Judge: Joseph Lipner, Case: 23STCV23567, Date: 2024-12-03 Tentative Ruling

Case Number: 23STCV23567    Hearing Date: December 3, 2024    Dept: 72

SUPERIOR COURT OF CALIFORNIA

COUNTY OF LOS ANGELES

DEPARTMENT 72

TENTATIVE RULING

Defendants Ohio Security Insurance Company and Ohio Casualty Insurance Company (the “Ohio Insurers”) demur to Plaintiff’s third amended complaint.

The Court OVERRULES the Ohio Insurers’ demurrer to Plaintiff’s first, second, and fifth causes of action.

The Court SUSTAINS WITHOUT LEAVE TO AMEND the Ohio Insurers’  demurrer to Plaintiff’s third and fourth causes of action.

Background

            Plaintiff alleges the following facts in his TAC, which are accepted as true for purposes of demurrer:

            Underlying Dispute

            This case concerns an insurance dispute. On January 9, 2016, the “the Ohio Insurers” issued a commercial general liability insurance policy (the “Policy”) to Sapphire Bakery Company, LLC (“Sapphire”). Sapphire is the named insured under the Policy. Under the Policy, the named insured can extend insurance coverage to any person or organization by means of a written contract or written agreement.

Plaintiff Kevin Laughlin (“Lauglin) runs Eagle Mist Corporation d/b/a Osagai International (“Eagle Mist”), which invents and formulates food products. In the summer of 2015, Laughlin was asked to re-formulate a protein bar that he was underselling. Laughlin and Sapphire agreed that Sapphire would manufacture the bars.

Before production began, Laughlin contacted the CEO of Sapphire and asked that Laughlin and Eagle Mist be added as additional insureds under the Policy. Sapphire provided Eagle Mist with a certificate of liability insurance (the “COI”). As a federal court later found, Laughlin reasonably, but incorrectly, believed that Laughlin and Eagle Mist were additional insureds under the Policy.

In August 2016, litigation commenced against Eagle Mist, Sapphire, and other entities involved in the production of the protein bars (the “Underlying Action”).

Laughlin contacted the Ohio Insurers to tender the defense of the Underlying Action and confirm coverage under the Policy. In October 2016, the Ohio Insurers confirmed that Laughlin and Eagle Mist were covered under the Policy and that they would provide coverage for Laughlin’s defense in the Underlying Action. From October 2016 through November 2019, Laughlin received numerous coverage position letters from the Ohio Insurers where they maintained their coverage position. The Ohio Insurers paid all of Laughlin’s legal bills from 2016 through 2019.

            The Federal Action

On November 5, 2019, a month before trial in the Underlying Action, the Ohio Insurers filed a lawsuit in the Eastern District of Missouri (the “Federal Action”). The Ohio Insurers sought declaratory relief absolving them of any continuing duty to defend Laughlin in the Underlying Action. The Ohio Insurers also raised a claim for unjust enrichment, seeking repayment from Laughlin of the defense costs they expended in his defense in the Underlying Action. Laughlin raised counterclaims for (1) bad faith; and (2) declaratory relief.

The Ohio Insurers subsequently refused to pay for any more of Laughlin’s defense costs in the Underlying Action. A judgment was entered against Laughlin in the amount of $51,990.30 in the Underlying Action. The Ohio Insurers continued to defend Sapphire throughout the entire action.

The federal court granted summary judgment in the Ohio Insurers’ favor on the declaratory relief claims and on Laughlin’s and Eagle Mist’s bad faith claim. (Ohio Casualty Insurance Company v. Eagle Mist Corporation (E.D. Mo., Dec. 22, 2021, No. 4:19-CV-2974-MTS) 2021 WL 6062520; (Ohio Casualty Insurance Company v. Eagle Mist Corporation (E.D. Mo., Oct. 4, 2021, No. 4:19-CV-2974-MTS) 2021 WL 4523146.)

Following a bench trial, the federal court issued a judgment for Laughlin and Eagle Mist on the Ohio Insurers’ unjust enrichment claim.

The federal court found that, although Laughlin was not actually an additional insured because no contract existed that made him an additional insured, Laughlin reasonably believed that he was covered by the Policy. (Ohio Casualty Insurance Company v. Eagle Mist Corporation (E.D. Mo., Dec. 16, 2022, No. 4:19-CV-2974-MTS) 2022 WL 17735530, at *5.)

The federal court explained:

“[Laughlin and Eagle Mist] had a good faith basis to believe they were Additional Insureds under the Policy. [Laughlin and Eagle Mist] reasonably believed the COI was valid and conferred coverage. Several written and verbal communications between Laughlin/Sapphire, Laughlin/[the Ohio Insurers], and Laughlin/Liberty Mutual show the same. The Court also notes that a single mention in a twenty-five-plus-page boilerplate reservation of rights letter, without any further action by [the Ohio Insurers] for three years, was insufficient to put [Laughlin and Eagle Mist] on notice they might not be covered under the Policy .... [The Ohio Insurers] assumed defense and investigated their coverage position in 2016 (notably, based on the same Policy and same documents reviewed in 2019 relied on to disclaim coverage), [the Ohio Insurers] sent [Laughlin and Eagle Mist] coverage letters in 2017, 2018, and 2019, and [the Ohio Insurers] continuously paid [Laughlin’s and Eagle Mist’s] legal fees over a three-year period. [The Ohio Insurers] had the ability to investigate whether [Laughlin and Eagle Mist] were covered under their own Policy and to clarify their coverage position to [Laughlin and Eagle Mist]. Instead of doing so, for more than three years, [the Ohio Insurers] did not notify [Laughlin and Eagle Mist] of their lack of coverage, [the Ohio Insurers] paid [Laughlin and Eagle Mist’s] legal bills without involving [Laughlin and Eagle Mist], and [the Ohio Insurers] continued to defend [Laughlin and Eagle Mist] without so much as a peep of this potential coverage issue. [The Ohio Insurers] offered no evidence to justify, what the Court considers, inconsistent conduct.”

(Ibid.)

The federal court further found:

“[T]he evidence here shows, undisputedly, [the Ohio Insurers] belatedly asserted their coverage position when they previously knew of their lack of coverage and took no steps to enforce their coverage position until [Laughlin and Eagle Mist] would be, in good faith, most disadvantaged by [the Ohio Insurers’] change in position. [The Ohio Insurers] failure to provide evidence concerning their coverage decision is especially pronounced here given that [Laughlin and Eagle Mist] offered evidence that [the Ohio Insurers’] decision to disclaim coverage in 2019 may have been for nefarious purposes. While the Court stops short of granting [Laughlin’s and Eagle Mist’s] unclean hands defense, the Court notes that [Laughlin and Eagle Mist], at the very least, offered testimony that [the Ohio Insurers’] change in coverage position was ‘strategic’ and the result of privileged communications with lawyers.”

(Id., at 6.)

            Procedural History

Laughlin filed this case on September 28, 2023 against Liberty Mutual. Liberty Mutual has since been dismissed from this case. The remaining Defendants are now the two Ohio Insurers.

The First Amended Complaint (“FAC”) raised claims for (1) breach of covenant of good faith and fair dealing; (2) malicious prosecution; and (3) unfair competition.

On April 2, 2024, the Court sustained the Ohio Insurers’ demurrer as to the breach of the covenant of good faith and fair dealing and malicious prosecution claims without leave to amend. The Court determined that Laughlin is precluded from relitigating whether he was an insured under the Policy because the federal court determined, in a final judgment on the merits, that Laughlin was not.

The Court sustained the demurrer with leave to amend with respect to the unfair competition claim. The Court additionally granted Laughlin’s request for leave to amend to add to the complaint claims for negligent misrepresentation, constructive fraud and/or abuse of process.

On April 22, 2024, Laughlin filed his second amended complaint (“SAC”). The SAC asserted claims for (1) fraud (concealment); (2) abuse of process; (3) unfair competition; (4) constructive fraud; (5) intentional infliction of emotional distress (“IIED”); (6) negligence; and (7) promissory estoppel. Laughlin had not been granted leave to amend to add claims 1, 5, 6, or 7.

On July 9, 2024, the Court sustained the Ohio Insurers’ demurrer to the first, second, fifth, sixth, and seventh claims without leave to amend. The Court sustained the demurrer to the third and fourth claims with leave to amend. The Court ordered that the time to amend would be tolled if Lauglin filed a motion for leave to amend to add claims for concealment, IIED, negligence, or promissory estoppel.

On July 29, 2024, Laughlin filed his motion for leave to amend to add the foregoing claims. The Court granted Laughlin’s motion.

On September 6, 2024, Laughlin filed his now-operative third amended complaint (“TAC”). The TAC asserts claims for:

            (1) fraud by concealment,

            (2) unfair competition,

            (3) intentional infliction of emotional distress,

            (4) negligence, and

            (5) promissory estoppel.

On October 8, 2024, the Ohio Insurers demurred to the TAC. On November 18, 2024, Laughlin filed his opposition.   On November 22, 2024, the Ohio Insurers filed a reply.

Request for Judicial Notice

            The Ohio Insurers request judicial notice of eight (8) documents filed in the Federal Action. The Court grants the request.

Legal Standard

Where pleadings are defective, a party may raise the defect by way of a demurrer. (Coyne v. Krempels (1950) 36 Cal.2d 257, 262.) A demurrer for sufficiency tests whether the complaint alleges facts sufficient to constitute a cause of action. (Cal. Code Civ. Proc. § 430.10; Young v. Gannon (2002) 97 Cal.App.4th 209, 220.)

When considering a demurrer, a court reads the allegations stated in the challenged pleading liberally and in context, and “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) Put differently: for purposes of demurrer, the court treats all facts alleged – but only the facts alleged – in the complaint as true. (Picton v. Anderson Union High School District (1996) 50 Cal.App.4th 726, 732.) “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 v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Meeting and Conference

“Before filing a demurrer ... , the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” (Code Civ. Proc., § 430.41(a).)

Counsel for the Ohio Insurers filed a declaration that satisfies section 430.41. (See Ghalyuman Decl., ¶ 3.)    

Discussion

            Plaintiff’s claims are not barred by claim or issue preclusion.

Defendants argue Plaintiffs’ claims are barred by res judicata, either via issue or claim preclusion, because they were already resolved by the federal court.

“The tenets of res judicata prescribe the preclusive effect of a prior final judgment on the merits. [Citation.] The doctrine has two distinct aspects: claim preclusion and issue preclusion.  . . . Claim preclusion, often referred to as res judicata, provides that ‘a valid, final judgment on the merits precludes parties or their privies from relitigating the same ‘cause of action’ in a subsequent suit.’ [Citation.] Issue preclusion, or collateral estoppel, ‘ “precludes relitigation of issues argued and decided in prior proceedings.” ’ [Citation.]” (City of Oakland v. Oakland Police & Fire Retirement System (2014) 224 Cal.App.4th 210, 227-228 (City of Oakland).)

As to claim preclusion: the federal court did not decide the claims Plaintiff asserts here. The Court found that Defendants had no duty to defend Plaintiff under the Policy. None of Plaintiff’s claims rely on that contractual duty. The federal court also found Plaintiff could not assert a “bad faith” claim against Defendants – Plaintiff asserts no “bad faith” claim here.

The Ohio Insurers argue that Laughlin’s claims are the same because they seek redress of the same harm, and are therefore based on the same “primary right.” (Dem., 6:23-7:8.) The Court disagrees. “When two actions seek compensation for the same harm, they generally involve the same primary right.” (Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 798, italics added.) But this is not always the case. In order to identify an “injury” for which a plaintiff seeks redress, the Court examines “the primary right” and “the corresponding duty”. (Ibid.) Whereas the Federal Action was premised on Laughlin’s alleged rights related to the insurance contract, this action is premised on his right not to suffer fraud. Whereas the prior action asserted the Ohio Insurers breached their duty to responsibly handle claims, this action asserts it breached its ordinary common-law duty not to commit fraud.

Lincoln Property Co., N.C., Inc. v. Travelers Indemnity Co. (2006) 137 Cal.App.4th 905 does not compel a different result. As the Ohio Insurers acknowledge, in that case an insured brought two separate actions against its insurer. (See Dem., 7:9-8:4.) All its claims relied on the insurer’s duty as insurer. Here, on the other hand, the federal court determined the Ohio Insurers had no such duty, and Laughlin has filed a separate suit asserting his general right not to suffer fraud.

On similar grounds, Laughlin’s claims are not barred by issue preclusion. Issue preclusion applies to “ ‘ “issues argued and decided” ’ ”. (City of Oakland, supra, 224 Cal.App.4th, at p. 228.) The federal court expressly noted that it could not decide the issues underlying Laughlin’s bad faith claim because there was no such action cognizable under Missouri law. “Res judicata bars the litigation not only of issues that were actually litigated in the prior proceeding, but also issues that could have been litigated in that proceeding.” (Franceschi v. Franchise Tax Bd. (2016) 1 Cal.App.5th 247, 257.) The issues Laughlin raises here fall into neither category.

Applying the equitable doctrine of preclusion here would not serve the doctrine’s purpose. “Application of the doctrine of res judicata ‘is intended to preserve the integrity of the judicial system, promote judicial economy, and protect litigants from harassment by vexatious litigation.’ [Citation.] It ‘rests upon the sound policy of limiting litigation by preventing a party who has had one fair adversary hearing on an issue from again drawing it into controversy and subjecting the other party to further expense in its reexamination.’ [Citation.]” (City of Oakland, supra, 224 Cal.App.4th, at p. 228.) Plaintiff is not engaged in vexatious litigation to avoid a prior result on the merits. Plaintiff’s claim in federal court failed because that Court was the wrong forum and not empowered to apply the relevant law. He now seeks redress in a forum that recognizes his claims. Defendants seek to preclude Plaintiff from litigating his claims at all, not from re-litigating them.

Laughlin’s claims are not precluded.

            First Cause of Action for Fraud by Concealment

The elements of fraud based on concealment are: “(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.) Absent a fiduciary duty, there are at least three instances in which a cause of action for non-disclosure of material facts may arise: “(1) the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead; (2) the facts are known or accessible only to defendant, and defendant knows they are not known to or reasonably discoverable by the Plaintiffs; (3) the defendant actively conceals discovery from the Plaintiffs.” (Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 294.)

            The Ohio Insurers contend that Laughlin has not pled a duty to disclose, a failure to disclose a material fact, or any intent to defraud, reliance, or damages. Not so. The Ohio Insurers do not have to be Laughlin’s insurer to have a duty to disclose. The duty can arise when a defendant makes representations and does not disclose material qualifying facts – such as the representation, suggested by the federal court and reiterated in the TAC, that the Ohio Insurers would continue representing Laughlin in the Underlying Action, without disclosing their intent to eventually stop doing so. The duty may also arise where a defendant fails to disclose material facts that only it knows – e.g., the communications wherein the Ohio Insurers allegedly discussed their intention to disclaim Laughlin’s defense at a strategically advantageous time.

Laughlin alleges, citing the federal court’s commentary, that the Ohio Insurers knowingly concealed, for a long period of time, the material fact that they were not legally obligated to represent him and intended to eventually stop doing so. And he alleges he reasonably relied on an understanding they would continue representing him, and he was left unexpectedly defending himself in the Underlying Action as a result.

            Laughlin has alleged all the elements of a claim for fraud by concealment. The Ohio Insurers’ demurrer to this claim is overruled.

            Second Cause of Action for Unfair Competition

            California’s Unfair Competition Law (“UCL”) “addresses ‘unfair competition,’ which ‘… include[s] any unlawful, unfair or fraudulent business act or practice  … .” (Bus. & Prof. Code, § 17200.) Its purpose ‘is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services.’ [Citation.]  ‘Actions for relief” under the UCL may be brought by various government officials and ‘by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.’ [Citation.]” (McGill v. Citibank, N.A. (2017) 2 Cal.5th 945, 954.)

The UCL “bars ‘unfair competition’ and defines the term as a ‘business act or practice’ that is (1) ‘fraudulent,’ (2) ‘unlawful,’ or (3) ‘unfair.’ … Each is its own independent ground for liability under the [UCL], but their underlying purpose ‘is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services’ … .” (Shaeffer v. Califia Farms, LLC (2020) 44 Cal.App.5th 1125, 1135, citations omitted.) “[T]he UCL is a chameleon. … Depending on which prong is involved, a UCL claim may most closely resemble, in terms of the right asserted, an action for misrepresentation …, misappropriation …, price fixing …, interference with prospective economic advantage …, or any of countless other common law and statutory claims. ” (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1196.)

            The Ohio Insurers, again, characterize Laughlin’s claim as one based on their failure to provide him with required insurance coverage. His claim is not that simple. The claim is based, rather, on their alleged fraudulent representation that they would provide him coverage, notwithstanding the fact that no coverage existed. Laughlin alleges he was disadvantaged in the Underlying Action and suffered an approximate $50,000.00 judgment that he would not have suffered otherwise. (TAC, ¶ 22.) Whether he can prove these damages is a question for a later date – he has pled them here.

            The Ohio Insurers’ demurrer to Laughlin’s second cause of action is overruled.

            Third Cause of Action for Intentional Infliction of Emotional Distress

Laughlin has not stated a claim for IIED.

“The elements of the tort for intentional infliction of emotional distress are: (1) outrageous conduct by the defendant; (2) intention to cause or reckless disregard of the probability of causing emotional distress, (3) severe emotional suffering and (4) actual and proximate causation of emotional distress.” (Stoiber v. Honeychuck (1980) 101 Cal.App.3d 903, 921.) Conduct satisfying the first element of intentional infliction of emotional distress “must be ‘so extreme and outrageous “as to exceed all bound of that usually tolerated in a civilized society.” ’ [Citation.]” (Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208, 1242.)

Laughlin has alleged that the Ohio Insurers defrauded him in order to give their insured an improperly-obtained advantage in the Underlying Action. This conduct, while perhaps tortious if proven, is not so uncivilized as to be outrageous. Moreover, Laughlin’s injury was primarily financial; he has pled no basis for alleged severe emotional suffering.

Given the multiple amendments to the complaint and the clear financial gravamen of Laughlin’s claims, the Court denies leave to amend.

The demurrer to Laughlin’s third cause of action is sustained without leave to amend.

Fourth Cause of Action for Negligence

Laughlin has not stated a claim for negligence. The elements of negligence are (1) duty, (2) breach, (3) causation, and (4) injury. (Thomas v. Stenberg (2012) 206 Cal.App.4th 654, 662.)

Laughlin has stated a claim for fraud, an intentional tort. He has not alleged a basis for any independent duty. The only duty he identifies in his opposition is “a duty to avoid creating [Laughlin’s] misbelief that he was insured.” (Opp., 10:12-13.) That “duty” is recognized in Laughlin’s concealment claim; his fourth cause of action at best restates his first.

Given the multiple opportunities to amend and the nature of Laughlin’s allegations, the Court sustains the demurrer to the fourth cause of action without leave to amend.

            Fifth Cause of Action for Promissory Estoppel

Plaintiff has stated a claim for promissory estoppel. As acknowledged in his opposition, promissory estoppel requires “(1) a clear and unambiguous promise by the promisor, (2) reasonable, foreseeable and detrimental reliance by the promise, and (3) … injur[y] [caused by] his reliance.” (Bushell v. JPMorgan Chase Bank, N.A. (2013) 220 Cal.App.4th 915, 929.)

The Ohio Insurers’ reservation of rights in their coverage letter casts doubt on Laughlin’s assertion of clear and unambiguous promise. But at the pleading stage, Laughlin has stated a claim. As discussed by the federal court and reiterated in the TAC, Laughlin alleges his reliance was reasonable. In fact, the federal court expressly found that “Laughlin reasonably believed [Defendants’ COI] was valid and conferred coverage.” (DRJN, Exh. 8, 9:1.) Laughlin’s injury is discussed above in the context of other claims.

The demurrer to Laughlin’s fifth cause of action is overruled.