Judge: Daniel S. Murphy, Case: 23STCV20264, Date: 2023-12-01 Tentative Ruling

Case Number: 23STCV20264    Hearing Date: December 1, 2023    Dept: 32

BACKGROUND

            On August 23, 2023, Plaintiffs CoverageSync Restaurants Insurance Services, LLC and Christopher Schaible filed this action against Defendant Hiscox Insurance Company, Inc., asserting (1) breach of contract and (2) breach of the implied covenant of good faith and fair dealing.

            Plaintiffs operate an insurance brokerage that obtains insurance for retail businesses. (Compl. ¶ 2.) Plaintiffs were sued in July 2021 by operators of a bar in Los Angeles (Underlying Action). (Ibid.) Plaintiffs allege that their insurance policy with Defendant covers claims such as those made in the Underlying Action. (Id., ¶ 3.) Defendant allegedly accepted coverage and agreed to provide Plaintiffs with a full defense and indemnity. (Id., ¶ 4.) Defendant has allegedly delayed settlement of the Underlying Action for its own benefit, to Plaintiffs’ detriment. (Id., ¶¶ 5-6.) Defendant is allegedly stalling in bad faith with the goal of withdrawing coverage completely. (Id., ¶ 7.)      

            On October 27, 2023, Defendant filed the instant demurrer and motion to strike against the complaint. Plaintiffs filed their opposition on November 16, 2023. Defendant filed its reply on November 22, 2023.

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.)

Any party, within the time allowed to respond to a pleading, may serve and file a notice of motion to strike the whole or any part of that pleading. (Code Civ. Proc., § 435, subd. (b).) The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike (1) any irrelevant, false, or improper matter inserted in any pleading and (2) all or any 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. (Id., § 436.) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Id., § 437.)

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 Defendant has complied with the meet and confer requirement. (See Gettell Decl.)

DISCUSSION

To establish breach of contract, a plaintiff must show: (1) the contract existed, (2) the plaintiff’s performance of the contract or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damage to the plaintiff. (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.) Additionally, “in every contract there is an implied covenant of good faith and fair dealing that neither party will do anything which injures the right of the other to receive the benefits of the agreement.” (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940.) In the insurance context, “the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty.” (Id. at pp. 940-41.) “[T]he insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits.” (Id. at p. 941.) “An unreasonable refusal to settle may subject the insurer to liability for the entire amount of the judgment rendered against the insured, including any portion in excess of the policy limits.” (Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 725.)

Plaintiffs allege that Defendant “breached the Policy by refusing to authorize a reasonable settlement of the Underlying Action within policy limits.” (Compl. ¶ 38.) Plaintiffs further allege that Defendant acted in bad faith by stalling negotiations and unreasonably refusing to settle. (Id., ¶ 45.)

I. Ripeness of the Claims

            “In most cases, an excess judgment (a judgment against the insured in an amount exceeding policy limits) is needed to establish liability and damages for wrongful refusal to settle.” (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 526-27.) After all, “[i]f the insurer declines to settle and decides to go to trial and then obtains a judgment below the settlement offer or obtains a complete defense verdict, then the insured would have no cause to complain, and the insurer would have no liability.” (Safeco Ins. Co. of Am. v. Superior Court (1999) 71 Cal.App.4th 782, 788.)

However, “[a]lthough an excess judgment is the common way in which an insured establishes liability and damages in a failure to settle case, it is not the only way.” (Howard, supra, 187 Cal.App.4th at p. 527.) “An insurer's wrongful failure to settle may be actionable even without rendition of an excess judgment.” (Ibid.) “An insured may recover for bad faith failure to settle, despite the lack of an excess judgment, where the insurer's misconduct goes beyond a simple failure to settle within policy limits or the insured suffers consequential damages apart from an excess judgment.” (Ibid.) “[U]nreasonable conduct during the handling of the claim can be a proximate cause of injury before the final disposition of the claim as well as after.” (Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1477, citing Larraburu Bros. Inc. v. Royal Indem. Co. (9th Cir. 1979) 604 F.2d 1208, 1215.)

Defendant contends that Plaintiffs’ lawsuit is premature because the Underlying Action is ongoing, and there has been no final judgment. However, Plaintiffs allege that “CoverageSync has lost significant business and taken a huge reputational hit because of the Underlying Action.” (Compl. ¶ 32.) Additionally, “Hiscox’s bad faith has also caused Schaible to suffer personally. Schaible paid more than $11,000 out-of-pocket to hire cleaners following the break-ins.” (Id., ¶ 33.) Lastly, “Schaible has also suffered severe emotional distress . . . [while] the Underlying Action continues to loom over Schaible and approaches trial.” (Id., ¶ 34.) These are “consequential damages apart from an excess judgment.” (See Howard, supra, 187 Cal.App.4th at p. 527.)

Moreover, Defendant’s misconduct allegedly “goes beyond a simple failure to settle within policy limits.” (See Howard, supra, 187 Cal.App.4th at p. 527.) Rather, Plaintiffs allege that despite being provided with analyses of the claims and litigation risks, Defendant rejected reasonable offers without explanation and disregarded the effect of prolonged litigation on Plaintiffs’ business, in order to save money and extract more profit. (Compl. ¶¶ 27, 29, 31, 46.) This constitutes actionable bad faith conduct regardless of whether the Underlying Action ultimately results in a judgment in excess of the policy.

Because Plaintiff may sue for bad faith failure to settle even without a judgment in excess of the policy, Plaintiff need not wait until a judgment in the Underlying Action before filing this suit. Howard and Bodenhamer make clear that there are damages beyond an excess judgment that may arise before final judgment in an underlying case. Even if the Underlying Action results in no liability, or Defendant fully indemnifies the liability, Plaintiff has sufficiently articulated independent injuries suffered as a result of protracted litigation caused by Defendant’s refusal to settle.

In sum, the claims do not fail merely because the Underlying Action has not resulted in a final judgment. The demurrer cannot be sustained for this reason. However, it appears to be in the interests of judicial economy to stay the case until the Underlying Action is resolved. The Court will hear from the parties on this matter.

II. Breach of Contract

            Defendant argues that it could not have breached the contract as a matter of law because the policy does not impose a duty to settle. (See Compl., Ex. A.) “While the allegations of a complaint must be accepted as true for purposes of demurrer, the facts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence.” (Moran v. Prime Healthcare Management, Inc. (2016) 3 Cal.App.5th 1131, 1145-46, citations omitted.) However, “an insurer moving for a demurrer based on insurance policy language must establish conclusively that this language unambiguously negates beyond reasonable controversy the construction alleged in the body of the complaint.” (Palacin v. Allstate Ins. Co. (2004) 119 Cal.App.4th 855, 862.) “To meet this burden, an insurer is required to demonstrate that the policy language supporting its position is so clear that parol evidence would be inadmissible to refute it.” (Ibid.)

            Here, the policy language does not conclusively contradict Plaintiffs’ interpretation. While the policy does not impose an express requirement to settle a covered claim, it does require Defendant to “defend” such claim. The term “defend” is not defined in the policy, but it reasonably may include the duty to settle a claim where reasonable and necessary to protect the insured against excessive losses. Plaintiffs have alleged that the claimant in the Underlying Action made a reasonable offer below the policy limit that Defendant rejected despite being provided with an analysis of the claim and knowing the risks of litigation. Defendant allegedly disregarded the harm to Plaintiffs in favor of its own interests. For pleading purposes, this sufficiently constitutes a breach of Defendant’s duty to defend its insured.

III. Implied Covenant of Good Faith and Fair Dealing

“The covenant of good faith and fair dealing imposes obligations on the contracting parties separate and apart from those consensually agreed to.” (Bodenhamer, supra, 192 Cal.App.3d at p. 1477.) “The obligations imposed by the implied covenant of good faith and fair dealing are not those set out in the terms of the contract itself, but rather are obligations imposed by law.” (Id. at p. 1478.) “In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party's rights to the benefits of the contract.” (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153.)

Defendant argues that if the policy has not been breached, the implied covenant cannot be breached either. However, as discussed above, Plaintiffs have alleged a breach of the policy. Additionally, the implied covenant is separate from the express duties imposed by contract. While the implied covenant derives from contractual rights, it may be independently breached by conduct that does not “technically transgress[] the express covenants” of the contract. (Love, supra, 221 Cal.App.3d at p. 1153.) “[B]reach of a specific provision of the contract is not a necessary prerequisite to a claim for breach of the implied covenant of good faith and fair dealing.” (Schwartz v. State Farm Fire & Casualty Co. (2001) 88 Cal.App.4th 1329, 1339.)

IV. Punitive Damages

“In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” (Civ. Code, § 3294, subd. (a).) “‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Id., subd. (c)(1).) “‘Oppression’ means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” (Id., subd. (c)(2).) Fraud is “intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Id., subd. (c)(3).)

The conduct discussed above sufficiently supports punitive damages for pleading purposes. Again, Defendant allegedly rejected reasonable settlement offers in order to prolong litigation for its own benefit. This constitutes a willful and conscious disregard of Plaintiffs’ rights.

CONCLUSION

            Defendant’s demurrer is OVERRULED. Defendant’s motion to strike is DENIED. The Court will hear from the parties regarding a stay.