Judge: Gregory Keosian, Case: 23STCV00686, Date: 2023-08-28 Tentative Ruling

Case Number: 23STCV00686    Hearing Date: August 28, 2023    Dept: 61

Defendants Pure Programs, LLC and Privilege Underwriters, Inc.’s Demurrer and Motion to Strike are SUSTAINED with leave to amend as to the second, fourth, eighth, eleventh, and twelfth causes of action. The motion to strike is GRANTED with 30 days leave to amend as to the allegations regarding the existence of a joint venture or partnership and the prayer for punitive damages.

Defendants USI Insurance Services, LLC, John Lasalle, Tawni Hylen, Eric Saunders, Samuel Vazquez Altero, Marylin Cartrett, and Clyde Nelson’s Demurrer to the First Amended Complaint is SUSTAINED with 30 days leave to amend as to the eighth and eleventh causes of action, and OVERRULED as to the ninth cause of action.

Defendant to give notice.

I.                   DEMURRER

A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Pro., §§ 430.30, et seq.) In particular, as is relevant here, a court should sustain a demurrer if a complaint does not allege facts that are legally sufficient to constitute a cause of action. (See id. § 430.10, subd. (e).) As the Supreme Court held in Blank v. Kirwan (1985) 39 Cal.3d 311: “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Id. at p. 318; see also Hahn. v. Mirda (2007) 147 Cal.App.4th 740, 747 [“A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. [Citation.]”)

“In determining whether the complaint is sufficient as against the demurrer … if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated.”  (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.) Such demurrers “are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Insurance Agency, Inc. (2017) 14 Cal.App.5th 841, 848.)

A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.) The demurrer also may be sustained without leave to amend where the nature of the defects and previous unsuccessful attempts to plead render it probable plaintiff cannot state a cause of action. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 967.)

A.    Pure Demurrer

Defendants Pure Programs, LLC and Privilege Underwriters, Inc. (collectively Pure) demurrer to the First Amended Complaint (FAC) of Plaintiffs Vernon Murray and Sandra Murray (Plaintiffs) on the following grounds. They claim that they cannot be liable on claims for breach of contract and breach of the covenant of fair dealing because they were not parties to the insurance contract with Defendant Indian Harbor at issue, and since Plaintiffs’ allegations of joint enterprise and partnership are ill-pleaded and contrary to established law holding that insurance administrators, as agents of the insurer, cannot be liable for conspiracy to breach an insurance contract. (Demurrer at pp. 5–9.) Pure further argues that the causes of action for fraud, concealment, and negligent misrepresentation are not pleaded with specificity, are premised on representations made by Indian Harbor rather than themselves, and finally fail to allege facts establishing a duty to disclose the information that Plaintiffs contend ought to have been revealed to them. (Demurrer at pp. 10–14.)[1]

Plaintiffs in opposition contend that Pure operated as a surplus lines broker, who ought to have acted on behalf of the insureds (Plaintiffs), rather than the insurers. (Opposition at p. 7.) Plaintiffs argue that Pure engaged in a number of functions, including claims administration and underwriting of the policy at issue, that it was legally prohibited from engaging in pursuant to guidelines promulgated by the California Department of Insurance. (Opposition at pp. 7–9.) Plaintiffs further contend that partners in a partnership, as Pure is alleged to have been with Indian Harbor, are liable for the fraud and liabilities of a copartner committed or incurred in the course of the partnership. (Opposition at pp. 9–10.) Plaintiffs further argue that negligence claims may be asserted against insurance adjusters, and particularly against brokers like Pure, who represent insureds. (Opposition at pp. 11–12.) Thus Pure may be liable for the failure to disclose both the existence of statutory insurance coverage and its conflicted duties with regard to Defendant Indian Harbor. (Opposition at pp. 13–16.)

Nonparties to an insurance contract cannot be liable for either breach of that contract or for breach of the covenant of good faith and fair dealing. (See Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576.) “California courts have refused to extend liability for bad faith, the predominant insurer tort, to agents and employees of the insurer.” (Sanchez v. Lindsey Morden Claims Services, Inc. (1999) 72 Cal.App.4th 249, 254–255.)

Plaintiffs do not seek to establish liability against Pure on the basis of their agency relationship with Indian Harbor, but rather allege that Pure may be liable on contract theories as “an actual undisclosed partner with insurance companies such as Harbor, and thus can have partner/joint venture liability itself as an insurer on policies issued by entities such as Indian Harbor.” (FAC ¶ 10.) Because “one incident of a partnership [or joint venture] is that all partners are jointly and severally liable for partnership obligations,” Plaintiffs argue that contract theories may be pleaded against Pure as a joint venture. (Opposition at pp. 9–10, quoting Myrick v. Mastagni (2010) 185 Cal.App.4th 1082, 1091.)

There are three elements to show the existence of a joint venture: “(1) joint interest in a common business; (2) with an understanding to share profits and losses; and (3) a right to joint control.” (Jacobs v. Locatelli (2017) 8 Cal.App.5th 317, 328 fn. 10.) The allegations in support of the existence of a joint venture are that Pure was acting as an underwriter, program manager, and claims administrator for Indian Harbor; that Pure’s website describes itself as “partnering” with many “insurer partners” to “join[] together to offer insurance solutions to high-net-worth homewoners”; that Pure prepared the policy forms for Indian Harbor; and that Pure shared in “the policy payments that Plaintiffs made.” (FAC ¶¶ 10, 53.)

The court has little basis to believe, as Pure contends, that joint venture liability is unavailable to plaintiffs suing upon an insurance contract. The authority Pure relies upon holds only for the general proposition that agents of an insurer, as with agents generally, cannot be held liable on contractual theories for conspiring with their principal to breach the contract under the “agent’s immunity rule.” (See Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 512 fn. 4 [“Agents and employees of a corporation cannot conspire with their corporate principal or employer where they act in their official capacities on behalf of the corporation and not as individuals for their individual advantage.”].) There is little reason to believe that well-pleaded allegations of partnership or joint enterprise could not establish liability alongside insurers as well as with other parties to the enterprise.

The allegations here, however, do not allege a joint enterprise or partnership. They rather allege that Pure performed myriad claims administration and underwriting functions for Indian Harbor, used the word “partnership” on its website, and on information and belief took a share of Plaintiffs’ policy payments. Plaintiffs do not allege a joint interest in a common business, the sharing of profits and losses, and a right to joint control. Thus the demurrer is properly SUSTAINED as to the second and fourth causes of action based on contractual theories.

This leaves the remaining causes of action based on fraud and concealment. The eighth cause of action alleges that all Indian Harbor defendants negligently misrepresented that the Indian Harbor insurance policy “contained no applicable workers’ compensation coverage.” (FAC ¶ 98.) The eleventh cause of action for concealment alleges that all defendants had a duty to inform Plaintiffs of statutory worker’s compensation coverage under the applicable policies, but failed to inform Plaintiffs of the existence of this coverage. (FAC ¶ 107.) And the twelfth cause of action alleges that Pure held itself out solely as a broker, and did not disclose their partnership with Indian Harbor, that they were underwriting the Indian Harbor policy, and that they were adjusting and managing any claims made by Plaintiff on the policy. (FAC ¶ 112.)

The elements of negligent misrepresentation are “(1) the misrepresentation of a past or existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to induce another's reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.” (National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc. (2009) 171 Cal.App.4th 35, 50.) “Fraud and negligent misrepresentation must be pleaded with particularity and by facts that show how, when, where, to whom, and by what means the representations were tendered.” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 185 fn. 14, internal quotation marks omitted.)

Here, Pure argues that the claim for negligent misrepresentation is merely a repetition of the contract causes of action, attempting to impose liability upon a third party adjuster/administrator for agreeing with, and failing to contradict, the policy position of the insurer, Indian Harbor. (Demurrer at pp. 11–12.) But this argument contradicts applicable authority. “[A] cause of action for negligent misrepresentation can lie against an insurance adjuster,” including where the adjuster misrepresents the provisions of the applicable policy. (See Bock v. Hansen (2014) 225 Cal.App.4th 215, 231.) Where the adjuster’s representations are in conformity with the insurer’s liability is still possible: “An agent or employee is always liable for his or her own torts, whether the principal is liable or not, and in spite of the fact that the agent acts in accordance with the principal's directions.” (Id. at p. 230.)

However, the claim against Pure is not pleaded with the requisite particularity. No representations are alleged specifically against Pure; the only representations for which any detail is supplied are those made by Indian Harbor specifically. (FAC ¶ 49.) The other allegations against Pure occupy an indefinite timeframe and are attributed to Pure either by indefinite means or else by deficient allegations of a joint venture between Pure and Indian Harbor, discussed above. Indeed, it is unclear from the FAC if Pure is alleged to have made any representations to Plaintiffs, or to have failed to correct representations made by its alleged joint venturer. The demurrer is therefore SUSTAINED with leave to amend as to the eighth cause of action.

By the same token, Plaintiffs have also failed to allege fraudulent concealment against Pure in the eleventh cause of action. Concealment of a material fact yields liability where the concealment is done “by a defendant with a duty to disclose the fact to the plaintiff.” (Hambrick v. Healthcare Partners Medical Group, Inc. (2015) 238 Cal.App.4th 124, 162.) There are “four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.” (Heliotis v. Schuman (1986) 181 Cal.App.3d 646, 651.) Fraudulent concealment claims, as with all fraud claims, must be pleaded with particularity. (See Dhital v. Nissan North America, Inc. (2022) 84 Cal.App.5th 828, 843–844.)

Plaintiffs here allege no facts establishing a duty to disclose. They allege no fiduciary duty, exclusive knowledge, active concealment, or partial representation, save by conclusory invocation to the foregoing terms, without elaboration. (See FAC ¶¶ 33 [“duty to disclose”]; ¶ 112 [defendants “actively concealed” the alleged facts].)

Plaintiffs in opposition invoke the duties owed by a broker, which Pure allegedly was. (Opposition at pp. 13–14.) But insurance brokers owe only “a limited duty to their clients,” namely “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.” (Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283.) The authorities that Plaintiffs cite in their favor are for the proposition that brokers may assume greater duties of disclosure in particular circumstances, such as by partial misrepresentation or a specific inquiry by the insured. (Opposition at pp. 13–15, citing Paper Savers, Inc. v. Nacsa (1996) 51 Cal.App.4th 1090.) Plaintiff allege w no facts supporting the existence of any of these circumstances against Pure here.

Moreover, Plaintiffs do not allege their reliance upon the alleged concealment that forms the basis for their twelfth cause of action — namely, that Pure concealed their relationship with Defendant Indian Harbor.  Rather, the only reliance pleaded is that of Defendants — that their undisclosed relationship enabled them to later misrepresent the scope of coverage. (FAC ¶ 113.) Plaintiffs allege for themselves only reliance upon later representations as to the unavailability of worker’s compensation coverage. (FAC ¶ 114.)

Accordingly, the demurrer is SUSTAINED with leave to amend as to the second, fourth, eighth, eleventh, and twelfth causes of action.

B.     USI Demurrer

The demurrer of Defendants USI Insurance Services, LLC, John Lasalle, Tawni Hylen, Eric Saunders, Samuel Vazquez Altero, Marylin Cartrett and Clyde Nelson (collectively USI) mimics the demurrer of Pure, analyzed above, with respect to its arguments directed toward the eighth and eleventh causes of action for negligent misrepresentation and fraudulent concealment, and these arguments are alike in merit. Plaintiffs’ claims sounding in misrepresentation and concealment are not pleaded with specificity as to the USI defendants, either with respect to the who-what-where-when of any alleged representation, or with regard to the facts establishing the alleged duty to disclose. The demurrer is therefore SUSTAINED as to the eighth and twelfth causes of action, with leave to amend.

But USI also demurrers to the eighth and ninth cause of action, on the grounds that the two-year statute of limitations applicable to claims of professional negligence bars claims based on negligence and negligent misrepresentation. (Demurrer at p. 8, citing Code Civ. Proc. § 339(1).) “A cause of action for professional negligence does not accrue until the plaintiff (1) sustains damage and (2) discovers, or should discover, the negligence.” (Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, 1161.) Defendant argues that Plaintiffs suffered damages, and should have discovered the alleged negligence, at least by May 2020 when the injured worker filed suit against them, and perhaps even more closely following the accident in November 2019, with the onset of an OSHA investigation. (Demurrer at p. 9.) USI thus argues that the present suit, filed in January 2023, is untimely. (Demurrer at pp. 9–10.)

Plaintiffs in opposition argue that damages did not begin to accrue on the present claims until after they discovered the existence of probable statutory coverage under Insurance Code § 11590 in the first quarter of 2021. (Opposition at p. 11.) Plaintiffs argue that the damages sought in the present action are not for USI’s failure to secure worker’s compensation coverage, but rather for their failure, following the accident, to inform Plaintiff of the availability of such coverage after Plaintiff discovered it. (Ibid.)

USI is correct in its analysis on damages. The FAC alleges that Defendants had a duty to disclose the availability of statutory coverage with the onset of the underlying suit, based on the centrality of the worker’s compensation issue to the case. (FAC ¶¶ 33–34.) The FAC indeed alleges that Defendants were aware of the potential applicability of statutory insurance coverage in 2019. (FAC ¶ 36.) Plaintiffs’ contention that it only began to incur damages resulting from the failure to disclose statutory coverage in the first quarter of 2021 is therefore unsupported. (FAC ¶ 61.)

A cause of action for professional negligence does not accrue upon damages alone, but accrues upon the occurrence of damages “and” discovery of the negligence, or at least when discovery ought to have been made. (SEe Hydro-Mill Co., Inc., supra, 115 Cal.App.4th at p. 1161.) Here, it is alleged that Plaintiffs had no reason to suspect the existence of Insurance Code § 11590 until they retained their own counsel in the first quarter of 2021. (FAC ¶ 35.) This allegation is further supported by the allegation that Plaintiffs’ insurers “constantly told” Plaintiffs that there was no applicable worker’s compensation coverage. (FAC ¶ 34.) This delayed discovery is thus adequately supported at the pleading stage by applicable allegations.

The demurrer is therefore SUSTAINED with leave to amend as to the eighth and eleventh causes of action, and OVERRULED as to the ninth cause of action.

II.                MOTION TO STRIKE

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 thereof. (Code Civ. Proc., § 435(b)(1)). The notice of motion to strike a portion of a pleading shall quote in full the portions sought to be stricken except where the motion is to strike an entire paragraph, cause of action, count or defense. (California Rules of Court Rule 3.1322.)

The grounds for a motion to strike shall appear on the face of the challenged pleading or form any matter of which the court is required to take judicial notice. (Code Civ. Proc., § 437(a)). The court then may strike out any irrelevant, false, or improper matter inserted in any pleading and strike out 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. (Code Civ. Proc., § 436.) When the defect which justifies striking a complaint is capable of cure, the court should allow leave to amend. (Perlman v. Municipal Court (1979) 99 Cal.App.3d 568, 575.)

Defendant Pure moves to strike allegations of a joint venture between itself and Defendant Indian Harbor, as well Plaintiffs’ prayer for punitive damages. (Motion at pp. 6–10.)

Punitive damages are allowed in non-contract cases when a defendant is guilty of “oppression, fraud, or malice . . . .” (Civ. Code § 3294.) The terms are defined as:

“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.

“Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.

“Fraud” means an 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.

(Civ. Code § 3294, subd. (c).)

Something more than the mere commission of a tort is always required for punitive damages. (Taylor v. Superior Court (1979) 24 Cal.3d 890, 894.) Proof of negligence, gross negligence, or recklessness is insufficient to warrant an award of punitive damages. (Dawes v. Sup.Ct. (Mardian) (1980) 111 Cal.App.3d 82, 88–89.) Punitive damages may be recovered in an action for negligence or other nonintentional torts if the plaintiff pleads and proves that the defendant acted with the state of mind described as “conscious disregard” of the potential dangers to others. (Pfeifer v. John Crane, Inc. (2013) 220 Cal.App.4th 1270, 1299.) When malice is based on a defendant’s conscious disregard of Plaintiff’s rights, the conduct must be both despicable and willful. (College Hospital v. Superior Court (1994) 8 Cal.4th 794, 713 (“College Hospital”).)

This court addresses the insufficiency of Plaintiffs’ joint-venture allegations in its ruling on Pure’s demurrer, and the motion to strike such allegations is GRANTED with leave to amend. Likewise, the allegations of bad faith and fraud upon which Plaintiffs base their prayer for punitive damages against Pure are deficient.

The motion to strike is therefore GRANTED with leave to amend as to the FAC’s joint venture and partnership allegations applicable to Pure, and as to the prayer for punitive damages.