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American Home Assurance Co. v. Kbe Building Corp.

United States District Court, D. Maryland

January 13, 2015

AMERICAN HOME ASSURANCE CO.,
v.
KBE BUILDING CORP

MEMORANDUM

CATHERINE C. BLAKE, District Judge.

KBE Building Corporation ("KBE") incurred substantial costs in repairing its subcontractors' defective construction of two buildings. It subsequently sought reimbursement for those expenses from its insurer, American Home Assurance Company ("American Home"). American Home sued, seeking a declaratory judgment that it was not liable under the commercial general liability policies it had sold KBE. KBE counterclaimed, seeking its own declaratory judgment and alleging breach of the policies, as well as a host of alternative contractual, quasi-contractual, and tort claims. American Home now moves for summary judgment. In addition, several individuals subject to subpoenas issued by American Home have moved to quash those subpoenas. All these motions have been fully briefed and no hearing is necessary to their resolution. See Local Rule 105.5 (D. Md. 2014).[1] For the reasons explained below, American Home's motion for summary judgment will be granted in part and denied in part, Marshall Taylor's motion to quash will be granted, William Watkins' motion to quash will be denied without prejudice, and KBE's motion to quash or for a protective order will be denied without prejudice.

BACKGROUND

KBE, formerly known as Konover Construction Corporation, is a general contractor. ( See Countercl. 1, ECF No. 7; Answer Countercl. 1, ECF No. 20.) In 2006, KBE purchased from American Home, an insurer, a commercial general liability policy to cover the period between June 1, 2006, and June 1, 2007. ( See Mot. Summ. J., Ex 3, Galardi Aff. 1, ECF No. 43-4; Opp. Mot. Summ. J., Ex. 25, 2006 Policy, ECF No. 61-26.) The following year, KBE purchased from American Home another such policy, this one to cover the period between June 1, 2007, and June 1, 2008. ( See Galardi Aff. 1; Galardi Aff., Ex 3G, 2007 Policy, ECF No. 43-11.) Those policies, which were identical in all relevant respects, limited coverage to $1, 000, 000 per incident, $2, 000, 000 in the aggregate for "products-completed operations, " and an additional $2, 000, 000 in the aggregate for all other claims. ( See 2006 Policy 2; 2007 Policy 2.) In total, KBE paid over $760, 000 for the two policies. ( See 2006 Policy 1; 2007 Policy 1.)

During the period of coverage, Waldorf Land L.L.L.P. ("Waldorf Land") hired KBE to construct an "EZ Storage" building in Waldorf, Maryland. ( See Countercl. 3; Answer Countercl. 3.) And Gainesville Land L.L.L.P. ("Gainesville Land") hired the firm to construct another "EZ Storage" building in Prince William County, Virginia. ( See Countercl. 5; Answer Countercl. 4.) KBE completed the Waldorf building in early 2008 and the Gainesville building in mid-2007. ( See Countercl. 3, 6; Answer Countercl. 3, 4.)

Dissatisfied with KBE's work, both Waldorf Land and Gainesville Land sued KBE, alleging that the buildings they had purchased did not match the specifications described in the construction contracts. At both sites, KBE's mason subcontractor failed to properly install grout in the interior cavities of the facilities' masonry block walls, leaving some walls with inadequate support and other walls with too much. ( See Mot. Summ. J., Ex. 1, First Interrog. Answers 4-7, ECF No. 43-2.) Those structural deficiencies generated cracks in the exterior walls, lintels, and piers of the building, as well as the stucco, sealant, and paint applied to those walls. ( See First Interrog. Answers 5, 7; Opp. Mot. Summ. J., Ex. 1, Dunn Aff. ¶ 11, ECF No. 61-2.) In addition, subcontractors failed to install adequate insulation in certain temperature-controlled floors of both buildings and failed to attach appropriately precast horizontal planks to vertical walls in both facilities. ( See First Interrog. Answers 5, 8.) Additional defects plagued the Gainesville facility, including failure to grout plank joint connections, application of overly thin surface paving, and improper wiring of interior lighting fixtures. ( See First Interrog. Answers 8-9.)

In May and June 2009, KBE notified American Home that it was claiming coverage under the policies related to losses associated with both projects. ( See Galardi Aff., Ex. 3A, Waldorf notes 41-42, ECF No. 43-5; Galardi Aff., Ex. 3B, Gainesville notes 30-31, ECF No. 43-6.) In the ensuing months, KBE representatives repeatedly expressed dissatisfaction with the perceived slowness of American Home's handling of its claims. ( See Opp. Mot. Summ. J., Ex. 1, Dunn. Aff. 2, ECF No. 61-2; Opp. Mot. Summ. J., Ex. 3, Teich Email, Aug. 6, 2009, ECF No. 61-4; Opp Mot. Summ. J., Ex. 5, Anderson Email, Aug. 31, 2009, ECF No. 61-6.)

By at least early October, American Home's claims administrator, Chartis Claims, Inc., had assigned claims specialist Lane Goos to handle KBE's Waldorf claim and, by the following month, the Gainesville claim. ( See Mot. Summ. J., Ex 3A, Waldorf Notes 39, ECF No. 43-5; Mot. Summ. J., Ex 3B, Gainesville Notes, 27, ECF No. 43-6.) Although Goos had many years of experience in the insurance industry, he had only begun handling construction defect claims in spring 2009. ( See Opp. Mot. Summ. J., Ex. 7, Goos Dep. 10-13, ECF No. 61-8.) When prompted during a deposition, Goos agreed that this period of his career was "pretty overwhelming." (Goos Dep. 133.) Before his assignment to KBE's Waldorf and Gainesville claims, Goos had participated in handling on American Home's behalf a separate set of KBE claims arising out of the firm's construction of two retail stores in Port Covington, Maryland. ( See Goos Dep. 19-20; First Interrog. Answers 15.) Much like the Waldorf and Gainesville claims, those Port Covington claims involved structural defects caused by improper masonry work. ( See First Interrog. Answers 15.) Although American Home issued a reservation of rights letter as to the Port Covington claim, it ultimately reimbursed KBE not only for the costs of KBE's defense but also for KBE's expenditures in repairing the defectively constructed buildings. ( See Dunn Aff. ¶ 7; Goos Dep. 128; Galardi Aff. 3.) American Home reimbursed KBE's repair expenses under the terms of the policies, decreasing the remaining aggregate coverage available to KBE. ( See Galardi Aff. 3.)

On November 16, 2009, Goos participated in a conference call with Robert Dunn, KBE's General Counsel, and William Watkins, the attorney American Home had retained on KBE's behalf in the litigation pursuant to its duty to defend under the policies. ( See First Interrog. Answers 16; Opp. Mot. Summ. J., Ex. 2, Watkins Aff. ¶ 2, ECF No. 61-3.) In an interrogatory answer, KBE stated that Goos confirmed during that phone call that American Home had "agreed to undertake KBE's immediate defense in the Waldorf Litigation and Gainesville Litigation, and agreed to the manner in which the Claims would be handled and the construction deficiencies would be remediated and reimbursed to KBE." (First Interrog. Answers 15.)

In a separate affidavit, Watkins recalled that, during that call, he had emphasized the perceived weaknesses of KBE's defenses in both lawsuits and "the high potential for loss of use damages if the repairs-particularly the structural grouting repairs-were not immediately made to the operating facilities." (Watkins Aff. ¶ 3.) Accordingly, Watkins recommended staying the lawsuits and immediately beginning repairs to the two buildings. ( See Watkins Aff. ¶ 3.) He believed that participants on the call "agreed that, a) the litigation would be stayed; b) KBE would coordinate the repairs at the facilities because it was most familiar with the projects and could likely do so at substantially less cost than another contractor, including efforts to involve the original subcontractors in the repair efforts." (Watkins Aff. ¶ 3.) He also remembered that, during the call, Dunn and Goos referred to the Port Covington claims and discussed "how that project was handled and that this case should be handled in a similar fashion." (Watkins Aff. ¶ 3.) Goos, for his part, stated in a deposition that he could not remember that conference call. ( See Reply Supp. Mot. Summ. J., Ex. B., Goos Dep. 50, ECF No. 62-2.) But he specifically denied having reached an agreement with KBE separate from the underlying insurance policies and could not recall ever having asked KBE to repair the two facilities. ( See Goos Dep. 72-73, 115-16.)

On the basis of that phone call, KBE began to repair the two facilities. ( See Dunn Aff. ¶ 6.) "Had Mr. Goos not made the commitment to KBE, " Dunn stated in an affidavit, "KBE would have considered other alternatives in response to, and defense of, the Claims." (Dunn Aff. ¶ 6.) Over the next several weeks, Goos communicated with KBE about investigative and repair work performed by subcontractors and engineers. ( See Opp. Mot. Summ. J., Exs. 9, 10, ECF Nos. 61-10, 61-11; Dunn Aff. ¶ 8; Waldorf notes 36-37; Gainesville notes 25.)

On January 29, 2010, American Home sent KBE two letters stating that it would be defending KBE in both matters, subject to a reservation of rights. ( See Opp. Mot. Summ. J., Ex. 11, ECF 61-12.) In an affidavit, Dunn stated that issuance of those letters did not indicate that KBE might not pay for repairs to the Waldorf and Gainesville facilities; after all, American Home had issued a similar letter with respect to the Port Covington claims, but still reimbursed KBE for the costs of the repairs it performed in that matter. ( See Dunn Aff. ¶ 7.) American Home's non-responsiveness to KBE's references to reimbursement may have increased the firm's sense of security. In late February, for example, KBE reported to Goos on the progress of repairs at the Waldorf facility, noting that it planned to submit soon its "first reimbursement request." ( See Opp. Mot. Summ. J., Ex. 13, Dunn Email, Feb. 25, 2010, ECF No. 61-14.) In late March, KBE requested reimbursement for $424, 399, which included the costs of legal defense, engineering, and construction at the Waldorf facility. ( See Opp. Mot. Summ. J., Ex. 14, Dunn Email, Mar. 25, 2010, ECF No. 61-15.) And in early April, KBE twice wrote to Goos' successor, Michael Bird, emphasizing its alleged agreement with Goos "on a process of handling [the Waldorf and Gainesville matters] consistent with recent claims on the Port Covington [stores]." (Opp. Mot. Summ. J., Ex. 17, Dunn Email, Apr. 13, 2010, ECF No. 61-18; see also Opp. Mot. Summ. J., Ex. 16, Dunn Email, Apr. 6, 2010, ECF No. 61-17.)[2]

On April 20, KBE requested an update on the status of the reimbursement request it had submitted the previous month, emphasizing its "agreement with Lane Goos to proceed with repairs and reimbursements as we had done with similar issues at the Port Covinginton project." ( See Opp. Mot. Summ. J., Ex. 20, Dunn Email, Apr. 20, 2010, ECF No. 61-21.) Bird responded that American Home's treatment of the Port Covington claims "is not an agreement that is made to each and every claim, " such that "all repairs and decisions made for repair are being done so [sic] under [KBE's] own power and are in no way subject to an agreement that was made on the [Port Covington matters]." (Opp. Mot. Summ. J., Ex. 20, Bird Email, Apr. 20, 2010, ECF No. 61-21.) In late May, American Home issued a second set of reservation-of-rights letters concerning the Waldorf and Gainesville facilities, this time describing American Home's position in greater detail. ( See Galardi Aff., Exs. 3E, 3F, ECF Nos. 43-9, 43-10.) To date, American Home has not reimbursed KBE for repairs it completed on the Waldorf and Gainesville buildings. ( See Dunn Aff. ¶ 10.) Although KBE has requested payment of $2, 858, 383.22, American Home has only reimbursed that firm for $34, 762.21 in defense costs. ( See Dunn Aff. ¶ 10.)

American Home sued KBE in Maryland court, seeking a declaratory judgment that it was not liable for the costs of KBE's repairs under the terms of the policies. (Compl. 6-7, ECF No. 2.) KBE subsequently removed the case to this court, ( see ECF No. 1), and filed a counterclaim, ( see Countercl., ECF No. 7). In that counterclaim, KBE also sought a declaratory judgment that American Home owed it a duty to reimburse its repair costs under the policy and alleged that KBE breached its contractual duty. In addition, KBE alleged American Home had breached a separate agreement, entered into by Goos, to reimburse KBE for the costs of repair, that principles of promissory estoppel or quantum meruit required reimbursement, that American Home breached the common law duty of good faith and fair dealings, and that American Home's treatment of its obligations under the policies was negligent.

ANALYSIS

I. Standard of Review

Federal Rule of Civil Procedure 56(a) provides that summary judgment should be granted "if the movant shows 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) (emphases added). Whether a fact is material depends upon the substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Accordingly, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment." Id. at 247-48. "A party opposing a properly supported motion for summary judgment may not rest upon the mere allegations or denials of [his] pleadings, ' but rather must set forth specific facts showing that there is a genuine issue for trial.'" Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003) (alteration in original) (quoting Fed.R.Civ.P. 56(e)). The court must view the evidence in the light most favorable to the nonmovant and draw all justifiable inferences in his favor. Greater Balt. Ctr. for Pregnancy Concerns, Inc. v. Mayor & City Council of Balt., 721 F.3d 264, 283 (4th Cir. 2013) (en banc). At the same time, the court must not yield its obligation "to prevent factually unsupported claims and defenses from proceeding to trial." Bouchat, 346 F.3d at 526 (citation and internal quotation marks omitted).

II. Claim Premised on the Policies

American Home seeks summary judgment on its request for a declaratory judgment concerning its liability under the insurance policies it issued to KBE, arguing that those policies do not cover KBE's claims. The parties agree that Connecticut law governs interpretation of the policies. ( See Mem. Supp. Mot. Summ. J. 11, ECF No. 43-1; Mem. Opp. Mot. Summ. J. 27, ECF No. 61.) Those policies provide, in relevant part, that American Home would indemnify KBE for "sums that the insured becomes legally obligated to pay as damages because of bodily injury' or property damage'...." (2006 Policy, Commercial General Liability Coverage Form 1; 2007 Policy 9.) The policies define "property damage, " in turn, as either "[p]hysical injury to tangible property, including all resulting loss of use of the property, " or "[l]oss of use of tangible property that is not physically injured." (2006 Policy, Commercial General Liability Coverage Form 13; 2007 Policy 21.) According to American Home, the repairs KBE completed merely corrected KBE's own deficient performance, rather than remedying "property damage, " as that term is defined in the policies.[3]

In Capstone Building Corp. v. American Motorists Insurance Co., 67 A.3d 961 (Conn. 2013), the Connecticut Supreme Court interpreted the scope of "property damage" under a materially identical commercial general liability insurance policy issued to a general contractor pursuing claims arising in part from its subcontractors' defective work on a construction project. Although Capstone cautioned that evaluating the viability of such claims "is a highly fact-dependent determination, " 67 A.3d at 978, it outlined the parameters of that inquiry. Where an insured contractor seeks indemnity "based on physical injury to or loss of use of nondefective property"-such as mold or other moisture-related damage arising from defective construction- its claims are covered. Id. at 979 (emphasis added). By contrast, where such a contractor's claims are premised on "project components defective prior to delivery, or those defectively installed, " its claims are not covered unless defective work "result[s] in damage to other, nondefective property." Id. at 980. In reaching this conclusion, Capstone relied on Traveler's Insurance Co. v. Eljer Manufacturing, Inc., 757 N.E.2d 481, 502 (Ill. 2010), which held that "physical injury' unambiguously ...


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