1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 LA ROCA CHRISTIAN Case No.: 20cv1324 DMS (BGS)

COMMUNITIES INTERNATIONAL,

12

INC., ORDER DENYING DEFENDANT’S

13 MOTION TO DISMISS Plaintiff, 14 v. 15

CHURCH MUTUAL INSURANCE CO.

16 Defendant. 17 18 19 20 This case comes before the Court on Defendant’s motion to dismiss. Plaintiff filed 21 an opposition to the motion, and Defendant filed a reply. For the reasons discussed below, 22 the motion is denied. 23 I. 24 BACKGROUND 25 The present case arises out of a March 2018 commercial lease agreement (“Lease”) 26 between Plaintiff La Roca Christian Communities International, Inc. (“Plaintiff” or “La 27 Roca”) and Pacific Coast Christian Prep (“PCCP”). (Compl. ¶17.) La Roca is a nonprofit 28 church and PCCP previously operated a primary school. (Id.) PCCP entered the Lease 1 for the purpose of opening and operating a primary school on La Roca’s premises. (Id.) 2 The Lease required a number of tenant improvements, some of which were paid for by 3 La Roca and others by PCCP. (Id. ¶18.) Ultimately, not all of the improvements were 4 completed prior to the start of the school year, and PCCP was unable to occupy the 5 premises and use it as a school. (Id. ¶19.) As a result, PCCP was forced to move its 6 school operation to an alternative site and suffered damages from loss of its tenant 7 improvements and other personal property. (Id.) 8 In March 2019, PCCP filed a demand for arbitration against Plaintiff La Roca 9 alleging claims for breach of contract and unjust enrichment. (Id. ¶¶20-21.) La Roca 10 thereafter tendered PCCP’s claim to Defendant Church Mutual Insurance Company for 11 defense and indemnity coverage under a multi-peril insurance policy it had issued to La 12 Roca, numbered 0263084-02-094345, effective March 21, 2018, to March 21, 2021 (“the 13 Policy”). (Id. ¶¶6, 27.) Defendant denied La Roca’s request for defense and indemnity 14 coverage, but paid it $20,000 (less a $250 deductible) under the Policy’s Legal Defense 15 Coverage. (Id. ¶29.) La Roca asked Defendant to reconsider its denial, but Defendant 16 failed to respond to Plaintiff’s request. (Id. ¶¶32-39.) The arbitrator then issued an 17 Interim Award, awarding PCCP monetary damages against La Roca in the amount of 18 $177,793.07. (Id. ¶40.) After the Interim Award was issued, La Roca forwarded it to 19 Defendant and again requested that Defendant reconsider its denial of the claim. (Id. 20 ¶¶41-43.) Ultimately, Defendant reaffirmed its denial. (Id. ¶¶44-47.) The arbitrator then 21 issued a Final Award in favor of PCCP and against La Roca in the amount of $337,930.04, 22 which included the interim award plus attorneys’ fees, costs and prejudgment interest. 23 (Id. ¶48.) Both PCCP and La Roca filed petitions to vacate the arbitration award in state 24 court, which petitions are pending. (Id. ¶49.) 25 On July 14, 2020, Plaintiff La Roca filed the present case against Defendant arising 26 from its denial of La Roca’s request for coverage under the Policy. La Roca alleges claims 27 for declaratory relief (duty to defend), declaratory relief (duty to indemnify), breach of 28 contract, specific performance and bad faith. In response to the Complaint, Defendant 1 filed the present motion to dismiss. 2 II. 3 DISCUSSION 4 Defendant moves to dismiss Plaintiff’s Complaint in its entirety. It argues Plaintiff 5 is not entitled to coverage because there was no “property damage” based on an 6 “occurrence” as those terms are defined in the Policy. In the absence of coverage, 7 Defendant argues the bad faith claim must also be dismissed. 8 A. Legal Standard 9 In Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. 10 Twombly, 550 U.S. 544 (2007), the Supreme Court established a more stringent standard 11 of review for 12(b)(6) motions. To survive a motion to dismiss under this standard, “a 12 complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief 13 that is plausible on its face.’” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 570). 14 “A claim has facial plausibility when the plaintiff pleads factual content that allows the 15 court to draw the reasonable inference that the defendant is liable for the misconduct 16 alleged.” Id. (citing Twombly, 550 U.S. at 556). 17 “Determining whether a complaint states a plausible claim for relief will ... be a 18 context-specific task that requires the reviewing court to draw on its judicial experience 19 and common sense.” Id. at 679 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)). 20 In Iqbal, the Court began this task “by identifying the allegations in the complaint that are 21 not entitled to the assumption of truth.” Id. at 680. It then considered “the factual 22 allegations in respondent’s complaint to determine if they plausibly suggest an entitlement 23 to relief.” Id. at 681. 24 B. Duty to Defend and Indemnify 25 Defendant’s motion to dismiss depends on issues of contract interpretation. 26 “’Resolution of contractual claims on a motion to dismiss is proper if the terms of the 27 contract are unambiguous.’” Monaco v. Bear Stearns Residential Mortg. Corp., 554 28 F.Supp.2d 1034, 1040 (C.D. Cal. 2008) (quoting Bedrosian v. Tenet Healthcare Corp., 208 1 F.3d 220 (9th Cir. 2000)). “A contract provision will be considered ambiguous when it is 2 capable of two or more reasonable interpretations.” Id. (citing Bay Cities Paving & 3 Grading, Inc. v. Lawyers' Mut. Ins. Co., 5 Cal. 4th 854, 867 (1993)). “Language in a 4 contract must be interpreted as a whole and in the circumstances of the case.” Id. (citing 5 Bank of W. v. Superior Court, 2 Cal. 4th 1254, 1265 (1992)). “Where the language ‘leaves 6 doubt as to the parties' intent,’ Consul Ltd. v. Solide Enters., Inc., 802 F.2d 1143, 1149 (9th 7 Cir. 1986), the motion to dismiss must be denied.” Id. 8 In this case, the relevant policy provisions provide: 9 We [Defendant] will pay those sums that the insured [La Roca] becomes legally obligated to pay as damages because of "bodily injury" or "property 10 damage" to which this insurance applies. We will have the right and duty to 11 defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages 12 for "bodily injury" or "property damage" to which this insurance does not 13 apply.

14 (Compl., Ex. A, ECF No. 1-2 at 121.) The Policy goes on to state: “This insurance applies 15 to ‘bodily injury’ and ‘property damage’ only if: (1) The ‘bodily injury’ or ‘property 16 damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’”. (Id.) 17 The Policy defines “property damage” as: 18 a. Physical injury to tangible property, including all resulting loss of use of 19 that property. All such loss of use shall be deemed to occur at the time of 20 the physical injury that caused it; or

21 b. Loss of use of tangible property that is not physically injured. All such 22 loss of use shall be deemed to occur at the time of the "occurrence" that caused it. 23

24 (Id. at 133.) “Occurrence” is defined as "an accident, including continuous or repeated 25 exposure to substantially the same general harmful conditions.” (Id.) 26 Here, Defendant argues that PCCP’s “suit” for damages against La Roca was limited 27 to “lost tuition and lost tenant improvements and equipment” (Mot. at 9.) Defendant 28 1 argues neither of these losses seeks covered “property damage” under the Policy, and that 2 even if it did, neither was caused by an “occurrence” under the Policy. Plaintiff disputes 3 that lost tuition and lost tenant improvements and personal property were the only damages 4 sought by PCCP in the underlying case. It asserts PCCP also alleged loss of use of real 5 property, namely “loss of use of the premises as a school[.]” (Opp’n at 7.) These losses, 6 according to La Roca, are covered “property damage” as they constitute “loss of use of 7 tangible property that is not physically injured[.]” La Roca further argues the losses were 8 caused by an “occurrence” and thus, triggered both a duty to defend and a duty to 9 indemnify. 10 It is undisputed that an insurer owes “a broad duty to defend its insured against 11 claims that create a potential for indemnity.” Montrose Chem. Corp. of Cal v. Superior 12 Court, 6 Cal. 4th 287, 295 (1993). Whether an insurer has a “duty to defend is determined 13 by reference to the policy, the complaint, and all facts known to the insurer from any 14 source.” Id. at 300. If an insurer wrongfully fails to defend its insured, it is required to 15 indemnify the insured for the resulting judgment, even though the duty to indemnify is 16 narrower than the duty to defend. Pruyn v. Agricultural Ins. Co., 36 Cal. App. 4th 500, 17 518 (1995). 18 La Roca argues the duty to defend was triggered under the Policy in light of the 19 allegations leveled against it by PCCP in the underlying arbitration, the testimony 20 presented at arbitration, and the arbitrator’s findings. In essence, PCCP accused La Roca 21 of breaching the lease by failing to timely prepare the property to meet fire and other code 22 requirements so it could be used by PCCP as a school. While La Roca worked on the 23 property to make it code-compliant, PCCP also made improvements to the property, 24 including installing IT equipment, cable, phones, speakers, projectors, internal wiring, 25 power outlets, doors, smartboards, and other school-specific items. An expert witness on 26 behalf of PCCP testified that La Roca’s work fell below the standard of care, causing it to 27 miss inspection deadlines and fail to timely deliver a code-compliant property in 28 accordance with the terms of the Lease. Based on these allegations and the evidence 1 presented at arbitration, the arbitrator found that “La Roca agreed to a date [to turn full 2 possession of the property over to PCCP] with no understanding of whether it was 3 reasonably achievable.” (Compl. ¶ 27, Ex. D at 416.) The arbitrator further found that, 4 “What La Roca did not know was that having a school on the property significantly 5 changed the scope of work and equipment needed to bring the property into compliance 6 with the latest fire code.” (Id.) These facts, according to La Roca, give rise to a potential 7 for coverage under the terms of the Policy. 8 La Roca asserts two theories in which the underlying action triggers coverage under 9 the “loss of use of tangible property” provision: (1) the allegations and evidence in the 10 arbitration show PCCP was unable to use the property as a school due to La Roca’s 11 conduct, and (2) the allegations and evidence in the arbitration show PCCP lost its own 12 personal property left at, and improvements made to, the leasehold property due to La 13 Roca’s conduct. 14 As to the first theory, the Court of Appeal, Second District, in Golden Eagle Ins. 15 Corp. v. Cen-Fed, Ltd., 148 Cal. App. 4th 976 (2007), concluded loss of use of a leasehold 16 interest, as here, would not constitute “loss of use of tangible property.” The court held 17 that “strictly economic losses like lost profits, loss of goodwill, loss of the anticipated 18 benefit of a bargain, and loss of an investment, do not constitute damage or injury to 19 tangible property[.]” Id. at 987. The court, therefore, concluded that the insured’s 20 “leasehold interests were not tangible property.” Id. In contrast, the Court of Appeal, 21 Fourth District, in Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729, 742 22 (2018), questioned the reasoning of Golden Eagle and stated in dictum that “a lease is … 23 a conveyance of an estate in real property. … Hence, a lessee in possession has a tangible 24 property interest in the leased premises.” The parties here dispute whether La Roca was a 25 “lessee in possession” of the property and dispute which Court of Appeal has the correct 26 interpretation of the “loss of use of tangible property” provision. This Court need not 27 resolve the issue on the present motion, as La Roca’s second theory provides, at a 28 minimum, disputed facts that defeat Defendant’s motion to dismiss. 1 La Roca’s second theory is that the underlying action involves loss of use of PCCP’s 2 own personal property left at, and improvements to, the leased property, including IT and 3 other school-related equipment and improvements, e.g., wiring, plugs, doors, etc. So, while 4 loss of use of the leased property might not be tangible property under Golden Eagle, the 5 loss of PCCP’s school equipment and improvements to the leasehold likely would be. See 6 Riverbank Holding Co., LLC v. New Hampshire Ins. Co., No. CIV. 2:11-2681 WBS GGH, 7 2012 WL 2119046 *8 (E.D. Cal. June 6, 2012) (finding, while loss of use of a leasehold 8 might not be loss of tangible property, “loss of use of tenant improvement is[.]”). See also 9 Conway v. Northfield Ins. Co., 399 F.Supp.3d 950 (N.D. Cal. 2019) (similar). Both 10 Riverbank and Conway involved leases for restaurant space and claims by the tenants 11 against the landlord-insureds when the tenants’ use and enjoyment of the space was 12 disrupted. In both cases, the courts construed the tenants’ claims to include losses for 13 improvements to the property, as well as “damage to property owned by [the tenant] and 14 located at the restaurant[,]” Riverbank, 2012 WL 2119046, at *6, and loss of use of the 15 tenant’s property that remained in the restaurant after it was forced to close. Conway, 399 16 F.Supp.3d at 961. And in both cases, the courts found those latter items of damage, 17 specifically the damage to the tenant’s property in Riverbank and the loss of use of the 18 tenant’s property in Conway, raised the potential for coverage under the policies. 19 Riverbank, 2012 WL 2119046, at *6; Conway, 399 F.Supp.3d at 961. These findings apply 20 equally here, where PCCP alleged loss of improvements to and loss of equipment left at 21 the property, and lead to a denial of Defendant’s motion based on the “property damage” 22 provision in the Policy.1 23

24 25 1 In its reply brief, Defendant argues any improvements PCCP made to the premises were not PCCP property according to the terms of the Lease. (Reply at 7.) However, Defendant 26 admits that any improvements would become the property of La Roca only upon 27 “expiration or termination of the Lease Agreement.” (Id.) Before that time, any improvements would have been the property of PCCP, which was lost due to La Roca’s 28 1 Defendant’s final argument rests on the term “occurrence,” which the Policy defines 2 as "an accident, including continuous or repeated exposure to substantially the same 3 general harmful conditions.” (Compl., Ex. A, ECF No. 1-2 at 133.) The term “accident,” 4 in the context of liability insurance, “is more comprehensive than the term ‘negligence’ 5 and thus includes negligence.” Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. 6 Co., 5 Cal. 5th 216, 221 ((2018). An “accident” exists “when any aspect in the causal 7 series of events leading to the injury or damage was unintended by the insured and a matter 8 of fortuity.” Merced Mut. Ins. Co. v. Mendez, 213 Cal. App. 3d 41, 50 (1989). Defendant 9 asserts PCCP alleged only intentional conduct, which does not fit the definition of an 10 “occurrence.” Plaintiff disputes that PCCP’s complaint was so limited. 11 Defendant is correct that PCCP’s complaint alleged some intentional conduct on the 12 part of LaRoca. (See Compl., Ex. B, ECF No. 1-2 at 327) (stating LaRoca’s “failure to 13 allow PCCP to remove even its personal property from the Premises was the result of a 14 decision made by LaRoca at some point prior to expiration of the Lease”). However, that 15 allegation, standing alone, does not mean PCCP’s complaint was concerned only with 16 intentional conduct. Elsewhere in the complaint, PCCP complained that LaRoca “worked 17 at its own pace, disregarded multiple deadlines and requirements imposed by the city, and 18 failed to act in a way that would bring it within even a long shot at providing the space to 19 PCCP in the condition required by the Lease.” (Id. at 325.) Based on these allegations and 20 the evidence presented below, the arbitrator concluded that, “La Roca agreed to a date with 21 no understanding of whether it was reasonably achievable” and “[w]hat La Roca did not 22 know was that having a school on the property significantly changed the scope of work and 23 equipment needed to bring the property into compliance with the latest fire code.” (Compl., 24 Ex. D, ECF No. 1-2 at 416.) The underlying record certainly raises the possibility that La 25 Roca’s actions were unintentional, negligent and fell below the standard of care in 26 performing the work and meeting deadlines. A trier of fact could conclude that La Roca’s 27 “negligence was the starting point in a series of events leading to the loss of use” of PCCP’s 28 school equipment and improvements to the leasehold. Conway, 399 F.Supp.3d at 962. 1 || Making an allowance for that possibility, the Court rejects Defendant’s argument that there 2 || was no “occurrence” here, and thus no coverage.” 3 HII. 4 CONCLUSION AND ORDER 5 For the reasons set out above, Defendant’s motion to dismiss is denied. 6 IT IS SO ORDERED. 7 Dated: November 12, 2020 g ns my. L4\ Hon. Dana M. Sabraw 9 United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 > In light of this decision, the Court also denies Defendant’s motion to dismiss □□□□□□□□□□□ bad faith claim.