Associated Industries Ins. Co., Inc. v. Detail Construction & Waterproofing, Inc.

Filing 20

ORDER for Reassignment to a District Judge; REPORT AND RECOMMENDATIONS re 10 MOTION for Default Judgment by the Court. Signed by Magistrate Judge Howard R. Lloyd on 5/3/2017. (hrllc2, COURT STAFF) (Filed on 5/3/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

United States District Court
Northern District of California

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ASSOCIATED INDUSTRIES INS. CO.,
INC., et al.,

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Plaintiffs,
v.
DETAIL CONSTRUCTION &
WATERPROOFING, INC.,
Defendant.

Case No.5:16-cv-06042-HRL
ORDER FOR REASSIGNMENT TO A
DISTRICT JUDGE
REPORT AND RECOMMENDATION
RE MOTION FOR DEFAULT
JUDGMENT
Re: Dkt. No. 10

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Plaintiffs Associated Industries Ins. Co. (AIIC) and AmTrust International Underwriters

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Limited (AmTrust) filed this insurance action, invoking diversity jurisdiction, 28 U.S.C. § 1332.

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They seek a declaratory judgment that they need not defend or indemnify defendant Detail

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Construction & Waterproofing (DCW) against claims pending in a state court lawsuit. Plaintiffs

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also seek reimbursement of defense costs incurred in the underlying state court action, as well as

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costs incurred here.

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In the present federal action, DCW was served with process (Dkt. 7), but failed to answer

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or otherwise respond to the complaint. At plaintiffs’ request, the Clerk of the Court entered

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defendant’s default on November 22, 2016. (Dkt. 9).

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Plaintiffs now move for default judgment. DCW was served with notice of this motion
(Dkt. 10-5), but the court has received no response, and the time for briefing has closed. Although

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plaintiffs have consented to proceed before a magistrate judge, 28 U.S.C. § 636(c); Fed. R. Civ. P.

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73, defendant has never appeared and is in default. Accordingly, this court directs the Clerk of the

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Court to reassign this action to a district judge, with the following report and recommendation that

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plaintiffs’ motion for default judgment be granted.
BACKGROUND

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The complaint alleges the following:

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Plaintiff AIIC is a Florida corporation, authorized and engaged in the business of writing

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insurance in California as an approved surplus line insurance carrier. (Dkt. 1, Complaint ¶ 4).

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AmTrust is an Irish limited company and alien surplus lines insurance carrier, duly licensed,
authorized, and engaged in the business of issuing insurance policies in California. (Id.). DCW is

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United States District Court
Northern District of California

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alleged to be a California corporation. (Id. 5).

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AIIC and AmTrust provided general commercial liability insurance coverage to one

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Yvonne Kathleen Holmes dba Detail Construction. There are three policies (collectively,

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“Policies”) at issue:

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

Plaintiff AIIC provided commercial general liability insurance to Yvonne Kathleen

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Holmes dba Detail Construction as the individual named insured on Policy No.

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NX100317300, which was in effect from April 8, 2012 through April 8, 2013

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(2012 Policy).

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AmTrust provided commercial general liability insurance coverage to Holmes dba

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Detail Construction as the individual named insured on Policy No. XN102112101,

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in effect from April 8, 2013 through April 8, 2014 (2013 Policy) and again on

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Policy No. XN102112102 from April 8, 2014 through April 8, 2015 (2014 Policy).

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(Id. ¶ 8 & Exs. A-C).
The complaint alleges that the Policies are based on standard Commercial General
Liability Form CG0001 and include the following limitations:
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Under the Policies, plaintiffs are obliged to “pay those sums that the insured

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becomes legally obligated to pay as damages because of . . . ‘property damage’ to

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which this insurance applies.” (Dkt. 1-1 Complaint, ¶ 9, Ex. A at ECF pp. 2, 12;
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Dkt. 1-2 Complaint Ex. B at ECF pp. 2, 12; Dkt. 1-3 Complaint, Ex. C at ECF pp.

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2, 12).

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

The Policies further provide that plaintiffs have “the right and duty to defend the

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insured against any ‘suit’ seeking those damages” and “no duty to defend the

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insured against any ‘suit’ seeking damages for . . . ‘property damage’ to which this

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insurance does not apply.” (Id., Complaint Ex. A at ECF p. 12; Ex. B at ECF p. 12;

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Ex. C at ECF p. 12).

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The Policies indicate that if the insured is an individual, then only the named
insured and his or her spouse are insureds, but only with respect to the conduct of a

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business of which the insured is the sole owner. Plaintiffs provided coverage to

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United States District Court
Northern District of California

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Holmes dba Detail Construction. No corporation is an insured on any of the

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Policies, and the business form of the insured on each policy is listed as

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“individual.” (Id., Complaint Ex. A at ECF pp. 2, 20; Ex. B at ECF pp. 2, 20; Ex.

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C at ECF pp. 2, 20).

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The 2012 and 2013 Policies include a “classification limitation endorsement” that

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limits coverage for fence erection activities. (Id. Complaint Ex. A at ECF pp. 4-5,

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79, Ex. B at ECF pp. 4-5, 79)

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8, 2014 inception date of that policy. (Id. Complaint, Ex. C at ECF pp. 12, 50).

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The 2014 Policy excludes any property damages that commenced before the April

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All Policies specifically exclude work on elevators and escalators and

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waterproofing of foundations and exterior buildings. (Id. Complaint, Ex. A at ECF

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p. 34; Ex. B at ECF p. 35; Ex. C at ECF p. 35).

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

All Policies indicate that “Supplementary Payments” coverage for costs taxed

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against the insured is limited to “court costs” and does not include an award of

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attorney’s fees. (Id. Complaint, Ex. A at ECF p. 19; Ex. B at ECF p. 19; Ex. C at

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ECF p. 19).

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The complaint goes on to allege that, in applying for the Policies, Holmes submitted
applications indicating that she was a residential fence contractor. On applications for the 2012
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and 2013 Policies, under a section titled “description of operations,” Holmes responded: “Fence

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Erection Contractor, contractor erects fences for residential homes. Very small contractor as you

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can see by the revenues.” (Complaint ¶ 13). The insurance applications also asked if there were

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any affiliated or subsidiary entities, and Holmes’ response was “no.” (Id. ¶ 14). Plaintiffs claim

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that Holmes’ representations were false and that the failure to disclose DCW constitutes

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concealment.

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As previewed above, DCW has been sued in an action filed in Marin County Superior

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Court, Volpe Company, Inc. v. Sausal Corp., et al., Case No. CV1402511 (Volpe or “underlying

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action”). Volpe concerns a public works project for construction of the City of Novato
Administration Office. In that action, DCW is alleged to have contracted with Sausal Corp. (the

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United States District Court
Northern District of California

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general contractor) in August 2012 to perform all waterproofing operations on the project. In

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November 2013, the City of Novato gave Sausal and or DCW notice of defects in the

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construction, including water leaks. Volpe Company (a subcontractor on the project) filed the

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underlying action, claiming (among other things) that Sausal Corp. breached its contract with

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Volpe. In December 2015, Sausal filed a second amended cross-complaint against DCW (and

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others) on the claims for breach of contract, indemnity, and equitable contribution. (Complaint ¶

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11, Ex. D).

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On April 8, 2016, AIIC agreed to defend DCW in Volpe under a reservation of rights,

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including the rights to (1) bring a declaratory relief action, (2) seek reimbursement of defense fees

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and costs and be paid to defend DCW in the underlying action, and (3) assert concealment in the

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insurance applications as a defense to coverage. (Complaint ¶¶ 12, 15). Plaintiffs now seek

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default judgment, contending that there is no insurance coverage for the Volpe matter because

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DCW was concealed on the subject insurance applications.

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LEGAL STANDARD
After entry of default, courts may, in their discretion, enter default judgment. Fed. R. Civ.

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P. 55; Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In deciding whether to enter

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default judgment, a court may consider the following factors: (1) the possibility of prejudice to

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the plaintiff; (2) the merits of the plaintiff’s substantive claim; (3) the sufficiency of the complaint;
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(4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material

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facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying

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the Federal Rules of Civil Procedure favoring decisions on the merits. Eitel v. McCool, 782 F.2d

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1470, 1471-72 (9th Cir. 1986). In considering these factors, all factual allegations in the plaintiff’s

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complaint are taken as true, except those relating to damages. TeleVideo Sys., Inc. v. Heidenthal,

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826 F.2d 915, 917-18 (9th Cir. 1987). When the damages claimed are not readily ascertainable

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from the pleadings and the record, the court may conduct a hearing to conduct an accounting,

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determine the amount of damages, establish the truth of any allegation by evidence, or investigate

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any other matter. Fed. R. Civ. P. 55(b)(2).
DISCUSSION

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United States District Court
Northern District of California

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A.

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Plaintiffs have satisfactorily established the existence of diversity jurisdiction, 28 U.S.C. §

Jurisdiction and Service of Process

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1332. Plaintiffs say that they are Ireland and Florida corporations and that DCW is a California

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company. (Complaint ¶¶ 1, 4-5). As for the amount in controversy, where (as here) the

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applicability of liability coverage to a particular occurrence is at issue, the amount in controversy

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is the value of the underlying claim. Budget Rent-A-Car, Inc. v. Higashiguchi, 109 F.3d 1471,

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1473 (9th Cir. 1997). The record presented shows that Volpe seeks contract damages of no less

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than $459,768.00 against Sausal. (Dkt. 10-1, Shemonsky Decl., ¶ 8 & Ex. 1). And, the City of

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Novato has filed a cross-complaint against Sausal, seeking no less than $500,000 in damages,

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alleging (among other things) that Sausal acted negligently, such that the project was not water

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tight and water entered the building, causing damage to the structure, interior finishes, and other

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City property. (Id. ¶ 9 & Ex. 2). As discussed, Sausal has cross-complained against DCW for

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breach of contract, indemnity, and equitable contribution arising from the water leaks.

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(Complaint, Ex. D). Although there is no indication as to the precise amount for which DCW may

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be liable in the underlying action, on this record this court is satisfied that the potential indemnity

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obligation exceeds $75,000.

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The court has personal jurisdiction over the defendant. The allegations of the complaint

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indicate that DCW regularly conducts business in this state. See generally Mavrix Photo, Inc. v.
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Brand Technologies, Inc., 647 F.3d 1218, 1223-24 (9th Cir. 2011) (“For general jurisdiction to exist,

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a defendant must engage in continuous and systematic general business contacts that approximate

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physical presence in the forum state.”) (citations omitted).
Plaintiffs properly effected service by personally serving the summons and complaint.

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(Dkt. 7). See Fed. R. Civ. Proc. 4(h)(1)(B) (a corporation may be served “by delivering a copy of

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the summons and of the complaint to an officer, a managing or general agent, or any other agent

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authorized by appointment or by law to receive service of process and---if the agent is one

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authorized by statute and the statute so requires---by also mailing a copy of each to the

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defendant”).
There is no indication that DCW is in active military service or is an infant or incompetent

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United States District Court
Northern District of California

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person.

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B.

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All of the Eitel factors favor entry of default judgment here. Plaintiffs contend that there is

The Eitel Factors

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no coverage under any of the Policies because Holmes’ failure to disclose DCW constitutes

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concealment. Each party to an insurance contract “shall communicate to the other, in good faith,

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all facts within his knowledge which are or which he believes to be material to the contract and as

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to which he makes no warranty, and which the other has not the means of ascertaining.” Cal. Ins.

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Code § 332. For an insurer to avoid coverage based on concealment, the undisclosed information

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must have been “material.” Id. §§ 333, 334. “The fact that the insurer has demanded answers to

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specific questions in an application for insurance is in itself usually sufficient to establish

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materiality as a matter of law.” Thompson v. Occidental Life Ins. Co., 513 P.2d 353, 360 (Cal. S.

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Ct. 1973). “Concealment, whether intentional or unintentional, entitles the injured party to rescind

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insurance.” Cal. Ins. Code § 331. However, “[t]he right to rescission of an insurance contract

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does not derogate the right to pursue other remedies,” Allmerica Fin. Life Ins. & Annuity Co. v.

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Dalessio, No. C96-0385-VRW, 2006 WL 408538, at *2 (N.D. Cal., Feb. 20, 2006), and rescission

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is not the exclusive remedy available to an insurer by reason of the insured’s concealment,

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Williamson & Vollmer Eng’g, Inc. v. Sequoia, Ins. Co., 134 Cal. Rptr. 427, 434-35 (Cal. Ct. App.

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1976).
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Plaintiffs have sufficiently alleged material concealment, and their claims have merit.

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According to the complaint’s factual allegations, which are deemed true, Holmes provided

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responses on the applications for the 2012 Policy issued by AIIC and the 2013 Policy issued by

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AmTrust indicating that she was a small residential fence contractor (dba Construction Detail) and

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that there were no affiliated or subsidiary entities. (Complaint ¶¶ 13-14). DCW having tendered

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the defense of Volpe concerning DCW’s waterproofing work on a large public works project,

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plaintiffs allege that the failure to disclose DCW constitutes concealment of a material fact. (Id.).

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In further support of the present motion, plaintiffs have submitted evidence showing that
DCW’s website (which indicates that it was copyrighted in 2010):
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projects; and

United States District Court
Northern District of California

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advertises commercial and public construction services, as well as residential

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indicates that DCW’s work is not limited to residential fence installation, but also

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includes waterproofing, flooring, deck work, pool work, kitchen, bathroom,

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landscaping, hardscape, and new home construction.

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(Shemonsky Decl. ¶¶ 13-14 & Ex. 4). Counsel avers that the insurance applications at issue also

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asked for the value of the largest current or planned job and largest job in the past three years, and

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the responses referred to a value of $5,000. (Id. ¶ 14). Plaintiffs say that the public works contract

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at issue in Volpe was for a value of $235,270.00. (Id.). Although the Volpe contract was executed

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after the application for the 2012 Policy, plaintiffs maintain that the Volpe contract still establishes

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concealment as to the application for the 2013 Policy. And, while the Volpe public works project

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did not begin until after the 2012 Policy application, plaintiffs point out that DCW’s website

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shows that the company was engaged in commercial work on other projects before the application

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for the 2012 Policy. (Id., Ex. 4).

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The amount of money at stake is significant, but not disproportionate to the issue in

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dispute. Because all liability-related allegations are deemed true, there is no possibility of a

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dispute as to material facts. Moreover, defendant received proper notice of this lawsuit, but has

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failed to appear or present a defense in this matter. There is no indication that its default was due

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to excusable neglect. While the court prefers to decide matters on the merits, defendant’s failure
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to participate in this litigation makes that impossible. A default judgment against defendant is

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plaintiffs’ only recourse.

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C.

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Having reviewed the supporting records submitted by plaintiffs, this court finds that the

Claim for Reimbursement

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request for $4,237.05 in costs incurred in the underlying action, as well as for $468.95 paid for the

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filing fee and service of process in the instant federal suit, is amply supported by the record. (Dkt.

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10-1 Shemonsky Decl., ¶¶ 15-16 & Ex. 5 at ECF pp. 47-50; Dkt. 10-2 Harris Decl. ¶¶ 1-2 & Ex. 1;

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Dkt. 19-1 Amended Harris Decl. ¶¶ 1-2 & Ex. 1).
ORDER

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Because not all parties have consented to the undersigned’s jurisdiction, IT IS ORDERED

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United States District Court
Northern District of California

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THAT this case be reassigned to a District Judge. Further, it is RECOMMENDED that plaintiffs’

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motion for default judgment be granted and that judgment be entered as follows:

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

No. NX100317300 for the policy period of April 8, 2012 to April 8, 2013;

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There is no potential for coverage and no duty to defend DCW under AmTrust
Policy No. XN102112102, effective April 8, 2014 through April 8, 2015;

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There is no potential for coverage and no duty to defend DCW under AmTrust
Policy No. XN102112101, effective April 8, 2013 through April 8, 2014;

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There is no potential for coverage and no duty to defend DCW under AIIC Policy

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The above-identified policies do not provide any duty to indemnify DCW for any

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damages which DCW may become legally obligated to pay in the underlying Volpe

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action or for any attorneys’ fees taxed as costs against DCW;

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

Volpe action; and

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For reimbursement of $4,237.05 in defense fees and costs paid in defense of the

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For costs of suit incurred here in the sum of $468.95.

Plaintiffs are ordered to serve a copy of this recommendation on DCW. Any party may
serve and file objections to this Report and Recommendation within fourteen days after being

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served. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72; Civ. L.R. 72-3.
Dated: May 3, 2017

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HOWARD R. LLOYD
United States Magistrate Judge

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United States District Court
Northern District of California

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5:16-cv-06042-HRL Notice has been electronically mailed to:

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Lisa Gayle Shemonsky

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Robert V. Closson

[e-mail]

[e-mail]

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United States District Court
Northern District of California

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