2011-00112151-CU-BC

Centex Homes vs. Ad Land Venture

Nature of Proceeding: Motion for Summary Adjudication (Duty to Defend)
Nature of Proceeding: Motion for Summary Adjudication (Duty to Defend)

Filed By: Mills, Graham C.

Plaintiff and Cross-Defendant Centex Homes’ (“Centex”) motion for summary
adjudication of the alleged duty to defend of Defendants Travelers Property Casualty
Company of America, St. Paul Fire and Marine Insurance Company, St. Paul Mercury
Insurance Company (“St. Paul Mercury”), and Fidelity and Guaranty Insurance
Company (“Fidelity and Guaranty”) (collectively the “Insurers”) is GRANTED in part
and DENIED in part.

Factual/Procedural Background

This is an insurance coverage dispute. Centex developed a residential project
(“Project”) and required subcontractor and Defendant herein Ad Land Venture (“Ad
Land”) to name it as an additional insured under its (“Ad Land’s) liability policies.
Between approximately March 2005 and January 2009, Ad Land performed
landscaping, irrigation, drainage and grading services at the Project. Ad Land
obtained additional-insured coverage for Centex from St. Paul Mercury in four policies
providing coverage between October 1, 2004 and June 1, 2008. (See Undisputed
Material Fact (“UMF”) 6; Centex’s Exhs. F-I.)

Each of the four policies provides that St. Paul Mercury has a “duty to defend against a
claim or suit for injury or damage covered by this agreement… .” (UMF 10.) The
policies further provide that “[w]e’ll pay amounts any protected person is legally
required to pay as damages for covered…property damage that: [¶] happens while this
agreement is in effect… .” (UMF 11.) The additional-insured endorsements cover
property damage “that results from your work,” not “your completed work.” The
policies define “your work” as “work that you’re performing or others are performing for
you.” (Centex’s Evid., Exh. N at 4.) The policies define “your completed work “ to
mean work that “is completed, including work that may need service, maintenance,
correction, repair or replacement, but which is otherwise competed” or “has been
abandoned by you.” (Id.) The policies further provide:

“We’ll consider your work to be completed at the earliest of the following
times:

· When all of the work called for in your contract has been completed.
· When all of the work at the work site has been completed, if your
contract calls for work at more than one site.
· When that part of the work at the work site has been put to its intended
use by any person or organization, other than another contractor or
subcontractor working on the same project.”

(See, e.g., Centex’s Evid., Exh. H at TRV-000245.)

On June 3, 2011, and pursuant to SB 800 (codified at CC §§ 895 et seq.), numerous
homeowners within the Project collectively served Centex with a written Notice of
Claim that their properties suffered from construction defects. (UMF 14.) The SB 800
Notice of Claim does not identify any subcontractors as having caused the defects,
and it does not contain any dates on which the damage purportedly occurred. (UMF
15; Centex’s Exh. J.) However, the SB 800Notice of Claim does cite numerous
defects in foundations/slabs, and it cites problems with soil/drainage problems as well
as irrigation systems. (UMF 15; Centex’s Exh. J.)

On June 22, 2011, Centex forwarded the SB 800 Notice of Claim to St. Paul Mercury
and tendered a defense under the above-cited Ad Land policies. (UMF 17.) On
August 17 and August 26, 2011, St. Paul Mercury served Centex with written notices
that it was denying coverage. (UMF 18.) The denials were based on definitional
distinctions between “your work” and “your completed work.” (See Centex’s Evid.,
Exhs. M, N.)

The homeowners filed a civil complaint in what the parties herein refer to as the Van
Loon action against Centex. Based on the policy it issued for the period between June
2006 and June 2008 only, St. Paul Mercury eventually agreed to provide Centex a
defense in the Van Loon action under a reservation of rights. St. Paul Mercury
reimbursed Centex $272,297.23 in defense fees/costs, and St. Paul Mercury
subsequently contributed to a monetary settlement that resulted in the homeowners’
release of claims based upon Ad Land’s work. St. Paul Mercury maintains that it never
had a contractual duty to defend Centex and that it is entitled to reimbursement of its
defense costs. This lawsuit followed.

Centex’s Complaint contains causes of action against the Insurers for declaratory
relief, breach of contract and breach of the implied covenant of good faith and fair
dealing. St. Paul Mercury and Fidelity and Guaranty filed a cross-complaint against
Centex and numerous others. The operative First Amended Cross-Complaint
(“FACC”) contains inter alia causes of action for breach of the implied covenant of
good faith and fair dealing and equitable reimbursement. St. Paul Mercury and Fidelity
and Guaranty allege that Centex has breached the implied covenant by unreasonably
interfering with their selection of defense counsel. These two insurers also assert that
they have expended sums in the defense of claims against Centex that are not
covered by any insurance policy. By the instant motion Centex seeks summary
adjudication of the issue whether the Insurers were under a contractual duty to defend
Centex. Centex bases its motion on its First and Second Causes of Action for
Declaratory Relief and Breach of Contract as well as the Third and Ninth Causes of
Action for Breach of the Implied Covenant of Good Faith and Fair Dealing and
Equitable Reimbursement in the FACC.

Discussion

Applicable Summary Adjudication Standards

An insured’s motion for summary adjudication of the insurer’s duty to defend employs
the burden-shifting procedures applicable to other motions for summary
adjudication/summary judgment. The insured’s initial burden is to produce evidence
demonstrating a potential for coverage. (Montrose Chem. Corp. of Calif. v. Superior
th
Court (1993) 6 Cal.4 297, 300, 304.) Once the insured meets its initial burden, the
burden shifts to the insurer to demonstrate the absence of any possibility of coverage.
(Id. at 300, 304.) The existence of a factual dispute over the possibility vel non of
coverage establishes a duty to defend. (See Mirpad, LLC v. California Ins. Guar.
th
Ass’n (2005) 132 Cal.App.4 1058, 1068.)

Preliminary Observations
Preliminarily, the court notes that Centex’s Moving Memorandum of Points and
Authorities contains two requests for adjudication, one on the issue of the Insurers’
duty to defend, and another on the issue whether the Insurers breached such a duty.
By statute, Centex is entitled to move for summary adjudication of the duty issue.
(CCP § 437c(f)(1).) There is no similar allowance, however, for summary adjudication
of the issue of breach. (Id.) For the court to reach the issue of breach, Centex was
required to move for summary adjudication of an entire cause of action and/or
affirmative defense. (Id.) Because Centex has not moved for summary adjudication of
any cause of action or affirmative defense encompassing the element of breach, its
request for an order adjudicating whether any Insurer breached a duty is DENIED at
the outset.

The court further notes an ambiguity in the temporal scope of the Centex’s motion. In
the moving papers, Centex requests an order that the Insurers had a duty to defend in
the Van Loon action. In their Opposition, the Insurers argue that there could not have
been such a duty once St. Paul Mercury settled the case. In the Reply, Centex
attempts to clarify the temporal scope of the duty in question. However, Centex’s
attempt arguably creates additional ambiguity.

Centex asserts at one point in the Reply that it seeks adjudication of the issue of duty
“to begin with,” i.e., when it first tendered its claim via the SB 800 Notice of Claim.
(See Reply at 2:4-5.) Elsewhere, however, Centex characterizes the motion as
seeking the court’s determination whether the Insurers had a duty to defend “at some
point in time.” (Id. at 6:1-3; but see id. at 6:3-4 [“If and when [the Insurers’] duty ended
will affect the amount of damages that Centex suffered, not whether [the Insurers] had
a duty to defend Centex to begin with”] [emphasis added].) Based on the totality of
materials submitted, the court construes the motion as one for adjudicaton of whether
the Insurers owed Centex a duty to defend at the time the latter first tendered a claim
via the SB 800 Notice of Claim. To the extent Centex requests an order adjudicating a
duty to defend at one or more other points in time, the request is DENIED.

Next, the court DENIES the motion at the outset as to all Insurers other than St. Paul
Mercury. There is no evidence that an insurer other than St. Paul Mercury issued an
additional-insured endorsement potentially covering Centex for the property damage in
question. The court notes that St. Paul Mercury initially communicated its denials of
coverage on ”Travelers” letterhead. (See Centex’s Evid., Exhs. M, N.) Centex,
however, has not argued the issue of alter ego, and it and has not otherwise shown
that the various Insurers are liable on each others’ policies. Accordingly, Centex has
not met its initial burden of producing evidence that an Insurer other than St. Paul
Mercury issued a policy for which there is a potential for coverage.

The Motion Directed at St. Paul Mercury

In assessing whether a claim triggers coverage, the court compares the allegations in
the complaint with the coverage terms in the policy. (See Horace Mann Ins. Co. v.
Barbara B. (1993) 4 Cal.4th 1076, 1081 [“The determination whether the insurer owes
a duty to defend usually is made in the first instance by comparing the allegations of
the complaint with the terms of the policy[..].[f]acts extrinsic to the complaint also give
rise to a duty to defend when they reveal a possibility that the claim may be covered by
the policy”].) In the instant case, Centex tendered its defense after receiving the SB
800 Notice of Claim. The Insurers do not dispute that an SB 800 Notice of Claim can
trigger a duty to defend in the same manner as a civil complaint. (See D.R. Horton
Los Angeles Holding Co. v. American Safety Indem. Co. (S.D. Cal., Jan. 5, 2012) 2012
U.S. Dist. LEXIS 1881, at *57-60.) Thus, the court must compare the contents of the
SB 800 Notice of Claim with the policies of insurance. The court may also consider
extrinsic evidence known to the Insurers at the time of tender. (See Ameron Internat.
Corp. v. Insurance Co. of State of Pennsylvania (2010) 50 Cal.4th 1370, 1383.) If
there is any potential for covered liability, then the insurer must provide a defense and
must do so until it is able to demonstrate that there is no potential for coverage. (See
th
Montrose, supra, 6 Cal.4 at 299.)

Centex has produced evidence supporting reasonable inferences that (1) it was
actively working at the Project between 2006 and 2008 and (2) homes were being
completed on a rolling basis during that period. (See UMF 1-2, 16.) Centex has also
produced testimony from an expert who opines that damage caused by Ad Land’s
work likely occurred immediately after the construction of a given home in the Project
was completed. (UMF 24 [citing the Tolman Decl., ¶ 6].) This evidence collectively
supports an inference that some of the property damage that Ad Land purportedly
caused occurred while Ad Land was still working on the Project, i.e., while it was still
performing work on other homes within the Project. Because such a scenario falls
within the definition of “your work” in at least some of the applicable policies and
additional-insured endorsements, it demonstrates a potential for coverage and shifts
the burden to St. Paul Mercury to produce evidence demonstrating no possibility of
coverage.

St. Paul Mercury has not met its responsive burden. Specifically, it has failed to
produce evidence establishing that none of the property damage could have occurred
while Ad Land was still performing work on the Project. As a consequence, Centex is
entitled to adjudication as a matter of law that, when it tendered its claim via the SB
800 Notice of Claim, it triggered St. Paul Mercury’s duty to defend.

In reaching its conclusion, the court is aware of cases suggesting or explicitly holding
that an insurer may exclude completed-operations coverage by defining the term “your
work” narrowly. (See, e.g., Opp. at 14:7-15:2, 16:20-18:2.) Because Centex has
produced evidence establishing a potential for coverage for damage that occurred
while Ad Land was still on site, the court need not address and does not address
whether the St. Paul Mercury policies and endorsements provide coverage for damage
that occurred only after Ad Land’s had completed all its work.

Judicial Notice

Centex’s request for judicial notice is GRANTED.

Evidentiary Objections

The Insurers’ Objections Nos. 1-24 are OVERRULED. Objections Nos. 25 and 26 are
SUSTAINED.

Centex’s objections are all OVERRULED.

Conclusion

With respect to Centex’s First and Second Causes of Action for Declaratory Relief and
Breach of Contract, as well as St. Paul Mercury’s Third and Ninth Causes of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing and Equitable
Reimbursement, Centex’s service of the SB 800 Notice of Claim on St. Paul Mercury
triggered the latter’s duty to defend.

The motion is otherwise DENIED.

Pursuant to CRC 3.1312, Centex shall lodge a formal order for the court’s signature.