Kilroy Industries v. United Pacific Ins. Co.

• Citation: 608 F. Supp. 847
• Decision Date: 01 March 1985
• Docket Number: No. CV 83-5156 MRP,CV 84-2370 MRP.,CV 83-5156 MRP
• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Central District of California
• Parties: KILROY INDUSTRIES, a California corporation, et al., Plaintiffs, v. UNITED PACIFIC INSURANCE COMPANY, Defendant. UNITED PACIFIC INSURANCE COMPANY, Plaintiff, v. KILROY INDUSTRIES, a California corporation, et al., Defendants.

608 F. Supp. 847

KILROY INDUSTRIES, a California corporation, et al., Plaintiffs, v. UNITED PACIFIC INSURANCE COMPANY, Defendant.

UNITED PACIFIC INSURANCE COMPANY, Plaintiff, v. KILROY INDUSTRIES, a California corporation, et al., Defendants.

Nos. CV 83-5156 MRP, CV 84-2370 MRP.

United States District Court, C.D. California.

March 1, 1985.

Michael A. Byrne, McKay, Byrne, Graham & Van Dam, Los Angeles, Cal., Douglas G. Houser, Douglas F. Foley, Bullivant, Houser, Bailey, Hanna, Pendergrass, Hoffman, O'Connell & Goyak, Vancouver, Wash., for plaintiffs.

Harvey R. Levine, Rick L. Bove, Shernoff & Levine, San Diego, Cal., for defendant.

OPINION

PFAELZER, District Judge.

In the first of these two related actions, United Pacific Insurance Company ("United") brought suit against Kilroy Industries, Sea-Tac Properties, and John Kilroy (collectively referred to as "Kilroy") and in the second, Kilroy filed suit against United. Subsequently, United and Kilroy filed cross-motions for summary judgment which came on for hearing on July 23, 1984 before the Honorable Mariana R. Pfaelzer.

I. BACKGROUND

These cases arise out of an insurance claim submitted by Kilroy to United under a $50,000,000 "Business Protection Insurance Policy" ("Policy"). The Policy provides liability and property insurance coverage for several properties owned by Kilroy in California and Washington. The property insurance covers loss of income as well as damage to Kilroy's property.

Kilroy is a real estate developer and owner of an eleven story office building in Seattle, Washington ("Sea-Tac"). Construction on Sea-Tac began in April 1978 and was completed in December 1979. Soon thereafter, tenants began to occupy office space in the building. At approximately the same time that the tenants began to take occupancy, Kilroy became aware of problems with the construction of the building, and, as a result, did not make its final progress payment to its general contractor, Baugh Construction Company ("Baugh"). On June 11, 1980, Baugh filed suit in King County, Washington to foreclose its construction lien on the building. On July 20, 1980, Kilroy answered Baugh's complaint and counterclaimed against Baugh and others alleging breach of contract. Kilroy and Baugh settled their claims on or about November 14, 1983.

Because of the controversy over the alleged structural problems with Sea-Tac, the King County Building Department conducted a "load test" in July 1981 and determined that the building was safe for occupancy. Thereafter, tenants continued to occupy the building and by August 1982, the building had attained a 48.5% occupancy rate.

On March 31, 1982, United issued its Business Protection Insurance Policy to Kilroy. Among the buildings covered under the Policy was Sea-Tac.

On August 13, 1982, the Building and Land Development Division of the Office of the Zoning and Subdivision Examiner of King County, Washington issued an order that Sea-Tac be vacated within sixty days. The order was based on the Division's determination that the building would be unsafe in the event of an earthquake. Following receipt of the order, Kilroy immediately began to relocate the Sea-Tac tenants.

In May 1983, Kilroy contacted United concerning its claim for income reduction from Sea-Tac and in June 1983, Kilroy submitted a formal claim for income reduction to the Robert Harris Agency in Newport Beach, California, the agency through which it purchased the Policy. The claim totalled approximately $6,000,000.00. With the formal claim, Kilroy also officially notified United of the then pending litigation between Kilroy and Baugh.

On July 22, 1983, United filed a complaint for declaratory relief in the Superior Court, King County, Washington asking the court to find that Kilroy's claim for income reduction was not covered under the Policy. On August 9, 1983, Kilroy filed suit against United in the United States District Court for the Central District of California alleging, inter alia, that United had breached its duty of good faith and fair dealing because it had denied Kilroy's claim for income reduction in bad faith and had filed the declaratory relief action in Washington. On August 10, 1983, Kilroy filed a petition for removal of United's declaratory relief action from the King County Superior Court to the United States District Court for the Western District of Washington. Subsequently, on March 22, 1984, the declaratory relief action filed by United was transferred from the Western District of Washington to the United States District Court for the Central District of California and thereafter was joined with the Kilroy action.

In May 1984, United filed this motion for summary judgment arguing that the Policy excludes Kilroy's claim for income reduction, that United did not act in bad faith when it rejected Kilroy's claim for income reduction and that Washington law applies in construing the rights of the parties. Kilroy also moved for summary judgment arguing that the Policy provides coverage for the income reduction claim, that the exclusions relied on by United to deny coverage do not relate to Kilroy's claim for income reduction, and that California law applies in construing the rights of the parties.

The Court, having considered the papers filed and the arguments of counsel, now grants Kilroy's motion for summary judgment with respect to the issue of whether its claim for income reduction is covered under the policy, and with respect to the issue of which state's law will apply to Kilroy's bad faith claims. However, there are genuine issues of material fact in dispute concerning Kilroy's allegations of bad faith denial of coverage by United. For this reason, summary judgment is denied as to that claim.

II. DISCUSSION

A. Summary Judgment

Summary judgment is appropriate when the court finds that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Ferguson v. Flying Tiger Line, Inc., 688 F.2d 1320, 1322 (9th Cir.1982). In evaluating a motion for summary judgment, the court must view the evidence in the light most favorable to the party opposing the motion. Deukmejian v. United States Postal Service, 734 F.2d 460, 462 (9th Cir. 1984). Summary judgment may be inappropriate in a contract case if there is a dispute over a material fact necessary to interpret the contract. See National Union Fire Insurance v. Argonaut Insurance Co., 701 F.2d 95, 97 (9th Cir.1983) (applying California law).

In this case, there is no dispute between Kilroy and United about the material facts as they relate to the issue of whether Kilroy's claim for income reduction is covered under the Policy. The only disagreement between the parties is as to the construction of the Policy which is a question of law. Fuller v. Equitable Savings and Loan Association, 718 F.2d 951, 952 (9th Cir.1983); Pacific Indemnity Co. v. Bloedel Timberlands Development, Inc., 28 Wash.App. 466, 624 P.2d 734, 836 (1982); Couch, Couch on Insurance Second § 15:3 (rev. ed. 1984). Thus, that issue is appropriate for summary adjudication.

In addition, the parties dispute the issue of whether California or Washington law applies to Kilroy's bad faith claims. Choice of law problems are also questions of law; thus, that issue is also ripe for summary adjudication.

B. United's Declaratory Judgment Action

1. Choice of Law

A threshold choice of law problem arises in this case because two states' laws are potentially involved. California is the state where the contract was negotiated and executed, where many of the buildings covered under the Policy are located, where Kilroy is incorporated and has its principal place of business, and where Kilroy is likely to collect for any claims made under the policy. Washington is the state where United is incorporated and has its principal place of business, and where Sea-Tac is located. Because jurisdiction is based on diversity, the Court must determine the applicable law under California's choice of law rules. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

The fact that more than one state's law is involved in a case does not inevitably present a choice of laws problem. "There is obviously no problem where the laws of the two states are identical." Hurtado v. Superior Court, 11 Cal.3d 574, 580, 114 Cal.Rptr. 106, 109, 522 P.2d 666, 669 (1974). That is the case here with respect to the construction and interpretation of the Policy, although not with respect to the bad faith claims.

California and Washington law are virtually indistinguishable with respect to the principles governing the construction of insurance contracts. In both states, the construction of an insurance policy is a question of law, Beaumont, Gribin-Von Dyl Management Co. v. California Union Insurance Co., 63 Cal.App.3d 617, 622, 134 Cal.Rptr. 25, 27 (1976); Pacific Indemnity, 28 Wash.App. at 468, 624 P.2d 734, and, in construing the policy, the Court's task is to ascertain the intent of the parties. Price v. Zim Israel Navigation Co., Ltd., 616 F.2d 422, 427 (9th Cir.1980) (applying California law), Allstate Insurance v. Neel, 26 Wash. App. 722, 612 P.2d 6 (1980). Both states also adhere to the general rule that "where a clause in an insurance policy is ambiguous, the meaning and construction most favorable to the insured must be applied, even though the insurer may have intended another meaning."¹Dairyland Insurance Co. v. Ward, 83 Wash.2d 353, 517 P.2d 966 (1974) (en banc). See also Price, 616 F.2d at 422; Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (1966); Beaumont, 63 Cal.App.3d at 617, 134 Cal.Rptr. 25; Witherspoon v. St. Paul Fire and Marine Insurance Co., 86 Wash.2d 641, 548 P.2d 302 (1976). In both states, this general rule is applied with particular force to exclusionary clauses. Beaumont, 63 Cal.App.3d at 623, 134 Cal.Rptr. 25; State Farm...