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Berkshire Hathaway Homestate Ins. Co. v. Sqi, Inc.

United States District Court, W.D. Washington, Seattle

March 30, 2015

SQI, INC., et al., Defendants.


JAMES L. ROBART, District Judge.


Before the court are Plaintiff Berkshire Hathaway Homestate Insurance Company, formerly known as Cornhusker Casualty Company's ("Cornhusker"), motion for summary judgment (Mot. (Dkt. #29)); Defendants SQI, Inc. ("SQI"), Ledcor Industries (USA), Inc. ("Ledcor"), and Admiral Way, LLC's ("Admiral") combined motion to strike and opposition memorandum (Resp. (Dkt. # 31)); Cornhusker's reply memorandum (Reply (Dkt. # 35)); and Defendants' motion for leave to file a surreply (Mot. for Surreply (Dkt. # 39)). The court has considered the parties' submissions, the balance of the record, and the relevant law, and has heard oral argument. Being fully advised, the court grants in part and denies in part Cornhusker's motion for summary judgment and denies Defendants' motion to strike and motion for leave to file a surreply.


This is a declaratory judgment action and insurance coverage dispute arising out of underlying construction defect litigation. Cornhusker moves for summary judgment on its request for a declaration that it has no obligation to indemnify or pay benefits to SQI or its assignees with respect the underlying litigation. ( See Mot. at 1-2.) Defendants oppose Cornhusker's motion and request that the court either strike the motion or grant summary judgment in SQI's favor. ( See Resp. at 1-2.)

The case has its origins in a construction project in West Seattle. In 2001, developer Admiral hired Ledcor as the general contractor to build the Admiral Way Project ("the Project"), a structure consisting of 65 residential units, two ground-floor commercial units, and an underground parking garage. ( See id. at 2; Mot. at 4; 1st Sparling Decl. (Dkt. # 30) ¶ 5, Ex. D ("Project CCRs") ¶ 3.1; see also Martens Decl. (Dkt. # 33) ¶ 5, Ex. D ("Gartin Decl.") ¶¶ 2, 4.) Ledcor in turn hired multiple subcontractors. (Resp. at 2; Sparling Decl. ¶ 8, Ex. G ("Ledcor Compl.") ¶ 12; see also Gartin Decl. ¶ 4.) One of those subcontractors was SQI, which Ledcor hired to do the roofing on the Project. (Resp. at 2; Ledcor Compl. ¶¶ 12-13.) In addition to working on the original roofing, SQI also performed repairs on the roof in May and June of 2005. (Resp. at 3; see Gardner Decl. (Dkt. # 32) ¶¶ 2-4, Exs. 1-3.)

From May 2003 through May 2006, SQI had three year-long commercial general liability ("CGL") insurance policies with Cornhusker. (Resp. at 2-3; see Martens Decl. ¶¶ 2-4, Exs. A-C; 2d Sparling Decl. (Dkt. # 36) ¶¶ 3-5, Exs. B ("1st Policy"), C ("2d Policy"), D ("3d Policy"). The policies provided coverage for "Bodily Injury and Property Damage Liability" (Coverage A)[1]; "Personal and Advertising Injury Liability" (Coverage B); and "Medical Payments (Coverage C). (1st Policy at 92-102; 2d Policy at 31-41; 3d Policy at 32-42[2].) In addition, SQI paid extra premiums for productscompleted operations hazard ("PCOH").[3] (1st Policy at 11; 2d Policy at 15; 3d Policy at 12.) PCOH provisions apply to bodily injury or property damage that arises out of the insured's completed work or product as opposed to its ongoing operations.[4] See Goodwin v. Wright, 6 P.3d 1, 4 (Wash.Ct.App. 2000). In addition, all three of SQI's policies were subject to an endorsement that added an exclusion for residential construction under Coverage A.[5] (1st Policy at 116; 2d Policy at 55; 3d Policy at 57.)

On August 6, 2002, Admiral recorded the "DECLARATION AND COVENANTS, CONDITIONS, RESTRICTIONS, AND RESERVATIONS For The Admiral[, ] A Condominium" ("Project CCRs"), establishing the structure of the ownership rights in the Project. ( See Project CCRs.) The Project CCRs identify the units as the individually owned portions of the Project. ( See id. ¶¶ B, 1.9.42, 5.1.) Correspondingly, the CCRs provide for common ownership by the unit-owners of the land on which the Project sits as well as the parts of the Project not included in the units. ( See id. ¶¶ B, 1.9.11, 1.9.35, 1.9.42, 2.1, 5.1, 6.1; see also id. ¶¶ 7.1 (describing the "Limited Common Elements"), 9.)

Litigation related to the Project commenced in 2007, when the Admiral Way Condominium Owners Association ("ACOA") sued Admiral in King County Superior Court alleging defects in the construction of the Project and Admiral added Ledcor as a third party defendant ("the ACOA Suit"). ( See Mot. at 6-7; Resp. at 4-5; 1st Sparling Decl. ¶ 6, Ex. E ("ACOA Compl.") While the ACOA Suit was ongoing, Admiral and Ledcor sued SQI and various other subcontractors, also in state court ("the Contractor Suit"). ( See Mot. at 7-8; Ledcor Compl.) Cornhusker defended SQI in the Contractor Suit under a reservation of rights. (Resp. at 8; 1st Sparling Decl. ¶ 9, Ex. H.) From there, however, litigation continued to proliferate as Zurich American Insurance Company ("ZAIC"), one of Ledcor's insurers, brought a declaratory judgment action in state court asserting that no coverage existed under its policies ("the Coverage Suit"). ( See Mot. at 8-9; Resp. at 5-6.)

Several other insurers also became involved in the Coverage Suit, including Cornhusker and First Mercury Insurance Company ("FMIC"), another of SQI's insurers. ( See Resp. at 5-6; Mot. at 8.) In the Coverage Suit, Admiral and Ledcor asserted that they are additional insureds under SQI's policies and that Cornhusker and FMIC therefore had a duty to defend and indemnify them in the ACOA suit. ( See Mot. at 8; Resp. at 5; 1st Sparling Decl. ¶¶ 12-13, Exs. K-L.) FMIC later filed a declaratory action in this court seeking a determination that it owed no duty to defend or indemnify SQI ("the FMIC Suit"). ( See First Mercury Ins. Co. v. SQI, No. C13-2110JLR (W.D. Wash.).) This court stayed the FMIC Suit under the Brillhart abstention doctrine. ( See id. Dkt. # 62.)

Over the last year, the parties to these various suits have begun to resolve their claims. ACOA, for example, settled its claims against Admiral. (Resp. at 5.) In the Coverage Suit, Cornhusker obtained a summary judgment ruling that at least Ledcor is not an additional insured under SQI's policies.[6] ( See 1st Sparling Decl. ¶¶ 12-13, Exs. K-L.) Most importantly for this case, SQI settled with Ledcor and Admiral in the Contractor Suit. ( See Resp. at 8; 1st Sparling Decl. ¶ 10, Ex. I ("Stip. Judgment").) Pursuant to that settlement, SQI agreed to a stipulated judgment and assigned its rights against Cornhusker to Ledcor and Admiral in exchange for a covenant not to execute. ( See Resp. at 8; Stip. Judgment; 1st Sparling Decl. ¶ 11, Ex. J ("IFCA Notice").)

The settlement between SQI and Ledcor and Admiral signaled the beginning of this action. Not only did SQI assign its rights against Cornhusker and obtain a covenant not to execute, but Admiral, Ledcor, and SQI have given notice to Cornhusker of their intent to file claims against it under the Insurance Fair Conduct Act ("IFCA"), RCW 48.30.15. ( See Stip. Judgment; IFCA Notice.) Anticipating impending litigation against Admiral and Ledcor as SQI's assignees, [7] Cornhusker filed this action in federal court seeking a declaration that its policies do not provide coverage for the losses involved in the Contractor Suit. ( See Compl. (Dkt. # 1); Mot.)

Shortly after Cornhusker filed this action, the case was transferred to this court as related to the FMIC Suit ( see 10/3/14 Min. Order (Dkt. # 24)), and the court issued an order to show cause regarding diversity jurisdiction ( see OSC (Dkt. # 25)). The court noted that one of the parties in this case, Admiral, is a limited liability company ("LLC"), that the court must analyze the citizenship of each member of an LLC for purposes of assessing diversity of citizenship, and that Cornhusker had not provided information on the citizenship of Admiral's members. ( See OSC at 2.) The court therefore ordered Cornhusker to provide that information within seven days. ( See id. ) Six days later, Cornhusker complied. ( See Resp. to OSC (Dkt. # 27).)

On November 13, 2014, Cornhusker filed the instant motion for summary judgment. ( See Mot.) Cornhusker's motion attempts to establish that Cornhusker has no duty to indemnify SQI or its assignees for the losses at issue in the Contractor Suit. ( See id. at 1-2, 16.) The basis for this position is the exclusion in the policies that Cornhusker issued to SQI which bars coverage for personal injury and property damage resulting from or arising out of residential construction, including the construction of condominiums. ( See id. at 11-16.) Cornhusker argues that the losses at issue in the Contractor Suit fall within residential construction exclusion because those losses arose out SQI's work on the construction of condominiums. ( See id. )

Defendants counter that the court should strike the motion for summary judgment or deny it and grant summary judgment in SQI's favor on the issue of coverage. ( See Resp. at 1-2.) In support of the first contention, Defendants argue that (1) the court has not yet ruled on the order to show cause and therefore a motion for summary judgment is premature; (2) the court should stay this matter because it previously stayed the FMIC Suit; and (3) the court should grant Defendants additional time to conduct discovery before entertaining a motion for summary judgment. ( See id. at 7-9.) Turning to the merits of the motion, Defendants assert that coverage exists because the residential construction exclusion does not apply to the policies' PCOH provisions, and even if the exclusion does apply to those provisions, coverage nevertheless exists under several exceptions to the residential construction exclusion. ( See id. at 9-20.)

Over fourteen weeks after Cornhusker filed its reply, Defendants filed a motion for leave to file a surreply. ( Compare Reply with Mot. for Surreply.) This motion purports to address "new arguments presented by [Cornhusker] in its reply brief." (Mot. for Surreply at 1-2.) Cornhusker's motion for summary judgment and ...

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