Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-00886/USCOURTS-cand-5_04-cv-00886-0/pdf.json

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

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28 1 Defendant was erroneously sued as The Travelers Indemnity Company of Rhode Island.

ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG

E-FILED on 9/6/05

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

ROYAL INDEMNITY GROUP, THE

GREYSTONE GROUP, INC.,

Plaintiffs,

v.

THE TRAVELERS INDEMNITY COMPANY

OF RHODE ISLAND, STEDMAN

CONSTRUCTION COMPANY, DOES 1-100,

Defendants.

No. C-04-00886 RMW

ORDER RE: CROSS MOTIONS FOR

SUMMARY JUDGMENT AND

ADJUDICATION; GRANTING IN PART AND

DENYING IN PART ROYAL INDEMNITY'S

MOTION TO STRIKE

[Re Docket No. 27, 28, 29, 60]

PlaintiffsRoyalIndemnityGroup ("Royal") andGreystone Group,Inc.("Greystone")move forsummary

adjudicationontwo issues:(1)thatdefendant Travelers'IndemnityCompany ofConnecticut1("Travelers") had

a dutyto defend co-defendant StedmanConstructionCompany("Stedman") against a cross-complaint brought

by Greystone in a now-resolved California state court action; and (2) that coverage under the policies issued

to Stedman by Travelers was triggered by the occurrence of property damage during the coverage period

irrespective of when that damage manifested or whether the present claimant then owned the property.

Plaintiffs also move to strike portions of Travelers' reply to its motion for summary adjudication and its

oppositionto plaintiffs'motion for summary judgment. Defendant Travelers moves for summary judgment on

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2 Travelers asks the court to take judicial notice of the four complaints filed in the AvalonBay

action as well as the order and judgment entered against Stedman. Plaintiffs ask for judicial notice of the

Third Amended Complaint in the AvalonBay action and the cross-complaint filed by Greystone in that

action. The court grants both parties' requests.

ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG 2

plaintiffs' complaint as a whole, contending that plaintiffs' claims should either be stricken for failure to

prosecute, are barred bythe statute of limitations, or are otherwise unsupportable based on the record before

the court. These motions were heard on April 22, 2005. The court has reviewed the papers and heard the

arguments of the parties. For the reasons set forth below, the court grants Royal's motion for summary

adjudication and grants in part and denies in part Travelers' motion for summary judgment.

I. BACKGROUND

Thisis aninsurance coverage dispute concerning alleged constructiondefects in anapartment complex

in San Jose known as "The Fountains." The dispute is essentially between two insurance companies: Royal,

the insurance provider for the owner of the apartment complex, and Travelers, the insurance provider for one

of the subcontractors on the original construction of the complex.

In 1990 and 1991 the developer and originalowner, WIC/W188 Ltd. ("WIC") worked with general

contractor Worthing to build the complex. Worthing retained Stedmanas a framing contractor onthe project.

During the time it worked on the Fountains project, Stedman held two Commercial General Liability("CGL")

insurance policies with defendant Travelers: policy number EE-SLS-685J728-5-89, in force September 22,

1989 through September 22, 1990 ("the 1989 policy"); and policy number EE-SLS-685J728-5-89-90, in

force September 22, 1990 through September 22, 1991 ("the 1990 policy") (collectively "the Stedman

policies"). 

While construction was ongoing, Worthing sold its assets to plaintiff Greystone, which assumed

Worthing's rights and responsibilities. WIC, Worthing, and Greystone were insured by plaintiff Royal. After

the completionofthe project, The Fountains changed ownership. On or about June 5, 1996, BayApartment

Communities, known since 1999 as AvalonBay Communities ("AvalonBay"), purchased The Fountains.2

Hungerford Decl., Exh. K.

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG 3

A. The AvalonBay Action

In1999, AvalonBayfiled suit in Santa Clara Superior Court over damage to the propertycaused by,

inter alia, water intrusion resulting from alleged defects in construction. AvalonBay Communities, Inc. v.

WIC/W188, No. CV782693 ("AvalonBay action"). The Third Amended Complaint in the matter, filed on

September 13, 2000, added Greystone and Stedman as defendants. Harrington Decl., Exh. 1. In the

complaint, AvalonBay alleged that "during the approximate period of 1990 to the date ofthis ThirdAmended

Complaint, Defendants negligently . . . constructed, inspected and installed the Project elements, including, but

not limited to, the Project's framing, exterior siding and siding systems. . . ." AvalonBay Third Amended

Complaint ("ATAC"), HarringtonDecl., Exh. 1 ¶ 32. The complaint further alleged that AvalonBay"sustained

and suffered consequential damages resulting from Defendants' acts and/or omissions, including, without

limitation, physical injury and/or destruction of tangible property and the loss ofuse of the Project to real and

personal property within the Project as a result ofsaid acts and/or omissions . . . ." ATAC ¶ 30; see id. ¶ 38.

The ATAC furthersetsforththat AvalonBaywas "unaware ofwhenallof the defective conditions alleged first

occurred or manifested themselves or caused physical injury to or destruction of tangible property . . . but

asserts that the construction deficiencies at the Project have developed and occurred over a number of years

. . . said deficiencies and resulting physical injuries being continuous and progressive." Id. at ¶ 29.

B. Tenders

WIC and Worthing tendered the AvalonBay action to Travelers under Stedman's CGL policies for

defense and indemnification. Travelers rejected the tender in a letter dated April 1, 2001, asserting that the

Certificate of Insurance naming Worthing lacked an Additional Insured Endorsement, thus neither entity was

an additional insured under the relevant CGL policy. Hungerford Decl., Exh. H. Thus, plaintiff Royal alone

defended WIC, Worthing, and Greystone inthe AvalonBay action. Pursuant to a contractual indemnity clause

in the subcontract between Worthing/Greystone and Stedman, Greystone cross-complained for indemnity

against Stedman on March 30, 2001. Harrington Decl., Exh. 2.

After receiving the tender from WIC and Worthing, Travelers sent a letter to Stedman on April 3,

2001, care ofits vice president,Robert Douds. This letter denied coverage to Stedman stating that Stedman's

policies had expired in 1991 – prior to 1996 AvalonBay's acquisition of the property to which it claimed

damage attributable to Stedman had occurred. Mathews Decl., Exh. 7. Stedman subsequently tendered to

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG 4

Travelers Greystone's cross-complaint for defense and indemnity on October 19, 2001, which Travelers

declined onsimilar grounds. Mathews Decl., Exh. 5. Stedman did not appear in the AvalonBay action, failing

to answer either AvalonBay's complaint or Greystone's cross-complaint. OnSeptember 17, 2002, the court

granted a default judgment against Stedman on the cross-complaint in the amount of $ 2,648,804.18, plus

$62,785.18 in costs and attorney's fees incurred by Greystone defending the AvalonBay action. Travelers'

Req. Judicial Notice, Exh. G. 

Eventually, AvalonBay settled with Greystone and Greystone settled with Stedman. In its settlement

withGreystone, Stedmanassigned its claims againstTravelersto Greystone. Royal asserts that it is subrogated

to any rights Greystone mayhave against any third partyinthe AvalonBay actionbyvirtue of having defended

Greystone. Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal. 3d 622, 633-34 (1975); In re Romero, 956

S.W. 2d 659, 661 (Tex. App. 1997); see also Thoreson v. Thompson, 431 S.W. 2d 341, 347 (Tex. 1968)

("By paying part of plaintiff's loss, its insurer . . . became a pro tanto owner of the cause of action. The

payment itself creates this right and need not be expressed in the insurance contract.").

C. The Present Suit

In the present action, plaintiffs Greystone and Royal seek payment for (1) amounts allegedly incurred

byWIC, Worthing/Greystone, and Royalinthe AvalonBay action;(2) amounts allegedly incurred byStedman

as a result of Travelers' failure to defend and indemnify under the insurance policy; (3) amounts allegedly

incurred by Greystone as a result of Travelers' failure to defend and indemnify it directly under the insurance

policy; and (4) amounts Travelers allegedly should have contributed toward settling Greystone's liability in the

AvalonBay action. Plaintiffs' claims are based upon a combination of direct claims against Stedman and

Travelers and claims assigned by Stedman as a result of its settlement with Greystone.

First, Greystone sues Stedmandirectly for express indemnity based on a provision in the construction

subcontract between Greystone and Stedman (claim 1). 

Second, Greystone sues Stedmanbased on an assignment fromAvalonBayofAvalonBay's claimsfor

negligence and strict liability (claims 2 and 3).

Third, Greystone sues Travelers directly for breachofthe insurance contract. Greystone contends that

it is an additional insured under Travelers' insurance policy (claim 4).

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG 5

Fourth, Greystone sues Travelersfor breachof contract onStedman's behalf. Greystone's right to sue

is based upon Stedman's assignment of its claims against Travelers to Greystone as part of the settlement

between Greystone and Stedman in the AvalonBay action (claim 5).

Fifth, Royal sues Travelers (1) in its own right for equitable contribution and (2) by subrogration to

Greystone's rights, which includes the assignment of Stedman's rights against Travelers (claim 6).

Finally, plaintiffs seek declaratory relief (claim 7).

II. ANALYSIS

The parties do not dispute that the outcome of the underlying AvalonBay action resulted in default

judgment against Stedman. Nor do they dispute that the policies between Stedman and Travelers were

standard third party CGL insurance policies. What they do dispute is (1) whether the policies are to be

interpreted in accordance with Texas or California law; (2) whether Travelers had a duty to defend; and (3)

even assuming Travelers had a duty to defend, which, if any, claims Royal and Greystone may legitimately

assert against Travelers in this action. Travelers asserts that the court's determination regarding the law

applicable to the insurance contractsimpactsthe analysis of Travelers' duty to defend, because California and

Texas law differ as to what triggers liability coverage under a standard CGL insurance policy. 

A. Summary Judgment

Summary judgment is proper when there are no genuine issues asto any material fact and the moving

party is entitled judgment as a matter of law. See Fed R. Civ. P. 56(c). Where the non-moving party bears

the burdenof proving an element of a claim, a party moving for summary judgment may simply "point[ ] out .

. . the absence of evidence to support [the] claim." Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir.

2001). The burden then shifts to the non-moving party to present evidence that could cause a reasonable jury

to find in its favor. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The court must view the

evidence inthe light mostfavorable to the non-moving party. See Rowe v. City& County of San Francisco,

186 F. Supp. 2d 1047, 1050 (N.D. Cal. 2002). 

B. Choice of Law

The threshold issue in this case is whether Texas or California law governs the interpretation of the

insurance policy. In a diversity case, a federal district court is to apply the law of the forum state for choice of

law purposes. Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135, 1138 (9th Cir. 2003) (citing

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG 6

Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941)). Thus, California choice of law rules

apply to this action.

Royal argues that California's choice of law rules require the court to apply the governmental interest

test to determine whether Texas or California lawapplies. Washington Mutual Bank,FAv.Superior Court,

24 Cal. 4th 906, 915 (2001). ("[W]hen there is no advance agreement on applicable law, but the action

involves the claims of residents from outside California, the trial court may analyze the governmental interests

of the various jurisdictions involved to select the most appropriate law."). Travelers, on the other hand,

contendsthat to determine the lawgoverning a contract, California courts look first to the relevant statute and,

only should further guidance be necessary, second to the governmentalinterest test. Shannon-Vail Five, Inc.

v. Bunch, 270 F.3d 1207, 1210 (9th Cir. 2001); Bassidiji v. Goe, 413 F.3d 928 (9th Cir. 2005). 

An insurance policy is a contract subject to the choice oflawprovisions codified inCivilCode section

1646. Gitano Group, Inc. v. Kemper Group, 26 Cal. App. 4th 49, 57 (1994). Civil Code section 1646

provides, "[a] contract is to be interpreted according to the law and usage of the place where it is being

performed; or, ifit does not indicate a place ofperformance, according to the lawand usage ofthe place where

it is made." Furthermore, "[t]he language of a writing is to be interpreted according to the meaning it bears in

the place of its execution unless the parties have reference to a different place." Cal. Civ. Proc. Code § 1857.

The parties do not dispute that the insurance policies neither include a choice of law provision nor

indicate a place of performance. Thus, the court looks first to the place where the contracts were made to

determine whether California or Texas law supplies the law for interpreting the terms of Stedman's policies.

Applying the relevant statutes demonstratesthat the interpretationofthe contractsshould begoverned byTexas

law. Stedman is a Texas corporation. It procured its insurance policies with Travelers through a Texas

insurance broker, Fort Bend Insurance Agency ("Fort Bend"). Floyd Decl. ¶ 3, Exh. A. It entered into the

insurance contracts in Texas with an insurer doing businessinHouston, Texas. Id. ¶ 2, 3. The underwriter for

the policies were based in Houston, Texas. Id. ¶ 4, 5. Both policies executed by Stedman and Travelers

include several endorsements required by Texas law. Fitts Decl., Exh. A at 6, 19, 20-22; Id., Exh. B at 15,

24, 17-18 ("Texas Changes – Conditions Requiring Notice"; "Texas Changes – Cancellation and Renewal";

"Premium Discount Endorsement – Texas").

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 7

Royal contends that the court may not confine its inquiry to California's statutory choice of law

provisions and must engage in the three-step governmental interest analysis most recently set forth in

Washington Mutual Bank v. Superior Court, 24 Cal. 4th 906, 919 (2001). It claims that Washington

Mutual requires applying the governmental interest analysis to all choice of law questions and, therefore, has

overruled the statutory choice of law provisions set forth in the California Civil Code and Code of Civil

Procedure. However, there is no indication in that case that the California statutory choice of law provisions

for contracts have been abrogated. Washington Mutual involved a class action certification and implicated

a more detailed governmentalinterest analysis than would be warranted where the issue at hand is determining

the law governing the interpretation of a contract.

In further support of the contention that California law governs the interpretation of the insurance

policies, plaintiffs cite Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc., 14 Cal. App. 4th 637

(1993). Stonewall, applying a governmental interest test to the choice of law determination regarding an

insurance contract,statesthat where a casualtyinsurance contract isindispute "particular importance is placed

on the location of the subject matter of the contract, i.e., the location of the insured." Id. at 646. However,

Stonewall and the other cases cited byRoyalthat applied the governmentalinterest testtodetermine the choice

of law for insurance contracts, did so when the statutory choice of law provision was uninformative. In

particular, the cases cited by Royal examine the choice of law outside the context of contract interpretation,

which is clearly governed by the California statutorydirectivesset forthabove. See, e.g., Stonewall, 14 Cal.

App. 4that 649-50 (whether liability insurance should be governed byWisconsin lawwhere punitive damages

are covered or byCalifornia lawwhere punitive damages are uninsurable); Downey Venture v. LMI Ins. Co.,

66 Cal. App. 4th 478, 514 (1998) (whether insuring willful misconduct violates California's public policy). 

The court thusfindsRoyal's argumentsthatCivilCode section1646 isinapplicable to be unpersuasive.

In light of the undisputed evidence that the contract was entered into inTexas and the clear direction provided

by section 1646, this court will apply Texas law to interpret the critical language in the contract without need

toresortto the Washington Mutual government interest analysis. Further, cases like Stonewalldonotpresent

contract interpretation issues but rather policy questions on issues such as coverage for willful acts.

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

STRIKE—C-04-00886 RMW

MAG 8

C. Traveler's Duty to Defend

An insurer's dutyto defend arises whena plaintiff allegesfacts that potentially support claims for which

there is coverage. National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139,

141 (Tex. 1997); Gray v. Zurich Ins. Co, 65 Cal. 2d 263, 275 (1966) ("An insurer is under a dutyto defend

any 'suit which potentially seeks damages within the coverage of the policy.'"). "Texas courts apply the 'eight

corners' rule to determine whether an insurer has the duty to defend an insured, comparing the plaintiff's

pleading allegations to the insurance contract provisions without regard to the facts that develop during

discovery and trial." Pilgrim Enterprises, Inc. v. Maryland Cas. Co., 24 S.W.3d 488, 493 (Tex. App.

2000) (citingMerchantsFast Motor Lines., 939 S.W.2d at 141). However, "an insurer is required to defend

only those cases within the policy coverage . . . . If the petition only alleges facts excluded by the policy, the

insurer is not required to defend." Fidelity & Guaranty Insurance Underwriters, Inc. v. McManus, 633

S.W.2d 787, 788 (Tex. 1982). "[I]n case of doubt as to whether or not the allegations of a complaint against

the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to

defend the action, such doubt will be resolved in [the] insured's favor." Heyden Newport Chem. Corp. v.

Southern Gen. Ins. Co., 387 S.W. 2d 22, 26 (Tex. 1965). 

Travelers contends that it had no duty to defend Stedman because AvalonBay in its complaint and

Greystone initscross-complaint allegedonlyfactsexcludedbythe policy. Specifically, AvalonBay did not own

The Fountains until 1996 and was unaware of the alleged damage until after it purchased the property. Thus,

Travelers asserts, even assuming that AvalonBay's complaint properly alleged that Stedman's acts caused

damage of a continuous nature to The Fountains during the policy period, the claimant could have suffered no

property damage during the policy period, which ended long before AvalonBay took ownership of the

property. 

With regard to insurance coverage, Stedman's 1989 policy provides: 

a. We will pay those sums that the insured becomes legally obligated to pay

as damages because of "bodily injury" or "property damage" to which this

insurance applies. . . . ."

b. This insurance applies to "bodily injury" or "property damage" only if: 

(1) . . . 

(2) the "bodily injury" or "property damage" occurs during the policy period."

Mathews Decl., Exh. 1, § I, ¶ 1, at Trav 0008. The 1989 policy defines "property damage" as:

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3 Stedman's 1990 policy contains similar, but not identical, language. See Mathews Decl.,

Exh. 2, § I, ¶ 1, at Trav 0032; Id. § V, ¶ 12, at Trav 0041. Neither party contends that the differences in

the language of the two policies is material to the determinations to be made.

ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 9

a. Physical injury to tangible property, including all resulting loss of use of

that property. All such loss of use shall be deemed to occur at the time of

the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such

loss shall be deemed to occur at the time of the "occurrence" that caused it. 

Id. § V, ¶ 12, at Trav 0018.3 The parties dispute whether property damage triggering coverage under the

Stedman policies occurred between September 22, 1989 and September 22, 1991. 

1. Duty to Defend Stedman

The parties vigorously dispute whether Travelers had a dutyto defend Stedman. Travelers contends

it had no duty to defend Stedman in the AvalonBay action because the claimant, AvalonBay, could not have

suffered property damage until 1996, when AvalonBay purchased the property. The Stedman policies were

only ineffect from September 22, 1989 through September 22, 1991. Thus, prior to 1996, Travelers argues,

no damage to claimant AvalonBay could have occurred. In essence, Travelers asserts that the policy requires

damage to The Fountainstohave occurred while AvalonBaywas owner ofthe propertysuchthat the claimant

against Stedman suffered the property damage. 

a. Trigger of Coverage

Travelers first contends that Texas has adopted a strict manifestation trigger for damage under the

occurrence wording set forthinthe Stedmanpoliciesthat requires the "bodily injury" or "property damage" to

occur within the policy period. In Dorchester Development Corp. v. Safeco Ins. Co., 737 S.W.2d 380

(Tex. App. 1987), the Texas Court of Appeals considered the question of "whether there is coverage for

property damage resulting from workmanship performed during the policy period whenthe propertydamage

is not manifested until after the policy period." Id. at 383. Examining authorities from the Florida Court of

Appeals and Idaho Supreme Court, the court held that "no liability exists on the part of the insurer unless the

property damage manifests itself, or becomes apparent, during the policy period." Id.

If, as Travelers contends, a manifestation trigger applies, no property damage manifested during the

policy period under the allegations in AvalonBay's complaint because the facts alleged in the AvalonBay

complaint set forth that AvalonBay only became aware of the property damage aftertaking ownership ofThe

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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Fountains in 1996. AvalonBay alleged, "Following the purchase of the Project, but within three (3) years of

the filing of the original complaint in this action, Plaintiff became aware of certain deficiencies in and to the

Project." ATAC ¶ 21. Because no property damage manifested during the policy period, Travelers contends

that it could have no duty to defend.

Royal argues that Dorchester inaccurately stated the rules set forth in the out-of-state authorities on

which it relied and thereby inadvertently created a manifestation trigger. It contends that the Texas court's

statements of the Florida and Idaho casesreveals the misstatement, whichhassince beenperpetuated through

subsequent Texas court decisions and FifthCircuit opinions applyingTexaslaw. See, e.g., Cullen/Frost Bank

v. Commonwealth Lloyd's Ins. Co., 852 S.W. 2d 252, 257 (Tex. App. 1993) (stating "coverage is not

afforded unless anidentifiable damage or injury, other than merely causative negligence, takes place during the

policy period"); Am. Home Assurance Co. v. Unitramp Ltd., 146 F.3d 313, 314 (1998) (citing to

Dorchesterinsupport ofitsinterpretationofCullen/Frost Bank stating "We read 'identifiable' as synonymous

with 'manifest' and 'apparent.'").

Royal'scriticismofDorchester has merit. The Texas Court of Appeals summarized the Florida court's

holding on which it relied as follows: 

The court said that the words 'caused by an occurrence' within the policy

provisions did not indicate that coverage was afforded for damagessustained

after expiration of the policy period due to causative negligence occurring

within the policy period. In other words, coverage is not afforded unless

an identifiable damage orinjury,otherthanmerely causative negligence,

took place during the policy period.

Dorchester, 737 S.W.2d at 383 (summarizingTravelersInsurance Company v. C.J. Gayfer's & Co. Inc.,

366 So. 2d 1199, 1201 (Fla. 1979)). The TexasCourt ofAppeals thenwent onto quote the Idaho Supreme

Court on whose opinion it also relied:

[I]t is well settled that the time of the occurrence of an "accident," within the

meaning of a liability indemnity policy, is not the time the wrongful act was

committed but the time the complaining party was actually damaged.

Id. (quoting Miller's Mutual Fire Ins. Co. of Texas v. Bailey, Inc., 647 P.2d 1249, 1251 (Idaho 1982)). But

then the Dorchester court goes on to hold that the that "no liability exists on the part of the insurer unless the

propertydamage manifestsitself, or becomes apparent, during the policyperiod." Id.(emphasis added). This

newly-appearing manifestationrequirement is accompanied byno additionalexplanationbut appears to be the

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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court's synthesis of the two cases upon which it relies. As there is no mention of a manifestation requirement

in either of the cited opinions, the rule announced by Dorchester may, indeed, have inadvertently adopted a

manifestation trigger when the Florida and Idaho cases cited seem to stand only forthe propositionthat there

must be at least some demonstrable property damage during the policy period.

A relatively recent Texas Court of Appeals' decision held that an exposure trigger should be applied

to a continuous property damage claims resulting from asbestos. Examining Texas and Fifth Circuit cases

addressing the issue, the appeals court in Pilgrim Enterprises, Inc. v.Maryland Cas. Co., 24 S.W.3d 488,

496(Tex. App.2000), concluded that, because the Texas Supreme Court had not addressed the issue, itfaced

a matter of first impression in determining what trigger to apply to continuous property damage in conjunction

with asbestos contamination. The Pilgrim court looked at the nature of the policy. As here, the policy was

an occurrence-based policy, covering "all claims based on an event occurring during the policy period,

regardless of whether the claim or occurrence is brought to the attention ofthe insured or made known to the

insurer during the policy period." Yancey v. Floyd West & Co., 755 S.W. 2d 914, 918 (Tex. App. 1988).

It contrasted claims-made policies which cover "only injuries or damages that come to the attention of the

insured and are made known to the insurer during the policyperiod." Id. The court then noted that the policy

language contained no express reference to a manifestation requirement or other statement that the damage

must be identified during the policy period. Pilgrim, 24 S.W. 3d at 497. Finally, it applied the principle of

insurance policy constructionthat "doubt as to whether the allegations of a complaint against the insured state

a cause of action within the coverage of a liability policy sufficient to compel the insured to defend the action

. . . will be resolved in [the] insured's favor." Id. at 498 (citing Heyden Newport Chem. Corp. v. Southern

Gen. Ins. Co., 387 S.W. 2d 22, 26 (Tex. 1965)).

As noted by the Pilgrim court, the Texas Supreme Court has thus far declined to rule on what the

trigger of coverage for continuing damage is. American Physicians Ins. Exchange v. Garcia, 876 S.W.2d

842, 853 n.20 (Tex. 1994) (surveying various states' triggers and stating "We believe it would be unwise to

select among these tests, or formulate our own, when the outcome of this case does not require resolution of

thisissue."). However, it seems likely that the Texas Supreme Court would follow the Pilgrim approach. That

approachseems consistent withthe actuallanguage ofthe Travelers policies—"'propertydamage'occursduring

the policy period." The policy language does not suggest that the damage must both occur and be discovered

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 12

during the policy period. This interpretation is consistent with constructions made by courts in other

jurisdictions. See, e.g., Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 689 (1995) ("We

agree with the conclusion of the Court of Appeal below that to apply a manifestation trigger of coverage to

Admiral's occurrence-based CGL policies would be to effectively rewriteAdmiral'scontractsofinsurance with

Montrose, transforming the broader and more expensive occurrence-based CGL policy into a claims made

policy.").

b. Existence of Property Damage

Travelers next argues that Texas law requires that the claimant sufferthe propertydamage during the

policy period in order to trigger liability coverage. Thus, because AvalonBay as claimant did not own The

Fountains at the time the policy was in effect, it could not have suffered damage during the policy period.

Travelers citeslanguage from a Texas and a California case that says that anoccurrence takes place whenthe

injured partysuffers damage,ratherthan at the time the act causes the damage. Snug Harbor, Ltd. v. Zurich

Ins., 968 F.2d 538, 544 (5th Cir. 1992); Montrose, 6 Cal. 4th at 300. However, these cases were

distinguishing the time the negligent act occurred from the time when damage first occurred. They were not

dealing with a situation such as the one here, where damage occurred during the policy period but did not

become apparent until after the property changed hands. It appears that no Texas court has yet addressed

whether property damage triggers coverage in a case where the damage occurs during the policy period, but

the claim for such damage is not made until after the propertyhas changed hands. However, it seems unlikely

that the Texas Supreme Court would read into a CGL policy a requirement that there must be continuous

ownership ofpropertybetweenthe time anoccurrence-based policyisissued and the claiminorder forliability

coverage to arise under a CGL policy. The Stedman policies define property damage as "physical injury to

tangible property . . . including loss of use of that property." They impose no requirement that the present

claimant have owned the property at the time of the physical injury. As the California Court ofAppealnoted,

"Nowhere do the policies say to whom that propertymust belong, save that it must not belong to the insured.

In other words, the policies themselves do not expressly require that the eventual claimant own the property

at the time the property is damaged for coverage to ensue; theymerely require that the damage, the 'physical

injury to . . . tangible property,' take place during the policyperiod." Garriott Crop Dusting Co. v. Superior

Court, 221 Cal. App. 3d 783, 791 (1990).

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4 Travelers objects to plaintiffs' submission of these certificates, submitted as attachments to

the Declaration of Walter Eeds, as improperly authenticated. However, Eeds's declaration sets forth that

he was an employee of both Worthing and Greystone during the relevant time and received these

certificates. The court finds this authentication sufficient to overrule Travelers' objection to the evidence.

ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 13

AvalonBay's third amended complaint sufficiently alleges that damage occurred during the Stedman

policy period and the policy sets forth no requirement that the claimant own the property during the policy

period. Thus, based on the allegations in AvalonBay's complaint and the policy terms, Travelers had a duty

to defend Stedman.

2. Duty to Defend Greystone

Plaintiffs contend that Travelers had a duty to defend Greystone as an additional insured under

Stedman's policy. Travelers, on the other hand, moves for summary judgment that Greystone has no direct

claimfor breachof contract because neither Greystone norits predecessor ininterest, Worthing, were covered

under the Stedman insurance policy as additional insureds. 

Asevidencethat Greystone and Worthing were additionalinsureds underthe Stedmanpolicy, plaintiffs

present three certificates of insurance issued by Stedman's insurance agent, James Harper of Fort Bend

Insurance Agency. Eeds Decl. Supp. Mot. Summ. Adjudication, Exh. 2-3. Travelers argues that these

certificates do not constitute evidence that Travelers ever added these entities as additional insureds under

Stedman's policies. Plaintiffs concede that certificates of insurance standing alone do not confer insured status.

Opp. Travelers' Mot. Summ. J. at 24. Nevertheless, they contend that there is sufficient evidence to raise a

materialissue oftriable fact asto whether Fort Bend acted as Travelers' actualor ostensible agent whenissuing

the certificates of insurance.4 

An agency is either actual or ostensible. Cal. Civ. Code § 2298. "An agency is ostensible when the

principalintentionally, or bywant ofordinarycare, causes a third personto believe anotherto be his agent who

is not really employed by him." Cal. Civ. Code § 2300. To establish a triable issue of fact that an insurance

agent otherwise unaffiliated with the insurer was the insurer's ostensible agent, a plaintiff asserting that it is an

additional insured must produce some evidence that the insurance company, not the insurance agency,

"intentionally or by want of ordinary care has caused or allowed [plaintiff] to believe the agent possesses such

authority. . . . Ostensible authoritymust be established through the acts or declarations of the principal and not

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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the acts or declarations of the agent." Am. Cas. Co. of Reading, Pennsylvania v. Krieger, 181 F.3d 1113,

1121 (9th Cir. 1999) (citing Preis v. American Indem. Co., 220 Cal. App. 3d 752, 761 (1990)).

Plaintiffs acknowledge that they currently cannot prove that Mr. Harper acted as Travelers' actual or

ostensible agent but that "they mean to try." Opp. Travelers' Mot. Summ. J. at 25. However, plaintiffs have

presented no evidence of acts or statements by Travelers in support of their contention that Harper acted as

Travelers' agent. Nevertheless, the court cannot finds that evidence presented by Travelers, combined with

the certificates ofinsurance, are sufficient to raise a questionasto whetherHarpermayhave acted as Travelers'

agent. 

Travelers submitted the declaration of William C. Floyd, in support of its contentions that Fort Bend

Insurance Agency was a Texas corporation and the insurance policy was underwritten in Texas. This

declaration states that "Fort Bend Insurance Agency was one of the insurance agencies for which I was

responsible. When I was account manager, I handled all applications for new business and renewals that

Travelers and its related entities received fromFort Bend Insurance Agencyin Stafford, Texas." Floyd Decl.

¶ 4. That declaration also establishes that Fort Bend submitted an application for insurance for Stedman to

Travelers, which Floyd claims he was responsible for underwriting. Id. ¶ 5. Floyd also states that he

"communicated with James Harper regarding Stedman Construction Companies . . . ." Id. Travelers'

declaration, combined withthe fact that the certificates of insurance were provided by Fort Bend, is sufficient

to raise a triable issue of fact as to whether Harper acted as Travelers' ostensible agent. As the Ninth Circuit

stated in Krieger, "[I]t is arguable that one who has obtained insurance through a broker would ask the same

broker to have an additional insured covered by the policy." Thus, here, asinKrieger, there "is a triable issue

offact whether the insurance company, having issued the policy at the request of that broker, has clothed the

broker with ostensible authority to add an additional insured to that policy." Krieger, 181 F.3d at 1121.

C. Greystone's Motion for Summary Adjudication

As set forth above, Travelers had a duty to defend Stedman. Thus, Royal's motion for summary

adjudication is granted on this issue. Furthermore, as discussed, the court has determined that, under Texas

law, the occurrence of covered damage to property, regardless of whether the present claimant owned it when

the damage occurred, will trigger coverage.

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 15

 D. Travelers' Motion for Summary Judgment

1. Claims Against Stedman

Defendant moves for summary judgment that plaintiffs have abandoned the three claims for relief

asserted directly against Stedmanbyfailingto serve Stedman. Travelers contends that the court should dismiss

these claims under Federal Rule of Civil Procedure 4(m). Plaintiffs did not oppose this motion. Thus, the

following claims are dismissed: (1) Greystone's express indemnity claim against Stedman; (2) AvalonBay's

assigned strict liabilityclaimagainst Stedman; and (3) AvalonBay's assigned negligence claimagainst Stedman.

2. Declaratory Relief Claim

Defendant likewise moved for summary judgment on plaintiffs' declaratory judgment claim on the

grounds that it is duplicative of the issues to be adjudicated in this action. Again, plaintiffs failed to address

defendant's motion in any briefing. Plaintiffs' claim for declaratory relief is hereby dismissed.

3. Breach of Contract Claims

As set forth above, the court has determined that Travelers had a duty to defend Stedman in the

AvalonBay action. Nevertheless, Travelers asserts that Royal has notsufficiently demonstrated that Stedman

assigned its claims to Greystone. However, plaintiffs attached to their complaint the "Assignment of Cause of

Action in Exchange forCovenant not to Execute"executed betweenthe Greystone and Stedman on February

26, 2002. That assignment provides:

In consideration of Greystone's covenants and undertakings hereunder,

Stedman hereby assigns and transfers to Greystone all claims and causes of

action Stedman may now have or hereafter acquire against Travelers

Insurance based on Travelers Insurance's failure and refusal to defend and

indemnify Stedman as hereinabove recited. 

The court finds this is sufficient evidence to demonstrate that Stedman assigned its claims against

TravelerstoGreystone. Accordingly, Travelers' motion for summary judgment on Greystone's assigned breach

of contract claim is denied.

As discussed, there is also sufficient evidence onrecord to present a material issue of disputed fact as

to whether Fort Bend acted as Travelers' ostensible agent inissuing the CertificatesofInsurance. Furthermore,

although plaintiffs have produced no evidence that Greystone suffered damages as a result of any refusal of

Travelers to defend or indemnify because it admitted that Royal undertook its defense and payment of the

settlement, Greystone islikely anindispensable partyto this action. Greystone's direct breach of contract claim

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5 The court agrees with Travelers that the two-year statute of limitations, not the four-year

statute of limitations applicable to contracts, applies to the equitable contribution claim. Century, 50 Cal.

App. 4th at 1117; cf. Signal Cos., Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 369 (1980) ('The reciprocal

rights and duties of several insurers who have covered the same event do not arise out of contract, for their

agreements are not with each other."); Travelers Cas. and Sur. Co. v. Century Sur. Co., 118 Cal. App.

4th 1156, 1162 (2004).

.

ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 16

is likely necessaryfor Royal's subrogated recovery, should such recovery be warranted, or Royal's equitable

contribution claim. Accordingly, Traveler's motion for summary judgment on Greystone's direct claim for

breach of contract is likewise denied.

4. Royal's Equitable Contribution Claim

As set forth above, there is an issue of fact as to whether Greystone was an additional insured under

the Stedman policies. Thus, Travelers' contention that it is entitled to summaryjudgment onRoyal's equitable

contribution claim because Royal and Travelers were not co-insurers of Greystone's loss fails. 

Travelersfurther contendsthatRoyal's claim for equitable contribution is barred bya two-yearstatute

oflimitations. Century IndemnityCo. v. Superior Court, 50 Cal. App. 4th 1115, 1117 (1996).5 Travelers

arguesthat because Greystone settled the actionwithAvalonBayonSeptember6,2001, its contributionclaim,

filedinstate court onJanuary7, 2004 istime-barred. Plaintiffs, on the other hand, contend that the contribution

claim is timely because Royal paid the finalsettlement inthe AvalonBay action on January 9, 2002, within the

statute of limitations.

"[A]n action for equitable indemnity does not accrue, for purposes ofthe statute oflimitations, untilthe

indemnitee pays a judgment orsettlement that entitles himto indemnity. . ." Lantzy v. Centex Homes, 31 Cal.

4th 363, 378 n.12 (2003) (citing Valley Circle Estates v. VTN Consolidated, Inc., 33 Cal. 3d 604, 611

(1983)). In itsreply, Travelersshifts to arguing that Royal failed to prove that it ever paid the settlement. As

set forth below, although untimely, the court chooses to accept plaintiffs' proffer of a copy of the settlement

check as evidence that Royal paid the settlement amount. The fact of payment appears not to be subject to

dispute and Travelers was not prejudiced bythe late disclosure. Thus, the court denies Travelers' motion for

summary judgment on Royal's equitable contribution claim.

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 17

E. Plaintiffs' Motion to Strike Portions of Travelers' Briefing

Plaintiffs moved to strike portions of Travelers' briefing. Plaintiffs seek to strike arguments onpage 1

ofTravelers'reply insupport ofitsmotionforsummary judgment that (1) plaintiffs have presented no evidence

thatRoyalpaid any sums onthe settlement;(2) thatRoyalhas not produced evidence that it insured Greystone;

and (3) plaintiffs have failed to prove a valid assignment of claims between Stedman and Greystone. 

Plaintiffs contend that theywere notrequired to respond on these points because Travelers produced

no evidence in support of its positions initsmotionforsummaryjudgment. As set forth above, where the nonmoving party bears the burden of proving an element of a claim, a party moving for summary judgment may

simply "point[] out . . .the absence of evidence to support [the] claim." Devereaux v. Abbey, 263 F.3d 1070,

1076 (9thCir. 2001). Thus, Traveler's responds that plaintiffsshould have presented evidence to refute these

points in response to Travelers' motion for summary judgment.

First, plaintiffs submitted a supplemental declaration on April 20, 2005, two days before the hearing

on the parties' motions, presenting a copy of a check for $3.6 million dated January9, 2002 and made out to

the trustee in the AvalonBay action. Travelers objected to the late filing on the grounds that this information

had not previously been produced in discovery and contends that this court should strike the additional

evidence. While the court agreesthat the late productionand receipt bythe court of this evidence violates the

rules of procedure, it elects to consider the evidence establishing that Royal paid the settlement in the

AvalonBay action. Plaintiffs' motion to strike is denied as to this argument.

Second, the court agrees that Travelers' argument that plaintiffs had failed to demonstrate that Royal

insured Greystone should be stricken. Travelers' motion states, "Here, because Royal insured Greystone but

Travelers did not, Royal has no claim against Travelers for equitable 

contribution . . .". Travelers' Mot. Summ. J. at 12-13 (emphasis added). Travelers did not place the

relationship between Royal and Greystone at issue in its motion and, in fact, indicated that the issue was

undisputed. Plaintiffs' motion to strike is granted as to this argument.

Third, since the court finds sufficient evidence that Stedman assigned its claims to Greystone in the

attachment to the complaint titled "Assignment inExchange for Covenant Not to Execute" signed onFebruary

26, 2002 byrepresentatives ofGreystone and Stedman, plaintiffs'motionto strike Travelers' motion regarding

the assignment is moot.

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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Plaintiffs also seek to strike section III of Travelers' opposition to plaintiffs' motion for summary

adjudication setting forth Travelers' arguments regarding plaintiffs' abilityto proceed directly against Stedman

under California Insurance Code section 11580(b)(2). Plaintiffs contend that these arguments are an

impermissible attempt by Travelers to continue the arguments from its own motion for summary judgment in

order to escape the page limit imposed by the Local Rules. Plaintiffs' motion to strike is denied. Plaintiffs'

motion for summary judgment asserts in a footnote on page 3 that plaintiffs are permitted to proceed directly

against Stedman under California Insurance Code section11580(b)(2). After raising the issue in their motion,

plaintiffs cannot complain that Travelers addressed it in opposition. Furthermore, the court agrees that direct

action under this insurance code section was not pleaded in the complaint.

III. ORDER

Plaintiffs'motionforsummaryadjudicationand defendant Travelers' motionforsummaryjudgment are

granted and denied as follows:

1. Summary adjudication is granted that Travelers had a duty to defend Stedman and that

coverage under the subject policies was triggered by the occurrence of property damage

without regard to when the damage was discovered or when AvalonBay acquired the

damaged property is granted;

2. Royal's direct claims against Stedman are dismissed.

3. Royal's declaratory judgment claim is dismissed.

4. Travelers' motion for summary judgment on plaintiffs' breach of contract claims is denied.

5. Travelers' motion for summary judgment on Royal's equitable indemnity claim is denied.

6. Plaintiffs'motionto strike portions of Traveler's reply is granted and denied asset forthabove.

The parties shall appear for a case management conference on Friday, September 30, 2005 at 10:30 a.m. to

discuss resetting the trial and pre-trial dates previously vacated at the parties' request.

DATED: 9/6/05 /s/ Ronald M. Whyte

RONALD M. WHYTE

United States District Judge

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ORDER RE:CROSS MOTIONS FOR SUMMARYJUDGMENT;GRANTING IN PART AND DENYING IN PART MOTION TO

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MAG 19

Notice of this document has been electronically sent to:

Counsel for Plaintiff(s):

Michael Mathews mathewsesq@earthlink.net 

Counsel for Defendant(s):

David Hungerford dhungerford@morison-knox.com 

Michael D. Prough mdp@morison-knox.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not registered for

e-filing under the court's CM/ECF program.

Dated: 9/6/05 /s/ MAG

Chambers of Judge Whyte

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