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National Fire Insurance Co. of Hartford v. James River Insurance

United States District Court, D. Arizona

February 16, 2016

National Fire Insurance Company of Hartford, et al., Plaintiffs,
James River Insurance, et al., Defendants.


James A. Teilborg Senior United States District Judge

The instant matter arises of out Defendant James River Insurance (“James River”)’s refusal to defend and indemnify Sigma Contracting, Inc. (“Sigma”) in litigation over property damage caused by a plumbing subcontractor’s work during construction of a shopping center. Both James River and Plaintiffs National Fire Insurance Company of Hartford (“National Fire”)[1] and Sigma have filed cross-motions for summary judgment and ask the Court to interpret an insurance policy. Having reviewed the record and considered oral argument, the Court now rules on the pending motions.

I. Background

The dispute between the parties traces its roots to the installation of plumbing pipes and fixtures by Quik Flush Plumbing (“Quik Flush”), a subcontractor, during the construction of The Shoppes at Legacy House (the “shopping center”) in Mesa, Arizona from 2006-2007. (Doc. 39 at 1-2). For the most part, the facts are not in dispute. (Doc. 47 at 1). In July 2006, Alta Mesa & McKellips, LLC (“Alta Mesa”) entered into a General Contract with Sigma to construct the shopping center. (Doc. 39 at 1). On August 20, 2006, Sigma entered into a Subcontract Agreement with Quik Flush to complete all plumbing work for the construction project. (Doc. 41 at 2). Quik Flush then purchased a Commercial General Liability (“CGL”) insurance policy (the “Policy”) from James River. (Doc. 39 at 2). The Policy provided coverage from February 11, 2007, to February 11, 2008.[2] The record is unclear as to when Quik Flush began work, but it completed installation of the plumbing in the shopping center without incident by May 30, 2007. (Doc. 43 at 5).

Despite the incident-free plumbing installation, an issue arose with respect to Quik Flush’s work soon after a number of tenants had signed leases with Alta Mesa and began business operations. Specifically, four tenants (collectively the “Knuth tenants”)[3] who opened businesses in the shopping center suffered injury from a plumbing defect in the shopping center between October 2007, and November 2008.[4] Almost immediately after the Knuth tenants opened their respective businesses, each tenant encountered a terrible “sewer odor” that was described as “sickening . . . horrific . . . revolting . . . and []debilitating.” (Doc. 41 at 4). The noxious gas, later determined to be Hydrogen Sulfide, [5]was omnipresent; it was “continual, ” “overwhelming, ” “unabated, ” and prevented customers from patronizing the affected businesses. (Doc. 39-3 at 7-8). Although the Knuth “[t]enants attempted to, and did, conduct business, ” the “ultimate result [was] that the [t]enants were forced to shut down, ” and suffered caused “catastrophic damages.” (Id. at 8).

On October 2, 2009, the Knuth tenants filed suit against Alta Mesa in Maricopa County Superior Court. The complaint alleged that due to “the sickening sewer gaseous odor radiating from” the shopping center, the businesses incurred damages in the form of potential liability under their leases, “loss of revenues, damage to good will, operating losses and future lost profits.”[6] (Doc. 10-4 at 10). See Knuth, et al v. Alta Mesa & McKellips, LLC, et al., No. CV-09-031043 (Ariz. Super. Ct. Oct. 2, 2009). No personal injury or property damage was alleged. Rather, “the continual overwhelming and unabated presence of the noxious sewer gas” interfered with business operations and prevented use of tangible property. (Doc. 39 at 2-3). On September 21, 2012, the Knuth tenants settled for $242, 500, which was paid by National Fire. (Doc. 39 at 8; Doc. 43 at 9).

On January 5, 2011, Alta Mesa filed a Third-Party Complaint against Sigma, alleging that as the General Contractor for the construction project, Sigma had a duty to defend and indemnify Alta Mesa for any liability arising out of the Knuth tenants’ lawsuit. (Doc. 39 at 5). In turn, Sigma filed a Fourth-Party Complaint against Quik Flush on June 22, 2011. (Id. at 6). Sigma sought “express and implied indemnity from Quik Flush for any liability Sigma Contracting had to [Alta Mesa] arising out of the [tenant] plaintiffs’ claims.” (Id.). Quik Flush-evidently out of business by this time-failed to respond, (Id.), and on May 9, 2013, the Superior Court entered a default judgment against Quik Flush and awarded $510, 642.17[7] to Sigma. (Doc. 10-4 at 62-63).

On June 8, 2011, Sigma “tendered the Third-Party Complaint against Sigma to James River Insurance for defense and indemnity, ” pursuant to Sigma’s designation as an additional insured under the Policy. (Doc. 39 at 6). The initial tender included a short letter, a copy of the Knuth tenants’ complaint, and the Third-Party Complaint filed against Sigma. (Doc. 39-3 at 17-18). On August 11, 2011, after an investigation of Sigma’s claim, James River concluded that “there is no coverage afforded to Quik Flush for this claim” and thus “there can be no additional insured coverage afforded to Sigma.” (Id. at 20). James River based its conclusion on the Policy’s “absolute exclusion for any claim arising from gas pollution such as what [was] alleged in this matter.” (Id. at 21). This exclusion “clearly preclude[d] coverage for damages for bodily injury, property damage, or any other type of injury, resulting from the actual or alleged ‘discharge, dispersal, seepage, migration, release, escape or placement’ of pollutants.” (Id.). James River also asserted that the Policy only provided coverage when “property damage occurs during the Policy period, ” and “[f]rom the documents reviewed, it [was] unclear when Quik Flush completed its work or when the alleged damage occurred.” (Id. (internal quotation marks omitted)). Because “there was no ‘occurrence’ during the relevant Policy period, there would be no coverage for this claim.” (Id.).

On May 1, 2012, Sigma renewed its tender to James River to “agree to defend and indemnify [Sigma] with respect to the Knuth litigation, ” due to additional developments in the underlying litigation. (Doc. 39-3 at 25-26). Sigma asserted that the Knuth tenants had obtained an expert who tested the drain line that Quik Flush installed in the shopping center. (Id. at 25). The expert concluded that Quik Flush’s installation was faulty and caused a “dip” in the drain line that “may have caused the pipe to pull apart or crack, ” which resulted in sewage being released. (Id. at 26). Unmoved by Sigma’s “additional factual allegations, ” James River again concluded that “there [was] no coverage under the Policy for this claim.” (Doc. 39-4 at 2). James River’s second denial was more robust, but rested on the same findings: (1) there was no occurrence during the Policy’s coverage period; and (2) the absolute pollution exclusion precluded coverage for property damage caused by the release of Hydrogen Sulfide gas from drain pipes installed by Quik Flush. (Doc. 39-4 at 3-15).

Twice rebuffed by James River in their request for defense and indemnity, Plaintiffs filed suit in this Court on April 11, 2014. Plaintiffs seek declaratory relief and subrogation, or, in the alternative, equitable contribution from James River in the amount of $510, 642.17. (Doc. 10 at 8). On July 30, 2015, James River filed a motion for summary judgment, (Doc. 38), and Plaintiffs filed a cross-motion for summary judgment on August 28, 2015. Oral argument on the motions was held on February 3, 2016.

Having set forth the pertinent factual and procedural background, the Court now turns to the parties’ motions.

II. Standard of Review

a. Summary Judgment

Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, admissions on file, and any affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Assurance Co. of Am. v. Wall & Assocs. LLC of Olympia, 379 F.3d 557 (9th Cir. 2004) (citation omitted); see also Fed. R. Civ. P. 56(a). The movant bears the initial burden of demonstrating to the Court the basis for and the elements of the causes of action upon which the non-movant will be unable to establish a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to the non-movant to establish the existence of a material fact in dispute. Id. The non-movant “must do more than simply show that there is some metaphysical doubt as to the material facts” by “com[ing] forward with ‘specific facts showing that there is a genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (emphasis in original) (quoting Fed.R.Civ.P. 56(e) (1963) (amended 2010)). A dispute about a fact is “genuine” if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The ...

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