Employers Mutual Casualty Co. v. North American Specialty Flooring, Inc.

[7] 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA [10] 11 EMPLOYERS MUTUAL CASUALTY No. 1:19-cv-00544-DAD-JLT COMPANY and ILLINOIS EMCASCO 12 INSURANCE COMPANY, 13 Plaintiffs, ORDER GRANTING PLAINTIFFS AND COUNTER-DEFENDANTS’ MOTION FOR 14 v. SUMMARY JUDGMENT 15 NORTH AMERICAN SPECIALTY (Doc. No. 31) FLOORING, INC., SPORTS 16 SURFACING, INC., S.C. ANDERSON, INC., and KOSTER AMERICAN 17 CORPORATION dba KOSTER USA, 18 Defendants. 19 NORTH AMERICAN SPECIALTY FLOORING, INC. and SPORTS 20 SURFACING, INC., 21 Counter-Claimants, 22 v. 23 EMPLOYERS MUTUAL CASUALTY COMPANY and ILLINOIS EMCASCO 24 INSURANCE COMPANY, 25 Counter-Defendants. [26] 27 ///// 28 ///// 1 This matter is before the court on the motion for summary judgment brought by plaintiffs 2 and counter-defendants Employers Mutual Casualty Company and Illinois Emcasco Insurance 3 Company (collectively, “EMC” 1). (Doc. No. 31.) A hearing on the motion was held on 4 December 3, 2019. Attorney Lisa Darling-Alderton appeared telephonically on behalf of EMC, 5 and attorney Arthur Grebow appeared telephonically on behalf of defendants and counter6 claimants North American Specialty Flooring and Sports Surfacing, Inc. (collectively, “Sports 7 Surfacing” 2). Having considered the parties’ briefs and oral arguments, and for the reasons set 8 forth below, the court will grant EMC’s motion for summary judgment. 9 BACKGROUND 10 In this declaratory relief action EMC seeks a declaration from this court that, as a matter 11 of law, the damages sought against Sports Surfacing by a third-party in an underlying state court 12 action are not covered under the insurance policies EMC issued to Sports Surfacing, and that 13 EMC therefore has no duty to defend or indemnify Sports Surfacing in that underlying state court 14 action. (See Doc. No. 2.) Sports Surfacing counter-claims that EMC has a duty to defend and 15 indemnify it in the underlying action pursuant to the insurance policies that EMC issued it and 16 seeks a declaration stating as much. (See Doc. No. 16.) 17 The material facts of this case are undisputed and, as relevant to the pending motion, are 18 set forth below. [19] 20 1 As confirmed at the December 3, 2019 hearing on the pending motion, plaintiff Illinois Emcasco Insurance Company is a subsidiary of plaintiff Employers Mutual Casualty Company. 21 Some of the insurance policies at issue here were issued by Illinois Emasco Insurance Company, and others were issued by Employers Mutual Casualty Company. As further confirmed at the [22] December 3, 2019 hearing, there is no material difference between the policies issued by Illinois 23 Emasco Insurance Company and those issued by Employers Mutual Casualty Company. Accordingly, the court will refer to these two plaintiffs collectively as “EMC” and the policies 24 issued by them as the “EMC insurance policies.” 25 2 According to the complaint in this action, as well as the complaint filed in the underlying state court action, North American Specialty Flooring formerly did business as “Sports Surfaces.” (See [26] Compl. at 12–13; 31-2 at 444.) As confirmed at the December 3, 2019 hearing on the pending 27 motion, “Sports Surfaces” is the same entity as defendant Sports Surfacing, Inc. Accordingly, the court will refer to defendants North American Specialty Flooring and Sports Surfacing, Inc. 28 collectively as “Sports Surfacing.” 1 A. The Relevant Parties. 2 Defendant Sports Surfacing is a contractor that “install[s] flooring and related products, 3 including rubber sports flooring.” (Doc. No. 31 at 7.) EMC provided insurance coverage to 4 Sports Surfacing under various insurance policies (collectively, the “EMC insurance policies”). 5 (Doc. No. 2 (“Compl.”) at 2–3.) EMC is moving for summary judgment against each named 6 defendant, but only Sports Surfacing has opposed the motion. Other named defendants—such as 7 defendants S.C. Anderson, Inc. (“Anderson”) and Koster American Corporation dba Koster USA 8 (“Koster”)—do not oppose the pending motion for summary judgment. Moreover, several 9 entities who were initially named as defendants in this action have been dismissed after agreeing 10 to be bound by the outcome of this litigation. (See Doc. Nos. 23, 27.) Included amongst that 11 group are Roy’s Flooring, Inc. and Jose Roy Garcia, formerly dba Roy’s Flooring, (collectively 12 “Roy’s Flooring”) who were subcontracted into the project that gave rise to the underlying 13 lawsuit, as well as Navigators Insurance Company (“Navigators”), an insurance company that 14 insured Roy’s Flooring. (Compl. at 12–13; Doc. No. 31-2, Ex. A) (Stipulation of Facts and 15 Evidence Admissible for Cross Motions for Summary Judgment3 (“UF”) at ¶¶ 22, 23; Doc. Nos, 16 23, 27.) 17 B. The Facts Giving Rise to the Underlying State Court Action. 18 On May 15, 2017, defendant Anderson, a general contractor, entered into a written 19 contract with California State University, Bakersfield (“CSU Bakersfield”) for a construction 20 project referred to by the parties as the “Student Recreation Center project.” (UF at ¶ 22; see also [21] 3 The parties have filed a “Stipulation of Facts and Evidence Admissible for Cross Motions for [22] Summary Judgment.” (See Doc. No. 31-2, Ex. A.) However, only EMC has moved for summary 23 judgment, and no other such motion is pending before the court in this action. Nevertheless, the parties agree that the facts that they have stipulated to are undisputed. (Doc. No. 31-2 at 6.) 24 Accordingly, the court construes the parties’ filing as a statement of undisputed facts and will hereafter to refer to that filing by the following abbreviation, “UF.” Moreover, EMC has attached [25] to the pending motion a separate statement of undisputed facts (see Doc. No. 31-1) as well as a “Compendium of Evidence” in support of the pending motion (see Doc. No. 31-2, Exs. 1–23.) In [26] its opposition, defendant Sports Surfacing does not dispute this evidence. Accordingly, the court 27 construes the facts contained within EMC’s separate statement of undisputed facts and “Compendium of Evidence” to be undisputed facts for the purposes of resolving the pending 28 motion. 1 Doc. No. 31-2 at 259.) On June 18, 2007, Anderson entered into a written subcontract with Roy’s 2 Flooring, whereby the latter agreed to “provide all labor, material, and equipment necessary to 3 furnish and install wood flooring, rubber flooring, and sports flooring” for the Student Recreation 4 Center project. (UF at ¶ 23.) At some point prior to the rubber flooring being installed in the 5 Student Recreation Center’s fitness room, it was discovered that excessive moisture was passing 6 through the concrete slab upon which the rubber flooring was to be installed, requiring the 7 application of a concrete sealant. (Id. at ¶ 25.) On January 8, 2009, Roy’s Flooring entered into a 8 written subcontract with defendant Sports Surfacing, whereby Sports Surfacing agreed to obtain 9 and apply a specific sealant produced by defendant Koster. (Id. at ¶ 24.) Roy’s Flooring 10 subcontracted with Sports Surfacing because Roy’s Flooring was not a “certified” installer of 11 Koster products and Sport Surfacing asserted that it had the proper certification. (Id.; see also 12 Doc. No. 31-2 at 260.) On July 15, 2009, Anderson and Roy’s Flooring executed a “change 13 order,” whereby Roy’s Flooring agreed to “provide all labor, material, and equipment necessary 14 to install moisture sealer in” the fitness room and running track at the Student Recreation Center. 15 (UF at ¶ 23.) Sports Surfacing installed a concrete sealant product manufactured by Koster to the 16 concrete slab and then installed the rubber flooring. (Id. at ¶ 25.) The Student Recreation Center 17 project was completed on or about August 12, 2009. (Id. at ¶ 26.) 18 In or around February 2016, CSU Bakersfield notified defendant Anderson that the rubber 19 flooring in the Student Recreation Center’s fitness room had failed and needed to be removed and 20 replaced. (Id. at ¶ 27.) Thereafter, representatives from CSU Bakersfield, Anderson, Roy’s 21 Flooring, and Sports Surfacing (and possibly Koster) scheduled and conducted a meeting “to 22 discuss what needed to be done to effectuate repairs or replacement of the flooring.” (Doc. No. 23 31-2 at 265–66.) “It was determined at the meeting that core samples and analysis testing was 24 necessary in order to ascertain the cause of the failure, the extent of the damage[,] and the best 25 method for correcting the problem.” (Id. at 266.) After samples were taken and tests were 26 conducted, it was revealed that an insufficient layer of Koster sealant was applied, causing 27 moisture to permeate through to the floor and causing it to fail. (Id. at 261, 266.) “The only 28 recommended means to remedy the condition [wa]s to remove the floor and sealant, re-level the 1 floor and replace the flooring.” (Id. at 261.) 2 On November 8, 2016, counsel for Anderson reached out to Roy’s Flooring, Sports 3 Surfacing, and Koster via letters to notify them that CSU Bakersfield “ha[d] made a final demand 4 on Anderson to commence the requisite corrective action . . . and to do so during the next 5 semester break scheduled for December 15, 2016 through January 22, 2017.” (Id. at 261–62, 6 266.) Anderson in turn demanded that Roy’s Flooring and its subcontractors, including Sports 7 Surfacing, “confirm [their] respective intent and ability to immediately proceed with the removal 8 and replacement of the defective flooring during the suggested period noted above or to refund to 9 Anderson all sums previously paid to [them] . . . for the defective flooring.” (Id. at 262.) 10 Anderson’s letter warned Roy’s Flooring and Sport Surfacing that their failure to timely comply 11 with its demand would result in Anderson “undertak[ing] its own corrective action through an 12 alternate subcontractor and suppliers and . . . seek[ing] to recover all expenses and damages 13 caused by [their] refusal to perform that corrective work . . . .” (Id.) 14 Ultimately, however, CSU Bakersfield removed and replaced the entire flooring in the 15 Student Recreation Center’s fitness room, and thereafter back-charged Anderson in the amount of 16 $229,345.71 for the costs that it incurred in doing so. (Id. at 395.) On July 19, 2017, Anderson 17 sent another letter to Roy’s Flooring, Sports Surfacing, and Koster, demanding that they 18 reimburse Anderson for the amount that CSU Bakersfield had back-charged it. (Id.) On October 19 24, 2017, Anderson informed Roy’s Flooring, Sports Surfacing, and Koster by way of another 20 letter that it had not received a response to its July 19, 2017 correspondence and that it planned on 21 filing a lawsuit against the subcontractors within the next ten days unless payment was received 22 by Anderson within that timeframe. (Id. at 398.) 23 C. The Underlying State Court Action and Subsequent Tenders to EMC. 24 On November 16, 2017, defendant Anderson filed suit against Roy’s Flooring, Sports 25 Surfacing, and Koster in Kern County Superior Court, asserting claims for breach of contract, 26 breaches of express and limited liability, and negligence (the “underlying action” or “Anderson 27 Action”). (See Doc. No. 31-2, Ex. 18.) The complaint in the Anderson Action alleges that “core 28 samples, testing and analysis of the . . . Flooring were conducted . . . [and] [t]he results . . . 1 determined that an insufficient layer of the Koster sealer was applied to the concrete floor of 2 the . . . Fitness Room which allowed and caused moisture to permeate through to the floor 3 causing the adhesive to fail to remain bonded to the rubber flooring.” (Doc. No. 31-2 at 448.) 4 The state court complaint further alleges that “the primary causes of the above-described failure 5 were . . . [t]he Koster sealer layer was not applied thick enough or continuous enough to perform 6 as an effective moisture mitigation membrane [and] . . . the acrylic adhesive likely never cured 7 effectively and did not develop initial bond strength.” (Id. at 452.) Anderson seeks 8 compensatory damages in the sum of $229,345.71, an award of consequential, incidental, and/or 9 other appropriate damages in amounts according to proof, and an award of costs of suit. (Id. at 10 461.) 11 On March 20, 2018, Sports Surfacing tendered the underlying action to EMC for a 12 defense and indemnification under the EMC insurance policies, and on April 12, 2018, 13 Navigators, as insurer for Roy’s Flooring, tendered Roy’s Flooring’s defense in the Anderson 14 Action to EMC, contending that Roy’s Flooring was an “additional insured” under the EMC 15 insurance policies issued to Sports Surfacing. (Doc. Nos. 31 at 20; 31-2 at 293.) By way of 16 letters dated August 8 and 17, 2018, EMC declined to defend both Sports Surfacing and Roy’s 17 Flooring in the Anderson Action. (See Doc. No. 31-2, Exs. 19 –21.) As relevant here, EMC 18 argued that, “[t]o the extent Anderson asserts any claims against [Sports Surfacing or Roy’s 19 Flooring in the Anderson Action], those claims are for the costs that [CSU Bakersfield] ‘back 20 charged’ to Anderson for the purpose of correcting [Sports Surfacing and/or Roy’s Flooring’s] 21 defective flooring work or products.” (Doc. No. 31-2 at 494, 515, 536.) EMC argued that these 22 costs are not for “property damage” as that term is defined in the EMC insurance policies. (Id.) 23 Moreover, EMC argued that, even if the costs incurred by CSU Bakersfield in removing and 24 replacing the defective flooring constituted “property damage” as that term is defined in the EMC 25 insurance policies, the “Damage to Your Product” and “Damage to Your Work” exclusions in 26 those policies also negate coverage. (Id. at 501–03, 516–17, 537–39.) Accordingly, EMC 27 requested that Sports Surfacing and Roy’s Flooring withdraw their coverage requests and 28 reserved all of its legal and equitable rights in connection with the matter, including its right to 1 initiate a declaratory judgment action if necessary. (Id. at 507, 528, 551.) 2 D. The EMC Insurance Policies. 3 EMC issued commercial general liability and commercial umbrella policies to Sports 4 Surfacing (the “CGL policies” and the “umbrella policies,” respectively) (collectively, the “EMC 5 insurance policies”).4 The EMC insurance policies were first issued in 2008 and renewed in 6 2009, 2010, and 2011. (UF at ¶¶ 1–16.) 7 1. The CGL Policies. 8 The CGL policies state in relevant part: 9 We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . “property damage” to which this 10 insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will 11 have no duty to defend the insured against any “suit” seeking damages for . . . “property damage” to which this insurance does not 12 apply. 13 (Doc. No. 31-2 at 25, 89.) As relevant here, the CGL policies define “property damage” as 14 Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at 15 the time of the physical injury that caused it; or . . . Loss of use of tangible property that is not physically injured. All such loss of use 16 shall be deemed to occur at the time of the “occurrence” that caused it. [17] 18 (Id. at 39, 103.) The CGL policies, however, explicitly “do[] not apply to”: 19 k. Damage To Your Product “Property damage” to “your product” arising out of it or any part of 20 it. 21 l. Damage To Your Work “Property damage” to “your work” arising out of it or any part of it 22 and included in the “products-completed operations hazard.” 23 (Id. at 26–29, 90–93.) The CGL policies define “your product,” “your work,” and “products24 completed operations hazard” as follows: [25] 4 EMC issued CGL and umbrella policies to both defendants Sports Surfacing, Inc. and North [26] American Specialty Flooring, Inc. A total of four CGL and four umbrella policies were issued to 27 each of these defendants. (See UF at ¶¶ 1–16.) The policies “were issued on the same coverage form” (Doc. No. 31 at 9, 12) and contain the same or similar language in the provisions that are 28 relevant to this action. 1 21. “Your product”: 2 a. Means: (1) Any goods or products, other than real property, 3 manufactured, sold, handled, distributed or disposed of by: (a) You; 4 . . . 5 b. Includes: (1) Warranties or representations made at any time with 6 respect to the fitness, quality, durability, performance or use of “your product”; and 7 (2) The providing of or failure to provide warnings or instructions. [8] 22. “Your work”: [9] a. Means: 10 (1) Work or operations performed by your or on your behalf; and 11 (2) Materials, parts, or equipment furnished in connection with such work or operations. [12] b. Includes: 13 (1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use 14 of “your work,” and (2) The providing of or failure to provide warnings or 15 instructions. . . . [16] 16. “Products-completed operations hazard”: [17] a. Includes all “bodily injury” and “property damage” occurring 18 away from premises you own or rent and arising out of “your product” or your work” . . . . [19] 20 (Id. at 39–40, 103–04.) 21 2. The Umbrella Policies. 22 EMC also issued Sports Surfacing “umbrella” policies, which provide that EMC “will pay 23 on behalf of the insured the ‘ultimate net loss’ in excess of the ‘retained limit’ because of . . . 24 ‘property damage’ to which this insurance applies.” (Id. at 166, 215.) In essence, these policies 25 are meant to provide coverage “when the ‘underlying insurance’ does not provide coverage or the 26 limits of any ‘underlying insurance’ have been exhausted.” (Id.) However, similar to the CGL 27 policies, the umbrella policies also contain language that EMC “will have no duty to defend the 28 insured against any ‘suit’ seeking damages for . . . ‘property damage’ to which this insurance does 1 not apply.” (Id.) Moreover, like the CGL policies, the umbrella policies exclude from coverage 2 “Damage to Your Product” and “Damage to Your Work.” (Id. at 132–140, 187–89.) The 3 umbrella policies define “property damage,” “your product,” “your work,” and “products4 completed operations hazard” in the same way as the CGL policies define these terms. (Id. at 5 150–53, 199–202.) 5 6 E. This Action and the Pending Motion for Summary Judgment. 7 On April 26, 2019, EMC commenced this declaratory judgment action as a response to 8 Sports Surfacing and Navigators tendering the claims asserted against Sports Surfacing and Roy’s 9 Flooring in the underlying action to EMC for defense and indemnity. (Doc. No. 1.) On June 4, 10 2019, Sports Surfacing answered and counterclaimed for declaratory relief, seeking a declaration 11 that the claims made against in the underlying action are covered under the terms of the EMC 12 insurance policies. (Doc. No. 16.) On October 4, 2019, EMC filed the pending motion for 13 summary judgment. (Doc. No. 31.) On October 22, 2019, Sports Surfacing filed its opposition, 14 and, on October 28, 2019, EMC filed its reply thereto. (Doc. Nos. 32, 34.) 15 LEGAL STANDARD 16 Summary judgment is appropriate when the moving party “shows that there is no genuine 17 dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. 18 Civ. P. 56(a). 19 In summary judgment practice, the moving party “initially bears the burden of proving the 20 absence of a genuine issue of material fact.” In re Oracle Corp. Sec. Litig., 627 F.3d 376 , 387 21 (9th Cir. 2010) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). The moving party 22 may accomplish this by “citing to particular parts of materials in the record, including [23] 5 The EMC insurance policies also contain provisions that expand coverage to include additional 24 insureds, provisions that Navigators relied on when it tendered Roy’s Flooring’s defense to EMC. As discussed in this order, however, the court concludes that EMC is not obligated to defend [25] Sports Surfacing in the underlying action pursuant to any of the EMC insurance policies. It follows then, that if Sports Surfacing as the insured is owed no duty of defense by EMC, neither [26] is any additional insured under the EMC insurance policies. Roy’s Flooring does not argue to the 27 contrary, and in fact has agreed to be bound by the outcome of this action. Accordingly, the court need not and will not review or analyze the additional insured provisions in the EMC insurance 28 policies. 1 depositions, documents, electronically stored information, affidavits or declarations, stipulations 2 (including those made for purposes of the motion only), admissions, interrogatory answers, or 3 other materials” or by showing that such materials “do not establish the absence or presence of a 4 genuine dispute, or that the adverse party cannot produce admissible evidence to support the 5 fact.” Fed. R. Civ. P. 56(c)(1)(A), (B). If the moving party meets its initial responsibility, the 6 burden then shifts to the opposing party to establish that a genuine issue as to any material fact 7 actually does exist. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 , 586 8 (1986). In attempting to establish the existence of this factual dispute, the opposing party may 9 not rely upon the allegations or denials of its pleadings but is required to tender evidence of 10 specific facts in the form of affidavits, and/or admissible discovery material, in support of its 11 contention that the dispute exists. See Fed. R. Civ. P. 56(c)(1); Matsushita, 475 U.S. at 586 n.11; 12 Orr v. Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002) (“A trial court can only consider 13 admissible evidence in ruling on a motion for summary judgment.”). The opposing party must 14 demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the 15 suit under the governing law, see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); T.W. 16 Elec. Serv., Inc. v. Pac. Elec. Contractors Ass’n, 809 F.2d 626 , 630 (9th Cir. 1987), and that the 17 dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the 18 nonmoving party. See Wool v. Tandem Computs., Inc., 818 F.2d 1433, 1436 (9th Cir. 1987). 19 In the endeavor to establish the existence of a factual dispute, the opposing party need not 20 establish a material issue of fact conclusively in its favor. It is sufficient that “the claimed factual 21 dispute be shown to require a jury or judge to resolve the parties’ differing versions of the truth at 22 trial.” T.W. Elec. Serv., 809 F.2d at 631. Thus, the “purpose of summary judgment is to ‘pierce 23 the pleadings and to assess the proof in order to see whether there is a genuine need for trial.’” 24 Matsushita, 475 U.S. at 587 (citations omitted). 25 “In evaluating the evidence to determine whether there is a genuine issue of fact,” the 26 court draws “all reasonable inferences supported by the evidence in favor of the non-moving 27 party.” Walls v. Cent. Contra Costa Cty. Transit Auth., 653 F.3d 963 , 966 (9th Cir. 2011). It is 28 the opposing party’s obligation to produce a factual predicate from which the inference may be 1 drawn. See Richards v. Nielsen Freight Lines, 602 F. Supp. 1224 , 1244–45 (E.D. Cal. 1985), 2 aff’d, 810 F.2d 898 , 902 (9th Cir. 1987). Undisputed facts are taken as true for purposes of a 3 motion for summary judgment. Anthoine v. N. Cent. Counties Consortium, 605 F.3d 740 , 745 4 (9th Cir. 2010). Finally, to demonstrate a genuine issue, the opposing party “must do more than 5 simply show that there is some metaphysical doubt as to the material facts . . .. Where the record 6 taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 7 ‘genuine issue for trial.’” Matsushita, 475 U.S. at 587 (citation omitted). 8 ANALYSIS 9 EMC moves for summary judgment, arguing that the undisputed evidence before the court 10 establishes that it owes no duty to defend or indemnify Sports Surfacing in the Anderson Action 11 because: (1) the damages claimed in the underlying action are not for “property damage,” as 12 defined by the EMC insurance policies; and (2), even if the damages claimed were for “property 13 damage,” the EMC insurance policies’ “Damage to Your Product” and “Damage to Your Work” 14 exclusions preclude coverage. (Doc. No. 31 at 24–31.) In opposition, Sports Surfacing contends 15 that: (1) because a potential for coverage exists under the EMC insurance policies, EMC is 16 obligated to defend it in the Anderson Action; and (2) this court should decline to exercise its 17 jurisdiction in this matter. (Doc. No. 32 at 6–14.) 18 A. EMC is Not Obligated to Defend or Indemnify Sports Surfacing in the Anderson 19 Action. 20 1. Choice of Law. 21 Because the EMC insurance policies do not contain “choice of law” provisions, and 22 because they were issued in the State of Illinois, the court must determine which state’s law 23 applies in resolving the pending motion. “In an ordinary diversity case, federal courts apply the 24 substantive law of the forum in which the court is located, including the forum’s choice of law 25 rules.” Ins. Co. of N. Am. v. Fed. Exp. Corp., 189 F.3d 914, 919 (9th Cir. 1999). “In contract 26 law, California has two different choice-of-law tests, either of which may apply to this action.” 27 Costco Wholesale Corp. v. Liberty Mut. Ins. Co., 472 F. Supp. 2d 1183, 1197 (S.D. Cal. 2007). 28 The first choice-of-law test is California Civil Code § 1646, which states that “[a] contract is to be 1 interpreted according to the law and usage of the place where it is to be performed; or, if it does 2 not indicate a place of performance, according to the law and usage of the place where it is 3 made.” See also Costco Wholesale, 472 F. Supp. 2d at 1197 . The second choice-of-law test is 4 the common law “governmental interest analysis,” under which the “the trial court may analyze 5 the governmental interests of the various jurisdictions involved to select the most appropriate 6 law.’” Genesis Ins. Co. v. BRE Properties, 916 F. Supp. 2d 1058, 1065 (N.D. Cal. 2013) (quoting 7 Washington Mutual Bank, FA v. Superior Court, 24 Cal. 4th 906, 915, 103 (2001). However, a 8 court need not apply either test where no material conflict exists between the laws of the states 9 involved. See, e.g., Axis Reinsurance Co., 913 F. Supp. 2d at 800 (“[C]ourts need not engage in a 10 section 1646 choice-of-law analysis where there is no material conflict between the laws of the 11 states involved.”); M.D. Sass Inv’rs Servs., Inc. v. Reliance Ins. Co. of Illinois, 810 F. Supp. 1082 , 12 1086 (N.D. Cal. 1992) (Addressing the “governmental interest analysis” and noting that “there is 13 no conflict in applying California law to a dispute if the same outcome would be reached under 14 the law of each of the states involved”); Genesis Ins. Co., 916 F. Supp. 2d at 1065 (“[W]here 15 there is no application of California's choice of law rules, the law of the forum state applies.”). 16 Here, neither party has pointed to a material conflict between the laws of California and 17 Illinois that would trigger application of either test. Indeed, in the pending motion, EMC notes 18 that “the law of California and Illinois regarding interpretation of the coverage issues involved in 19 this matter do not conflict.” (Doc. No. 31 at 23.) Sports Surfacing does not dispute this assertion 20 and, in opposing the pending motion, has relied exclusively on California law. (See Doc. No. 32.) 21 Moreover, at the December 3, 2019 hearing on the pending motion, neither party objected to the 22 court applying California law in resolving the pending motion. Accordingly, the court will apply 23 California law in this case. Hurtado v. Superior Court, 11 Cal. 3d 574, 582 , 522 P.2d 666 , 671 24 (1974) (“[W]e hold that where as here in a California action both this state as the forum and a 25 foreign state (or country) are potentially concerned in a question of choice of law . . . and it 26 appears that the foreign state (or country) has no interest whatsoever in having its own law 27 applied, California as the forum should apply California law.”). 28 ///// 1 2. Duty to Defend or Indemnify in the Underlying Action. 2 “It is . . . a familiar principle that a liability insurer owes a broad duty to defend its insured 3 against claims that create a potential for indemnity.” Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4 4th 1076, 1081 (1993), as modified on denial of reh’g (May 13, 1993). “[T]he [insurer] must 5 defend a suit which potentially seeks damages within the coverage of the policy.” Gray v. Zurich 6 Ins. Co., 65 Cal. 2d 263, 275 (1966). “The determination [of] whether the insurer owes a duty to 7 defend usually is made in the first instance by comparing the allegations of the complaint with the 8 terms of the policy.” Horace Mann, 4 Cal. 4th at 1081. In analyzing an insurance policy, “courts 9 must consider both the [] language in the policy, and the endorsements or exclusions affecting 10 coverage, if any, included in the policy terms.” Modern Dev. Co. v. Navigators Ins. Co., 111 Cal. 11 App. 4th 932, 939 (2003), as modified (Aug. 29, 2003), as further modified (Sept. 18, 2003). 12 “Facts known to the insurer and extrinsic to the third party complaint can generate a duty to 13 defend, even though the face of the complaint does not reflect a potential for liability under the 14 policy.” Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 296 (1993). 15 To prevail in an action for declaratory relief regarding the duty to defend, “the insured 16 must prove the existence of a potential for coverage, while the insurer must establish the absence 17 of any such potential.” Id. at 300 ; see also Reg’l Steel Corp. v. Liberty Surplus Ins. Corp., 226 18 Cal. App. 4th 1377 , 1389 (2014) (“The insurer’s defense duty is obviated where the facts are 19 undisputed and conclusively eliminate the potential the policy provides coverage for the third 20 party’s claim.”) “Facts merely tending to show that the claim is not covered or may not be 21 covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of 22 the action) will fall within the scope of coverage . . . add no weight to the scales.” Montrose 23 Chem., 6 Cal. 4th at 300 . Accordingly, for Sports Surfacing to survive summary judgment here, 24 it must show that the underlying claims may fall within the coverage of the policy. Montrose 25 Chem., 6 Cal. 4th at 300 . EMC, on the other hand, “is entitled to summary judgment that no 26 potential for indemnity exists if the evidence establishes no coverage under the policy as a matter 27 of law.” Reg’l Steel, 226 Cal. App. 4th at 1389; see also Am. Star Ins. Co. v. Ins. Co. of the W., [28] 232 Cal. App. 3d 1320, 1325 (1991) (“If the claim does not fall within the insuring clauses, there 1 is no need to analyze further. There is no coverage.”) (citations omitted). 2 As relevant here, the EMC insurance policies provide Sports Surfacing with coverage for 3 “property damage.” EMC contends that it is not obligated to defend or indemnify Sports 4 Surfacing in the underlying state court action because the damages claimed in that underlying 5 action do not constitute property damage as defined by the EMC insurance policies. For the 6 reasons explained below, the court agrees. 7 a. The Anderson Action Does Not Seek Damages for “Property Damage.” 8 The EMC insurance policies define property damage as “[p]hysical injury to tangible 9 property, including all resulting loss of use of that property” or “[l]oss of use of tangible property 10 that is not physically injured.” (Doc. No. 31-2 at 39, 103.) In the underlying state court action, 11 however, Anderson is not seeking damages for physical injury to tangible property or loss of use 12 of property. The Anderson Action asserts claims for breach of contract, negligence, breach of 13 express and implied warranties, and “strict liability.” (Doc. No. 31-2, Ex. 18.) Moreover, the 14 allegations of the complaint in that action do not claim that Sports Surfacing’s actions or inactions 15 lead to physical injury to tangible property or loss of use of that property. Instead, the complaint 16 in the Anderson Action alleges that an “insufficient layer of the Koster sealer was applied [by 17 Sports Surfacing] to the concrete floor of the Rec Center Fitness Room which allowed and caused 18 moisture to permeate through to the floor causing the adhesive to fail to remain bonded to the 19 rubber flooring.” 6 (Doc. No. 31-2 at 448.) The only damages sought by Anderson in that 20 underlying action are for the $229,345.71 that CSU Bakersfield back-charged Anderson after 21 CSU Bakersfield demolished, removed, and replaced the defective flooring that Sports Surfacing 22 installed in the college’s fitness room. 23 A claim to recover expenses incurred to replace defectively installed flooring is not, 24 however, a claim for “property damage.” In California, “the prevailing view is that the [25] 6 Sports Surfacing does not materially dispute these facts. Indeed, in its opposition to the [26] pending motion, it concedes that “Roy’s Flooring engaged Sports Surfacing to obtain a Koster 27 sealer, which Sports Surfacing did. Sports Surfacing prepared the surface of the concrete floor and applied the Koster sealer under the supervision of a Koster representative. Sports Surfacing 28 then prepared and installed a supply rubber floor . . ..” (Doc. No. 32 at 5.) 1 incorporation of a defective component or product into a larger structure does not constitute 2 property damage unless and until the defective component causes physical injury to tangible 3 property in at least some other part of the system.” F & H Constr. v. ITT Hartford Ins. Co., 118 4 Cal. App. 4th 364 , 372 (2004). Consequently, “property damage is not established by the mere 5 failure of a defective product to perform as intended. Nor is it established by economic losses 6 such as the diminution in value of the structure or the cost to repair a defective product structure.” [7] Id. (citation omitted). These principles are in keeping with the basic purpose of CGL policies, 8 which 9 are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. The risk of 10 replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on 11 to the liability insurer. Rather liability coverage comes into play when the insured’s defective materials or work cause injury to 12 property other than the insured’s own work or products. 13 Id. at 373 (citations and internal quotation marks omitted). “In short, a liability insurance policy 14 is not designed to serve as a performance bond or warranty of a contractor’s product.” Id. 15 (citations omitted). 16 Here, the undisputed facts on summary judgment establish that the damages claimed by 17 Anderson in the underlying state court action “resulted from the remediation of the [fitness 18 room], and remediation work does not constitute property damage under California law.” Am. 19 Home Assurance Co. v. SMG Stone Co., Inc., 119 F. Supp. 3d 1053, 1060 (N.D. Cal. 2015); see 20 also Reg’l Steel, 226 Cal. App. 4th at 1393 (“California cases consistently hold that coverage 21 does not exist where the only property ‘damage’ is the defective construction, and damage 22 to other property has not occurred.”).7 The court therefore concludes that as a matter of law the 23 damages claimed in the underlying action do not constitute property damage as defined by the 24 EMC insurance policies. 25 7 Sports Surfacing’s contention that there is a potential for coverage under the EMC policies because CSU Bakersfield back-charged Anderson $9,125.00 for “moving of equipment” similarly [26] fails. (Doc. No. 32 at 7.) First, Sports Surfacing provides no authority indicating that the 27 “moving of equipment” constitutes property damage, as defined by the EMC policies. Second, and more importantly, CSU Bakersfield had to move that equipment in order to fix the defective 28 flooring. Accordingly, those costs are part of the remediation costs, not independent of them. 1 Sports Surfacing attempts to circumvent this conclusion by contending that “[t]he state 2 court complaint is at best ambiguous as to whether it alleges [a claim for] property damage.” 3 (Doc. No. 32 at 7.) In support of its argument in this regard, Sport Surfacing directs the courts 4 attention to paragraph 22 of the complaint in the Anderson Action, claiming that it seeks damages 5 for “loss of past, present and/or future use.” (Id.) Sports Surfacing, however, misreads that 6 paragraph of the complaint. Paragraph 22 of the state court complaint does not identify the 7 damages that Anderson is seeking in the underlying action; that paragraph simply recites that, 8 after discovery of the flooring defects, CSU Bakersfield “notified [Anderson] of those defects and 9 failures and claimed and demanded that [Anderson] correct the latent defects and reimburse [CSU 10 Bakersfield] for any loss of past, present, and/or future use and diminution in value of the Rec 11 Center Fitness Room’s Flooring System caused by the occurrence of the latent defects and 12 failures.” (Doc. No. 31-2 at 449.) Of course, it is not surprising that CSU Bakersfield, upon 13 discovering the defects in the flooring, demanded that its general contractor (Anderson) make it 14 whole, and in doing so anticipated damages based on loss of use or diminution in value of the 15 fitness room. Notably missing from the state court complaint, however, is any allegation that 16 CSU Bakersfield did in fact recover damages from Anderson for “any loss of past, present, and/or 17 future use” of the fitness room. Indeed, as discussed, the Anderson Action only seeks damages to 18 recover reimbursement of the sum of $229,345.71 “for the cost of the testing, removal and 19 replacement of the failed flooring.” (Id. at 448.) Finally, the court notes that, CSU Bakersfield 20 has not sued Anderson or any subcontractor that worked on the Student Recreation Center project 21 for “property damage” to that facility. CSU Bakersfield sought and received reimbursement from 22 Anderson for the costs to repair the defects, and Anderson has thereafter sought reimbursement 23 from Sports Surfacing and the other subcontractors for those same costs. There is simply no 24 allegation in the Anderson Action that the damages sought by Anderson therein are for “property 25 damage” as that term is defined by the EMC insurance policies. 26 Finally, Sports Surfacing contends that, “while the cost of repairing or replacing the 27 insured’s defective work may not be covered, damage to any other portion of the building would 28 be covered.” (Doc. No. 32 at 7.) It argues that this court cannot yet determine whether a 1 potential for coverage exists under the EMC insurance policies because “the underlying claim 2 will ultimately be determined in the state court action.” (Id.) Sports Surfacing’s argument in this 3 regard has already been addressed. As noted above, Sports Surfacing “must prove the existence 4 of a potential for coverage,” Montrose Chem. Corp., 6 Cal. 4th at 300 , which is done “by 5 comparing the allegations of the complaint with the terms of the policy,” Horace Mann, 4 Cal. 6 4th at 1081. However, save for the single reference to potential ambiguity in the complaint in the 7 Anderson Action (which the court has already addressed and rejected), Sports Surfacing’s 8 opposition is completely bereft of any facts or argument that would create a potential for EMC to 9 cover it in that action. 10 Having determined that the damages claimed in the underlying action do not constitute 11 property damage, the court finds that there is no genuine dispute as to whether or not the EMC 12 insurance policies cover the causes of action asserted against Sports Surfacing in the underlying 13 state court action. The court will therefore grant EMC’s motion for summary judgment seeking a 14 declaration that, pursuant to the EMC insurance policies, it has no duty to defend or indemnify 15 Sports Surfacing in the underlying action. Moreover, having determined that the damages 16 claimed in the underlying action do not fall within the scope of the EMC insurance policies, the 17 court need not and will not analyze whether the policies’ “Damage to Your Product” or “Damage 18 to Your Work” exclusions are applicable to the underlying action. 19 B. The Court Will Not Decline to Exercise its Jurisdiction over this Matter. 20 Finally, the court addresses Sports Surfacing’s argument that this court should decline to 21 exercise its jurisdiction under the Federal Declaratory Judgment Act because “jurisdiction is 22 expressly discretionary” and there is a “strong preference for having a state court, where the 23 underlying action is filed and pending, adjudicate a declaratory relief action for coverage as 24 well.” (Doc. No. 32 at 4, 8.) Essentially, Sports Surfacing argues that, because the Anderson 25 Action is pending in state court, this federal court should not exercise its jurisdiction in this 26 declaratory action. EMC describes this argument as an “unmeritorious, hail-Mary procedural 27 argument.” (Doc. No. 34 at 4.) However it may be characterized, the court finds this argument 28 advanced by EMC to be unpersuasive. 1 In Government Employees Insurance Company v. Dizol, 133 F.3d 1220 (9th Cir. 1998), 2 the Ninth Circuit noted that the factors outlined by the Supreme Court in Brillhart v. Excess 3 Insurance Company of America, 316 U.S. 491 (1942), “remain the philosophic touchstone for the 4 district court” when determining whether it should exercise its jurisdiction in a declaratory 5 judgment action. 133 F.3d at 1225. Specifically, the court in Dizol noted that: 6 The district court should avoid needless determination of state law issues; it should discourage litigants from filing declaratory actions 7 as a means of forum shopping; and it should avoid duplicative litigation. If there are parallel state proceedings involving the same 8 issues and parties pending at the time the federal declaratory action is filed, there is a presumption that the entire suit should be heard in 9 state court. The pendency of a state court action does not, of itself, require a district court to refuse federal declaratory relief. 10 Nonetheless, federal courts should generally decline to entertain reactive declaratory actions. [11] However, there is no presumption in favor of abstention in 12 declaratory actions generally, nor in insurance coverage cases specifically. We know of no authority for the proposition that an 13 insurer is barred from invoking diversity jurisdiction to bring a declaratory judgment action against an insured on an issue of 14 coverage . . .. 15 But these are considerations for the district court, which is in the best position to assess how judicial economy, comity and federalism are 16 affected in a given case. 17 Id. at 1225–26 (internal quotation marks and citations omitted). 18 The court finds that consideration of the Brillhart factors do not compel this court to 19 decline to exercise its jurisdiction in this case. While this action involves a question of state law, 20 there is no indication that EMC is forum-shopping by seeking declaratory relief in this court, or 21 that entering judgment in favor of EMC in this action would result in duplicative litigation. 22 Indeed, EMC is not even a party to the Anderson Action, and the coverage questions presented in 23 this action are not at issue in the Anderson Action. Accordingly, this court’s conclusion that 24 EMC is not obligated to defend or indemnify Sports Surfacing with respect to the Anderson 25 Action will not resolve or in any way affect Anderson’s claim that Sports Surfacing is liable to it 26 for the repair costs that CSU Bakersfield back charged to Anderson. 27 Moreover, it appears that Sports Surfacing’s argument may be brought in bad faith. As 28 noted above, Sports Surfacing has counterclaimed for declaratory relief, seeking a declaration that 1 the claims alleged against it in the underlying action are covered under the relevant provisions of 2 the EMC insurance policies. (See Doc. No. 16.) It is therefore odd that Sports Surfacing asks this 3 court to not exercise its jurisdiction, given that it has counterclaimed for declaratory relief itself. 4 Moreover, the timing of Sports Surfacing’s argument compounds the court’s concern that it may 5 not be brought in good faith. To argue now—after discovery has closed and after EMC has 6 brought a motion for summary judgment—that this court should decline to exercise its 7 jurisdiction under the Brillhart factors appears likely to be nothing more than an attempt to 8 preclude this court from ruling in EMC’s favor.8 See, e.g., Dizol, 133 F.3d at 1225 (“Parties may 9 no longer crouch in the underbrush, poised for the opportunity to interpose a discretionary 10 jurisdictional objection at the first hint of adversity.”). 11 Indeed, attached to EMC’s reply to Sports Surfacing’s opposition to the pending motion is 12 EMC attorney Lisa Darling-Alderton’s declaration, which further supports the court’s concern 13 that Sports Surfacing’s request may be brought in bad faith. Therein, attorney Darling-Alderton 14 avers that the parties—including Sport Surfacing, by and through its counsel in this matter, 15 attorney Arthur Grebow—“agreed [in June of 2019] to continue the trial in the Anderson 16 Litigation to January or February 2020 to allow time for the coverage issue to be decided via MSJ 17 in the Federal Court.” (Doc. No. 34-1 (“Darling Decl.”) at ¶ 5.) Attorney Darling-Alderton also 18 declares that, during “a conference call with all parties to this action for purposes of the Rule 26f 19 meeting and preparation of the joint report[,] . . . Mr. Grebow insisted that we include a date 20 certain for the motion for summary judgment in this action, so that the coverage issue would be 21 decided before trial commenced in the Anderson Action in January of 2020.” (Darling Decl. at 22 ¶ 7.) Attorney Darling-Alderton further declares that between July of 2019 to when Sports 23 Surfacing filed its opposition to the pending motion, attorney Grebow never indicated that he 24 intended on filing a motion or opposition contesting this court’s jurisdiction. (Id. at ¶¶ 7–14.) It 25 therefore appears clear that the parties in the underlying action agreed to postpone trial in that [26] 27 8 The court further notes that, to the extent that Sports Surfacing sought to dismiss or stay this action based on the application of the Brillhart factors, it should have done so by way of a 28 motion, and not in its opposition to EMC’s motion for summary judgment. 1 | action so that this federal court could resolve the coverage issues well before trial. Ud. at 45 2 | (‘Anderson wanted the coverage issue to be decided before proceeding with mediation or trial, 3 | for the obvious reason that having an insurer possibly participate in the mediation would [] impact 4 | those discussion.”).) 5 Accordingly, the court will not decline to exercise its jurisdiction over this matter. 6 CONCLUSION 7 For the reasons set forth above, EMC’s motion for summary judgment (Doc. No. 31) is 8 | granted and the Clerk of the Court is directed to close this case. 9 | IT IS ORDERED. a '0 Dated: _ December 27, 2019 Lele A. 2, ay 11 UNITED STATES DISTRICT JUDGE