Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_04-cv-05327/USCOURTS-cand-4_04-cv-05327-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1441 Petition for Removal- Insurance Contract

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

NOT FOR CITATION

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

JON JERNIGAN, et al., 

Plaintiffs, No. C 04-5327 PJH

v. ORDER GRANTING MOTION 

FOR SUMMARY JUDGMENT

NATIONWIDE MUTUAL INSURANCE 

COMPANY,

Defendant.

_______________________________/

Defendant’s motion for summary judgment came on for hearing before this court on

February 1, 2006. Plaintiffs appeared by their counsel Todd B. Gary, and defendant

appeared by its counsel Julian J. Pardini. Having read the parties’ papers and carefully

considered their arguments and the relevant legal authority, and good cause appearing, the

court hereby GRANTS the motion as follows.

BACKGROUND

This is a breach of insurance contract case. Plaintiffs are Jon Jernigan (“Jernigan”),

individually and as trustee of the Jernigan Family Living Trust; and Chuck Scoble

(“Scoble”), individually and as trustee of the Scoble Family Living Trust. In December

1998, Jernigan and Scoble purchased a piece of real property (“the property”) located at

300 Bell Avenue in Windsor, California. At the time of the purchase, there were three

buildings standing on the property – an old wood-frame building known as the Windsor

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Feed and Supply Building (“the Feed and Supply Building”), and two auxiliary buildings. 

On December 30, 1998, defendant Nationwide Mutual Insurance Company

(“Nationwide”) issued Jernigan and Scoble a commercial property policy, which was

renewed annually thereafter. The Nationwide policy is an “all risk” policy, covering all risk

of loss unless specifically excluded. The insuring agreement states, “We will pay for direct

physical loss of or damage to the Covered Property . . . caused by or resulting from any

Covered Cause of Loss,” unless the loss is specifically excluded or limited. The term

“Covered Cause of Loss” also includes “Collapse” of a building, defined as “an abrupt

falling down or caving in of a building” if caused by certain specified causes of loss. 

Jernigan and Scoble planned to develop the property with a ten-unit live-work

industrial/residential mixed-use project which would incorporate the 10,800 square-foot

Feed and Supply Building. Approximately 18 months after they purchased the property,

plaintiffs obtained approval from the Town of Windsor for their development plans. The

Town issued the permits contingent on the renovation of the Feed and Supply Building. At

some point during the development process, plaintiffs began negotiating with a prospective

tenant for the Feed and Supply Building space, Siduri Winery.

Jernigan and Scoble hired Harvey Charnofsky (“Charnofsky”), a developer, to serve

as the project manager for the development. Charnofsky was to be paid to serve as the

general contractor, and also was to receive a portion of the profits from the development. 

In September 2002, Charnofsky hired Daniel O. Davis (“Davis”), a Santa Rosa demolition

contractor, to perform demolition work at the site, for $40,000. Davis’ bid stated in part,

“Demolish and remove buildings, concrete debri[s], and brush inside of fence line . . . “ 

When Charnofsky signed the bid (turning it into a contract), he added, “Including interior

wood floor and floor joists and mezzanine and interior walls, corrigated [sic] metal from

remaining building.” 

The contract required that Davis obtain the necessary permits. Davis submitted a

permit application to the Town of Windsor, consisting of the application page and a site

plan. The permit application describes the scope of work as “Demolish & Remove comm’l

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building.” The permit was issued on September 25, 2002. According to Davis, the copy of

the permit he received from the Town did not have the attached site plan, although the site

plan apparently indicated that only the two auxiliary buildings – not the Feed and Supply

Building – were to be demolished. 

Davis demolished the two auxiliary buildings, and cleared away the debris. He then 

removed the siding and the floor of the Feed and Supply Building. All the work performed

by Davis to that point was in conformance with the demolition permits. Davis stopped the

demolition work at about the time that the winter rains began. 

Davis and his workers had reported to Charnofsky that the wood beams and trusses

of the Feed and Supply Building had considerable dry rot. At some point, Charnofsky hired

Vinson Engineering (“Vinson”) to evaluate the internal structure of the building. Vinson’s

inspection revealed extensive areas of dry rot that rendered the wood incapable of

supporting any load, and also revealed significant problems with the trusses and other

problems that indicated the building lacked structural integrity and that its rehabilitation

would be “cost-prohibitive.” Vinson advised Charnofsky of these problems, and

subsequently issued a written report dated January 29, 2003. 

According to Davis, Charnofsky asked him in mid-January 2003 how much

additional he would charge to demolish the remainder of the Feed and Supply Building. 

Davis verbally quoted him a price of $8,500. Davis claims that Charnofsky then told him he

wanted the work done, “the sooner the better.” Davis took this as a direction to proceed

with demolishing the building. He testified in his deposition that he did not apply for

additional demolition permits because he thought the permits previously obtained applied to

the whole property, and that he didn’t question Charnofsky when Charnofsky told him to

demolish the remainder of the building. Nor did he contact the Town to ascertain whether

the existing permit would cover the additional work. 

Charnofsky’s version of events differs slightly. He claims that in January 2003, after

the discovery of some dry rot in the framing and structural members of the Feed and

Supply Building, he discussed with Jernigan and Scoble the possibility of “reconstructing”

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 All the deposition excerpts submitted as evidence in connection with the present

motion were taken in the Sonoma County Superior Court case filed by Jernigan and Scoble

against Davis In its October 30, 2003, letter denying plaintiffs’ claim, Nationwide notes that it

appeared that Charnofsky was the one who instructed Davis to demolish the building, but that

it was not certain, as Jernigan and Scoble had refused to produce Charnofsky for a sworn

examination and would not allow Charnofsky to be interviewed by a Nationwide representative.

They did provide Nationwide with a written statement from Charnofsky. This is the August 22,

2003, declaration of Charnofsky submitted as evidence by plaintiffs herein. 

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the building to “match the rendering approved by the Town of Windsor,” as opposed to

keeping and strengthening the existing structural elements. In a declaration dated August

22, 2003, Charnofsky stated, “In connection with that, I asked Davis to provide an estimate

to clear the site, including the Feed and Supply Building, and he quoted me $8,500.” 

Charnofsky asserted further that after he had obtained approval from the plaintiffs for that

price, he “asked Davis to proceed with the process of potentially demolishing the Feed and

Supply Building.” According to Charnofsky, this process was to include “the same process

as the earlier work” – preparing and sending a contract for final approval and execution,

obtaining a permit from the Town of Windsor, and giving Charnofsky notice before the work

began.1

On January 15, 2003, Charnofsky advised Jernigan and Scoble by e-mail that Davis

had quoted a price of $8,500 to demolish the remainder of the building, “in addition to the

$40,000 already quoted,” adding that “[t]he site will be cleared in the next two weeks,” and

stating, “I authorized the additional demolition.” 

Shortly thereafter, Davis resumed work at the property. He completed the

demolition of the building by January 23, 2003. On that date, a Town of Windsor building

inspector visited the site, determined that Davis had exceeded the scope of the permit, and

issued a stop-work order. 

Charnofsky stated in his declaration that prior to January 23, 2003, Davis did not

provide him with a contract for the additional demolition work, did not obtain a permit from

the Town of Windsor for the work, and did not advise him (Charnofsky) that he (Davis) was

going to start the work. Charnofsky specifically stated that he did not authorize Davis to

demolish the building “without a proper permit, and would never have allowed the building

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to be taken down without a proper permit.”

On January 28, 2003, Charnofsky wrote an e-mail to Rick Jones, a member of the

Windsor Planning Committee’s staff, explaining that after his workers had gutted the Feed

and Supply Building pursuant to the demolition permit, they had discovered that the dry rot

was so extensive that the structure would have to be replaced. He noted that he had asked

Jones in mid-January whether a building that looked like the old one on the outside, but

with a steel frame structure, would be acceptable to the Town Council in terms of their

approval of the development. He stated that Jones had responded that as long as the

building looked like the old one, it would be acceptable. 

On January 29, 2003, Charnofsky wrote to Windsor Town Manager Paul Berlant,

stating that Vinson Engineering had advised him that the structural integrity of the Feed and

Supply Building was “minimal,” and also stating that he had advised the Town Planning

Staff verbally of the engineer’s findings and asked if they could remove the building, so long

as the building that replaced it looked like the old building. 

In an editorial for the week of January 29-February 4, 2003, the Windsor Times ran

an article about the non-permitted demolition of the building. The article quoted a member

of the Town Council as stating that Charnofsky had torn down the building “without a word

to the town” and without a permit. The article quoted Charnofsky as saying, “We just didn’t

arbitrarily go out there and knock it down. We got permission from the planning staff to

take the building down . . . Our original plan was to rehabilitate [the building], but as we got

more into the evaluation, it was so deteriorated that it was just not economically feasible. 

. . . I thought I had permission.”

On March 25, 2003, Davis wrote a letter to the Mayor of Windsor, stating that he

regretted that the Feed and Supply Building “came down without a demolition permit,” and

that he wanted to apologize to the Mayor and the Town. He explained that “the basis of the

mistake made by our firm” was the fact that the site plan that he had submitted with the

permit application was not attached to the issued permit. He stated that the owners “did

not direct us to remove the feed and seed building without a proper demolition permit.” 

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At an April 2, 2003, meeting, the Windsor Town Council considered whether to

reinstate the use permit that had previously been issued for construction of the project. 

The Council considered several resolutions, each of which stressed that the permit had

been issued based on plaintiffs’ representations that the Feed and Supply Building would

be “remodeled,” but that the non-permitted demolition of the building had changed the

project from one of remodeling to one of “reconstruction.” 

On April 16, 2003, the Council met again. Davis made an appearance at the

meeting, where he stated that the demolition of the Feed and Supply Building without a

permit was “just a terrible, terrible oversight on my part.” He added that he took

responsibility for the demolition, but also stated that it had not been his intent to demolish

without a permit. 

At the April 16, 2003, meeting, the Council adopted a resolution finding that the

project plan as earlier submitted and approved was, in light of the demolition of the building,

“no longer consistent with the project description and representations made to the Town

Council for the purpose of obtaining entitlements granted.” The Council refused to reinstate

the use permit and directed that a variety of changes be incorporated in a revised project

description prior to the Council’s further consideration of the project. Jernigan and Scoble

then determined that the changes that the Council required would make the project

financially unfeasible, and abandoned the effort. They subsequently sold the property. 

 The Nationwide commercial property policy was in effect from December 30, 2002,

to December 30, 2003, for the property. On February 5, 2003, Jernigan and Scoble

reported the claim to Nationwide. The report of the claim stated, “Insured stated that he

hired contractor to do examination, including removal of skin and some floorboards to view

completely. Subcontractor came in after the examination had been completed and

demolished the entire building. Insured found out about this through newspaper. No

authority or approval.” 

On June 1, 2003, Jernigan and Scoble submitted their sworn statement in proof of

loss, identifying the cause and origin of the loss as “Negligence/Demolition.” They stated

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that the amount of the loss was $515,225, which equaled the combined policy limits for the

building ($435,225) and for business income loss ($80,000). After a thorough investigation,

including retaining coverage counsel and taking sworn statements from Jernigan and

Scoble, Nationwide advised plaintiffs on October 30, 2003, that there was no coverage. 

Nationwide denied the claim on the grounds that Jernigan and Scoble had

participated in the decision to demolish the building, and that the loss was therefore not

“fortuitous,” as required to obtain policy benefits, and was also not covered pursuant to

California Insurance Code § 533 (“an insurer is not liable for a loss caused by willful act of

the insured”). Alternatively, Nationwide asserted that the loss fell within the exclusion for

“faulty, inadequate or defective . . . renovation, remodeling,” and also might be excluded

because of the exclusions for wear and tear, fungus, decay and deterioration, or “[a]cts or

decisions, including the failure to act or decide, of any person.” Nationwide further advised

Jernigan and Scoble that even if the demolition of the building was considered a “collapse,”

the policy would not provide coverage because such “collapse” was not caused by a

covered cause of loss under the policy. In addition, the claim for loss of business income

was not covered for the same reasons, and was also too speculative to establish coverage. 

Meanwhile, on June 13, 2003, Jernigan, Scoble, the Jernigan Family Living Trust,

and the Scoble Family Living Trust had filed suit against Daniel O. Davis, Inc., in the

Superior Court of California, County of Sonoma, alleging breach of contract, negligence,

negligence per se, and trespass (Jernigan v. Davis, Case No. 232893). The parties agreed

to submit the dispute to binding arbitration, and a hearing was conducted on December 20,

2004. In the statement of decision, issued December 23, 2004, the arbitrator awarded the

plaintiffs $2,522,714 against Davis. 

The arbitrator found that Davis had a duty to perform the agreed-upon renovation of

the structures, including the necessary permit processing, in a competent and professional

manner. The arbitrator found further that Davis had breached this duty “by using defective

methods of renovation and thus negligently causing the collapse of the Feed and Supply

Store without lawful permission to do so.” 

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The arbitrator found as follows: Davis admitted he was responsible for obtaining the

necessary permits; the demolition of the building was in fact done without a proper permit

and was thus a defective method of renovation; Davis admitted that his failure to obtain a

permit was a “terrible, terrible oversight” on his part – namely, in wrongly assuming that the

previous permit was sufficient; the permit on file with the Town of Windsor clearly indicated

that only the two auxiliary buildings were to be demolished; the Feed and Supply Building

was excluded from the demolition permit; the Town of Windsor Building Code provides that

separate permits are required to demolish or renovate separate buildings; and Davis

admitted he should have been more careful in clarifying which buildings were to be

demolished under the original permit application. 

The Superior Court entered judgment on February 17, 2005. Davis reached a postjudgment settlement agreement with the plaintiffs whereby he provided plaintiffs with a

promissory note in the amount of $250,000, and assigned them his rights against his

liability insurer, which had denied his tender of defense and indemnity 

On November 2, 2004, plaintiffs filed the present action in the Superior Court of

California, County of Sonoma, alleging breach of contract, insurance bad faith, and unfair

business practices in violation of California Business & Professions Code § 17200, and

seeking compensatory and punitive damages. On December 4, 2004, Nationwide removed

the case, asserting diversity jurisdiction. 

Nationwide now seeks summary judgment, or in the alternative, summary

adjudication. 

DISCUSSION

A. Legal Standard

Summary judgment is appropriate when there is no genuine issue as to material

facts and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. 

Material facts are those that might affect the outcome of the case. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is “genuine” if there

is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id.

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A party seeking summary judgment bears the initial burden of informing the court of

the basis for its motion, and of identifying those portions of the pleadings and discovery

responses that demonstrate the absence of a genuine issue of material fact. Celotex Corp.

v. Catrett, 477 U.S. 317, 323 (1986). Where the moving party will have the burden of proof

at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other

than for the moving party. On an issue where the nonmoving party will bear the burden of

proof at trial, the moving party can prevail merely by pointing out to the district court that

there is an absence of evidence to support the nonmoving party’s case. Id. If the moving

party meets its initial burden, the opposing party must then set forth specific facts showing

that there is some genuine issue for trial in order to defeat the motion. See Fed. R. Civ.

P. 56(e); Anderson, 477 U.S. at 250. 

“To show the existence of a ‘genuine’ issue, . . . [a plaintiff] must produce at least

some significant probative evidence tending to support the complaint.” Smolen v. Deloitte,

Haskins & Sells, 921 F.2d 959, 963 (9th Cir. 1990) (quotations omitted). The court must

view the evidence in the light most favorable to the non-moving party. United States v. City

of Tacoma, 332 F.3d 574, 578 (9th Cir. 2003). The court must not weigh the evidence or

determine the truth of the matter, but only determine whether there is a genuine issue for

trial. Balint v. Carson City, 180 F.3d 1047, 1054 (9th Cir. 1999). If the nonmoving party

fails to show that there is a genuine issue for trial, “the moving party is entitled to judgment

as a matter of law.” Celotex, 477 U.S. at 323. Regardless of whether plaintiff or defendant

is the moving party, each party must “establish the existence of the elements essential to

[its] case, and on which [it] will bear the burden of proof at trial.” Id. at 322. 

B. Nationwide’s Motion

Nationwide seeks summary judgment on the ground that Davis’ intentional,

engineered demolition of the Feed and Storage Building was not a covered “fortuitous” loss 

– that is, an unforeseen event, not caused by the insured, and not an event that could have

been prevented by the insured – and was excluded by various provisions of the policy. 

Thus, Nationwide asserts, its denial of the claim was proper and did not constitute a breach

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of contract. In the alternative, Nationwide seeks summary adjudication of the breach of

contract claim, based on the applicability of certain exclusions in the policy; and also seeks

summary adjudication of the claim of breach of the implied covenant of good faith and fair

dealing, the § 17200 claim, and the punitive damages claim. Nationwide asserts in addition

that plaintiffs’ alleged business losses are speculative, and that it is entitled to a set-off in

the amount of the judgment that plaintiffs obtained against Davis. 

Plaintiffs oppose the motion, arguing that the Feed and Supply Building was

completely destroyed, constituting a loss of a covered building, caused by risk not excluded

under the policy. Plaintiffs contend that Nationwide’s refusal to pay benefits under the

policy constitutes breach of contract; that the claims for bad faith, punitive damages, and

unfair business practices are supported by evidence sufficient to submit those claims to the

trier of fact or to permit further discovery under Federal Rule of Civil Procedure 56(f); that

plaintiffs’ claims of lost business income are covered under the policy; and that Nationwide

is not entitled to a set-off for the potentially unrecoverable judgment against Davis.

Because the court finds that plaintiffs have not met their burden of showing that the

demolition of the Feed and Supply Building was a covered cause of loss, summary

judgment must be GRANTED on the breach of contract claim.

1. Breach of Contract Claim

Nationwide argues that it did not breach the insurance contract because plaintiffs did

not suffer a covered loss. Nationwide contends that the loss was not covered because the

demolition of the building was not a fortuitous event, because plaintiffs did not suffer a

“direct physical loss” caused by a covered cause of loss, and because the demolition of the

building was not a “collapse.” Nationwide also asserts that the demolition of the building is 

excluded from coverage under various exclusions set forth in the policy. 

In opposition, plaintiffs assert that the destruction of the Feed and Supply Building

constitutes a “collapse” under ordinary meaning and the plain language of the policy, and

that the collapse of the building was caused by “defective methods in construction,

remodeling or renovation” and is therefore within the express grant of coverage for 

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damages resulting from “collapse.” 

An “all-risk” policy creates a special type of coverage extending to risks not usually

covered under other insurance, and recovery under an “all-risk” policy will be allowed for all

fortuitous losses not resulting from misconduct or fraud, unless the policy contains a

specific provision expressly excluding the loss from coverage. C.H. Leavell & Co. v.

Fireman's Fund Insurance Co., 372 F.2d 784, 787 (9th Cir. 1967). 

Before considering exclusions, a court must examine the coverage provisions to

determine whether the claim falls within the terms of the policy. Waller v. Truck Ins.

Exchange, 11 Cal. 4th 1, 16 (1995). “[W]hen an occurrence is clearly not included within

the coverage afforded by the insuring clause, it need not also be specifically excluded.” 

However, the burden is on the insured to bring the claim within the basic scope of

coverage, and courts “will not indulge in a forced construction of the policy’s insuring clause

to bring a claim within the policy’s coverage.” Id. (citations and quotations omitted). 

Exclusions, by contrast, are narrowly construed and must be proven by the insurer. Id. 

a. Whether the demolition of the building was a covered loss

Nationwide contends that plaintiffs did not suffer a “direct physical loss” caused by a

covered cause of loss. The policy’s “Building and Personal Property Coverage Form”

endorsement provides, in section A (Coverage), “We will pay for direct physical loss of or

damage to Covered Property at the premises described in the Declaration caused by or

resulting from any Covered Cause of Loss.” 

The policy’s “Causes of Loss – Special Form” endorsement provides, in Section A

(Covered Causes of Loss), 

When Special is shown in the Declarations, Covered Causes of Loss means

Risks of Direct Physical Loss unless the loss is:

1. Excluded in Section B., Exclusions; or

2. Limited in Section C., Limitations;

that follow.

The “Causes of Loss – Special Form” endorsement, Section B (Exclusions),

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 “Specified causes of loss” means fire, lightning, explosion, windstorm or hail, smoke,

aircraft or vehicles, riot or civil commotion, vandalism, leakage from fire extinguishing

equipment, sinkhole collapse, volcanic action, falling objects, weight of snow, weight of ice or

sleet, water damage. 

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provides, “2. We will not pay for loss or damage caused by or resulting from any of the

following: . . . k. Collapse, except as provided below in the Additional Coverage for

Collapse. . . .” 

The “Causes of Loss – Special Form” endorsement, Section D (Additional Coverage

– Collapse) provides as follows:

1. with respect to buildings, 

a. Collapse means an abrupt falling down or caving in of a building

or any part of a building with the result that the building or part

of the building cannot be occupied for its intended purpose;

b. A building or any part of a building that is in danger of falling

down or caving in is not considered to be in a state of collapse;

c. A part of a building that is standing is not considered to be in a

state of collapse even if it has separated from another part of

the building;

d. A building that is standing or any part of a building that is

standing is not considered to be in a state of collapse even if it

shows evidence of cracking, bulging, sagging, bending, leaning,

settling, shrinkage or expansion.

2. We will pay for direct physical loss or damage to Covered Property,

caused by collapse of a building or any part of a building that is insured

under this Coverage Form or that contains Covered Property insured

under this Coverage Form, if the collapse is caused by one or more of

the following:

a. The “specified causes of loss” or breakage of building glass, all

only as insured in this Coverage Part;2

b. Decay that is hidden from view, unless the presence of such

decay is known to an insured prior to collapse;

c. Insect or vermin damage that is hidden from view, unless the

presence of such damage is known to the insured prior to

collapse;

d. Weight of people or personal property;

e. Weight of rain that collects on a roof;

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f. Use of defective materials or methods in construction,

remodeling, or renovation if the collapse occurs during the

course of the construction, remodeling or renovation. However,

if the collapse occurs after construction, remodeling or

renovation is complete and is caused in part by a cause of loss

listed in 2.a. through 2.e., we will pay for the loss or damage

even if use of defective materials or methods in construction,

remodeling or renovation, contributes to the collapse.

Nationwide argues that the “careful and meticulous demolition” by Davis, which

involved attaching a cable to the trusses and tugging with an excavator until the building

came down, does not qualify as a “collapse,” which is defined by the policy as “an abrupt

falling down or caving in of” the building. Nationwide also asserts that even if one were to

consider Davis’ “engineered demolition” of the building as a “collapse,” the policy still would

not provide coverage because such “collapse” would not have been the result of one or

more “specified causes of loss” – decay, insects or vermin; weight of people or personal

property; weight of rain; or the use of defective materials or methods in construction,

remodeling or renovation. 

In opposition, plaintiffs argue that it is undisputed that the building abruptly fell down

with the result that it cannot be occupied for its intended purpose – which is what the policy

definition of “collapse” requires. Plaintiffs assert that it is irrelevant that Davis carefully

planned and executed the dismemberment of the building, where plaintiffs (the insureds)

did not themselves carefully plan or meticulously dismember the building, and did not

intend that Davis do so. They argue that the evidence shows that plaintiffs intended to

retain and use the existing building unless approval for new construction could be obtained

from the Town, which approval they had not even sought as of the date of the demolition. 

Plaintiffs claim that the building collapse, from the perspective of the insureds, was

unquestionably unexpected and abrupt.

The court finds that the demolition of the building was not a “covered cause of loss”

under the policy. The policy defines “collapse” as an “abrupt falling down.” That is not the

same as “intentional demolition.” When used in an all-risk policy, in its plain, common and

ordinary sense, 

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“collapse” means a falling down, falling together, or caving into an

unorganized mass. There is a collapse within the meaning of such a policy

when there is a sudden or unusual shrinking, settling, or falling of the building

or any part thereof, or a loss of form, support, rigidity, or connection with other

parts. Collapse is a sudden and relatively abrupt occurrence causing serious

structural damage, and not a gradual occurrence over a period of time.

10A Couch on Insurance (3d ed. 1998) § 148:54. 

Moreover, the policy provides coverage for “collapse” only where it is caused by one

of the following: the “specified causes of loss,” listed in note 2, above; decay that is hidden

from view; insect or vermin damage that is hidden from view; weight of people or personal

property; weight of rain that collects on a roof; or use of defective materials or methods in

construction or remodeling. Davis’ intentional demolition of the Feed and Supply Building

does not fall under any of these specific causes of loss, and is therefore not covered. 

b. Whether policy exclusions apply to bar plaintiffs’ claim

“Causes of Loss – Special Form,” section A (Covered Causes of Loss”) provides that

“covered causes of loss” means “risks of direct physical loss” unless the loss is excluded

(listed under “exclusions”) or limited (listed under “limitations”). The policy also provides

that if any of these excluded causes of loss result in a “Covered Cause of Loss,”

Nationwide will pay for the loss or damage caused by the “Covered Cause of Loss.” 

Nationwide argues, however, that even if plaintiffs could establish a “direct physical loss”

caused by a covered cause of loss, the denial of plaintiffs’ claim was proper, as the

demolition of the Feed and Supply Building was excluded from coverage under the

exclusions for faulty or inadequate repair or renovation; acts and decisions of any person;

operation of ordinance or law; and wear and tear, fungus, decay, and deterioration. 

Having found that plaintiffs have not established a covered cause of loss, the court

considers here only briefly whether any policy exclusions apply to bar the plaintiffs’ claim. 

As the parties agree that no ordinance or law caused the demolition of the building, and

that the destruction cannot be attributed to wear and tear, fungus, decay, or deterioration,

the court does not address those exclusions. 

With regard to the exclusion for faulty or inadequate repair or renovation, Nationwide

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argues that the demolition can be said to have been “defective,” in the sense that only part,

but not all, of the building was to have been dismantled; or can even be said to have been

“faulty” if Davis did not know but should have known that an additional permit was required;

or “inadequate” if he did know that he needed an additional permit but nevertheless did not

secure one. Nationwide contends that whichever term is used to describe the demolition,

the loss is excluded under Exclusion B.3.c., above.

In opposition, plaintiffs assert that the “collapse” of the building was caused by

defective methods in construction, remodeling, or renovation, and is therefore within the

express grant of coverage for damages resulting from “collapse. They argue that under

Exclusion B.3.c.2, the policy excludes coverage for defective renovation, unless the

defective renovation causes the “collapse” of a building, which is expressly listed as a

“Covered Cause of Loss.” They contend that in that case, the policy extends coverage. 

Plaintiffs also argue Nationwide has taken contradictory positions – arguing on the

one hand that there is no coverage for “collapse” caused by defective methods of

renovation because there was nothing defective in the methods used in the demolition

process,” while claiming on the other coverage is excluded under Exclusion B.3.c.2

because the demolition constituted “defective renovation or remodeling.” 

While Davis’ failure to secure the permit might arguably be considered “faulty” or

“inadequate,” his failure to comply with the laws of the Town of Windsor did not cause the

destruction of the building, and the court does not agree that Davis’ method of demolishing

the building was “defective.” The evidence shows that Davis determined which approach to

use to demolish the building and then carried out his plan, with the result that the building

was destroyed the way he had intended. Moreover, as Nationwide asserts, the ensuing

loss provision of the policy does not figure into the analysis of coverage. 

Nationwide also argues that the exclusion for “acts or decisions . . . of any person”

applies to bar coverage of plaintiffs’ claim. Nationwide asserts that possible actual causes

of the claimed loss include Davis’ not obtaining an additional permit, Davis’ demolition of

the building, the Town of Windsor’s decision to require in its permit that the building be

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preserved, the Town’s issuance of a stop-work order when the conditions of the permit

were violated, the Town’s decision to impose additional requirements on the project after

the demolition of the building, the plaintiffs’ decision to abandon the project rather than

comply with the Town’s additional requirements. Nationwide claims that each of these acts

or decisions is excluded as a cause of loss under the policy, and that no such act or

decision resulted in a covered cause of loss as defined by the policy. 

In opposition, plaintiffs argue that because the loss resulted from a covered cause of

loss (“collapse” caused by defective renovation), the policy exclusion pertaining to the “acts

or decisions of any person” does not apply. Plaintiffs contend as with the defective

renovation exclusion discussed above, the exclusion pertaining to the acts or decisions of

any person falls under Exclusion B.3.b – that the exclusion does not apply on its face if the

loss resulted from a “Covered Cause of Loss,” which was the collapse caused by defective

methods of renovation.

As Nationwide points out, plaintiffs’ interpretation of “collapse” necessarily requires

an intentional act by a person. Thus, coverage is excluded. Nor can there be coverage for

any ensuing loss, as the destruction of the Feed and Supply Building was not a separate

and independent act resulting from the loss caused by Davis’ act. Rather, Davis’ act was to

demolish the building, and that is the loss for which plaintiffs seek coverage. 

2. Claim of Breach of Implied Covenant of Good Faith and Fair Dealing

Nationwide argues that summary judgment should be granted on the bad faith

insurance claim because absent a breach of the insurance contract, Nationwide cannot be

found to have acted in bad faith. Nationwide also asserts that even if plaintiffs were to

prevail on their breach of contract claim, they would not prevail on the bad faith insurance

claim because Nationwide’s denial of the claim was reasonable and well-supported by the

language of the policy. 

The court finds that the motion must be GRANTED, because the court has granted

summary judgment on the breach of contract claim. In California, an insured cannot base a

claim for breach of the implied covenant of good faith and fair dealing on conduct by an

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insurer that does not violate the express terms of the insurance policy. Waller, 11 Cal. 4th

at 36; see also Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1153 (1990). 

3. Punitive Damages

Nationwide argues that plaintiffs are not entitled to punitive damages, as they cannot

prove, by clear and convincing evidence, that Nationwide acted with oppression, fraud,

malice, intent to harm, or despicable conduct. Nationwide also asserts that punitive

damages may be recovered against an insurer only for conduct that goes beyond “bad

faith.” 

The court finds that the motion must be GRANTED. In order to establish entitlement

to punitive damages, plaintiffs must prove by clear and convincing evidence that

Nationwide is guilty of malice, oppression or fraud. Cal. Civ. Code § 3294; Basich v.

Allstate Ins. Co., 87 Cal. App. 4th 1112, 1118-19 (2001). Malice is defined as conduct

intended to cause injury or despicable conduct carried on with a willful and conscious

disregard of the rights or safety of other. Oppression is defined as despicable conduct

which subjects a person to cruel and unjust hardship in conscious disregard of that

person's rights. Id.

Plaintiff has provided no evidence that Nationwide’s decision to deny coverage

resulted from malice, oppression or fraud. As with the bad faith claim, plaintiffs contend

that it took Nationwide more than eight months to deny the claim, and that all indications

are that Nationwide intended to deny the claim in any event. Plaintiffs also assert that there

are contradictions in Nationwide’s arguments in support of the present motion, referring

specifically to the argument that coverage is excluded on the basis of the exclusion for

defective renovation or remodeling, and the simultaneous argument that the alleged

“collapse” was not caused by defective materials or methods used in remodeling. As the

court has already determined, however, there was reasonable and proper cause to deny

coverage. Plaintiffs were not entitled to the benefits under the policy and Nationwide did

not act with malice or oppression in denying the claim.

Nationwide appears to have thoroughly investigated plaintiffs’ claim. The insurer

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obtained recorded statements from plaintiff Jernigan and from Davis; obtained

examinations under oath from both plaintiffs; tried to obtain a recorded statement from

Charnofsky but was denied by plaintiffs’ counsel; interviewed Windsor Town officials; and

then concluded that Davis’ intentional, planned, and engineered demolition of the building

did not constitute a covered loss under the policy, even though Davis failed to obtain the

required permit. 

4. Plaintiffs’ Claimed Business Loss

Nationwide also seeks summary judgment on plaintiffs’ claim of business losses.

Nationwide argues that this claim was properly denied, as the reason the development

project did not go forward was that plaintiffs decided not to accept the additional conditions

imposed by the Town on the project, not that they were prohibited from proceeding with the

project. Nationwide also argues that the claim is speculative, as plaintiffs had not entered

into a specific agreement with Siduri Winery as to the key terms of the proposed lease.

Plaintiffs contend that the claims of lost business losses are covered under the

policy, and argue that it was impossible for them to go forward with the development as

they had planned, because the Town of Windsor’s withdrawal of the permits and demand of

numerous changes to the project reduced the usable portion of the property by 50%. 

Plaintiffs contend that they lost the potential winery tenant because they could no longer

offer the same amount of physical space. 

They also argue that the lost rental profits and the lost live/work profits are not

speculative, as Nationwide claims. They assert that those lost profits have already been

adjudicated by the arbitrator as being non-speculative, noting that the arbitrator found that

plaintiffs had agreed to all essential terms of a lease for the remodeled Feed and Supply

Building with Siduri Winery.

The court finds that the motion must be GRANTED, because there is no coverage

under the policy for plaintiffs’ claimed loss. Moreover, plaintiffs’ argument that they had

agreed to all essential terms of the lease with Siduri Winery prior to the demolition of the

building directly contradicts Scoble’s testimony that no specific agreement with the winery

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had been reached with respect to any key terms of any proposed lease, including the

amount of rent to be paid. Plaintiffs provide no evidence to support this claim, apart from

the decision of the arbitrator, which appears to have been based, at least in part, on

evidence that did not support the claim. 

5. Business & Professions Code § 17200 Claim

Nationwide argues that summary judgment must be granted on the § 17200 claim

because a cause of action for unfair business practices must be based on a violation of an

underlying “predicate” statute. In opposition, plaintiffs note that § 17200 prohibits “any

unlawful, unfair, or fraudulent business act or practice,” and that they do not have to

establish violation of a particular statute to prevail in this claim. 

However, plaintiffs have provided no evidence to support any viable claim under 

§ 17200. In the complaint, plaintiffs allege that “[t]he above acts and practices [referring to

the allegations supporting the claims for breach of contract and breach of the implied

covenant] are a violation of law, unfair, and/or fraudulent, and therefore constitute an

unlawful, unfair, and/or fraudulent business acts [sic] and/or practices within the meaning of

[§ 17200].” Thus, it appears that they do not allege anything apart from the asserted failure

to pay benefits and failure to pay benefits in good faith. Accordingly, the court finds that the

motion must be GRANTED.

6. Nationwide’s Claim of Entitlement to Set-Off

Finally, Nationwide notes that the California Superior Court determined that Davis

was liable to plaintiffs for his failure to secure an additional permit before demolishing the

remainder of the building, and entered judgment for more than $2.5 million in damages. 

Nationwide argues that even were plaintiffs able to show a covered loss, Nationwide would

be entitled to a set-off of the $2.5 million judgment before it would be obligated to pay

plaintiffs any policy benefits. The total of potentially available policy benefits is limited to

$515,225. Thus, Nationwide asserts, no policy benefits would be recoverable from

Nationwide under any circumstances. Nationwide argues that plaintiffs have already been

made whole, and have not suffered any actual loss for which Nationwide can be made

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answerable.

Having granted summary judgment on all causes of action asserted by plaintiffs in

this action, the court need not address this additional argument. 

7. Plaintiffs’ Rule 56(f) Motion and Objections to Evidence

As stated at the hearing, the motion for a continuance pursuant to Federal Rule of

Civil Procedure 56(f) motion is DENIED. Plaintiffs have not met their burden of showing

what additional information is sought in discovery and how it would preclude summary

judgment. See Nidds v. Schindler Elevator Corp., 113 F.3d 912, 920 (9th Cir. 1996).

Plaintiffs’ objections to evidence are stricken as untimely.

CONCLUSION

In accordance with the foregoing, the court GRANTS defendant’s motion for

summary judgment.

IT IS SO ORDERED.

Dated: February 27, 2006 ______________________________

PHYLLIS J. HAMILTON

United States District Judge

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