Court Opinion

ID: 903174
Source: CourtListenerOpinion
Date Created: 2013-06-18 20:21:13.776234+00
Date Added: 2024-06-11T13:20:56.562028
License: Public Domain

FILED
                            NOT FOR PUBLICATION                             JUN 18 2013

                                                                        MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U .S. C O U R T OF APPE ALS

                            FOR THE NINTH CIRCUIT

BARRY SHY, an individual;                        No. 11-56887
MANHATTAN LOFT, LLC, a California
limited liability company,                       D.C. No. 2:10-cv-01415-DSF-
                                                 MAN
              Plaintiffs - Appellants,

  v.                                             MEMORANDUM *

THE INSURANCE COMPANY OF THE
STATE OF PENNSYLVANIA, a
corporation,

              Defendant - Appellee.

BARRY SHY, an individual;                        No. 11-56964
MANHATTAN LOFT, LLC, a California
limited liability company,
                                                 D.C. No. 2:10-cv-01415-DSF-
              Plaintiffs - Appellees,            MAN

  v.

THE INSURANCE COMPANY OF THE
STATE OF PENNSYLVANIA, a
corporation,

              Defendant - Appellant.

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
                    Appeal from the United States District Court
                       for the Central District of California
                     Dale S. Fischer, District Judge, Presiding

                         Argued and Submitted June 3, 2013
                               Pasadena, California

Before:      TROTT and W. FLETCHER, Circuit Judges, and STEIN, District
             Judge.**

      Manhattan Loft, LLC, a real estate development company, and its manager,

Barry Shy, (collectively “Manhattan”) bring this action against their insurance

company demanding indemnification for an arbitration award. The arbitration

award was based on a dispute between Manhattan and the Meieran Trust (the

“Trust”), another development company. The arbitrator found that Manhattan

owed the Trust approximately $14 million in property damage, lost profits, lost

business value, attorney’s fees and costs. Manhattan has two insurance policies:

one for the initial $2 million in liability, and one that provided following-form

excess liability for another $10 million for anything above $2 million. The

primary insurer, Gemini, paid the full policy limit. The excess insurer, the

Insurance Company of the State of Pennsylvania (“ISOP”), refused to pay.

Manhattan sued ISOP in state court for breach of contract, bad faith, and punitive

      **
             The Honorable Sidney H. Stein, District Judge for the U.S. District
Court for the Southern District of New York, sitting by designation.

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damages. ISOP removed. The district court granted summary judgment to ISOP.

Manhattan appealed, and ISOP cross-appealed the district court’s rejection of

arguments that could have provided alternative bases for summary judgment. We

have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm. Because we affirm

summary judgment in ISOP’s favor, we do not reach ISOP’s alternative arguments

on cross-appeal.

      Manhattan makes several arguments: (1) that ISOP is bound by Gemini’s

decision to provide coverage under the policy; (2) that the district court erred in

looking to the arbitration award in determining whether the award was covered by

the policy; (3) that the district court erred in concluding that the lost business value

and profits did not result from an accident; and (4) that the district court erred by

failing to consider multiple causes for the lost business value and profits award.

Manhattan also argues that the district court erred in finding the policy did not

cover damage due to rust and mold, amounting to $535,900 of the property damage

award. We consider each in turn.

      First, ISOP is not bound by Gemini’s determination that there was coverage.

ISOP’s insurance policy is a following-form policy, which means that it

incorporates the terms of the underlying policy. Qualcomm, Inc. v. Certain

Underwriters At Lloyd’s, London, 73 Cal. Rptr. 3d 770, 773 n.2 (Ct. App. 2008)

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(quoting Wells Fargo Bank v. California Ins. Guarantee Assn., 45 Cal. Rptr. 537,

539 (Ct. App. 1995)). Nothing in the policy says that ISOP is bound by Gemini’s

coverage decision. We conclude that ISOP is bound by the terms of Gemini’s

policy but not Gemini’s coverage decision.

      Second, the District Court did not violate Vandenberg v. Superior Court,

982 P.2d 229 (Cal. 1999), by relying on the arbitration award. In Vandenberg, the

California Supreme Court held that nonmutual collateral estoppel did not apply to

arbitration awards. Id. at 234. But the district court did not apply collateral

estoppel. Rather, it relied on the arbitration award to determine whether it was

based on actions or events that are covered by the insurance policy, as it is required

to do under California law. See Collin v. Am. Empire Ins. Co., 26 Cal. Rptr. 2d

391, 399 (Ct. App. 1994); Fireman’s Fund Ins. Co. v. Nat’l Bank of Cooperatives,

103 F.3d 888, 896 (9th Cir. 1996).

      Third, Manhattan’s interference with the smoke evacuation system is not a

covered occurrence under the policy. The policy covers “‘property damage’ [that]

is caused by an ‘occurrence.’” The policy defines an occurrence as an accident.

Under California law, an accident refers to an insured’s conduct, not to the

consequences of such conduct. Fire Ins. Exch. v. Superior Court, 104 Cal. Rptr.

3d 534, 537 (Ct. App. 2010). California courts have rejected expressly any

                                           4
argument that Delgado v. Interinsurance Exch. of Auto. Club of S. Cal., 211 P.3d

1083 (Cal. 2009), is to the contrary. See State Farm Gen. Ins. Co. v. Frake, 128

Cal. Rptr. 3d 301, 309-12 (Ct. App. 2011), review denied (Sept. 28, 2011)

(“Delgado contains no language indicating that the California Supreme Court

intended to overrule prior case law holding that ‘the term ‘accident’ does not apply

to an act’s consequences, but instead applies to the act itself.’”). If conduct is

intentional and volitional, unforeseen consequences are not accidents. See

Delgado, 211 P.3d at 317 (holding there was no accident where insured

intentionally hit another person even under mistaken belief in need for self-

defense); Fire Ins. Exch., 104 Cal. Rptr. 3d at 540-41 (holding there was no

accident where insured built structure encroaching on neighbor’s land even though

insured thought the building was on his own land). Here, Manhattan intentionally

poured the slab to fill in the second-floor mezzanine. The fact that Manhattan

claimed not to know that the slab would block the Trust’s planned smoke

evacuation system does not make this conduct accidental.

      Fourth, the district court did not err in failing to consider multiple causes for

the lost profits and lost business value award. In California, an insurer in a third-

party liability suit such as this one must indemnify where any independent cause of

the damage is covered. City of Carlsbad v. Ins. Co. of State of Pa., 102 Cal. Rptr.

                                            5
3d 535, 540 (Ct. App. 2009); see also State Farm Mut. Auto. Ins. Co. v. Partridge,

514 P.2d 123, 131-32 (Cal. 1973). The arbitrator awarded lost profits and business

value damages because the slab that Manhattan poured prevented smoke

evacuation, making it impossible legally to operate a bar in the basement. Though

the arbitrator also awarded damages for property damage due to covered causes,

this was not the basis for the lost profits and business value award.

      Based on the foregoing, we affirm the district court’s conclusion that there

was no breach of contract. The arbitrator found for the Trust and awarded

$1,394,600 for property damage, $1,428,137 for lost profits, and $10,727,785 for

lost business value. The arbitrator also awarded $977,287.88 for attorney’s fees

and costs. The district court found that the contractual liability exclusion applied

to the attorney’s fees and costs and therefore it was not covered by the policy.

Manhattan did not appeal this conclusion. Therefore the only covered damages are

those for the property damage award. Whether or not the rust and mold exclusion

applies, ISOP has not breached its contract because the total property damage

award was only $1,394,600, including losses due to rust and mold. ISOP is not

obligated to pay unless covered damages exceed $2 million.

      Because we affirm that there was no breach of contract, we affirm the

district court’s dismissal of the bad faith claim as derivative, Century Sur. Co. v.

                                           6
Polisso, 139 Cal. App. 4th 922, 948 (2006), and need not reach the question of

punitive damages.

      AFFIRMED.

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