Judge: Daniel S. Murphy, Case: BC723434, Date: 2024-02-02 Tentative Ruling

Case Number: BC723434    Hearing Date: February 2, 2024    Dept: 32

BACKGROUND

            On September 27, 2018, Plaintiff Poonam Dua filed this action against Stillwater Insurance Company, alleging (1) breach of contract and (2) breach of the implied covenant of good faith and fair dealing. The case was initially assigned to Judge Keosian in Department 61.

            According to the complaint, Plaintiff had an insurance policy with Defendant that was in effect from May 2015 to May 2016. In March 2016, Plaintiff was sued in a dog attack case (Peroff Action), and she alleges that Defendant failed to properly investigate the claim, failed to tender a defense, and failed to indemnify Plaintiff. Plaintiff ultimately settled the Peroff Action for $15,528.13 and also incurred attorneys’ fees.

            On June 9, 2021, Judge Keosian granted Defendant’s motion for summary judgment on the grounds that an exclusion in the policy precluded coverage. The exclusionary clause at issue exempted claims for damages caused by: (i) an animal at an insured premises; or (ii) an animal owned by, or in the care, custody, or control of the insured. Defendant successfully argued on summary judgment that the only way Plaintiff could have been found liable in the Peroff Action was through facts that also triggered the animal exclusion in the policy. Specifically, Defendant argued that the Peroffs would have needed to prove that Plaintiff owned or had custody or control of the offending dogs, facts which would have necessarily triggered the policy exclusion. Therefore, Judge Keosian held that Defendant had no duty to defend as a matter of law. This led to a judgment in favor of Defendant on June 16, 2021.

            Plaintiff appealed the judgment, and in a published opinion issued on May 5, 2023, the Court of Appeal reversed and remanded. (Dua v. Stillwater Ins. Co. (2023) 91 Cal.App.5th 127, 127.) The California Supreme Court subsequently denied review. (Dua v. Stillwater Insurance Co. (July 12, 2023, No. S280415) 2023 Cal. LEXIS 3920, at *1.) This leaves the Court of Appeal decision as binding authority and the law of the case. The Court of Appeal rejected Defendant’s argument because it conflates Defendant’s duty to indemnify with its duty to defend. (Dua, supra, 91 Cal.App.5th at p. 138.) The Court of Appeal held that even if the Peroffs’ complaint was frivolous and could not have resulted in liability for Plaintiff—meaning Defendant did not have to indemnify the claim—Defendant may have still been required to defend Plaintiff. (Ibid.) The Court of Appeal found that the Peroffs’ complaint asserted a theory of liability that, even if frivolous, was not covered by the animal exclusion in the policy. (Ibid.) This created “at least a possibility of coverage” and therefore triggered Defendant’s duty to defend. (Ibid.)  

            The case was reassigned to this Department after peremptory challenges. On January 8, 2024, Defendant filed the instant motion for leave to file a cross-complaint. Plaintiff filed her opposition on January 22, 2024. Defendant filed its reply on January 26, 2024.

LEGAL STANDARD

“Except as otherwise provided by statute, if a party against whom a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has against the plaintiff, such party may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded.” (Code Civ. Proc., § 426.30.)

“A party who fails to plead a cause of action subject to the requirements of this article, whether through oversight, inadvertence, mistake, neglect, or other cause, may apply to the court for leave to amend his pleading, or to file a cross-complaint, to assert such cause at any time during the course of the action. The court, after notice to the adverse party, shall grant, upon such terms as may be just to the parties, leave to amend the pleading, or to file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith. This subdivision shall be liberally construed to avoid forfeiture of causes of action.” (Code Civ. Proc., § 426.50.)

“A motion to file a cross-complaint at any time during the course of the action must be granted unless bad faith of the moving party is demonstrated where forfeiture would otherwise result. Factors such as oversight, inadvertence, neglect, mistake or other cause, are insufficient grounds to deny the motion unless accompanied by bad faith.” (Silver Orgs. v. Frank (1990) 217 Cal.App.3d 94, 99.) To justify denial of a motion to file a cross-complaint, the trial court must find “substantial evidence that bad faith existed in the circumstances . . . .” (Ibid.)

DISCUSSION

            Defendant seeks to file a cross-complaint to adjudicate its liability for indemnification. Defendant argues that even if it has a duty to defend any claim that is potentially covered, it only has a duty to indemnify claims that are actually covered. Defendant maintains that the claims arising from the Peroff Action are not covered and therefore it has no duty to indemnify Plaintiff. Defendant has paid Plaintiff the amount she paid to settle the Peroff Action, subject to a right of reimbursement should Defendant be found not liable for indemnity. Defendant asserts the cross-claim to recover the amount paid to Plaintiff.

            A compulsory cross-claim is one that “arises out of the same transaction, occurrence, or series of transactions or occurrences as the cause of action which the plaintiff alleges in his complaint.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 960.) Defendant’s proposed cross-claim concerning its liability for indemnification arises from the same insurance policy underpinning Plaintiff’s complaint. Plaintiff’s complaint asserts liability based on that same indemnification provision. Therefore, the proposed cross-claim arises from the same transaction or occurrence and is compulsory. The cross-claim is not being filed within the time for Defendant to answer the complaint. Accordingly, the issue is whether Defendant acted in bad faith in asserting the cross-claim at this stage. Leave to file a compulsory cross-claim must be granted unless there is “substantial evidence” of bad faith. (Silver Orgs., supra, 217 Cal.App.3d at p. 99.) Bad faith is defined as “dishonest purpose, moral obliquity, sinister motive, furtive design or ill will.” (Id. at p. 100.) Mere delay and neglect are not sufficient to justify denial of the motion. (Id. at p. 99.)

Plaintiff argues that Defendant cannot file a cross-claim at this stage because Defendant failed to assert the claim at the time of its answer. Plaintiff argues that the Code only allows the amendment of an existing cross-complaint, not the belated filing of a cross-complaint. However, the statute expressly provides that leave to “file a cross-complaint” must be granted “at any time during the course of the action” unless there is evidence of bad faith. (Code Civ. Proc., § 426.50.) Therefore, the statute explicitly permits the late filing of a cross-complaint. Plaintiff cites to cases where parties were not allowed to assert related claims in successive actions. Defendant does not seek to assert its claim in a separate action. In fact, Defendant filed this motion precisely to avoid doing that. Defendant also does not seek to file its cross-claim on the eve of trial, because trial in this matter is scheduled for September 10, 2024. In any case, mere delay is not grounds to deny the motion. (Silver Orgs., supra, 217 Cal.App.3d at p. 99.)  

Plaintiff next argues that even if Section 426.50 permits the late filing of a cross-complaint, defendant has not established sufficient good cause to warrant granting the motion. However, due to the policy in favor of resolution on the merits and the express legislative mandate to avoid forfeiture where possible, leave to file a compulsory cross-complaint must be granted unless there is “substantial evidence” of bad faith. (Silver Orgs., supra, 217 Cal.App.3d at p. 99.) The Court does not find substantial evidence of bad faith. Defendant explains that it did not assert the cross-claim earlier because it did not need to. Before Defendant reimbursed Plaintiff for the Peroff settlement, the issue of Defendant’s liability could have been resolved in Plaintiff’s claims. But after Defendant paid Plaintiff, Defendant needed to assert an affirmative claim to recover the money. Plaintiff has not shown that allowing Defendant to file the cross-claim “would work a substantial injustice” to her or “prejudice [her] position in some way.” (See Foot's Transfer & Storage Co. v. Superior Court (1980) 114 Cal.App.3d 897, 903.)     

Lastly, Plaintiff argues that the Court of Appeal decision acts as res judicata on the issue of indemnity. However, the Court of Appeal did not reach the issue of indemnity because it did not need to. The Court of Appeal held that there was a triable issue on Plaintiff’s causes of action because Defendant was potentially liable for failing to defend. Plaintiff asserts without support that the Court of Appeal decided the issue of both indemnity and defense. Nowhere in the decision does the Court of Appeal hold that Defendant is liable for failing to indemnify Plaintiff. To the contrary, the Court of Appeal acknowledged that the duty to defend is broader than the duty to indemnify, and therefore there may be a duty to defend even in the absence of a duty to indemnify. (Dua, supra, 91 Cal.App.5th at pp. 136-38.)

In any case, the merits of the cross-claim have no bearing on Defendant’s right to file the cross-complaint. As discussed above, the law mandates granting leave to file a compulsory cross-claim absent evidence of bad faith.

CONCLUSION

            Defendant’s motion for leave to file cross-complaint is GRANTED.