Judge: William D. Claster, Case: 21-01202281, Date: 2022-07-28 Tentative Ruling
1) Plaintiff/Cross-Defendant Admiral Insurance Company’s demurrer to the cross-complaint (XC) of Gary L. Jarvis and Care West Insurance Risk Management, LLC
2) Plaintiff/Cross-Defendant Admiral’s motion to strike
3) Status Conference
Admiral Insurance Company’s demurrer to the cross-complaint (XC) of Gary L. Jarvis and Care West Insurance Risk Management, LLC is SUSTAINED WITHOUT LEAVE TO AMEND. Cross-complainants’ cross-claims are DISMISSED WITH PREJUDICE. Admiral’s motion to strike is DENIED AS MOOT.
I. Factual Background
Cross-Complainants’ XC expressly incorporates the allegations of Admiral’s FAC, so the Court assumes all of the following to be true for purposes of this demurrer.
Cross-Complainants were among the defendants in an underlying case, JPH Consulting, Inc. v. Jarvis, No. 15-00823625. Admiral had issued a professional liability policy in favor of Care West that insured both Care West and Jarvis. Cross-Complainants tendered defense of JPH Consulting to Admiral, which accepted tender with a reservation of rights. Admiral provided a defense, paid for Cumis counsel, and ultimately paid the remaining policy limits to settle the claims against Cross-Complainants. Following settlement, JPH Consulting was dismissed with prejudice in 2019.
Admiral filed this coverage action in 2021. It alleges the claims in JPH Consulting were not covered for two reasons. First, under the terms of the policy, the claims at issue were not covered in whole or in part. Second, because Cross-Complainants misrepresented or omitted material information when applying for insurance, the policy should be rescinded ab initio. In the FAC, Admiral advances causes of action for (1) reimbursement of indemnity, (2) reimbursement of defense costs, (3) intentional misrepresentation, (4) negligent misrepresentation, and (5) negligent supervision (alleging Cross-Complainants negligently supervised the employee who filled out the insurance application).
Cross-Complainants then filed the XC. They bring claims for (1) breach of the contractual duty to defend, (2) breach of the contractual duty to indemnify, and (3) breach of the implied covenant of good faith and fair dealing. Admiral now demurs to the XC.
II. Discussion
A. Contract Claims
The elements of a breach of contract claim are “(1) the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to plaintiff.” (Coles v. Glaser (2016) 2 Cal.App.5th 384, 391.) There is no dispute that Admiral in fact paid for defense and indemnity under the policy (subject to a reservation of rights), that JPH Consulting has terminated, and that the policy is no longer in effect. As a result, it appears from the face of the pleadings that Admiral has discharged its duties under the policy.
Cross-Complainants disagree. The Court understands them to make two arguments. First, they argue that by suing for reimbursement, Admiral has reneged on the duties it already discharged, and the reneging is itself a breach of contract. But as Admiral points out, California law allows an insurer that reserved its rights to pay for an insured’s defense or pay to settle an insured’s claims, then sue the insured for reimbursement of costs associated with claims that either lacked any potential for coverage (defense) or for which coverage was in fact lacking (indemnity). (See Buss v. Superior Court (1997) 16 Cal.4th 35 [defense]; Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489 [indemnity].) Cross-Complainants’ “reneging” argument is irreconcilable with Buss and Blue Ridge.
Second, Cross-Complainants argue that Buss and Blue Ridge allow an insurer to seek reimbursement to the extent there is either no potential for coverage or no coverage. They note that JPH Consulting included claims for professional negligence, which were in fact covered by the policy. Cross-Complainants argue that by seeking reimbursement for all defense and indemnity costs, including those attributable to the professional negligence claims, Admiral goes beyond what Buss and Blue Ridge permit. This, Cross-Complainants contend, is a breach of contract.
The Court disagrees. Cross-Complainants are correct that if a potential for coverage (for defense costs) or actual coverage (for indemnity costs) exists, Buss and Blue Ridge do not allow an insurer to seek reimbursement of associated costs. Rather, reimbursement must be limited to claims for which no potential coverage or actual coverage exists. But Cross-Complainants point to no authority that bars Admiral from alleging there was neither coverage nor a potential for coverage for all claims in JPH Consulting. The extent to which coverage or a potential for coverage exists is precisely the question to be decided. If Admiral is partially wrong, and coverage or a potential for coverage exists for some claims, it will be denied reimbursement to that extent. If Admiral is entirely wrong, and all claims were covered, then it will be reimbursed nothing. The mere allegation that no claims in JPH Consulting were covered is not a breach of contract.
The demurrer to the first and second causes of action therefore is sustained. Because it is not apparent to the Court that these claims may be saved by amendment, leave to amend is denied.
B. Bad Faith
Cross-Complainants offer two theories of bad faith. First, they argue that by seeking total reimbursement instead of reimbursement to the extent claims weren’t covered, Admiral has acted in bad faith. The court disagrees for the same reasons stated above: no authority prevents Admiral from alleging a total lack of coverage in a pleading, with the exact extent of coverage to be determined in litigation.
Second, Cross-Complainants argue that Admiral lacks any ground to rescind the policy because it issued the policy despite knowing that sections of the application had been left blank (as the FAC calls them, “omissions”), but waited five and a half years to seek recission after issuing a policy based on a partially blank application. Under Hailey v. California Physicians’ Service (2007) 158 Cal.App.4th 452, an inference of bad faith may arise when an insurer “adopt[s] a ‘wait and see’ attitude after learning of facts justifying rescission by continuing to collect premiums while keeping open its rescission option” if the insured later tenders a sizable claim. (Id., at p. 473.)
Similarly, Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169 provides, “Where no valid ground for rescission exists, the . . . attempt to seek such relief may itself constitute . . . a breach of the covenant of good faith and fair dealing which is implied in the policy . . . .” (Id., at p. 185, fn. 16.) Cross-Complainants argue that because Admiral issued a policy despite missing information in the application, that missing information is not a valid ground to seek rescission today.
Imperial Casualty is closely on point, Admiral’s arguments to the contrary notwithstanding. Whether Admiral has a valid ground to seek rescission is squarely at issue in the FAC. If Admiral lacks a valid ground to seek rescission, then it may be acting in bad faith by filing this lawsuit.
But the Court is persuaded by another argument advanced by Admiral. Again, it is undisputed that Admiral in fact paid for defense and indemnity as required by the policy. “[B]ecause a contractual obligation is the underpinning of a bad faith claim, such a claim cannot be maintained unless policy benefits are due under the contract.” (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 35.) Significantly, in both Imperial Casualty and Hailey the insurer rescinded (or sought to rescind) the policy rather than pay the claims. Under Waller, because nothing is due under the policy, a bad faith claim cannot be maintained. Further, the Court is unaware of an appellate decision allowing such a bad faith claim when the insurer paid for defense and indemnity and then later brought suit seeking rescission.
Accordingly, the demurrer to the third cause of action is sustained. Again, because it is not apparent to the Court that this claim may be saved by amendment, leave to amend is denied.