Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_19-cv-01872/USCOURTS-cand-3_19-cv-01872-1/pdf.json

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

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United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

BROSAMER & WALL, INC.,

Plaintiff,

v.

INDIAN HARBOR INSURANCE 

COMPANY; and ZURICH AMERICAN 

INSURANCE COMPANY,

Defendants.

No. C 19-01872 WHA

ORDER ON MOTIONS FOR 

SUMMARY JUDGMENT

INTRODUCTION

In this insurance action, an insured moves for partial summary judgment against two 

insurers and one insurer moves for summary judgment against the insured. To the extent stated 

below, these motions are GRANTED IN PART and DENIED IN PART.

STATEMENT

This insurance action stems from flawed soil testing that led to cracking in levees freshly 

constructed by plaintiff Brosamer & Wall, Inc., for the Santa Clara Valley Water District. 

When it came to light that Brosamer had used nonconforming soil, the District, pursuant to the 

project’s contract, demanded Brosamer remove and replace the nonconforming soil, rather than 

merely fix the top layer of cracking soil. The levee remediation plan cost the company

$4.6 million. The District, apparently satisfied, never sued Brosamer.

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Brosamer, however, sought insurance reimbursement for its extra expense. Defendant 

Zurich American Insurance Company insured Brosamer against “builders risk.” Defendant 

Indian Harbor Insurance Company insured Brosamer against “professional and contractor 

pollution legal liability” for consecutive years, covering 2017–18 and 2018–19. Both insurers 

denied coverage and, to the extent any duty to defend existed, both refused to defend. This 

action followed.

Our story began in June 2016 when the Santa Clara Valley Water District hired Brosamer

as the general contractor for a flood-protection project at the lower Berryessa Creek in Santa 

Clara County. The work involved constructing floodwalls, improving levees, and widening 

creek channels along the lower Berryessa Creek. The project specified certain soils be used:

Imported borrow materials and Native soils obtained from channel 

excavation and structural excavation and that meet the requirements 

listed in this Article shall be used in embankment construction, 

including materials for the new levee fill. 

The specifications further required that the chosen materials meet certain characteristics, such 

as a “Plasticity Index (PI) in the range of 10 to 20.” The cracking evidently resulted from soils 

whose plasticity index measured too high (Decl. Faoro Exh. C at 16). 

As quoted, the specifications allowed use of soils native to the project site or imported 

materials, so long as whichever used met the given characteristics. William Faoro, Brosamer’s 

area manager responsible for supervision of the project, explained in his deposition that the 

company preferred using native soils for time and cost saving. Brosamer’s initial testing, 

however, “showed that natives would not meet the requirements” of the project. Instead, 

Brosamer planned on importing leftover materials from nearby projects. Because those local

projects were nearing completion, the materials would be hauled away and unavailable if not 

then used in 2017 (Faoro Dep. 24–25, 29).

The District, however, asked Brosamer to postpone construction of certain levees until 

2018 due to unrelated complications. As a result, the materials set aside disappeared. To fill 

the void, Brosamer proposed using native sandy and clay soils blended to achieve the required 

plasticity levels. To develop and test blends for compliance with the project specifications, 

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Brosamer brought on Twinings, Inc., a materials-engineering subcontractor. After a monthslong process, the District accepted the new soils and construction recommenced in 2018 (Dkt. 

No. 61-8 at 2).

Unfortunately, the new soil led to new issues. On July 13, 2018, Brosamer and the 

District conducted an inspection of the completed southern half of the project. The walkthrough revealed shoulder and levee embankment cracking. Manager Faoro, not in attendance, 

learned of the cracking in the week that followed. In his deposition, he testified that “during 

the inspection they observed some cracks in the levy” and “from there an investigation started . 

. . [that] lasted several months” (Faoro Dep. 21). 

During this time, a side plot thickened concerning the professional-liability policies 

issued by Indian Harbor. For at least four years, Indian Harbor had insured Brosamer against 

professional liability. Each September 1, a new, year-long policy began. For the 2018–19 

policy, Brosamer’s broker began the renewal application process in April 2018. 

In the application, Brosamer co-owner Charles Wall answered “No” to two questions: 

One asked, “[h]as any pollution or professional claim, suit or notice of incident been made 

against [Brosamer]?” The other asked, “[i]s any member of your firm . . . aware of any 

circumstance which may result in any project delay, professional or pollution liability claim, 

suit, or notice of incident/occurrence against them?” (Decl. Wall ¶¶ 4, 5; Decl. Baker ¶ 9).

On July 10, a few days before the District’s levee inspection, Brosamer’s broker 

delivered the completed renewal application to Indian Harbor and requested a quote for the 

renewal. As will become evident, the overlapping timing of the renewal process for the

liability policy and the ongoing levee investigation put the “known circumstances or 

conditions” exclusion to that policy at issue. The exclusion provided:

This policy does not apply to any claim [or] professional loss . . . 

arising from:

1. a claim [or] professional loss . . . known by a responsible 

insured prior to the inception of the policy period; or [¶]

3. a circumstance or condition known by a responsible insured 

prior to the inception of the policy period where the 

responsible insured should have reasonably foreseen that a 

claim, professional loss or pollution loss would result[.] 

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A responsible insured meant “any officer, director, partner, member, manager, supervisor or 

foreman of any insured or any employee . . . that has responsibility, in whole or in part, for risk 

control, risk management, health and safety or environmental affairs, control or compliance.”

Manager Faoro ranked as one such “responsible insured,” both as a manager and as a 

representative responsible for risk control and risk management. On July 20, one week after 

the inspection, the District’s project manager sent an email to Manager Faoro and others, 

providing: 

The shoulder and levee embankment cracking leads us to believe 

there maybe [sic] underlying reasons why the AC road is cracking. 

Are [sic] wish is to determine the underlying reason for the cracking.

Therefore, in accordance with . . . the Specifications the District 

hereby rejects all of the levee embankment and AC maintenance 

trail constructed in the 2017 season due to obvious workmanship 

issues. [. . .] Until such time that we can determine the cause and 

limits of the cracking no repair shall be performed.

At this time we would also request that your QC firm, Twining, 

perform an inspection and determination of what they believe the 

issue would be. 

By deposition, Manager Faoro testified to his understanding around the time he received the 

email (Faoro Dep. 55):

Q: [To] frame our conversation with reference to . . . the 

July 20, 2018 email. At that time did you have an 

understanding that the water district was seeking to hold 

Brosamer & Wall responsible for the cracking?

A: I mean, I did not know. It was during the investigative stages 

here. We had to find out why it was cracking.

Q: Do you believe it was possible that the water district would 

try to hold Brosamer & Wall responsible for the cracking at 

this time?

A: Yeah, I believe that it would be possible.

Meanwhile, Brosamer’s broker negotiated the liability policy and, “prior to late-August

2018,” the parties reached a deal. Owner Wall executed the application on August 29.

Two days later, the District’s project manager sent Brosamer a letter explaining that the 

material used in Levee 11 did not meet the project requirements. The project manager deemed 

the material unacceptable. More testing and investigation ensued. 

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On November 20, the District sent Brosamer a letter cataloging the alleged deficient work 

and outlining an acceptable levee remediation plan. The claim letter provided in part:

The District has reviewed [Brosamer’s] quality control tests 

submitted to the District via email on August 1 and 8, 2018. 

Included in both emails are . . . Reports for the Levee Fill Materials 

used in the construction of Levees 11, 12, 13, and 14 in 2017 and 

2018. . . . These reports have identified deficient work related to 

construction of Levees 11, 12, 13, and 14 which was rejected by the 

District on July 20 (by email) and August 31, 2018 (by letter).

On September 18, 2018, the District submitted an email to 

[Brosamer] outlining an acceptable levee remediation criteria. 

Since that time, deeper . . . sampling and laboratory testing of Levees 

12, 13, 14 were . . . were submitted by Geocon on October 26, 2018. 

The plasticity index for Levee 14 is slightly higher than required, 

and our field observations noted some cracking on the pavement 

maintenance path and levee side slopes. An acceptable remediation 

to mitigate for Levee 14 was determined by the District and is 

summarized below including the remediation criteria for Levees 11, 

12, and 13. 

[Brosamer] shall provide to the District a levee remediation plan by 

January 15, 2019 addressing the rejected levee work.

By declaration, Owner Wall swears that “Brosamer” first learned of the levee cracking 

issue on July 13 and, at that time, it did not anticipate a delay or resulting liability suit. On 

October 19, Twining disclosed for the first time that its test results had been flawed and 

understated the plasticity levels. Owner Wall swears that it still, as of July 13, remained 

insufficiently clear whether the flawed test results explained the cracking issue; whether and to 

what extent the cracking would require extensive supplemental work; and whether the District 

would seek to hold Brosamer responsible. Only upon receipt of the November 20 “claim 

letter” did Brosamer understand that a professional liability claim had arisen (Decl. Wall ¶¶ 8–

14).

In mid-December, the District’s project manager confirmed that a change order would 

issue to address the schedule of the unfinished levee work through 2019. The District finalized 

the change order in June 2019, requiring, among other things, that the upper two-and-a-half to 

three feet of levee fill be removed and replaced “with suitable levee materials.” 

The insurers’ involvement with this case began in earnest on November 30, 2018, when 

Brosamer sent each insurer the District’s claim letter. The policies are discussed at length

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below. Briefly, Indian Harbor issued consecutive, year-long policies beginning and ending on 

September 1. For certain claims, a ninety-day extended reporting period stretched the policy’s 

coverage to include claims reported as late as November 30. Brosamer tendered the District’s 

claim letter to Indian Harbor on November 30, 2018, creating at least a possibility for coverage 

under either the 2017–18 policy or the 2018–19 policy.

Indian Harbor acknowledged receipt of the claim letter in early December 2018. The 

first “coverage advisory” it issued came on March 19, 2019. Indian Harbor sent subsequent 

denials in July 2019 and October 2019. The letters deny coverage under both policies based on

untimely notice, exclusions for “known circumstances,” and failure to meet several conditions 

precedent to coverage (Dkt. No. 59-3, 61-15). 

* * *

Zurich’s “builders risk” policy, on the other hand, constituted a first-party insurance 

policy triggered by “direct physical loss of or damage to covered property.” Covered property 

included property under construction and temporary works such as scaffolding, subject to 

several exclusions.

When notified of the potential covered loss, Zurich hired EFI, Global, Inc., to investigate. 

EFI completed two reports, one in December 2018, the other in April 2019. In both reports, 

EFI concluded that “[t]he soil desiccation cracking observed was caused by drying of the soils 

with a high plasticity index[.]” In its April 2019 report, EFI also concluded that “the majority 

of the samples [of soils] tested did not meet the requirements of Santa Clara Valley Water 

District Specifications.” 

In August 2019, Zurich denied coverage to remove and replace the levee soils under the

policy’s “cost of making good” exclusion, which excluded the cost of fixing the insured’s own 

snafus. But for expenses Brosamer incurred repairing the cracked asphalt maintenance path on

one levee, Zurich paid out over $300,000. 

To date, as stated, the District has not sued Brosamer. Rather, Brosamer met the 

District’s demands in its change order. This involved removing and replacing the top two to 

three feet of nonconforming soil from the levees to the tune of roughly $4.6 million.

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In April 2019, Brosamer sued Indian Harbor for declaratory relief, breach of contract, bad 

faith, and Section 17200 violations. Brosamer added Zurich a few weeks later. 

A prior order granted Indian Harbor leave to amend its answer five months into the 

action, adding an affirmative defense about a misstatement or omission on the renewal 

application; the tendered 2018–19 policy number in a general allegations paragraph; and 

“professional loss” as to an existing affirmative defense (Dkt. No. 49).

Brosamer now seeks summary judgment against both insurers. Against Zurich, Brosamer 

focuses on one issue: Whether or not the “cost of making good” exclusion in the “builders

risk” policy precludes or limits relief for Brosamer in this action. Zurich does not move for 

summary judgment, but it does move to allow further discovery under Rule 56(d) related to 

Brosamer’s motion.

Against Indian Harbor, Brosamer moves for partial summary judgment on three issues 

under the 2017–18 liability policy: (1) the enforceability of the parties’ choice-of-law clause; 

(2) whether Brosamer provided effective notice to Indian Harbor of the District’s claim; and 

(3) whether the District’s claim involved an act, error, or omission in “professional services.”

Indian Harbor moves for summary judgment against Brosamer seeking enforcement of 

New York law and raising six supposed bars to coverage under both liability policies.

This order follows full briefing and a hearing.

ANALYSIS

Summary judgment is appropriate when there is no genuine dispute as to any material 

fact. A genuine dispute of material fact is one that “might affect the outcome of the suit under 

the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986).

1. THE INDIAN HARBOR POLICIES.

This section resolves the overlapping motions between Brosamer and Indian Harbor. 

Both seek a decision on the applicable state law. They ask for rulings on six coverage issues.

A. CALIFORNIA LAW GOVERNS.

The liability policies selected New York law to govern all issues arising under or related 

to the policies. When a federal district court is sitting in a diversity action, it must apply the 

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choice-of-law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Manufacturing 

Co., Inc., 313 U.S. 487, 496 (1941). When there is a valid, bargained-for choice-of-law 

provision in a contract, California courts apply the approach outlined in the Restatement 

Second of Conflict of Laws Section 187. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 

459, 464–65 (1992). Section 187 provides:

The law of the state chosen by the parties to govern their contractual 

rights and duties will be applied, even if the particular issue is one 

which the parties could not have resolved by an explicit provision in 

their agreement directed to that issue, unless either

(a) the chosen state has no substantial relationship to the parties 

or the transaction and there is no other reasonable basis for 

the parties’ choice, or

(b) the application of the law of the chosen state would be 

contrary to a fundamental policy of a state which has a 

materially greater interest than the chosen state in the 

determination of the particular issue and which, under the 

rule of Section 188, would be the state of the applicable law 

in the absence of an effective choice of law by the parties.

In short, a district court must first determine “(1) whether the chosen state has a substantial 

relationship to the parties or their transaction or (2) whether there is any other reasonable basis 

for the parties’ choice of law. If neither of these tests is met, that is the end of the inquiry, and 

the court need not enforce the parties’ choice of law.” If the first prong is met, a court must 

then determine whether the chosen state’s law is contrary to a fundamental policy of 

California. If so, then the court must weigh whether California has a materially greater interest 

than the chosen state in determining a particular issue. Nedlloyd, 3 Cal.4th at 466.

Indian Harbor bears the burden under the first prong. If demonstrated, Brosamer bears 

the burden on the second. Washington Mutual Bank v. Sup. Court, 24 Cal.4th 906, 917 (2001). 

“A substantial relationship exists where one of the parties is domiciled or incorporated in 

the chosen state.” Nedlloyd, 3 Cal. 4th at 465. Brosamer is a California company 

headquartered in California. Indian Harbor is a Delaware company with its principal place of 

business in Connecticut (Decl. Briggs ¶ 12). So, New York is a no go.

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But, does New York have a substantial relationship to the transaction? The obligations 

under the policy, including any duty to defend, were to be performed in California. Indian 

Harbor does not dispute this. The only factual support given that could tie New York to the 

transaction is a senior claims specialist’s sworn declaration that “[t]he signature on the two 

policies that are at-issue in this case are of the President and CEO of Indian Harbor, who is 

located in New York” (Decl. Briggs ¶ 14). The declaration, however, is nothing but smoke and 

mirrors. It does not state where the documents were executed. It does not tell us where the 

executive lived or worked either, only where he was “located.” In contrast, the documents 

containing the signatures prominently display Indian Harbor’s Pennsylvania regulatory office 

address and a witness clause. The documents make no reference to New York (Decl. Faoro 

¶ 17; Exh. O at 66; Exh. P at 51). 

Indian Harbor focuses instead on the catch-all in the Restatement, some “other reasonable 

basis for the parties’ choice.” The theory is twofold. Indian Harbor argues that there is a 

reasonable basis for choosing New York law because (Decl. Briggs ¶¶ 9–17):

(1) given its other contacts with New York — including a New 

York office; employees, directors, and officers in New York; 

affiliated entities incorporated in New York (its parent 

company’s parent); and “New York businesses;” 

(2) it has “elected to include a New York choice of law clause 

in the types of policies that are at issue in this case . . . in an 

attempt to maintain uniformity, clarity, and consistency in 

the application of its policies, for the benefit of itself and its 

policyholders.” 

Indian Harbor’s best support is 1-800 Got Junk? LLC v. Superior Court, 189 Cal. 

App. 4th 500, 513–15 (2010), which found a reasonable basis for the parties’ choice of 

Washington law, despite Washington indisputably lacking a substantial relationship to the 

transaction or the parties. Got Junk held:

Because a multi-state franchisor has an interest in having its 

franchise agreements governed by one body of law, Got Junk had a 

reasonable basis for inserting a choice of law provision in the 

franchise agreement. Further, given Washington State’s proximity 

to Got Junk's headquarters in Vancouver, Canada, there was a 

reasonable basis for the designation of that state's law in particular.

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Id. at 515 (emphasis added). The first sentence of this holding is irrelevant here. Brosamer

does not challenge Indian Harbor’s ability to insert a choice-of-law provision in its policies; the 

dispute is over which state it chose. The crucial portion of Got Junk’s holding is the second

sentence, finding it reasonable for a Canadian company to designate the state law of the state 

(Washington) nearest the Canadian home office (Vancouver). That is a reasonable basis 

particular to Washington and independent from the minimum-contacts analysis that requires 

domicile or incorporation. In this way, Got Junk demonstrates where Indian Harbor’s choiceof-law provision went wrong.

During oral argument, Brosamer noted that Got Junk is an anomaly because it was the 

party that inserted the choice-of-law clause there who sought to apply a different law. Because 

the decision supports Brosamer’s position anyway, rather than Indian Harbor’s, this order does 

not reach the anomaly point (other than to note it was odd that the drafter would run away from 

its own agreement).

Indian Harbor also notes that the policies contain a forum-selection clause “favoring” 

New York. It does not, however, provide authority for the proposition that a voluntary forumselection clause can take the place of a “substantial relationship” to establish a “reasonable 

basis” for applying that state’s law. In every decision Indian Harbor cites that analyzes the 

“reasonable basis” issue, there is a “substantial relationship” between the state and the parties 

or the transaction in addition to any supporting forum-selection clause. None of the decisions 

indicate that the forum-selection clause alone could support the parties’ choice of law. 

For example, Insurance Auto Auctions, Inc. v. Indian Harbor Ins. Co., 2010 WL 

11688494 at *3 (W.D. Wa. Sep. 16, 2010) (Judge Richard Jones), looking at the same choiceof-law and forum-selection clauses, found a substantial relationship because the plaintiff had 

facilities in New York covered by the policy and because the policy identified New York in the 

forum-selection clause. Importantly, however, the decision noted that the policy covered:

[E]ach of the approximately thirty states in which [the plaintiff] 

ha[d] a facility, so all of those states (including New York and 

Washington) ha[d] the same contacts with the parties and the 

[p]olicy. Thus, New York, like Washington, ha[d] a substantial 

relationship with the [p]olicy by virtue of the location of [the 

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plaintiff’s] facilities. This approach is consistent with the 

Restatement’s discounting the importance of the location of an 

insured risk at issue when the policy insures against risks located in 

several states.

Ibid. Here, everything about the project, down to the soil, remained local to California. New 

York lacked the “substantial relationship” required for the parties to contract around the laws 

of California.

Indian Harbor relies on several other decisions that look to other contacts beyond one 

party’s domicile or principal place of business. They all are unavailing. At least one of the 

parties in each decision was domiciled or had its principal place of business in the chosen state. 

In CQL Original Products, Inc. v. National Hockey League Players’ Assn., 39 Cal. App. 4th 

1347, 1355 (1995), Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 

1003 (9th Cir. 2010), and International Business Machines Corp. v. Bajorek, 191 F.3d 1033, 

1038 (9th Cir. 1999), the state of the chosen law was the defendant’s principal place of 

business. In First Intercontinental Bank v. Ahn, 798 F.3d 1149, 1153 (9th Cir. 2015), the 

bank-plaintiff had its principal place of business and was chartered in the state. In Gustafson v. 

BAC Home Loans Servicing, LP, 294 F.R.D. 529, 537 (C.D. Cal. Nov. 4 2013) (Judge 

Josephine Staton), a putative class action challenging force-placed insurance practices, the 

mortgage contracts chose the law of the state where the encumbered property lay. Because the 

property was the subject of the mortgage contract, Gustafson found a substantial relationship 

with the parties and the transaction. Judge Staton’s decision cited to an unpublished priordecision of the undersigned judge, where Arkansas had a substantial relationship to the parties 

and their transaction, inasmuch as the property lay in Arkansas, the plaintiffs resided in

Arkansas, and the mortgage derived from an Arkansas company. Lane v. Wells Fargo Bank 

N.A., 2013 WL 269133 at *4 (N.D. Cal. Jan. 24, 2013).

Finally, Indian Harbor relies on two decisions from the same case, Pitzer College v. 

Indian Harbor Insurance Company. The district court decision provided no analysis for its 

conclusion that it had “no question that there [was] at least a ‘reasonable basis’ for the 

selection of New York law.” Pitzer College v. Indian Harbor Insurance Company, 2014 WL 

12558276 at *5 (C.D. Cal. May 22, 2014) (Judge George Wu). The California Supreme Court, 

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answering certified questions from our court of appeals, did not reach the issue, noting that the 

parties did not contest the district court’s “reasonable basis” finding. Neither decision informs 

this order’s analysis.

Because Indian Harbor has failed to establish a “reasonable basis” for choosing New 

York law, this order will not opine on California’s fundamental policies or New York’s and 

California’s competing law enforcement interests. Nedlloyd, 3 Cal.4th at 466. California law 

governs the liability policies here.

B. THERE IS NO COVERAGE UNDER THE 2017–18 POLICY.

(i) The Claim Did Not Involve Professional Loss.

Indian Harbor disputes whether Brosamer effectively tendered a notice of the District’s 

claim to trigger coverage for professional loss under the 2017–18 policy. This order need not 

reach the issue because even with effective notice, the definition of professional loss excluded

Brosamer’s claimed loss. 

The 2017–18 policy defined professional loss as:

1. a monetary judgment, award or settlement of compensatory 

damages;

2. civil fines and penalties assessed against a third party other 

than an insured for which the insured is legally liable, but 

only where insurance coverage for such fines and penalties 

is allowable by law;

3. civil fines and penalties assessed against the insured, but 

only where insurance coverage for such fines and penalties 

is allowable by law;

4. punitive, exemplary or multiplied damages for which the 

insured is legally liable, but only where insurance coverage 

for such damages is allowable by law;

5. Legal expense associated with subsections Y.1. though Y.4. 

referenced above.

Professional loss does not include: (i) injunctive or equitable relief; 

(ii) the return of fees or charges for services rendered; (iii) costs and 

expenses incurred by the insured to redo, change, supplement or fix 

the insured’s work or service, including redesign; or (iv) any of the 

insured’s overhead, mark-up or profit.

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The primary issue here is that the policy specifically excluded “costs and expenses incurred by 

the insured to redo, change, supplement or fix the insured’s work or service, including 

redesign.” Brosamer replies that Indian Harbor still had a duty to defend its insured and 

refused to do so, leaving Brosamer to do its best to mitigate its damages.

The District never instituted any lawsuit against Brosamer. While the policy broadly 

defined “claims” to include a “monetary demand or notice, or assertion of a legal right alleging 

liability or responsibility on the part of any” insured, the District’s claim letter did not make a 

monetary demand on its face. But it did demand that Brosamer submit a plan for levee 

remediation to cure the cracking issues. The definition of professional loss excluded “costs 

and expenses incurred by the insured to redo, change, supplement or fix the insured’s work or 

service, including redesign.” Far and away, this is the most important expense incurred by the 

insured and it is specifically not covered as professional loss. The most that could theoretically 

be covered is the legal expense incurred by Brosamer in responding to the letter. Brosamer, 

however, has not requested such insignificant relief and has chosen to swing for the fences, 

striking out instead.

(ii) No Rectification-Expense Coverage is Available 

Under the 2017–18 Policy.

Distinct from the policy’s coverage for professional loss, the policy also provides for 

coverage of rectification expense, defined as follows:

RECTIFICATION EXPENSE means direct costs and expenses that 

the Company deems reasonable and necessary to mitigate or rectify 

an act, error or omission in PROFESSIONAL SERVICES or to 

prevent further damages resulting from said act, error, or omission.

Indian Harbor argues that Brosamer is not entitled to rectification-expense coverage under the 

2017–18 policy because Brosamer failed to timely notify Indian Harbor of the error at issue 

and the proposed corrective action. Brosamer decided not to address this issue in its 

opposition.

The extended reporting period that allowed reporting of a professional-loss claim until

November 30 expressly did not apply to rectification-expense coverage. Brosamer had until 

September 1, 2018, to secure rectification coverage under the 2017–18 policy. Brosamer 

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reported the District’s claim to Indian Harbor three months too late. Because Indian Harbor 

limited this issue to the 2017–18 policy, this order has no occasion to consider rectificationexpense coverage under the 2018–19 policy.

C. COVERAGE UNDER THE 2018–19 POLICY.

(i) Triable Issues Remain as to Brosamer’s 

Knowledge of the Claim When it Applied for the 

2018–19 Policy.

Indian Harbor’s two arguments for denying coverage under the 2018–19 policy stem 

from the same argument: That Brosamer should have disclosed its knowledge of 

circumstances that could have led to a claim in the renewal application. 

First, the policy precluded coverage for:

A circumstance or condition known by a Responsible Insured prior 

to the inception of the Policy Period where the Responsible Insured 

should have reasonably foreseen that a claim, negligent act, error or 

omission in Professional Services, Professional Loss . . or 

Rectification Expense . . . could be incurred.

The parties agree that the question is whether Brosamer should have reasonably foreseen that a 

covered loss could be incurred based on its knowledge of the cracking issue prior to the 

inception of the policy. The scuffle here is whether or not this is a factual question for the jury 

to decide. This order finds that it is. 

Even if the reasonable-foreseeability question prompts an objective inquiry, as Indian 

Harbor argues, that inquiry still would require a trier of fact to weigh the evidence and 

determine whether Brosamer, with knowledge of the cracking issue, should have reasonably 

foreseen that a covered loss could be incurred. When the evidence is viewed in the light most 

favorable to Brosamer, a reasonable trier of fact could conclude that Brosamer could have 

reasonably determined that a covered loss would not be incurred. When viewed the opposite 

way, a fact finder could easily conclude that Brosamer should have reasonably foreseen a 

covered loss would be incurred. This is a triable issue. 

Second, Indian Harbor argues that Brosamer’s “no” response to the following two 

questions in the renewal application constituted material misrepresentations sufficient to bar 

coverage: (1) “Has any pollution or professional claim, suit or notice of incident been made 

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against [Brosamer]?” (2) “Is any member of your firm . . . aware of any circumstance which 

may result in any project delay, professional or pollution liability claim, suit, or notice of 

incident/occurrence against them?” For the same reasons the prior argument fails, so too does 

this one. The issue must be tried.

(ii) The Claim Arose Out of Professional Services.

Coverage under both the 2017–18 and 2018–19 policies, whether for professional loss or

rectification expense, required that the claim result from an act, error or omission in 

“professional services.” The policy defined “professional services” as “value engineering,”

“field changes to design,” and “constructability reviews.” The policy did not define these three 

terms. Instead, the parties provided their own definitions in written discovery. 

The parties defined “value engineering” as:

Indian Harbor: A formal process for determining methods 

for performing a construction job more 

efficiently or economically.

Brosamer: A strategy in which a process, product, 

system, service, supply, or other aspect of a 

project, is analyzed in an effort to increase its 

overall value — specifically in order to 

maximize cost savings and/or efficiencies. 

Value engineering can occur at any phase of 

a given project, including after the design and 

construction has begun.

Brosamer contends that its work to find a soil replacement constituted “value engineering.” 

When the original soils Brosamer planned to use disappeared, the District, Brosamer, and 

Brosamer’s subcontractor engaged in a months-long process to determine an alternative source 

for the soil. Brosamer proposed using native sandy and clay soils blended to achieve the 

required plasticity levels. Brosamer’s subcontractor tested the proposed blends and ensured

that the final materials met the project specifications. After a months-long process, the District 

accepted Brosamer’s recommended soils and construction recommenced in 2018. On its face, 

this process fits both definitions. 

Indian Harbor, however, argues that the use of native soils rather than offsite soils did not 

constitute value engineering as such use was both contemplated originally and resulted from 

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necessity due to the District’s delays that caused the offsite soils to become unavailable. 

Indian Harbor points to various letters in the record that rather than discuss decisions of 

economy or efficiency, show that the decision to use native soils came out of necessity in 

response to the District’s delays. On the other hand, Brosamer points to the correspondence 

and argues it shows the process was designed to make the project more efficient and 

economical. Because value engineering is not defined or explained in the policies, the term is 

ambiguous and will be interpreted in favor of coverage. California State Auto. Assn. Inter-Ins. 

Bureau, 94 Cal. App. 3d 113, 118 (1979).

* * *

For the reasons stated above, summary judgment is granted as follows: (1) California 

law governs both policies, (2) professional-loss coverage is barred because the definition of 

“professional loss” specifically excludes the claimed loss, (3) rectification-expense coverage is 

barred under the 2017–18 policy because Brosamer did not timely report the claim under that 

coverage part, (4) the claim involved an act, error, or omission in “professional services.”

Triable issues remain as to (1) whether the “known circumstances of conditions” 

exclusion bars coverage and (2) whether Brosamer made misrepresentations in its renewal

application for the 2018–19 policy. 

Rectification-expense coverage under the 2018–19 policy remains an open issue, subject 

to the argument that Brosamer’s notice came late.

2. THE ZURICH POLICY.

Zurich insured Brosamer against “builders risk.” The parties presume application of 

California law so this order adopts California law. 

Brosamer moves for partial summary judgment against Zurich on one issue: Whether the 

cost-of-making-good exclusion bars coverage. It is “axiomatic that the insurer has the burden 

of proving that an otherwise covered claim is barred by a policy exclusion.” Travelers Cas. & 

Sur. Co. v. Superior Court, 63 Cal. App. 4th 1440, 1453 (1998). Nevertheless, “[w]hile the 

burden is on the insurer to prove a claim covered falls within an exclusion, the burden is on the 

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insured initially to prove that an event is a claim within the scope of the basic coverage.” 

Royal Globe Ins. Co. v. Whitaker, 181 Cal. App. 3d 532, 537 (1986). 

The Zurich policy’s coverage provision provided:

This Master Policy, its quarterly reports and all Project Certificates 

issued hereunder, subject to the terms, exclusions, limitations and 

conditions contained herein or endorsed hereto, insures against all 

risks of direct physical loss of or damage to Covered Property while 

at the location of the insured project and occurring during the Policy 

or Certificate Term. 

The policy defined covered property as “property under construction” and “temporary works.” 

The claim implicated “property under construction,” defined as:

All property, including materials, supplies, equipment, machinery, 

and other property of a similar nature, being property of the Insured 

or of others for which the insured may have assumed responsibility, 

that will become a permanent part of the INSURED PROJECT*, the 

value of which has been included in the estimated TOTAL 

PROJECT VALUE* . . . .

Zurich argues there was no direct physical loss of or damage to the property. We do not 

need to reach this threshold coverage issue because the policy’s “cost of making good” 

exclusion applied. 

This exclusion precluded payment of expenses resulting from:

The costs that would have been incurred to rectify any of the 

following had such rectification been effected immediately prior to 

the loss or damage:

(1) Fault, defect, error, deficiency or omission in design, plan or 

specification;

(2) Faulty or defective workmanship, supplies or material;

(3) Wear and tear, gradual deterioration, inherent vice, latent 

defect, corrosion, rust, dampness or dryness of the 

atmosphere;

However, if direct physical loss or damage by an insured peril 

ensues, then this Policy will cover for such ensuing loss or damage 

only.

For the purpose of this Policy and not merely this exclusion, 

Covered Property, or any portion thereof, shall not be regarded as 

damaged solely by virtue of the existence of any condition stated 

under (1), (2) or (3) above.

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All agree that the soils used constituted “material.” The issue turns on whether the soils 

qualified as “faulty” or “defective.” 

Insurance policies are construed to give words their popular and ordinary meaning. “The 

clause must be construed with regard to the contract as a whole, and its meaning is to be 

derived from the circumstances of the particular case and not in the abstract.” Tzung v. State 

Farm Fire and Cas. Co., 873 F.2d 1338, 1340 (9th Cir. 1989). “Although examination of

various dictionary definitions of a word will no doubt be useful, such examination does not 

necessarily yield the “ordinary and popular sense of the word if it disregards the policy’s 

context.” MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 649 (2003).

The Zurich policy did not define “faulty” or “defective.” Zurich urges us to look to the 

District’s and Brosamer’s contract to shed light on the word “defective.” Under the 

construction contract, Brosamer agreed that “materials not conforming to the requirements of 

the Contract shall be considered as defective.” In full, the Section 10.05 provides:

All materials not conforming to the requirements of the Contract 

shall be considered as defective and all such materials shall be 

rejected, whether in place or not. They shall be removed 

immediately from the site of the work, unless otherwise permitted 

by the Engineer. No rejected material, the defects of which have 

been subsequently corrected, shall be used unless approval in 

writing has been given by the Engineer. If the Contractor should 

fail to comply promptly with any order of the Engineer made under 

the provisions of this article, the Engineer may cause defective

materials to be removed and replaced, and the costs thereof to be 

deducted from moneys due, or to become due, the Contractor. 

Although Zurich is not a party to the District contract, the provision squarely fits Brosamer’s

claimed loss. The provision also militates in favor of finding that the ordinary meaning of 

“defective” in this case includes nonconforming materials. It both comports with the plain 

language of the exclusion and provides context that must be considered. 

Brosamer disagrees, arguing that the focus should be on the insurance policy. Rather 

than suggest an alternative ordinary meaning for “faulty” or “defective,” Brosamer argues that

an entirely different word — “unsuitable” — is the term that Zurich and Brosamer contracted 

to use for describing soils that did not comply with the project specifications. Brosamer’s only 

example of “unsuitable” in the insurance policy comes from the project certificate’s description 

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of the insured project. One of Brosamer’s many contractual obligations to the district listed in 

the description is: “Channel excavation and embankment, including the testing and disposal of 

unsuitable materials” (Dkt. No. 56-11 at 2). The other example Brosamer relies on is the 

District’s claim letter that demanded that Brosamer remove and replace certain soils “with 

suitable levee materials.” 

These examples fall victim to the same criticism Brosamer levies on Zurich. But only 

Section 10.05 is helpful in understanding the ordinary meaning of “defective” here.

Brosamer also argues that the dictionary definition of defective does not support 

application of the exclusion. Black’s Law Dictionary defines defective as:

1. (Of a position, right, act, or process) lacking in legal 

sufficiency <defective execution of documents> <defective 

service of process>. 

2. (Of a product) containing an imperfection or shortcoming in 

a part essential to the product’s safe operation <defective 

wiring caused the accident>.

The second definition is apt when viewed in the policy’s context. The District’s demand that a 

full two to three feet of the levee fill materials be removed, rather than just the cracked 

surfaces, suggests the import of the plasticity specifications is more than cosmetic. While the 

record does not explain one way or the other whether the soil specifications serve a safety 

purpose, construction of insurance policies should take into account the circumstances of the 

particular case. Tzung v. State Farm Fire and Cas. Co., 873 F.2d 1338, 1340 (9th Cir. 1989). 

This order finds that nonconforming soils constitute “defective materials” under the 

policy’s “cost of making good” exclusion. This defeats coverage.

CONCLUSION

For the reasons stated herein, summary judgment is GRANTED as follows: (1) California 

law governs both policies, (2) professional-loss coverage is barred because the definition of 

“professional loss” specifically excludes the claimed loss, (3) rectification-expense coverage is 

barred under the 2017–18 policy because Brosamer did not timely report the claim under that 

coverage part, (4) the claim involved an act, error, or omission in “professional services.” 

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Triable issues remain as to (1) whether the “known circumstances of conditions” 

exclusion bars coverage and (2) whether Brosamer made misrepresentations in its renewal

application for the 2018–19 policy. As to these issues, Indian Harbor’s motion for summary 

judgment is DENIED.

Rectification-expense coverage under the 2018–19 Indian Harbor policy remains an open 

issue, subject to the argument that Brosamer’s notice came late.

The Zurich policy’s “cost of making good” exclusion defeats coverage. Brosamer’s 

motion for partial summary judgment against Zurich is DENIED.

Zurich’s and Indian Harbor’s motions under Rule 56(d) are both DENIED. 

IT IS SO ORDERED.

Dated: March 3, 2020.

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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