Judge: Daniel S. Murphy, Case: 23STCV03859, Date: 2024-02-16 Tentative Ruling

Case Number: 23STCV03859    Hearing Date: February 16, 2024    Dept: 32

BACKGROUND

            On February 22, 2023, Plaintiff Creditors Adjustment Bureau (CAB) filed this action against various entity defendants with the Schon Tepler name. The complaint asserts (1) breach of contract, (2) open book account, (3) account stated, and (4) reasonable value. The dispute stems from a debt that Schon Tepler allegedly owes to State Compensation Insurance Fund (SCIF) arising from two workers compensation insurance policies. Schon Tepler allegedly defaulted on premium payments. SCIF assigned the debt to CAB for collection purposes.

            On August 16, 2023, Schon Tepler Construction, Inc. filed a cross-complaint against SCIF, asserting (1) breach of contract and (2) tortious breach of the implied covenant of good faith and fair dealing. The cross-complaint alleges that SCIF mishandled, overpaid, and over-reserved one or more claims made under the policies, resulting in higher premiums.

            On October 19, 2023, SCIF filed the instant demurrer to the cross-complaint. Schon Tepler filed its opposition on February 2, 2024. SCIF filed its reply on February 8, 2024

LEGAL STANDARD

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, supra, 147 Cal.App.4th at 747.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court notes that Cross-Defendant has complied with the meet and confer requirement. (See Creel Decl.)

DISCUSSION

I. Administrative Exhaustion

            “[W]here a remedy before an administrative agency is provided by statute, regulation, or ordinance, relief must be sought by exhausting this remedy before the courts will act.” (Parthemore v. Col (2013) 221 Cal.App.4th 1372, 1379.) “The ‘failure to exhaust administrative remedies is a proper basis for demurrer.’” (Ibid.)

In the insurance context, “[e]very insurer or rating organization shall provide within this state reasonable means whereby any person aggrieved by the application of its filings may be heard by the insurer or rating organization on written request to review the manner in which the rating system has been applied in connection with the insurance afforded or offered.” (Ins. Code, § 11737(f).) “Any person aggrieved by any decision, action, or omission to act of a rating organization may request that the rating organization reconsider the decision, action, or omission.” (Id., § 11753.1(a).) The procedural requirements and standards applicable to the review process enumerated in these code sections are set forth in the California Code of Regulations, sections 2509.40 et seq.

According to SCIF, these statutes and regulations establish an administrative process that Schon Tepler has failed to allege exhaustion of. SCIF relies on P.W. Stephens, Inc. v. State Compensation Ins. Fund (1994) 21 Cal.App.4th 1833, 1841, which noted that “the question of excessive insurance rates is singularly within the technical competence of the Insurance Commissioner through the enlistment of agency resources. Thus, before any judicial relief can be sought regarding the question of excessive surcharges, it is indispensable that the expertise of the insurance commissioner and the agency's staff be initially engaged to make such review.” This is because “the propriety of premium rates and surcharges involve factors and methodology which require quasi-legislative action involving expertise in the subject matter, and courts have traditionally given deference to such agency determinations.” (State Compensation Ins. Fund v. Brown (1995) 32 Cal.App.4th 188, 199.)

However, “courts have rejected the idea that an insured must first exhaust administrative remedies through an appeal to the Insurance Commissioner before asserting claims of breach of contract against its insurer, including breaches that place the amount of premium in dispute.” (State Comp. Ins. Fund v. ReadyLink Healthcare, Inc. (2020) 50 Cal.App.5th 422, 460.) Stephens and related cases pertain to rate-setting disputes and “did not purport to address an insured's right to sue civilly for an insurer's breach of express and implied contractual provisions obligating an insurer to promptly and fairly handle claims made against its insured.” (Lance Camper Manufacturing Corp. v. Republic Indemnity Co. (1996) 44 Cal.App.4th 194, 202.) The administrative exhaustion requirement does not apply where an insured “is challenging the claims handling practices that increased the Insurer's reported losses, which resulted in higher premiums, higher reserves, and lower dividends.” (Id. at p. 203.)

Here, as in Lance Camper, “this is not a rate setting dispute, but rather a claim that the Insurer engaged in bad faith in settling individual policy claims to artificially inflate its reserves and the Insured's premiums, and deflate the Insured's dividends.” (Lance Camper, supra, 44 Cal.App.4th at p. 202.) Insurance Code sections 11737 and 11753.1 are inapplicable because “[n]either of these provisions indicates that the Insurance Commissioner has the authority to consider the common law breach of contract and other collection claims.” (ReadyLink, supra, 50 Cal.App.5th at p. 459.) The court in ReadyLink also distinguished Stephens for the same reasons discussed above. (Id. at pp. 463-64.) “[I]ssues of contract interpretation, including whether an insurer accurately calculated a premium under the contract, and the application of equitable defenses to the enforcement of a contract, do not involve considerations that fall uniquely within the Insurance Commissioner's expertise.” (Id. at p. 464.)

Schon Tepler’s cross-complaint alleges that SCIF mishandled, overpaid, and over-reserved one or more claims made under the policies, resulting in higher premiums. (Cross-Compl. ¶¶ 13-14.) The cross-complaint alleges that “SCIF breached the Policies by overcharging final premium for the Policies.” (Id., ¶ 17.) Therefore, this is not a rate-setting dispute like the one in Stephens, but rather a contractual dispute like the one in Lance Camper concerning the insurer’s handling of claims. It does not become a rate-setting dispute simply because the amount of premium is disputed. (ReadyLink, supra, 50 Cal.App.5th at p. 460.) At the very least, the allegations are sufficient to survive demurrer because the complaint must be interpreted in Plaintiff’s favor. The allegations support a reasonable inference that this is a contractual dispute about claims handling rather than a rate-setting dispute. Therefore, the failure to exhaust administrative remedies is not a defect that appears on the face of the complaint.

II. Uncertainty

            A demurrer for uncertainty applies “if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (A.J. Fistes Corp. v. GDL Best Contractors, Inc. (2019) 38 Cal.App.5th 677, 695.) Usually, a complaint does not need to be a “model of clarity” to survive a demurrer because most ambiguities can be clarified through discovery. (Ibid.)

SCIF argues that the breach of contract claim is uncertain regarding how SCIF breached the policy by “overcharging final premium.” (See Cross-Compl. ¶ 17.) For pleading purposes, Schon Tepler has alleged the ultimate fact that SCIF overcharged the premiums on the policies. This places SCIF on adequate notice of the claim. Precisely how SCIF overcharged the premiums is an evidentiary matter to be resolved through discovery.

SCIF also argues that “[i]f SCHON TEPLER were to contend that it is not required to exhaust its administrative remedies, there is not enough information alleged in the Cross-Complaint to evaluate such an assertion.” (Dem. 10:23-25.) However, as discussed above, the allegations support a reasonable inference that this is a contractual dispute rather than a rate-setting dispute. Therefore, the information alleged in the cross-complaint is enough to determine, at least for pleading purposes, that Schon Tepler was not required to exhaust administrative remedies.

CONCLUSION

            SCIF’s demurrer to cross-complaint is OVERRULED.