Judge: Glenda Sanders, Case: 2022-01261243, Date: 2022-12-22 Tentative Ruling
Defendant Axis Specialty Insurance Company (Axis) generally and specially demurrers to the “First, Second and Third” causes of action for breach of contract, bad faith and declaratory relief, respectively, in Plaintiff City of Santa Monica’s (City) Complaint.
Although Axis indicates it has submitted the Axis Excess Insurance Policy at issue with the accompanying request for judicial notice (ROA 146, P&A, p. 6:22-23), the Court does not have a request for judicial notice from Axis.
Defendant Arch Specialty Insurance Company (Arch) joins in Axis’s Demurrer. Arch submitted a separate supporting memorandum and request for judicial notice in support of its general and special demurrers to the 20th COA for declaratory judgment, the 52nd COA for breach of contract and the 93rd COA (presumably, in fact, the 94th COA) for breach of the implied covenant of good faith and fair dealing.
Pursuant to CCP §§ 452(c) and 453, Arch seeks judicial notice of:
1. The 2004-2005 Arch Specialty Insurance Company Policy, policy number UXP0000427-00, attached herewith as Exhibit A.
2. The 2004-2005 Insurance Company of the State of Pennsylvania (“Primary Policy”), policy number 4-7041840, attached herewith as Exhibit B.
3. The 2004-2005 Lexington Insurance Company Policy, policy number 6500601, attached herewith as Exhibit C.
4. The 2004-2005 Axis Specialty Insurance Company Policy, policy number ALU 704438-04, attached herewith as Exhibit D.
See ROA 232, Burleigh Decl., Ex. C, RJN.
The Court GRANTS the request for judicial notice but is mindful of the following:
As to accepting the accuracy of the contents of judicially noticed documents, in Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 374–375, 228 Cal.Rptr. 878, the Court of Appeal analyzed three different approaches to judicial notice at the demurrer stage: the truth of a document's contents will not be considered unless it is an judgment, statement of decision, or order (Garcia v. Sterling (1985) 176 Cal.App.3d 17, 22, 221 Cal.Rptr. 349; Ramsden v. Western Union (1977) 71 Cal.App.3d 873, 879, 138 Cal.Rptr. 426); the truth of statements may be accepted when made by a party but not those of third parties or an opponent (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604–605, 176 Cal.Rptr. 824; Able v. Van Der Zee (1967) 256 Cal.App.2d 728, 734, 64 Cal.Rptr. 481); and the contents of a document may only be accepted “where there is not or cannot be a factual dispute concerning that which is sought to be judicially noticed.” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 114, 55 Cal.Rptr.3d 621; Cruz v. County of Los Angeles (1985) 173 Cal.App.3d 1131, 1134, 219 Cal.Rptr. 661.) And the general rule is that the truthfulness and interpretation of a document's contents are disputable. (StorMedia Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9, 84 Cal.Rptr.2d 843, 976 P.2d 214; Middlebrook–Anderson Co. v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1038, 96 Cal.Rptr. 338.)
(C.R. v. Tenet Healthcare Corp. (2009) 169 Cal. App. 4th 1094, 1103–04, 87 Cal. Rptr. 3d 424, 431–32, as modified on denial of reh'g (Feb. 3, 2009).)
Relevant Authority: A demurrer presents an issue of law regarding the sufficiency of the allegations set forth in the complaint. (Lambert v. Carneghi (2008) 158 Cal.App.4th 1120, 1126.) The challenge is limited to the “four corners” of the pleading (which includes exhibits attached and incorporated therein) or from matters outside the pleading which are judicially noticeable under Evidence Code §§ 451 or 452. Although California courts take a liberal view of inartfully drawn complaints, it remains essential that a complaint set forth the actionable facts relied upon with sufficient precision to inform the defendant of what plaintiff is complaining, and what remedies are being sought. (Leek v. Cooper (2011) 194 Cal.App.4th 399, 413.)
On demurrer, a complaint must be liberally construed. (Code Civ. Proc. § 452; Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 601.) All material facts properly pleaded, and reasonable inferences, must be accepted as true. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-67.)
A pleading is adequate if it contains a reasonably precise statement of the ultimate facts, in ordinary and concise language, and with sufficient detail to acquaint a defendant with the nature, source and extent of the claim. The degree of detail required depends on the extent to which the defendant in fairness needs such detail which can be conveniently provided by the plaintiff. Less particularity is required when the defendant ought to have co-extensive or superior knowledge of the facts. Under normal circumstances, there is no need for specificity in pleading evidentiary facts. However, bare conclusions of law are insufficient. (Code Civ. Proc. §§ 425.10(a), 459; Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 549-50; Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126; Doheny Park Terrace HOA v. Truck Ins. Exchange (2005) 132 Cal.App.4th 1076, 1098-99; Berger v. California Insurance Guarantee Assn (2005) 128 Cal.App.4th 989, 1006.)
The Merits: As correctly pointed out by the City, Axis fails to accurately or adequately identify the specific causes of action to which its demurrer is directed. Axis demurrers to the 1st, 2nd and 3rd causes of action but none of those causes of action involve the Axis Excess Policy. See ROA 2, Complaint, pp. 49:13-51:20. Similarly, Arch demurrers to the 93rd COA but that is not directed to the Arch Excess Policy. ROA 2, Complaint, pp. 127:53-129:24. The Court may disregard Axis’s demurrer in its entirety and Arch’s demurrer on the 93rd COA on that basis. (Code Civ. Proc. §§ 430.50 and 430.60; Cal. R. Ct. 3.1320(a).)
Although Axis and Arch also demur on the ground of uncertainty, their supporting Memoranda fail to present any argument based on uncertainty. The absence of any argument in support of the special demurrers may be construed as an admission that this argument is not meritorious. (Cal. R. Ct. 3.1113(a).)
Nevertheless, because the City was aware that Axis intended to demurrer to the 19th, 51st and 93rd COA and Arch intended to demurrer to the 94th COA, fully briefed the issues, and has suffered no prejudice from the error, the Court has considered the arguments on the merits. A future failure to comply with the basic requirement that a motion challenging a pleading correctly and sufficiently identify the part of the pleading challenged will not again be condoned.
It is undisputed that the Axis and Arch policies are excess policies. The Axis Policy is the third-layer excess policy and the Arch Policy is the fourth-layer excess policy. See ROA 232, Burleigh Decl., Ex. C, RJN, Ex. A, Arch Policy and Ex. D, Axis Policy; ROA 2, Complaint, ¶¶147, 148. Excess insurance “refers to indemnity coverage that attaches upon the exhaustion of underlying insurance coverage for a claim.” (Montrose Chemical Corp. of Calif. v. Sup.Ct. (Canadian Universal Ins. Co., Inc.) (Montrose III) (2020) 9 Cal.5th 215, 222 (internal quotes omitted); Powerine Oil Co., Inc. v. Sup.Ct. (Central Nat'l Ins. Co. of Omaha) (Powerine II) (2005) 37 Cal.4th 377, fn. 8 (citing text).) In other words, excess insurance “provides coverage after other identified insurance is no longer on the risk.” (North American Capacity Ins. Co. v. Claremont Liab. Ins. Co. (2009) 177 Cal.App.4th 272, 291.)
An excess insurer's coverage obligation begins once a certain level of loss or liability is reached; that level is generally referred to as the “attachment point” of the excess policy. (Montrose III, supra, 9 Cal.5th at 222-223 (internal quotes omitted).) Thus, before coverage attaches under an excess or umbrella policy, the policy limits of the underlying primary policy or policies normally must be exhausted. (Community Redevelopment Agency of City of Los Angeles v. Aetna Cas. & Sur. Co. (1996) 50 Cal.App.4th 329, 339; see Transcontinental Ins. Co. v. Insurance Co. of State of Penn. (2007) 148 Cal.App.4th 1296, 1304.) Primary coverage is “exhausted” when, e.g., a primary insurer pays its policy limits to settle a claim or to satisfy a judgment against its insured. (Travelers Cas. & Sur. Co. v. Transcontinental Ins. Co. (2004) 122 Cal.App.4th 949, 952, fn. 3 (citing text).)
While a duty to defend is broader than the duty to indemnify, “California’s rule of ‘horizontal exhaustion’ in liability insurance law requires all primary insurance to be exhausted before an excess insurer must ‘drop down’ to defend an insured, including in cases of continuing loss.” Padilla Const. Co. v. Transportation Ins. Co., 150 Cal. App. 4th 984, 986 (2007). “[U]nder California law, it is clear that ‘[a]ll primary insurance must be exhausted before liability attaches under a secondary policy.’ ” Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1504 (9th Cir. 1994) (quoting Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal.App.3d 593, 599 (1981)). Thus, an insured cannot sue “the excess insurers for breach of contract until the legal obligations of the primary insurers [have] been determined and the excess policies [have] been triggered.” Id. (affirming dismissal of claim for failure to allege exhaustion).
Plaintiffs' failure to allege exhaustion or even facts giving rise to an inference of exhaustion of the primary policies is insufficient. A generalized allegation that plaintiffs have satisfied all conditions or are entitled to benefits under the applicable policies does not suffice. (Emphasis added.)
(Webcor Constr., LP v. Zurich Am. Ins. Co. (N.D. Cal. 2017) No. 17-CV-02220-YGR, 2017 WL 4310763, at *3.)
In Iolab Corp. v. Seaboard Sur. Co. (1994) 15 F.3d 1500, the district court dismissed the excess insurers on the pleadings or granted summary judgment because Iolab was required to exhaust all primary coverage before requesting coverage from the excess insurers and the excess insurers argued the loss was below the aggregate primary insurance and would never be triggered. (Id. at 1504.) The 9th Circuit Court of Appeals affirmed the district court’s rulings, explaining:
First, under California law, it is clear that “[a]ll primary insurance must be exhausted before liability attaches under a secondary policy.” Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal.App.3d 593, 599, 178 Cal.Rptr. 908 (1981). Further, “liability under [an excess] policy will not attach until all primary insurance is exhausted, even if the total amount of primary insurance exceeds the amount contemplated in the secondary policy.” North River Ins. Co. v. American Home Assurance Co., 210 Cal.App.3d 108, 115, 257 Cal.Rptr. 129 (1989); see also Signal Co. v. Harbor Ins. Co., 27 Cal.3d 359, 165 Cal.Rptr. 799, 612 P.2d 889 (1980); Denny's Inc. v. Chicago Ins. Co., 234 Cal.App.3d 1786, 286 Cal.Rptr. 507 (1991) (affirming the trial court's summary judgment in favor of the excess insurers on the ground that primary coverage had not been determined); Hellman v. Great Amer. Ins. Co., 66 Cal.App.3d 298, 305, 136 Cal.Rptr. 24 (1977); Hartford Acc. & Indemn. v. Continental Nat. Am. Ins., 861 F.2d 1184 (9th Cir.1988); Continental Cas. Co. v. U.S.F. & G., 516 F.Supp. 384 (N.D.Cal.1981). Thus, Iolab could not have sued the excess insurers for breach of contract until the legal obligations of the primary insurers had been determined and the excess policies had been triggered.
(Id. at 1504, emphasis added.)
The 9th Circuit Court of Appeals further explained that even when the amount of the potential exposure is reasonably ascertainable, the excess insurer is not required to join the defense because the excess liability may never attach. (Iolab, supra, 15 F.3d at 1505.) This is because requiring the excess insurers to defend against a claim “would impose on the excess insurers the unnecessary cost of litigating a claim that may never trigger excess coverage and thereby would frustrate the policy adopted by the California courts.” (Id. See also, Signal Companies, Inc. v. Harbor Ins. Co. (1980) 27 Cal.3rd 359, 366 [rejecting argument that “once excess insurer has been given notice that the tort claim against its insured might invade excess coverage, and the amount of potential exposure is reasonably ascertainable, the excess insurer should be obligated to participate immediately in the defense” directly or indirectly because this would make the excess insurer a coinsurer with the primary insurer, contrary to the excess policy].)
Here, the Axis Policy states it will “pay those sums in excess of the ‘underlying insurance’ that you become legally obligated to pay as damages because of injury or damage to which this insurance applies, provided that the ‘underlying insurance’ also applies, or would have applied but for the exhaustion of the applicable Limits of Insurance.” ROA 232, Burleigh Decl., Ex. C, RJN, Ex. D, Axis Policy, §I.2 and Policy Declarations, Item 8 [“underlying insurance” means the ICSOP and Lexington policies]. Similarly, under the “Loss Payable” section:
a. Liability under this policy shall not apply unless and until the insured and the underlying insurer has become obligated to pay the amount of the "underlying insurance". Such obligation by the underlying insurer and us to pay damages shall have been previously determined by a final settlement or judgment after an actual trial or written agreement between the insured, the claimant or the claimant's legal representative, the underlying insurer and us.
Id. at V.8.a.
Additionally, Axis “shall not be called upon” to provide a defense to the insured and will pay necessary defense expenses “[i]f all ‘underlying insurance’ has been exhausted by payment of damages”. ROA 232, Burleigh Decl., Ex. C, RJN, Ex. D, Axis Policy, at §II.1 and 2. The Axis Policy also prohibits anyone from suing Axis on the policy “unless all of its terms have been fully complied with”. Id. at §V.7.b.
The Arch Policy states that Arch will pay on behalf of the insured “those amounts of loss exceeding the limits of liability of all underlying insurance as stated in Item 3. of the Declarations.” ROA 232, Burleigh Decl., Ex. C, RJN, Ex. A, Arch Policy § I(b) [“underlying insurance includes ISCOP, Lexington and Axis policies”] and Schedule of Underlying Insurance. Arch’s limits apply once the underlying limits are reduced or exhausted “solely by payment of loss” to which the Arch Policy applies. Id. § II(f). “Loss” is defined in the Arch Policy as “amounts paid in settlement of a claim or judgment for which an insured is legally liable. The amounts that are payable by us are subject to deductions for subrogation, salvages, and any recoveries available.” Id. § V(d).
The Complaint makes general allegations that City has paid $100 million of its own resources in investigating, defending, settling, and attempting to settle claims from the PAL/Uller Litigation, complied with all terms and conditions of its insurance policies, including satisfying any potentially applicable retentions or deductibles, and tendered its defense and indemnity to each of the defendant insurers, and that the defendant insurers owe it a defense and indemnity and have wrongfully withheld coverage. Complaint, ¶¶206-214.
The Complaint makes no attempt to distinguish amounts paid for settlements or as damages versus amounts paid for defense or investigation. The Complaint also makes no attempt to apportion any part of the $100 million to claims arising during the 2004 policy period.
As pointed out by Axis and Arch, in the prayer for declaratory judgment, the Complaint requests an order that states: “Once any applicable retention or deductibles and underlying insurance have been paid or otherwise satisfied, the City is immediately entitled to complete defense and indemnity against the PAL/Uller Litigation from Axis under the Axis 04/05 3D XS Policy up to its policy limits.” ROA 2, Complaint, ¶¶646.c and 647.c. This indicates that the necessary condition to trigger Axis’s and Arch’s duty to the City, i.e. exhaustion of the underlying insurance policies, has not yet to occurred.
Consequently, the allegations in the Complaint are insufficient to show the underlying policies have been reduced or exhausted by payment of damages because of injury or damage to which the Axis insurance applies or loss to which the Arch Insurance applies as required under the Axis and Arch Policies, respectively. (Reichert v. General Ins. Co. (1968) 68 Cal. 2d 822, 830 [A complaint for breach of contract must allege (1) the existence of a contract; (2) that plaintiff performed; (3) that defendant failed to do something that the contract required it to do; and (4) resulting damages].) The Complaint does not allege that all underlying insurance has
The demurrers to the breach of contract causes of action (51st and 52nd COA) are SUSTAINED WITH 21 days leave to amend.
Because the breach of contract claims fail for the reasons set forth above, the City’s bad faith claims also fail. (Love v. Fire Ins. Exch. (1990) 221 Cal. App. 3d 1136, 1153 [bad faith claim cannot be maintained unless policy benefits are due; cannot state s bad faith claim for delayed benefits when no benefits are due]; San Diego Housing Comm’n v. Indus. Indem. Co. (1998) 68 Cal.App.4th 526, 544 [“Where a breach of contract cannot be shown, there is no basis for a finding of breach of the covenant.”].)
The demurrers to the claims for breach of the covenant of good faith and fair dealing (93rd and 94th COA) are SUSTAINED WITH 21 days leave to amend.
Regarding the declaratory judgment causes of action (19th and 20th COA), a declaratory relief action against an excess insurer does not require a “reasonable probability of exhaustion” in order to maintain an action against the excess insurer. (Ludgate Ins. Co., Ltd. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 606.) As the Ludgate court explained:
All that Code of Civil Procedure section 1060 requires is that there be “actual controversy relating to the legal rights and duties of the respective parties.” Exhaustion of underlying limits, while necessary to entitle the insured to recover on the excess policy, is not necessary to create actual controversy. Exhaustion is merely an issue of proof and entitlement to recovery, not of pleading. A cardinal rule of pleading is that only the ultimate facts need be alleged. (Semole v. Sansoucie (1972) 28 Cal.App.3d 714, 719, 104 Cal.Rptr. 897.) In a declaratory relief action, the ultimate facts are those facts establishing the existence of an actual controversy. (Code Civ. Proc., § 1060.) Facts showing exhaustion of the underlying limits merely establish the insured's right to recovery, not whether an actual controversy exists between the parties.
(Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal. App. 4th 592, 606–07.)
For purposes of declaratory relief, the allegations in the Complaint are sufficient to show an actual controversy. The City has alleged facts that show a possibility of exhaustion, that they have tendered their defense to the insurance carriers and have been denied coverage.
The demurrers to the declaratory relief causes of action (19th and 20th COA) are OVERRULED.
Axis is ordered to give notice.