Ply Gem Industries Inc. v. James River Insurance Company

Background

Ply Gem Industries Inc. and Ply Gem Pacific Windows Corporation purchased a general liability insurance policy from James River Insurance Company covering the period from October 31, 2017, through October 31, 2018. The policy required James River to defend the insured against a suit seeking damages for bodily injury or property damage. The policy defined property damage as physical injury to tangible property, including resulting loss of use, or loss of use of tangible property that was not physically injured.

CP V JLS, LLC filed an underlying state-court action against Ply Gem and others. It alleged that Ply Gem supplied defective windows for a construction project, that many windows leaked during water testing, and that the windows had to be replaced. The underlying complaint asserted contract, warranty, and negligence claims. In connection with the negligence claim, it alleged that CPV suffered property damage to materials encasing Ply Gem’s product.

Ply Gem tendered the underlying lawsuit to James River and demanded a defense. James River denied coverage, stating in part that the underlying action did not allege property damage as defined by the policy. Ply Gem then filed this federal action, which included claims concerning James River’s duties to defend, breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. Ply Gem moved for partial summary judgment on its first claim, concerning the duty to defend in the underlying action.

Legal standard

Summary judgment is appropriate when there is no genuine dispute about any material fact and the moving party is entitled to judgment as a matter of law. The court must view the evidence in the light most favorable to the nonmoving party and may not weigh evidence or decide witness credibility.

Under California law, an insurer must defend a suit that potentially seeks damages within the policy’s coverage. The insured need only show that the underlying claim may fall within coverage; the insurer must prove that it cannot. Doubts about whether the duty to defend exists are resolved in favor of the insured. The duty can exist even if coverage is uncertain and ultimately does not apply.

Analysis

The parties agreed that the policy covered damages arising from property damage but disagreed about whether the underlying action sought such damages. The court observed that the underlying complaint expressly alleged “property damage to the materials encasing Ply Gem’s product.” That allegation was enough to raise the possibility of covered property damage.

The court also considered information outside the underlying complaint. CPV’s interrogatory response stated that damage to the project included defective, leaking windows that had to be removed, which caused damage to other components, followed by replacement with functioning windows. The court found that this response could be read to mean that damage to other components was caused by leaking windows, removal of the windows, or both. It therefore did not conclusively show that CPV sought only uncovered “rip and tear” damages associated with removing and replacing the windows.

The court rejected James River’s unsupported assertion that the windows were replaced immediately after failing their water tests. The underlying complaint said only that testing began on February 12, 2018, continued periodically, and that the windows were eventually replaced. The water-testing reports covered almost three months. The court stated that whether water damage actually occurred was not decisive at the duty-to-defend stage because the possibility of coverage was sufficient.

The court also did not treat statements in an initial case evaluation report from Ply Gem’s former counsel as facts eliminating coverage. The report described expected contractual damages but stated that it was based on limited information, that documents from the plaintiff in the underlying action had not yet been received, and that the extent of damages was unknown. The court viewed those statements as a preliminary assessment rather than facts that could eliminate the potential for coverage.

James River also argued at the hearing that its duty to defend did not arise until Ply Gem exhausted its $500,000 self-insured retention. The court found that issue immaterial because the parties agreed Ply Gem had exhausted the retention and because the available extrinsic facts still did not eliminate the potential for covered liability.

Disposition

The court held that James River had not identified extrinsic facts conclusively eliminating the potential for liability based on property damage. It also had not shown with conclusive evidence that its duty to defend was extinguished. Accordingly, Judge Donna Ryu granted Ply Gem’s motion for partial summary judgment on its claim that James River breached its contractual duty to defend Ply Gem in the underlying state action.