Ave. C Apartments, LLC v. Cincinnati Ins. Co.

AVENUE C APARTMENTS, LLC,a Montana limited liability company, Plaintiff/Counter-Defendant, v. THE CINCINNATI INSURANCE COMPANY,a corporation; and JOHN DOES 1-10, Defendant/Counter-Claimant.

CV 19-37-BLG-SPW-TJC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MONTANA BILLINGS DIVISION

February 25, 2021

FINDINGS AND RECOMMENDATIONS OF U.S. MAGISTRATE JUDGE

Plaintiff Avenue C Apartments, LLC ("ACA") brought this action against Defendant Cincinnati Insurance Company ("Cincinnati") for the denial of insurance coverage relating to its water damaged apartment building. (See generally, Doc. 1.) Before the Court is Cincinnati's Motion for Partial Summary Judgment and ACA's Cross-Motion for Partial Summary Judgment. (Docs. 34, 40.) The motions are fully briefed and ripe for review. (Docs. 35, 36, 41, 42, 45, 46, 47.) For the following reasons, the Court recommends Cincinnati's motion be DENIED and ACA's cross-motion be DENIED.

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I. Factual Background

Both parties have previously briefed the facts of this case, and the Court has recounted those facts in findings and recommendations. (See e.g. Docs. 6, 10, 12, 17.) The Court will, therefore, limit discussion to facts relevant to the issue at hand; all facts are undisputed unless otherwise noted.

ACA initiated construction on a 126-luxury apartment building in Billings, Montana, in November 2015 and substantially completed the project by October 2017. Jackson Contractor Group, Inc. (JCG) was the general contractor for the project. Cincinnati provided ACA with insurance coverage between August 8, 2017 and August 8, 2018, under policy # ECP 045 50 20/EBA 045 50 20 ("Policy").

During the winter of 2017/2018, accumulated snow and ice on the apartment's roof melted and caused water damage to the top (4th) floor and portions of lower floors. Water penetrated the roof membrane, damaged the roof decking, and soaked underlying insulation between the decking and the 4th floor ceiling. Water also ran down walls and damaged insulation and drywall. Ultimately, the water damage caused or contributed to condensation and mold, causing further damage, and required restoration.

ACA submitted a property loss notice to Cincinnati in March 2018, marking the approximate date of loss as January 5, 2018. To date, it appears Cincinnati hasnot provided any coverage for ACA's claimed damages. Currently, the parties dispute whether coverage exists under the Policy's defective work exclusion, among other provisions. Cincinnati also asserts that rainstorms in July 2017 also contributed to water damage and mold during construction; ACA disagrees with the assertion.

ACA subsequently filed the instant suit alleging breach of contract, violations of Montana's Unfair Trade Practices Act, and constructive fraud/breach of fiduciary duties. (Doc. 1.) Cincinnati answered, and asserted a counterclaim for declaratory judgment that ACA's damages and losses are not covered under the Policy.

II. Legal Standard

A. Summary Judgment

Typically, the standards for summary judgment are set out in boilerplate fashion at the beginning of any motion or order on summary judgment. But the standards are particularly important to resolution of the issues here.

Summary judgment is appropriate where the moving party demonstrates the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Material facts are those which may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to amaterial fact is genuine if there is sufficient evidence for a reasonable factfinder to return a verdict for the nonmoving party. Id. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).

The moving party bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. If the moving party fails to discharge this initial burden, summary judgment must be denied, and the court need not consider the non-moving party's evidence. Adickes v. S. H. Kress & Co., 398 U.S. 144, 159-60 (1970).

If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). In attempting to establish the existence of this factual dispute, the opposing party must "go beyond the pleadings and by 'the depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (quoting Fed. R. Civ. P. 56(e)). The opposing party cannot defeat summary judgment merely by demonstrating "that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586; Triton Energy Corp. v. Square D Co., 68 F.3d 1216, 1221 (9th Cir. 1995) ("The mere existence of a scintilla of evidence in support ofthe nonmoving party's position is not sufficient.") (citing Anderson, 477 U.S. at 252).

When making this determination, the Court must view all inferences drawn from the underlying facts in the light most favorable to the non-moving party. See Matsushita, 475 U.S. at 587. "Credibility determinations, the weighing of evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, [when] he [or she] is ruling on a motion for summary judgment." Anderson, 477 U.S. at 255.

When parties file cross-motions for summary judgment, the Court reviews each motion on its own merits. Fair Housing Council of Riverside Cty., Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001).

B. Declaratory Judgment

Under the Erie Doctrine, "federal courts exercising diversity jurisdiction must follow state substantive law and federal procedural law when adjudicating state law claims." Sonner v. Premier Nutrition Corp., 971 F.3d 834, 839 (9th Cir. 2020). Declaratory relief under the federal Declaratory Judgment Act is procedural in nature. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, (1950) ("(T)he operation of the Declaratory Judgment Act is procedural only." (internal citation omitted, alteration original)); Golden Eagle Ins. Co. v. Travelers Companies, 103 F.3d 750, 753 (9th Cir. 1996), overruled on other grounds byGov't Employees Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998) ("The Declaratory Judgment Act, 28 U.S.C. § 2201, is the procedural statute under which a federal court determines whether to exercise its jurisdiction to hear a case . . ."); Kolstad v. Trinity Universal Ins. Co. of Kansas, 12 F. Supp. 2d 1101, 1104 (D. Mont. 1998) (same). Thus, the Court will apply the federal Declaratory Judgment Act, 28 U.S.C. § 2201, to Cincinnati's counterclaim.

C. Montana Insurance Law

As noted above, since the Court's jurisdiction over this action is based on diversity of citizenship, the Court must apply the substantive law of Montana. In re Cty. of Orange, 784 F.3d 520, 523-24 (9th Cir. 2015). In Montana, the interpretation of an insurance contract is a question of law. Scentry Biologicals, Inc. v. Mid-continent Cas. Co., 319 P.3d 1260, 1264 (Mont. 2014). A court interpreting an insurance policy is to read the policy as a whole and, to the extent possible, reconcile the policy's various parts to give each meaning and effect. O'Connell v. Liberty Mut. Fire Ins. Co., 43 F.Supp.3d 1093, 1096 (D. Mont. 2014) (citing Newbury v. State Farm Fire & Cas. Ins. Co. of Bloomington, Ill., 184 P.3d 1021 (Mont. 2008)). The terms and words used in an insurance policy are to be given their usual meaning and construed using common sense. Hardy v. Progressive Specialty Ins. Co., 112, 67 P.3d 892, 896 (Mont. 2003). Any ambiguities in the insurance contract are construed against the insurer and in favorof extending coverage. Revelation Indus., Inc. v. St. Paul Fire & Marine Ins. Co., 206 P.3d 919, 929 (Mont. 2009). "An ambiguity exists when the policy, taken as a whole, is reasonably susceptible to two different interpretations." Heggem v. Capitol Indem. Corp., 154 P.3d 1189, 1193 (Mont. 2007). But a court should not "seize upon certain and definite covenants expressed in plain English with violent hands and distort them so as to include a risk clearly excluded by the insurance contract." Travelers Cas. & Sur. Co. v. Ribi Immunochem Research, Inc., 108 P.3d 469, 474 (Mont. 2005). Moreover, "a court may not create an ambiguity where none exists, nor may a court rewrite an insurance policy by ignoring clear and unambiguous language to accomplish a 'good purpose.'" Heggem, 154 P.3d at 1193.

III. Discussion

A. Cincinnati's Motion for Partial Summary Judgment

Cincinnati moves the Court for partial summary judgment, seeking the interpretation of certain Policy provisions to determine ACA's coverage. (Doc. 34.) Cincinnati advances multiple arguments relating to property damage coverage, as well as business income and extra expense coverage.

First, as to property damage coverage, Cincinnati argues that (1) the Policy excludes coverage for the cost of repairing defective construction work; (2) the Policy excludes loss resulting from water seepage, leakage, or condensationoccurring over a period of 14 days; (3) any coverage for losses caused directly or indirectly by mold is limited to $15,000; and (4) the fungi exclusion is an anti-concurrent exclusion. (Doc. 35 at 10, 12, 14, 17.)

Second, Cincinnati asserts that there is no business income and extra expense coverage for (1) the period of repair necessary to correct defective workmanship; (2) water seepage occurring more than 14 days; and (3) suspension of business operations caused by mold for a period longer than 30 days. (Id. at 18-21.)

1. Property Damage Coverage

a. Defective Construction Work

In...