Judge: Barbara M. Scheper, Case: 21STCV00174, Date: 2022-09-13 Tentative Ruling

Case Number: 21STCV00174    Hearing Date: September 13, 2022    Dept: 30

Dept. 30

Calendar No.

Carlson vs. Farmers Insurance Exchange, et. al., Case No. 21STCV00174

Tentative Ruling re:  Defendant’s Motion for Summary Judgment, or in the alternative, Summary Adjudication of Issues

            Defendants move for summary judgment, or, in the alternative, summary adjudication against the Complaint of Plaintiff Douglas Carlson (Plaintiff). The Court denies summary adjudication as to the breach premised on Defendants’ failure to provide a termination review board hearing and denies summary adjudication as to the third cause of action. The Court grants summary adjudication in favor of Defendants as to all other breaches of contract stated under Issue One and on the second cause of action.

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party can show evidentiary support for a pleading or claim and if not to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 (Atlantic Richfield).) Code of Civil Procedure Section 437c, subdivision (c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.)

Once the moving party has met that burden, the burden shifts to the opposing party to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.)

Defendants are insurance companies which were either signatories to or companies subsequently added to a 1985 written contract with Plaintiff – the Agent Appointment Agreement, hereafter the Agreement – under which Plaintiff was appointed as an agent for the companies that would sell insurance for them. (Defendants’ Evidence (DE), Ex. 3.) The contract was to be “continuing until terminated either party as provided herein.” Section C of the Agreement reads, “This Agreement terminates upon the death of the Agent and may be terminated by either the Agent or the Companies on three (3) months written notice.” (Id. p. 2.) Under Section D of the Agreement, “if the Agreement is terminated by the Companies, the Agent may within ten (10) days of receiving the notice of termination request a review of the termination by a termination review board.” (Ibid.)

On December 10, 2019, Defendants delivered to Plaintiff a letter stating that Defendants were terminating the Agreement on three months’ notice, effective March 10, 2020. (UMF 3, DE Ex. 7.) On December 19, 2019, Plaintiff requested a termination review board hearing pursuant to section D of the Agreement. (UMF 6; DE Ex. 6, p. 17; Lyons Decl. ¶ 4.) Defendants did not respond to communications from Plaintiff’s counsel regarding the hearing in the month prior to the effective termination date. (Lyons Decl. ¶ 5, Exs. O, P, Q.) No hearing before the board was held. (UMF 8.)

After receiving the three months’ notice, Plaintiff also sought to sell his accounts and commissions to another of Defendants’ agents, Dave Terpening. (UMF 9.) Defendants did not allow the sale to proceed on the basis that “[t]he Companies do not allow the sale of service and commission rights between agents in different districts.” (Lyons Decl. ¶ 4, Ex. M.)

            Under his first cause of action for breach of contract, Plaintiff alleges that Defendants breached the agreement by (1) denying Plaintiff an appeal to the termination review board; (2) terminating Plaintiff’s contract without 120 days’ notice; (3) refusing to provide Plaintiff the name of the person making the decision to terminate his agency or the specific reasons for that decision; (4) refusing to allow Plaintiff to sell his agency to another agent; and (5) terminating Plaintiff without cause. (Comp. ¶¶ 30-32, 36.) Under their first Issue, Defendants seek summary adjudication of the first cause of action as a whole, or, in the alternative, summary adjudication as to each separate breach alleged.

Plaintiff pleads a separate cause of action alleging that Defendants breached the implied covenant and good faith and fair dealing in the Agreement by their acts. (Comp. ¶ 46.) Plaintiff also asserts a cause of action against Defendants for Tortious Interference with Contract and Prospective Economic Advantage, premised upon Defendants’ alleged interference with the contracts between Plaintiff and his customers. (Comp. ¶ 40.)

Breach of Contract – Termination Review Board Hearing

            The Agreement provides, “[i]n the event this Agreement is terminated by the Companies, the Agent may within ten (10) days of receiving the notice of termination request a review of the termination by a termination review board.” (DE Ex. 3, ¶ D.) Defendants’ duty to provide a hearing before the board following the agent’s request is mandatory under this section: “The Review Board will convene within twenty (20) days of the request by the agent,” “[t]he Board will submit a summary and its recommendations to the Executive Home Office,” and “[t]he chief executive officer and staff will review the summary and recommendations, reach a decision, and promptly advise the Agent of that decision.” (Ibid.)

            This section plainly provides Plaintiff the right to request and receive a hearing by the termination review board on termination of the Agreement by Defendants. It is undisputed that the conditions triggering Defendants’ duty under the Agreement to provide a hearing were met: Defendants sent the notice of termination to Plaintiff on December 10, 2019, and Plaintiff requested a hearing on December 19, 2019. (UMF 3, 6; Lyons Decl. ¶ 4.) It is also undisputed that no hearing was held. (UMF 8.) Plaintiff’s counsel sent emails to Defendants regarding the hearing on February 5, February 19, and March 9, 2020 but received no response. (Lyons Decl. ¶ 5, Exs. O, P, Q.)

            Defendants argue that Plaintiff has failed to show damages resulting from the breach because Defendants provided proper notice and there is no evidence that a review would have reversed the termination decision. The fact that Defendants provided proper notice did not negate Defendants’ contractual duty to provide a hearing by the review board following Plaintiff’s timely request. This is necessarily the case given that the provision of notice is a condition precedent to the termination review board procedure, as an agent can only request a hearing after notice of termination is sent. (DE Ex. 3, ¶ D.)

            Accordingly, Defendants have failed to meet their burden to show no triable issue of material fact as to their breach of the Agreement by failure to provide a hearing before the termination review board.

Breach of Contract – 120-Day Notice Requirement

            The Complaint alleges that Defendants “breached the terms of the agreement as modified by law under California Insurance Code Section 790 by terminating his agency without providing 120 days notice.” (Comp. ¶ 31.)

            The relevant section here is Insurance Code section 769, which provides, “[a]fter a written agency or written brokerage contract, where the broker-agent represents the insurer, has been in effect for at least one year, it shall not be terminated or amended by an insurer, except by mutual agreement, unless 120 days’ advance written notice has been given by the insurer to the broker-agent.” (Ins. Code § 769, subd. (a).)

            Defendants first argue that Plaintiff has no standing to sue for a violation of this section because Section 769 does not provide a private right of action. The Court agrees.

            Section 769 itself does not contain any language referencing a private right of action or method of enforcement. An administrative remedy exists under Section 790.06 of the Insurance Code, which provides the Insurance Commissioner the power to act against “any method of competition or in any act or practice in the conduct of the business that is not defined in Section 790.03” and that is “unfair or deceptive.” (Ins. Code, § 790.06, subd. (a); see Vikco Ins. Services, Inc. v. Ohio Indem. Co. (1999) 70 Cal.App.4th 55.) In Vikco Ins. Services, the Court of Appeal concluded that “the Legislature did not intend to create any private right or cause of action to enforce the provisions of section 769, and that the sole remedy for alleged violations of that statute is administrative.” (Id. at 68.)

            As a matter of law, Plaintiff cannot premise his claim for breach of contract on Defendants’ failure to give 120 days’ notice in violation of the Insurance Code. Accordingly, summary adjudication is granted as to this alleged breach.

Breach of Contract – Sale of Agency to Third Party

Plaintiff alleges that “Farmers’ refusal to allow [Plaintiff] to sell his agency to another Farmers agent was a breach of the covenant of good faith and fair dealing implied in the agreement.” (Comp. ¶ 32.) After receiving notice of termination, Plaintiff sought to sell his accounts and commissions to another of Defendants’ agents, Dave Terpening, but Defendants did not allow Plaintiff to proceed with the sale. (UMF 9.) Defendants told Plaintiff that “[t]he Companies do not allow the sale of service and commission rights between agents in different districts.” (Lyons Decl. ¶ 4, Ex. M.)

The Agreement contains no express provisions regarding the sale of Plaintiff’s business to persons other than members of Plaintiff’s immediate family. (DE, Ex. 3 ¶ F.) Plaintiff therefore cannot premise a claim for breach of contract on Defendants’ decision to disallow the sale.

            In addition, Defendants’ decision to disallow the sale does not support a claim for breach of implied covenant of good faith and fair dealing. “The covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made. The covenant thus cannot ‘be endowed with an existence independent of its contractual underpinnings.’ It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.) “If there exists a contractual relationship between the parties . . . the implied covenant is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated in the contract.” (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1032.)

Here, the specific terms of the Agreement do not support the existence of an implied duty on Defendants’ part to allow the sale of an agent’s agency to persons other than the agent’s immediate family. There are no obligations of Defendants set forth under the express terms of the contract that could underpin such a duty.

            Accordingly, summary adjudication is granted as to this alleged breach.

Breach of Contract – Termination Without Cause

Plaintiff alleges that Defendants breached the Agreement by “subjecting [Plaintiff] to differential standards of conduct from other agents”; terminating the Agreement “without cause, reason, or justification”; and “failing to follow written policies or to apply the same practices to other agents in the same manner that they were strictly applied to [Plaintiff].” (Comp. ¶ 36.) Plaintiff asserts that Defendants breached the Agreement by purporting to terminate it based on Plaintiff’s failure to meet certain unjustified or inconsistently applied performance metrics.

Defendants argue that this theory of breach fails because the Agreement created an at will employment relationship between Plaintiff and Defendants requiring only 3 months’ written notice. The Court agrees.

Prior binding decisions have concluded that provisions nearly identical to the one at issue here allowed a party to terminate the Agreement for any reason so long as sufficient notice was given. (See also Appling v. State Farm Mut. Auto. Ins. Co. (9th Cir. 2003) 340 F.3d 769, 778 [“The Termination Provision is clear and only requires written notice for termination . . . Moreover, State Farm's insertion of the Termination Review Provision does not compel a conclusion that the contract requires good cause for termination”]; Olander v. State Farm Mut. Auto. Ins. Co. (8th Cir. 2003) 317 F.3d 807, 811 [“To our knowledge, every court but one has interpreted the State Farm Agent's Agreement as being unambiguously terminable at will”].)

First, in Bernard v. State Farm Mutual Automobile Ins. Co. (2007) 158 Cal.App.4th 304, the court found that “the termination provision here stating in full that ‘You or State Farm have the right to terminate this Agreement by written notice delivered to the other or mailed to the other's last known address’ is not reasonably susceptible to an interpretation requiring good cause for termination.” (Bernard, 158 Cal.App.4th at 310.) The court further found that the inclusion of a termination-review provision, like the one present here, was insufficient to transform the contract into one allowing termination only for cause. (Id. at 311.)

In United Farmers Agents Assn., Inc. v. Farmers Group, Inc. (2019) 32 Cal.App.5th 478, the plaintiff’s contract (also an Agent Appointment Agreement for a Farmers insurance agent) “allow[ed] any party to terminate the contract by giving three months’ written notice,” under a provision which the court referred to as “the no-cause termination provision.” (Id. at 483.) The court stated, “the no-cause termination provision does not require any conditions precedent. The parties may invoke the provision and terminate the Agreement at any time, and for any or no reason, so long as they provide sufficient notice. It follows that Farmers may terminate an agency under the no-cause termination provision for reasons not specifically listed in the Agreement, including dissatisfaction with the agent's office location or failure to meet performance standards.” (Id. at 495.)

These decisions are dispositive of the issue here. The parties’ Agreement provides that it “may be terminated by either the Agent or the Companies on three (3) months written notice.” (DE Ex. 3, ¶ C.) The only condition precedent to termination under this provision is the giving of three months’ written notice. It is undisputed that Defendants gave the required notice. (UMF 3.) Because only notice is required, Defendants may terminate the Agreement “for reasons not specifically listed in the Agreement including . . . failure to meet performance standards.” (United Farmers Agents, supra, at 495.) Accordingly, Defendants have shown that no triable issue of material fact exists and that they are entitled to judgment as a matter of law on this theory of breach.

Furthermore, because the Agreement is at will, Plaintiff cannot premise a claim for breach of implied covenant of good faith and fair dealing on Defendants’ termination. (See Appling v. State Farm Mut. Auto. Ins. Co. (9th Cir. 2003) 340 F.3d 769, 779 [“The Agents cannot graft a good cause requirement onto the Termination Provision using the implied covenant of good faith and fair dealing where State Farm has terminated an at-will relationship according to an express contract provision”].)

            Accordingly, summary adjudication is granted as to this alleged breach.

Second Cause of Action for Tortious Interference with Contract and Business Advantage

The elements for the tort of intentional interference with the performance of a contract are: “(1) a valid contract between plaintiff and another party; (2) defendant’s knowledge of the contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (Asahi Kasei Pharma Corporation v. Actelion Ltd. (2013) 222 Cal.App.4th 945, 958.) A cause of action for interference with contractual relations does not lie against a party to the contract. (See Dryden v. Tri-Valley Growers (1977) 65 Cal.App.3d 990, 999.) 

Here, Plaintiff alleges that Defendants “had actual knowledge of the Agent Agreement . . . as well as the agreements and business advantage he entered into with his customers,” and that Defendants interfered with those contracts and business advantages by “tortiously taking his business.” (Comp. ¶¶ 39-40.)

Agents of an insurer are not parties to the insurance contract. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 824.) Because Plaintiff was not a party to the contract with his customers, he has not satisfied the first element of a claim for interference with contract.

The elements for the tort of intentional interference with prospective economic advantage are: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153.)  

In order to establish intentional interference with prospective economic advantage, a plaintiff must show that the defendant engaged in an independently wrongful act. (See Korea Supply Co., supra, 29 Cal.4th at 1158.) “An act is not independently wrongful merely because defendant acted with an improper motive.” (Ibid.) “[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (Id. at 1159.) 

Here, Plaintiff has not presented evidence of any independently wrongful act by Defendants proscribed by a determinable legal standard. Defendants’ alleged breach of the Agreement by failure to provide a termination review board hearing does not meet that standard.

            In his Opposition, Plaintiff argues that an interference claim may be premised upon Defendants’ interference with Plaintiff’s business with insurance companies and customers other than Defendants. The Court agrees with Defendants that this theory has not been pled in the Complaint and so is unavailing to Plaintiff. It is clear that the allegations under the second cause of action reference the contracts and relationships between Plaintiff and his Farmers customers. It is alleged that Defendants “took Plaintiff’s customers from him for inadequate compensation by tortiously taking his business and interfering with his business advantages,” that Defendants sought to “steal accounts,” and that Defendants’ conduct was a “substantial factor in the unlawful and unjustified termination of the aforementioned contractual relationships between Plaintiff and his customers.” (Comp. ¶ 40.) Plaintiff has not claimed that Defendants took customers or accounts related to non-Farmers companies from him.

            Accordingly, summary adjudication is granted as to the second cause of action.

Third Cause of Action for Breach of Implied Covenant of Good Faith and Fair Dealing

            As discussed above, Plaintiff cannot base a claim for breach of implied covenant on Defendants’ failure to give 120 days’ notice, Defendants’ refusal to allow Plaintiff to proceed with the sale of his agency, or Defendants’ decision to terminate the contract. However, Plaintiff has shown a triable issue of fact as to whether Defendants’ denial to Plaintiff of a hearing before the termination review board constituted a breach of the implied covenant of good faith and fair dealing in the Agreement.

“‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.’ [Citation.] . . . The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.” (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371-72.) “A party violates the covenant if it subjectively lacks belief in the validity of its act or if its conduct is objectively unreasonable. . .. ‘The issue of whether the implied covenant of good faith and fair dealing has been breached is ordinarily a question of fact unless only one inference [can] be drawn from the evidence.’ [Citation.]” (Moore v. Wells Fargo Bank, N.A. (2019) 39 Cal.App.5th 280, 291.)

Defendants were obliged under the express terms of the contract to provide Plaintiff a hearing before the termination review board on timely request. After Plaintiff made the request, Defendants refused to provide Plaintiff information regarding the decision to terminate the Agreement and did not respond to multiple communications from Plaintiff’s counsel in the month leading up to the hearing. (Lyons Decl. ¶ 5, Exs. M-Q.) Ultimately, no hearing took place. (UMF 8.) Defendants later stated in discovery that Plaintiff “abandoned efforts” to arrange a hearing. (Lyons Decl. ¶ 5, Ex. G.) This evidence is sufficient to show a triable issue of material fact as to whether Defendants in bad faith failed to provide Plaintiff a hearing before the termination review board.

            Accordingly, summary adjudication is denied as to the third cause of action.