Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-02022/USCOURTS-cand-4_06-cv-02022-5/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

LIBERTY MUTUAL INSURANCE COMPANY,

Plaintiff,

 v.

MICHAEL T. BLATT,

Defendant.

 

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Case No. 06-2022 SC

ORDER DENYING

PLAINTIFF'S MOTION

FOR SUMMARY JUDGMENT

AND GRANTING IN PART

AND DENYING IN PART

PLAINTIFF'S MOTION

FOR SUMMARY

ADJUDICATION

I. INTRODUCTION

This matter comes before the Court on a motion by plaintiff

Liberty Mutual Insurance Company ("Plaintiff" or "Liberty") for

Summary Judgment or, in the Alternative, For Summary Adjudication

("Motion"). See Docket No. 36. Defendant Michael T. Blatt

("Defendant" or "Blatt") filed an Opposition and Liberty submitted

a Reply. See Docket Nos. 43, 45.

For the following reasons, the Court DENIES Liberty's Motion

for Summary Judgment and GRANTS IN PART and DENIES IN PART

Liberty's Motion for Summary Adjudication.

II. BACKGROUND

In September 1998, Blatt contracted to build and sell two

high-end condominiums to James Gabbert and Michael Lincoln ("the

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1 Because Liberty has moved for summary judgment, "the

evidence of [Blatt] is to be believed, and all justifiable

inferences are to be drawn in [his] favor." Eastman Kodak Co. v.

Image Technical Servs., Inc., 504 U.S. 451, 456 (1992). Any

disputed issue of fact is thus construed in favor of Blatt. Id.

2

Buyers").1 Opp'n at 3; Mot. at 1. Prior to the contract, on June

9, 1998, Blatt had contracted with a foundation contractor,

Schnabel Foundation Company ("Schnabel"), to build a retaining

wall in order to stabilize the hillside behind the two units. 

Opp'n at 3. 

At the time, Schnabel was insured by Liberty under a general

liability policy ("the Policy"). Opp'n at 3; Mot. at 3. The

Policy covered property damage and stated that Liberty's "defense

obligation is triggered only by allegations of 'property damage'

arising out of our named insured's [Schnabel's] work." Mot. at 6. 

The policy included a blanket additional insured endorsement,

which expanded the policy definition of insured to include "any

person or organization for whom you have agreed in writing to

provide liability insurance, but coverage is limited to liability

arising out of your operations or premises owned by or rented to

you." Id. at 3 (internal quotations omitted). 

On June 20, 1997, Blatt was included as an additional insured

on the Policy and Liberty issued a certificate of insurance

stating that "[a]ll liability policies are . . . endorsed to

include Mike Blatt as an additional insured as their interest(s)

may appear." Mot. at 3. (alterations in original). 

Escrow on the condominiums closed in March 1999. Opp'n at 3. 

The Buyers then began remodeling the condominiums and discovered

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construction defects, including problems associated with water

intrusion from the hillside. Id.; Mot. at 1. On January 29,

2002, the Buyers filed suit against Blatt in Marin County Superior

Court, CV 020477. Opp'n at 1; Mot. at 2. On March 21, 2002,

Blatt tendered his defense to Liberty and Liberty accepted the

defense subject to a September 4, 2002, reservation of rights

letter. Opp'n at 5; Mot. at 2. The letter reads, in part:

This responds to your firm's letters to

us [Liberty] in which you tendered the

defense and indemnity of your client,

Michael Blatt, as an additional insured

under our policy for Schnabel . . . . We

have reviewed the subcontract and the

certificates of insurance . . . and

because the correspondence in this case

can be read as alleging 'property damage'

to which our policy would potentially

apply, we will agree to share in the

defense of Michael Blatt . . . . 

Mot., Ex. C. 

In the complaint filed in Superior Court the Buyers asserted

causes of action for breach of contract, negligence, fraud,

negligent misrepresentation, concealment of material facts and

breach of implied warranty against Blatt. Opp'n at 4; Mot. at 2. 

Among other construction defects, the Buyers alleged that water

from the hillside had penetrated the property and there was

insufficient drainage. Compl., Ex. B ¶¶ 11, 17. All of the

causes of action included allegations of property damage. Id.

Blatt, in turn, cross-complained against Schnabel, alleging that

Schnabel failed to provide adequate retaining walls and drainage

and this failure, in part, caused the Buyers' damages. Opp'n at

2, 5; Mot. at 2. 

The matter proceeded to trial and the jury found Blatt liable

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2 Almost all of the damages were awarded under the negligence

claim; the jury only awarded one dollar in damages for the breach

of contract claim. Mot., Bennington Decl., Ex. E.

4

under two theories: negligence and breach of contract. Mot.,

Bennington Decl., Ex. E. The Buyers were awarded damages of

almost $145,000.2 Opp'n at 2, 5; Mot. at 2. Schnabel was found

not liable to any party. Mot. at 2. In addition to the damages

the court awarded the Buyers $286,669 in attorneys' fees and

$13,634.85 in costs, totaling $300,302.25. Opp'n at 6. 

Because Schnabel was found not liable, Liberty declined to

pay any indemnity on behalf of Blatt and Blatt therefore paid the

damages of almost $145,000 directly to the Buyers. Mot. at 3;

Opp'n at 6. Liberty did, however, pay $300,302.25 in

reimbursement for the Buyers' attorneys' fees and costs and

$198,345.11 for Blatt's attorneys' fees and costs. Opp'n at 2, 6. 

According to Liberty, payment of these fees and costs was pursuant

to a supplementary payments provisions of the Schnabel policy. 

Mot. at 3. These payments were made subject to the September 4,

2002, reservation of rights letter. Id.

Liberty has filed the present suit in an effort to recoup the

payments associated with the defense of Blatt, which totaled

$498,648. 

III. DISCUSSION

A. Legal Standard

Entry of summary judgment is proper "if the pleadings,

depositions, answers to interrogatories, and admissions on file,

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together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is

entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). 

"Summary judgment should be granted where the evidence is such

that it would require a directed verdict for the moving party.” 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). Thus,

"Rule 56(c) mandates the entry of summary judgment . . . against a

party who fails to make a showing sufficient to establish the

existence of an element essential to that party's case, and on

which that party will bear the burden of proof at trial." Celotex

Corp. v. Catrett, 477 U.S. 317, 322 (1986). In addition, entry of

summary judgment in a party's favor is appropriate when there are

no material issues of fact as to the essential elements of the

party's claim. Anderson, 477 U.S. at 247-49.

B. Analysis

1. Summary Judgment

Liberty argues that because a jury found Schnabel, the

original insured, not liable, Liberty never had a duty to defend

Blatt and may therefore recover the costs Liberty spent in

defending Blatt. According to California state law, "[t]he duty

to defend depends on whether there is potential indemnity

liability based on facts pled in the complaint . . . . There is

no duty where the only potential for liability turns on resolution

of a legal question." Golden Eagle Ins. Corp. v. Cen-Fed, Ltd.,

148 Cal. App. 4th 976, 993 (Ct. App. 2007) (internal quotation

marks, citations and alterations omitted). Thus, Liberty asserts

that "[t]he jury verdict in the underlying case has established as

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a matter of law that there was never a potential for coverage for

the claims made against Mr. Blatt." Reply at 9. 

"[T]he insurer's duty to defend arises whenever the third

party complaint and/or the available extrinsic facts suggest,

under applicable law, the possibility of covered claims." 

Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 657 (2005)

(emphasis added). "Determination of the duty to defend depends,

in the first instance, on a comparison between the allegations on

the complaint and the terms of the policy." Id. at 654. 

In the underlying Superior Court action, the Buyers raised

claims for breach of contract, negligence, fraud, negligent

misrepresentation, concealment of material facts and breach of

implied warranty against Blatt. Opp'n at 4; Mot. at 2. The

Buyers alleged that, among other construction defects, water from

the hillside had penetrated the property and there was

insufficient drainage. Compl., Ex. B ¶¶ 11, 17. 

The terms of the Policy issued to Schnabel by Liberty, as

reiterated in the September 4, 2002, reservation of rights letter

to Blatt, stated that Liberty's "defense obligation is triggered

only by allegations of 'property damage' arising out of our named

insured's [Schnabel's] work." Mot. at 6. The Policy defined

property damage "to mean: (a) physical injury to tangible

property, including all resulting loss of use of that property. .

. . (b) Loss of use of tangible property that is not physically

injured . . . ." Mot., Ex. C at 3. In addition, the policy

included a blanket additional insured endorsement, which expanded

the policy definition of insured to include Blatt. Mot. at 3.

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Blatt was found liable under two claims: negligence and

breach of contract. Both of these claims included allegations of

property damage. In comparing the allegations in the Buyers'

complaint with the terms of the Policy, the Court must determine

whether, as a matter of law, either claim was covered by the

insurance policy. See Golden Eagle, 148 Cal. App. 4th at 984

(holding that "interpretation of an insurance policy is a question

of law"). 

In their breach of contract claim, the Buyers asserted, in

part, the following:

Blatt . . . breached the Purchase

Agreement by failing to deliver to

plaintiffs the Property in accordance

with the original structural and

engineering plans. . . . Blatt . . .

also breached the Purchase Agreement by

failing to disclose material defects as

required by law. Among the defects are

the following: required hold-downs were

missing . . .; walls were missing sill

plate [sic] and were not built to plain;

. . . steel beams were not correctly

packed; welded bolts were used instead of

through bolts; . . . improper stair

risers; . . . vapor barriers missing; and

insufficient drainage because of lack of

exit routes . . . .

Sup. Ct. Complaint ¶¶ 10-11, Mot., Ex. D.

A review of this claim and theory of recovery shows that the

Buyers did allege physical injury to tangible property. Liberty's

Policy explicitly covered "physical injury to tangible property." 

Mot., Ex. C at 3. At the very least, the allegations in the

breach of contract claim created the potential for coverage under

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3

 Indeed, Liberty acknowledged this potential when it agreed

to defend Blatt. See September 4, 2002, Reservation of Rights

letter, Mot., Ex. C (stating "because the correspondence in this

case can be read as alleging 'property damage' to which our policy

would potentially apply, we will agree to share in the defense of

Michael Blatt . . .").

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the Policy.3 This potential is all that is required under

California law to trigger a duty to defend. See Scottsdale, 36

Cal. 4th at 657 (stating "[t]he insurer's duty to defend arises

whenever the third party complaint and/or the available extrinsic

facts suggest, under applicable law, the possibility of covered

claims") (emphasis added). Thus, the Court finds, as a matter of

law, that the Buyers' cause of action for breach of contract

constituted a claim for physical injury to tangible property and

therefore was a claim for property damage. 

In their negligence claim, the Buyers asserted, in part, the

following:

[Blatt] negligently . . . constructed

houses for plaintiffs such that, among

other things, water penetrated the

Property, the Property failed to comply

with applicable building and safety

codes, [and] the Property was not

properly ventilated . . . . [Blatt] also

negligently and carelessly selected and

engaged contractors and subcontractors

and others to perform portions of the

work on the Property.

Sup. Ct. Complaint ¶ 17, Mot., Ex. D.

Again, upon review of this claim and theory of recovery, it

is clear that the Buyers alleged physical injury to tangible

property. There was, at minimum, the potential for the claims to

be covered by the policy. This potential is all that is required

to trigger a duty to defend. Scottsdale, 36 Cal. 4th at 657. 

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Thus, the Court finds, as a matter of law, that the Buyers' cause

of action for negligence constituted a claim for physical injury

to tangible property and therefore was a claim for property

damage.

Liberty's assertion that "[t]he jury verdict in the

underlying case has established as a matter of law that there was

never a potential for coverage for the claims made against Mr.

Blatt," Reply at 9, is, simply put, wrong. 

The role of a jury is that of a fact-finder. See, e.g., 75A

AM. JUR. 2d Trial § 602 (2007) (stating "it is the function of the

jury to resolve conflicts in the evidence and determine issues of

fact . . . . The jury hears the evidence and, by its verdict,

settles the issues of fact . . ."); Cal. Jury Instructions, Civil,

General Instructions, Pre-Trial Admonitions, at 2 (Fall, 2006 Ed)

(explaining that juries "must base [their] decisions . . . on the

facts and the law" and "must determine the facts from the evidence

received in trial"); 23B AM. JUR. Pleading & Practice Forms § 212

(2007) (stating that jury members "are the sole judges of the

facts in issue . . . . It is the exclusive province of the jury

to weigh and consider all evidence . . . to determine the issues

of fact in the case"). 

In the underlying Superior Court action, the jury found that

the facts presented at trial did not give rise to any liability

for Schnabel. That Schnabel's liability was put in front of a

jury in the first place indicates that there were triable issues

of fact. As the California Court of Appeal has noted, where "the

potential for indemnity liability . . . turn[s] on disputed

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factual issues," the insurer is "required to provide a defense at

least until the facts [are] conclusively decided to show that

there is no coverage and thus no duty to defend." Golden Eagle,

148 Cal. App. 4th at 993 (emphasis in original). Therefore,

Liberty's duty to defend was triggered. 

Liberty's reliance on Golden Eagle, 148 Cal. App. 4th, is

also misplaced. In Golden Eagle, the court granted reimbursement

for defense costs because the court determined that the insured's

complaint and theory of recovery were premised on claims for

economic harm, not property damage. Id. at 989. Because the

insurance policy covered only property damage, and not economic

harm, the court found, as a matter of law, that there was no

potential coverage. Id. In addition, the court found that the

insurer's policy covering personal injury was outside the scope of

the insured's claim, which involved "a corporate organization, not

a person." Id. at 990. Thus, in Golden Eagle, the court found

that as a matter of law, the claims raised by the insured did not

fall under the insurance policies. As detailed above, the same

cannot be said for the claims in the present case. 

For the foregoing reasons, the Court FINDS, as a matter of

law, that the Buyers' claims for breach of contract and negligence

constituted claims that were potentially covered by the insurance

Policy for property damage. Therefore, Liberty's duty to defend

Blatt was triggered and Liberty cannot now seek reimbursement for

defense funds that accrued before the jury verdict. Therefore,

Liberty's Motion for Summary Judgment is DENIED.

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2. Summary Adjudication

In the alternative to its Motion for Summary Judgment,

Liberty moved for summary adjudication of three issues: (1) that

Liberty is entitled to reimbursement by Blatt for any costs and

fees paid to defend Blatt against claims not covered by the

Policy; (2) that Liberty is entitled to reimbursement from Blatt

for any costs and fees paid to defend Blatt after the jury verdict

was returned; and (3) Liberty is entitled to prejudgment interest

on any amounts recovered from Blatt. The Court addresses each in

turn.

i. Reimbursement for Claims Not Covered by the

Policy

Liberty argues that it is entitled to reimbursement of the

funds used to defend Blatt against claims that were not covered by

the Policy. "In a 'mixed' action, in which some of the claims are

at least potentially covered and the other claims are not, the

insurer has a duty to defend as to the claims that are at least

potentially covered . . . but does not have a duty to defend as to

those that are not . . . ." Buss, 16 Cal. 4th at 47-48. 

Nonetheless, because of policy concerns, the California Supreme

Court has also held that "in a mixed action, the insurer has a

duty to defend the action in its entirety." Id. at 48. In

explaining this, the Court stated: "To defend meaningfully, the

insurer must defend immediately. To defend immediately, it must

defend entirely. It cannot parse the claims, dividing those that

are at least potentially covered from those that are not." Id. at

49 (internal citations omitted).

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Thus, "[a]s to the claims that are at least potentially

covered, the insurer may not seek reimbursement for defense

costs." Id. "As to the claims that are not even potentially

covered, however, the insurer may indeed seek reimbursement for

defense costs." Id. at 50. In determining which costs may

actually be recovered, the California Supreme Court stated that

only "[d]efense costs that can be allocated solely to the claims

that are not even potentially covered" may be recovered. Id. at

52. 

The Court further held that the insurer must demonstrate by a

preponderance of the evidence that certain defense costs were

allocated solely to claims that were not potentially covered. Id.

at 53. The Court noted the difficulty of this standard, stating

that to carry its burden, the insurer "must accomplish a task

that, if ever feasible, may be extremely difficult." Id. at 57-58

(internal quotation marks and citations omitted). "Hence, the

insurer will probably pursue the matter only in apparently

exceptional cases--for example, where the defense costs the

insurer may obtain in reimbursement are clear and substantial and

where the assets the insured has available for reimbursement are

themselves of the same sort." Id. at 58 (emphasis in original).

Blatt was found liable on two claims: breach of contract and

negligence. As stated above, however, the Court finds that both

of these claims were potentially covered by the insurance policy. 

Thus, there are no remaining claims which might be "not even

potentially covered." Buss, 16 Cal. 4th at 52. Accordingly,

summary adjudication on this issue is DENIED. 

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4 To be clear, the fees and costs generated by Blatt and the

Buyers during the trial and paid by Liberty after the verdict, are

not fees that were 'incurred after the jury verdict.' 

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ii. Reimbursement for Costs and Fees Incurred

After the Jury Verdict

"When the duty [to defend], having arisen, is extinguished by

a showing that no claim can in fact be covered, 'it is

extinguished only prospectively and not retroactively.'" 

Scotsdale Ins. Co., 36 Cal. 4th at 655 (citing Buss v. Super. Ct.,

16 Cal. 4th 287, 298 (1997)). Thus, Liberty was "required to

provide a defense at least until the facts were conclusively

decided to show that there [was] no coverage and thus no duty to

defend." Golden Eagle, 148 Cal. App. 4th at 993.

Once the jury returned a finding of no liability for

Schnabel, Liberty's duty to defend Blatt was extinguished. Blatt

was insured only insofar as any claims against him arose under

Liberty's coverage of Schnabel. Therefore, any attorneys' fees

and costs that were generated after the jury found no liability

for Schnabel may be recovered by Liberty. 

Although the Court finds that Liberty is entitled to recover

the attorneys' fees and costs, if any, that arose after the jury

returned its verdict, neither Liberty nor Blatt indicates whether

any of these fees and costs were in fact generated after the

verdict.4

 Thus, although Liberty would be entitled to any of

these fees, it is unclear from the parties' papers whether such

fees and costs even exist. As detailed below, this issue is one

for the jury. The Court therefore GRANTS Liberty's Motion for

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Summary Judgment on the issue of whether the fees and costs

generated after the jury verdict may be recovered by Liberty. 

This holding, however, is contingent upon the finding, by the

jury, that such fees and costs even exist.

iii. Prejudgment Interest

Finally, Liberty argues that it is entitled to prejudgment

interest of 10% on all amounts recovered from Blatt. Blatt has

not contested this assertion.

California Civil Code section 3287 provides in pertinent

part: "Every person who is entitled to damages certain, or

capable of being made certain by calculation, and the right to

recover which is vested in him upon a particular day, is entitled

also to recover interest thereon from that day . . . ."

The only issue on which the Court has granted summary

adjudication is in respect to Liberty's right to recover any

attorneys' fees and costs that were generated after the jury found

Schnabel not liable. Thus, these fees are the only fees that

would be affected by the awarding of prejudgment interest. 

Liberty, however, has failed to state what, if any, fees were

generated after the verdict. One of the requirements of

California Civil Code section 3287, as interpreted by California

courts, is that section 3287 "does not authorize prejudgment

interest as a matter of law where the amount of damages depends

upon a judicial determination based upon conflicting evidence." 

Hartford Accident & Indem. Co. v. Sequoia Ins. Co., 211 Cal. App.

3d 1285, 1307 (Ct. App. 1989) (internal quotation marks and

citations omitted). 

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In the present case, Liberty has presented no evidence

pertaining to post-verdict fees. Thus, the Court at this time

cannot say with any certainty that the amount of damages for which

Liberty requests prejudgment interest is, as it must be, certain. 

See id. (stating that "[p]rejudgment interest runs from the date

when damages are certain or are capable of being calculated to a

certainty") (internal citations and quotation marks omitted). For

these reasons, Liberty's Motion for Summary Adjudication on the

issue of prejudgment interest is DENIED.

IV. REMAINING ISSUES TO BE DECIDED BY JURY

This matter is scheduled to go to trial on November 19, 2007. 

In the interest of judicial economy and for the benefit of both

parties, the Court FINDS that the following issues remain to be

decided by the jury:

(1) Whether any attorneys' fees and/or costs were generated,

in the defense of Blatt, after the jury verdict;

(2) Whether Liberty paid any of these fees and/or costs;

(3) The amount, if any, of these fees and costs. 

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V. CONCLUSION

For the foregoing reasons, Plaintiff's Motion for Summary

Judgment is DENIED. Plaintiff's Motion for Summary Adjudication

is GRANTED IN PART and DENIED IN PART.

IT IS SO ORDERED.

Dated: October 26, 2007 

UNITED STATES DISTRICT JUDGE

Case 4:06-cv-02022-CW Document 60 Filed 10/26/07 Page 16 of 16