LMC Vineyards, LLC v. Allied World National Assurance Company

Background

LMC Vineyards, LLC owned Trilogy Vineyards, a housing development in Brentwood, California, during the relevant insurance period. Homeowners later asserted construction-defect claims involving homes that closed escrow during that period. American Safety Indemnity Company issued the primary insurance policy, and Allied World issued a following-form excess policy.

The primary policy required the insurer to defend the insured against a “suit” seeking covered damages. It defined “suit” as a civil proceeding alleging covered damages and also included certain arbitration and alternative-dispute-resolution proceedings where the insured submitted with the insurer’s consent. Allied World’s policy followed the primary policy’s terms and did not separately define “suit.”

LMC notified Allied World of the construction defects and homeowners’ claims in March 2017. LMC later asked Allied World to consent to settlements and confirm that it would fund reasonable settlements after the primary policy limits were exhausted. Allied World continued investigating under a reservation of rights, raised concerns about the proposed prelitigation home buy-backs, and declined to pay the related costs.

The homeowners’ claims involved procedures, including notices, mediation, and settlements. LMC had opted out of Chapter 4 of California’s Right to Repair Act, which otherwise establishes prelitigation procedures for construction-defect claims.

Motion and Legal Standard

LMC moved for partial summary judgment, asking the court to decide that a “suit” had commenced and that Allied World’s coverage obligations had been triggered. LMC also asked the court to decide that Allied World breached those obligations by denying coverage.

Under Rule 56, summary judgment is proper only when there is no genuine dispute over a material fact and the moving party is entitled to judgment as a matter of law. A genuine dispute exists when the evidence could allow a reasonable jury to decide for the opposing party.

Analysis

The court rejected LMC’s argument that the homeowners’ notices automatically constituted a “suit” under Chapter 4 of the Right to Repair Act. The court found factual disputes about whether the notices satisfied Chapter 4’s requirements. The court also explained that LMC’s undisputed decision to opt out of Chapter 4 meant that Chapter 4’s definition of a legal proceeding did not apply. A provision in LMC’s contract with the homeowners could not bind Allied World, which was not a party to that contract.

The court then examined the insurance policies’ definition of “suit.” The court concluded that the policy language indicated Allied World’s consent was required before the alternative-dispute-resolution proceedings could qualify as a “suit.” The parties agreed that LMC engaged in mediation, and it was undisputed that Allied World did not consent to LMC’s prelitigation procedures, including the mediations and settlements.

The court nevertheless found a factual dispute about whether Allied World waived its consent right under the Diamond Heights rule. That rule can require an excess insurer to approve a proposed settlement, take over the defense, or reject the settlement without taking over the defense and face a possible claim for contribution. The court said factual disputes remained about whether LMC showed that Allied World had a reasonable opportunity to undertake the defense, wrongfully failed or refused to provide coverage or a defense, and whether LMC’s settlement was reasonable and made in good faith.

Because those factual disputes remained, LMC had not shown on summary judgment that Allied World waived its consent right or that a “suit” occurred under the policies. The court therefore did not decide whether Allied World actually breached its coverage obligations. It also stated that the same factual issues affected LMC’s related claim concerning the implied covenant of good faith and fair dealing.

Disposition

The court denied LMC’s motion for partial summary judgment as to whether a “suit” commenced. It also denied LMC’s motion for partial summary judgment concerning whether Allied World breached its contract by denying coverage. The court stated that all claims and future dates remained pending. The opinion identifies the judge’s signature only incompletely, so the judge’s full name cannot be determined from the text provided.