Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-00313/USCOURTS-cand-3_05-cv-00313-1/pdf.json

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

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SCOTTSDALE INSURANCE COMPANY,

Plaintiff,

v

OU INTERESTS, INC, et al,

Defendants.

______________________________/

No C 05-0313 VRW

ORDER

Before the court are the parties’ cross motions for

summary judgment. For reasons discussed herein, plaintiff

Scottsdale Insurance Company’s (“Scottsdale”) motion for summary

judgment in its favor as to defendant and counterclaimant Ou

Interests, Inc (“Ou”) is DENIED; Ou’s motion for partial summary

judgment on its counterclaim for breach of contract is GRANTED.

Partial summary judgment is further GRANTED in favor of Ou on its

counterclaim for breach of the implied covenant of good faith and

fair dealing. Scottsdale’s motion for summary judgment in its

favor as to defendant and counterclaimant SOCO Limited (“SOCO”) is

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 1 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

GRANTED, and SOCO’s motion for partial summary judgment on its

counterclaim for breach of contract is DENIED.

I

All facts relevant to this proceeding are undisputed. 

Now-defunct SOCO was a California limited partnership whose sole

general partner was Ou. SOCO’s business was real estate

development. On August 12, 1991, Scottsdale issued a comprehensive

general liability insurance policy (“CGL policy”) to SOCO, naming

both SOCO and Ou as insureds. Doc #28 (“Joint Stip”) at 5, ¶13. 

 The CGL policy was effective from August 12, 1991, to

January 1, 1994, during which time all premiums were paid. Id. 

The CGL policy was governed pursuant to form L6395a, which provides

in relevant part:

The company will pay on behalf of the insured all sums

which the insured shall become legally obligated to pay

as damages because of

A. bodily injury or

B. property damage

to which this insurance applies, caused by an occurrence,

and the company shall have the right and the duty to

defend any suit against the insured seeking damages on

account of bodily injury or property damage, even if the

allegations in the suit are groundless, false, or

fraudulent, and may make such investigation and

settlement of any claim or suit as it deems expedient,

but the company shall not be obligated to pay any claim

or judgment or to defend any suit after the applicable

limit of the company’s liability has been exhausted by

payment of judgments or settlements.

Id at 5-6 ¶14; Ex G. 

Like most insurance policies, the CGL policy enumerated

several exclusions from coverage. Relevant to this proceeding is

the “owned property exclusion,” whereby coverage does not extend to

damage “to property owned or occupied by or rented to the insured,

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 2 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

or, except with respect to the use of elevators, to property held

by the insured for sale or entrusted to the insured for storage or

safekeeping.” Id at 6, ¶14; Ex G. 

During the policy period, SOCO built and developed two

buildings consisting of seventy-two residential condominium units

and three commercial units (the “Post International property”)

located in San Francisco, California. Joint Stip at 3, ¶¶2, 4. At

all relevant times, deeds to the Post International property were

in the name of SOCO and not Ou. Id at 5, ¶12; Ex C. SOCO sold the

first unit of the Post International property on March 11, 1994,

and all remaining units were transferred from SOCO’s control on or

before November 11, 1996. Id ¶11; Ex B.

 In 2001, the homeowners association of the Post

International property filed a complaint against SOCO, Ou and Group

1 (successor-in-interest to SOCO and Ou) in California state court

asserting various causes of action arising from alleged

construction deficiencies (“Post International litigation”). SOCO

and Ou first tendered defense of the Post International litigation

to Scottsdale in June 2001 after the original complaint was filed;

Scottsdale denied coverage based on the owned property exclusion. 

On October 21, 2004, the homeowners association filed a second

amended complaint. The alleged construction deficiencies include

substandard drainage and concrete work, poor design and

installation of plumbing and fire sprinkler systems, defects in the

spa and flaws in the roofing construction. The Post International

plaintiffs further allege that the construction defects have caused

other physical damage to the property.

//

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 3 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

On October 25, 2004, SOCO and Ou retendered defense and

indemnity to Scottsdale. On November 24, 2004, Scottsdale, through

its agent, once again denied coverage to SOCO on the basis of the

owned property exclusion. Notwithstanding that Ou never held title

to the Post International property, Scottsdale cited the owned

property exclusion as grounds for denying coverage to Ou, positing

that Ou had an ownership interest in the Post International

property “entirely derivative of its status as general partner of

[SOCO], such that the owned property exclusion is applicable to it

as well.” Doc #37 (Willoughby Decl), Ex P at 11.

On January 21, 2005, Scottsdale filed this action against

SOCO, Ou and Group 1 (collectively, “defendants”) seeking a

declaration that Scottsdale is not obligated to defend or indemnify

SOCO or Ou in the Post International litigation. Doc #1. On March

11, 2005, SOCO and Ou filed counterclaims against Scottsdale for

breach of contract and breach of the implied covenant of good faith

and fair dealing. Doc #12. On May 16, 2005, Scottsdale agreed to

defend Ou in the Post International litigation subject to a

reservation of rights. Joint Stip at 6, ¶17. 

Before the court are the parties’ motions for summary

judgment. Scottsdale moves for summary judgment in its favor on

the applicability of the owned property exclusion and against

counterclaimants SOCO and Ou on their counterclaims for breach of

contract and breach of the implied covenant of good faith and fair

dealing. Doc #26. Defendants cross-move for summary judgment in

their favor on the applicability of the owned property exclusion. 

Doc #32. Counterclaimants SOCO and OU move for partial summary

judgment on their counterclaim for breach of contract. Id.

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 4 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

II

In reviewing a summary judgment motion, the court must

determine whether genuine issues of material fact exist, resolving

any doubt in favor of the party opposing the motion. “[S]ummary

judgment will not lie if the dispute about a material fact is 

‘genuine,’ that is, if the evidence is such that a reasonable jury

could return a verdict for the nonmoving party.” Anderson v

Liberty Lobby, 477 US 242, 248 (1986). “Only disputes over facts

that might affect the outcome of the suit under the governing law

will properly preclude the entry of summary judgment.” Id. And

the burden of establishing the absence of a genuine issue of

material fact lies with the moving party. Celotex Corp v Catrett,

477 US 317, 322-23 (1986). Summary judgment is granted only if the

moving party is entitled to judgment as a matter of law. FRCP

56(c).

The nonmoving party may not simply rely on the pleadings,

however, but must produce significant probative evidence, by

affidavit or as otherwise provided in FRCP 56, supporting its claim

that a genuine issue of material fact exists. TW Elec Serv v

Pacific Elec Contractors Ass’n, 809 F2d 626, 630 (9th Cir 1987). 

The evidence presented by the nonmoving party “is to be believed,

and all justifiable inferences are to be drawn in his favor.” 

Anderson, 477 US at 255. “[T]he judge’s function is not himself to

weigh the evidence and determine the truth of the matter but to

determine whether there is a genuine issue for trial.” Id at 249.

The evidence presented by both parties must be

admissible. FRCP 56(e). Conclusory, speculative testimony in

affidavits and moving papers is insufficient to raise genuine

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 5 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

issues of fact and defeat summary judgment. Thornhill Publishing

Co, Inc v GTE Corp, 594 F2d 730, 738 (9th Cir 1979). Hearsay

statements in affidavits are inadmissible. Japan Telecom, Inc v

Japan Telecom America Inc, 287 F3d 866, 875 n1 (9th Cir 2004).

Finally, summary judgment is appropriate in this instance

because interpretation of an insurance policy is generally a

question of law. See Tzung v State Farm Fire & Cas Co, 873 F2d

1338, 1340-41 (9th Cir 1989); AIU Ins Co v Superior Court, 51 Cal

3d 807, 818 (1990).

III

Because this is a diversity action involving

interpretation of an insurance contract, California insurance law

governs. See Conestoga Servs v Executive Risk Indemnity, 312 F3d

976, 980-81 (9th Cir 2002). “A federal court applying California

law must apply the law as it believes the California Supreme Court

would apply it.” Gravquick A/S v Trimble Navigation Int’l Ltd, 323

F3d 1219, 1222 (9th Cir 2003). To the extent the California

Supreme Court has not decided an issue presently before the court,

the court must “predict how the California Supreme Court would

decide the issue, using intermediate appellate court decisions,

statutes, and decisions from other jurisdictions as interpretive

aids.” Id. Further, the court must defer to decisions of

intermediate California appellate courts “unless there is

convincing evidence that the California Supreme Court would decide

the matter differently.” California Pro-Life Council, Inc v

Getman, 323 F3d 1088, 1099 (9th Cir 2003) (citing In re Watts, 298

F3d 1077, 1082 (9th Cir 2002)). Although the court is not bound by

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 6 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

unpublished decisions of intermediate state courts, unpublished

opinions that are supported by reasoned analysis may be treated as

persuasive authority. See, e g, Employers Ins of Wausau v Granite

State Ins Co, 330 F3d 1214, 1220 n8 (9th Cir 2003) (“[W]e may

consider unpublished state decisions, even though such opinions

have no precedential value.”).

With these legal principles in mind, the court turns to

the parties’ arguments.

A

Scottsdale contends that the owned property exclusion

precludes a finding of coverage as to both Ou and SOCO. Although

apparently conceding that SOCO owned the property, defendants

contend that Ou never owned the property, rendering the owned

property exclusion inapplicable to Ou.

In determining whether a partner owns partnership

property for purposes of insurance coverage (when, as in this case,

title to the property is not actually registered or recorded in the

partner’s name), California courts look to the relevant provisions

of California Corporations Code. See, e g, Tinseltown Video, Inc v

Transportation Ins Co, 61 Cal App 4th 184 (1998). Although SOCO is

a limited partnership, Cal Corp Code § 15643(a) provides that the

rights and liabilities of a partner in a limited partnership are

determined according to the principles applicable to general

partnerships. The parties do not dispute that general partnership

law applies to this case. Accordingly, the law of general

partnerships is relevant for present purposes.

//

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 7 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

 The California Uniform Partnership Act of 1994 (“1994

UPA”) was enacted in 1996 and took effect on January 1, 1997. Cal

Corp Code § 16001, et seq. The 1994 UPA superseded the California

Uniform Partnership Act (“pre-1994 UPA”), codified at Cal Corp Code

§ 15001 et seq. The pre-1994 UPA governed partnerships formed

prior to January 1, 1997 and the 1994 UPA governs partnerships

formed on or after that date. Id § 16111(a). Additionally, as of

January 1, 1999, the 1994 UPA governs all partnerships regardless

of when they were formed. Id § 16111(b). But the 1994 UPA “does

not affect an action or proceeding commenced or right accrued

before” January 1, 1997. Id § 16112. As noted, the Post

International litigation commenced in 2001. Further, Ou’s right

accrued when it first tendered defense to Scottsdale in 2001. See

Montrose Chemical Corp v Superior Court, 6 Cal 4th 287, 295 (1993)

(stating that the duty to defend “is a continuing one, arising on

tender of defense and lasting until the underlying lawsuit is

concluded, or until it has been shown that there is no potential

for coverage”). Accordingly, the action did not commence nor did

the right accrue before January 1, 1997. It would thus appear that

the 1994 UPA, and not its predecessor, applies in this case.

The 1994 UPA unambiguously states that a “partner is not

a coowner of partnership property and has no interest in

partnership property that can be transferred, either voluntarily or

involuntarily.” Cal Corp Code § 16501. As the sole general

partner of SOCO, Ou might have a substantial interest in the

profits and losses of the partnership, but it is not considered an

owner of any property held by SOCO. Under the 1994 UPA, then, Ou

never owned the Post International property.

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 8 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

Scottsdale argues that the contract was formed in 1991

and the parties’ mutual intent at that time should inform the

choice of applicable law. According to Scottsdale, because the

pre-1994 UPA governed in 1991, Ou’s status as owner of the property

should be evaluated under that body law. Doc #39 at 6. The court

is unpersuaded. 

Scottsdale relies solely upon AIU Ins Co v Superior

Court, 51 Cal 3d 807 (1990), and Bank of the West v Superior Court,

2 Cal 4th 1254 (1992). See Doc #39 at 6-7. Those cases confirm

the uncontroversial proposition, codified at Cal Civ Code § 1636,

that “the mutual intention of the parties at the time the contract

is formed governs interpretation.” AIU, 51 Cal 3d at 821; see also

Bank of the West, 2 Cal 4th at 1264-65. But Scottsdale points to

no direct authority for the proposition that the pre-1994 UPA

applies for purposes of construing an insurance policy that took

effect prior to the effective date of the 1994 UPA or January 1,

1999, when the pre-1994 UPA ceased to govern any partnership

(except as to actions commenced or rights accrued prior to January

1, 1997, see Cal Corp Code § 16112). 

Ironically, AIU actually undercuts Scottsdale’s position. 

There, the California Supreme Court indicated that the parties’

mutual understanding at the time of contract formation does not

necessarily trump subsequent legislative developments that expand

coverage:

Although our focus is the expectations of the

insured at the time the policy is made, this

emphasis does not preclude coverage of forms of

liability * * * created after the formation of the

policy. Because the policies in question here are

“comprehensive,” it was within the insured’s

reasonable expectation that new types of statutory

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 9 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

liability would be covered, as long as they were

within the ambit of the language used in the

coverage provision. * * * [F]ailure to cover new

liabilities would create a discordant result, for it

would mean that where courts enlarge liability

during the effective period of a liability policy,

an insured who contracted for complete coverage of a

possible risk would be left without coverage because

the scope of risk had been enlarged by decisional

law. The same is true when legislatures create

entirely new forms of liability. The sole relevant

inquiry in determining whether such types of

liability are covered is whether, in view of the

reasonable expectations of the insured, policy

language can be interpreted to embrace the liability

that may accrue under new statutory schemes.

AIU, 51 Cal 3d at 823 n9 (internal citation and quotations

omitted).

To be sure, the California Supreme Court was addressing a

situation somewhat different from the present case. But this is

precisely the kind of datum by which the California Supreme Court’s

receptivity to Scottsdale’s argument can be predicted. And in this

respect, the foregoing passage from AIU signals that the California

Supreme Court will not fix an insurer’s obligations at the time of

contract formation such that subsequent legislative enactments

cannot enlarge the scope of obligations that would otherwise be

encompassed by the language of the policy. 

In light of AIU and the clear language of the 1994 UPA,

the court concludes (1) the 1994 UPA determines whether Ou owned

the Post International property, (2) under the 1994 UPA, Ou did not

own the Post International property and, accordingly, (3) the owned

property exclusion does not preclude coverage as to Ou.

//

//

//

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 10 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11

B

Even assuming arguendo that the pre-1994 UPA applies (and

the court will entertain this assumption only because the effect of

the pre-1994 UPA bears upon the issue of Scottsdale’s good faith,

see infra V), Ou was not an owner of the Post International

property. Although § 15025(1) of the pre-1994 UPA states that a

“partner is coowner with other partners of specific partnership

property holding as a tenant in partnership,” California courts

have uniformly stated that § 15025(1) does not mean what it says. 

See, e g, Mayer v C W Driver, 98 Cal App 4th 48, 60 & n5 (2002);

Munkdale v Giannini, 35 Cal App 4th 1104, 1111 (1995). Further,

California courts have applied this principle to insurance disputes

where coverage turned on whether a partner owned partnership

property.

One good example is Bartlome v State Farm Fire & Cas, 208

Cal App 3d 1235 (1989), which involved a partner’s personal

liability insurance coverage. The coverage dispute turned on

whether the partner owned a boat that was registered to the

partnership. The court noted how California’s hybrid approach to

the entity and aggregate theories of partnership was reflected in §

15025. Specifically, although § 15025 begins by stating a “partner

is coowner with the other partners of specific partnership

property,” § 15025 goes on to qualify that ownership such that

“most of the normal incidents of ownership are held by the

partnership as a group rather than the individual partners.” Id at

1240. After an extensive discussion of case law from other

jurisdictions, the court concluded by “reject[ing] the proposition

that an individual partner is, in effect by operation of law,

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 11 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12

deemed the owner of specific partnership assets, simply by virtue

of his status as a partner.” Id at 1243.

In Tinseltown Video, Inc v Transportation Ins Co, 61 Cal

App 4th 184 (1998), an insured sued its insurer for failing to

defend against an underlying action brought by two partners of a

partnership that did business with the insured. In order to

determine whether the insurer owed a duty to defend, the court had

to determine first whether the two partners held a real property

interest in properties owned by the insured. Relevant for present

purposes, the court stated that in “California it is wellestablished that the partnership interest held by a copartner is

treated in equity as personalty notwithstanding that the

partnership property may consist of realty.” Tinseltown, 61 Cal

App 4th at 196 (citing Comstock v Fiorella, 260 Cal App 2d 262, 266

(1968)). Accordingly, the court held that a partner’s interest in

a partnership property of whatever character is held in a personal

property interest for all purposes. Id. 

The court went on to discuss § 15025, explaining that

although the language of § 15025 states that a “partner is coowner

with other partners,” it is generally recognized that real property

acquired on behalf of the partnership is “owned by the partnership,

not the partners individually.” Id at 198. The court quoted other

courts’ explanation of the ambiguity of § 15025: 

“In all material respects, California Corporations

Code section 15025 is identical to section 25 of the

Uniform Partnership Act, a provision which has been

described as follows: ‘Although stating that each

partner is a co-owner of the partnership property,

[§ 25 of the Uniform Partnership Act] systematically

destroys the usual attributes of ownership. * * *

Functionally, despite the literal language, the

partnership owns its property and the partners do

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 12 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

13

not. The Act would be better if it conceded this

rather than accomplishing it by indirection.’”

Id at 199-200 (quoting Munkdale, 35 Cal App 4th at 1111 n6 (1995)

(quoting Employers Casualty Co v Employers Commerical Union, 632

F2d 1215, 1219-20 (5th Cir 1980))). 

The court concluded that a “copartner’s statutory right

to possession of partnership realty does not derive from the

copartner’s ownership of the realty, which is owned not by the

copartner, but by the partnership.” Id at 200. Thus, the court

held as a matter of law that the real property at issue was owned

by the partnership as an entity and not by the partners

individually. 

More recently, a California intermediate appellate court,

in an unpublished opinion, utilized the reasoning of Tinseltown to

decide whether an insurance policy containing an owned property

exclusion barred coverage in a factual situation virtually

identical to the present case. See Century Indemnity Co v Cannery

Row Plaza Assc, No H021857, 2002 WL 317915 (Cal App Ct Feb 28,

2002) (unpublished opinion). In Century, a general partner of a

limited partnership sought defense and indemnity from an insurer in

an underlying action for defective design and construction of a

hotel. As in this case, the insurer denied coverage to the general

partner on the basis of owned property exclusion. The court found

that the general partner “had a statutory right to possession of

the hotel, the partnership realty, but the partnership realty is

owned by the partnership” and the general partner was “entitled to

coverage under the policies.” Id at *8. The persuasive authority

of Century is, of course, amplified by published California state

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 13 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14

court opinions (i e, Bartlome and Tinseltown) holding that a

partner does not own partnership property for purposes of insurance

coverage. 

Finally, courts applying other jurisdictions’ versions of

the pre-1994 UPA have held that a partner does not own partnership

property for insurance coverage purposes simply by virtue of his

status as a partner. See Harleysville Mutual Ins Co v Packer, 60

F3d 1116, 1120-21 (4th Cir 1995) (North Carolina law); Green v

Farmers Ins Co Inc, 57 F Supp 2d 729, 734 (WD Ark 1999) (Arkansas

law); Auto-Owners Ins Co v Safety Mut Cas Ins Corp, 476 So 2d 732,

734 (Fla Dist Ct App 1985) (Florida law).

C

In sum, although the court finds that the 1994 UPA

applies in this case, the court has no trouble concluding that the

California Supreme Court would hold that under either the pre-1994

UPA or 1994 UPA, a partner does not, simply by virtue of his status

as a partner, own partnership property for purposes of an owned

property exclusion such as that contained in the CGL policy. To be

clear, the court does not hold that Ou is absolutely entitled to

coverage. The court simply holds that the owned property exclusion

does not apply to Ou and is therefore not a valid justification for

Scottsdale’s denial of coverage. To the extent Scottsdale denied

coverage to Ou under the owned property exclusion, Scottsdale

breached the contract; Ou’s motion for partial summary judgment on

its counterclaim for breach of contract is accordingly GRANTED. 

//

//

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 14 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

15

IV

In an effort to secure coverage as to SOCO, defendants

contend that the CGL policy contains two provisions that “carve

out” of the owned property exclusion the claims asserted in the

Post International litigation. Doc #32 at 11. First, defendants

point to the “Broad Form General Liability Endorsement” (the “broad

form endorsement”) accompanying the CGL policy, which appears

subsequent to the exclusions. Section 1 of the endorsement is

entitled “Contractual Liability Coverage.” Section 1(A) provides

that “[t]he definition of incidental contract is extended to

include any oral or written contract or agreement relating to the

conduct of the named insured’s business.” Joint Stip, Ex D. Next,

defendants point to the “Exclusions” section of the policy itself. 

Exclusion (a) (alternatively, the “contractual liability

exclusion”) provides that coverage does not extend 

to liability assumed by the insured under any

contract or agreement except to an incidental

contract; but this exclusion does not apply to a

warranty of fitness or quality of the named

insured’s products or a warranty that work performed

by or on behalf of the named insured will be done in

a workmanlike manner. 

Id. 

Because the claims asserted against defendants in the

Post International litigation allege breach of contractual

obligations that were entered into in connection with the

defendants’ business of real estate development, defendants contend

those claims are in fact encompassed by the policy’s coverage for

liabilities assumed by the insured in incidental contracts. 

Although defendants do not clearly explain why the alleged coverage

for incidental contracts exists in this case despite the owned

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 15 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

16

property exclusion, it appears that defendants read the contractual

liability exclusion as excepting incidental contracts from all

other exclusions set forth in the policy. See Doc #32 at 12

(“Section (a) of the exclusions provides that the articulated

exclusions in the policy do not apply to [i]ncidental

[c]ontracts.”). Defendants’ reading of the contractual liability

exclusion is unreasonably broad. The language excepting incidental

contracts from the contractual liability exclusion does just that

and nothing more. It does not purport to except liabilities

assumed by the insured in incidental contracts from other

exclusions in the policy. 

Next, defendants argue that because certain implied

warranties (e g, warranty of fitness and warranty of workmanlike

performance) are expressly excepted from the contractual liability

exclusion, “the owned property exclusion does not apply in the face

of claims arising out of implied warranty claims.” Id at 14. A

virtually identical argument was rejected in St Paul Fire & Marine

Ins Co v Coss, 80 Cal App 3d 888 (1978). The GCL policy in Coss

contained a contractual liability exclusion identical to the policy

in this case. Similar to the Post International litigation, the

claims against the insured “were for a breach of construction work

to be performed and delivered.” Id at 894. The insured argued

that the contractual liability exclusion, which preceded other

exclusions that would have themselves precluded coverage, could be

interpreted to create coverage under the circumstances. Id at 894-

95. Unpersuaded, the Coss court concluded that “[t]he exception to

exclusion (a) merely removes breach of implied warranty of fitness,

quality, or workmanship from the specific exclusion relating to

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 16 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

17

contractual liability.” Id at 896. “The exception remains subject

to and limited by all other related exclusions contained in the

policy.” Id. 

Similar to the insured in Coss, defendants advance the

alternative argument that even if the implied warranty exception

from the contractual liability exclusion does not create coverage

of itself, “at a minimum, the owned property exclusion and the

incidental contract/warranty exceptions to the contractual

liability coverage provisions render the policy ambiguous.” Doc

#32 at 15. According to defendants, this ambiguity should be

resolved in favor of the insureds, resulting in a finding of

coverage for both SOCO and Ou. To the extent the ambiguity arises

from some conflict between the contractual liability exclusion and

the owned property exclusion, a similar argument was also

dismissed, summarily, in Coss. The court found that because the

implied warranty exception to the contractual liability exclusion

did not affect any other exclusion, no ambiguity existed. See

Coss, 80 Cal App 3d at 896 (“For the reasons stated, exclusion (a)

is not in conflict with the other exclusions; therefore, we do not

find the ambiguity urged by Coss.”). That same reasoning should

apply in this case.

According to defendants, Coss is distinguishable because

“the insured never argued that there was contractual liability

coverage * * *. Nor did the policy at issue in Coss contain the

Broad Form General Liability Endorsement.” Doc #40 at 6-7. The

thrust of defendants’ argument, then, is that although the

contractual liability exclusion itself may not create an ambiguity,

it does so in conjunction with the endorsement’s provisions

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 17 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

18

relating to contractual liability coverage. At the hearing,

counsel for defendants suggested that a reasonable person would

read the body of the policy itself and the exclusions, proceed to

the broad form endorsement, encounter the provision entitled

“Contractual Liability Coverage” and conclude that the endorsement

created new coverage not provided for in the body of the policy. 

This argument fails for two reasons.

First, if this argument gains its force from the sequence

in which the provisions appear in the body of the policy and

endorsements or amendments thereto, then it is severely weakened by

the fact that the owned property exclusion is reiterated (in

modified form) on the very next page of the broad form endorsement. 

Thus, even if a reasonable person, upon encountering the

contractual liability provision in the broad form endorsement,

would believe that provision nullified certain exclusions such as

the owned property exclusion, that belief would be dispelled by the

reappearance of the owned property exclusion on the very next page.

Second, the court is bound to follow the rules of policy

interpretation as set forth by the California Supreme Court. And

that court has made clear that the terms of an insurance policy,

like any contract, should be interpreted in their “ordinary and

popular sense.” See, e g, AIU, 51 Cal 3d at 821-22. “Thus, if the

meaning a layperson would ascribe to contract language is not

ambiguous,” the court will “apply that meaning.” Id at 822. The

court agrees with Scottsdale that the owned property exclusion

(which appears initially in the body of the policy and again in

modified form in the broad form endorsement) is clear: coverage

for property damage does not extend to property owned by the

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 18 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

19

insured. Accordingly, the court declines to accept defendants’

invitation to find an ambiguity where none exists. See, e g, Coss,

80 Cal App 3d at 896 (“The courts will not indulge in a forced

construction of an insurance policy so as to fasten a liability on

the insurance company which it has not assumed.”).

The court finds that the relevant provisions of the CGL

policy are unambiguous. To be clear, the court does not hold that

the owned property exclusion defeats coverage as to SOCO. Rather,

assuming (as the parties appear to have stipulated) that the owned

property exclusion would otherwise defeat coverage as to SOCO, the

court holds there is no ambiguity that justifies a finding of

coverage as to SOCO. With that caveat, Scottsdale’s motion for

summary judgment is GRANTED as to SOCO; SOCO’s motion for partial

summary judgment on its counterclaim for breach of contract is

DENIED.

V

A

Every contract imposes on each party an implied duty of

good faith and fair dealing. See Egan v Mutual of Omaha Ins Co, 24

Cal 3d 809, 818 (1979). “Simply stated, the burden imposed is

‘that neither party will do anything which will injure the right of

the other to receive the benefits of the agreement.’” Chateau

Chamberay Homeowners Ass’n v Associated Int’l Ins Co, 90 Cal App

4th 335, 345 (2001) (quoting Comunale v Traders & Gen Ins Co, 50

Cal 2d 654, 658 (1958)). 

In order to find a breach of the implied covenant of good

faith, an insured must show that (1) benefits due under the policy

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 19 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

20

have been withheld and (2) the reason for withholding was

unreasonable or without proper cause. See Love v Fire Ins

Exchange, 221 Cal App 3d 1136, 1151 (1990). The inquiry must focus

on whether the conduct of the defendant 

demonstrates a failure or refusal to discharge

contractual responsibilities, prompted not by an

honest mistake, bad judgment or negligence but

rather by a conscious and deliberate act, which

unfairly frustrates the agreed common purposes and

disappoints the reasonable expectations of the other

party thereby depriving that party of the benefits

of the agreement.

Chateau Chamberay, 90 Cal App 4th at 346.

But “where there is a genuine issue as to the insurer’s

liability under the policy for the claim asserted by the insured,

there can be no bad faith liability imposed on the insurer for

advancing its side of that dispute.” Id at 347. Moreover,

although an insurer might be liable for breach of contract, “[i]t

is now settled law in California that an insurer denying or

delaying the payment of policy benefits due to the existence of a

genuine dispute with its insured as to the existence of coverage

liability or the amount of the insured’s coverage claim is not

liable in bad faith.” Id. (citing Fraley v Allstate Ins Co, 81 Cal

App 4th 1282, 1292 (2000)). 

 “While the reasonableness of an insurer's claims

handling conduct is ordinarily a question of fact, it becomes a

question of law where the evidence is undisputed and only one

reasonable inference can be drawn from the evidence.” Chateau

Chamberay, 90 Cal App 4th at 346. More important for purposes of

these proceedings, “[w]hen the issue of the insurer's objective

reasonableness depends on an analysis of legal precedent,

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 20 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

21

reasonableness is a legal issue,” CalFarm Ins Co v Krusiewicz, 131

Cal App 4th 273, 287 (2005), presumably appropriate for summary

judgment.

B

The court first determines whether benefits under the

policy have been withheld. SOCO and Ou first tendered defense of

the Post International litigation to Scottsdale in June 2001. 

Joint Stip ¶15. It was not until May 16, 2005 that Scottsdale

agreed to represent Ou in the Post International litigation. Id,

Ex U. Ou was without benefit of defense under the CGL policy for

almost four years. Accordingly, the court finds that the first

prong is met. 

Scottsdale argues that despite a withholding of benefits,

its actions were reasonable and involved a genuine dispute over the

interpretation of unsettled California law. Specifically,

Scottsdale argues that there is no published California case

interpreting the scope and application of the owned property

exclusion in insurance contracts. Defendants suggest that the

question of bad faith should focus on the dispute over a partner’s

status as owner of partnership property and not the dispute over

the applicability of the owned property exclusion generally. After

reviewing the parties’ written correspondence leading up to

Scottsdale’s agreement to defend Ou, the court agrees that the

issue should be framed in this manner. Viewed in this light, the

court finds that Scottsdale’s denial of coverage to Ou was

unreasonable. 

//

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 21 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

22

First and foremost, Scottsdale offers no reasonable

explanation for its belief that the pre-1994 UPA applied to this

matter. In ostrich-like fashion, Scottsdale has ignored the plain

language of Cal Corp Code §§ 16111 and 16112, which state, clearly

and unambiguously, that the 1994 UPA applies to all partnerships

after 1999, excepting actions commenced or rights accrued before

January 1, 1997. And as already discussed, the 1994 UPA also

states, pellucidly, that partners are not owners of partnership

property. Scottsdale has not cited any relevant authority to

justify its position that the 1994 UPA does not apply. Nor has the

court found any California or other potentially persuasive

authority supporting Scottsdale’s position. Further, the authority

that Scottsdale does cite undercuts its position. See supra

III(A). In short, there is no genuine dispute regarding the

applicability or effect of the 1994 UPA.

Assuming arguendo that the applicability of the pre-1994

UPA was a matter upon which reasonable minds could disagree,

Scottsdale’s position was nonetheless unreasonable. The court has

already discussed published California decisions holding that a

partner is not an owner of partnership property for insurance

coverage or other purposes under the pre-1994 UPA. Scottsdale has

not cited one case holding to the contrary. Instead, Scottsdale

(1) dissected helpful language from § 15025(1) without considering

the effect of § 15025(2), (2) ignored a substantial body of

published California case law interpreting § 15025 and (3) hid

behind the fact that a well-reasoned opinion addressing an

identical situation was unpublished. The court finds no legal

basis for Scottsdale’s assertion that Ou owned the Post

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 22 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

23

International property simply by virtue of its status as a general

partner. Accordingly, Scottsdale’s motion for summary judgment

against Ou on its counterclaim for breach of the covenant of good

faith and fair dealing is DENIED.

Further, with the well-developed record before the court,

the absence of any issues of fact and the parties’ complete

briefing on this issue, the court, sua sponte, finds it appropriate

to GRANT summary judgment in favor of Ou on its counterclaim for

breach of the covenant of good faith and fair dealing. See, e g,

Gospel Missions of America v City of Los Angeles, 328 F3d 548, 553

(9th Cir 2003) (“Even when there has been no cross-motion for

summary judgment, a district court may enter summary judgment sua

sponte against a moving party if the losing party has had a ‘full

and fair opportunity to ventilate the issues involved in the

matter.’” (quoting Cool Fuel, Inc v Connett, 685 F2d 309, 312 (9th

Cir 1982)).

VI

As the court found no need to rely upon the declaration

of Joy Ou, Scottsdale’s motion to strike is DENIED AS MOOT.

VII

In sum, Scottsdale’s motion for summary judgment in its

favor as to Ou is DENIED; Ou’s motion for partial summary judgment

in its favor on its counterclaim for breach of contract is GRANTED. 

Partial summary judgment is further GRANTED in favor of Ou on its

counterclaim for breach of the implied covenant of good faith and 

//

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 23 of 24
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

24

fair dealing. Scottsdale’s motion for summary judgment in its

favor as to SOCO is GRANTED, and SOCO’s motion for partial summary

judgment on its counterclaim for breach of contract is DENIED.

The parties are ORDERED to appear for a case management

conference on January 31, 2006, at 9:00 am.

SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

Case 3:05-cv-00313-VRW Document 44 Filed 11/02/05 Page 24 of 24