Taylor Morrison of California, LLC et al vs AIG Specialty Insurance Company et al

The AIG Specialty insurance policies at issue in this case are a series of “Homebuilders Umbrella” commercial umbrella liability policies for the policy periods March 1, 2007, to

1 The underlying case is Modern Ice Owners Association v. Taylor Morrison of California, LLc, et al. filed in Santa Clara Superior Court.

March 1, 2019—each of the 12 insurance policies at issue (“AIG Specialty Policies”) has a $25,000,000 aggregate limit of coverage, and each of the 11 policies for the policy period of March 1, 2008 for March 1, 2019 has a $2,000,000 SIR. (XC, ¶¶ 6-10.)

TM were the Named Insured under the AIG Specialty Policies. Pursuant either to the amendment to the definition of Named Insured Endorsement or the Broad Form Named Insured Amendatory Endorsement or other policy endorsement. (XC, ¶ 13.)

The Level 1 matter involves allegations of property damage due to alleged defective construction at a condominium project consisting of 17 buildings with 60 condominiums units plus common areas located in Costa Mesa, California (the “Project”). (XC, ¶ 26.) TM Services completed all of the work called for in the construction contract for the Project in May 2015— the common areas of the Project were turned over to the Level 1 community association (“Level 1 HOA”) in May 1, 2017, when the last TM board member resigned from the Level 1 HOA board. (Ibid.)

In August 2019, the Level 1 HOA served a notice of claim (“NOC”) on TM alleging property damage due to allegedly defective construction at the Project. (XC, ¶ 27.) In its NOC, the Level 1 HOA alleged property damage due to allegedly defective construction at the Project, including damages to the stucco, doors, windows, rooftop decks and fire walls, as well as damage to areas of the building structures adjacent to those features. (Ibid.) The Level 1 HOA’s claims were the subject of an arbitration in January 2022, and in June 2022, the arbitrator awarded the Level 1 HOA a total of $5,200,000-comprising of an award of $5,020,502 for the cost of repair; and a $179,498 award for statutory and/or arbitration costs (the “Final Award”). (XC, ¶ 28.) The cost of repair award was for “property damage” covered by the AIG Specialty Policies. (XC, ¶ 29.)

Examples of covered “property damage” in the Final Award include: Water damaged framing, cracked stucco and damaged paint caused by defective weep provisions; water damaged framing and paint caused by the absence of sealant at the butt joints in the C-channel reveal accessory; water intrusion at window heads, causing discoloration of glazing and stucco and corrosion of metals; and water damage to flooring, backboards, drywall and paint caused by leaks at French doors. (XC, ¶ 30.) The largest single component of the Final Award relates to the Level 1 HOA’s claim for damage to Fire Stopping at Partition Walls and the award was $2,984,728.99 for these claims, which included a 39.5% mark-up on the hard costs awarded to reflect a share of the additional expected expenditures for Contingency (10%), General Conditions (10%), General Contractor’s Fees (17.5%), and General Liability Insurance (2%). (XC, ¶ 31.)

TM incurred more than $400,00 in fees and expenses to defend the claims. (XC, ¶ 33.)

AIG Claims, as the claims administrator for AIG Specialty acknowledged receipt of TM’s September 22, 2020 tender of the Level 1 HOA’s claims in a letter dated September 29, 2020. (XC, ¶ 34.) In its September 29, 2020 letter, AIG Claims did not assert any coverage positions on behalf of AIG Specialty—rather it requested certain documents; stated that in investigating this matter, AIG Specialty was reserving all of its rights and defenses; noted that if AIG Specialty decided to provide a defense to TM, the AIG Specialty was reserving “any and all rights and defenses,”; and reserved the right to seek reimbursement of any amounts expended by AIG Specialty for claims not covered by the AIG Specialty Policy. (XC, ¶ 34.) The letter from AIG Claims did not raise any specific coverage issues. (XC, ¶ 35.)

TM’s counsel in the Level 1 HOA proceeding, Collingsworth, Specht, Calkins, & Giampaoli, LLP (“CSCG”), responded to the September 29, 2020 requests for document by providing those document with a letter dated October 9, 2020. (XC, ¶ 36.) Subsequently, CSCG provided AIG Specialty with regular detailed Status Report; the interim summary reports by email; copies of all the Level 1 HOA defect reports; and a detailed pre-arbitration report on December 17, 2021. (XC, ¶ 37.) During the 2-week arbitration hearing, CSCG provided daily updates to AIG Specialty summarizing the main evenings in the hearing for that day; post-hearing briefs and a port were provided on March 10, 2022. (Ibid.)

AIG Specialty never issued a formal reservation of rights letter and never asserted a single reservation of relating to a substantive coverage issue. (XC, ¶ 38.) The arbitrator issued the interim award on May 3, 2022 and on May 20, 2022, AIG Specialty first informed TM that it had coverage issues with the Level 1 HOA claims and that in its view, “a substantial portion of the claims identified in the Interim Award”—no less than 63% of the total award—was not covered. (XC, ¶ 40.) At that time, it was too late for TM to address those issues in the arbitration. (XC, ¶ 41.)

If TM had known AIG Specialty would take such a position, it could have performed additional destructive testing to confirm that there was water intrusion, when surface inspection indicated that this was the case. (Ibid.) The Final Award was issued on June 5, 2022 and AIG Specialty refused to pay any part of the Final Award—leaving TM to pay the full amount on July 1, 2022. (XC, ¶¶ 43-44.)

From May 20, 2022 to June 8, 2023, AIG Specialty and TM exchanged correspondence setting forth their respective coverage position on coverage for the amounts that the arbitrator awarded to the Level 1 HOA. (XC, ¶ 45.) AIG Specialty began taking coverage positions that were completely inconsistent with positions it had taken in prior claims by TM involving the same policy forms and the same policy language as are in issue in this case. (Ibid.) On June 22, 2023, Counsel for AIG Specialty advised counsel for TM that “the issues are under consideration at AIG” and that he would “reach out to [counsel] next week to further discuss.” (XC, ¶ 46.)

Instead of doing so, AIG Specialty’s counsel reached out to TM’s counsel and stated “it appears the parties are not able to reach agreement on this matter” with AIG Specialty’s complaint against TM in AIG Specialty Insurance Company v. Taylor Morisson of California, LLC, et al. filed in United States District Court, Central District of California. (XC, ¶ 47.)

Based on the foregoing, on December 4, 2024, TM filed the initial Complaint in this action, asserting the following causes of action: (1) breach of contract; (2) declaratory relief; (3) tortious breach of the implied covenant of good faith and fair dealing; and (4) fraudulent concealment. On February 28, 2025, AIG filed its Cross-Complaint against TM and on June 23, 2025, AIG filed its First Amended Cross-Complaint (“FAXC”) against TM asserting causes of action for: (1) reimbursement; (2) unjust enrichment; (3) declaratory relief regarding duty to indemnify on a per occurrences basis as to pending and future claims; and (4) declaratory relief regarding duty to indemnify in excess of the per occurrences self-insured retention to the policies as to pending and future claims.

Subsequently, on October 20, 2025, TM filed its XC, asserting causes of action for: (1) declaratory relief-one occurrence as to the Level 1 Matter; (2) declaratory relief- Self-insured retention as to the Level 1 Matter; (3) declaratory- partial satisfaction of the self-insured retention by defense expense as to the Level 1 Matter; (4) declaratory relief-complete satisfaction of the self-insured retention by loss as to the Level 1 Matter; (5) breach of contract

as to the Level 1 Matter; (6) tortious breach of the implied covenant of good faith and fair dealing as to the Level 1 matter; (7) declaratory relief-one occurrence as to the Luca at Sorento East matter; (8) declaratory relief-self-insured retention as to the Luca Sorento East Matter; (9) declaratory relief- one occurrence as to the State 121 Matter; (10) declaratory relief- selfinsured retention as to the station 121 Matter; (11) declaratory relief- one occurrence as to the Apex 204 Matter; (12) declaratory relief-self-insured retention as to the Apex 204 Matter; (13) declaratory relief- one occurrence as to the Nova at the Vale Matter; and (14) declaratory relief- self-insured retention as to the Nova at the Vale Matter.

On February 6, 2026, the Court issued its order which granted AIG’s motion to bifurcate and denied the motion to stay discovery.2

V. DEMURRER

AIG Specialty demurs to the sixth cause of action for failure to state a cause of action upon which relief can be granted. (Code Civ. Proc., § 430.10, subd. (e).)3

A. Request for Judicial Notice

In support of its motion, AIG Specialty requests judicial notice of the allegations in the XC.

Evidence Code section 452, subdivision (c), permits judicial notice of court records. However, the Court declines to take judicial notice in this instance as it must necessarily consider the XC in ruling on the merits of the motion. (See Paul v. Patton (2015) 235 Cal.App.4th 1088, 1091, fn. 1 (Paul) [Sixth Appellate District denies request for judicial notice as unnecessary as the court must consider allegations in the complaint and attached exhibits in ruling on demurrer].)

Accordingly, AIG Specialty’s request for judicial notice is DENIED.

B.

Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see also Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the

2 On April 17, 2026, AIG Specialty filed a notice of withdrawal of their motion for a stay. 3 In its reply, AIG Specialty references Code of Civil Procedure section 430.10, subdivision (f), as a basis for demurrer, however, AIG Specialty failed to identify uncertainty as a ground for demurrer in its notice of demurrer and no arguments were made in the MPA regarding uncertainty. Therefore, the Court will not consider uncertainty as a basis for the instant motion. (See Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764 [points raised for the first time in reply brief will not ordinarily be considered, because this would deprive respondent of an opportunity to counter the argument]; L.A.

Taxi Cooperative, Inc. v. The Independent Taxi Owners Assn. of Los Angeles (2015) 239 Cal.App.4th 918, 926, fn. 7 [contention forfeited where raised for the first time in reply brief without a showing of good cause].)

truth of the plaintiff’s allegations or the accuracy with which he describes the defendant’s conduct. ... Thus, ... the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.)

In ruling on a demurrer, the allegations of the complaint must be liberally construed, with a view to substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 Cal.App.4th 1, 6.) Nevertheless, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.)444

C.

Discussion

AIG Specialty argues that TM’s sixth cause of action for tortious breach of implied covenant of good faith and fair dealing as to the Level 1 Matter does not allege any facts to support a finding that AIG Specialty withheld policy benefits unreasonably or without proper cause. (AIG Specialty’s Memorandum of Points and Authorities (“MPA”), 1:21-26.) On this basis, AIG Specialty argues that TM simply realleges its claim for breach of contract. (MPA, p. 1:26-27; p. 6:15-17.) It further argues there are no allegations that the SIR was exhausted, thus, a duty to respond to TM’s tender or investigate its claims was not triggered yet. (MPA, p. 8:15- 18.)

TM argues that it alleges AIG Specialty’s conduct such as remaining staying for 20 months regarding any potential coverage issues until after an interim arbitration award had been issued against TM, taking inconsistent positions with TM, declining to conduct a reasonable investigation of the claim against TM despite knowing the claim implicated its layers of coverage, and declining to pay any portion of the millions of dollars of indemnity payments owed to TM despite a clear obligation to do so. (TM’s Opposition (“Opp.,”), 2:16- 23.)

The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing. “The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits. To fulfill its obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.” (Frommoethelydo v.

Fire Ins. Exchange (1986) 42 Cal.3d 208, 214-215 (Frommoethelydo).) A breach of implied covenant good faith and fair dealing involves something beyond breach of the contractual duty itself. (See Howard v. American National Fire Insurance Company (2010) 187 Cal.App.4th 498, 528 (Howard); see also California Shoppers, Inc. v. Royal Globe Insurance Company (1985) 175 Cal.App.3d 1, 54.)

Tort liability for the breach of the implied covenant of good faith and fair dealing has been variously measured. The primary test in this context is whether the insurer withheld payment of an insured’s claim unreasonably and in bad faith. (Frommoethelydo, supra, 42 Cal.3d at pp. 214-215.) Where benefits are withheld for proper cause, there is no breach of the

implied covenant. (California Shoppers, Inc. v. Royal Glob Ins. Co. (1985) 175 Cal.App.3d 1, 54-55.) The duty imposed by law is not to unreasonably withhold payments due under the policy. (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 920.)

Thus, there are at least two separate requirements to establish breach of the implied covenant: (1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause. (Love v. Fire Ins. Exchange (1990) 221 Cal.App.Exchange (1990) 221 Cal.App.3d 1136, 1151-1152; see also California State Auto. Assn. Inter-Ins. Bureau v. Superior Court (1986) 184 Cal.App.3d 1428, 1433 [no award for bad faith can be made “without first establishing that coverage exists”]; Kopczynski v. Prudential Ins. Co. (1985) 164 Cal.App.3d 846, 849.)

“In evaluating whether an insurer acted in bad faith, “the critical issue [is] the reasonableness of the insurer’s conduct under the facts of the particular case.’” (Pinto v. Farmers Ins. Exchange (2021) 61 Cal.App.5th 676, 687 (Pinto) [internal citations omitted].) “Although ‘the reasonableness of an insurer’s claims-handling conduct is ordinarily a question of fact, it becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.’” (Pinto, supra, 61 Cal.App.5th at p. 689 [internal citations omitted].)

Here, TM alleges AIG Specialty tortiously breached the duty of good faith and fair dealing by: unreasonably and without proper cause for refusing to provide the benefits that are due under the AIG Specialty Policies; failing to conduct a reasonable claim investigation; focusing its investigation on the development of facts to justify a denial of the claim; failing to search for evidence to support TM’s claim and failing to assess coverage for TM’s claim under each of its potential applicable policies of insurance issued to TM; failing to affirm or deny coverage within a reasonable time after all relevant information had been provided; refusing to make coverage decisions and/or failing to communicate its coverage decisions; taking coverage positions that are completely inconsistent with the coverage positions it has taken on other claims involving the same policy forms and language in issue in this case; falsely asserting that there is little or no covered “property damage” at the Level 1 project, when a reasonable investigation would have demonstrated to AIG Specialty that such damage is pervasive; shifting its coverage positions so as to advance its own interests over those of its insured; refusing to take its insureds out of harm’s ways; representing to TM that its claim for coverage could be resolved without litigation and then filing its complaint against TM; and failing to promptly provide a reasonable explanation of the basis relied on in the AIG Specialty insurance policies, in relation to the facts or applicable law, for the denial of the claim, or for the offer of a compromise settlement or for the refusal to pay any portion of the Level 1 Award. (XC, ¶ 85.) TM further alleges that AIG Specialty’s denials of coverage have been unreasonable, done in its own interests to save money and to avoid the responsibilities that it knows it owes, and done without regard to relevant provisions of the AIG Specialty Policies or relevant case law and facts. (XC, ¶ 87.)

Excess insurance refers to “indemnity coverage that attached upon the exhaustion of underlying insurance coverage for a claim.” (Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215, 222 (Montrose Chemical).) “Excess insurance provides coverage after other identified insurance is no longer on the risk.” (North American Capacity Ins. Co. v. Claremont Liability Ins. Co. (2009) 177 Cal.App.4th 272, 291.) “An excess insurer’s coverage obligation begins once a certain level of loss or liability is reached; that

level is generally referred to as the “attachment point” of the excess policy.” (Montrose, supra, 9 Cal.5th at pp. 222-223.)

It is undisputed that AIG Specialty is an excess insurer and that its policy was an indemnity-only policy. In opposition, TM argues that there is no primary policy providing coverage and it gave notice of a claim in an amount that exceeds the SIR and implicates its coverage layer.

“California case law has consistently protected the limited and shielded position of the excess carrier when the obligations of the excess carrier are set in clear phrases.” (Ticor Title Ins. Co. v. Employers Ins. Of Wausau (1995) 40 Cal.App.4th 1699, 1708.) The AIG Specialty policies for the SIR products state that they were for “EACH AND EVERY OCCURRENCE INDEMNITY ONLY.” (See XC, ¶ 14 [SIR for policy period from March 1, 2007 to March 1, 2008 is $1,000,000]; ¶ 15 [SIR for policy periods from March 1, 2008 to March 1, 2019 is $2,000,000].)

Coverage A of the AIG Specialty Policies provides, “we will pay on behalf of the Insured those sums in excess of the Self-Insured Retention that the Insured becomes legally obligated to pay as damages by reason of liability imposed by law because of Bodily Injury, Property Damages, or Personal Injury and Advertising Injury to which this insurance applies or because of Bodily Injury or Property Damage to which this insurance applies assumed by the Insured under an Insured Contract.” (XC, ¶ 17 [emphasis added].)

Here, the SIR was not exhausted until TM paid the Arbitration Award. (See XC, ¶ 43.) Thus, based on the allegations, it does not appear that any benefits were owed until the SIR was exhausted and the claim cannot be predicated upon conduct that occurred before benefits were owed. (See Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153 (Love) [breach of the covenant of good faith and fair dealing cannot occur if no benefits are due under the subject policy].) As currently alleged, the remaining portion of TM’s sixth causes of action hinges AIG Specialty’s purported breach of contract, which is insufficient to support a claim for breach of the covenant of good faith and fair dealing. (See Howard, supra, 187 Cal.App.4th at p. 528.)

Based on the foregoing, AIG Specialty’s demurrer to the sixth cause of action is SUSTAINED with 20 days’ leave to amend.

VI. MOTION TO STRIKE

AIG Specialty moves to strike portions of the XC related to TM’s sixth cause of action and the related request for punitive damages. (Motion, p. 1: 17-21.)

A. Request for Judicial Notice

1. AIG Specialty’s Request

AIG Specialty requests judicial notice of the following items: (1) Allegations in AIG Specialty’s Complaint in AIG SPECIALTY INSURANCE COMPANY v. TAYLOR MORRISON OF CALIFORNIA, et al., (Case No. 2:23-cv- 05533) filed in the Central District of California (the “Federal Action”): Exhibit A; (2) TM’s Complaint in this action filed on December 4, 2024: Exhibit B; and (3) TM’s XC filed on October 20, 2025: Exhibit C

As the Court noted above, it is unnecessary to take judicial notice of the pleading at issue. (Paul, supra, 235 Cal.App.4th at p. 1091, fn. 1.) Thus, AIG Specialty’s request is DENIED as to Exhibit C. Nevertheless, Evidence Code section 452, subdivision (d), permits judicial notice of records of any court of this state or any court of record of the United States or of any state of the United States. (Code Civ. Proc., § 452, subd. (d).) Exhibits A-B are court records, therefore, they are proper items of judicial notice. Thus, the Court takes judicial notice of the existence of the documents but does not take notice of the truth of any disputed contents. (Oh v. Teachers Ins. & Annuity Assn. of America (2020) 53 Cal.App.5th 71, 79-81 (Oh).) Accordingly, AIG Specialty’s request for judicial notice is GRANTED, in part and DENIED, in part.

2. TM’s Request

TM requests judicial notice of the following items: (1) The March 3, 2026, order granting Defendants’ [TM’s] Motion to Stay the Action in the Federal Action: Exhibit 1; and (2) AIG Specialty’s first amended cross-complaint in the instant action filed on June 23, 2025: Exhibit 2.

Both exhibits are court records and thus, proper items for judicial notice. Thus, the Court takes judicial notice of the existence of the documents and the legal effect of the court orders but does not take notice of the truth of any disputed contents. (See Oh, supra, 53 Cal.App.5th at pp. 79-81.) Accordingly, TM’s request for judicial notice is GRANTED.

B.

Legal Standard

Under section 436, a court may strike out any irrelevant, false, or improper matter inserted into any pleading or strike out all or part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Code Civ. Proc., § 436.) The grounds for a motion to strike must appear on the face of the challenged pleading or from matters of which the court may take judicial notice. (Code Civ. Proc., § 437, subd. (a); see also City and County of San Francisco v.

Strahlendorf (1992) 7 Cal.App.4th 1911, 1913.) In ruling on a motion to strike, the court reads the complaint as a whole, all parts in their context, and assuming the truth of all well-pleaded allegations. (See Turman v. Turning Point of Central California, Inc. (2010) 191 Cal.App.4th 53, 63 (Turman), citing Clauson v. Super. Ct. (1998) 67 Cal.App.4th 1253, 1255.) “Thus, for example, defendant cannot base a motion to strike the complaint on affidavits or declarations containing extrinsic evidence showing that the allegations are ‘false’ or ‘sham.’” (Weil & Brown, Cal.

Practice Guide: Civil Procedure Before Trial (The Rutter Group 2020) 7.169.) At the same time, the California Court of Appeal has emphasized “[w]e have no intention of creating a procedural ‘line item veto’ for the civil defendant.” (PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1683.)

C.

Discussion

AIG Specialty moves to strike allegations from the sixth cause of action (paragraphs 88-92) and the request for punitive damages related to the claim. As the Court sustained the demurrer to the sixth cause of action above, the motion to strike the subject paragraphs is MOOT.

VII. CONCLUSION

AIG Specialty’s demurrer to the sixth cause of action is SUSTAINED with 20 days’ leave to amend and the motion to strike is MOOT.

The Court will prepare the order.

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