Arroyo v. Unigard Insurance Company

Filing 51

ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT. Signed by Judge Jeffrey S. White on 9/17/14. (jjoS, COURT STAFF) (Filed on 9/17/2014)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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PEDRO ARROYO,
Plaintiff,

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For the Northern District of California

United States District Court

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No. C 13-02810 JSW

v.

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UNIGUARD INSURANCE COMPANY,

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ORDER REGARDING MOTION
CROSS-MOTIONS FOR
SUMMARY JUDGMENT

Defendant.
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Now before the Court is the motion for partial summary judgment filed by plaintiff

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Pedro Arroyo (“Arroyo”) and the cross-motion for summary judgment by defendant Uniguard

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Insurance Company (“Uniguard”). Having carefully reviewed the parties’ papers, considered

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their arguments and the relevant legal authority, the Court hereby denies Arroyo’s motion for

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partial summary judgment and grants Uniguard’s cross-motion for summary judgment.1
BACKGROUND

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In this action, Arroyo contends that Uniguard breached a duty to defend an underlying

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lawsuit between Arroyo and Jack Neal and Sons (“JNS”) and thus is liable for the default

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judgment entered against JNS. Uniguard contends that general liability insurance policy issued

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to JNS does not even potentially cover the claims asserted by Arroyo against JNS in the

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underlying lawsuit.

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Arroyo had hired JNS to “develop and manage a vineyard on Arroyo’s property.”

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(Arroyo’s RJN, Ex. B, ¶ 6.) Arroyo alleged that JNS did not perform as it had promised.

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The Court GRANTS the parties’ requests for judicial notice (“RJN”). See Fed. R.
Evid. 201.
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Among the errors alleged, Arroyo claimed that JNS chose inappropriate rootstocks and/or

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selected poor quality vines, improperly planted the vines, damaged the vines with weed

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whackers, failed to properly prepare the soil, failed to properly manage the water resources

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available, including a failure to properly study the water needs and water availability, planting

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grapevines too late in the growing season, and mismanaged deer and turkey populations and

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their access to the grapevines. (Id., ¶ 11.)

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Uniguard denied coverage for the underlying suit. Arroyo settled the underlying suit

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with JNS. As part of the settlement, JNS defaulted in the underlying lawsuit and assigned its

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rights under the insurance policies with Uniguard to Arroyo.
The Court will address additional facts as necessary in the remainder of this Order.

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For the Northern District of California

United States District Court

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ANALYSIS

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A.

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Applicable Legal Standards.
A principal purpose of the summary judgment procedure is to identify and dispose of

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factually unsupported claims. Celotex Corp. v. Cattrett, 477 U.S. 317, 323-24 (1986).

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Summary judgment is proper when the “pleadings, depositions, answers to interrogatories, and

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admissions on file, together with the affidavits, if any, show that there is no genuine issue as to

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any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R.

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Civ. P. 56(a). “In considering a motion for summary judgment, the court may not weigh the

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evidence or make credibility determinations, and is required to draw all inferences in a light

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most favorable to the non-moving party.” Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir.

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1997).

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The party moving for summary judgment bears the initial burden of identifying those

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portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine

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issue of material fact. Celotex, 477 U.S. at 323; see also Fed. R. Civ. P. 56(c). An issue of fact

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is “genuine” only if there is sufficient evidence for a reasonable fact finder to find for the non-

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moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A fact is

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“material” if it may affect the outcome of the case. Id. at 248. Once the moving party meets its

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initial burden, the non-moving party must go beyond the pleadings and, by its own evidence,

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“set forth specific facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e).

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In order to make this showing, the non-moving party must “identify with reasonable

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particularity the evidence that precludes summary judgment.” Keenan v. Allan, 91 F.3d 1275,

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1279 (9th Cir. 1996) (quoting Richards v. Combined Ins. Co., 55 F.3d 247, 251 (7th Cir. 1995)

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(stating that it is not a district court’s task to “scour the record in search of a genuine issue of

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triable fact”); see also Fed. R. Civ. P. 56(e). If the non-moving party fails to point to evidence

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precluding summary judgment, the moving party is entitled to judgment as a matter of law.

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Celotex, 477 U.S. at 323; Fed. R. Civ. P. 56(e)(3).

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For the Northern District of California

United States District Court

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B.

The Parties’ Motions.
Both of the motions raise the same legal issue – whether Uniguard owed a duty to

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defend in the underlying lawsuit. California’s substantive insurance law governs in this

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diversity case. State Farm Mut. Auto. Ins. Co. v. Khoe, 884 F.2d 401, 405 (9th Cir. 1989). In a

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dispute over insurance policy coverage, the burden is on the insured to bring the claim within

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the basic scope of coverage. Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 16 (1995).

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Under California law, “a liability insurer owes a broad duty to defend its insured against claims

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that create a potential for indemnity. The carrier must defend a suit which potentially seeks

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damages within the coverage of the policy.” Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d

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1264, 1267 (9th Cir. 2010) (quoting Montrose Chem. Corp. of Cal. v. Superior Court, 6 Cal. 4th

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287, 296 (1993)). The insured “need only show that the underlying claim may fall within

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policy coverage; the insurer must prove it cannot.” Montrose, 6 Cal. 4th at 300. Furthermore,

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“‘the insurer’s duty is not measured by the technical legal cause of action pleaded in the

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underlying complaint, but rather by the potential for liability under the policy’s coverage as

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revealed by the facts alleged in the complaint or otherwise known to the insurer.’” Hudson, 624

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F.3d at 1267 (quoting CNA Cas. of Cal. v. Seaboard Sur. Co., 176 Cal. App. 3d 598, 606

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(1986)). In instances where “‘there is doubt as to whether the duty to defend exists, the doubt

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should be resolved in favor of the insured and against the insurer.’” Id. (quoting CNA, 176 Cal.

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App. 3d at 607). However, “an insured may not trigger the duty to defend by speculating about
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extraneous ‘facts’ regarding potential liability or ways in which the third party claimant might

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amend its complaint at some future date.” Gunderson v. Fire Ins. Exchange, 37 Cal. App. 4th

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1106, 1114 (1995). “Although an insurer’s duty to defend is broader than the duty to

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indemnify, the duty to defend depends upon facts known to the insurer at the inception of the

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suit.” Id.

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To interpret the meaning of the policy language, courts must first look at the written

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provisions of the policy. “If the policy language is clear and explicit, it governs. ... When

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interpreting a policy provision, we must give its terms their ordinary and popular sense, unless

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used by the parties in a technical sense or a special meaning is given to them by usage.” Palmer

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For the Northern District of California

United States District Court

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v. Truck Ins. Exch., 21 Cal. 4th 1109, 1115 (1999) (citations omitted).
Policy exclusions are strictly construed, while exceptions to exclusions are broadly

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construed in favor of coverage. MacKinnon, 31 Cal. 4th at 648; Aydin Corp. v. First State Ins.

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Co., 18 Cal. 4th 1183, 1192 (1998). An insurer cannot escape its basic duty to insure by means

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of an exclusionary clause that is unclear. Any exception to the performance of the basic

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underlying obligation must be so stated as clearly to apprise the insured of its effect.

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MacKinnon, 31 Cal. 4th at 648.

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A policy provision is ambiguous if it is susceptible to two or more reasonable

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constructions. E.M.M.I., Inc. v. Zurich American Ins. Co., 32 Cal. 4th 465, 470 (2004). Any

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ambiguous terms are interpreted in favor of finding coverage, consistent with the insured’s

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reasonable expectations. Id.

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Uniguard contends that several exceptions stated in the applicable insurance policies

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make clear that there was no potential for coverage. One of the exceptions on which Uniguard

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relies provides, in pertinent part, as modified by the Crop Management Services endorsement:

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j. Damage to property
“Property Damage” to:
(5) That particular part of real property, including but not limited to vines
or other growing crops, on which you . . . are performing operations, if,
the “property damage” arises out of those operations; . . .

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(Declaration of John D. Green, Ex. 1 at UCF2865.) Arroyo seeks to read “that particular part”

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to mean the specific piece of property that JNS was working on at a particular moment.

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According to Arroyo’s proposed construction, when JNS was tending to the weeds, and

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damaged the vines, the weeds were the “particular part” of the property that JNS was working

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on at that moment. However, neither the allegations in the complaint from the underlying

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lawsuit nor the relevant authority supports Arroyo’s position.

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As courts in California have explained:

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Generally liability policies, such as the ones in dispute here, are not designed to
provide contractors and developers with coverage against claims their work is
inferior or defective. . . . The risk of replacing and repairing defective materials
or poor workmanship has generally been considered a commercial risk which is
not passed on to the liability insurer. . . . Rather liability coverage comes into
play when the insured’s defective materials or work cause injury to property
other than the insured’s own work or products.

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Maryland Casualty Co. v. Reeder, 221 Cal. App. 3d 961, 967 (1990) (citations omitted)

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For the Northern District of California

United States District Court

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(emphasis added). “In other words, the contractor bears the risk of repairing or replacing faulty

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workmanship, while the insurer bears the risk of damage to the property of others.” Clarendon

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Amer. Ins. Co. v. General Security Indemnity Co., 193 Cal. App. 4th 1311, 1325 (2011)

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(internal quotation marks and citation omitted). Pursuant to exclusion j(5), “[t]he insurer is not

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obligated to indemnify a policy holder for property damage that occurs while the insured is

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performing operations on that property.” Id. at 1326.

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“In the case of a general contractor, all the work at the project is considered its work

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product, whereas in the case of a subcontractor . . . only its portion of the work, such as siding,

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is the work product and damage to other parts of the project is considered damage to other

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property.” George F. Hillenbrand, Inc. v. Insurance Co. of North America, 104 Cal. App. 4th

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784, 805 (2002); see also Clarendon America Ins. Co. v. General Sec. Indem. Co. of Arizona,

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193 Cal. App. 4th 1311, 1314, 1325-26 (2011) (finding there was no duty to defend pursuant to

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the faulty workmanship exclusionary provisions j(5) and (6), which refer to the “particular part”

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of the property, for a lawsuit alleging defects in the construction of a new home where the

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contractor signed an agreement to construct a custom single family home); Legacy Partners,

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Inc., 2010 WL 1495198, *9 (S.D. Cal. April 14, 2010) (finding that j(5) exclusion applied

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where all of the damages alleged in the underlying lawsuit arose out of the contractor’s

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operations on the property).
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The analysis set forth in Roger H. Proulx & Co. v. Crest-Liners, Inc., 98 Cal. App. 4th

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182 (2002), a case relied on by Arroyo, is in accord. In Proulx, a subcontractor was hired to

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furnish and install roofing and waterproofing on a 25-story commercial building, including a

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waterproof liner in a tank that was part of the air conditioning system. Id. at 189. The

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waterproof liner leaked and had to be repaired. The leaks damaged pumps and valves. The

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costs associated with the leaky liner and its repair included replacing a valve pit, painting the

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office area, repairing the office area, and patching drywall, in addition to replacing the defective

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waterproof liner. Id. at 189-90. In light of this evidence, the insurance company was unable to

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prove that the damage was limited to the part of the real property on which the subcontractor
was performing work, i.e. the waterproof liner and/or other waterproofing materials. Therefore,

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For the Northern District of California

United States District Court

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the exclusion did not apply. Id. at 202-203.

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Arroyo’s attempts to divide the single project for which he hired JNS into separate

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“parts” is unavailing in light of the allegations in the underlying complaint. The underlying

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complaint alleges that JNS was hired to “develop and manage a vineyard on Arroyo’s

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property.” (Arroyo’s RJN, Ex. B, ¶ 6.) The complaint does not allege separate contracts or

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projects, one for planting the vineyards and another one for maintaining them. The complaint

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describes one agreement – to develop and manage a vineyard. All of the property damage for

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which Arroyo alleges in the underlying complaint was the part of the property that JNS was

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hired to perform work.

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Arroyo’s attempt to argue damage that was caused by JNS’s purported inaction, such as

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damage cause by turkeys, deer, and frost and by inadequate watering, does not fare any better.

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All of the damage alleged in the underlying complaint is alleged to be caused by JNS’s failures

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and mistakes in the planting and management of the vineyard. Arroyo alleged that JNS failed to

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properly manage the water resources available, including a failure to properly study the water

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needs and water availability and that JNS mismanaged deer and turkey populations and their

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access to the grapevines. (Arroyo’s RJN, Ex. B, ¶ 11.) The alleged damage arose out of JNS’s

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operations. Accordingly, the Court finds that Uniguard did not owe a duty to defend JNS in the

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underlying complaint and, thus, is not liable to Arroyo. Therefore, the Court denies Arroyo’s
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motion for partial summary judgment and grants Uniguard’s cross-motion for summary

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judgment.

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CONCLUSION
For the foregoing reasons, the Court DENIES Arroyo’s motion for partial summary
judgment and GRANTS Uniguard’s cross-motion for summary judgment.
IT IS SO ORDERED.

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Dated: September 17, 2014
JEFFREY S. WHITE
UNITED STATES DISTRICT JUDGE

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For the Northern District of California

United States District Court

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