he mere existence

Id. at 252.

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IV.

DISCUSSION
Great American has asked the Court to render summary judgment

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on ten issues: (1) & (2) whether Great American has a duty to

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defend or indemnify the Changs with respect to government agency

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duty to defend or indemnify the Changs with respect to the

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complaint in the Kartal Action; (5) whether Great American has duty

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to pay the Changs' expenses of pursuing claims against other

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parties in the Kartal Action; (6) whether Great American has a duty

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pay the Changs' expenses in pursuing ligation against the Storage

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Tank Fund; (7) & (8) whether Great American has a duty to defend or

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indemnify as to the cross-complaints against the Changs in the

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Kartal Action; (9) & (10) whether the Changs may recover against

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United States District Court

orders to address pollution; (3) & (4) whether Great American has a

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For the Northern District of California

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Great American on their counterclaims for breach of contract and

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breach of the covenant of good faith and fair dealing.

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A.

The Duty to Defend and the Duty to Indemnify

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Before considering the particular issues raised by Great

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American's motion for partial summary judgment, the Court reviews

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some general principles concerning the duty to defend and the duty

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to indemnify.

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insured for risks covered by the relevant insurance policy.

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duty to indemnify and the duty to defend are correlative, but are

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not coterminous.

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Super. Ct. (Powerine Oil Co.) ("Powerine"), 24 Cal. 4th 945, 958

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(Cal. 2001).

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damages are fixed in their amount, the duty to defend may arise as

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soon as damages are sought in some amount."

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omitted).

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duty to indemnify.

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1076, 1081 (Cal. 1993).

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a claim that creates even the potential for liability, and so an

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insurer may owe its insured a duty to defend in a case where no

An insurer generally has a duty to indemnify its
The

Certain Underwriters at Lloyd's of London v.

"Whereas the duty to indemnify can arise only after

Id. (citations

Further, the duty to defend is broader in scope than the
Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th
An insurer must defend its insured against

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damages are ultimately awarded.

Id.

Moreover, in "mixed actions"

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-- actions in which some claims are at least potentially covered by

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an insurer and the others are not -- "the insurer has a duty to

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defend the action in its entirety."

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4th 35, 47-48 (Cal. 1997).

Buss v. Super. Ct., 16 Cal.

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B.

Duty to Defend as to the Government Orders

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Great American argues that, under the stipulated language of

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the policies, it has no duty to defend the Changs with respect to

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government orders pertaining to pollution.

The policies state:

United States District Court

For the Northern District of California

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"The company shall have the right and duty to defend any suits

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against the insured seeking damages on account of such bodily

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injury or property damage . . . ."

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018, Ex. 3 at EXH 045.

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Union Fire Insurance Co., 18 Cal. 4th 857 (Cal. 1998), Great

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American argues that the duty to defend "suits" does not include

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the duty to pay costs of responding to government agency orders.

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Opp'n at 15.

Zacharias Decl. Ex. 2 at EXH

Relying on Foster-Gardner, Inc. v. National

In Foster-Gardner, the California Department of Toxic

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Substances Control ("DTSC") found that the plaintiff had incurred

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liability for cleaning up contamination on the site of his

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wholesale pesticide and fertilizer business.

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63.

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insurers, which had issued policies providing that they had a "duty

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to defend any suit against the insured seeking damages . . . ."

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Id. at 863.

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did not have a duty to defend because the DSTC Order did not

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constitute a "suit," which the court defined as "a court proceeding

18 Cal. 4th at 861-

The plaintiff tendered the defense of the DTSC order to his

The California Supreme Court held that the insurers

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initiated by the filing of a complaint."3

Id. at 887.

In response, the Changs cite to an earlier California Supreme

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Court decision, AIU Insurance Co. v. Superior Court, 51 Cal. 3d

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807, 818 (Cal. 1990).

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local administrative agencies brought third-party suits against an

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insured for alleged violations of various environmental laws and

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the alleged contamination of seventy-nine different hazardous waste

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sites.

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its insurer seeking a judicial declaration that it was entitled to

Opp'n at 6.

51 Cal. 3d at 815.

In AIU, the United States and

The insured brought an action against

United States District Court

For the Northern District of California

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coverage for costs it might have become obligated to pay as a

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result of injunctive relief or reimbursement ordered in the third-

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party suits.

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entitled to summary adjudication, because the insured's liability

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in the third-party suits could constitute damages under the

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insurance policies.

Id. at 816.

The court found that the insurer was not

Id. at 843.

The Court finds that AIU is inapposite here.

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Unlike the

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insured in AIU, there is no indication that the Changs have been

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sued in court by a government agency.

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Court observed in Foster-Gardner: "AIU's holding -- that there is

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coverage for certain damages sought in a third-party suit

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prosecuted [by a government agency] -- has nothing to do with

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whether the carrier has a duty to defend when no third-party suit

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has been filed."

As the California Supreme

18 Cal. 4th at 857 (quotations omitted).

The Changs also suggest that it is irrelevant whether the

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government agency orders constitute suits for the purposes of the

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Courts in other states have adopted a broader interpretation,
holding that an agency proceeding does constitute a suit for the
purposes of triggering insurance coverage. See Pac. Employers Ins.
Co. v. Servco Pac., Inc., 273 F. Supp. 2d 1149, 1156 (D. Haw.
2003).

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policies, since "there are pleadings before the San Mateo County

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Superior Court that are asking the court to hold the Changs liable

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for compliance with an administrative order to investigate

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pollution-impacted third party properties . . . ."

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The Changs appear to be referring to the cross-complaints filed in

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the Kartal Action.

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in the Kartal Action is a separate question from whether it has a

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duty to defend with respect to the government agency orders.

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Opp'n at 6.

But whether Great American has a duty to defend

Accordingly, the Court GRANTS Great American's motion for

United States District Court

For the Northern District of California

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summary judgment as to its duty to defend the Changs against the

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government orders pertaining to pollution.

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C.

Duty to Indemnify as to the Government Orders

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The policies state: "[Great American] agrees . . . [t]o pay on

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behalf of the insured all sums which the insured shall become

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legally obligated to pay as damages because of property damage

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caused by the occurrence."

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Powerine, Great American contends that this language does not

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create a duty to indemnify the Changs as to the government orders.

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MSJ at 15-16.

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Compl. ¶ 31; Answer ¶ 31.

Relying on

Powerine concerned whether an insurer was liable for costs

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incurred by the insured in complying with orders issued during

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administrative environmental proceedings.

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Like the policies at issue here, the Powerine policy required the

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insurer to defend "any suit seeking damages" and to "pay all sums

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that the insured becomes legally obligated to pay as damages."

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at 950.

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discussed in Section IV.B supra, the California Supreme Court held

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that the policy only created a duty to pay money ordered by a court

24 Cal. 4th at 952-55.

Id.

Based on its earlier holding in Foster-Gardner, which is

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and did not extend to any expenses required by an administrative

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agency pursuant to an environmental statute.

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Court reasoned that the duty to defend is broader than the duty to

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indemnify.

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not broad enough to extend beyond a civil action pending in court,

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the duty to indemnify is not broad enough to extend beyond money

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damages awarded by a court.

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Id. at 961.

Id. at 951.

The

Thus, if an insurer's duty to defend is

Id. at 961.

The Changs appear to argue that the government orders involve
damages because of the claims and counterclaims asserted in the

United States District Court

For the Northern District of California

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Kartal Action.

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that the Kartal Action creates the potential for a court judgment

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finding them liable for the cleanup ordered by the government.

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This argument is unavailing for the reasons set forth in Section

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IV.B supra.

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orders, not the pleadings in the Kartal Action, create a duty to

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indemnify.

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as to the Kartal Action below.

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See Opp'n at 7.

The Changs' reasoning seems to be

Id.

The pertinent question here is whether the government

The Court addresses Great American's duty to indemnify

Since there is no indication that the government has brought a

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civil action against the Changs, the Court finds that Great

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American does not have a duty to indemnify the Changs with respect

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to the government orders.

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D.

Duty to Defend and Indemnify as to Kartal's Complaint

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Great American contends that it does not have a duty to defend

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or indemnify the Changs as to the claims asserted against them by

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Kartal, because the damages alleged in Kartal's complaint occurred

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after the expiration of the policy period.

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American points out that the Changs' policy period ran from 1977 to

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1983, while Kartal alleges that he was first injured by

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MSJ at 16-19.

Great

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contamination caused by the leaking storage tanks in or around

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2002, when his customers first noticed a peculiar odor emanating

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from the property.

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to coverage since the loss of use asserted by Kartal was allegedly

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caused by the Changs' failure to deal with the underground storage

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tanks when they purchased the property in 1977.

Id.

The Changs respond that they are entitled

Opp'n at 8-9.

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The Great American policies issued to the Changs constitute

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third-party liability insurance, since they provide coverage for

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liability of the insured to a third party, as opposed to coverage

United States District Court

For the Northern District of California

10

for loss or damage sustained directly by the insured.

See

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Zacharias Decl. at EXH 019 ("This policy does not apply to . . .

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property damage to property owned or occupied by or rented to the

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insured . . . .").4

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on behalf of the insured all sums which the insured shall become

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legally obligate to pay as damages because of property damage

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caused by an occurrence" and "to defend any suits against the

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insured seeking damages on account of . . . property damage."

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Zacharias Decl. Ex. 1 at EXH 018.

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damage" to mean:

The policies obligate Great American "[t]o pay

The policies define "property

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(1) physical injury to or destruction of tangible
property which occurs during the policy period
including the loss of use thereof at any time
resulting therefrom, or (2) loss of use of tangible
property which has not been physically injured or
destroyed provided such loss of use is cause by an
occurrence during the policy period.

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22
23
24
25
26
4

27
28

See also Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th
645, 663-666 (Cal. 1995) (discussing the distinction between firstparty and third-party liability insurance).

13

1

Id. at EXH 021.

They define "occurrence" to mean "an accident,

2

including continuous or repeated exposure to conditions, which

3

results during the policy period in bodily injury or property

4

damage neither expected nor intended from the standpoint of the

5

insured."

Id.

The California Supreme Court addressed almost identical policy

6
7

language in the context of third-party liability insurance in

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Montrose.5

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or progressing over a number of years and an insured who had

Montrose involved property damage that was continuous

United States District Court

For the Northern District of California

10

obtained a series of successive liability policies from multiple

11

insurers while the property damage was ongoing.

12

655.

13

last few years of this period had a duty to defend suits alleging

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continuous and progressive property damage that resulted from

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hazardous chemicals that the insured started manufacturing before,

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but continued manufacturing during, the policy period.

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661.

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occurrence for the purposes of the policy when the property damage

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manifests:

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22

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25
26
27
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At issue was whether an insurer whose policy covered only the

Id. at 656-

The court held that a continuous condition becomes an

Th[e] policy language unambiguously distinguishes
between the causative event -- an accident or
"continuous and repeated exposure to conditions" -and the resulting "bodily injury or property damage."
It is the latter injury or damage that must "occur"

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10 Cal. 4th at

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The insurer in Montrose contracted to "pay on behalf of the
insured all sums which the insured shall become legally obligated
to pay as damages because of . . . bodily injury, or . . . property
damage to which this insurance applies, caused by an occurrence . .
. ." 10 Cal. 4th at 668. The policy defined "property damage" as
"(1) physical injury to or destruction of tangible property which
occurs during the policy period, including the loss of use thereof
at any time resulting therefrom . . . ." Id. Occurrence meant "an
accident, including continuous or repeated exposure to conditions,
which results in bodily injury or property damage neither expected
nor intended from the standpoint of the insured." Id. at 669.

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during the policy period, and "which results" from the
accident or "continuous and repeated exposure to
conditions."

1
2
3

Id. at 669.
The Montrose court found that its decision was confirmed by

4
5

prior case law, including Remmer v. Glens Falls Indemnity Co., 140

6

Cal. App. 2d 84 (Cal. Ct. App. 1956).

7

had obtained property insurance for the period of 1945 through

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1948.

9

the insureds graded and filled portions of their property.

140 Cal. App. 2d at 85.

Id.

In Remmer, the insureds

In 1947, during the policy period,
Id.

In

United States District Court

For the Northern District of California

10

1952, after the policy period, a landslide on the property damaged

11

an adjacent lot.

12

nuisance action against the insureds, and the insureds tendered the

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suit to their insurer.

14

covered because "the occurrence of an accident within the meaning

15

of the policy is not the time the wrongful act was committed"

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(i.e., the grading of the property in 1947), "but the time when the

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[third] party was actually damaged" (i.e., the landslide in 1952).

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Id. at 88.

19

Id.

The owner of the adjacent lot brought a

Id.

The Court held that the loss was not

Interpreting the language of the policies pursuant to Montrose

20

and Remmer, Great American does not owe a duty to defend or

21

indemnify the Changs as to Kartal's complaint.

22

policies' definition of "property damage," Kartal alleges that the

23

physical injury or destruction of tangible property manifested as

24

early as 2002, when Kartal first started losing customers due to

25

the odor caused by the solvent leak.

26

"accident" about which Kartal complains happened as early as 2002.

27

The policies expired in 1983, about nineteen years prior to the

28

events that could potentially trigger coverage.

15

With respect to the

Likewise, the "occurrence" or

The Changs argue that Kartal's complaint alleges occurrences

1
2

in 1977, including failure to discover the storage tanks and

3

failure to discover the contamination at the time of the purchase

4

that proximately caused the property damage.

5

California Supreme Court rejected this same reasoning in Montrose

6

when it found that the "causative event" does not constitute an

7

occurrence for the purpose of a similarly worded policy.6

8

4th at 669.

9

allegedly occurred, but when the third party was allegedly damaged.

Opp'n at 8.

But the

10 Cal.

The pertinent question is not when the negligent act

United States District Court

For the Northern District of California

10

See id.

In this case, there is no dispute the Kartal alleges that

11

he was damaged well after the expiration of the policy period.
The Changs also argue that the policies provide coverage for

12
13

loss of use that occurs "at any time."

14

the policies define property damage as, among other things,

15

"physical injury to or destruction of tangible property which

16

occurs during the policy period including the loss of use thereof

17

at any time resulting therefrom."

18

The Changs' interpretation of this language is unpersuasive.

19

the "loss of use" can occur "at any time," it must result from

20

property damage "which occurs during the policy period."

21

case, Kartal could not have possibly suffered property damage

22

during the policy period because he leased the Property over a

23

decade after the policy period's expiration.

24

6

25
26
27
28

Opp'n at 9.

Specifically,

Zacharias Decl. Ex. 1 at EXH 21.
While

In this

Even if the Changs

Contrary to the Changs' suggestion, State v. Continental
Insurance. Co., 55 Cal. 4th 186 (Cal. 2012), does not hold
otherwise. See Opp'n at 9. Continental Insurance stands for the
proposition that an insurer may be held liable for ongoing property
damage that commenced prior to the policy period as long as some of
the continuous property damage occurred during the policy period.
55 Cal. 4th at 199-200. In this case, there is no evidence that
any of the property damage alleged occurred during the Great
American policy period.

16

1

suffered some property damage from the leaking storage tanks during

2

the policy period, the policies only provide coverage for damage to

3

third parties.7

4

For these reasons, the Court finds that Great American does

5

not have a duty to defend or indemnify as to Kartal's complaint.

6

E.

Duty to Pay Costs Incurred Prosecuting Cross-Complaints

7

in the Kartal Action and Seeking Recovery from the

8

Storage Tank Fund

9

Next, the Court must determine whether Great American must pay

United States District Court

For the Northern District of California

10

the costs incurred by the Changs in pursuing cross-complaints

11

against various third parties in the Kartal Action or seeking

12

recovery from the Storage Tank Fund.

13

favor of finding a duty here are unpersuasive.

14

The Changs' arguments in

First, the Changs argue that Great American is obligated to

15

fund their cross-complaints because they are an essential part of

16

the Changs' defense in the Kartal Action.

17

under California law, an insurer does not have a duty to prosecute

18

a counterclaim or a cross-complaint on behalf of the insured absent

19

some contractual provision requiring such action.

20

Corp. v. Truck Ins. Exch., 91 Cal. App. 4th 1093, 1105-06 (Cal. Ct.

21

App. 2001).

22

provision.

23

American does not owe the Changs a duty to defend or indemnify with

24

respect to Kartal's claims against them.

Opp'n at 10.

However,

See James 3

The Changs have pointed to no such contractual
In any event, as discussed in Section IV.C supra, Great

25
7

26
27
28

The Changs argue that the definition of "property damage" used by
Great American in policies issued after 1993 shows that their
interpretation is correct. Surreply at 8. As an initial matter,
the Court is only concerned with the language in the policies at
issue. Further, even if the revised language were used in the
relevant policies, the Court would reach the same conclusion.

17

1

The Changs also argue that the California Supreme Court's

2

decision in Ameron International Corporation v. Insurance Co., 50

3

Cal. 4th 1370 (Cal. 2010), requires Great American to provide

4

coverage.8

5

Supreme Court held that administrative adjudicative proceedings

6

before an administrative law judge, which involved twenty-two days

7

of trial, numerous witnesses, and substantial evidence, constituted

8

a "suit" triggering an insurer's duty to defend.

9

4th at 1374.

Opp'n at 12.

The Court disagrees.

In Ameron, the

Ameron, 50 Cal.

As the Changs point out, Ameron could be construed as

United States District Court

For the Northern District of California

10

"emphasizing form over substance."

11

opinion suggests that an insurer has a duty to fund a cross-

12

complaint or any other type of offensive action by an insured for

13

contribution against a third party.

14

However, nothing in that

Finally, the Changs argue that Great American has a duty to

15

fund their action against the Storage Tank Fund because Great

16

American "voluntarily and in writing" agreed to advance the Changs'

17

costs in that action.

18

concede, Great American advanced those costs under a full

19

reservation of rights.

20

duty to defend merely because it provides a defense under a

21

reservation of rights.

22

reimbursement from the insured for defending claims that are not

23

even potentially covered.

24

///

Opp'n at 12-13.

However, as the Changs

See Opp'n at 13.

An insurer does not owe a

In fact, an insurer may later seek

See Buss, 16 Cal. 4th at 48.

25
8

26
27
28

The Changs cite Ameron International Corp. v. Insurance Co., 150
Cal. App. 4th 1050 (Cal. Ct. App. 2007), the unpublished opinion by
the California Court of Appeal that was later reversed by the
California Supreme Court; however, they appear to be referring to
the California Supreme Court opinion.

18

1

Accordingly, the Court finds that Great American does not owe

2

the Changs a duty to defend or indemnify with respect to their

3

cross-complaints against third parties in the Kartal Action or

4

their action against the Storage Tank Fund.

5

F.

Duty to Defend and Indemnify as to the Cross-Complaints

6
7

Filed by Christopher Chang, Yamaguchi, and Lee
Next, the Court considers whether Great American has a duty to

8

defend or indemnify the Changs as to the cross-complaints filed

9

against them by Christopher Chang, Yamaguchi, and Lee in the Kartal

United States District Court

For the Northern District of California

10

Action.

11

to defend "any suits against the [Changs] seeking damages," and to

12

pay all sums "the [Changs] shall become legally obligated to pay as

13

damages."

14

trigger coverage because they do not seek affirmative recovery from

15

the Changs.

16

merely seek to reduce any liability the cross-complaintants may be

17

found to have to the Changs in the Kartal Action.

As discussed above, the policies obligate Great American

Great American argues that the cross-complaints do not

MSJ at 20.

Rather, according to Great American, they

Id.

18

Great American relies on the California Court of Appeal's

19

decision in CDM Investors v. Travelers Casualty and Surety Co., 139

20

Cal. App. 4th 1251 (Cal. Ct. App. 2006).

21

concerned alleged contamination on a commercial property owned by

22

the plaintiffs.

23

Water Board ordered the plaintiffs to test the property for

24

pollutants, the plaintiffs sued their former tenants under CERCLA

25

to apportion liability for response costs.

26

tenants raised affirmative defenses seeking to apportion

27

responsibility to plaintiffs.

28

those affirmative defenses were the functional equivalent of a

MSJ at 21.

CDM, 139 Cal. App. 4th at 1257.

Id.

19

That case

After the State

Id. at 1266.

The

The plaintiffs argued that

1

counterclaim and that the plaintiffs' insurer had a duty to defend

2

as to those affirmative defenses.

3

that an affirmative defense would only constitute a suit seeking

4

damages for the purposes of the policy if the affirmative defense

5

"would unquestionably have been a suit for damages if asserted in a

6

court of law."

7

defenses asserted by the tenants did not trigger coverage because

8

they were "purely defensive":

Id. at 1269.

Id. at 1266-67.

The court held

The court found that the affirmative

9
Here, plaintiffs' tenants had no independent suit
against [plaintiffs] that they sought to reduce to a
monetary value by asserting it as a setoff payment for
the liability that [plaintiffs] was alleging against
them. They had no claim whatsoever and could not have
sued
[plaintiffs]
for
anything.
Regardless
of
plaintiffs' characterization of a CERCLA proceeding as
an action to apportion liability, the reality of CDM's
CERCLA case is that [plaintiffs] sued the tenants for
indemnity as to an obligation imposed upon [them] by
the [State Water] Board and the tenants countered with
an indemnity claim against [plaintiffs].
In this
posture, the tenants' indemnity claim was purely
defensive -- it sought and functioned only to reimpose
upon [plaintiffs] what [plaintiffs] w[ere] already
legally obligated for.

United States District Court

For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21

Id.
Like the affirmative defenses in CDM, the cross-complaints in

22

this action are almost exclusively defensive.

The cross-complaint

23

filed by Yamaguchi merely seeks to hold the Changs liable or

24

partially liable for any judgments rendered against Yamaguchi.

25

Yamaguchi X-Compl. (praying that the cross-defendants be adjudged

26

liable to Yamaguchi for "total," "partial," and "equitable or

27

comparative indemnity").

28

Christopher Chang.

See

As does the cross-complaint filed by

See C. Chang X-Compl.

20

Lee's cross-complaint is

1

slightly different.

2

Changs, Lee asserts "damages in the form of property damage,

3

contents damage, loss of value, loss of use, loss of rents, repair

4

costs, and other economic and non-economic damages in an amount

5

according to proof."

6

operated a dry cleaners on the property between 1989 and 1996,

7

several years after the Great American policy period, these damages

8

cannot trigger a duty to defend or indemnify under the policies.

9

See Section IV.D supra.

United States District Court

For the Northern District of California

10

In addition to seeking a set-off against the

Lee X-Compl. at 5.

However, since Lee

The Changs' opposition brief provides a confused set of

11

arguments on this issue.

12

Yamaguchi, Christopher Chang, and Lee cross-complaints are "purely

13

defensive," but the Changs then go on to argue that these cross-

14

complaints seek affirmative relief for property damage.

15

Opp'n at 14-15 with id. at 25.

16

inapposite, but then appear to point out the similarities between

17

that case and the instant action.

18

argue, without further explanation, that the cross-complaints

19

should trigger coverage because they are "an essential part of the

20

Changs defense in the underlying Kartal action."

21

again, the Changs urge the Court to place "substance over form,"

22

but they fail to cite any on-point case law which would support

23

their position.

The Changs' surreply brief does little to clarify

24

their position.

In it, the Changs assert that the cross-complaints

25

show the potential for coverage, because they do not allege when

26

the contamination on the property started or stopped.

27

3.

28

"'defensive' in nature."

The Changs repeatedly concede that

Compare

They contend that CDM is

Id. at 15.

The Changs also

Id. at 14.

Once

Surreply at

However, the Changs again concede that the cross-complaints are
Id. at 4.

21

1

For these reasons, the Court finds that Great American does

2

not have a duty to defend or indemnify as to the cross-complaints

3

filed by Yamaguchi, Christopher Chang, and Lee.

4

G.

5

The Changs' Counterclaims for Breach of Contract and
Breach of the Covenant of Good Faith and Fair Dealing

6

Finally, Great American moves for summary judgment on the

7

Changs' two counterclaims.

8

that if the Court finds that Great American does not owe the Changs

9

a duty to defend or indemnify in any of the underlying actions,

MSJ at 24-25.

Great American reasons

United States District Court

For the Northern District of California

10

then the Changs cannot possibly show that Great American breached

11

its duty to defend and indemnify or engaged in bad faith.

12

Changs do not appear to dispute this reasoning.

13

that if the Court does find that Great American owes a duty, then

14

the Court should find that it breached that duty.

15

As Great American has prevailed on all of the issues discussed

16

above, the Court finds that the Changs cannot succeed on their

17

counterclaims.

Id.

The

They merely argue

Opp'n at 16-17.

18
19
20

V.

CONCLUSION
In sum, the Court finds that the Changs' Great American

21

insurance policies, which provided coverage against third-party

22

lawsuits from 1977 to 1983, do not provide coverage for lawsuits

23

and government actions commenced over twenty years after the

24

policies' expiration.

25

American's motion for partial summary judgment.

26

that Great American is entitled to partial summary judgment of the

27

following issues:

Accordingly, the Court GRANTS Great

28

22

The Court finds

1

•

Under the language of its insurance policies, Great American

2

has no duty to defend or indemnify the Changs with respect to

3

government orders to address pollution.

4

•

Under the language of its insurance policies, Great American

5

has no duty to defend or indemnify the Changs as to the

6

complaint filed by Kartal in the Kartal Action.

7

•

Under the language of its insurance policies, Great American

8

has no duty to defend or pay expenses incurred by the Changs

9

with respect to cross-complaints the Changs filed against

United States District Court

For the Northern District of California

10
11

other parties in the Kartal Action.
•

Under the language of its insurance policies, Great American

12

has no duty to pay expenses incurred by the Changs in seeking

13

recovery from the California Underground Storage Tank Fund.

14

•

Under the language of its insurance policies, Great American

15

has no duty to defend or indemnify the Changs as to cross-

16

complaints filed against the Changs in the Kartal Action.

17

•

Because Great American is entitled to partial summary judgment

18

of the above issues, the Changs are not entitled to any

19

recovery from Great American under their counterclaims for

20

breach of contract and breach of the covenant of good faith

21

and fair dealing.

22
23

IT IS SO ORDERED.

24
25
26

Dated:

June 19, 2013
UNITED STATES DISTRICT JUDGE

27
28

23