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MKB Constructors v. American Zurich Insurance Co.

United States District Court, W.D. Washington

September 25, 2014

MKB CONSTRUCTORS, Plaintiff,
v.
AMERICAN ZURICH INSURANCE COMPANY, Defendant

Decided Date: September 24, 2014.

Page 815

[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For MKB Constructors a Washington joint venture, Plaintiff: A Richard Dykstra, LEAD ATTORNEY, FRIEDMAN RUBIN (SEATTLE), SEATTLE, WA; Kenneth R Friedman, FRIEDMAN RUBIN (BREMERTON), BREMERTON, WA; Peter J Mullenix, FRIEDMAN RUBIN (SEATTLE), SEATTLE, WA.

For American Zurich Insurance Company an Illinois corporation, Defendant: Elaine Videa, Jonathan R. Gross, LEAD ATTORNEYS, PRO HAC VICE, MOUND COTTON WOLLAN & GREENGRASS, EMERYVILLE, CA; Jose Dino Vasquez, KARR TUTTLE CAMPBELL, SEATTLE, WA.

Page 818

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

JAMES L. ROBART, United States District Judge.

I. INTROCUTION

This order addresses two motions: (1) Plaintiff MKB Constructors' (" MKB" ) motion for partial summary judgment (MKB Mot. (Dkt. # 91)), and (2) Defendant American Zurich Insurance Company's (" American Zurich" ) motion for summary judgment (AZ Mot. (Dkt. # 93)). The court has review the motions, all submissions filed in support of and opposition thereto, the balance of the record, and the applicable law. Being fully advised,[1] the court GRANTS in part and DENIES in part both motions.

Page 819

II. BACKGROUND

This case is an insurance coverage dispute involving a " Builders Risk" policy. MKB contracted with the Lower Yukon School District (" LYSD" ) for Phase I of a project that involved " the procurement, delivery and placement of gravel fill" for a new building pad and driveway upon which a school building would be erected in Emmanak, Alaska (" the Project" ). (Am. Compl. (Dkt. # 35) ¶ 6; 7/22/14 Videa Decl. (Dkt. # 94) Ex. 1 at 2.) In March 2012, LYSD requested contractors to bid on Phase I of the Project and provided the bidding contractors information, including topographical maps or drawings that showed the elevation of the original ground and the elevation to which the gravel pad was to be built. (Carl Decl. (Dkt. # 96) ¶ 5.) From this information, LYSD expected bidding contractors to calculate the volume of compacted gravel that would be required to complete Phase I of the Project. ( See id.) The maps and drawings were incorporated into and made a part of the Phase I contract. ( Id.)

The Project site was built on tundra that melted during the summer, becoming marshy and pocketed by pools of standing water. ( See 7/22/14 Videa Decl. Ex. 3 (Nesheim Dep.) at 28:9-14, Ex. 4 (Romine Dep.) at 33:9-12; Ex. 6 (Wilson Dep.) at 170:4 (" It's a swamp." ).) LYSD provided the bidding contractors with a geotechnical report that stated: " Settlements of 3 to 9 inches should be expected in area [sic] with 30 inches of fill and 5 to 12 inches in areas with 72 inches of fill." ( Id. Ex. 7 (attaching February 2012 Revised Northern Geotechnical Engineering Report) at 5.) The geotechnical report did not give the rate of settlement. ( See generally id.) LYSD, however, also issued Addendum 2, which stated:

There will be some initial settlement of about two inches that will occur during construction but the majority of the settlement will occur over a few years. The Phase I contractor is expected to bring the gravel to the grades shown on the drawings, concluding with substantially [sic] completion on September 15, 2012. The final topping and finish grading will be done by the Phase II contractor after the old HS building is demolished; this Phase II work will correct for any additional settlement occurring after Phase I substantial completion.

( Id. Ex. 8 (attaching Addendum 2) at 3 of 5; 7/22/14 Mullenix Decl. (Dkt. # 92) Ex. 14 at 3 of 5.) LYSD intended to pay for additional gravel that the contractor placed due to more than two inches of settlement. (7/22/14 Videa Decl. Ex. 34 (John Dep.) at 44:2-8; John Decl. (Dkt. # 96) ¶ 18.)

LYSD placed the drawings showing the topographical elevation contours of the original existing ground and the elevation to which the gravel pad would be built on a website called " The Plans Room." (John Decl. ¶ 5.) The drawings on the website were not distorted (7/22/14 Videa Decl. Ex. 12 (" Fortunato Dep." ) at 97:14-17), but they became so when MKB printed hardcopies of the drawings on its office printer ( id. Ex. 9 (" 12/17/13 Jensen Dep." ) at 47:16-23, 115: 10-20; Ex. 13 (" 8/27/13 Jensen Dep." ) at 8:15-17, 9:20-23). MKB assigns responsibility for the distorted drawings to LYSD. ( See Jensen Decl. (Dkt. # 110) ¶ 13.) In any event, MKB used the distorted drawings to estimate that it would need a volume of 23,626 cubic yards of compacted gravel for Phase I of the Project. (12/17/13 Jensen Dep. at 47:16-49:2, 126:2-5.) Based on MKB's bid of $5,582,887.00, LYSD awarded the Phase I contract to MKB. (John Decl. ¶ 8; 7/22/14 Videa Decl. Ex. 14; 7/22/14 Mullenix Decl. Ex. 10.)

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After winning the bid, MKB hired a computer-aided earthwork calculations specialist, Earthwork Services (" Earthworks" ), which determined that the required volume of compacted gravel for Phase I was 26,767 cubic yards. ( See 7/22/14 Videa Decl. Ex. 15 (" Zimmerman Dep." ) at 39:5-15; id. Ex. 16 at 2; see 7/22/14 Mullenix Decl. Ex. 12 (" 12/17/13 Jensen Dep." ) at 26:12-21.) As a part of its analysis, Earthworks pointed out to MKB that the drawings MKB had relied upon in making its bid to LYSD were distorted. (7/22/14 Mullenix Decl. Ex. 21.) As a result, MKB " question[ed] the sufficiency of its bid quantities." (MKB Mot. at 3-4 (citing 7/22/14 Mullinex Decl. Ex. 22).)

On May 17, 2012, MKB sent a letter to LYSD's engineer stating:

MKB performed the bid takeoff for import fill utilizing drawing C1.0. We have confirmed drawing C1.0 to be in error based on the CADD [sic] files forwarded to MKB. We estimate the total volume difference, base and alternates, to be approximately 4,700 CY [cubic yards].
MKB would appreciate the opportunity to sit down and discuss this issue in greater detail and negotiate an equitable price adjustment fair to both parties.

( 7/22/14 Videa Decl. Ex. 18.)

On June 5, 2012, MKB sent another letter to LYSD's engineer explaining that the drawing MKB had used to determine the required volume of compacted gravel was distorted. ( Id. Ex. 19; 7/22/14 Mullenix Decl. Ex. 22.) The letter explained that the distorted drawing resulted in a faulty estimate of 23,896 cubic yards of gravel while the " Total Corrected Cubic Yardage" should be 30,479 for a difference of 6,583 cubic yards. (7/22/14 Videa Decl. Ex. 19 at MKB001112; 7/22/14 Mullenix Decl. Ex. 22 at RNA00374.) MKB estimated the " TOTAL COST IMPACTS" to be $482,757.00. ( Id.)

As an alternative to the " lump sum payment of impacts noted above," MKB offered two alternative solutions to the situation, as follows:

1. Settlement in excess of the noted two (2" ) inches will most likely occur based on regional settlement results. MKB can furnish and place the quantity of fill as originally bid. In consideration of such the LYSD would revise the Phase II bid proposal to include the unit quantity and pricing for additional fill. This allows for any and all additional fill to be furnished and place [sic] at an agreed to unit price subject to LYSD direction.
2. MKB's estimated costs to furnish and place are subject to change based on actual production. MKB would be agreeable to furnishing and placing additional fill under actual cost conditions utilizing the contract markup provisions for change orders.

( 7/22/14 Decl. Ex. 19 at MKB001114; 7/22/14 Mullenix Decl. Ex. 22 at RNA00375.) MKB closed the letter by stating that it " certif[ied] the above and attached information to be true and copied without edit." ( Id.)

On July 11, 2014, LYSD responded to MKB, stating that it would not agree to increase the contract price:

It is my decision as the District's (Owner's) Representative for this project, that MKB's claim is without merit. MKB admittedly based its bid upon an " import fill takeoff from drawing C1.0." . . . . That alleged underestimation has not been shown to be the result of

Page 821

any error by the District. The claim is denied.

( 7/22/14 Videa Decl. Ex. 20.)

MKB started placing gravel on the Emmonak site in the second half of July. ( See id. Ex. 22 (attaching July 23, 2012 MKB daily log); Ex. 3 (Nesheim Dep.) at 71:2-8; Ex. 4 (Romine Dep.) at 82:6-7.) After about a month, MKB performed an interim survey which indicated less progress at placing fill than expected. (7/22/14 Mullinex Decl. Ex. 23 (Wilson Dep.) at 48:25-49:18.) As a result, MKB dug potholes at the site down to the geotextile fabric it had laid at the beginning of the project, and 19 out of 24 of these potholes indicated settlement at the site beyond two inches. ( Id. Ex. 24, Ex. 25 (Hayden Dep.) at 98:7-99:22.)[2] During the course of the summer, MKB also lost the ability to obtain additional gravel from its original source and was forced to barge in gravel from Nome, Alaska, at a higher cost. ( See 7/22/14 Videa Decl. Ex. 4 (Romine Dep.) at 214: 16-24; Ex. 24.)

On August 28, 2012, MKB wrote to LYSD that it anticipated " an import fill overrun approaching 100% of the estimated quantities," with " cost impacts" near or exceeding $2,000,000.00. ( Id. Ex. 26.) In the letter, MKB stated that it had determined based on a survey performed the weekend of August 22, 2012, that " settlement was a contributing factor" that justified contract relief as a change in conditions. ( Id.) LYSD responded on August 29, 2012, that MKB had provided " no documented evidence" that settlement was a contributing factor to the overruns. ( Id. Ex. 27.)

On August 30, 2012, MKB replied:

Based on preliminary survey data the site is experiencing settlement during construction in excess of [the description contained in Addendum 02] with only half the revised quantities placed to date. The addition of fill will only magnify and accelerate settlement conditions.

( Id. Ex. 28.) As a result, MKB requested " a time extension and payment of all costs resulting from deficient specifications/drawings and change conditions." ( Id.) On the same day, LYSD wrote that it would " work with MKB to the extent possible on justifiable gravel settlement," but noted that " MKB has failed to substantially demonstrate that there is indeed settlement in the quantities presently being asserted." ( Id. Ex. 28.)

Although MKB worked for nearly a month past the substantial completion deadline, the gravel it placed on the pad was still significantly below the levels required by the contract. ( See MKB Mot. at 5 (citing 7/22/14 Mullenix Decl. Ex. 30).) LYSD sent MKB a letter on October 15, 2012, transmitting " the as constructed survey results of the Phase I Emmonak Site." (7/22/14 Videa Decl. Ex. 31.) The letter states that the " survey reflects MKB's substantial and material failure to meet its contractual obligations to complete the work by October 1, 2012." ( Id.) On November 8, 2012, LYSD sent a letter to MKB terminating the contract. ( Id. Ex. 32.) LYSD also withheld the final contract payment of $1,436,419.40. ( See id. Ex. 33 at 13.) At this point in time, MKB was unable to retrieve its equipment from the site before the Yukon River, which was

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used to access the site, was frozen over. ( See 7/22/14 Mullenix Decl. ¶ 2.cc, Ex. 29 (" 2/18/14 Jensen Dep." ) at 80:18-23.)

In December, 2012, MKB processed a change order for the Phase II contractor, for placement of 7,000 cubic yards of fill to satisfy the specification requirements of Phase I construction. (7/22/14 Mullenix Decl. Ex. 9.) The price for the change order was $1,737,152.00. ( Id.)

On December 21, 2012, MKB sent a letter to LYSD demanding " compensation related to earth subsidence, settlement, of the native soils in accordance with the . . . contract by and between the LYSD and MKB . . . ." ( Id. at 1.) MKB asserted in the letter that it was " legally entitled to the following cost recovery:"

Remaining Contract Balance:

$1,436,419.40

Earth Movement Claim . . . :

$669,508.99

Incidental Costs to Changed Conditions:

$464,286.10

Markup & Overhead

$208,880.62

Legal and Professional Fee

$TBD

TOTAL

$2,779,095.11

( Id. at 13.)

MKB initiated arbitration proceedings against LYSD. (7/22/14 Videa Decl. Ex. 35 at 1; John Decl. ¶ 21.) MKB settled the arbitration after LYSD agreed to pay MKB $1,436,419.40,[3] which is the same amount that LYSD withheld from MKB as the remaining Phase I contract balance. ( Id. at 2.) Mr. Mark Jensen, MKB's Federal Rule of Civil Procedure 30(b)(6) deponent, testified that MKB was paid the contract balance by LYSD in arbitration proceedings. ( Id. Ex. 36 (" 2/18/14 Jensen Dep." ) at 22:7-9 (" MKB was paid -- in arbitration proceedings, MKB was paid the contract balance by [LYSD]." ) This testimony is consistent with LYSD's understanding of the settlement amount. ( See John Decl. ¶ 21 (" LYSD did not intend to pay for anything else in the settlement other than the withheld contract payment. . . . LYSD decided to settle the arbitration by paying the withheld contract payment because of business reasons." ).)

Despite Mr. Jensen's Rule 30(b)(6) deposition testimony, MKB submits that there were numerous claims besides just the withheld contract payment that were resolved by the settlement agreement. (Nourse Decl. (Dkt. # 109) ¶ 12.) Indeed, following his Rule 30(b)(6) deposition on behalf of MKB, Mr. Jensen submitted a declaration in which he states that " MKB has never been paid 'the withheld contract payment' from LYSD." (Jensen Decl. (Dkt. # 110) ¶ 4.)

On June 15, 2012, American Zurich issued Builders Risk Policy No. EC04372092 (" the Policy" ) to MKB. (7/22/14 Videa Decl. Ex. 38 at Zurich Policy 03.) The Policy provides that American Zurich " will pay for direct physical loss or damage to Covered Property caused by or resulting from a Covered Cause of Loss . . . ." ( Id. at Zurich Policy 038.) " Covered Causes of Loss means risk of direct physical loss or damage unless the loss or damage is otherwise excluded or limited in this Coverage Form." ( Id.) Earth movement is ordinarily an excluded Cause of Loss under the Policy ( id. at Zurich Policy 041), but MKB paid extra for the addition of an " Earth Movement" endorsement to the Policy (Mullinex Decl. Ex. 16 at 6). The definition of " earth movement" includes " earth

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sinking . . . or shifting." (7/22/14 Videa Decl. Ex. 38 at Zurich Policy 010.)

On August 30, 2012, MKB gave American Zurich notice of a claim but did not specify the nature of the loss except to say: " MKB has contract for site preparation work at Emmonak School. Potential design issue resulted in damage to the foundation work." ( Id. Ex. 39; 7/22/14 Mullinex Decl. Ex. 27.) On December 28, 2012, MKB submitted the specific items it was claiming to American Zurich. (7/22/14 Videa Decl. Ex. 40 at 2.) These items included:

A. Contract Balance:

$1,436,419.40

(Tab A)

B. Additional Foundational Materials:

$669,508.99

(Tab B)

C. Incidental Costs:

$464,268.10

(Tab B)

Markup & Overhead:

$208,880.62

Policy Deductible (Earth Movement):

$-100,000.00

Legal and Professional Fee:

$TBD

$2,679.095.11

(7/22/14 Videa Decl. Ex. 40 at AZ01047.) Mr. Jensen has acknowledged that MKB's claim against LYSD is the same as MKB's claim against American Zurich. ( Id. Ex. 9 (" 12/17/13 Jensen Dep." ) at 68:14-23 (" It's the same claim." ).)

American Zurich conducted a coverage investigation, and ultimately denied MKB's claim in a letter dated March 26, 2013. (Mullinex Decl. Ex. 4; 7/22/14 Videa Decl. Ex. 41.) American Zurich's March 26, 2003, letter states, in part:

Our investigation has not revealed that the building pad was ever damaged. MKB simply did not order enough fill material to complete the project. As the project was ongoing and MKB realized the 30,000 tons of gravel fill it had ordered was not going to be enough, it ordered approximately 15,000 additional tons of fill. This shortage of gravel fill material does not constitute " physical loss or damage" under the Policy so as to give rise to a covered claim.

( 7/22/14 Videa Decl. Ex. 2 at AZ3736.) In addition, the letter states that, even if MKB's claim represents damage under the Policy, a number of policy exclusions apply to negate any coverage. ( Id. at AZ3737-38.)

During the course of American Zurich's investigation, Ninyo & Moore issued a March 8, 2013, report indicating that the volume of gravel needed to complete the Phase I contract was 23,775 cubic yards. (7/22/14 Johnson Decl. (Dkt. # 95) ¶ 6.) In a June 7, 2013, report, Ninyo & Moore revised its calculations and came to the conclusion that 26,983 cubic feet of gravel were required to complete Phase I. ( Id. ¶ ¶ 10-11.) Ninyo & Moore did not revise its calculations, however, until after American Zurich had denied coverage to MKB.

The March 8, 2013, Ninyo & Moore report also stated that " one factor in the shortage of gravel fill needed to complete the project is the MKB under-estimated the quantity of fill, based on weight, required to construct the building pad." (8/18/14 Videa Decl. (Dkt. # 106) Ex. 10 at 13; see also id. at 15 (" [T]he shortage of gravel fill to complete the building pad was due to the following factors: 1) MKB under-estimated the weight of gravel to be purchased for the project, and 2) settlement of the ground surface beneath the fill." ).)

Following American Zurich's denial of MKB's claim, this lawsuit ensued. The parties' cross motions for summary judgment or partial summary judgment are presently before the court. American Zurich

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asks the court to rule as a matter of law that each of the individual cost items claimed by MKB is not a covered loss under the Policy. (AZ Mot. at 12-18.) American Zurich also asks the court to grant summary judgment that Alaska law governs MKB's common law and statutory claims for bad faith and then to dismiss those claims pursuant to Alaska's legitimate dispute doctrine. ( Id. at 18-23.)

MKB asks the court to grant partial summary judgment on five issues. First, MKB asks the court to rule as a matter of law that it need not prove full performance of the Phase I contract with LYSD to establish a covered loss under the Policy. (MKB Mot. at 6-11.) Second, MKB asks for a ruling that none of the Policy exclusions apply because earth movement was necessarily the dominant cause of its loss under the Policy. ( Id. at 12-14.) Third, MKB asks the court to grant summary judgment that none of the Policy exclusions asserted by American Zurich are applicable. ( Id. at 14-19.) Fourth, MKB asks the court to rule on summary judgment that the fortuity doctrine is inapplicable. ( Id. at 19-23.) Finally, MKB asks the court to rule as a matter of law that it has met the statutory preconditions for bringing a claim under Washington's Insurance Fair Conduct Act (" IFCA" ), RCW 48.30.015. ( Id. at 23.)

The court addresses each of these issues in turn.

III. ANALYSIS

A. Standards

The standards governing motions for summary judgment under Federal Rule of Civil Procedure 56 are familiar. Summary judgment is appropriate if the evidence, when viewed in the light most favorable to the non-moving party, demonstrates " that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Galen v. Cnty. of L.A., 477 F.3d 652, 658 (9th Cir. 2007). Where cross motions are at issue, the court must " evaluate each motion separately, giving the nonmoving party in each instance the benefit of all reasonable inferences." ACLU of Nev. v. City of Las Vegas, 466 F.3d 784, 790-91 (9th Cir. 2006) (citations omitted); see also Friends of Columbia Gorge, Inc. v. Schafer, 624 F.Supp.2d 1253, 1263 (D. Or. 2008).

B. American Zurich's Motion

American Zurich moves for summary judgment with respect to the items of cost that MKB contends it is owed under the Policy. American Zurich also moves for a ruling on summary judgment that Alaska and not Washington law applies to MKB's common law and statutory claims for bad faith, and that these claims therefore should be dismissed under Alaska's legitimate dispute doctrine.

1. MKB's Items of Cost

In its December 28, 2012, letter to American Zurich, MKB asserted that it was entitled to the following " specific monetary damages" under the Policy " as a direct result of earth movement:" (1) the " Contract Balance" of $1,436,419.40, (2) the cost of " Additional Foundation Materials" totaling " $669,508.99, (3) " Incidental Costs" totaling $464,286.10, and (4) legal and professional fees in an amount to be determined.[4] (7/22/14 Videa Decl. Ex. 40; 7/22/14 Mullenix Decl. Ex. 22.)

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Throughout this litigation, MKB has repeatedly affirmed that it is claiming the foregoing specific cost items originally listed in its December 28, 2012, letter to American Zurich. In its May 31, 2013, Initial Disclosures, MKB identified the same costs as those listed in its December 28, 2012, letter.[5] (MKB Initial Disclosures (Dkt. # 115-6).) On August 21, 2013, in response to American Zurich's First Set of Interrogatories, which asked MKB to " [i]dentify with specificity each and every item of cost MKB contends it is owed under the Policy," MKB again referenced its December 28, 2012, letter to American Zurich and its Initial Disclosures. (MKB Int. Resp. (Dkt. # 115-6) at 5.) Finally, on February 18, 2014, during the course of American Zurich's Rule 30(b)(6) deposition of Mr. Jensen on behalf of MKB, MKB's counsel stated, " Let me just tell you MKB's legal position which is that we're seeking everything in this December 28th letter . . . ." (2/18/14 Jensen Dep. (Dkt. # 115-7) at 35:3-5.)

Based on these representations, American Zurich moves for summary judgment with respect to each of the foregoing items of cost alleged by MKB. The court will address American Zurich's motion with respect to each cost item.[6]

a. Arbitration Costs

MKB initially claimed that an unspecified amount of its arbitration costs or " legal and professional fees" were covered under the Policy. ( See 7/22/14 Videa Decl. Ex. 40 at AZ01047 (attaching 12/28/12 claim letter from MKB to American Zurich stating claim for " Legal and Professional Fee" in an amount " TBD" ).) In its response to American Zurich's motion for summary judgment, however, MKB states: " Zurich is right that arbitration costs are not covered by the policy." (MKB Resp. at 14.) Thus, MKB has expressly abandoned this element of damages with respect to its claim for indemnification under the Policy. Accordingly, the court grants this portion of American Zurich's motion for summary judgment.[7]

Page 826

b. The $1,436,419.40 Contract Balance

MKB also asserts a claim under the Policy for the " Contract Balance" of $1,436,419.40. (Videa Decl. Ex. 40.) It is undisputed that LYSD paid MKB $1,436,419.40 in settlement following the initiation of arbitration proceedings by MKB against LYSD. It is undisputed that this amount is identical to the contract balance withheld by LYSD when it declared MKB to be in material breach of the Phase I contract. Indeed, MKB's Rule 30(b)(6) deponent, Mr. Jensen, has admitted that " MKB was paid--in the arbitration proceedings--. . . the contract balance by [LYSD]." (Videa Decl. Ex. 36 (2/18/14 Jensen Dep.) at 22:7-9.)[8]

The court need not consider the parties' dueling arguments concerning whether this specific cost item--the contract balance--is covered or excluded under various provisions of the Policy. Irrespective of whether the contract balance is collectable under the Policy as " direct physical loss or damage to Covered Property caused by or resulting from [earth movement]," or excluded under some other provision, American Zurich argues that it is entitled to summary judgment because LYSD paid MKB the remaining contract price of $1,436,419.40, and MKB, therefore, has suffered no loss with respect to this specific item of alleged damage. (AZ Mot. at 12-13.) The court agrees with American Zurich's position as explained below.

" Under the indemnity principle of insurance, an insured receives only that amount that will indemnify actual loss, not an additional windfall above this amount."

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Dombrosky v. Farmers Ins. Co., 84 Wn.App. 245, 928 P.2d 1127, 1136, n.4 (Wash. Ct. App. 1997). In Dombrosky, the insureds' home was damaged in a fire and a dispute arose between the insureds and their insurance company as to the amounts owed under the insureds' homeowners' policy. Id. at 1131-33. Following the fire, the insureds did not repair or replace the damaged home. Id. at 1132-33. They nevertheless sought payment from their carrier for costs related to repairing the structure rather that they had not actually incurred. Id. Specifically, they sought payment for additional replacement costs mandated by recently enacted building codes. Id. at 1135. The Washington Court of Appeals stated that even if these additional costs were covered under the policy, " the matter is moot because the [insureds] suffered no loss due to the building code." Id. at 1136, n.4. The court reasoned that the insureds had not taken steps to rebuild the structure and thus had not incurred the additional expense mandated by the new building codes. Id. Accordingly, the court would not permit the insured to collect a " windfall." Id.

There is no dispute that LYSD paid MKB $1,436,419.40 in the arbitration settlement. (Nourse Decl. (Dkt. # 109) Ex. 8 (attaching Settlement Agreement and Release) (" LYSD agrees to pay MKB . . . $1,436,719.40 . . . ." ).) This is the precise amount of the contact balance that MKB claimed in the arbitration and later in its claim letter to American Zurich. MKB therefore cannot be said to have suffered this loss. If MKB were to move forward with its claim that American Zurich should nevertheless reimburse it for the contract balance that LYSD has already paid, then (like the insureds in Dombrosky ) MKB would be seeking a double recovery and a significant windfall, in violation of the most basic principle of insurance.[9]

MKB nevertheless argues that Dombrosky is distinguishable because MKB " did incur . . . cost with respect to the withheld payment from LYSD." (MKB Resp. at 16.) This may be true, and to the extent that MKB can prove it incurred costs--other than or in addition to the amount of the contract balance--and those costs represent " direct physical loss or damage to Covered Property caused by or resulting from [earth movement]," then MKB may be entitled to recover them from American Zurich. MKB is not, however, entitled to claim items under the Policy for which it suffered no loss--namely the contract balance of $1,436,719.40.

MKB nevertheless makes the extraordinary argument that it is entitled to present the $1,436,419.40 contract balance as damages to the jury because American Zurich may only claim an offset for this amount in a post-trial proceeding. (MKB Resp. at 14-15.) MKB asserts that until it has been made whole for all of its alleged damages, American Zurich is not entitled to claim any offset for amounts paid by LYSD. ( Id.) According to MKB, the court must permit MKB to present this claim to the jury, American Zurich must expend time and resources defending the claim, and the jury must expend time and resources considering and deciding the claim, all before American Zurich is entitled to present undisputed facts to the court in a post-trial motion that LYSD has in fact paid this exact amount to MKB. This is nonsensical, and the court declines

Page 828

to engage in such a colossal waste of the parties', the jury's, and the court's time and resources.

In asserting this extraordinary argument, MKB relies primarily on Puget Sound Energy, Inc. v. Alba General Insurance Co., 149 Wn.2d 135, 68 P.3d 1061 (Wash. 2003).[10] ( See MKB Resp. at 14-15.) Alba is readily distinguishable. Alba involved an environmental insurance coverage action for six cleanup sites in Washington. 68 P.3d at 1062. The plaintiff settled with a number of its insurers prior to trial. Id. The non-settling carriers moved for summary judgment asserting that the plaintiff had already recovered sufficient funds from the settling insurers to cover its liabilities. Id. The plaintiff, however, argued that the settlements covered additional sites not in Washington and that it could not definitively determine what its future cleanup costs would be at each Washington site. Id. The Washington Supreme Court held that the non-settling insurers bore the burden of establishing that the plaintiff had been whole and the burden of establishing " the right to and amount of any offsets necessary to avoid double recovery by [the plaintiff]." 68 P.3d at 1064. Because there were issues of fact concerning whether the plaintiff had been made whole by the prior settlements with its other carriers in the context of this complex environmental coverage action, the court remanded the case to the trial court. Id.

The issues of fact and complexities present in Alba are simply not present here. This case does not involve multiple sites in multiple states with the uncertain future damages often associated with environmental cleanup sites. Here the issue is straightforward: Did LYSD fully reimburse MKB for the remaining contract balance of $1,436,419.40 such that MKB may not assert that it has suffered this loss or collect it a second time from American Zurich? As noted above, MKB's Rule 30(b)(6) deponent unambiguously testified that MKB " was paid--in the arbitration proceedings--. . . the contract balance by [LYSD]." (Videa Decl. Ex. 36 (2/18/14 Jensen Dep.) at 22:7-9.) More importantly, the settlement agreement between LYSD and MKB recites that LYSD paid MKB $1,436,719.40. (Nourse Decl. Ex. 8 at 2.) Thus, undisputed evidence forecloses any answer to the foregoing question other than " yes." Accordingly, unlike the carriers in Alba, American Zurich has met its burden " of establishing what part of the settlement was attributable to the claim it seeks to offset." Id.

Nevertheless, in an apparent attempt to create an issue of fact with respect to this issue, Mr. Jensen submits a declaration that contradicts his prior Rule 30(b)(6) deposition testimony. In his declaration, he states that " MKB has never been paid 'the withheld contract payment' from LYSD." (Jensen Decl. (Dkt. # 110) ¶ 4.) In the Ninth Circuit, the " sham affidavit rule" prevents a party from creating

Page 829

an issue of material fact by introducing an affidavit that contradicts prior deposition testimony. Kennedy v. Allied Mutual Ins. Co., 952 F.2d 262, 266-67 (9th Cir. 1991). The rule, however, is in tension with the principle that a court's role in deciding a motion on summary judgment is not to make credibility determinations or to weigh evidence. Van Asdale v. Int'l Game Tech., 577 F.3d 989, 998 (9th Cir. 2009). Therefore, it should be applied with caution. Inconsistencies in a party's statements must be clear and unambiguous to justify striking an affidavit. Id.

The court has little difficulty in finding that Mr. Jensen's statement that " MKB has never been paid 'the withheld contract payment' from LYSD" (Jensen Decl. ¶ 4) is clearly and unambiguously inconsistent with his prior deposition testimony that " MKB was paid--in the arbitration proceedings--. . . the contract balance by [LYSD]" (Videa Decl. Ex. 36 (" 2/18/14 Jensen Dep.) at 22:7-9). Nowhere in his declaration does Mr. Jensen reference or try to explain his prior inconsistent deposition testimony or try to harmonize the two statements. ( See generally Jensen Decl.) Rather, he simply states that " MKB resolved a number of claims and counterclaims with LYSD," and MKB's " claim in the arbitration far exceeded the amount we ultimately compromised that claim for." ( Id. ¶ 4.) Although these additional facts may be true, they do not alter the parties' mutual understandings that LYSD's payment in arbitration represented the withheld contract price. ( See John Decl. ¶ 21; Videa Decl. Ex. 36 (2/18/14 Jensen Dep.) at 22:7-9.) The court, therefore, finds that Mr. Jensen's subsequent inconsistent declaration creates nothing more than a sham issue of fact. See Kennedy. 952 F.2d at 267; Radobenko v. Automated Equip. Corp., 520 F.2d 540, 544 (9th Cir. 1975). Thus, the court may rely on the Mr. Jensen's deposition testimony in granting summary judgment on this issue.[11]

In addition to Mr. Jensen's subsequent declaration, MKB also submits the declaration of Stephen L. Nourse, who was

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counsel for MKB in its dispute with LYSD concerning the Phase I contract. (Nourse Decl. ¶ 1.) Mr. Nourse also testifies that the settlement with LYSD resolved numerous claims and that " [i]f MKB had prevailed on all of its claims in the arbitration, it would have received far more than the amount received as a result of the settlement agreement." ( Id. ¶ 12.) As the court has indicated above, this fact may well be true, and if so, then MKB may entitled to recover those amounts from American Zurich, assuming that they are costs covered under the Policy and not otherwise excluded. The fact, however, that MKB was not compensated for some of its claims in the arbitration with LYSD does not mean that it can assert items for which it has been fully reimbursed and therefore suffered no loss.

Based on the foregoing, the court grants American Zurich's motion for summary judgment with respect to MKB's claim that MKB is entitled to payment under the Policy of the $1,436,419.40 contract balance.

c. " Additional Foundation Materials" Totaling " $669,508

MKB asserts that because the earth under the building pad sank more than two inches, it was required to spend an additional $669,509 for purchasing, transporting and placing gravel over and above what the contract required. ( See MKB Resp. at 9.) American Zurich argues that it is entitled to summary judgment on this claim because MKB never placed the full amount of gravel required under the contract in the first place, and thus it could not have suffered a loss in excess of those amounts already required under the Phase I contract. (AZ Mot. at 15-16.) For purposes of its motion, American Zurich concedes that MKB placed 25,537 cubic yards of gravel at the site. ( See AZ Mot. at 15-16 (relying on MKB's assertion that it delivered and placed 25,537 cubic yards of gravel for purposes of its argument, but asserting that MKB will not be able to prove this amount at trial.) Even accepting American Zurich's argument that MKB must place all the gravel required under the Project contract before MKB can assert a loss under the Policy, the court finds that there are questions of fact that preclude summary judgment here.

The problem with American Zurich's argument is that the Phase I contract did not require a specific volume or tonnage of gravel. ( See Carl Decl ¶ 5 (" The contractors were expected to calculate the volume of compacted gravel required for the Project by determining the depth of gravel . . . and the square footage of the Project." ).) Rather, LYSD expected each company that bid on the Project to make its own calculation from drawings and maps that LYSD had placed on the Internet. ( See id.) The parties have submitted into evidence of numerous calculations of the volume of gravel that would be required to complete the Project from a variety of entities. Although it may have done so in error, MKB originally calculated that the Phase I contract would require the placement and compaction of 23,626 cubic yards of gravel. (7/22/14 Videa Decl. Ex. 9 (12/17/13 Jensen Dep.) at 126:2-5.) Earthworks, on behalf of MKB, later determined that the required volume of compacted gravel for Phase I was 26,767 cubic yards. ( See 7/22/14 Videa Decl. Ex. 15 (Zimmerman Dep.) at 39:5-15; id. Ex. 16 at 2; see 7/22/14 Mullenix Decl. Ex. 12 (12/17/13 Jensen Dep.) at 26:12-21.) In addition, two other contractors, using the drawings provided by LYSD, estimated the necessary volume of gravel for completion of Phase I to be 24,220 and 26,170 cubic yards, respectively. ( See 7/22/14 Mullenix Decl. Ex 22 at 5, Ex. 36, Ex. 38 (12/28/13 Jensen Dep.) at 60:3-22).) During

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the course of American Zurich's investigation into MKB's claim, Ninyo & Moore initially calculated the required volume of gravel to be 23,775 cubic yards (Johnson Decl. ¶ 8), but later revised that calculation to 26,983 cubic yards ( id. ¶ ¶ 10-11). Finally, American Zurich has retained another expert who has calculated the required volume to be 26,734 cubic yards.[12] (7/22/14 Videa Decl. Ex. 2 at 4.) Depending on which calculation persuades the jury, MKB either laid sufficient gravel to meet the Phase I contract requirements absent " earth movement" or did it not. This is a factual issue reserved for the jury. The court, therefore, denies American Zurich's motion with respect to this cost item.

In addition, however, the underlying assumption of American Zurich in this portion of its motion is that MKB cannot suffer a loss under the Policy until it has fully performed the contract. (AZ Mot. at 16 (" All gravel that MKB placed on the Emmonak site was part of its performance of a contract that MKB never fully performed. This is not 'direct physical loss' and is not covered by the Policy's insuring clause." ).) The court is not persuaded that MKB must prove that it laid sufficient gravel to fully perform the Phase I contract before it can assert a claim under the Policy. The court, however, will discuss this issue when it turns to MKB's motion for summary judgment. ( See infra § III.C.1.)

Finally, American Zurich also argues that any earth settlement that occurred under the building pad is not covered because it was not a fortuitous event. (AZ Mot. at 16.) Insurance coverage under an all risk builders' risk insurance policy, requires a fortuitous event. Frank Coluccio Const. Co., Inc. v. King Cnty., 136 Wn.App. 751, 150 P.3d 1147, 1156 (Wash. Ct. App. 2007) (" As a condition precedent to coverage under an all risk builders' risk insurance policy, the loss-causing instrumentality must have been brought about as the result of a 'fortuitous event.'" ) (quoting 7A Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 101:7 (3d ed. 2005)). American Zurich asserts that there was no fortuitous event because everyone expected the earth under the building pad to sink. ( See 7/22/14 Videa Decl. Ex. 7 at 5, Ex. 8 at 3 of 5.) MKB counters that any settlement over two inches during Phase I was fortuitous because LYSD had told the bidding contractors to expect settlement of only two inches during Phase I. ( See MKB Mot. at 19-23.) The court also denies American Zurich's motion summary judgment on this ground because it believes that there are factual issues concerning fortuity that are reserved for the jury. See Frank Coluccio Constr. Co., 150 P.3d at 1156 (" The test for fortuity is a subjective, not objective, one and involves questions of fact." ). The court, however, will discuss this issue more fully when it turns to MKB's motion for summary judgment. ( See infra § III.C.4.)

d. " Incidental Costs" Totaling $464,286.10

Several items that MKB claims as " incidental costs" under the Policy, American Zurich challenges as costs that MKB actually incurred to perform the Phase I contract. (AZ Mot. at 17-18.) Specifically, American Zurich challenges costs MKB claims for barging gravel, for equipment that was left at the Project site in 2012, and for certain work performed by Edge

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Survey and Design. ( Id.) MKB, however, has submitted evidence sufficient to raise genuine issues of material fact that MKB incurred these expenses not in performance of the Phase I contract but rather as a result of earth movement beneath the building pad. ( See, e.g., 8/18/14 Jensen Decl. ¶ ¶ 10-12.) Accordingly, the court denies American Zurich's motion for summary judgment with respect to this category of costs.

2. Choice of Law for MKB's Bad Faith, IFCA, and CPA Claims

MKB alleges that American Zurich violated Washington's CPA and various provisions of Washington's IFCA. (Am. Compl. (Dkt. # 35) ¶ ¶ 30-33, 35.) MKB also alleges that American Zurich breached its duty of good faith and fair dealing under both Washington law and Alaska law. ( Id. ¶ ¶ 34, 36-37.) American Zurich moves for summary judgment that Alaska law applies to these claims. (AZ Mot. at 19-23.) MKB counters that Washington law applies. (MKB Resp. at 19.)

When the laws of more than one state potentially apply, a federal district court sitting in diversity applies choice of law rules from the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941) (holding that a federal court sitting in diversity applies the conflict-of-law rules of the state in which it sits). Washington courts follow the Restatement (Second) of Conflicts of Laws § 145 to determine which state's law governs tort, IFCA, and CPA claims. Tilden-Coil Constructors, Inc. v. Landmark Am. Ins. Co., 721 F.Supp.2d 1007, 1016 (W.D. Wash. 2010) (citing Rice v. Dow Chemical Co., 124 Wn.2d 205, 875 P.2d 1213, 1217 (Wash. 1994) and analyzing choice of law for tort and CPA claims); Polygon Nw. Co. v. Nat'l Fire & Marine Ins. Co., No. 11-92Z, 2011 WL 2020749 (W.D. Wash. May 24, 2011) (analyzing choice of law for IFCA and CPA claims).[13]

Section 145 of the Restatement (Second) of Conflicts of Laws directs the court to determine the state with the most significant relationship to the occurrence and the parties under the general principles stated in Section 6. See Restatement (Second) of Conflict of Laws § 145(1). In doing so, the court should take into account the following four contacts: (a) the place where the injury occurred; (b) the place where the conduct causing the injury occurred; (c) the domicil, residence, nationality, place of incorporation, and place of business of the parties; and (d) the place where the relationship, if any, between the parties is centered. Id. § 145(2). These contacts must be evaluated according to their relative importance with respect to the issue at hand. Id. The most important Section 6 factors for torts claims are the needs of the interstate and international systems, the relevant policies of the forum,

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the relevant policies of other interested states and particularly of the state with the dominant interest in the determination of the particular issue, and ease in the determination and application of the law to be applied. Id. cmt. b.

American Zurich argues that the place where the injury occurred is Alaska because " the loss which is the subject matter of the coverage dispute, occurred in Emmonak, Alaska," the contract dispute between MKB and LYSD occurred in Alaska, the arbitration between LYSD and MKB occurred in Alaska, and MKB performed the Phase I contract there. (AZ Mot. at 20-21.) If the court were analyzing choice of law with respect to the contract dispute between LYSD and MKB, or MKB's contractual indemnity claim, then the location of the covered loss in Alaska might bear more weight. See Restatement (Second) of Conflict of Laws, § 188 cmt. e (situs of subject matter of contract is significant for contracts that protect against localized risks). The court, however, is analyzing MKB's tort and statutory claims for alleged IFCA and CPA violations. With respect to MKB's tort and statutory claims, it is conceptually more difficult to place the injury in Alaska. MKB's tort and statutory claims arise out of American Zurich's duties to MKB under the Policy. MKB is a Washington joint venture company, with its principal place of business in Washington. (8/18/14 Jensen Decl. ¶ 7.) MKB is headquartered in Washington and has no permanent offices in Alaska. ( Id.) MKB purchased the Policy at issue in Washington through its Washington agent. ( Id. at 8.) Logically, when an insurance company acts in bad faith or violates IFCA or CPA, its insured will experience that injury where the insured is located. Thus, the court concludes that the place where the injury occurred in this case is in both Alaska (where the site is located) and Washington (where the insured is located). Washington, though, has a substantial interest in deterring bad faith conduct on the part of carriers towards Washington insureds--an interest that Alaska would not share. Thus, although the court concludes that some aspects of the injury are located in both Alaska and Washington, due to Washington's interest in protecting Washington insureds from bad faith conduct, this factor weighs slightly in favor of Washington.

The place where the conduct causing the alleged injury occurred is indisputably California. ( See AZ Mot. at 22.) American Zurich admits that " the claim was investigated and adjusted by Richard Dugo, an American Zurich adjuster located in Escalon, California." (AZ Mot. at 21.) Any bad faith or statutory violations in the conduct of American Zurich's claims handling therefore occurred in California. This factor does not weigh in favor of Washington or Alaska, and therefore is neutral.

The next factor--the place of incorporation and the place of business of the parties--weighs in favor of Washington law. MKB is a Washington joint venture, composed of two Washington companies, with its principal place of business in Washington. (Am. Compl. ¶ 1.) American Zurich is an Illinois corporation with its principal place of business in Illinois. (Answer (Dkt. # 39) ¶ 2.) Nothing in this factor recommends Alaska law, but the location of MKB supports application of Washington law.

Finally, the center of the parties' relationship is split. MKB is headquartered in Washington and purchased the Policy in Washington. American Zurich is an Illinois company, but it adjusted MKB's claim from California concerning a project located

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in Alaska.[14] The court cannot conclude that the center of the parties' relationship weighs heavily in favor of either Alaska or Washington.

Overall, two of the relevant factors weigh in favor of applying Washington law, albeit marginally, while two are neutral. The balance thus tips in favor of applying Washington law. However, when considering other significant § 6 factors--particularly the relevant policies of the forum--the scale tips more clearly in favor of applying Washington law. See Restatement (Second) of Conflict of Laws § 6 (1971), id. § 145(2), cmt. b. Washington " has a strong interest in protecting insureds who must resort to litigation to establish coverage." Axess Int'l, Ltd. V. Intercargo Ins. Co., 107 Wn.App. 713, 30 P.3d 1, 8 (Wash. Ct. App. 2001). In light of this strong interest, the court concludes that Washington law should apply with respect to MKB's claims for alleged bad faith and alleged violations of IFCA and CPA, and denies American Zurich's motion for summary judgment that Alaska law applies.

American Zurich also moves for summary judgment dismissing MKB's claim for bad faith under Alaska's legitimate dispute doctrine. ( See AZ Mot. at 23 (citing Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001).) Because the court has concluded that Washington law applies to this claim, and American Zurich has not asserted that a similar doctrine exists under Washington law, the court denies this aspect of American Zurich's motion as well.

C. MKB's Motion

MKB moves for summary judgment on a variety of issues. First, MKB asks the court to rule as a matter of law that it need not prove it fully performed on its contract with LYSD in order to prove a loss under the Policy. (MKB Mot. at 6-11.) Next, MKB seeks a ruling on summary judgment that none of the exclusions in the Policy are applicable to MKB's claim for earth movement. ( Id. at 12-19.) Third, MKB seeks a ruling as a matter of law that the fortuity doctrine does not apply. ( Id. at 19-23.) Finally, MKB moves for summary judgment that it has met the procedural prerequisites for bringing an IFCA claim. ( Id. at 23.) The court addresses each issue in turn.

1. Full Contract Performance

MKB asks the court for a ruling as a matter of law that the MKB does not need to show that it fully performed the Phase I contract with LYSD to have a covered claim under the Policy. (MKB Mot. at 6-11.) The court agrees that nothing in the Policy specifically requires MKB to submit such proof to have a covered claim. To the extent that this is the ruling that MKB seeks, the court grants its motion.

The issue in dispute between the parties, however, is not one of law but one of fact. Although MKB need not prove that it fully performed the Phase I contract, it must prove that it suffered " direct physical loss or damage" to covered property. (7/22/14 Mullinex Decl. Ex. 3 (AZ Policy) at 038.) The parties have very different views of how MKB's claim should be analyzed, and they each seek to introduce different evidence to support their contentions. MKB asserts that the ground settled under the building pad which resulted in damage to covered property and losses that it is entitled to recover under the Policy. Thus, MKB seeks to introduce evidence of

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ground settlement to support its contentions. American Zurich, on the other hand, argues that the losses incurred by MKB are not the result of any sinking that occurred beneath the building pad but rather poor planning on MKB's part with respect to its contractual obligations. ( See id. at 8.) Thus, American Zurich seeks to introduce evidence that MKB miscalculated the amount of gravel it would need and never imported sufficient quantities to fulfill its underlying contractual obligations. American Zurich wishes to use this evidence to support its contention that poor planning as opposed to ground settlement is the source of MKB's losses. ( Id.)

The jury is entitled to hear and weigh all of this evidence--to the extent that it is otherwise admissible--with respect to both sides' contentions concerning the source or sources of MKB's losses. Thus, to the extent MKB's motion seeks to exclude American Zurich from presenting otherwise admissible evidence to the jury concerning the quantities of gravel fill that were required to complete Phase I of the Project or the quantities of gravel that MKB actually imported to the site or placed on the building pad, the court denies the motion.

2. Dominant Cause Clause

In its March 26, 2013, denial of coverage letter, American Zurich identifies a variety of Policy exclusions that it contends apply to MKB's claim. ( See 7/22/14 Videa Decl. Ex. 41 at AZ3737-38.) The Policy, however, carves out an exception to all Policy exclusions, as follows:

If a Covered Cause of Loss is the dominant cause of such a loss, we will not deny coverage on the basis that a secondary cause in that chain is not a Covered Cause of Loss.

( 7/22/14 Mullinex Decl. Ex. 3 (AZ Policy) at 017.) The parties refer to this provision as the dominant cause clause. American Zurich did not reference or discuss the dominant cause clause in its March 26, 2013, denial letter. Consequently, MKB argues that it is entitled to summary judgment barring American Zurich from subsequently raising the dominant cause provision to support application of the Policy's exclusions. ( See MKB Mot. at 12-14.) MKB misapprehends both the nature of the dominant cause clause and the nature of American Zurich's obligations under the Washington Administrative Code to notify MKB of the basis for its denial of MKB's claim. The court therefore denies MKB's motion for partial summary judgment on this issue as discussed below.

Under the Washington Administrative Code, American Zurich " must not deny a claim on grounds of a specific policy provision, condition, or exclusion unless reference to the specific provision, condition, or exclusion is included in the denial." WAC 284-30-380(1); see also WAC 284-30-330(13) (stating that it is an unfair or deceptive act or practice if an insurer " fail[s] to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim" ). MKB asserts that American Zurich's failure to address the dominant cause provision in its denial letter was a violation of the foregoing Washington Administrative Code provisions. ( See MKB Mot. at 13.) The dominant cause clause, however, is not an exclusion to coverage, but rather an exception to all of the exclusions in the Policy. See, e.g., Gen. Constr. Co. v. Zurich Am. Ins. Co., No. C03-5047FDB, 2004 WL 1707845, at *3 (W.D. Wash. May 21, 2004) (" [A]n ensuing loss provision operates as an exception to a policy exclusion" ). As such American Zurich is not relying on the grounds contained in the dominant cause clause to deny MKB's claim. It seems axiomatic that an exception

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to an exclusion, if applicable, would not provide a " basis in the insurance policy . . . for denial of a claim." See WAC 284-30-330(13). The court finds no authority, nor does MKB cite any, under which American Zurich is required to discuss the possible exceptions to the Policy exclusions cited in its denial letter.

Such a requirement would also be inconsistent with other aspects of insurance coverage law. Although American Zurich bears the burden of proof with respect to policy exclusions, Diamaco, Inc. v. Aetna Cas. & Sur. Co., 97 Wn.App. 335, 983 P.2d 707, 709 (Wash. Ct. App. 1999), MKB, as the insured, bears the burden of proof with respect to exceptions to Policy exclusions, Mid-Continent Cas. Co. v. Titan Constr. Corp., No. 05-CV-1240 MJP, 2009 WL 1587215, at *5 (W.D. Wash. June 5, 2009) (" A large majority of . . . courts hold[] that the burden of proof, which falls on the insured for coverage and shifts to the insurer for an exclusion, shifts back to the insured for an exception to an exclusion." ); Gen. Constr. Co., 2004 WL 1707845, at *3 (" Because the ensuing loss provision operates as an exception to a policy exclusion, the insured bears the burden of establishing it suffered a covered ensuing loss." ). Thus, although it logically follows that American Zurich must notify MKB of any exclusions to coverage upon which it relies to deny coverage, the same logic would not apply to exceptions to exclusions for which MKB bears the burden.[15] The court, therefore, denies this aspect of MKB's motion for partial summary judgment.

3. Policy Exclusions

MKB moves for summary judgment with respect to the Policy exclusions asserted by American Zurich in its March 26, 2013, denial letter. (MKB Mot. at 14-19.) American Zurich asserted three exclusions as grounds for denying MKB's claim: Policy exclusions 3(c) and 2(a) and (f). Policy exclusion 3(c) excludes coverage for " [f]aulty, inadequate, or defective (1) Planning . . ., (2) Design, specifications, workmanship, repair, construction, . . . grading, or compaction." (7/22/14 Mullinex Decl. Ex. 3 (AZ Policy) at 042; 8/18/14 Videa Decl. (Dkt. # 106) Ex. 2 at AZ3737.) Policy exclusions 2(a) and (f) exclude coverage for " loss or damage caused directly or indirectly by or resulting from . . . a. Delay, loss of use, loss of contract, loss of

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market or any other 'consequential loss'; [or] f. Penalties for noncompliance of, or delay in completion of, any contract or failure to comply with contract conditions[.]" (7/22/14 Mullinex Decl. Ex. 3 (AZ Policy) at 041; 8/18/14 Videa Decl. Ex. 2 at AZ3737-38.)

MKB asserts that exclusion 3(c) for inadequate or faulty planning, design, and specifications is inapplicable because MKB asserts a claim for earth movement and there is no way that " bad planning could have caused the ground below the building pad to move." (MKB Mot. at 16.) Specifically, MKB states that it " is not claiming that [American] Zurich should pay for any financial loss MKB sustained because MKB or LYSD made a mistake in planning the project." ( Id. at 17.) Yet, as delineated in detail in the background section of this order, this is a highly debated factual issue notwithstanding MKB's disclaimer. ( See supra § II.) Indeed, MKB does not deny that there were errors in the drawings upon which it based its original bid. (MKB Mot. at 19 (" Factual disputes . . . remain as to whether MKB correctly predicted the amount of gravel for the project." ).) MKB cannot eliminate the factual issue surrounding the application of exclusion 3(c) by simply stating that it is not claiming any financial loss because of a mistake in planning the project. There is certainly evidence in the record from which a jury could conclude that the costs MKB has asserted as covered under the Policy's insuring language and earth movement endorsement were actually incurred as a result of MKB's " mistake[s] in planning the project."

After reviewing the parties' dueling motions for summary judgment, there is no doubt that the parties view this case through very different analytical prisms. How the parties analyze the facts, however, does not alter the underlying reality that the record is replete with material factual disputes that only the jury can resolve. Determining whether the costs that MKB submits with regard to its claim are (1) covered as " direct physical loss or damage" to covered property due to earth movement (7/22/14 Mullinex Decl. Ex. 3 (AZ Policy) at 09-10, 038), or (2) excluded as resulting from " [f]aulty, inadequate, or defective" planning, design, or specifications ( id. at 042) requires the resolution of material factual issues that must be reserved for the jury.

The same is true with respect to Policy exclusions 2(a) and (f). The mere fact that MKB baldly asserts that " consequential losses . . . are not part of the claim MKB will present to the jury" does not make it so. Again, whether the specific categories of damages MKB asserts with respect to its claim fall within the Policy's coverage clause and earth movement endorsement or are excluded under Policy exclusions 2(a) and (f) requires the resolution of factual issues that would be inappropriate for the court to decide on a motion for summary judgment. Accordingly, the court denies MKB's motion for partial summary judgment with respect to the exclusionary clauses at issue.

4. Fortuity

MKB moves for summary judgment with respect to American Zurich's affirmative defense that MKB's alleged loss was not fortuitous. (MKB Mot. at 19-23.) " The fortuity principle is central to the notion of what constitutes insurance." Aluminum Co. of Am. v. Aetna Cas. & Sur. Co., 140 Wn.2d 517, 998 P.2d 856, 878 (Wash. 2000) (quoting Eric Mills Holmes & Mark S. Rhodes, 1 Appleman On Insurance 2D § 1.4, at 26 (1996)). " The insurer will not and should not be asked to provide coverage for a loss that is reasonably certain or expected to occur within the policy period." Id. The doctrine

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is " premised on the principle that an insured cannot collect on an insurance claim for a loss that the insured subjectively knew would occur at the time the insurance was purchased." Hillhaven Props. Ltd. v. Sellen Constr. Co., Inc., 133 Wn.2d 751, 948 P.2d 796, 799 (Wash. 1997) (extending the fortuity principle to first-party insurance). " [A]n all-risk policy might provide coverage for all risks minus named exclusions, but never provides coverage for nonfortuitous events, even though nonfortuitous events are not named exclusions in the policy." Aluminum Co., 998 P.2d at 879. The Washington Supreme Court has held that an insurer must prove the insured's actual knowledge of a " substantial probability" of a loss in order to bar coverage. Pub. Util. Dist. No. 1 v. Int'l Ins. Co., 124 Wn.2d 789, 881 P.2d 1020, 1031 (Wash. 1994).

Generally, " whether a particular occurrence was expected by the insured before the insurance coverage was obtained . . . is a question of fact." Pub. Util. Dist. No. 1 of Klickitat Cnty. v. Int'l Ins. Co., 124 Wn.2d 789, 881 P.2d 1020, 1030 (Wash. 1994); see also Frank Coluccio Constr. Co., 150 P.3d at 1156 (" The test for fortuity is a subjective, not objective, one, and involves questions of fact." ). MKB nevertheless argues that it is entitled to summary judgment primarily on the basis of a " prediction" in Addendum 2, which was issued by LYSD to the bidding contractors on March 26, 2012. ( See MKB Mot. at 20-22; Reply at 12.) Addendum 2 predicts " about two inches" of settlement under the building pad during Phase I. (8/18/14 Videa Decl. Ex. 21 (attaching Addendum 2) at 3 of 5.) MKB argues that any settlement beyond two inches was therefore fortuitous in nature, and there is no evidence that MKB should have expected more than two inches of settlement during Phase I or the Policy period.[16] (MKB Mot. at 20-23.)

Although a jury may well be convinced by MKB's argument, the court cannot conclude that there are not genuine issues of material fact with respect to fortuity. First, MKB omits the full context of the portion of Addendum 2 upon which it relies. Addendum 2 contains LYSD's responses to various questions from bidding contractors. ( See 8/18/14 Videa Decl. Ex. 21 at 2 of 5.) The question at issue and LYSD's response are as follows:

Q.3. Projects in and around Emmonak have historically shown substantial settlement. How do we account for this? Are the elevations shown on the plan fill to and let it settle? [sic] Do we add for settlement and barge in more gravel?
A. There will be some initial settlement of about two inches that will occur during construction but the majority of the settlement will occur over a few years. The Phase I contractor is expected to bring the gravel to the grades shown on the drawings, concluding with substantially [sic] completion on September 15, 2012. The final topping and finish grading will be done by the Phase II contractor after the old HS building is demolished; this Phase II work will correct for any additional settlement occurring after Phase I substantial completion.

( Id. at 2 of 5 - 3 of 5.) Thus, the question from the contractor informs the reader that Emmanok projects " have historically shown substantial settlement." ( Id. at 2 of 5.) Further, LYSD's response that " [t]here will be some initial settlement of about two inches" is not the same as " there will be

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some initial settlement of no more than two inches." Yet, this is the inference one draws from MKB's argument.

In addition, there is evidence in the record concerning fortuity that MKB does not address. On the same day that MKB received Addendum 2, MKB also received a geotechnical engineering report from Larsen Consulting Group, Inc., advising that there was going to be up to twelve inches of settlement at the Emmonak site. (8/18/14 Videa Decl. Ex. 17 at 5 of 8 (§ 7.3).) The report states:

Settlements under driveways and parking areas are expected to vary. Proper earthwork is necessary to minimize the settlement potential. Settlements of 3 to 9 inches should be expected in area [sic] with 30 inches of fill and 5 to 12 inches in areas with 72 inches of fill.

( Id.) Nothing in this document limits the timeframe of the expected settlement to Phase I of the Project. More significantly, however, on June 5, 2012, ten days prior to the Policy's June 15, 2012, effective date, MKB sent a letter to LYSD, stating: " Settlement in excess of the noted two (2" ) will most likely occur based on regional settlement results." (7/22/14 Mullinex Decl. Ex. 22 at RNA00375.) The factual record, therefore, is more complex and nuanced than MKB acknowledges in its motion.

A reasonable juror might easily conclude from the foregoing evidence that MKB did not subjectively expect settlement in excess of two inches during the Policy period. Such a juror, however, could also infer from the same evidence that MKB had knowledge of a " substantial probability" that more than two inches of settlement would occur during Phase I of the Project or the Policy period. Giving American Zurich, as the nonmoving party, " the benefit of all reasonable inferences," see ACLU of Nev., 466 F.3d 790-91, the court cannot conclude that this issue should be removed from the province of the jury. Accordingly, the court denies MKB's motion for summary judgment on the issue of fortuity.

5. IFCA's Procedural Prerequisites

On October 24, 2013, MKB amended its complaint to allege IFCA violations. (Am. Compl. at ¶ ¶ 30-33.) IFCA provides that " [a]ny first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys' fees and litigation costs." RCW 48.30.015(1). The statute, however, also requires that " [t]wenty days prior to filing an action based on this section, a first party claimant must provide written notice of the basis for the cause of action to the insurer and office of the insurance commissioner." RCW 48.30.015(8)(a).

On April 4, 2013, more than five months prior to filing its amended complaint, MKB sent a letter to Zurich, with a copy to the insurance commissioner, stating the bases for MKB's IFCA claim.[17] ( See 7/22/14 Mullinex Decl. Exs. 34, 35.) Based on this

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April 4, 2013, letter, MKB moves for a ruling on summary judgment that it has fulfilled the RCW 48.30.015(8)(a) procedural prerequisite for bringing an IFCA claim. (MKB Mot. at 23.) MKB is not seeking summary adjudication of the merits of its IFCA claim. ( Id.)

The court found no Washington authority construing IFCA's pre-suit notice provision, and the parties cite none. However, numerous federal decisions have construed the provision to require dismissal of an IFCA claim that a plaintiff brought without providing the prior the statutory notice. See Freeman v. State Farm Mut. Auto. Ins. Co., No. No. C11-761RAJ, 2012 WL 2891167, at *4 (W.D. Wash. July 16, 2012); Hiller v. Allstate Prop. & Cas. Co., No. 11-cv-291-TOR, 2012 WL 2325603, at *9 (E.D. Wash. Jun. 19, 2012); see also Polygon Nw. Co. v. Nat'l Fire & Marine Ins. Co., No. C11-92Z, 2011 WL 2020749, at *2, n.3 (W.D. Wash. May 24, 2011) (dismissing IFCA claim, as an alternative holding, where the plaintiff failed to wait 20 days after giving notice before suing). This court agrees that IFCA's pre-suit notice provision is a mandatory condition precedent to an IFCA lawsuit.

American Zurich does not contest that it received MKB's April 4, 2013, letter or that MKB provided a copy of the letter to the insurance commissioner. ( See AZ Resp. at 18-23.) Indeed, MKB plainly marked the upper left-hand corner of the first page of the letter with a legend, as follows:

20-day Notice of Violation
RCW 48.30.015 -- Insurance Fair Conduct Act

( 7/22/14 Mullinex Decl. Ex. 34 at 1.) The letter also identifies the specific provisions of the Washington Administrative Code that MKB asserts American Zurich violated and contains a brief explanation of each alleged violation. ( See generally id.)

American Zurich complains that MKB's letter does not have " the necessary substance to sufficiently provide notice of an actual improper claim practice." (AZ Resp. at 18-19.) American Zurich, however, does not explain why the letter is insufficient to provide " notice of the basis for the cause of action." RCW 48.30.015(8)(a). American Zurich's bald complaints of insufficiency are inadequate to prevent summary judgment on this issue.

The only other arguments that American Zurich raises go to the substance of MKB's IFCA claim, including whether any alleged IFCA violations occurred, and whether America Zurich responded and cured any such violations in a timely fashion. ( See AZ Resp. at 19-23.) MKB, however, has not moved for summary adjudication of these issues, and they remain for trial. American Zurich has failed to raise any genuine issue of fact with respect to MKB's compliance with the statutory notice requirements of RCW 48.30.015(8)(a), and the court therefore grants this portion of MKB's motion.

IV. CONCLUSION

As delineated in detail above, the court GRANTS in part and DENIES in part both American Zurich's motion for summary judgment (Dkt. # 93) and MKB's motion for partial summary judgment (Dkt # 91).


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