Judge: Bruce G. Iwasaki, Case: 20STCV10768, Date: 2022-10-11 Tentative Ruling

Case Number: 20STCV10768    Hearing Date: October 11, 2022    Dept: 58

Judge Bruce G. Iwasaki

Hearing Date:             October 11, 2022

Case Names:               Rotax, Inc. v. Underwriters at Lloyd’s et al.

Case Nos.:                   20STCV10768           

Matter:                        Motion for Summary Judgment

Moving Party:             Defendant G.J. Sullivan Excess & Surplus Line Insurance Brokers, Inc.

Responding Party:      Plaintiff Rotax, Inc.

Background

This is an action involving breach of contract and negligence against insurance companies and their agents for procuring the wrong policy. 

In April 2019, Rotax, Inc. (Plaintiff or Rotax) entered into an agreement with M.L. Enterprise, LLC (M.L. Enterprise) where Rotax would store merchandise in a warehouse that was leased by M.L. Enterprise.  As part of the agreement, Rotax required that M.L Enterprise provide insurance on the stored merchandise.  Rotax subsequently referred M.L. Enterprise to Edik Davidyan (Davidyan) to facilitate the purchase of the insurance.  Davidyan utilized his company, Daragon Insurance Services, who then contacted G.J. Sullivan Co. (Defendant or G.J. Sullivan), a surplus lines broker. [1]  G.J. Sullivan ultimately procured the insurance from Underwriters at Lloyd’s (Lloyd’s).  Rotax informed Davidyan to obtain an endorsement from Lloyd’s for Rotax to be the payee under the policy. 

On May 31, 2019, Rotax’s merchandise property was allegedly damaged in a warehouse fire.  Lloyd’s declined to cover the loss, claiming that the insurance was for liability only, not coverage for property damage.  Rotax settled the case with Lloyd’s, which is no longer a party.

Defendant G.J. Sullivan now moves for summary judgment.  It contends that it owed no duty of care to Plaintiff and policy considerations weigh against imposing such a duty.  Alternatively, it asserts there is no breach because it procured the policy that Plaintiff requested.

Plaintiff opposed the motion for summary judgment, arguing that it is disputed whether Davidyan requested the correct policy.  It argues that it requested a warehouseman’s property policy but received a warehouseman’s liability policy instead.

Defendant replied, arguing that Plaintiff failed to present any admissible evidence and failed to meet its burden.

           Defendant’s objection to Plaintiff’s provided declaration of James Robertson is sustained.  (Lynn v. Tatitlek Support Services, Inc. (2017) 8 Cal.App.5th 1096, 1115-1116.)

           After Defendant filed its reply, Plaintiff improperly submitted a supplemental declaration without asking for leave to file evidence 14 days before the hearing.  The Court does not consider this declaration.  (Code Civ. Proc, § 437c, subd (b)(2); Hobson v. Raychem Corp. (1999) 73 Cal.App.4th 614, 624-625.)

           Despite Plaintiff’s scant opposition and failure to produce opposing evidence, the Court finds that Defendant has failed to meet its initial burden for the negligence claim.  Defendant has failed to show that it had no duty or that there was no breach of duty as a matter of law.  Thus, the motion for summary judgment is denied.

Legal Standard

A party may move for summary judgment “if it is contended that the action has no merit or that there is no defense to the action or proceeding.”  (Code Civ. Proc., § 437c,¿subd. (a).)  “[I]f 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,” the moving party will be entitled to summary judgment.  (Adler v. Manor Healthcare Corp.¿(1992) 7 Cal.App.4th 1110, 1119.)

The moving party has the initial burden of production to make¿a prima facie¿showing of the nonexistence of any triable issue of material fact, and if he does so, the burden shifts to the opposing party to make¿a prima facie¿showing of the existence of a triable issue of material fact.  (Aguilar v. Atlantic Richfield Co.¿(2001) 25 Cal.4th 826, 850; accord Code Civ. Proc., § 437c,¿subd. (p)(2).)  A Defendant moving for summary judgment may meet its initial burden by proving that for each cause of action alleged, plaintiff cannot establish at least one element of the cause of action.  (Code Civ. Proc., § 437c(p)(2).) The facts are to be construed in the light most favorable to the opposing party.  (Caloroso v. Hathaway (2004) 122 Cal.App.4th 922, 926.)

Discussion

           Defendant G.J. Sullivan argues there is no triable issue of material fact because it did not owe a duty to Plaintiff Rotax, policy considerations weigh against imposing liability on a surplus lines broker, and even if it did owe a duty, there was no breach.

A surplus lines broker may still owe a duty of care to a third party beneficiary of an insurance policy despite a lack of privity and communication.

           “‘The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion. [Citations.] Whether this essential prerequisite to a negligence cause of action has been satisfied in a particular case is a question of law to be resolved by the court.’”  (Centinela Freeman Emergency Medical Associates v. Health Net of Cal. (2016) 1 Cal.5th 994, 1012.)

           The seminal case discussing whether a duty exists to a third party not in privity with a plaintiff is Biakanja v. Irving (1958) 49 Cal.2d 647 (Biakanja).  That case involved a defendant notary public who provided insufficient attestation to a will.  The will was found to be invalid, and plaintiff sued the notary public.  (Id. at p. 648.)  The California Supreme Court provided several factors to consider whether a defendant is liable, despite no privity with the plaintiff: “[1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant's conduct and the injury suffered, [5] the moral blame attached to the defendant's conduct, and [6] the policy of preventing future harm.”  (Id. at p. 650.)

           These factors were further explored in a case similar to this one, Business to Business Markets, Inc. v. Zurich Specialties London Limited (2005) 135 Cal.App.4th 165 (Business to Business).  The plaintiff, Business to Business, hired Tricon, an Indian software company, to create a computer program.  In the contract, the plaintiff required Tricon obtain an errors and omissions insurance policy to protect plaintiff if the software was unusable.  (Id. at p. 167.)  Plaintiff contacted Hoyla, a retail insurance broker, and informed it of Tricon’s insurance needs and that Tricon was based in India.  Hoyla contacted Professional Liability Insurance Services, Inc. (PLIS), a surplus lines broker, to obtain the policy based on the information that Hoyla received from plaintiff.  PLIS procured the policy from Zurich Specialties, but the coverage excluded claims that arose from or related to work performed in India. (Ibid.) 

           After Tricon failed to provide usable software, Plaintiff Business to Business sued and obtained a default judgment against Tricon.  (Id. at p. 168.)  Plaintiff then sued PLIS for negligence in procuring a policy that did not cover any work done in India. (Ibid.)  The trial court sustained PLIS’s demurrer without leave to amend, finding that PLIS did not directly deal with plaintiff and did not owe it a duty of care. (Ibid.)

           The Court of Appeal reversed.  Though the parties “had no direct contact, were not in privity of contract, and [plaintiff] was not named on the policy,” PLIS owed plaintiff a duty of care.  (Business to Business, supra, 135 Cal.App.4th at p. 168.)  The appellate court considered the Biakanja factors, holding that the policy was procured for “protecting B2B against Tricon’s possible breach of contract” and the injury was foreseeable.  (Id. at p. 169.)  The appellate court noted that “PLIS voluntarily assumed the responsibility of finding insurance for Tricon . . . [and] was obligated to discharge that responsibility competently.”  Thus, “imposing liability on PLIS has the salutary effect of encouraging PLIS and other insurance brokers to secure insurance policies for their clients that meet their clients’ needs.”  (Id. at pp. 169-170.)

           Apart from the Biakanja factors, the Court of Appeal in Business to Business considered additional factors when evaluating professional negligence: “One factor is the degree to which clients and third parties ordinarily relinquish control for decisionmaking to the professional. Another is the degree to which the defendant works under professional standards established and maintained by the profession. A third factor is the defendant's ability to spread its costs by raising its fees or buying liability insurance. And a fourth factor is the expected and customary reliance by clients and others on the skillfulness and expertise of the defendant's profession.”  (Id. at p. 172.)

           Here, neither party discussed the Biakanja factors or the Business to Business case.  The holdings in those cases defeat G.J. Sullivan’s assertion that it cannot owe a duty to Plaintiff Rotax as a third party beneficiary. 

           The first Biakanja factor is whether the transaction was intended to affect the plaintiff. (Business to Business, supra, 135 Cal.App.4th at p. 169.)  Here, Rotax contracted with M.L. Enterprise for Rotax to store its inventory in M.L. Enterprise’s warehouse.  The contract required that M.L. Enterprise obtain insurance for the goods.  (Campo Decl., Ex. A, Torossian Depo., p. 50:2-11; Ex. B, Temporary License to Use Premises, ¶ 6; Ex. E, Libermann Depo., pp. 15:16-16:6.)  While M.L. Enterprise was the named insured, Rotax was added on as a payee and the purpose of procuring the policy was to protect Rotax’s inventory.  (Campo Decl., Ex. A, Torossian Depo., p. 50:2-11, 55:23-56:15; Ex. B, Temporary License to Use Premises, ¶ 6.) In this respect, the argument for G.J. Sullivan’s duty to Rotax is stronger than the plaintiff’s claim in Business to Business, where the plaintiff was not named on the policy. The insurance policy was intended to affect Rotax.

           The second factor is the foreseeability of harm to Rotax.  “Insurance exists to protect against unlikely, but nevertheless possible, and thus foreseeable, events. Insurance companies take a gamble when giving insurance, and there was always the possibility here that [insured] would default on its contractual obligations.”  (Business to Business, supra, 135 Cal.App.4th at p. 169.)  For the same reason, it is foreseeable that Rotax’s inventory would be damaged in M.L Enterprise’s warehouse.   

           There is no dispute that Rotax has suffered actual injury and meets the third factor. (Campo Decl., Ex. A, Torossian Depo., p. 176:12-17.)

           The fourth factor is “the closeness of the connection between the defendant’s conduct and the injury suffered.” (Biakanja, supra, 49 Cal.2d at p. 650.)  This is the primary factor on which G.J. Sullivan argues that it has no duty because it had no contact with Rotax or M.L. Enterprise.  It argues that it dealt only with the retail broker, Davidyan, and conveyed the information to the underwriter, Lloyd’s.  It contends that “a non-retail insurance broker, who did not have direct contact with the insured during the process of procuring the policy, owes the insured no duty.”  But G.J. Sullivan provides no legal authority to support such a broad proposition.

           This factor depends on “whether a third party is an intended beneficiary or merely an incidental beneficiary,” which requires consideration of the “‘parties’ intent, gleaned from reading the contract as a whole in light of the circumstances under which it was entered.’”  (Business to Business, supra, 135 Cal.App.4th at p. 170.)  An intended beneficiary is one who “intentionally receives the benefit of the insurance. However, this person does not need to be specifically named, as long as he is in the class of members that the insurance is intended to benefit.”  For example, if the contract contains a provision in the policy “specifically for third parties injured on the insured’s property,” then a plaintiff would have a right to enforce the contract as a third party beneficiary.  (Id. at p. 171 [citing Harper v. Wausau Insurance Co. (1997) 56 Cal.App.4th 1079].)

           Here, Rotax, like the Business to Business plaintiff, “comes close enough to being [an intended beneficiary] that imposing duty on [G.J. Sullivan] is within the spirit of Biakanja.  Just because other parties, such as retail insurance broker [Davidyan], may have close connections to [Rotax] does not mean [G.J. Sullivan’s] connection was legally inadequate.”  (Business to Business, supra, 135 Cal.App.4th at p. 171.)  Rotax communicated with Davidyan and informed him to procure “coverage for other people’s goods.”  (Campo Decl., Ex. A, Torossian Depo., p. 51:11-23.)  It also appears that Davidyan provided G.J. Sullivan a copy of an unsigned “Temporary License to Use Premises.”  (Campo Decl., Ex. H.)  Moreover, Rotax requested and was added on as a loss payee so presumably, G.J. Sullivan knew who the policy was intended to cover.  (Campo Decl., Ex. L.)  Thus, Rotax was an intended third party beneficiary.

           Defendant’s reliance on Rios v. Scottsdale Insurance Co. (2004) 119 Cal.App.4th 1020, 1029 that a “wholesale broker [who] acts on the instructions of the retail broker who is ultimately responsible for advising the insured regarding suitability of coverage,” is misplaced.  Rios discussed that duty in the context of negligent misrepresentation, which was for “liability for communications, not liability for failing to obtain a policy with the expected type of coverage.”  (Business to Business, supra, 135 Cal.App.4th at p. 171, n.3.)  Similarly, Fitzpatrick v. Hayes (1997) 57 Cal.App.4th 916 and Wallman v. Suddock (2011) 200 Cal.App.4th 1288 involved different scopes of duty.  Fitzpatrick did not require an insurer to advise the insured of the “availability of personal umbrella coverage,” while Wallman declined to impose a duty because the plaintiffs’ requests for coverage “were extremely general in nature.”  (Fitzpatrick, supra, 576 Cal.App.4th at p. 920; Wallman, supra, 200 Cal.App.4th at p. 1310.)

           As to the fifth and sixth Biakanja factors, G.J. Sullivan undertook the responsibility to obtain insurance for Rotax and M.L. Enterprise.  “[I]mposing liability on [G.J. Sullivan] has the salutary effect of encouraging [G.J. Sullivan] and other insurance brokers to secure insurance policies for their clients that meet their clients’ needs.”  (Business to Business, supra, 135 Cal.App.4th at p. 170.)

           Finally, in evaluating a “defendant’s rendering of professional services,” the Court finds that imposing a duty on G.J. Sullivan is appropriate.  Similar to the defendant in Business to Business, G.J. Sullivan is a surplus lines broker, which is a “specialized, niche-market service” for which clients “rely on the broker to get the right type of policy.”  (Id. at p. 172.)  The insurance field is a “highly regulated industry” and “exists within a broad, well developed marketplace, permitting market participants to charge prices that reflect their costs and risks.”  Thus, G.J. Sullivan was “well positioned to prevent the injury [Rotax] suffered from [M.L. Enterprise’s] inadequate insurance coverage.”  (Ibid.)

           Defendant’s Reply argues that Plaintiff concedes that the correct insurance was procured: Paragraph 18 of the Second Amended Complaint provides that “GJS/Worldwide procured the property insurance being sought . . . They informed Underwriters that they were seeking insurance to cover the damage, loss or theft of any inventory of Rotax.”  G.J. Sullivan argues this is an admission and the Court must deem it true.  Yet, in that same Complaint, Paragraph 41 pleads that “If said assertion by Underwriters is correct [denying the claim because the policy did not cover property damage], it will be as a result of all Defendants seeking to purchase and/or provide insurance different from the insurance requested by Plaintiff.”  The paragraphs conflict and this issue is far from being “determinative of the issues on summary judgment in and of itself” as asserted by Defendant.

           There may be an ambiguity on what was stated to Davidyan, the retail broker, and what he informed G.J. Sullivan, the surplus lines broker.  The evidence shows that Rotax specifically informed M.L Enterprise of its request that the insurance to cover “fire, water damage, theft.”  Rotax testified that Davidyan stated there would be no issue to “cover other people’s goods in [M.L.’s] warehouse.” (Campo Decl., Ex. A, Torossian Depo., pp. 50:17-51:3, 51:21-23, 59:12-17.)  Davidyan then submitted a “Commercial Insurance Application” to G.J. Sullivan, stating that the “insured [M.L.] operates his own clothing distribution business, this portion of his warehouse is being leased out to others. Insured leases part of his warehouse and needs cover for the property of others.”  (Campo Decl., Ex. F.) 

           Davidyan’s application eventually resulted in G.J. Sullivan procuring a “Warehousemens Legal Liability” policy, which covers the “liability of the Named Assured [M.L.] as a warehouseman or bailee under warehouse receipts issued by the Named Assured for direct physical loss or damage to property of others while contained in the premises.”  (Campo Decl., Ex. I.)  This is distinguished from a scenario in which the insured is claiming that the insurer has a duty to advise of the availability of other forms of coverage (Fitzpatrick, supra, 57 Cal.App.4th at p. 920; Wallman, supra, 200 Cal.App.4th at p. 1310.)

The policy considerations cited by G.J. Sullivan are not applicable.

           Defendant cites Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370 for additional factors to evaluate on whether to impose a tort duty upon a third party.

           In Bily, supra, 3 Cal.4th 370 at p. 406, our Supreme Court held, based on policy considerations, that “an auditor's liability for general negligence in the conduct of an audit of its client financial statements is confined to the client, i.e., the person who contracts for or engages the audit services,” and that the auditor owes no duty of care to third party plaintiffs who may have relied on the audit report as part of a public stock offering. 

           The Supreme Court restricted the foreseeability prong of the Biakanja factor and “decline[d] to permit all merely foreseeable third party users of audit reports to sue the auditor on a theory of professional negligence.”  The holding was based on three central concerns: “(1) Given the secondary ‘watchdog’ role of the auditor, the complexity of the professional opinions rendered in audit reports, and the difficult and potentially tenuous causal relationships between audit reports and economic losses from investment and credit decisions, the auditor exposed to negligence claims from all foreseeable third parties faces potential liability far out of proportion to its fault; (2) the generally more sophisticated class of plaintiffs in auditor liability cases (e.g., business lenders and investors) permits the effective use of contract rather than tort liability to control and adjust the relevant risks through ‘private ordering’; and (3) the asserted advantages of more accurate auditing and more efficient loss spreading relied upon by those who advocate a pure foreseeability approach are unlikely to occur; indeed, dislocations of resources, including increased expense and decreased availability of auditing services in some sectors of the economy, are more probable consequences of expanded liability.”  (Id. at p. 398.)

           Notably, the court in Bily held that a narrow class of third parties who, though not clients, may rely on such a report and sue the auditor for negligent misrepresentation so long as they “are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report.”  (Id. at p. 407.)

           Bily is distinguishable because those plaintiffs were not contemplated between the client and the auditing company and were therefore not intended beneficiaries.  Defendant also relies on Adelman v. Associated International Insurance Co. (2001) 90 Cal.App.4th 352, 359, which presented the issue of whether an insurer may be liable “to a noninsured third party for the negligent performance of its indemnity obligations to the named insured.”  Thus, Defendant’s reliance on that case requires this Court to presuppose G.J. Sullivan is liable to M.L. Enterprise, which is an issue not before the Court.  (See Business to Business, supra, 135 Cal.App.4th at p. 171, n.3.)

There is a material issue of fact on whether Defendant breached its duty because whether the correct form of insurance was procured is a disputed issue.

           Alternatively, G.J. Sullivan argues that under agency principles, it has satisfied its duty and that there is no breach.  It asserts that ordinarily, “such a duty is limited to the use of reasonable care, diligence, and judgment in procuring the insurance requested by the client.”  (Motion, p. 14:23-25; San Diego Assemblers, Inc. v. Work Comp for Less Insurance Services, Inc. (2013) 220 Cal.App.4th 1363, 1369 [no duty to “investigate [plaintiff’s] coverage needs and procure the requisite coverage to meet those needs, even if [plaintiff] did not request the coverage and … probably could not have afforded it”]; Jones v. Grewe (1987) 189 Cal.App.3d 950, 954 [no duty to procure “complete liability protection,” especially since there was no evidence that the insured requested such comprehensive coverage].)

           Generally, insurance brokers have no duty to inform the insured that it should procure additional or different coverage, subject to three exceptions: “(a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided . . . (b) there is a request or inquiry by the insured for a particular type or extent of coverage . . . or (c) the agent assumes an additional duty by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured.”  (Fitzpatrick, supra, 57 Cal.App.4th at p. 927.)  Plaintiff concedes that the first and third exception do not apply; thus, the dispute is whether the insured requested a particular type of coverage and Defendant failed to procure it.

           Whether a defendant breached its duty is “ordinarily [a] question[] of fact for the jury’s determination.”  (Vasquez v. Residential Investments, Inc. (2004) 118 Cal.App.4th 269, 278.) But the element of breach can be decided as a matter of law if “‘no reasonable jury could find the defendant failed to act with reasonable prudence under the circumstances.’”  (T.H. v. Novartis Pharmaceuticals Corp. (2017) 4 Cal.5th 145, 188.)

           Here, Defendant argues that M.L. Enterprise, through Davidyan, requested a “warehouseman’s policy, and G.J. Sullivan obtained one.”  But this is unsupported by the evidence.  Rotax, through Arthur Torossian, testified that he told Nicolas Libermann of M.L. Enterprise that he wanted coverage for “fire, water damage, theft.”  (Campo Decl., Ex. A, Torossian Depo., p. 50:17-19.)  Joseph Levy, a Rotax employee, testified that he informed Davidyan that Rotax “needed insurance for merchandise stored at the [warehouse]” and that Davidyan informed him that the inventory needed to be “segregate[d]” from M.L. Enterprise’s merchandise.  (Id., Ex. C, Levy Depo., pp. 100:22-101:14.)  Libermann’s own deposition failed to mention specifically requesting a “warehouseman’s policy.”  (Id., Ex. E, Libermann Depo., pp. 15:8-16:6.)  Libermann has difficulty with English and communicated with Davidyan through Levy.  (Libermann Decl., ¶¶ 2-3.)

           While G.J. Sullivan obtained the insurance that it thought was being requested, this presents a triable issue of fact.  In Davidyan’s application for insurance that was provided to G.J. Sullivan, he noted that M.L. Enterprise “leases part of his warehouse and needs cover for the property of others.”  (Campo Decl., Ex. F.)  This can be read to mean the insured is seeking liability insurance to protect others’ goods, or it could mean that the insured is seeking property insurance.[2]  The ambiguity is exemplified in the deposition of G.J. Sullivan’s person most knowledge, Esthela Mejia, who testified that she believed “the insured [M.L. Enterprise] did not own the warehouse. He was looking for a warehouse to store his merchandise.”[3]  (Campo Reply Decl., Ex. B, Mejia Depo., p. 36:3-11.) 

           Because there appears to be an ambiguity between what Rotax and M.L. Enterprise requested from Davidyan, and subsequently, what Davidyan requested from G.J. Sullivan, it cannot be said that G.J. Sullivan has shown the absence of a breach of duty as a matter of law.   

           Accordingly, G.J. Sullivan’s motion for summary judgment is denied.