Saarman Construction, Ltd v. Ironshore Specialty Insurance Company

Filing 136

AMENDED ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS MOTION FOR PARTIAL SUMMARY JUDGMENT re 35 MOTION for Partial Summary Judgment filed by Saarman Construction, Ltd, 34 MOTION for Summary Judgment filed by Ironshore Specialty Insurance Company, 130 MOTION for Reconsideration filed by Ironshore Specialty Insurance Company. Signed by Judge Jon S. Tigar on January 31, 2017. (wsn, COURT STAFF) (Filed on 1/31/2017)

1
2
3
4

UNITED STATES DISTRICT COURT

5

NORTHERN DISTRICT OF CALIFORNIA

6
SAARMAN CONSTRUCTION, LTD,

7

Case No. 15-cv-03548-JST

Plaintiff,
8
v.
9
IRONSHORE SPECIALTY INSURANCE
COMPANY,

10

Defendant.

United States District Court
Northern District of California

11

AMENDED ORDER GRANTING
DEFENDANT'S MOTION FOR
SUMMARY JUDGMENT AND
DENYING PLAINTIFF’S MOTION FOR
PARTIAL SUMMARY JUDGMENT1
Re: ECF Nos. 34, 35, 130

Before the Court are Defendant Ironshore Specialty Insurance‘s Motion for Summary

12
13

Judgment and Plaintiff Saarman Construction‘s Motion for Partial Summary Judgment. The Court

14

grants Ironshore‘s motion and denies Saarman‘s motion.

15

I.

BACKGROUND

16

A.

The Condominium Repairs

17

The Westborough Court Condominiums, located in the City of South San Francisco, were

18

developed and constructed in the late 1990‘s. ECF No. 34-5 at 2. Almost immediately after

19

construction, the condominiums experienced significant water intrusion and resultant damage. Id.

20

In 2006, the Westborough Court Condominiums Homeowner‘s Association retained Plaintiff

21

Saarman Construction to be the general contractor responsible for conducting various repairs to

22

the exterior of the buildings. Id. Saarman subsequently performed this remedial construction

23

work at the property in 2006 and 2007. See id.; ECF No. 1 at ¶ 14.

24

B.

The Underlying Action

25

John and Stella Lee owned a unit in the Westborough Court Condominiums. ECF No. 34-

26
27
28

1

This order amends the Court‘s prior order, ECF No. 87, to reflect the Court‘s grant of
Ironshore‘s motion for reconsideration, ECF No. 130. The Court granted the motion for
reconsideration by separate order.

1

5 at 34, ¶ 5. The Lees leased the unit to Tiffany Jane Molock. Id. at ¶ 6. At some point, Molock

2

found mold in her unit.2 In 2011, Molock sued the Lees, the Homeowner‘s Association, and other

3

defendants in San Mateo County Superior Court. See id. at 6. She sought damages for several

4

defects in the unit, including mold, plumbing leaks, and water intrusion. Id. at 9, ¶ 13. Molock

5

eventually settled her claims. ECF No. 34-6 at 5.
The Lees subsequently cross-claimed against Saarman, the Homeowners Association, and

6

the owners of two neighboring units. See ECF No. 34-5 at 32. The Lees‘ cross-complaint alleged

8

that Saarman and its sub-contractors negligently performed repair work to the building, resulting

9

in water intrusion and water damage to the interior of their unit that contributed to mold growth.

10

ECF No. 34-5 at 43, ¶¶ 34-35 (noting ―resulting omnipresent conditions of mold, toxic mold, and

11
United States District Court
Northern District of California

7

biological growth within the perimeter of the building‖); ECF No. 34-5 at 54, ¶ 71 (―The cross-

12

defendants‘ agents and contractors failed to perform and render services to the building . . . and

13

said failures foreseeably caused water and moisture intrusions into the property resulting [sic] the

14

formation of and amplification of toxic mold within the building.‖); ECF No. 34-5 at 55, ¶ 75 (―As

15

a proximate result of the cross-defendants continuing and intentional trespasses of water and

16

moisture to the property, toxic mold has developed within the property resulting in it being

17

uninhabitable.‖). The Lees claimed both bodily injury and property damage. See id. at 51, ¶ 64

18

(alleging that the cross-defendants‘ negligence ―deprived the Lees of the safe, healthy and

19

comfortable use of the property [and] were injurious to the health of occupants of the property‖).

20

The Lees alleged that they discovered the water damage in June 2011, when they had an

21

environmental firm investigate the property. Id. ¶¶ 24-25. In addition, the Lees requested that

22

Saarman and the other cross-defendants indemnify them against any damages ultimately recovered

23

by Molock. ECF No. 34-5 at 62-63, ¶¶ 104-106. The Homeowner‘s Association filed a similar

24

cross-complaint against Saarman, seeking indemnification and contribution from Saarman. ECF

25
26
27
28

2

The parties dispute when Molock first discovered mold in her apartment. Ironshore argues that,
according to Molock‘s complaint, Molock first discovered mold in her apartment in December
2009. ECF No. 34 at 11; see also ECF 34-5 at 10, ¶ 15. Saarman argues that, according to the
Lees‘ cross-complaint, Molock did not observe any mold until September 14, 2010. See ECF No.
66 at 4; see also ECF No. 34-5 at 37, ¶ 16.
2

1

No. 34-7 at 4-6, ¶¶ 4, 6. Saarman eventually contributed $65,000 to settle the Lees‘ and the

2

HOA‘s claims. ECF No. 34-2 at 17-18.

3

C.

The Ironshore Insurance Policy

4

Ironshore issued Saarman a commercial general liability policy for the policy period of

5

June 30, 2010 to June 30, 2011. See ECF No. 34-4 at 3. Under this agreement, Ironshore agreed

6

to indemnify Saarman for ―sums that the insured becomes legally obligated to pay as damages

7

because of ‗bodily injury‘ or ‗property damage‘ to which this insurance applies.‖ Id. at 6.

8

Ironshore also agreed that it would have the ―duty to defend the insured against any ‗suit‘ seeking

9

those damages.‖ Id. The policy covered ―bodily injury‖ and ―property damage‖ that (1) ―is
caused by an ‗occurrence,‘‖ and (2) ―occurs during the policy period.‖ Id. In turn, the policy

11
United States District Court
Northern District of California

10

defined ―occurrence‖ as ―an accident, including continuing or repeated exposure to substantially

12

the same harmful conditions.‖ Id. at 18. In addition, the policy covered ―completed operations‖—

13

that is, ―all ‗bodily injury‘ and property damage‘ . . . arising out of . . . ‗your product‘ or ‗your

14

work‘ except . . . work that has not yet been completed or abandoned. ECF No. 34-4 at 3, ¶ 4;

15

ECF No. 34-4 at 18, ¶ 16.

16

The policy includes two coverage exclusions that are potentially relevant to this dispute.

17

First, it contains the following ―Mold, Fungi or Bacteria Exclusion‖ (―Mold Exclusion‖), located

18

in an endorsement separate from the main body of the policy:

19
20
21

22
23
24

Notwithstanding anything to the contrary contained in the policy or
any endorsement attached thereto, this insurance does not apply to
and shall not respond to any claim, demand, or ―suit‖ alleging:
1. ―Bodily Injury,‖ ―Property Damage,‖ or ―Personal and
Advertising Injury‖ arising out of, in whole or in part, the actual,
alleged, or threatened discharge, inhalation, ingestion, dispersal,
seepage, migration, release, escape or existence of any mold,
mildew, bacteria or fungus, or any materials containing them, at
any time.

25
2. . . . ; or
26
27
28

3. [A]n obligation to contribute to, share damages with, repay or
indemnify someone else who must pay damages, loss, cost or
expense because of ―Bodily Injury,‖ ―Property Damage,‖ or
3

―Personal and Advertising Injury‖ as set forth in 1., 2.a., or 2.b.
above.

1
2

Id. at 41. In turn, the contract defines a ―suit‖ as ―a civil proceeding in which damages because of

3

‗bodily injury‘ [or] ‗property damage‘ . . . to which this insurance applies are alleged.‖ Id. at 19.

4
5

Second, the policy includes the following ―Continuous or Progressive Injury or Damage
Exclusion‖ (―CP Exclusion‖):

6

This insurance does not apply to any ―bodily injury‖ or ―property
damage‖:

7
8

1. which first existed, or is alleged to have first existed, prior to the
inception of this policy. ―Property damage‖ from ―your work,‖
or the work of any additional insured, performed prior to policy
inception will be deemed to have first existed prior to the policy
inception, unless such ―property damage‖ is sudden and
accidental and takes place within the policy period [sic] ; or

9
10

United States District Court
Northern District of California

11
12

2. which was, or is alleged to have been, in the process of taking
place prior to the inception date of this policy, even if such
―bodily injury‖ or ―property damage‖ continued during this
policy period; or

13
14

3. which is, or is alleged to be of the same general nature or type as
a condition, circumstance or construction defect which resulted
in ‗‖bodily injury‖ or ―property damage‖ prior to the inception
date of this policy.

15
16
17
18

Id. at 32.
D.

19

Saarman‘s attorney, Paul Lahaderne, notified Ironshore‘s third-party claims administrator

20
21

Saarman’s Tender and Ironshore’s Denial

about the Molock cross-complaints in a letter sent on February 3, 2014.3 See ECF No. 34-5 at 2.

22
23
24
25
26
27
28

3

Saarman had a separate insurance policy with American Safety Indemnity Company that covered
mold-related claims. See ECF No. 34-2 at 40, 69 (agreeing to ―pay for ‗loss‘ applicable,
associated or in connection with ‗mold, mildew, or fungus‘‖). Before Lahaderne tendered the
Molock cross-complaints to Ironshore, he tendered them to the claims adjuster for American
Safety Indemnity Company on January 13, 2014. See ECF No. 34-2 at 25 (acknowledging that
Saarman‘s counsel tendered the claim to American Safety Indemnity Company on January 13,
2014). However, American Safety Indemnity Company denied coverage because Saarman failed
to report the claim before the end of the policy term. See id. at 73, 80. American Safety
Indemnity Company is not a party to the present action.
4

Lahaderne told the claims administrator that ―Ms. Molock did not name Saarman Construction as

2

a defendant,‖ and that ―Ms. Molock‘s claims regarding the mold on the interior walls have no

3

causal connection to the reconstruction work performed by Saarman on the exterior building

4

envelope.‖ Id. at 3. He further notified the claims administrator that the Lees‘ cross-complaint

5

alleged that Saarman‘s construction activities ―resulted in mold infestation in the unit interior.‖

6

Id. at 4-5. In addition to mold damage, Lahaderne informed the claims‘ administrator that the

7

Lees alleged that Saarman‘s repair work had caused a water leak in the northwest corner of the

8

kitchen that caused property damage as a well as a ―threshold leak.‖ Id. Lahaderne, however,

9

disputed that Saarman‘s work to the exterior of the building caused the water intrusion and mold-

10

related damage to the interior of the building. See id. Lahaderne attached both Molock‘s initial

11
United States District Court
Northern District of California

1

complaint and the Lees‘ cross-complaint to the letter. See id. at 6, 32. Lahaderne subsequently

12

responded to the claim examiner‘s requests for more information and provided supplemental

13

documentation related to the Molock action, including the Homeowner‘s Association‘s cross-

14

complaint. See ECF Nos. 34-6; 34-7.
On August 21, 2014, Ironshore informed Saarman that it refused to defend or indemnify

15
16

Saarman in the Molock action. ECF No. 34-9 at 3. Ironshore declined coverage based on both the

17

Mold Exclusion and CP Exclusion in the policy. Id. at 8-9. First, Ironshore explained that

18

Saarman completed its work on the properties prior to the policy inception date and, therefore,

19

coverage was excluded by the CP Exclusion. Id. at 8. Second, Ironshore explained that coverage

20

was independently excluded by the Mold Exclusion because Molock alleged in her complaint that

21

she sustained personal injury and property damage caused by the presence of mold in her unit. Id.

22

at 9.

23

E.

Procedural History

24

On July 31, 2015, Saarman filed the present action against Ironshore. ECF No. 1.

25

Saarman‘s Complaint alleges that Ironshore improperly refused to provide Saarman with a defense

26

regarding the two cross-complaints in the Molock action. Id. at ¶ 36. Saarman asserts that

27

Ironshore‘s refusal to defend was a breach of contract and a breach of the implied covenant of

28

good faith and fair dealing. Id. at ¶¶ 45, 53. Saarman also seeks a declaration that Ironshore has a
5

1

duty to defend Saarman. Id. at 64.

2
II.

JURISDICTION

3
This Court has subject matter jurisdiction of this action under 28 U.S.C. § 1332(a)(1)
4
because the named parties are diverse and the amount in controversy exceeds $75,000. ECF No.
5
1, ¶¶ 1, 2, 5.
6
III.
7
8
9

LEGAL STANDARD
Summary judgment is proper when a ―movant shows that there is no genuine dispute as to

any material fact and the movant is entitled to judgment as a matter of law.‖ Fed. R. Civ. P. 56(a).
―A party asserting that a fact cannot be or is genuinely disputed must support the assertion by‖

10
citing to depositions, documents, affidavits, or other materials. Fed. R. Civ. P. 56(c)(1)(A). A

United States District Court
Northern District of California

11
12
13

party also may show that such materials ―do not establish the absence or presence of a genuine
dispute, or that an adverse party cannot produce admissible evidence to support the fact.‖ Fed. R.
Civ. P. 56(c)(1)(B). An issue is ―genuine‖ only if there is sufficient evidence for a reasonable

14
fact-finder to find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–
15

49 (1986). A fact is ―material‖ if the fact may affect the outcome of the case. Id. ―In considering

16
a motion for summary judgment, the court may not weigh the evidence or make credibility
17
determinations, and is required to draw all inferences in a light most favorable to the non-moving
18

party.‖ Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir.1997).

19
Where the party moving for summary judgment would bear the burden of proof at trial,
20
that party bears the initial burden of producing evidence that would entitle it to a directed verdict if
21
uncontroverted at trial. See C.A.R. Transp. Brokerage Co. v. Darden Rests., Inc., 213 F.3d 474,

22
480 (9th Cir.2000). Where the party moving for summary judgment would not bear the burden of
23
proof at trial, that party bears the initial burden of either producing evidence that negates an
24

essential element of the non-moving party‘s claim, or showing that the non-moving party does not

25
have enough evidence of an essential element to carry its ultimate burden of persuasion at trial. If
26
the moving party satisfies its initial burden of production, then the non-moving party must produce
27
admissible evidence to show that a genuine issue of material fact exists. See Nissan Fire &
28
6

1

Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102–03 (9th Cir.2000).

2

The non-moving party must ―identify with reasonable particularity the evidence that

3

precludes summary judgment.‖ Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir.1996). It is not the

4

duty of the district court to ―to scour the record in search of a genuine issue of triable fact.‖ Id.

5

―A mere scintilla of evidence will not be sufficient to defeat a properly supported motion for

6

summary judgment; rather, the nonmoving party must introduce some significant probative

7

evidence tending to support the complaint.‖ Summers v. Teichert & Son, Inc., 127 F.3d 1150,

8

1152 (9th Cir.1997) (citation and internal quotation marks omitted). If the non-moving party fails

9

to make this showing, the moving party is entitled to summary judgment. Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986).

11
United States District Court
Northern District of California

10

IV.

12

ANALYSIS
Saarman has asserted three claims against Ironshore: (1) breach of contract; (2) breach of

13

the implied covenant of good faith and fair dealing; and (3) claim for declaratory relief that

14

Ironshore has a duty to defend Saarman. Ironshore moves for summary judgment in its favor on

15

all three claims, and Saarman moves for summary judgment in its favor with respect to the first

16

two claims. The Court will address each of the claims in turn.

17
18

A.

Breach of Contract Claims
1.

Duty to Defend

19

First, Saarman argues that Ironshore owed Saarman a duty to defend it in the underlying

20

construction defect action, and that Saarman accordingly breached its contract with Saarman by

21

refusing to defend it. In response, Ironshore argues that it did not have a duty to defend Saarman

22

in the underlying action because either the Mold Exclusion or the CP Exclusion negated any

23

potential coverage.

24

An insurer has a duty to defend its insured against claims that are potentially covered under

25

the insurance policy. See Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081 (1993); Gray

26

v. Zurich Ins. Co., 65 Cal.2d 263, 275 (1966) (―[T]he carrier must defend a suit which potentially

27

seeks damages within the coverage of the policy.‖). This duty to defend is ―measured by the

28

nature and kinds of risks covered by the policy.‖ Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1,
7

1

19 (1995), as modified on denial of reh‘g (Oct. 26, 1995). ―[W]here there is no potential for

2

coverage, there is no duty to defend.‖ La Jolla Beach & Tennis Club, Inc. v. Indust. Indem. Co., 9

3

Cal.4th 27, 39 (1994). ―The burden is on an insured to establish that the occurrence forming the

4

basis of its claim is within the basic scope of insurance coverage.‖ Aydin Corp. v. First State Ins.

5

Co., 18 Cal. 4th 1183, 1188 (1998), as modified on denial of reh‘g (Oct. 14, 1998). ―And, once an

6

insured has made this showing, the burden is on the insurer to prove the claim is specifically

7

excluded.‖ Id. If met, the burden shifts back to Saarman to prove that an exception to the

8

exclusion nevertheless affords coverage. Id. at 1194.

9

To determine whether there was potential coverage, and thus a duty to defend, courts
generally compare the allegations in the underlying complaint with the terms of the insurance

11
United States District Court
Northern District of California

10

policy. See Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 295 (1993). However,

12

―facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility

13

that the claim may be covered by the policy.‖ Id. By the same token, extrinsic evidence may

14

defeat the duty to defend if ―such evidence presents undisputed facts which conclusively eliminate

15

a potential for liability.‖ Id. at 298-99 (internal quotation marks omitted). In other words, ―[i]f

16

any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the

17

insurer, suggest a claim potentially covered by the policy, the insurer‘s duty to defend arises and is

18

not extinguished until the insurer negates all facts suggesting potential coverage.‖ Scottsdale Ins.

19

Co. v. MV Transp., 36 Cal. 4th 643, 655 (2005). ―On the other hand, if, as a matter of law, neither

20

the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to

21

defend does not arise in the first instance.‖ Id. ―[T]he duty to defend is determined by the

22

information possessed by the insurer at the time it refuses to defend, not by information

23

subsequently obtained.‖ Amato v. Mercury Cas. Co., 18 Cal. App. 4th 1784, 1787 (1993).

24

If the insurer had a duty to defend, that duty ―continues ‗until [the insurers] can

25

conclusively refute th[e] potential‘ that liability will arise under the policies.‖ Nat'l Union Fire

26

Ins. Co. of Pittsburgh, Pa. v. Seagate Techs., Inc., 466 F. App'x 653, 655 (9th Cir. 2012) (quoting

27

Montrose, 24 Cal.Rptr.2d 467). This places a ―high burden‖ on the insurer. Id. A defense is

28

excused only when ―the third party complaint can by no conceivable theory raise a single issue
8

1

which could bring it within the policy coverage.‖ Montrose, 6 Cal.4th at 295. ―[T]he insured

2

need only show that the underlying claim may fall within the policy coverage; the insurer must

3

prove it cannot.‖ Id. at 300. On a motion for summary judgment on the insurer‘s duty to defend,

4

an insurer must be able to negate coverage as a matter of law. Maryland Cas. Co. v. Nat‘l Am.

5

Ins. Co of Calif., 48 Cal. App. 4th 1822, 1832 (1996).

6

When interpreting an insurance policy to determine potential coverage, courts apply ―the

7

ordinary rules of contractual interpretation.‖ Bank of the W. v. Superior Court, 2 Cal. 4th 1254,

8

1264 (1992). ―If contractual language is clear and explicit, it governs.‖ Id. (citing Cal. Civ. Code,

9

§ 1638); see also Buss v. Superior Court, 16 Cal. 4th 35, 45, 939 P.2d 766 (1997) (―Where it is
clear, the language must be read accordingly.‖). If the contractual language is ambiguous, ―it must

11
United States District Court
Northern District of California

10

be read in conformity with what the insurer believed the insured understood thereby at the time of

12

formation and, if it remains problematic, in the sense that satisfies the insured‘s objectively

13

reasonable expectations.‖ Buss, 16 Cal. 4th at 45; see also Gray, 65 Cal. 2d at 269 (―In

14

interpreting an insurance policy we apply the general principle that doubts as to meaning must be

15

resolved against the insurer and that any exception to the performance of the basic underlying

16

obligation must be so stated as clearly to apprise the insured of its effect.‖). California courts ―do

17

not add to, take away from, or otherwise modify a contract for public policy considerations.‖

18

Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 75-76 (1997) (internal quotation marks

19

omitted), as modified on denial of reh‘g (Mar. 11, 1998).

20
21

a.

What to Consider in the Duty to Defend Analysis

As a preliminary matter, Saarman argues that ―[t]he allegations of mold in the Molock

22

complaint are irrelevant and immaterial to Ironshore‘s duty to defend Saarman as to either the Lee

23

cross-complaint or the HOA [Homeowner‘s Association] cross-complaint‖ because Saarman was

24

not named as a defendant in the Molock complaint. ECF No. 35 at 17-18. The Court finds this

25

argument unpersuasive. Even if the Molock complaint did not name Saarman as a defendant,

26

Ironshore was allowed to consider ―facts extrinsic to the complaint,‖ including the underlying

27

allegations that prompted the Lees and the Homeowner‘s Association to seek indemnification

28

from Saarman, to determine whether there was potential coverage. Montrose, 6 Cal. 4th 287 at
9

1

298-99. The Court therefore considers both the allegations in the cross-complaints against

2

Saarman and the extrinsic evidence available to Ironshore at the time to determine whether

3

Ironshore had a duty to defend Saarman.

4
5

b.

Basic Scope of Coverage

Saarman has introduced evidence showing that the cross-complaints included allegations

6

of water intrusion and water damage resulting from Saarman‘s repair work that was within the

7

basic scope of coverage. The Lees‘ cross-complaint alleged that Saarman negligently repaired the

8

exterior of the building and, as a result, this caused water intrusion and property damage. ECF

9

No. 34-5 at 43, ¶¶ 34-35, 71. As early as February 3, 2014, Lahaderne informed Ironshore that
―the Lees‘ experts have and [sic] presented evidence that there are at least 2-3 areas of water

11
United States District Court
Northern District of California

10

intrusion due to deficiencies in work performed by Saarman (and/or subcontractor Shapiro

12

Plastering), which have resulted in tangible property damage to the unit interiors and fixtures.‖

13

ECF No. 34-7 at 3. In a subsequent letter sent to Ironshore on March 28, 2014, Lahaderne

14

informed Ironshore that there was ―water intrusion into her unit with resultant property damage.‖

15

ECF No. 34-6 at 5. And, based on expert opinions, Lahaderne informed Ironshore that ―[t]here is

16

clear evidence of water intrusion which appears at this location.‖ ECF No. 34-6 at 9. These

17

claims for water damage clearly fell within the basic scope of coverage under Ironshore‘s policy,

18

which covers sums that Saarman became obligated to pay because of ―property damage‖ caused

19

by an occurrence that occurred during the policy period. See ECF No. 34-4 at 3. As a result, the

20

burden shifted to Ironshore to prove that this claim was specifically excluded and therefore, that

21

there was no potential coverage under the policy. Aydin, 18 Cal. 4th at 1188.

22
23

c.

Mold Exclusion

First, Ironshore argues that the Mold Exclusion eliminated any potential coverage for

24

Saarman‘s claim such that there was no duty to defend. ECF No. 34 at 17. Ironshore points out

25

that the Mold Exclusion broadly bars coverage for ―any claim, demand, or ‗suit‘ alleging . . .

26

‗Bodily Injury,‘ [or] ‗Property Damage‘. . . arising out of, in whole or in part, the actual, alleged,

27

or threatened . . . existence of any mold. . . .‖ Id. Ironshore argues that this exclusionary language

28

clearly and unmistakably bars any potential coverage not just for ―claims‖ that include mold
10

1

allegations, but also any ―suit‖ that includes mold allegations, either in whole or in part. Id. at 17.

2

Because the Molock action was such a ―suit,‖4 Ironshore argues that the Mold Exclusion applies,

3

thus eliminating any possibility of coverage with respect to the entire underlying ―suit.‖ Id. at 17-

4

19.
In response, Saarman argues that the Mold Exclusion did not relieve Saarman of its duty to

5
6

defend because the cross-complaints also included claims for water intrusion and water damage,

7

separate and apart from the mold damage, that were potentially covered under the policy. ECF

8

No. 66 at 10, 12-13. Based on the water intrusion claim, Saarman argues that Ironshore had a duty

9

to defend the entire underlying action, including the uncovered mold claim. Id. at 10-11. To
support its argument, Saarman relies primarily on cases in which the California Supreme Court

11
United States District Court
Northern District of California

10

has held that ―[o]nce the defense duty attaches, the insurer is obligated to defend against all of the

12

claims involved in the action, both covered and noncovered.‖ Horace Mann Ins. Co. v. Barbara

13

B., 4 Cal. 4th 1076, 1081, 1084 (1993), as modified on denial of reh‘g (May 13, 1993) (―We look

14

not to whether noncovered acts predominate in the third party‘s action, but rather to whether there

15

is any potential for liability under the policy.‖).
There is some tension between the plain terms of the insurance contract—which clearly bar

16
17

coverage for any ―suit‖ that includes mold allegations, even if there are other potentially covered

18

claims within that suit—and California case law which holds that insurers have a duty to defend a

19

mixed action if there is any potentially covered claim, even if the action includes uncovered

20

claims. On the one hand, California courts enforce clear and explicit contractual language

21

contained in insurance exclusions. Bank of the W., 2 Cal. 4th at 1264 (citing Cal. Civ. Code, §

22
23
24
25
26
27
28

4

Both Molock‘s complaint and the Lees‘ cross-complaint included mold allegations. See, e.g.,
ECF No. 34-5, Ex. 2 at 55, ¶¶ 71, 75 (alleging that ―[t]he cross-defendants‘ agents and contractors
failed to perform and render services to the building and devices therein . . . and said failures
foreseeably caused water and moisture intrusions into the property resulting [sic] the formation of
and amplification of toxic mold within the building . . . As a proximate result of the crossdefendants continuing and intentional trespasses of water and moisture to the property, toxic mold
has developed within the property resulting in it being uninhabitable.‖). Saarman‘s defense
counsel admitted as such in his deposition. See ECF No. 34-2, Ex. 2 at 13:18-23 (responding ―I
believe that‘s correct‖ after being asked whether ―the Lees made the claim that Saarman was
somehow responsible for the mold in Ms. Molock‘s unit‖).
11

1

1638). On the other hand, the California Supreme Court has held that in a ―mixed action‖—i.e. an

2

action that includes both potentially covered and uncovered claims—―the insurer has a duty to

3

defend the action in its entirety.‖ Buss, 16 Cal. 4th at 48. This is so because the claim, and not the

4

entire lawsuit, is the proper unit of analysis for determining whether the duty to defend is

5

triggered. See id. (―As stated, the duty to defend goes to any action seeking damages for any

6

covered claim. If it went to an action simpliciter, it could perhaps be taken to reach the action in

7

its entirety. But it does not.‖). And this ―prophylactic[]‖ duty to defend mixed actions prevents

8

insurers from wasting time dividing potentially covered claims from uncovered claims in a way

9

that would hamper an immediate and meaningful defense. Id. at 48-49.
At oral argument on these motions, the parties acknowledged that California courts have

10

United States District Court
Northern District of California

11

not squarely addressed the effect that a mold exclusion like the one at issue—which bars coverage

12

for any ―suit,‖ not just any ―claim,‖ in which mold damages are alleged, either in whole or in

13

part—has on otherwise covered claims.5 This Court must therefore determine how the California

14

Supreme Court is likely to decide this state law issue of first impression. See In re K F Dairies,

15

Inc. & Affiliates, 224 F.3d 922, 924 (9th Cir. 2000).
The Court finds the reasoning in Mount Vernon Fire Ins. Co. v. Creative Housing, Ltd.

16
17

persuasive on this issue. 88 N.Y. 2d 347 (N.Y. Ct. App. 1996). In that case, a woman who was

18

assaulted in an apartment building sued the owner of the building for negligence. Id. at 349-50.

19

In turn, the building owner sought defense and indemnification in the underlying suit from its

20

insurer. Id. The insurer sued in federal district court seeking declaratory judgment that it did not

21

owe the building owner a duty to defend, relying on language in its policy that excluded coverage

22

―for any claim, demand or suit based on Assault and Battery.‖ Id. at 350. On appeal, the Second

23
24
25
26
27
28

5

The broad exclusionary language in this Mold Exclusion—which bars coverage in any suit in
which mold-related damage is alleged, not just coverage for mold-related damages—distinguishes
this case from the cases cited by Saarman. Cf. Schmitt v. NIC Ins. Co., No. C 06-5837 MHP,
2007 WL 3232445, at *2, n. 7 (N.D. Cal. Nov. 1, 2007) (providing that ―[t]his insurance does not
apply to: ‗Bodily injury,‘ ‗property damage,‘ . . . arising out of, resulting from, or caused by or
contributed to by any fungus, mildew, or mold‖); Tower Ins. Co. v. Dockside Associates Pier 30
LP, 834 F. Supp. 2d 257, 264-65 (E.D. Pa. 2011) (―[T]he mold exclusion does not act as a
complete bar to coverage, but only excludes coverage for damage caused by mold.‖).
12

1

Circuit certified several issues of state law to the New York Court of Appeal. Id. at 350-51. The

2

New York Court of Appeal applied a ―but-for‖ test to the exclusion: ―if no cause of action would

3

exist but for the assault, the claim is based on assault and the exclusion applies.‖ Id. In other

4

words, the exclusion applied if ―the negligence claim could not be established without proving the

5

underlying assault.‖ Id. at 351-52. The court reasoned that, although the plaintiff had alleged

6

negligence (a covered claim), that cause of action would not have existed but for the assault (an

7

uncovered claim). Id. Therefore, the court concluded that the ―claim [was] based upon an assault

8

for which coverage is excluded.‖ Id.
Ironshore acknowledges that the assault and battery exclusion in Mount Vernon ―has some

10

similarities with the Ironshore mold exclusion.‖ ECF No. 81 at 3-4. Notably, both exclusions use

11
United States District Court
Northern District of California

9

the phrase ―claim, demand, or suit.‖ Id. However, Ironshore argues that Mount Vernon should

12

not apply here for two reasons. Id. First, Ironshore argues that the New York court applied the

13

―but-for‖ test to determine what the suit was ―based on.‖ Id. Ironshore argues that such a

14

determination is not necessary in this case because coverage under its policy does not hinge on

15

what the suit is ―based on.‖ Id. Rather, Ironshore‘s policy bars coverage for any suit that alleges

16

mold-related damages either ―in whole or in part.‖ Id. Second, Ironshore argues that Mount

17

Vernon does not apply because California courts have adopted a broader definition of ―arising out

18

of‖ than New York courts. Id. at 4. Neither argument is persuasive.

19

To the extent Ironshore relies on the language in the Mold Exclusion to evade its duty to

20

defend mixed actions that include covered claims, that language contradicts California law. As the

21

California Supreme Court explained in Buss, ―in a ‗mixed‘ action, the insurer has a duty to defend

22

the action in its entirety.‖ Buss, 16 Cal. 4th at 48 (emphasis added). Here, Ironshore has

23

attempted to circumvent that principle by hinging its duty to defend on the presence of any

24

allegations of non-covered damage in the ―suit‖—no matter how small or inconsequential those

25

allegations may be. However, the court in Buss suggested that insurers could not contract around

26

their duty to defend mixed actions in this way. The court explained that this obligation is not even

27

rooted in the contractual language itself, but rather is ―imposed by law in support of the policy.‖

28

Id.; see also State Farm Gen. Ins. Co. v. Mintarsih, 175 Cal. App. 4th 274, 286 (2009) (―[T]he
13

1

duty to defend claims in a ‗mixed‘ action that are not potentially covered is not a contractual

2

duty.‖). In short, Ironshore cannot contract around California law that requires insurers to defend

3

the entire action if there is any potentially covered claim. Because the language in the mold

4

exclusion barring coverage for ―any claim, demand, or ‗suit‘ alleging [damage] arising out of, in

5

whole or in part, the . . . alleged . . . existence of any mold‖ tries to do precisely that, it is

6

unenforceable.

7

The ―but-for‖ test also has close parallels to other facets of California insurance law. For

8

example, California courts require coverage when two negligent acts on the part of the insured—

9

one covered and one not covered—concurrently cause damages for which the insured seeks
indemnification. See State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94, 98, 102, 104-05

11
United States District Court
Northern District of California

10

(1973).6 In Partidge, for example, the California Supreme Court held that the insurer was liable

12

where the insured‘s negligent modification of a gun to have a ―hair trigger action‖ (a covered act)

13

and the insured‘s negligent driving (a non-covered act) simultaneously caused a passenger in the

14

car to be shot. Id. The court explained that ―although the accident occurred in a vehicle, the

15

insured‘s negligent modification of the gun suffices, in itself, to render him fully liable for the

16

resulting injuries.‖ Id. at 103. In other words, the plaintiff in the underlying negligence suit

17

would have had a cause of action even if the insured had not engaged in uncovered conduct—i.e.

18

the insured‘s liability existed ―independently‖ of the uncovered conduct. Id. The court further

19

explained that the insurer was ―attempting to escape liability under the homeowner‘s policy

20

simply because, in the instant case, both negligent acts happened to have been committed by a

21

single tortfeasor.‖ Id. The same rationale applies here, and even if Saarman‘s conduct is

22

categorized as a single negligent act that results in two categories of damages ‒ one category that

23
6

24
25
26
27
28

Saarman also relies on Howell v. State Farm Fire & Casualty Co., 218 Cal. App. 3d 1446 (1990).
However, shortly before that case was decided the California Supreme Court held that the
concurrent proximate cause doctrine only applies to third party liability cases, not first-party
property policy cases like Howell. See Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395,
399, 410 (1989) (recognizing ―the important distinction between property loss coverage under a
first-party property policy and tort liability coverage under a third-party liability insurance policy‖
and holding that the lower court ―erroneously failed to limit at the threshold the application of
Partridge to the third party liability context‖). Therefore, the Court does not consider the Howell
case in its analysis.
14

1

is covered and one category that is not covered ‒ there is no reason not to apply the same analysis.

2

The ―but-for‖ test prevents insurers from escaping their duty to defend mixed actions simply

3

because the negligent act happened to result in uncovered damage as well as covered damage. In

4

sum, the ―but-for‖ test balances the undisputed need to enforce the clear contractual language of a

5

policy exclusion, on the one hand, with California law that requires insurers to defend the entire

6

action if there is a potentially covered claim, on the other hand. Therefore, the Court applies the

7

―but-for‖ test to the case at hand.

8
9

Applying the ―but-for‖ test to the Mold Exclusion at issue in this case, Ironshore had a
duty to defend Saarman in the underlying suit based on the potentially covered water
intrusion/water damage claim. This is because the Lees‘ cause of action for negligence against

11
United States District Court
Northern District of California

10

Saarman for water intrusion and damage would have existed even if there were no mold

12

allegations—i.e. it exists ―independently‖ of the mold allegations. In other words, the Lees could

13

have established a negligence claim against Saarman based on water intrusion/water damage alone

14

(which is potentially covered) without proving mold damage (which is not covered). Because the

15

water damage claim was potentially covered, the duty to defend attached and Ironshore ―is

16

obligated to defend against all of the claims involved in the action, both covered and noncovered.‖

17

Horace Mann, 4 Cal. 4th at 1081. Ironshore may not evade this duty to defend simply because

18

Saarman‘s covered negligent act happened to result in allegations of mold damage as well as water

19

damage. Such a result would frustrate the reasonable expectations of policy holders by depriving

20

them of their contractual right to a defense for potentially covered claims simply because the

21

plaintiff in the underlying suit decided to include additional allegations of damage that are not

22

covered under the policy.

23
24
25
26

d.

CP Exclusion

Second, Ironshore argues that the policy‘s CP exclusion barred any potential coverage and
therefore negated any duty to defend. ECF No. 34 at 19-24. The Court agrees.
Paragraph 1 of the CP exclusion bars coverage for ―continuous or progressive injury or

27

damage‖ which ―first existed, or is alleged to have first existed, prior to the inception of this

28

policy.‖ ECF No. 34-4 at 32. That paragraph also states that damage resulting from the insured‘s
15

1

work ―performed prior to policy inception will be deemed to have first existed prior to the policy

2

inception, unless such ‗property damage‘ is sudden and accidental and takes place within the

3

policy period.‖ Id. (emphasis added). Ironshore argues that it is undisputed that Saarman

4

completed its work on the project no later than 2007, while the inception date of the Ironshore

5

policy is June 30, 2010. ECF No. 34 at 19-24. Therefore, Ironshore argues, the water intrusion

6

damage is deemed to have first existed prior to the policy period and there is no potential for

7

coverage. See id.; see also ECF No. 65 at 13.

8

Saarman does not dispute that it finished its repair work on the property by 2007 at the
latest, several years before the policy inception date of June 30, 2011. ECF No. 1 at ¶ 14; ECF

10

No. 66 at 16. Therefore, regardless of when the damage resulting from that work first existed or

11
United States District Court
Northern District of California

9

was alleged to have first existed, the CP exclusion automatically deems that damage to have first

12

existed prior to the policy inception, and excludes coverage unless the damage was ―sudden and

13

accidental.‖ ECF No. 34-4 at 32.

14

Saarman does not argue that the water damage was sudden and accidental. Instead,

15

Saarman argues that: (1) the CP exclusion does not apply because the water damage was not

16

―continuous‖ or ―progressive,‖ but rather ―intermittent‖ based on rainfall; (2) the deemer clause in

17

the CP exclusion is unenforceable because it renders the Ironshore policy ―ambiguous as to the

18

operative event on which property damage coverage is conditioned‖; and (3) the deemer clause in

19

the CP exclusion is unenforceable because it operates as ―an undisclosed exclusion of ‗completed

20

operations‘ coverage as to work completed before [the] policy period.‖ ECF No. 66 at 15-17. All

21

of these arguments fail.

22

First, although the heading of the CP exclusion contains the phrase ―continuous or

23

progressive,‖ a heading is not an operative term in an insurance contract. Hervey v. Mercury Cas.

24

Co., 185 Cal. App. 4th 954, 965 (2010). The operative language in the CP exclusion precludes

25

coverage for any property damage that first existed prior to the policy period or that results from

26

work performed by the insured prior to the policy period. ECF No. 34˗4 at 32. At the time

27

Ironshore denied coverage, extrinsic evidence provided to Ironshore confirmed that Saarman

28

completed its work on the project in 2007, several years before the policy inception date, thus
16

1

bringing the underlying claim within the CP exclusion and negating any potential coverage. ECF

2

No. 34˗9 at 2. Therefore, the CP exclusion applies to the damage at issue here.

3

Second, Ironshore‘s policy is not ambiguous as to the trigger of coverage. The general

4

coverage clause provides that coverage is triggered by damage that occurs within the policy

5

period. ECF No. 34-4 at 3. And the CP exclusion, contained in an endorsement, modifies the

6

underlying policy by clearly and unambiguously excluding coverage for damage that would

7

otherwise be covered if that damage resulted from work performed by the insured prior to policy

8

inception. Id. at 32.

9

To support its ambiguity argument, Saarman relies primarily on Pennsylvania Gen. Ins.
Co. v. American Safety Indem. Co., 185 Cal. App. 4th 1515 (2010). In that case, a California

11
United States District Court
Northern District of California

10

Court of Appeal held that an endorsement modifying the definition of the term ―occurrence‖ was

12

ambiguous because it did not clearly specify whether the causal act or the resulting damage was

13

the operative act triggering potential coverage. Id. at 1526-27. The endorsement modified the

14

policy‘s definition of a covered ―occurrence‖ in the following way:

15
16
17
18

‗Occurrence‘ means ‗an accident, including continuous or repeated
exposure to substantially the same general harmful conditions that
happens during the term of this insurance. ‘Property damage’ . . .
which commenced prior to the effective date of this insurance will be
deemed to have happened prior to, and not during, the term of this
insurance.

19

Id. at 1525 (emphasis in original). The insurance company argued that this definition of

20

―occurrence‖ unambiguously required both that the causal act occurred during the policy period

21

and that the resulting damage occurred during the policy period. Id. at 1526. However, the court

22

found that ―[t[he italicized language read as a whole is at least equally susceptible to the

23

interpretation that resulting damage is the defining characteristic of the occurrence.‖ Id. at 1527.

24

Because the endorsement did not ―clearly and unambiguously limit coverage to those claims in

25

which the causal acts took place during the policy period,‖ and because there was a factual dispute

26

as to when those damages first commenced, the court reversed the trial court‘s summary judgment

27

order. Id. at 1527, 1532-34.

28

However, unlike the endorsement at issue in Pennsylvania General, the language in
17

1

Ironshore‘s CP exclusion endorsement clearly and unambiguously excludes coverage for property

2

damage resulting from work performed by the insured prior to policy inception. See Am. Zurich

3

Ins. Co. v. Ironshore Specialty Ins. Co., No. 2:14-CV-00060-TLN-KJ, 2014 WL 3687727, at *5

4

(E.D. Cal. July 23, 2014) (―Unlike the policy in Pennsylvania Gen., the policy at issue herein is

5

not ambiguous. The policy specifically states that property damage caused by work that was

6

completed prior to the policy‘s inception is excluded from coverage.‖). Saarman cannot point to

7

any ambiguity within the language of the endorsement itself. Instead, Saarman tries to

8

manufacture ambiguity by arguing that the deemer clause in the CP exclusion (which conditions

9

coverage on the time the causal act occurred) conflicts with the general coverage clause in the
body of the policy (which conditions coverage on the time the resulting damage occurred). ECF

11
United States District Court
Northern District of California

10

No. 66 at 15˗16. However, ―if there is a conflict in meaning between an endorsement and the

12

body of the policy, the endorsement controls.‖ Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal.

13

4th 38, 50, n. 4 (1997), as modified on denial of reh'g (Mar. 11, 1998) (internal quotation marks

14

omitted) (quoting Continental Cas. Co. v. Phoenix Constr. Co., 46 Cal.2d 423, 431 (1956)).

15

Because the language in the CP exclusion overrides any conflicting language in the body of the

16

policy, there is no such ambiguity.

17

Nor does the deemer clause in the CP exclusion operate as an undisclosed exclusion on the

18

completed operations coverage. ECF No. 66 at 16˗17. As an initial matter, the CP exclusion does

19

not entirely exclude completed operations coverage so as to render that coverage illusory, but

20

rather only excludes completed operations coverage if the work was completed prior to the policy

21

inception. In addition, the CP exclusion endorsement clearly discloses the following: ―THIS

22

ENDORSEMENT CHANGES THE POLICY, PLEASE READ IT CAREFULLY.‖ ECF No.

23

34˗4 at 32 (emphasis in original). The endorsement goes on to state that it ―modifies insurance

24

provided under . . . COMMERCIAL GENERAL LIABILITY COVERAGE PART.‖ Id. These

25

repeated disclosures are ―conspicuous, plain and clear,‖ and they apprise the insured that the

26

endorsement modifies coverage provided for elsewhere in the policy, including the completed

27

operations coverage. MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003), as modified on

28

denial of reh'g (Sept. 17, 2003).
18

In sum, the CP exclusion in Ironshore‘s policy is enforceable and applies to the

1
2

underlying claim. Because Saarman concedes that it finished its repair work on the property by

3

2007 at the latest, several years before the policy inception date of June 30, 2011, the CP

4

exclusion deems any damage resulting from that work to have first existed prior to the policy

5

period and excludes coverage for that damage unless it was ―sudden and accidental.‖ ECF No.

6

34˗4 at 32. Saarman does not argue that the damage was sudden and accidental, and therefore

7

does not meet its burden of showing that it satisfies this exception to the CP exclusion. See Aydin

8

Corp., 18 Cal. 4th at 1188. Because the CP exclusion negates any potential coverage, Ironshore

9

does not have a duty to defend. LaJolla, 9 Cal. 4th at 39. Accordingly, the Court grants

10

Ironshore‘s motion for summary judgment with respect to this claim.7
2.

United States District Court
Northern District of California

11

Duty to Indemnify

12

Absent a duty to defend, Ironshore does not have a duty to indemnify. Certain

13

Underwriters at Lloyd's of London v. Superior Court, 24 Cal. 4th 945, 961 (2001). The Court

14

accordingly grants Ironshore‘s motion for summary judgment with respect to this claim.

15

B.

Breach of the Implied Covenant of Good Faith and Fair Dealing Claim

16

Absent a predicate breach of contract, an insurer cannot be liable for breach of the implied

17

covenant of good faith and fair dealing. Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 36, 900

18

P.2d 619, 639 (1995), as modified on denial of reh'g (Oct. 26, 1995) (―It is clear that if there is no

19

potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no

20

action for breach of the implied covenant of good faith and fair dealing because the covenant is

21

based on the contractual relationship between the insured and the insurer.‖). The Court

22

accordingly grants Ironshore‘s motion for summary judgment with respect to this claim.

23

C.

Claim for Punitive Damages

24

Because Saarman has failed to show a genuine issue of triable fact regarding its tort claims,

25

there is no basis for an award of punitive damages. Cont'l Ins. Co. v. Superior Court, 37 Cal. App.

26

4th 69, 86 (1995).

27
7

28

Because the Court finds that paragraph 1 of the CP exclusion negates any potential coverage
under the policy, it does not need to address paragraphs 2 or 3 of the CP exclusion.
19

1

D.

Claim for Declaratory Relief

2

Saarman also seeks a declaration that Ironshore owed Saarman a duty to defend. Because

3

Ironshore did not owe Saarman a duty to defend, as explained above, this cause of action

4

necessarily fails. The Court accordingly grants Ironshore‘s motion for summary judgment with

5

respect to Saarman‘s claim for declaratory relief.
CONCLUSION

6
7

The Court grants Ironshore‘s motion for summary judgment in its entirety, and denies

8

Saarman‘s motion for partial summary judgment. Because this amended summary judgment order

9

obviates the need for the upcoming jury trial, the Court hereby vacates the trial scheduled to

10

United States District Court
Northern District of California

11

commence on February 6, 2017.
Ironshore is ordered to serve a proposed form of judgment to Saarman within seven days

12

of this order. Saarman may either sign the proposed judgment indicating its agreement as to form,

13

or serve objections on Ironshore within seven days thereafter. Within seven days thereafter,

14

Ironshore must file its proposed form of judgment on the Court, and either (1) incorporate

15

Saarman‘s requested changes if any, or (2) file Saarman‘s objections and Ironshore‘s responses.

16
17
18
19

IT IS SO ORDERED.
Dated: January 31, 2017
______________________________________
JON S. TIGAR
United States District Judge

20
21

22
23
24
25
26
27
28
20