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Illinois National Insurance Som/Ksc Company, An Illinois Corporation; and v. Nordic Pcl Construction

October 31, 2012

ILLINOIS NATIONAL INSURANCE SOM/KSC COMPANY, AN ILLINOIS CORPORATION; AND
NATIONAL UNION FIRE INSURANCE COMPANY PITTSBURGH, PA., A PENNSYLVANIA CORPORATION,
PLAINTIFFS,
v.
NORDIC PCL CONSTRUCTION, INC., F/K/A NORDIC CONSTRUCTION, LTD., A HAWAII CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Susan Oki Mollway Chief United States District Judge

ORDER GRANTING COUNTERCLAIM DEFENDANTS' MOTION TO DISMISS OF COUNTERCLAIM PLAINTIFF'S FIRST AMENDED COUNTERCLAIM

I. INTRODUCTION.

This is an insurance dispute arising out of alleged construction defects. Plaintiffs Illinois National Insurance Company ("Illinois National") and National Union Fire Insurance Company of Pittsburgh, PA ("National Union") (collectively, the "Insurers"), seek declaratory relief against Defendant Nordic PCL Construction, Inc., f/k/a Nordic Construction, Ltd. ("Nordic"). Compl., ECF No. 1. Nordic filed a Counterclaim against the Insurers, and a Third-Party Complaint against Marsh USA ("Marsh"), which allegedly acted as Nordic's insurance broker. Countercl., ECF No. 10-1; Third-Party Compl., ECF No. 11. This court earlier granted in part the Insurers' motion to dismiss the Counterclaim, but gave Nordic leave to amend its Counterclaim in certain respects. See Order ("Prior Dismissal Order"), ECF No. 69. Nordic filed a First Amended Counterclaim, ECF No. 84, and now before the court is the Insurers' Motion to Dismiss Nordic's First Amended Counterclaim. ECF No. 88. The court grants the Insurers' motion, and extends the deadline for motions seeking leave to amend pleadings.

II. BACKGROUND.

Nordic acted as a general contractor on two projects (a Safeway store and the Moanalua Shopping Center) for which it seeks insurance coverage in connection with alleged construction defects. Nordic is a defendant in a pending state court action on the Safeway project, and has spent over $460,000 in repairs on the Moanalua project. Am. Countercl. ¶¶ 28, 44, ECF No. 84. Nordic tendered its defense of the pending state court action to the Insurers and sought reimbursement from the Insureds for the repairs it had performed. The Insurers filed this action to determine their obligations to Nordic under their policies. See Compl., ECF No. 1.

The facts relevant to this motion include the facts set forth in detail in this court's lengthy Prior Dismissal Order. See ECF No. 69. Those facts are incorporated here and supplemented.

In or around 2007, Illinois National issued Commercial General Liability Policy No. GL 161-68-33 (the "CGL Policy") to Nordic. See CGL Policy, attached as Exhibit "A" to Compl., ECF No. 1-1. In or around 2007, National Union issued Commercial Umbrella Liability Policy No. BE 5685754 (the "Umbrella Policy") to Nordic. See Umbrella Policy, attached as Exhibit "B" to Compl., ECF No. 1-2.

The CGL Policy provides, "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury or 'property damage' to which this insurance applies." CGL Policy at 23 of 64 (page numbers refer to numbers at top of page in electronically filed document). The Umbrella Policy likewise states, "We will pay on behalf of the Insured those sums in excess of the Retained Limit that the Insured becomes legally obligated to pay as damages by reason of liability imposed by laws because of Bodily Injury, Property Damage or Personal Injury and Advertising Injury to which this insurance applies or because of Bodily Injury or Property Damage to which this insurance applies assumed by the Insured under an Insured Contract." Umbrella Policy at 6 of 63 (emphasis in original).

The CGL Policy's coverage "applies to 'bodily injury' and 'property damage' only if . . . [t]he 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory.'" CGL Policy at 23 of 64. The Umbrella Policy only applies if "the Bodily Injury or Property Damage is caused by an Occurrence that takes place anywhere, and the Bodily Injury or Property Damage occurs during the Policy Period." Umbrella Policy at 6 of 63.

Under the CGL Policy, "'Occurrence' means an accident, including continuous or repeated exposure to substantially the same general harmful conditions." CGL Policy at 35 of 64. "In the event of continuing or progressive 'bodily injury' or 'property damage' over any length of time, such 'bodily injury' or 'property damage' shall be deemed to be one 'occurrence', and shall be deemed to occur only when such 'bodily injury' or 'property damage' first commenced." Id. at 13 of 64. The Umbrella Policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions. All such exposure to substantially the same general harmful conditions will be deemed to arise out of one Occurrence." Umbrella Policy at 25 of 63.

The First Amended Counterclaim asserts that, notwithstanding the Prior Dismissal Order, Nordic is entitled to coverage pursuant to provisions relating to what the CGL Policy and Umbrella Policy refer to as the "products-completed operations hazard" ("PCOH"). Because PCOH provisions were not clearly identified in the original Counterclaim, the Prior Dismissal Order did not include a ruling on what, if any, coverage was available through them.

Nordic's original Counterclaim asserted (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) misrepresentations and omissions of material fact, and (4) bad faith, and sought (5) declaratory relief. See Countercl., ECF No. 10-1.

This court dismissed most of the Counterclaim. The heart of the dismissal was this court's conclusion that "the alleged construction defects are not 'occurrences' as defined by the Intermediate Court of Appeals ('ICA') in Group Builders, Inc. v. Admiral Insurance Company, 123 Haw. 142, 231, 231 P.3d 67 (Ct. App. 2010) ('Group Builders'), and by the Ninth Circuit in Burlington Insurance Company v. Oceanic Design & Construction, Inc., 383 F.3d 940, 944 (9th Cir. 2004) ('Burlington')." Prior Dismissal Order at 16. The court's determination that there was no "occurrence" under the Policies meant that there was no triggering event that afforded Nordic coverage. While the court denied Nordic leave to amend the "occurrence-based portion" of its breach of contract claim, the court allowed Nordic leave to amend its breach of contract claim in other respects. Id. at 37.

The court also rejected Nordic's claim for breach of the covenant of good faith and fair dealing (Count II) because "Nordic fails to identify the specific contractual provisions that the Insurers allegedly breached, and the court is unable to identify what obligations Count II is based on." Id. at 37. The court dismissed Nordic's claim for fraudulent and negligent misrepresentation and omissions of material facts (Count III) as inadequately pled. Id. at 42-43 (finding that the fraud portion of Count III failed to satisfy Rule 9(b)'s heightened pleading requirement, and that the negligent misrepresentation portion of Count III, subject only to Rule 8, was defective because it "allow[ed] Nordic to spring on the Insurers an unlimited number of unidentified misrepresentations"). The court concluded that Nordic had sufficiently pled bad faith (Count IV), to the extent the claim was not based on fraud, but that any fraud-based bad faith claim was insufficiently pled. Id. at 43-45.

The court denied Nordic and Marsh's motions for reconsideration. ECF No. 83. Nordic then filed its First Amended Counterclaim asserting: (1) Count I: Breach of Contract; (2) Count II: Negligent Misrepresentations and Omissions of Material Fact; (3) Count III: Bad faith and Fraud; and (4) Count IV: Declaratory Relief. ECF No. 84. The Insurers now seek dismissal of the First Amended Counterclaim. ECF No. 88. Nordic is joined in its opposition to the Insurers' motion by Marsh.*fn1

ECF No. 111.

The CGL Policy defines PCOH as including "all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work' except" for products "still in your physical possession" or "[w]ork that has not yet been completed or abandoned." CGL Policy at 35 of 64. The CGL Policy further states, "Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed." Id. The Umbrella Policy says that PCOH "means all Bodily Injury and Property Damage occurring away from premises you own or rent and arising out of Your Product or Your Work except" for "products that are still in your physical possession" or "work that has not yet been completed or abandoned." Umbrella Policy at 26 of 63.

The CGL Policy defines "Your work" to mean "[w]ork or operations performed by you or on your behalf" and "[m]aterials, parts or equipment furnished in connection with such work or operations." CGL Policy at 36 of 64. The Umbrella Policy defines "Your Work" as "work or operations performed by you or on your behalf" and "materials, parts or equipment furnished in connection with such work or operations." Umbrella Policy at 28 of 63.

There are two exclusions in the CGL Policy that address PCOH issues. First, Exclusion j excludes from coverage any "Property damage" to:

(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property;

(2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises;

(3) Property loaned to you;

(4) Personal property in the care, custody or control of the insured;

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

CGL Policy at 26 of 64. However, an exception to this exclusion provides: "Paragraph (6) of this exclusion does not apply to 'property damage' included in the 'products-completed operations hazard.'" Id. The Umbrella Policy has an equivalent provision in Exclusion E(6). Umbrella Policy at 11 of 63.

Second, Exclusion R excludes from coverage "'Property damage' to 'your work' arising out of it or any part of it and included in the 'products completed operations hazard.'" CGL Policy at 26 of 64. However, there is also an exception to this exclusion: "This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." CGL Policy at 26 of 64. The Umbrella Policy has an equivalent provision at Exclusion G. Umbrella Policy at 11 of 63.

The court turns now to examining Nordic's amended claims and the arguments relating to them.

III. LEGAL STANDARD.

Under Rule 12(b)(6), a court is generally limited to reviewing the contents of the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996). If matters outside the pleadings are considered, the Rule 12(b)(6) motion is treated as one for summary judgment. See Keams v. Tempe Tech. Inst., Inc., 110 F.3d 44, 46 (9th Cir. 1997); Anderson v. Angelone, 86 F.3d 932, 934 (9th Cir. 1996). However, courts may "consider certain materials--documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice--without converting the motion to dismiss into a motion for summary judgment." United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

On a Rule 12(b)(6) motion to dismiss, all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Fed'n of African Am. Contractors v. City of Oakland, 96 F.3d 1204, 1207 (9th Cir. 1996). However, conclusory allegations of law, unwarranted deductions of fact, and unreasonable inferences are insufficient to defeat a motion to dismiss. Sprewell, 266 F.3d at 988. Additionally, the court need not accept as true allegations that contradict matters properly subject to judicial notice or allegations contradicting the exhibits attached to the complaint. Id. Dismissal under Rule 12(b)(6) may be based on either:

(1) lack of a cognizable legal theory, or (2) insufficient facts under a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988) (citing Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984)).

To survive a Rule 12(b)(6) motion to dismiss, a claimant must make factual allegations sufficient to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true even if doubtful in fact. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Accord Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (Rule 8 "does not require 'detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation."). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal citations omitted). The complaint must "state a claim to relief that is plausible on its face." Id. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S. Ct. at 1949.

As the Ninth Circuit has recently stated:

First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively. Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation.

Starr v. Baca, 652 F.3d 1202, 1216 (9th ...


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