Judge Theresa M. Traber, Case Number: 21STCV05412, Date: 2023-08-22 Tentative Ruling

Judge: Theresa M. Traber, Case: 21STCV05412, Date: 2023-08-22 Tentative Ruling

Case Number: 21STCV05412 Hearing Date: January 31, 2024 Dept: 47

Tentative Ruling

Judge Theresa M. Traber, Department 47

HEARING DATE: January 31, 2024 TRIAL DATE: July 30, 2024

CASE: Jennifer Gerard, et al. v. John Haubrich, Jr., et al.

CASE NO.: 21STCV05412

MOTION FOR SUMMARY ADJUDICATION

MOVING PARTY: Defendant Travelers Casualty & Surety Co. of America

RESPONDING PARTY(S): Plaintiffs Jennifer Gerard and Gerard Cosmetics, Inc.

CASE HISTORY:

02/10/21: Complaint filed.
05/26/21: First Amended Complaint filed.
07/14/21: Dismissal entered as to Connie M. Fickel and Tamar Yeghiayan.
07/14/21: Dismissal entered as to Tristan Mullis as to the third CoA for declaratory relief.
07/14/21: Dismissal entered as to Tom Ingrassia as to the third CoA for declaratory relief.
07/14/21: Dismissal entered as to Pettit Kohn as to the third CoA for declaratory relief.

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

This is an action for declaratory and injunctive relief against a liability insurer and the attorneys retained by the insurer to defend Plaintiffs in an underlying employment discrimination lawsuit.

Defendant Traveler’s Casualty & Surety Co. moves for summary adjudication on the issue of whether Defendant’s February 26, 2020, reservation of rights letter created a duty for Defendant to provide independent counsel to defend Plaintiffs in the underlying action.

TENTATIVE RULING:

Defendant’s motion for summary adjudication is GRANTED.

DISCUSSION:

Evidentiary Objections to Declaration of Jennifer Gerard

Defendant raises numerous evidentiary objections to the declaration of Jennifer Gerard submitted by Plaintiffs in opposition to this motion. The Court rules on these objections as follows:

Objections Nos. 1-11: SUSTAINED as irrelevant. This testimony is not relevant to the issue of whether Travelers’ reservation of rights created a duty to appoint independent counsel.

Evidentiary Objections to Declaration of Stephen Thomas

Defendant also raises evidentiary objections to the Declaration of Stephen Thomas in support of the opposition. The Court rules on these objections as follows:

Objections Nos. 1-4: SUSTAINED under Evidence Code section 1523. The Policy speaks for itself.

Request for Judicial Notice

Defendant requests that the Court take judicial notice of the Complaint in the action White v. Gerard Cosmetics, Inc. LASC Case No. 19STCV33840. Defendant’s request is GRANTED pursuant to Evidence Code section 452(d) (court records).

Improper Reply Separate Statement

Defendant submitted a document entitled “Reply Re: Separate Statement of Undisputed Material Facts in Support of Motion for Summary Adjudication.” No such filing is authorized either by the Code of Civil Procedure or the Rules of Court. (See Code Civ. Proc. § 437c(b); Cal. Rules of Court Rule 3.1350.) The Court therefore refuses to consider this document in ruling on Defendant’s motion.

Legal Standard

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party can show evidentiary support for a pleading or claim and, if not, to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) Code of Civil Procedure Section 437c(c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.) “The function of the pleadings in a motion for summary judgment is to delimit the scope of the issues; the function of the affidavits or declarations is to disclose whether there is any triable issue of fact within the issues delimited by the pleadings.” (Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67, citing FPI Development, Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-82.)

As to each claim as framed by the complaint, the plaintiff moving for summary judgment must satisfy the initial burden of proof by presenting proving each element of a cause of action. (Code Civ Proc. § 437c(p)(1).) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.) Once the plaintiff has met that burden, the burden shifts to the defendant to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. (Code Civ. Proc. § 437c(p)(1).) To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.)

Duty to Select Independent Counsel

California law requires insurance carriers to provide insured parties with independent defense counsel when specific circumstances arise. As set forth in Civil Code section 2860:

(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision which sets forth the method of selecting that counsel consistent with this section.

(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.

(Civ. Code § 2860(a)-(b).)

Section 2860 does not state that all conflicts of interest cause the right to independent counsel to vest. (James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1101.) As set forth by numerous appellate opinions, the right to independent counsel vests if “the way counsel retained by the insurance company defends the action will affect an underlying coverage dispute between the insurer and the insured.” (Id. at 1108.) “Attorney control of the outcome of a coverage dispute involves insurance coverage, i.e., whether a certain risk or peril is covered under the policy. Furthermore, the coverage dispute must be one that will be litigated in the underlying action.” (Id [emphasis in original].) Conversely, the right to independent counsel does not vest “where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action.” (Gafcon, Inc. v. Ponsor Associates (2002) 98 Cal.App.4th 1388, 1423; Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal. App. 4th 999, 1006-1007 [“There is no such entitlement, . . . , where the coverage issue is independent of, or extrinsic to, the issues in the underlying action.”].)

A conflict of interest requiring the appointment of independent counsel does not automatically arise where only some damages are covered by the insurer. Thus, for example, the Court in Foremost Ins. Co. v. Wilks (1988) 206 Cal. App. 3d 251, rejected the contention that an exclusion of coverage for punitive damages that might be awarded against the insured created a disqualifying conflict of interest. In so ruling, the Foremost Court noted that the insurance company would be liable for any compensatory damages regardless of whether the jury found the insured acted with malice. Noting the unity of interests in a strong defense, the Court explained it was “in Foremost’s interest to vigorously defend the suit to avoid liability for indemnification of compensatory damages,” and that the company “gain[ed] no benefit from pursuing a theory that [the insured] acted with malice.” (Id., at p. 261.) Thus, courts generally conclude that no actual conflict of interest arises from non-coverage of only certain damages, so long as the interests of the insured and insurer are fully aligned on defending against liability contentions. (Blanchard v. State Farm Fire and Casualty Co. (1991) 2 Cal. App. 4th 345, 350.) This situation is in contrast to a case where appointed insurance counsel has to make a decision between two possible defenses where one would limit the insurer’s benefits obligation and the other would expand the coverage available to the insured. (See, e.g., Executive Aviation, Inc. v. National Ins. Underwriters (1971) 16 Cal. App. 3d 799 [conflict found where defense posture on commercial nature of flight would impact coverage dispute].)

Travelers’ Reservation of Rights

Defendant seeks summary adjudication of Plaintiffs’ primary claim against it: whether, applying the standard set forth above, Defendant’s February 26, 2020 reservation of rights letter created a disqualifying conflict of interest for its dependent counsel such that Defendant was obligated to provide independent counsel. Although Plaintiffs pose arguments about Defendant’s alleged obligation to make disclosures about possible conflicts and the Lewis Brisbois Defendants’ alleged breaches of their duty to advise Plaintiffs on conflict issues, these are beyond the scope of Defendant’s motion, so the Court will not address them.

The Reservation of Rights letter at issue here reserved Defendants’ right to deny coverage on the underlying action against Plaintiffs on six bases: (1) damages excluded from coverage, including, inter alia, under either the definition of “Loss” or Exclusion “B.2.”; (2) coverage for Plaintiff Gerard to the extent she was not acting in her capacity as an officer of Gerard Cosmetics; (3) to the extent that Plaintiffs’ late reporting of an EEOC claim against them prejudiced Defendant; (4) reserving the right to seek reimbursement of defense costs not covered by the Insurance Policy; (5) reserving the right to assert that the Policy exceeds other coverage available to Plaintiffs; and (6) denying coverage for any loss, fees, or costs incurred or paid without Defendant’s consent. (Separate Statement of Undisputed Material Fact Nos. 22-28.)

1. Reservation of Rights Under Definition of “Loss” and Exclusion B.2

Defendant first contends that its reservation of rights as to the definition of loss and the exclusions in clause B.2 did not create a disqualifying conflict of interest as a matter of law. As stated in the policy and described in the reservation of rights letter, Loss is defined to mean, as relevant here:

Defense Expenses and money which an Insured is legally obligated to pay as a result of a Claim, including settlements; judgments; back and front pay; compensatory damages; punitive or exemplary damages or the multiple portion of any multiplied damage award if insurable under the applicable law most favorable to the insurability of punitive, exemplary, or multiplied damages; prejudgment and postjudgment interest; and legal fees and expenses of a Claimant or Outside Claimant awarded pursuant to a court order or judgment. “Loss” does not include:

1. civil or criminal fines; sanctions; liquidated damages other than liquidated damages awarded under the Age Discrimination in Employment Act or the Equal Pay Act; payroll or other taxes; or damages, penalties or types of relief deemed uninsurable under applicable law;

2. future compensation, including salary or benefits, for a Claimant or Outside Claimant who has been or will be hired, promoted or reinstated to employment pursuant to a settlement, court order, judgment, award or other resolution of a Claim; or that part of any judgment or settlement which constitutes front pay, future monetary losses including pension and other benefits, or other future economic relief or the value or equivalent thereof, if the Insured has been ordered, or has the option pursuant to a judgment, order or other award or disposition of a Claim, to promote, accommodate, reinstate, or hire the Claimant or Outside Claimant to whom such sums are to be paid, but fails to do so;

3. medical, pension, disability, life insurance, Stock Benefit or other similar employee benefits, except and to the extent that a judgment or settlement of a Claim includes a monetary component measured by the value of:

a. medical, pension, disability, life insurance, or other similar employee benefits; or

b. Stock Benefits of an Insured Organization whose equity or debt securities are not publicly traded, including on a stock exchange or another organized securities market, as consequential damages for a Wrongful Act; or

4. any amount allocated to non-covered loss pursuant to Section III.

(SSUMF No. 7 [emphasis added].)

Exclusion B.2 eliminates from the definition of covered losses any coverage for damages other than defense costs “[f]or any Claim seeking severance pay, damages or penalties under an express written Employment Agreement, or under any policy or procedure providing for payment in the event of separation from employment; or sums sought solely on the basis of a claim for unpaid services.” (SSUMF No. 8.)

In its reservation of rights letter, Defendant reserved its right to disclaim coverage as to any of the kinds of excluded damages identified in the definition of Loss, including certain front pay, payroll and other taxes, severance pay, and money due for unpaid services. In opposition, Plaintiffs voice a general concern that, as the plaintiff in the underlying lawsuit, Shaun White could have sought future compensation, taxes, lost medical, pension, disability, life insurance, or other employee benefits, and a reinstatement order, and posits broadly that Defendant’s reservation of rights left Plaintiffs exposed to pay for those damages without insurance support.

With respect to the exclusion of certain damages, the controlling authorities are conclusive: even where non-covered damages might be awarded, a conflict of interest does not arise because the existence or threat of those damages does not create competing incentives for panel counsel in the way they defend the underlying case. (Blanchard v. State Farm Fire and Casualty Co., supra, 2 Cal. App. 4th at p. 350.) Even in such circumstances, panel counsel retains the incentive to avoid liability altogether. (Id.; see also Foremost Ins. Co. v. Wilks, supra, 206 Cal.App.3d at p. 261.) Here, there is no basis to conclude that appointed counsel would not vigorously defend against the payment of back and front pay, reinstatement, and all lost benefits sought by White, as part and parcel of defense counsel’s strident resistance to any finding of liability in the underlying case.

What is more, Defendant’s policy provides broad coverage for “back and front pay,” which would be the source of any obligation on Plaintiff’s part to pay payroll and related taxes, so the parties’ interests in opposing such damages would be fully aligned, thus negating any conflict of interest on behalf of insurance counsel. Similarly, both Plaintiffs and Defendant would have similar goals of defeating any orders for reinstatement. The gap in coverage arises in that context only if such an order is issued and Plaintiff is successful in buying-out the obligation by advancing front pay to White in lieu of restatement. Under those unique circumstances, Defendant would not cover the front pay offered, but that is a mere theoretical possibility and, in any event, does not lend itself to control by appointed counsel. In addition, as Defendant argues, many of the other conflicts raised by Plaintiff are purely hypothetical. There is no prayer for reinstatement in White’s complaint, nor any request for severance pay. Having been terminated by Plaintiff, the time for severance pay had passed by the time White’s lawsuit was commenced, so he was instead seeking past and future lost compensation, not a severance package. Nor is there any claim in White’s complaint seeking payment for unpaid services or the actual provision of medical, pension or other benefits. Rather, as is typical in such employment cases, White sought a monetary award that would include damages to compensate him for lost salary and benefits, both of which are covered under Defendant’s policy. (SSUMF No. 7 [Loss excludes “medical, pension, disability, life insurance, Stock Benefit or other similar employee benefits, except and to the extent that a judgment or settlement of a Claim includes a monetary component measured by the value of [those benefits]” (emphasis added)].)

In sum, the Court finds no actual conflict of interest arising from these exclusions based on the legal authorities defining an insurance company’s obligation to appoint independent counsel. Consistent with those authorities, the Court reaches this conclusion by conducting an analysis focused on the facts of this case and examining “the nature of the coverage issue[s], as [they] relate[ ]to the issues in the underlying case.” (Blanchard, supra, at p. 350.) Accordingly, Defendant has satisfied its initial burden of showing that it is entitled to summary adjudication of the duty issue as a matter of law. While the burden to demonstrate a triable issue of fact thus shifts to Plaintiffs, they have “produced no evidence to show in what specific way the defense attorney could have controlled the outcome of the damage issue to appellant’s detriment, or had incentive to do so. [Plaintiff] merely urged that there was an unspecified possibility of a conflict.” (Id. [Emphasis in original].)

2. Reservation of Rights Under Definition of Insured Person

Defendant also argues that no actual conflict was created by its reservation of the right to disclaim coverage for any loss attributable to Plaintiff Gerard to the extent that she did not qualify as an insured person within the meaning of the policy.

The definition of “Insured Person” in Travelers’ Policy states, in pertinent part:

Insured Person means any natural person who was, is or becomes an Employee, duly elected or appointed member of the board of directors, officer, member of the board of trustees, member of the board of regents, member of the board of governors, natural person partner, LLC manager or a functional equivalent thereof of the Insured Organization for Wrongful Acts committed in the discharge of his or her duties.

(SSUMF No. 24.)

As Defendant states, the White Action asserted only employment-based causes of action-- specifically, employment discrimination, harassment, retaliation, failure to prevent discrimination, harassment, and retaliation, and wrongful termination. (SSUMF No. 17.) Defendant contends that, because the claims asserted against Plaintiff Gerard only pertained to the discharge of her duties as owner of the business, the Policy’s definition of Insured Person did not create a dispute as to whether Plaintiff was covered for the purpose of those claims. Moreover, Defendant argues, even if there was a dispute as to whether Plaintiff was an Insured Person, that dispute is “independent of the issue of [the insured’s] liability.” (McGee v. Super Ct. (1985) 176 Cal.App.3d 221, 227.)

Plaintiffs, in opposition, argue that the White Action alleged facts which could give rise to personal liability for Gerard for sexual harassment as well as common law claims for sexual assault, defamation, and wrongful eviction against Plaintiff Gerard in her personal capacity. As a preliminary matter, many of the allegations which Plaintiffs recite are not set forth in the separate statement, which merely offers assertions that the Complaint alleges facts giving rise to those claims “in ordinary and concise language.” (See, e.g., Statement of Additional Fact No 18.) Vague conclusions do not constitute statements of material fact, disputed or otherwise, and the Court would be within its authority to disregard those contentions and the citations to the White Action altogether. The Golden Rule of Summary Adjudication is “if it is not set forth in the separate statement, it does not exist.” (United Community Church v. Garcin (1991) 231 Cal.App.3d 327, 337 [italics in original].) Notwithstanding those issues, Plaintiffs’ argument is premised on the conclusion that the “plasticity of modern pleading” requires independent counsel when the facts, as alleged, could give rise to claims that would create a conflict of interest, even if those claims have not yet been asserted, citing Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 at 276. Plaintiffs’ premise is flawed. Gray’s discussion of the “plasticity of modern pleading” pertained to our Supreme Court’s holding that the question of coverage is not limited to the claims asserted in the pleadings with respect to whether the insurance carrier has a duty to defend the action. (Id. at 276-77.) The question of whether a claim is actually covered by the Policy relates not to the insured’s duty to defend the action, but its duty to indemnify, i.e., to cover Plaintiffs’ liability.

Even so, Plaintiffs’ assertions of a conflict arising because of the “personal capacity” exclusion are plainly unpersuasive. If Plaintiff Gerard had been found personally liable for sexual harassment as White’s supervisor, Gerard Cosmetics would have been strictly liable for that misconduct. (State Dept. of Health Services v. Superior Court (2003) 31 Cal. 4th 1026, 1040-1041.) Thus, their defense interests are inextricably intertwined. As for the common law claims to which Plaintiffs refer, there is virtually no possibility that they could have been asserted against Plaintiff Gerard as an individual because their limitations periods had expired by the time White commenced his action. Plaintiff White’s complaint against Gerard Cosmetics, Inc., and Jennifer Gerard was filed on September 23, 2019, alleging only statutory discrimination, harassment, retaliation and related claims under the Fair Employment and Housing Act, Government Code § 1294, et seq., and a common law claim for wrongful discharge in violation of public policy. While White did allege that Gerard sexually assaulted him, falsely accused him of raping his former roommate, and evicted him from his company-provided apartment just before his June 15, 2016, termination (Defendant’s Exh. E, ¶¶ 14, 30, 31), these allegations formed the predicate for White’s claims of sexual harassment and retaliation. He did not assert any common law claims for assault, defamation, or wrongful eviction. Indeed, by the time White filed his complaint in September 2019, the limitations period for all these claims had already expired. (Code Civ. Proc. § 335.1 [two-year limitations for assault or battery claims]; § 340(c) [one-year limitations for defamation]; § 338(b) [three-year limitations for wrongful eviction].)

For all these reasons, the Court finds that Defendant has established as a matter of law that the exclusion for persons sued in their personal capacity does not give rise to a duty to appoint independent counsel. In response to Defendant’s initial showing, Plaintiffs have failed to rebut the evidence presented by Defendant and have thus failed to demonstrate the existence of a triable issue of fact as to whether the definition of Insured Person created an actual conflict of interest requiring independent counsel.

3. Other Reservations of Rights

Plaintiffs do not contest that the other reservations of rights identified by Defendant do not give rise to a conflict of interest that would require independent counsel. As there appears to be no dispute between the parties on this point, the Court need not discuss this matter further.

Conclusion

The Court finds, based on the foregoing, that Defendant has demonstrated with admissible evidence that the reservation of rights created no actual conflict of interest requiring independent counsel with respect to the definition of “Loss” or its related exclusions. Similarly, as to the other categories of reservations of rights, the Court finds that Defendant has shown that no conflict of interest was created by these provisions, and that Plaintiffs have failed to demonstrate a triable issue of fact to the contrary. Accordingly, Defendant is entitled to summary adjudication of the issue of duty raised by its motion.

CONCLUSION

Accordingly, Defendant’s motion for summary adjudication is GRANTED.

Moving Party give notice, unless waived.

IT IS SO ORDERED.

Dated: January 31, 2024 ___________________________________

Theresa M. Traber

Judge of the Superior Court

Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept47@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.