Judge Jon R. Takasugi, Case 21STCV12443 2023-03-29 Tentative Ruling

Gallagher’s motion for summary judgment is DENIED. Gallagher’s motion for summary adjudication is DENIED.

On 4/1/2021, Plaintiffs Caruso Affiliated Holdings, LLC, Caruso Management Company, Ltd., Americana Housing L.P., Americana Homes, LLC, Americana Homes II, LLC, and the Americana at Brand, LLC (collectively, Plaintiffs), filed suit against Allied World Assurance Company (U.S.) Inc., (AWAC) Endurance American Specialty Insurance Company, Endurance Assurance Corporation, Arthur J. Gallagher & Co. Insurance Brokers of California (Gallagher). On 1/10/2023, Plaintiffs filed a first amended complaint (FAC) alleging: (1) declaratory relief; (2) reformation; (3) negligence; (4) negligent misrepresentation; and (5) breach of fiduciary duty.

Now, Gallagher moves for summary judgment, or in the alternative, summary adjudication of Plaintiffs’ causes of action for professional negligence, breach of fiduciary duty, and negligent misrepresentation.

In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion. Objections to evidence that are not ruled on for purposes of the motion shall be preserved for appellate review.

In light of CCP 437c, subdivision (q), the Court overrules Gallagher’s objections Nos.1-3 and objections concerning Mr. Schulz’s declaration. The Court declines to rule on the remaining submitted objections.

Gallagher argues that Plaintiffs cannot establish their causes of action for professional negligence, breach of fiduciary duty, and negligent misrepresentation because they cannot show they suffered actual damages.

In order to prevail on a professional negligence claim, the insured must show more than breach of the broker’s duty of care. It must also prove that the breach of that duty caused actual loss or damages. (Valentine v. Membrila Ins. Services, Inc. (2004) 118 Cal.App.4th 462, 475.) “If the allegedly negligent conduct does not cause damage, it generates no cause of action in tort.” (Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 749-750.)

In Valentine v. Membrila Ins. Services, Inc. (2004) 118 Cal.App.4th 462, 464, an insurance broker negligently assisted a nightclub in procuring an insurance policy which included a broad exclusion for assault and battery. Based on this exclusion, the nightclub’s insurer refused to defend the nightclub in a lawsuit arising from a shooting. (Ibid.) Because it did not have insurance to defend itself, the nightclub entered into a stipulated judgment with the injured customer for $6 million, and assigned its rights against its insurer and broker to the customer who signed a covenant not to execute against the nightclub’s assets. (Id., at p. 466.) The customer, as the assignee of the nightclub, then sued the nightclub’s insurer and broker and settled with the nightclub’s insurer for $240,000.00, an amount in excess of the nightclub’s defense fees in the original lawsuit. (Id., at p. 467.) Based on this settlement, the trial court entered judgment for the insurance broker, finding the nightclub had not been damaged by the broker’s obvious breach of its duty. (Ibid.)

Here, Gallagher argues that Plaintiffs cannot assert they were damaged by Gallagher’s alleged failure to ensure that the 12- 13 Policy, 13-14 Policy, and the Sompo Operations Policies included a named insured endorsement including all Caruso entities. In support, it submitted evidence that:

- AWAC did not deny coverage for any claim under the 12-13 Policy or 13-14 Policy on the ground that the claim was made against a Caruso entity that was not a named insured. (SS ¶ 35.)

- AWAC defended and settled all claims asserted against all Caruso entities, not just claims against Caruso Management. (SS ¶¶ 24, 31, 36, 37.)

- AWAC paid a claim under the 12-13 Policy without first requiring that Caruso Management be named as a defendant. (SS ¶ 37.)

- AWAC contributed $1 million to the settlement of the Excelsior Action based on the AWAC Operations Policies. (SS ¶ 31.)

- AWAC has not received notice of any claim or potential claim under the 12-13 Policy or 13-14 Policy within the last four years. (SS ¶ 38.)

- Sompo did not deny coverage for any claim under the Sompo Operations Policies on the grounds that the claim was made against a Caruso entity that was not a named insured. (SS ¶¶ 39, 40.)

- Sompo paid a claim under the 17-18 Policy which was asserted against Caruso entities other than Caruso Management. (SS ¶ 41.)

- Sompo agreed to defend the Excelsior Action under the Sompo Operations Policies subject to a reservation of rights and satisfaction of the Self-Insured Retentions. (SS ¶ 21.)

- Sompo contributed $500,000 to the settlement of the Excelsior Action based on the Sompo Operations Policies. (SS ¶ 32.)

- Sompo has not received notice of any claim or potential claim under the 18-19 Policy or 19-20 Policy other than the Excelsior Action. (SS ¶ 42.)

- Caruso’s representatives are not aware of any pending claim under the 12-13 Policy, 13-14 Policy, or Sompo Operations Policies that was denied because the claim was asserted against a Caruso entity that was not a named insured. (SS ¶ 43.)

- Gallagher is not aware of any claim that was denied under the 12-13 Policy, 13-14 Policy, or the Sompo Operations Policies that was denied because the claim was asserted against a Caruso entity that was not a named insured. (SS ¶ 44.)

- Caruso was not required to pay any money to settle the Excelsior Action. (SS ¶¶ 33, 34.)

In opposition, Plaintiffs argue they are entitled to recover the attorney fees of their coverage counsel, the McLeod Law Group (also Caruso’s litigation counsel here), for both the Excelsior Action and this action, pursuant to Third Eye Blind v. Near North Entertainment Ins. Serv., LLC (2005) 127 Cal.App.4th 1311.

In Third Eye Blind, a music band retained an insurance broker to assist with the placement of insurance for the band and its members. (Id., at p. 1315.) The broker assisted the band in purchasing a general liability insurance policy but did not advise that the policy contained a “Field of Endorsement Business” Endorsement excluding coverage for claims of: (1) invasion, infringement or interference of the right to privacy or publicity; (2) copyright or trademark infringement; (3) defamation, except for claims arising out of a public appearance unrelated to the band’s professional entertainment work; (4) plagiarism, piracy or unfair competition regarding unauthorized use of others’ ideas or works; and (5) breach of contract regarding the band’s professional entertainment work. (Ibid.) While the policy was in effect, a former band member sued the band and its members for misappropriating the former member’s right of publicity and violating the Lanham Act by creating public confusion regarding the former member’s affiliation with the band. (Id., at p. 1315-1316.) The former member also sued the individual members of the band for trademark infringement. (Id., at p. 1316.) The band and its members tendered the complaint to their insurer, which denied coverage because the “Field of Endorsement Business” Endorsement excluded coverage for Lanham Act claims and claims alleging a violation of the former member’s right of publicity. (Id.)

After defending and settling the action with their own funds, the band and its members sued the insurer for unreasonably refusing to defend and indemnify the band and its members and, in the alternative, sued the insurance broker for negligence relating to the placement of the policy. (Ibid.) After determining the insurance company owed a duty to defend, the trial court granted the broker’s motion for judgment on the pleadings on the grounds that the broker’s alleged negligence had not caused damage. (Id., at p. 1317.) The Court of Appeal reversed based on the “tort of another” doctrine, i.e., the “principle that attorney fees incurred through instituting or defending an action as a direct result of the tort of another are recoverable damages”. (Id., at p.1326.) It ruled the band and its members could pursue a claim against the broker for attorney’s fees incurred in suing the insurer for its wrongful denial of coverage because those fees were allegedly incurred due to the broker’s negligent advice. (Id., at p. 1324-1325.) “Because they had no errors and omissions policy to rely on, appellants were required to litigate coverage with [insurer] as a direct result of respondents’ alleged negligence; thus, the attorneys’ fees and costs incurred in the coverage litigation may be recovered as damages if appellants prevail in their claims against respondents.” (Id., at p.1325.)

Here, Gallagher attempts to distinguish Third Eye Blind from the facts here, noting that Plaintiffs did not sue their insurer for wrongful denial of any insurance claim, and AWAC and Sompo ultimately defended and indemnified claims asserted against Caruso entities other than Caruso Management, the Caruso entity that purportedly was the only named insured. (SS ¶¶ 35-37, 39, 40, 41 43, and 44.) However, Plaintiffs submitted evidence that Caruso was initially denied coverage[1] and “only persuaded the insurers to reverse course through extensive negotiations and discussions, none of which would have been necessary if the policies had clearly identified all relevant Caruso entities as ‘Named Insureds.’” (Opp., 14: 24-26.) As such, contrary to Gallagher’s contention, Plaintiffs’ theory does not rely on merely speculative harm or a reservation of rights for future claims. Rather, Plaintiffs’ theory is based on fees incurred reversing an initial denial of coverage, and securing the defense and indemnity it ultimately obtained. As such, the facts here fit within the holding of Third Eye Blind. As the Court there noted, “[b]ecause [the band] did not have such a policy to provide clear coverage of the Cadogan suit, [they] were forced to assume their own defense, incurring attorney fees, costs and indemnity.” (Id. at p. 1319) (emphasis added). The fact that the ultimate coverage outcome was positive did not “preclude [the broker’s] potential liability because the broker’s “negligence caused [the insureds] to have to spend large sums in suing their insurer for coverage.” (Id. at p. 1323)

Applied here, Plaintiffs have submitted evidence that Gallagher “failed to alert” Caruso that the Named Insured issue “would give [AWAC and Sompo] a viable basis for refusing coverage.” (Id. at p. 1318.) Thus, like in Third Eye Blind, the policies Gallagher recommended did not “provide clear coverage” and failed to help Caruso “secure more direct, and certain, coverage” by including all relevant Caruso entities as named insureds. (Id. at p. 1319, 1322.) Because of that failure, Caruso was initially denied coverage and only persuaded the insurers to reverse course through extensive negotiations and discussions, none of which would have been necessary if the policies had clearly identified all relevant Caruso entities as “Named Insureds.” Moreover, during the insurers’ intransigence, Caruso “suffered the foreseeable harm of having to defend a lawsuit without adequate insurance coverage.” (Id. at p.1320.) Hence, the damages here, just like in Third Eye Blind, include the attorneys’ fees and costs Caruso had to expend because of the lack of clear coverage. (Id. at p.1325.) The fact that the ultimate coverage outcome was positive does not preclude recovery of attorney fees. (Id. at p. 1323.)

Gallagher argues that Plaintiffs’ breach of fiduciary duty claim fails because there is no fiduciary relationship between an insurance broker and its client and there are no damages proximately caused by the alleged breach of such duty.

“Insurance brokers owe a limited duty to their clients.” (Pacific Rim Mech. Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283; Jones v. Grewe (1987) 189 Cal.App.3d 950.) The court in Jones explained the limited duties normally owed to an insured as “Ordinarily, an insurance agent assumes only those duties normally found in any agency relationship. This includes the obligation to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.” (Id., at p. 954.)

Here, Gallagher argues that Plaintiffs have no basis for asserting that Gallagher owed it a fiduciary duty because Gallagher was an insurance broker that assisted in the placement of insurance policies, and there is no allegation in the FAC or in discovery that Gallagher was handling Caruso’s money. Gallagher also argues that Plaintiffs cannot show Gallagher’s alleged breach caused any damage based on the evidence set forth above.

In opposition, Plaintiffs argue that Gallagher misrepresented the scope of the coverage because it failed to discuss the risks associated with the Named Insured Issue with Caruso, and held itself out as a specialist in the retail and hospitality fields which cover Caruso’s core operations. (RSS ¶¶ 179-180.) Based on this conduct, Plaintiffs argue that Gallagher assumed a fiduciary care of duty through its actions.

In Fitzpatrick v. Hayes (1997) 57 Cal.App.4th 916, 927, the Court found an insurance broker, in certain situations, may owe the insured special duties beyond the general duty of reasonable care where “a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided (as in Free, Desai and Nacsa), (b) there is a request or inquiry by the insured for a particular type or extent of coverage (as in Westrick), or (c) the agent assumes an additional duty by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured (as in Kurtz).”

Here, there are triable issues as to the nature of the relationship between Gallagher and Caruso, and whether or not Gallagher misrepresented the scope of coverage. As such, whether or not a fiduciary duty exists is not properly decided at this stage. (See Third Eye Blind, supra, 127 Cal.App.4th at 1319, fn.3) (noting that whether insurance brokers “assumed a special duty of care based on their purported expertise” raised “factual questions about the nature of the parties’ relationships”).

Gallagher argues that Plaintiffs cannot establish a claim for negligent misrepresentation because they cannot show it made any misrepresentation about a past or existing fact, and cannot show they suffered any actual damages.

In opposition, Plaintiffs submitted evidence that “Gallagher made multiple misrepresentations, many repeated across multiple policy periods, all to the effect that all the desired entities, trusts and individuals would be covered, even though only Caruso Management Company was listed as the named insured.” (Opp., 17:27-18:2; RSS ¶¶ 198-224.) For example, Plaintiffs submitted testimony such as:

Q: [W]ould it be fair to say that in your communications with Caruso around the 12-13 policy and this new AWAC policy, that you were advising them that all of the entities listed in the insured schedule, named insured schedule, were going to be insureds under that Allied World policy?

Q: And would that have been true of your communications with Caruso not just for the 12-13 but for all the policies from 2012 through 2020?

Moreover, Plaintiffs note that these alleged misrepresentations concern the terms of coverage of policies that Gallagher secured. As such, the misrepresentations are based on alleged statements of fact, not matters of opinion or some future promise to perform. Accordingly, the facts in cases cited by Gallagher, such as Neu-Visions Sports v. Soren/McAdama/Bartells (2000) 86 Cal.App.4th 303, 307, are distinguishable from the facts here.

Based on the foregoing, Gallagher’s motion for summary judgment is denied. Gallagher’s motion for summary adjudication is denied.

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org. If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative. If all parties to a motion submit, the court will adopt this tentative as the final order. If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar.

Due to Covid-19, the court is strongly discouraging in-person appearances. Parties, counsel, and court reporters present are subject to temperature checks and health inquiries, and will be denied entry if admission could create a public health risk. The court encourages the parties wishing to argue to appear via L.A. Court Connect. For more information, please contact the court clerk at (213) 633-0517. Your understanding during these difficult times is appreciated.

[1] In reply, Gallagher strongly disputes that coverage was initially denied. The Court concludes a triable issue of material fact exists as to whether or not the insurers initial response constituted a denial of coverage, and whether or not it was only through Plaintiffs’ intervention and negotiation that coverage was secured.