Martz et al v. Leading Insurance Group Insurance Company, LTD.

Filing 64

ORDER by Magistrate Judge Howard R. Lloyd denying 31 Motion for Summary Judgment; denying 19 Motion for Partial Summary Judgment (hrllc1, COURT STAFF) (Filed on 7/29/2014)

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*E-Filed: July 29, 2014*

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

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United States District Court

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SAN JOSE DIVISION

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KENNETH E. MARTZ and ANNA K.
MARTZ, Trustees of the MARTZ FAMILY
TRUST, U.T.D. 10/21/1993,
Plaintiffs,

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v.
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LEADING INSURANCE GROUP
INSURANCE CO., LTD (UNITED STATES
BRANCH), AND Does 1-25, inclusive,

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No. C13-03815 HRL
ORDER DENYING PLAINTIFFS’
MOTION FOR PARTIAL SUMMARY
JUDGMENT; DENYING
DEFENDANT’S MOTION FOR
SUMMARY JUDGMENT OR, IN THE
ALTERNATIVE, PARTIAL
SUMMARY JUDGMENT
[Re: Docket No. 19, 31]

Defendants.
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Kenneth E. Martz and Anna K. Martz, Trustees of the Martz Family Trust (collectively,

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“Martz”) sue Leading Insurance Group Insurance Company (“LIG”) for its alleged breach of

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contract and breach of the implied covenant of good faith and fair dealing arising from its denial of

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coverage for mold and water damage to Martz’s apartment building. Before any discovery took

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place, Martz moved for partial summary judgment on the issue of liability for breach of contract.

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See Dkt. No. 19. LIG opposed the motion. See Dkt. No. 23. Shortly thereafter, LIG moved for

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summary judgment on all claims. See Dkt. No. 31. Martz opposed. See Dkt. No. 43. The parties

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consented to having all matters proceed before the undersigned. See 28 U.S.C. § 636(c); Fed. R.

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Civ. P. 73. Based on the moving and responding papers, as well as the arguments of counsel at the

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hearing on March 4, 2014, 2014, the Court DENIES both motions.

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BACKGROUND

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In July 2013, Martz discovered mold and water damage to several units in an apartment

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complex insured by LIG pursuant to the parties’ Businessowners Coverage Form (“Policy”), an “all

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risk” policy, so called because it covers all risks not expressly excluded. The parties agree that three

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distinct perils acted in succession to cause the damage: (1) negligent installation of the plumbing;

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(2) erosion of a hot water pipe; and (3) leakage of hot water and steam. LIG denied coverage based

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on exclusions for: (1) “Negligent Work”; (2) “Wear and tear; Rust or other corrosion” (hereinafter,

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“Corrosion”); and (3) “Continuous or Repeated Seepage Or Leakage Of Water” (hereinafter,

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“Continuous Leakage”).

For the Northern District of California

United States District Court

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The Negligent Work exclusion provides that “[LIG] will not pay for loss or damage caused

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by or resulting from [Negligent Work]. But if [Negligent Work] results in a Covered Cause of Loss,

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[LIG] will pay for the loss or damage caused by that Covered Cause of Loss.” Policy, at ¶ I.B.3.c.

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A Covered Cause of Loss is any risk of direct loss not expressly excluded. Id. at ¶ I.A.3. The

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parties agree that the negligent installation of the plumbing constitutes Negligent Work within the

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meaning of the exclusion. However, they dispute whether the negligence resulted in a Covered

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Cause of Loss, i.e. whether the erosion of the pipe or the leakage of hot water and steam is a

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Covered Cause of Loss.

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The Corrosion exclusion provides that “[LIG] will not pay for loss or damage caused by or

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resulting from [Corrosion] . . . . But if [Corrosion] results in a ‘specified cause of loss’ . . . [LIG]

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will pay for the loss or damage caused by that ‘specified cause of loss.’” Policy, at ¶ I.B.2.l.

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“Specified causes of loss” include “water damage,” which is defined as “accidental discharge or

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leakage of water or steam as the direct result of the breaking apart or cracking of any part of a

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system or appliance . . . containing water or steam.” Id. at ¶ I.H.12.c. Again, the parties agree that

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the erosion of the hot water pipe constitutes Corrosion, and the leakage of hot water and steam here

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falls within the definition of “water damage.” Nevertheless, LIG disputes that the resulting leakage

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is a “specified cause of loss” as it contends that “specified causes of loss” are also subject to the

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policy’s exclusions.

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The Continuous Leakage exclusion provides that LIG “will not pay for loss or damage

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caused by or resulting from . . . continuous or repeated seepage or leakage of water, or the presence

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of or condensation of humidity, moisture or vapor, that occurs over a period of 14 days or more.”

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Id. at ¶ I.B.2.p. Here, the parties dispute whether the leakage did in fact occur for 14 days or more.

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Under the “Additional Coverages” section, the Policy expressly provides “Limited Coverage

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For ‘Fungi’, Wet Rot Or Dry Rot,” (hereinafter, “Fungi”) which “only applies when the ‘fungi’, wet

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rot or dry rot are the result of a ‘specified cause of loss’ other than fire or lightning.” Again, the

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parties agree that the mold here constitutes “Fungi,” but LIG argues that the mold was not caused by

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a “specified cause of loss” because other relevant exclusions, namely the Continuous Leakage

For the Northern District of California

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exclusion, apply.
LEGAL STANDARD

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A. Summary Judgment

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A motion for summary judgment should be granted if there is no genuine dispute of material

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fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Anderson

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v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party bears the initial burden of

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informing the court of the basis for the motion, and identifying portions of the pleadings,

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depositions, answers to interrogatories, admissions, or affidavits which demonstrate the absence of a

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triable issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In order to meet

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its burden, “the moving party must either produce evidence negating an essential element of the

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nonmoving party’s claim or defense or show that the nonmoving party does not have enough

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evidence of an essential element to carry its ultimate burden of persuasion at trial.” Nissan Fire &

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Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099, 1102 (9th Cir. 2000).

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If the moving party meets its initial burden, the burden shifts to the non-moving party to

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produce evidence supporting its claims or defenses. See Nissan Fire & Marine Ins. Co., Ltd., 210

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F.3d at 1102. The non-moving party may not rest upon mere allegations or denials of the adverse

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party’s evidence, but instead must produce admissible evidence that shows there is a genuine issue

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of material fact for trial. See id. A genuine issue of fact is one that could reasonably be resolved in

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favor of either party. A dispute is “material” only if it could affect the outcome of the suit under the

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governing law. Anderson, 477 U.S. at 248-49.
“When the nonmoving party has the burden of proof at trial, the moving party need only

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point out ‘that there is an absence of evidence to support the nonmoving party’s case.’” Devereaux

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v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001) (quoting Celotex Corp., 477 U.S. at 325). Once the

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moving party meets this burden, the nonmoving party may not rest upon mere allegations or denials,

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but must present evidence sufficient to demonstrate that there is a genuine issue for trial. Id.
DISCUSSION

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The four policy provisions relevant here present four corresponding disputed issues now
before the Court: (1) Negligent Work – whether the erosion of the pipe or leakage of hot water and

For the Northern District of California

United States District Court

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steam resulting from the negligent installation of plumbing are Covered Causes of Loss; (2)

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Corrosion – whether the leakage of hot water and steam resulting from corrosion is a “specified

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cause of loss”; (3) Continuous Leakage – whether the leak did in fact last for 14 days or more; and

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(4) Fungi – whether the leakage of hot water and steam resulting in mold was a “specified cause of

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loss.” As an initial matter, the Court must address a dispute over policy interpretation, a pure issue

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of law for the Court, which underlies the second and fourth issues – whether “specified causes of

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loss” are subject to the policy’s exclusions, namely Continuous Leakage.

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A. “Specified causes of loss”

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The Corrosion provision expressly provides that where Corrosion causes a “specified cause

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of loss,” including leakage of hot water or steam, LIG will provide coverage for the loss caused by

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that “specified cause of loss.” Similarly, the additional coverage for Fungi provides coverage where

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the Fungi resulted from a “specified cause of loss.” Thus, Martz asserts that, based on the plain

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meaning of the relevant provisions, the policy provides coverage for the resulting damage here

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because the erosion of the pipe (Corrosion) caused leakage of hot water or steam (“specified cause

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of loss”), and the leakage of hot water and steam (“specified cause of loss”) resulted in mold

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(Fungi). However, LIG argues that the analysis cannot end there, as “specified causes of loss” are a

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narrow subset of Covered Causes of Loss and subject to the same exclusions, including Continuous

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Leakage. Accordingly, LIG asserts that because the leakage here lasted for 14 days or more,

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Continuous Leakage applies and prevents the leakage here from qualifying as a “specified cause of

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loss.”

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“The rules governing policy interpretation require us to look first to the language of the

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contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to

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it.” Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 18 (1995). “If contractual language is clear

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and explicit, it governs. On the other hand, if the terms of a promise are in any respect ambiguous

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or uncertain, it must interpreted in the sense in which the promisor believed, at the time of making

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it, that the promisee understood it. This rule, as applied to a promise of coverage in an insurance

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policy, protects not the subjective beliefs of the insurer but, rather, the objectively reasonable

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expectations of the insured. Only if this rule does not resolve the ambiguity do we then resolve it

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against the insurer.” Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1264-65 (1992) (internal

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quotations omitted) (citations omitted). In cases involving all-risk insurance policies, “once the

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insured shows that an event falls within the scope of basic coverage under the policy, the burden is

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on the insurer to prove a claim is specifically excluded.” Garvey v. State Farm Fire & Cas. Co., 48

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Cal. 3d 395, 406 (1989). “The exclusionary clause must be conspicuous, plain and clear.”

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MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635, 648 (2003) (internal quotation marks omitted).

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With these principles of construction in mind, the Court disagrees with LIG’s interpretation.

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There is simply no indication in the definition of “specified causes of loss” or the policy as a whole

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that “specified causes of loss” are a narrow subset of Covered Causes of Loss subject to the same

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exclusions. While Covered Causes of Loss are expressly defined by reference to the applicable

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exclusions, “specified causes of loss” are defined by an enumerated list of fourteen causes with no

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mention of the policy’s exclusions. Moreover, because the term “specified cause of loss” is

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typically used in affirmative statements of coverage within the policy’s exclusion provisions and as

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exceptions thereto, it is reasonable for an insured to expect that “specified causes of loss” are a

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distinct set of causes that are covered regardless of other exclusions. At the very least, that

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“specified causes of loss” are to be subject to exclusions is not “conspicuous, plain and clear,” and

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LIG has not met its burden to show that the Continuous Leakage exclusion applies to the “specified

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cause of loss” that occurred here. Accordingly, the Court finds that where corrosion causes the

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leakage of hot water and steam, the Policy provides coverage for the resulting damage. Likewise,

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where the leakage of hot water and steam causes mold, the resulting damage is covered.

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B. Negligent Work
The parties agree that the negligent installation of the plumbing is Negligent Work which

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resulted in the corrosion and leakage, and for the reasons discussed above, the Court finds that

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corrosion-caused leakage is a Covered Cause of Loss. Accordingly, Negligent Work resulted in a

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Covered Cause of Loss, and the resulting damage is covered under the Policy.

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C. Continuous Leakage
Having found that the Negligent Work and Corrosion provisions do not exclude, and purport

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United States District Court

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to affirmatively provide, coverage for the resulting mold and water damage, the Court now turns to

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the third exclusion cited by LIG, Continuous Leakage. Here, the parties’ dispute is purely a factual

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one as to whether the leak lasted for 14 days or more. In support of its assertion that the leak lasted

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14 days or more, LIG provides the declaration of Steve Virostek, the engineer LIG hired to

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investigate the claim, who opines that the leak lasted for 4-7 weeks based on water usage records

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and other factors. Martz does not offer any evidence but objects to Virostek’s assessment as

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impermissible expert testimony pursuant to Federal Rule of Evidence 702 because LIG has not

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demonstrated that he is qualified as an expert or that his methodology is reliable. LIG responds to

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Martz objection asserting that Virostek is not an expert but a percipient witness who participated in

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the factual investigation, and therefore Rule 702 does not apply. However, as a lay percipient

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witness only, Virostek may not opine as to the duration of the leak, which opinion was based on

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scientific, technical, or other specialized knowledge. See Fed. R. Evid. 701(c). Accordingly, neither

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party has admissible evidence as to the duration of the leak.

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D. Martz’s Motion for Summary Judgment
Martz moves for summary judgment on the issue of liability for breach of contract only.

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Viewing the evidence in the light most favorable to LIG, the leak persisted for 14 days or more, and

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the Continuous Leakage exclusion applies. However, as discussed above, the Policy purports to

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provide coverage for loss resulting from corrosion-caused leakage, as well as the resulting damage

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when corrosion-caused leakage is itself the result of negligent work.

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“Under California law, the ‘efficient proximate cause’ doctrine is ‘the preferred method for

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resolving first party insurance disputes involving losses caused by multiple risks or perils, at least

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one of which is covered by insurance and one of which is not.’” Pyramid Techs., Inc. v. Hartford

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Cas. Ins. Co., 752 F.3d 807, 820 (9th Cir. 2014) (quoting Julian v. Hartford Underwriters Ins. Co.,

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35 Cal. 4th 747, 753 (2005). “[I]n determining whether a loss is within an exception in a policy,

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where there is a concurrence of different causes, the efficient cause . . . is the cause to which the loss

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is to be attributed.” Julian, 35 Cal. 4th at 754 (second alteration in original). “[T]he ‘efficient

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proximate cause’ of a loss is the predominant, or most important cause of a loss.” Id. “[A]n insurer

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may not preclude application of efficient proximate cause analysis through inconsistent policy

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language.” Id.

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Based on the current record, the Court cannot say as a matter of law that any of the three

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perils, two of which are covered and one of which is not, is the predominating or most important

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cause, and the one to which the loss should be attributed. See Garvey, 48 Cal. 3d at 412 (“Coverage

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should be determined by a jury under an efficient proximate cause analysis.”). Accordingly, Martz’

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motion for summary judgment is DENIED.

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E. LIG’s Motion for Summary Judgment

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LIG moves for summary judgment as to Martz’s claims for breach of contract and breach of

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the implied covenant of good faith and fair dealing, as well as Martz’s prayer for punitive damages.

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Viewing the facts in the light most favorable to Martz, the leak lasted less than 14 days, none of the

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policy exclusions apply, and LIG improperly denied Martz benefits on three separate bases.

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Accordingly, LIG is not entitled to judgment as a matter of law on the breach of contract claim.

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As for Martz’s bad faith claim, LIG asserts that the Court should grant it summary judgment

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because there exists a “genuine dispute” as to LIG’s coverage obligations with respect to Martz’s

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claims. Martz argues that the genuine dispute rule does not apply because LIG’s interpretation of

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the policy is unreasonable, it materially misrepresented the policy terms in its denial letters, and it

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failed to reasonably investigate the claim with an intent to deny coverage. “The genuine issue rule

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in the context of bad faith claims allows a [trial] court to grant summary judgment when it is

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undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable—for

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example, where even under the plaintiff's version of the facts there is a genuine issue as to the

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insurer's liability under California law. . . . On the other hand, an insurer is not entitled to judgment

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as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could

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conclude that the insurer acted unreasonably.” Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 724

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(2007) (alterations in original) (quoting Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152,

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1161-62 (9th Cir. 2002). Here, under Martz’s version of the facts, there is no genuine dispute as to

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the insurer’s liability, and a jury could conclude that LIG acted unreasonably. Accordingly, LIG is

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not entitled to summary judgment on Martz’s bad faith claim.

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Finally, LIG moves for partial summary judgment as to Martz’s prayer for punitive damages

For the Northern District of California

United States District Court

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because it asserts that Martz cannot offer clear and convincing evidence to show oppression, fraud,

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or mistake, as required by Cal. Civil Code § 3294. However, while Martz may not have produced

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clear and convincing evidence to this point, this motion was brought prior to any discovery being

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conducted in this case, and based on the record now before the Court it would be premature to find

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that Martz cannot produce such evidence. Moreover, “[d]eterminations related to assessment of

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punitive damages have traditionally been left to the discretion of the jury.” Amdadeo, 290 F.3d at

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1165 (reversing grant of summary judgment against plaintiff on claim for punitive damages because

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there was “sufficient evidence that the denial of her claim was not simply the result of poor

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judgment, but rather resulted from [defendant’s] plainly unreasonable interpretation of its policy and

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the deliberate restriction of its investigation in a bad faith attempt to deny benefits due.” (citations

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omitted) (internal quotation marks omitted)). Accordingly, the LIG is not entitled to summary

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judgment on Martz’s claim for punitive damages, and LIG’s motion for summary judgment is

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DENIED.

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IT IS SO ORDERED.
Dated: July 29, 2014
HOWARD R. LLOYD
UNITED STATES MAGISTRATE JUDGE

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C13-03815 Notice will be electronically mailed to:

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Alan Louis Martini

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Julian J. Pardini

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Julian John Pardini

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Rowena Ching-Wen Seto

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Stephen James Liberatore [e-mail], [e-mail], [e-mail],
[e-mail]

[e-mail], [e-mail]

[e-mail]
[e-mail], [e-mail]
[e-mail], [e-mail]

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Counsel are responsible for distributing copies of this document to co-counsel who have not
registered for e-filing under the court’s CM/ECF program.

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For the Northern District of California

United States District Court

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