Crown Energy Servs., Inc. v. Zurich Am. Ins. Co., Case No. 19-cv-06334-EMC

• Decision Date: 08 January 2021
• Docket Number: Case No. 19-cv-06334-EMC
• Citation: 512 F.Supp.3d 997
• Court: U.S. District Court — Northern District of California
• Parties: CROWN ENERGY SERVICES, INC., et al., Plaintiffs, v. ZURICH AMERICAN INSURANCE COMPANY, et al., Defendants.

512 F.Supp.3d 997

CROWN ENERGY SERVICES, INC., et al., Plaintiffs,
v.
ZURICH AMERICAN INSURANCE COMPANY, et al., Defendants.

Case No. 19-cv-06334-EMC

United States District Court, N.D. California.

Signed January 8, 2021

512 F.Supp.3d 1000

George John Vogrin, Craig Glenn Kline, Vogrin and Frimet, LLP, Beverly Hills, CA, Michael James Frimet, Pro Hac Vice, Vogrin and Frimet, LLP, New York, NY, for Plaintiffs.

James Ronald Tenero, Debra B. Branse, Matthew Kurt Telford, Nolan Richard Theurer, Selman Breitman LLP, San Francisco, CA, Sheryl Weinberger Leichenger, Selman Breitman LLP, Los Angeles, CA, for Defendants.

ORDER DENYING PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING DEFENDANTS’ CROSS-MOTION FOR SUMMARY JUDGMENT

Docket Nos. 59, 67

EDWARD M. CHEN, United States District Judge

I. INTRODUCTION

In this action, Plaintiffs Crown Energy Services, Inc. (d/b/a Able Engineering Services) and Crown Building Maintenance Co. (d/b/a Able Building Maintenance) (collectively "Able") sue Defendants Zurich American Insurance Co., Zurich Services Corp., and Does 1-50 (collectively "Defendants") for breach of contract and breach of the implied covenant of good faith and fair dealing. At issue are Defendants’ responsibilities under multiple insurance policies. The motions currently before the Court concern the coverage terms of two commercial general liability ("CGL") policies that Zurich American Insurance Co. ("Zurich") issued to Able starting in 2013. The parties dispute whether the policies’ Self-Insured Retention ("SIR") endorsements—under which Able was responsible for paying the first $500,000 in compensation and defense costs for each incident arising under the CGL policies before Zurich's coverage kicked in—apply not only to Able, but to third-party "additional insureds" as well.

Able has moved for summary judgment on its first cause of action, alleging Zurich's breach of contract as to its CGL policies. Zurich, in turn, has cross-moved for summary judgment on Able's first cause of action (and Zurich's analogous counterclaim for declaratory judgment on the CGL issue), as well as Able's fifth cause of action, alleging Zurich's breach of the covenant of good faith and fair dealing. Prior to the motion hearing, the parties completed four rounds of briefing; see Docket No. 59 ("Able Mot."), Docket No. 67 ("Zurich Mot."), Docket No. 69 ("Able Reply"), and Docket No. 71 ("Zurich Reply"). For the reasons given below, the Court GRANTS Zurich's cross-motion for summary judgment on Able's first claim and DENIES Able's motion for partial summary judgment on the same claim. The Court also GRANTS Zurich's motion for summary judgment on Able's fifth claim.

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II. BACKGROUND

A. Factual Background

The Able companies "provide stationary engineering" services (such as HVAC repair) and "building maintenance and janitorial services to clients on a nationwide basis." Able Mot. at 1. "The scope of Able's activities requires a comprehensive insurance program, inclusive of Commercial General Liability[,] to meet its needs across multiple jurisdictions." Id. Such coverage was especially important because, in the period relevant to this action, Able had agreed "to defend and indemnify its clients, building owners and property managers, against claims arising from [Able]-provided janitorial and building engineering services." Zurich Mot. at 1. Able therefore contracted with Zurich "to buy general liability insurance and to ensure that such insurance covered [Able's] clients as additional insureds on a primary, first-dollar basis."¹ Id. From April 2013 until April 2014, Able was insured under Zurich Policy No. GLO 5747214-00; for the coverage period spanning April 2014 to April 2015, the policy was reissued as GLO 5747214-01. FAC ¶ 11. Able also obtained worker's compensation coverage from Zurich during the same period—coverage that is at issue elsewhere in this litigation but not in the pending motions. See id. ; Able Mot. at 1.

Prior to Able's agreement with Zurich, Able had maintained a primary insurance policy with another provider in which Able "and its additional insured clients received first-dollar defense and indemnity from the insurance company." Zurich Mot. at 1. Under the new policies with Zurich, "Able maintain[ed] a $500,000 Self-Insured Retention on [its] General Liability Coverage which [wa]s inclusive of defense costs." Able Mot. at 1. The main purpose of this change, as discussed below, was to reduce Able's insurance premiums.

To put the dispute in context, the Court first addresses self-insured retentions generally. "Liability insurance policies often contain a ‘deductible’ or a ‘self-insured retention’ (SIR) requiring the insured to bear a portion of a loss otherwise covered by the policy."² Croskey et al., Cal. Practice Guide: Insurance Litigation § 7:378 (2020). An SIR (also known as a "retained limit") "refers to a specific sum or percentage of loss that is the insured's initial responsibility and must be satisfied before there is any coverage under the policy." Id. at § 7:384 (emphasis in original). As a result, "a true [SIR] expressly limits the duty to indemnify to liability in excess of a specified amount and expressly precludes any duty to defend until the insured has actually paid the specified amount."³ Id. at

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§ 7:385.1 (internal quotation omitted) (emphasis in original). "The effect of a policy provision requiring the insured to retain the first portion of a loss is that the insurer is essentially providing excess insurance. " Id. at § 7:387 (emphasis in original). In sum, "no coverage attaches unless and until the insured becomes legally obligated for a loss in excess of the SIR. Until then, the insurer has no duty to defend or indemnify. " Id. (emphasis in original).

Able notes that, in contrast to a typical primary-insurance policy, an SIR allows the insured "to choose defense counsel and manage its defense costs" during litigation. See Able Mot. at 1. But the main benefit of an SIR-based policy is that it reduces premium payments. As the court in Forecast Homes, Inc. v. Steadfast Insurance Co. , 181 Cal. App. 4th 1466, 105 Cal.Rptr.3d 200 (2010), explains, "the primary purpose of an SIR provision is to allow the named insured to contain its insurance costs. As with deductibles, the more risk the named insured claims for itself, the lower the premiums will be." Id. at 1483, 105 Cal.Rptr.3d 200.

The record here suggests that reducing premium payments (and so incurring greater risk of liability) was, in fact, Able's motivation in contracting with Zurich for the contested CGL policies. In its moving papers, Zurich explains that, prior to its becoming Able's CGL insurer, Able maintained a standard primary-insurance policy that provided Able "and its additional insured clients ... first-dollar defense and indemnity" with a $10,000 deductible. Zurich Mot. at 1, 4 (citing Tenero Decl., Exs. 4 and 5). In 2013, however, Able retained Marsh Risk & Insurance Services ("Marsh") as an insurance broker to contract with Zurich for the SIR-based policy.⁴ Id. Soliciting a quote from Zurich on a CGL program, Marsh explained in an email that Able had "previously purchased insurance with relatively low retentions and as a result began to trade dollars with the insurance companies they dealt with." Id. at 4 (quoting Tenero Decl., Ex. 3). Through Marsh, Able thus sought from Zurich a "high retention" program, with options of $250,000 and $500,000 SIR amounts. Id. (quoting Tenero Decl., Ex. 3).

But this new arrangement evidently unnerved some of Able's clients, who would only be indemnified from loss resulting from Able's work if Able in fact paid the potentially high SIR amount under the CGL policies. In other words, Able's clients, as additional insureds, risked losing the benefit of Zurich policies for costs and losses below the SIR limit. In communications with Able, for example, Marsh noted that it was "anticipating some push back from certain certificate holders [i.e. , clients of Able] who will initially reject the new $500,000 SIR on the GL policy." Id. at 9 (quoting Tenero Decl., Ex. 14 at MARSH-CES-003911).⁵ In discussions

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with another insurer, however, Marsh expressed hope that "very few[ ] property manager cert holders will reject Able's SIR status for GL." Id. (quoting Tenero Decl., Ex. 15 at MARSH-CES-004522). But in an exchange with Zurich, Marsh again noted that because of Able's adoption of the SIR policy Marsh and/or Able "anticipate[d] some certificate issues" with Able's clients. Id. at 30 (quoting Tenero Decl., Ex. 3). Marsh therefore requested of Zurich, in addition to the SIR-based program Able was seeking, "a matching deductible policy" that would serve as a safety net for clients concerned about indemnification through the SIR.⁶ See id. (quoting Tenero Decl., Ex. 3). In its final quote to Marsh, Zurich offered such a matching deductible policy, the purpose of which "was ‘to certify coverage to those of Able's clients who require[d] proof of first-dollar [general liability] insurance.’ " Id. at 8 (quoting Tenero Decl., Ex. 8).

In subsequent discussions among the companies, Zurich explained to Marsh that, with respect to Able's prospective CGL policy, "Zurich's coverage attaches on top of Able's SIR," which, Zurich added, "should give some comfort to the umbrella carrier." Id. at 4 (quoting Tenero Decl., Ex. 6 at MARSH-CES-0028942). After Able and Zurich had agreed on the CGL policy, Marsh conveyed to Able that Zurich was also prepared to "issue an accommodation GL policy for those certificate holders who absolutely reject the high SIR status on the main policy." Id. at 8 (quoting Tenero Decl., Ex. 13 at MARSH-CES-003835). But shortly after the 2013 CGL policy had taken effect, one of Able's large clients, the Shorenstein Company, expressed concern to Zurich and Marsh that Able might fail to pay damages under the SIR amount, thereby exposing Shorenstein to...