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Liberty Mutual Fire Insurance Co. v. Kb Home, Kb Home Raleigh-Durham, Inc.

United States District Court, E.D. North Carolina, Western Division

October 28, 2014

LIBERTY MUTUAL FIRE INSURANCE COMPANY, Plaintiff,
v.
KB HOME, KB HOME RALEIGH-DURHAM, INC., and STOCK BUILDING SUPPLY, LLC, Defendants.

ORDER

W. EARL BRITT, Senior District Judge.

This matter is before the court on the motion for judgment on the pleadings, (DE # 30), filed by defendants KB Home and KB Home Raleigh-Durham, Inc. (collectively "KB"). Also before the court is plaintiff Liberty Mutual Fire Insurance Company's ("Liberty") cross-motion for judgment on the pleadings. (DE # 39.) The motions are now ripe for adjudication.

I. BACKGROUND

The instant dispute concerns two commercial general liability insurance policies Liberty issued to KB Home Raleigh-Durham, Inc.'s subcontractor, defendant Stock Building Supply, LLC[1] ("Stock"), in 2005 and 2006 and settlement of a lawsuit concerning those policies. KB was named as an additional insured under the 2005 policy. (Aff., DE # 3-1, at 11-12.) KB alleges that it was also listed as an additional insured under the 2006 policy. (Answer, DE # 26, at ¶ 8.) The policies each provide that Liberty has a duty to defend the insured against any suit seeking damages to which the insurance applies. (Am. Compl., DE # 13, ¶ 19.) Under the policies, Liberty's duty to defend terminates upon the exhaustion of the applicable limit of insurance in the payment of judgments or settlement of covered damages. (Id.)

On or about 5 December 2008, a group of North Carolina homeowners filed a lawsuit against KB in Wake County Superior Court, North Carolina, alleging that their homes had suffered water damage resulting from improper home construction, Mark Elliott, et al. v. KB Home North Carolina, Inc. and KB Home Raleigh-Durham, Inc. , Case No. 08-CVS-21190. (Id. ¶ 14.) KB subsequently filed a declaratory judgment action against Liberty in the same state court (which was later removed to this court, Case No. 5:10-CV-573), seeking defense as an additional insured under the policies. (Id. ¶ 16; Answer, DE # 26, ¶ 10.) On 28 February 2012, KB and Liberty reached a settlement regarding that declaratory judgment action and Liberty's defense obligations and entered the "Settlement Agreement" and the "Elliot Defense Cost Agreement" ("Defense Agreement"). (See DE ## 26-1, 26-2.)

Pursuant to the Settlement Agreement, Liberty agreed to reimburse KB for past defense costs arising from the Elliott suit and incurred through 30 November 2011. (DE # 26-1, at 1.) Further, the parties agreed:

that based on the presently pending pleadings, [Liberty] is obligated to defend KB Home and to pay KB Home's on-going defense fees and costs until such time that the Elliott Action is resolved by settlement(s), verdict(s), or judgment(s) through trial, or until such time as [Liberty] brings a declaratory action seeking a court's determination regarding coverage of the claim ("[Liberty's] On-Going Defense Obligations").

(Id.) The Settlement Agreement goes on to state that "[Liberty's] On-Going Defense Obligations are set forth more fully in the Defense Agreement attached hereto as Exhibit B.'" (Id. at 2.)

The Settlement Agreement also contains a detailed reservation of rights provision. Namely, the reservation of rights excepts from the Settlement Agreement "[Liberty's] On-Going Defense Obligations to KB Home under the Policies and the Defense Agreement." (Id.) In addition, Liberty reserved its right "to institute a declaratory judgment action to determine whether [Liberty] may be permitted to withdraw from the defense of the Elliott Action should [Liberty] determine that the claim is not covered under the Policies." (Id.) The reservation of rights further specifies that the Settlement Agreement and the Defense Agreement "are intended to apply solely to the defense obligation of [Liberty] and are limited to the issue of defense." (Id.) It excepts all rights and claims relating to Liberty's duty to indemnify. (Id.)

The Defense Agreement obligates Liberty to pay KB's defense costs in the Elliott action "from December 1, 2011 until the matter is resolved by settlement, verdict, or judgment, subject to paragraph 2(h) below (Defense Obligation')." (DE # 26-2, at 1.) Paragraph 2(h) of the Defense Agreement provides as follows:

Notwithstanding the foregoing, [Liberty] reserves all rights to institute a declaratory judgment action to determine whether [Liberty] may be permitted to withdraw from the defense of the Elliott Action should plaintiffs in the Elliott Action assert a claim for mold damages. [Liberty] also reserves all rights to withdraw from the defense of the Elliott Action if plaintiffs amend their complaint to allege damages not covered by the Policies.

(Id. at 2.) The agreement states that it is intended to "apply solely to the defense obligation of [Liberty]" and reserves the parties' rights regarding Liberty's duty to indemnify. (Id. at 1.) The final provision of the Defense Agreement is an integration clause stating, in pertinent part, "This Defense Agreement sets forth the entire agreement between the Parties with regard to the subject matter hereof." (Id. at 3.)

After the execution of the agreements, Liberty paid the ongoing defense costs incurred by KB in the Elliott action until 9 May 2013. (Answer, DE # 26, ¶ 62.) At that time, Liberty informed KB that it was stopping payment because the policy limits had been exhausted as a result of payment of other claims. (Id.; Reply, DE # 29, ¶ 62.)

On 14 June 2013, Liberty filed the instant complaint in the United States District Court for the Eastern District of Virginia, seeking declaratory judgment that it is not required to defend (or pay defense costs) to KB in connection with the Elliott action and that it has "fully discharged" its defense obligations "pursuant to the Settlement Agreement and/or Defense Cost Agreement." (DE # 1, at 6.) On 11 July 2013, KB filed a motion to dismiss, or in the alternative, to transfer venue. (DE # 3.) Liberty responded by requesting that KB's motion be denied or, in the alternative, that Liberty be granted leave to amend its complaint. (DE # 7.) On 22 October 2013, the court granted Liberty leave to amend its complaint to further allege facts regarding subject matter jurisdiction. (DE # 12.) Liberty filed an amended complaint for declaratory judgment on 5 November 2013, setting forth allegations pertinent ...


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