1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 STEADFAST INSURANCE COMPANY, Case No. 21-cv-02756-JSC

8 Plaintiff,

ORDER RE: MOTION TO DISMISS,

9 v. AND ORDER TO SHOW CAUSE

10 ESSEX PORTFOLIO LP, Re: Dkt. No. 13 Defendant. 11

12 13 Before the Court is Steadfast’s motion to dismiss Essex’s counterclaim in this insurance 14 coverage dispute action.1 (Dkt. No. 13.)2 After carefully considering the parties’ briefing, and 15 having had the benefit of oral argument on August 19, 2021, the Court GRANTS the motion. For 16 related reasons, the Court ORDERS Steadfast to SHOW CAUSE as to why its declaratory 17 judgment claim should not be dismissed without prejudice as unripe. 18 BACKGROUND 19 BRE Properties, Inc. undertook a development project in San Francisco, California and 20 purchased insurance from Steadfast. Two firms, McLarand Vasquez Emsiek & Partners Inc. and 21 Cross 2 Design Group, provided design services for the project. BRE later transferred the project 22 to Essex. In May 2016, Essex notified the design firms about potential problems with the 23 project’s roofs, and then contacted Steadfast about the issues in September 2016. In April 2019, 24 Essex filed suit against the design firms for breach of contract and negligence in designing the 25 26 1 All parties have consented to the jurisdiction of a magistrate judge pursuant to 28 U.S.C. § 27 636(c). (Dkt. Nos. 7, 11.) 1 project. See Essex Portfolio, LP v. Suffolk Constr. Co., Inc., No. CGC19575609 (Cal. Super. Ct. 2 filed Apr. 30, 2019).3 Essex informed Steadfast about the lawsuit in August 2020. 3 The insurance policy between Steadfast and BRE includes the following:

4 The Company shall indemnify you for “loss” in excess of the “Design Professional’s Insurance”, subject to the provisions of the Limit of 5 Liability and “Self Insured Retention” designated in Items 3. and 4. of the Declarations, respectively, provided that: 6 1. The “Protective Indemnity Claim” is first made by you against the 7 “Design Professional” under contract to you and reported in writing by you to us during the Policy Period or Extended 8 Reporting Period, if applicable;

9 2. The “Protective Indemnity Claim” arises out of a negligent act, error or omission of the “Design Professional” in the rendering or 10 failure to render “Professional Services” and the negligent act, error or omission took place on or after the “Retroactive Date” 11 and before the end of the “Policy Period”[.] 12 (Dkt. No. 1 ¶ 21; Dkt. No. 8 at 4–5 ¶ 21.) The policy defines “Design Professional” as “those 13 persons or entities or successors professionally qualified to perform ‘Professional Services’ either 14 itself or through the services of a subcontractor or subconsultant at any tier.” (Dkt. No. 1 ¶ 22.)4 15 “Design Professional’s Insurance” means “all professional liability policies insuring the ‘Design 16 Professionals’ under contract to you.” (Dkt. No. 1 ¶ 23; Dkt. No. 8 at 5 ¶ 23.) “Design 17 Professional’s Insurers” means “all the Insurers providing insurance to the ‘Design Professionals’ 18 under contract to you.” (Dkt. No. 1 ¶ 24; Dkt. No. 8 at 5 ¶ 24.) “Loss” means:

19 [T]he amount you are legally entitled to recover from a “Design Professional(s)” either by adjudication by a court of competent 20 jurisdiction, arbitration or settlement or any other method of dispute resolution to which we agree in writing. Such “Loss” must be the 21 result of a negligent act, error or omission on the part of the “Design Professional(s)” in the rendering of or failure to render “Professional 22 Services”. “Loss” does not include any amounts deemed uninsurable by law. 23 24

25 3 The Court grants Steadfast’s request for judicial notice of the case management statement in the 26 underlying action, (Dkt. Nos. 13-2, 13-3), as a matter of public record. Lee v. City of Los Angeles, 250 F.3d 668, 688–89 (9th Cir. 2001). 27 4 Essex’s answer omits paragraph 22. (See Dkt. No. 8 at 5.) Based on the context, the Court 1 (Dkt. No. 1 ¶ 25; Dkt. No. 8 at 5 ¶ 25.) “Protective Indemnity Claim(s)” means “a written demand 2 by you against the ‘Design Professional’ under contract to you seeking a remedy and alleging 3 liability or responsibility on the part of such ‘Design Professional’ arising from a negligent act, 4 error or omission in the performance of ‘Professional Services’.” (Dkt. No. 1 ¶ 28; Dkt. No. 8 at 5 5 ¶ 28.) The policy includes the following “Notice of Protective Indemnity Claim” provision:

6 As a condition precedent to Coverage Part A – Protective Indemnity Claims of this policy, you shall provide us with notice in writing of a 7 “Protective Indemnity Claim” at the same time that you make such “Protective Indemnity Claim” against a “Design Professional”. 8 9 (Dkt. No. 1 ¶ 29; Dkt. No. 8 at 5 ¶ 29.) Finally, the policy states under “Action Against Us”:

10 As to Coverage Part A - Protective Indemnity Claims, no legal action may be brought against us until there has been full compliance with 11 all the terms and conditions of this policy and both the “Design Professional’s” liability and the amount of the “Design 12 Professional’s” obligations to pay have been finally determined either by judgment against the “Design Professional” after an actual trial, 13 adjudication or arbitration or by your written agreement with the “Design Professional” with our prior approval. No person or 14 organization has a right under this policy to bring us into any action to determine our liability or the “Design Professional’s” liability. 15 16 (Dkt. No. 1 at 24–25; see Dkt. No. 8 at 13 ¶ 10.) 17 Steadfast filed this action against Essex, seeking a declaratory judgment that coverage is 18 precluded because a “Protective Indemnity Claim” was not timely made or reported and BRE 19 failed to obtain Steadfast’s consent to assign BRE’s interests to Essex. (Dkt. No. 1 ¶¶ 33–53.) 20 Essex answered and counterclaimed for breach of insurance contract and breach of the implied 21 covenant of good faith and fair dealing. (Dkt. No. 8 at 11–15 ¶¶ 1–18.) Steadfast moves to 22 dismiss the counterclaim as unripe. (Dkt. No. 13.) Essex opposes and requests that if the Court 23 dismisses Essex’s counterclaim it also sua sponte dismiss Steadfast’s complaint or stay both the 24 complaint and counterclaim. (Dkt. No. 17.) 25 DISCUSSION 26 “The constitutional component of ripeness is a jurisdictional prerequisite.” United States 27 v. Antelope, 395 F.3d 1128, 1132 (9th Cir. 2005). “The Article III case or controversy 1 claims be ‘ripe’ for adjudication. . . . [R]ipeness is a means by which federal courts may dispose 2 of matters that are premature for review because the plaintiff’s purported injury is too speculative 3 and may never occur.” Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1122 (9th Cir. 4 2010) (citations omitted). Ripeness may be properly raised in a Rule 12(b)(1) motion to dismiss. 5 Id. “The central concern of the ripeness inquiry is whether the case involves uncertain or 6 contingent future events that may not occur as anticipated, or indeed may not occur at all.” Id. at 7 1122–23 (internal quotation marks and citations omitted). Therefore, the doctrine is “designed to 8 prevent the courts, through avoidance of premature adjudication, from entangling themselves in 9 abstract disagreements.” Thomas v. Anchorage Equal Rights Comm’n, 220 F.3d 1134, 1138 (9th 10 Cir. 2000) (internal quotation marks and citation omitted). 11 I. Essex’s Breach of Contract Claim 12 Essex’s counterclaim alleges that Steadfast has breached the contract by “wrongfully 13 refusing to provide the full benefits of coverage,” specifically by “inform[ing] Essex that there 14 was no coverage under the Policy” related to Essex’s lawsuit against the design firms and by 15 “refus[ing] to provide Protective Indemnity Claim coverage promised by” the policy. (Dkt. No. 8 16 at 12–13 ¶¶ 11, 7, 8.) 17 The breach of contract claim is unripe because the conditions precedent to Steadfast’s 18 performance have not been satisfied. For a Protective Indemnity Claim, the policy states that 19 Steadfast “shall indemnify you for ‘loss’ in excess of the ‘Design Professional’s Insurance.’” 20 (Dkt. No. 1 ¶ 21; Dkt. No. 8 at 4–5 ¶ 21.) A “loss” requires an adjudication or a settlement with 21 the Design Professionals. (Dkt. No. 1 ¶ 25; Dkt. No. 8 at 5 ¶ 25.) Since Essex has not alleged and 22 cannot allege that it has obtained a judgment or settlement against the Design Professional, there 23 has been no “loss” within the meaning of the insurance policy. Essex’s allegations do not 24 establish that it is currently “legally entitled to recover” any “amount” from the Design 25 Professionals. (Dkt. No. 1 ¶ 25; Dkt. No. 8 at 5 ¶ 25.) Thus, Steadfast’s duty to “indemnify” for 26 “loss” has not arisen. And the duty may never arise: Essex might not prevail in its suit against the 27 Design Professionals, or it might win a judgment that is fully covered by the Design Professionals’ 1 That uncertainty renders the breach of contract claim premature at this time. Chandler v. State 2 Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1122 (9th Cir. 2010) (“[T]he plaintiff’s purported injury 3 is too speculative and may never occur.”); see Tarakanov v. Lexington Ins. Co., 441 F. Supp. 3d 4 887, 898 (N.D. Cal. 2020) (“[Insureds’] claim is that [insurer] had an obligation to acknowledge 5 its obligation to reimburse, or put differently, accept the plaintiffs’ hypothetical claim. This theory 6 does not plausibly establish a breach of contract.”). 7 In its opposition, Essex argues that Steadfast’s failure to reasonably settle the lawsuit 8 against the design firms is an actionable breach. Bodenhamer v. Superior Court, 238 Cal. Rptr. 9 177, 179–81 (Cal. Ct. App. 1987). But Essex’s counterclaim provides no specific allegations 10 about efforts to settle the lawsuit and Steadfast’s conduct in that process. See Planet Bingo LLC v. 11 Burlington Ins. Co., 276 Cal. Rptr. 3d 348, 354–57 (Cal. Ct. App. 2021); Howard v. Am. Nat’l 12 Fire Ins. Co., 115 Cal. Rptr. 3d 42, 66 (Cal. Ct. App. 2010) (“An insurer does not breach the duty 13 to settle if it never had an opportunity to settle.”). Moreover, unreasonable failure to settle 14 typically gives rise to a breach of contract claim only after the insured receives a judgment in 15 excess of the policy limits (or, here, a judgment in excess of the design firms’ insurance limits); 16 not until that point does the harm to the insured mature. Safeco Ins. Co. v. Superior Court, 84 Cal. 17 Rptr. 2d 43, 46 (Cal. Ct. App. 1999) (“If the insurer declines to settle and decides to go to trial and 18 then obtains a judgment below the settlement offer or obtains a complete defense verdict, then the 19 insured would have no cause to complain, and the insurer would have no liability. Until judgment 20 is actually entered, the mere possibility or probability of an excess judgment does not render the 21 refusal to settle actionable.”). While Essex argues that loss of business goodwill is a current harm, 22 see Howard, 115 Cal. Rptr. 3d at 67–68; Bodenhamer, 238 Cal. Rptr. at 179–81, again, the 23 counterclaim contains no specific allegations of such. See Swinerton Builders v. Am. Home Assur. 24 Co., 2013 WL 1122022, at *1 n.1 (N.D. Cal. Mar. 15, 2013) (“In those cases, however, the 25 plaintiffs had suffered damages beyond exposure to risk of liability in excess of policy limits, such 26 as damage to business reputation. In this case, Plaintiffs allege that they have suffered such 27 damages only in a conclusory fashion.”). 1 to the time for performance, when it denied coverage in December 2020. But Essex does not 2 adequately support the proposition that the pure denial of coverage—without an accompanying 3 “loss” or other concrete harm to Essex—creates a ripe claim. Similarly, Essex argues that 4 Steadfast has waived the condition precedent (i.e., a judgment or settlement in the lawsuit between 5 Essex and the design firms) by filing this declaratory relief action in bad faith. That proposition 6 lacks support; as discussed further below, Essex has not made clear how a declaratory relief suit 7 can be the basis for a bad faith claim. 8 Accordingly, the allegations in Essex’s counterclaim indicate that its claim for breach of 9 contract is unripe. 10 II. Essex’s Bad Faith Claim 11 Essex’s counterclaim alleges that Steadfast breached its duty of good faith and fair dealing 12 by “unreasonably, oppressively, and without proper cause” withholding policy benefits, making 13 false assertions about the scope of policy coverage, holding onto premiums, failing to timely 14 communicate with Essex, and many other instances of conduct. (Dkt. No. 8 at 13–14 ¶ 15.) 15 The bad faith claim is similarly unripe because it requires a ripe claim for breach of 16 contract. “[W]ithout a breach of the insurance contract, there can be no breach of the implied 17 covenant of good faith and fair dealing.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 18 1025, 1034 (9th Cir. 2008).

19 [W]hen benefits are due an insured, delayed payment based on inadequate or tardy investigations, oppressive conduct by claims 20 adjusters seeking to reduce the amounts legitimately payable and numerous other tactics may breach the implied covenant because they 21 frustrate the insured’s right to receive the benefits of the contract in prompt compensation for losses. Absent that contractual right, 22 however, the implied covenant has nothing upon which to act as a supplement, and should not be endowed with an existence 23 independent of its contractual underpinnings. 24 Waller v. Truck Ins. Exch., Inc., 900 P.2d 619, 639 (Cal. 1995) (internal quotation marks and 25 citations omitted); see Love v. Fire Ins. Exch., 271 Cal. Rptr. 246, 254–56 (Cal. Ct. App. 1990) 26 (rejecting insureds’ argument that “delay in denying a claim constitutes bad faith even if no 27 coverage exists,” id. at 255). Because Essex’s claim that Steadfast breached the insurance contract 1 Essex argues that Steadfast’s initiating this declaratory action is a breach of the implied 2 covenant, citing a case upholding a malicious prosecution judgment against the insurer based on 3 its lawsuit against the insured. George F. Hillenbrand, Inc. v. Ins. Co. of N. Am., 128 Cal. Rptr. 4 2d 586 (Cal. Ct. App. 2002). Malicious prosecution is a distinct tort, predicated on a previous 5 lawsuit that the defendant pursued “to a legal termination in the plaintiff’s favor.” Id. at 597. 6 Essex has not cited authority for the proposition that Steadfast’s declaratory action itself could 7 constitute a breach of the implied covenant of good faith and fair dealing, as opposed to fodder for 8 a future malicious prosecution claim. 9 III. Steadfast’s Declaratory Judgment Claim 10 It follows from the above that Steadfast’s declaratory judgment claim may be equally 11 unripe. If the duty to defend is at issue, an insurer’s declaratory judgment claim may be ripe 12 before any underlying liability is established. See Am. States Ins. Co. v. Kearns, 15 F.3d 142, 144 13 (9th Cir. 1994) (holding that a “case or controversy” exists where insurer “seeks a declaration 14 regarding its obligations in the pending state court liability suit against” insured). Here, however, 15 only the duty to indemnify is at issue. Because Essex might not prevail in its suit against the 16 Design Professionals, or it might win a judgment that is fully covered by the Design Professionals’ 17 Insurance, Steadfast’s duty to indemnify Essex may never ripen into a live case or controversy. 18 Thus, a decision by this Court on Steadfast’s declaratory judgment claim would be purely 19 advisory. Thomas v. Anchorage Equal Rights Comm’n, 220 F.3d 1134, 1138 (9th Cir. 2000) 20 (“Our role is neither to issue advisory opinions nor to declare rights in hypothetical cases, but to 21 adjudicate live cases or controversies consistent with the powers granted the judiciary in Article III 22 of the Constitution.”). 23 The Court has an independent obligation to ensure it has subject matter jurisdiction. Ray 24 Charles Found. v. Robinson, 795 F.3d 1109, 1116 (9th Cir. 2015) (“[I]t is our duty to consider sua 25 sponte whether a suit is ripe, because the question of ripeness goes to our subject matter 26 jurisdiction to hear the case.” (internal quotation marks and citation omitted)). Accordingly, 27 Steadfast shall show cause as to why its complaint should not be dismissed without prejudice as 1 Co., 598 F.3d 1115, 1122 (9th Cir. 2010); United States v. Antelope, 395 F.3d 1128, 1132 (9th Cir. 2 |} 2005). 3 CONCLUSION 4 For the reasons explained above, Steadfast’s motion to dismiss is GRANTED. Essex’s 5 counterclaim is DISMISSED without prejudice as unripe. 6 On or before September 3, 2021, Steadfast shall SHOW CAUSE as to why its complaint 7 should not be dismissed without prejudice as unripe, if it believes there are grounds to show cause. 8 This Order disposes of Docket No. 13. 9 IT IS SO ORDERED. 10 Dated: August 20, 2021

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ACQUELINE SCOTT CORLEY

13 United States Magistrate Judge © 15 16

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