I. Background

23 Plaintiff Home Depot, U.S.A., Inc. (“Home Depot”) sells 24 products manufactured by nonparty Woodstream Corporation 25 (“Woodstream”), including the Victor Electronic Model m240 rat 26 trap. On or about November 11, 2013, Home Depot customer Cheyenne 27 Angle (“Angle”) was injured in a Home Depot store while examining a 28 Model m240 trap (“the trap.”) (Dkt. 1 Complaint 9.) Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 2 of 14 Page ID #:2923

1 Battery-operated rat traps, such as the Model m240, are supplied to 2 Home Depot without batteries. (MSJ Ex. 34, p.2.) The trap Angle 3 handled, however, was placed on the shelf with batteries installed. 4 While holding the trap inside the store, Angle placed his fingers 5 inside the trap and suffered an electric shock. Angle and Home 6 Depot employee Alex Pilat (“Pilat”) observed that the trap’s 7 packaging appeared to be worn, leading Pilat to conclude that a 8 customer had returned the trap with batteries installed and the 9 trap was then re-stocked in that condition. 10 Within one week of the incident, Home Depot was made aware 11 that Angle claimed to have been diagnosed with nerve damage, and 12 that he intended to make a claim against Home Depot. (MSJ Ex. 59 13 at 4-5.) In June 2014, Home Depot received a letter from Angle’s 14 counsel suggesting that Home Depot was negligent in placing the 15 trap back on the shelf with batteries installed, and raising the 16 possibility that Angle had permanent nerve damage. (MSJ Ex. 30 at 17 1.) Angle filed suit against Home Depot in November 2015 and 18 served Home Depot with the complaint in February 2016. 19 Woodstream, the trap manufacturer, was the named insured on 20 (1) a primary $1 million products liability insurance policy issued 21 by Defendant Twin City Fire Insurance Company (“Twin City”) and (2) 22 an excess policy issued by movant and Defendant National Union. 23 The Twin City policy covered Woodstream’s vendors, subject to 24 certain additional exclusions not applicable to Woodstream itself. 25 The National Union excess policy also covered vendors, under the 26 same terms as the underlying Twin City policy. 27 Although Angle’s suit against Home Depot alleged both that 28 Home Depot was negligent and that the trap’s design was defective, 2 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 3 of 14 Page ID #:2924

1 Home Depot’s in-house counsel classified the suit as a “core 2 matter,” as opposed to a “closed box defect” case that might have 3 been suitable for tender to a third party. (MSJ Ex. 61.) 4 Subsequently retained outside counsel suggested that Home Depot 5 tender the matter to Woodstream, but Home Depot declined, and 6 proceeded to litigate the matter itself. 7 Although Home Depot initially designated an electrical 8 engineer as an expert, Home Depot withdrew that expert once it 9 became clear that Home Depot’s retained expert (1) could not 10 dispute that the trap could have caused Angle’s injuries and (2) 11 agreed with Angle’s expert that the trap was defectively designed. 12 (SGD 36.) Home Depot did not conduct an independent medical 13 examination of Angle. Home Depot’s counsel valued Angle’s suit at 14 up to $100,000. Approximately three weeks before trial, Home Depot 15 obtained new outside counsel. Less than one week later, on May 8, 16 2017, new counsel valued the case at $4-6 million, and recommended 17 that Home Depot consider a settlement in the $3-5 million range. 18 Soon thereafter, on May 12, Home Depot tendered the case to 19 Twin City. Home Depot notified National Union on May 18, four days 20 before a scheduled mediation and eight days before trial. After 21 the mediation, and after the trial was continued, Home Depot 22 rejected a $5.5 million settlement demand from Angle and agreed to 23 binding arbitration. As part of the stipulation to arbitrate, Home 24 Depot agreed to pay Angle no less than $3 million and no more than 25 $9 million. The arbitrator ultimately found in Angle’s favor and 26 awarded him over $12 million. 27 Home Depot then demanded that National Union help fund the $9 28 million award to Angle. National Union declined coverage, citing 3 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 4 of 14 Page ID #:2925

1 Home Depot’s untimely notice to National Union and coverage 2 exclusions in the Twin City policy. Home Depot then filed the 3 instant action, alleging breach of contract and bad faith and 4 seeking a declaration of coverage. National Union now moves for 5 summary judgment. 6 II. Legal Standard 7 Summary judgment is appropriate where the pleadings, 8 depositions, answers to interrogatories, and admissions on file, 9 together with the affidavits, if any, show “that there is no 10 genuine dispute as to any material fact and the movant is entitled 11 to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A party 12 seeking summary judgment bears the initial burden of informing the 13 court of the basis for its motion and of identifying those portions 14 of the pleadings and discovery responses that demonstrate the 15 absence of a genuine issue of material fact. See Celotex Corp. v. 16 Catrett, 477 U.S. 317, 323 (1986). All reasonable inferences from 17 the evidence must be drawn in favor of the nonmoving party. See 18 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 242 (1986). If the 19 moving party does not bear the burden of proof at trial, it is 20 entitled to summary judgment if it can demonstrate that “there is 21 an absence of evidence to support the nonmoving party's case.” 22 Celotex, 477 U.S. at 323. 23 Once the moving party meets its burden, the burden shifts to 24 the nonmoving party opposing the motion, who must “set forth 25 specific facts showing that there is a genuine issue for trial.” 26 Anderson, 477 U.S. at 256. Summary judgment is warranted if a 27 party “fails to make a showing sufficient to establish the 28 existence of an element essential to that party’s case, and on 4 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 5 of 14 Page ID #:2926

1 which that party will bear the burden of proof at trial.” Celotex, 2 477 U.S. at 322. A genuine issue exists if “the evidence is such 3 that a reasonable jury could return a verdict for the nonmoving 4 party,” and material facts are those “that might affect the outcome 5 of the suit under the governing law.” Anderson, 477 U.S. at 248. 6 There is no genuine issue of fact “[w]here the record taken as a 7 whole could not lead a rational trier of fact to find for the 8 nonmoving party.” Matsushita Elec. Indus. Co. v. Zenith Radio 9 Corp., 475 U.S. 574, 587 (1986). 10 It is not the court’s task “to scour the record in search of a 11 genuine issue of triable fact.” Keenan v. Allan, 91 F.3d 1275, 12 1278 (9th Cir. 1996). Counsel have an obligation to lay out their 13 support clearly. Carmen v. San Francisco Sch. Dist., 237 F.3d 14 1026, 1031 (9th Cir. 2001). The court “need not examine the entire 15 file for evidence establishing a genuine issue of fact, where the 16 evidence is not set forth in the opposition papers with adequate 17 references so that it could conveniently be found.” Id. 18 III. Discussion 19 A. Timely Notice 20 Although Home Depot knew as early as 2013 that Angle would be 21 filing some type of claim, and was served with Angle’s complaint in 22 early 2016, Home Depot did not notify National Union of Angle’s 23 injury or claims until days before trial in May 2017. National 24 Union contends that it was prejudiced by this unreasonably late 25 notice, which, National Union argues, precludes coverage under the 26 National Union policy. 27 There is no dispute that the National Union policy requires 28 insureds to provide National Union with notice “as soon as 5 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 6 of 14 Page ID #:2927

1 practicable of an Occurrence that may result in a claim or Suit 2 under this policy.” (Ex. 15 at 19.) The notice provision provides 3 further that “[i]f a claim or suit is brought [,and] is reasonably 4 likely to involve this policy, [the insured] must notify [National 5 Union] in writing as soon as practicable.” (Id.) Home Depot 6 argues that its May 2017 notice to National Union comported with 7 the policy’s notice requirements because there is no evidence that, 8 prior to May 2017, Home Depot had any reason to believe that 9 Angle’s claim would exceed $1 million, thus exhausting the Twin 10 City primary policy and potentially implicating the National Union 11 excess policy. (Opposition at 13-14.) 12 This argument is hard to square with the evidence in the 13 record. Although outside counsel’s initial valuation report, 14 completed before the close of discovery, estimated a case value of 15 only $100,000, that same report indicated that Angle himself 16 expected an “eight figure” settlement, while Angle’s counsel 17 suggested that the case was “a low seven-figure case.”1 (MSJ, Ex. 18 32 at 8.) Home Depot was aware that (1) Angle, who was in his 19 thirties and had a family, was claiming “a moderate, long-term 20 neurological condition,” and would likely present evidence of 21 “prolonged and acute suffering, along with depression and anxiety” 22 in addition to loss of future earnings, (2) Angle’s expert would 23 attribute all symptoms to electrical shock, and (3) Home Depot was 24 “likely” liable. (Id. at 6, 8.) Although these circumstances 25 might not necessarily have resulted in a settlement or verdict over 26 1 The same outside counsel for Home Depot had earlier, in 27 March 2016, recommended that Home Depot tender the matter to Woodstream, albeit not for any valuation-related reason. (MSJ Ex. 28 54 at 21-22.) 6 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 7 of 14 Page ID #:2928

1 $1 million, they certainly created at least a reasonable likelihood 2 of such an outcome. Furthermore, although only a “reasonable 3 likelihood” would have triggered Home Depot’s obligation to provide 4 written notice to National Union, Home Depot was required to 5 provide some notice as soon as it became apparent that Angle’s 6 claim “may” eventually implicate the National Union policy. No 7 reasonable trier of fact could conclude that, given the nature of 8 Angle’s claim, evidence, and expectations, Home Depot had no reason 9 to believe the claim “may” exceed $1 million. Moreover, any 10 lingering uncertainties on that score were the product of Home 11 Depot’s own failures. Home Depot failed to retain any expert who 12 could have contradicted Angle’s causation evidence, and did not 13 conduct an independent medical evaluation that, regardless of its 14 conclusion, would have clarified the extent of Home Depot’s 15 potential exposure. Having blithely buried its head in the sand, 16 Home Depot cannot now credibly contend that the risk that Angle’s 17 claim would be worth more than $1 million was simply unknowable. 18 B. Prejudice 19 Having concluded that there is no genuine dispute as to Home 20 Depot’s failure to give adequate notice, the court turns to the 21 question of prejudice. “California’s notice-prejudice rule 22 requires an insurer to prove that the insured’s late notice of a 23 claim has substantially prejudiced [the insurer’s] ability to 24 investigate and negotiate payment for the insured’s claim. A 25 finding of substantial prejudice will generally excuse the insurer 26 from its contractual obligations under the insurance policy . . . 27 .” Pitzer Coll. v. Indian Harbor Ins. Co., 8 Cal. 5th 93, 101 28 (2019). “[P]rejudice is not established merely because the late 7 Case j?2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 8o0f14 Page ID #:2929

1]} notice prevented the insurer from contemporaneously investigating 2 the claim, nor does it arise from the mere denial of the 3} opportunity to make an early settlement of the claim.” Ins. Co. of 4) State of Pennsylvania v. Associated Int’l Ins. Co., 922 F.2d 516, 5S 524 (9th Cir. 1990) (internal alternations, quotation marks, and 6 || citation omitted). “[U]nder California case law, the only 7! prejudice sufficient to allow an insurer to avoid liability based 8]/on late notice is found in those cases where the insurer actually demonstrated that there was a substantial likelihood that it could 10})/ have either defeated the underlying claim against its insured, or 11] settled the case for a smaller sum than that for which its insured ultimately settled the claim.” Id. (citing Northwestern Title Sec. 13]) Co. v. Flack, 6 Cal. App. 3d 134, 143 (1970); see also Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 763 (1993) 15}/ (“In order to demonstrate actual, substantial prejudice from lack 16] of timely notice, an insurer must show it lost something that would 17] have changed the handling of the underlying claim. If the insurer 18]/ asserts that the underlying claim is not a covered occurrence or is 19}/ excluded from basic coverage, then earlier notice would only result 20]/in earlier denial of coverage.”). 21 “[A]lthough the issue of prejudice is ordinarily one of fact, 22\)it may be established as a matter of law by the facts proved.” 23] Flack, 6 Cal.App.3d at 141. Here, as discussed above, there is evidence to suggest that, with timely notice, National Union might 25]) have been able to conduct a more comprehensive investigation than 26|| Home Depot did, or to settle Angle’s claims for less than the amount ultimately awarded. The record does not, however, compel 28 |} such a conclusion. The threshold for a showing of prejudice as a

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1} matter of law is high. In Belz v. Clarendon Am. Ins. Co., 158 Cal. 21 App. 4th 615 (2007), for example, an insurer never received notice 3 from its insured, and only learned of a claim against him after 4) default had already been entered against him. Belz, 158 Cal. App. 5] 4th at 622. Notwithstanding the lack of any opportunity for the 6}/ insurer to investigate the claim, the Belz court reversed the trial 7! court’s grant of summary judgment in the insurer’s favor, holding that the insurer had failed to show prejudice as a matter of law. 9} Id. at 633. This Court acknowledges that other courts in this 10}) circuit have occasionally found substantial prejudice as a matter 11} of law under comparable circumstances, citing to the Ninth 12] Circuit’s unpublished disposition in Cybernet Ventures, Inc. v. 13} Hartford Ins. Co. of the Midwest, 168 F. App’x 850 (9th Cir. 2006). 14}| See, e.g., Century Sur. Co. v. Visemer De Gelt, LLC, No. 15} 211CV42220DWFEMX, 2012 WL 13008730, at *5 (C.D. Cal. Feb. 17, 16] 2012); Travelers Prop. v. Centex Homes, No. C 10-02757 CRB, 2011 WL 171225982, at *7 (N.D. Cal. Apr. 1, 2011). The Ninth Circuit 18}) subsequently clarified, however, that such reliance upon the 19] Cybernet disposition is misplaced. Landmark Am. Ins. Co. v. Taisei 20 Constr. Corp., 854 F. App’x 854, 856 (9th Cir. 2021) (unpublished 21] disposition). “The issue of substantial prejudice is one of fact 221 to be resolved by the trial court in the first instance.” Id., 23] (citing Flack, 6 Cal. App. 3d at 141). “Summary judgment cannot 241] properly be based on [] presumptions.” Id. Here, although National Union may be able to demonstrate at trial that it was 26|| actually prejudiced by Home Depot’s late notice, it has not made that showing as a matter of law at this stage of proceedings. 28 Cc. Inspection Exclusion

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1 The underlying Twin City policy excludes “any failure to make 2 such inspections . . . as the vendor has agreed to make or normally 3 undertakes to make in the usual course of business, in connection 4 with the distribution or sale of the [Woodstream] products.” (MSJ 5 Ex. 16.) National Union asserts that the trap that injured Angle 6 was only restocked on the Home Depot shelf because Home Depot 7 failed to follow its own inspection procedures, and thus the 8 inspection exclusion applies. 9 Woodstream’s person most knowledgeable testified that when a 10 consumer returns a Woodstream product to Home Depot, Home Depot is 11 not required to return the item to Woodstream. (MSJ Ex. 15 at 26.) 12 Instead, Home Depot is “supposed to” destroy the product and then 13 seek a credit from Woodstream. (Id. at 26-27.) Between 2010 and 14 2014, Woodstream credited Home Depot for 13,819 rat traps. 15 Although National Union contends that Home Depot’s agreement with 16 Woodstream required the former to destroy all returned rat traps, 17 the evidence in the record does not support such a conclusion 18 beyond dispute. Lawrence Cook, the manager of the Home Depot store 19 where Angle was injured, testified that whether a returned item is 20 placed back on the shelf “depends on how - - once we figure out how 21 it’s returned, it depends on what it is. If it’s in saleable 22 condition like new, then, yeah, it can go back on the shelf.” (MSJ 23 Ex. 49 at 30.) That testimony is consistent with evidence 24 regarding Home Depot’s standard operating procedure for returned 25 merchandise, which states that “[a]ll returned merchandise must be 26 inspected . . .. The Returns Associate must ensure that all 27 returned merchandise sent to the sales floor is unused . . .. The 28 appropriate department Sales Associate rechecks the merchandise 10 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 11 of 14 Page ID #:2932

1 before making it available for resale. If the merchandise is not 2 salable, [designate the item for return to vendor.]” (Declaration 3 of Chris J. Middleton, Ex. A at 5.) National Union has not, 4 therefore, demonstrated beyond dispute that Home Depot failed to 5 follow an inspection policy that would have required the 6 destruction of a returned trap. 7 Regardless whether Home Depot was required to destroy a 8 returned trap, however, the inspection exclusion applies if Home 9 Depot failed to conduct the type of inspection it “normally 10 undertakes to make in the usual course of business.” An initial 11 question, therefore, is whether Home Depot normally undertakes to 12 conduct any kind of inspection. The answer is yes. As stated 13 above, Home Depot’s standard procedures require that all returned 14 merchandise be inspected to “ensure” that it is in unused 15 condition, and that such merchandise only be sent to the sales 16 floor if that condition is met. Indeed, standard Home Depot 17 procedures dictate that two different employees, the Returns 18 Associate and the department Sales Associate, check merchandise to 19 “ensure” that it is unused prior to placing it back on the shelf 20 for resale. 21 National Union argues that Home Depot could not possibly have 22 followed its own standard inspection procedures because, if it had, 23 then the rat trap would not have been placed back on the shelf in 24 used, energized, unsalable condition. In response, Home Depot 25 points to the testimony of its representative, Kimberly Dobbs, who 26 stated that “a visual inspection is done” on a product to determine 27 whether that product can be resold. (MSJ Ex. 52 at 76.) Home 28 Depot contends that such an inspection would not necessarily have 11 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 12 of 14 Page ID #:2933

1 revealed whether the trap in question here had batteries inside. 2 Thus, Home Depot concludes, the fact that an energized trap was 3 placed on the shelf for re-sale does not establish that Home Depot 4 failed to inspect the returned trap. 5 This argument is not persuasive. There is no indication in 6 the record that Home Depot’s standard operating procedure permits, 7 let alone instructs, associates to conduct only a visual inspection 8 of returned products. Indeed, such a practice would appear 9 incompatible with store policy requiring employees to “ensure that 10 all returned merchandise sent to the sales floor is unused.” 11 Moreover, given the wide range of potentially dangerous products 12 sold by Home Depot, the assertion that associates conduct a purely 13 visual inspection of returned items strains credulity. If true, 14 virtually every Home Depot store is all but certain to contain 15 products that, although visually indistinguishable from inoperable 16 versions in safe condition, are in fact energized, gassed up, 17 loaded, or otherwise capable of inflicting grievous harm upon 18 unsuspecting shoppers or purchasers. Put differently, Home Depot 19 employees could not possibly “ensure that all returned merchandise 20 sent to the sales floor is unused” and in salable condition if, as 21 Home Depot now suggests, employees do no more than conduct a purely 22 visual inspection. 23 The notion that Home Depot’s usual practice is limited to 24 visual inspections also conflicts with the testimony of numerous 25 Home Depot employees and representatives. Store Manager Cook, for 26 example, testified that if a rat trap were returned by a customer, 27 Cook would expect a Home Depot employee to make sure that there 28 were no batteries inside. (Id. at 32.) Michael Weinman, a higher- 12 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 13 of 14 Page ID #:2934

1 level Home Depot manager, testified that return associates can 2 determine whether a product is used either by asking the customer 3 or by inspecting the returned product, and that he too “would 4 expect” a used rat trap to be designated for return to Woodstream. 5 (MSJ Ex. 51 at 30.) Weinman further testified that he would assume 6 that a product that was sold without batteries but returned with 7 batteries had been used, and that an inspection would reveal 8 whether power was on when the product was returned. (Id. at 33.) 9 Ms. Dobbs, the representative who testified that “a visual 10 inspection is done,” also testified that Home Depot employees 11 “should know” that rat traps are not sold with batteries, that Home 12 Depot’s policy is not to place powered products on the shelf, and 13 that it would therefore be important to inspect a returned trap and 14 check for batteries. (Id. at 106, 109, 111). These assumptions 15 and expectations would be totally unrealistic if, as Home Depot now 16 asserts, employees only conduct visual inspections of returned 17 merchandise. 18 The record indicates that it was Home Depot’s common, sensible 19 practice to “ensure that all returned merchandise sent to the sales 20 floor is unused” and in salable condition. Thus, the rat trap in 21 question here could not have ended up on the shelf absent a failure 22 to conduct a reasonable, typical inspection. Accordingly, the 23 inspection exclusion applies, and Angle’s claim against Home Depot 24 is not covered under the National Union excess policy.2 25 26 2 Having so concluded, the court need not reach the question 27 whether the exception to the repackaging exclusion applies when a product is removed from its packaging, altered, and then placed 28 back into its original box. 13 Case 2:18-cv-03051-DDP-JC Document 118 Filed 01/31/22 Page 14 of 14 Page ID #:2935

1 IV. Conclusion 2 For the reasons stated above, National Union’s Motion for 3 Summary Judgment is GRANTED. 4 5 6 7 8 9 10 IT IS SO ORDERED. 11 12 13 Dated: January 31, 2022 DEAN D. PREGERSON 14 United States District Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14