Webcor-Obayashi Joint Venture v. Zurich American Insurance Company

Background

Webcor-Obayashi Joint Venture was the general contractor for construction of the Salesforce Transit Center. Webcor obtained builder’s risk insurance from Zurich American Insurance Company. The policy covered “all risks of direct physical loss of or damage to Covered Property” during the policy term, which ran from March 28, 2011, through July 16, 2018. The Transit Center was substantially completed on July 12, 2018, and opened to the public in August 2018. Workers discovered fractures in two girders on September 25 and 26, 2018. The Transit Center was closed while the parties investigated and performed work that included shoring, opening and closing installed systems, installing steel plates, and other investigation and repair activities.

Webcor notified Zurich of the loss on September 27, 2018. Zurich denied coverage on the grounds that the damage did not manifest until after the policy period and that the fractures resulted from faulty or defective materials or workmanship, which Zurich said was excluded by the policy’s “Cost of Making Good” exclusion.

In earlier orders, the court had held that Zurich could not use California’s “manifestation of loss” rule to deny coverage in this case. The court had also held that the fractured girders constituted physical damage to covered property, shifting to Zurich the burden of showing that the Cost of Making Good exclusion clearly and unambiguously defeated coverage.

Zurich moved for summary judgment—a decision without a trial when no genuine dispute over an important fact exists—on four categories of Webcor’s claimed damages: costs allegedly excluded by the Cost of Making Good exclusion; costs allegedly unrelated to repairing the Fremont Street fractures; liquidated damages; and bad-faith and punitive damages.

Cost of Making Good Exclusion

Zurich argued that all of Webcor’s costs were excluded because the work addressed defective construction rather than simply restoring the fractured girders. The court denied summary judgment on this issue because factual disputes existed about whether construction or design defects caused the Fremont Street fractures, whether such defects caused problems elsewhere in the Transit Center, and why particular repair options were selected or rejected.

The court also noted that insurance exclusions are interpreted narrowly and that the insurer must state an exclusion in clear and unmistakable language. It found that the Cost of Making Good exclusion was “hardly a model of clarity.” On the record before it, Zurich had not shown that the exclusion barred all of Webcor’s damages arising from the fractured girders.

Costs Beyond the Fremont Street Fractures

Zurich separately argued that many claimed costs were not covered because they involved work elsewhere in the Transit Center, including inspecting numerous locations, work on the First Street structure, and punch-list costs. Zurich relied on the policy’s Valuation provision, which referred to the actual cost to repair or replace lost or damaged property.

The court agreed with Webcor that the Valuation provision described how to value a covered loss and did not limit the broad coverage provided by the policy’s insuring agreement. The court also found factual disputes about what repairs were needed for the damaged property. It therefore denied summary judgment on this ground.

Liquidated Damages

Webcor claimed approximately $17 million in liquidated damages that the Transbay Joint Power Authority had asserted under the construction contract. Zurich argued that the policy’s Consequential Loss exclusion barred those damages.

Webcor argued that Zurich should be barred from relying on that exclusion because Zurich had not identified it in earlier responses to discovery questions asking which exclusions would be used to deny Webcor’s damages claim. Zurich amended its responses on January 28, 2022, after Webcor opposed the summary-judgment motion.

Federal Rule of Civil Procedure 37(c)(1) generally prevents a party from using information that it failed to disclose or timely supplement unless the failure was substantially justified or harmless. The court found that Zurich had known of Webcor’s liquidated-damages claim no later than August 2021 and that Zurich’s explanation—that counsel was too busy—did not justify the late disclosure. The late disclosure was also not harmless because fact discovery had closed and Webcor identified discovery it would have pursued had Zurich timely disclosed the exclusion. The court concluded that Zurich could not now assert the Consequential Loss exclusion under Rule 37(c)(1).

Bad Faith and Punitive Damages

Zurich argued that the “genuine dispute” doctrine entitled it to summary judgment on Webcor’s bad-faith claim. That doctrine can prevent bad-faith liability when a genuine dispute exists about the insurer’s responsibility under the policy. Zurich also sought summary judgment on punitive damages.

Webcor presented evidence and arguments that Zurich’s investigation was inadequate or biased, that Zurich delayed investigating the claim, that Zurich’s internal documents suggested the fractures occurred during the policy period, and that Zurich advanced multiple theories about coverage and causation. The court sustained Webcor’s hearsay objection to the expert report of James Wraith and did not consider that report in deciding the motion because Zurich did not address the objection or state whether Wraith would testify at trial.

The court held that Webcor had raised factual issues about the reasonableness of Zurich’s claims handling, including whether the investigation was biased. It therefore denied summary judgment on bad faith. Viewing the evidence in Webcor’s favor, the court also found factual issues about whether Zurich could be liable for punitive damages.

Disposition

Judge Susan Illston denied Zurich’s motion for summary judgment. The order did not resolve the parties’ ultimate liability or the amount of any damages. It determined that the identified issues could not be resolved on summary judgment because factual disputes remained.