the result would be the same under California law as under the law of any of the other interested states. Thus, there is no conflict in applying California law. Hurtado v. Superior Court, 11 Cal. 3d 574, 579-80, 114 Cal. Rptr. 106, 522 P.2d 666 (1974).
1. Sass's Claims of Bad Faith and Breach of Fiduciary Duty
Under California law, an insurer can be held liable in tort for bad faith in refusing to bestow policy benefits. See Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 573-74, 108 Cal. Rptr. 480, 510 P.2d 1032 (1973). The insured must prove that the insurer withheld policy benefits without proper cause. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 54-55, 221 Cal. Rptr. 171 (1985).
In addition, an insurer holds itself out as a fiduciary, so a wrongful denial of benefits would be a breach of fiduciary duty. See Frommoethelydo v. Fire Ins. Exchange, 42 Cal. 3d 208, 215, 228 Cal. Rptr. 160, 721 P.2d 41 (1986).
Reliance argues that this court's findings in its previous Order mandate summary judgment in its favor. The court stated in its Order that "a fact finder could easily conclude that Sass was on sufficient notice of potential claims against it that coverage is properly disclaimed pursuant to Exclusion E." (Order, at 17.) Reliance argues that since it is possible that a jury can find in its favor, it did not act in bad faith as a matter of law. What Reliance fails to note is that when the court made the above statement, it was viewing the evidence in the light most favorable to Reliance. There is no guarantee that the jury will do the same. Moreover, for the purposes of Reliance's motion, this court must do the opposite.
In its previous Order, this court held that whether Reliance had a basis for disclaiming coverage under Exclusion E was a "question of fact which must be reserved for the trier of fact." (Order, at 17) Viewing the evidence in the light most favorable to Sass, the court held that "a reasonable fact finder could conclude that Sass could not reasonably have known of Wrongful Acts, and Reliance would consequently be liable under the Policy." Id. If the jury indeed decides this issue in Sass's favor, they also may decide that Reliance's disclaimer of coverage was without proper cause, or wrongful under the circumstances. This precludes summary judgment for Reliance on Sass's claims of bad faith and Breach of fiduciary duty. As to these claims, Reliance's motion for summary judgment is denied.
2. Sass's Claims of Fraud and Negligent Misrepresentation
Sass's claim for "fraud and deceit" alleges an intentional misrepresentation by Reliance. Sass also alleges a claim for negligent misrepresentation.
This court found in its previous Order that Reliance had not made any material misrepresentation, and that none could be found in its Policy or in the renewal application. (Order, at 14-15.) This finding is now part of the law of the case. Because an affirmative misrepresentation is a necessary element of Sass's claims of fraud and negligent misrepresentation, Reliance is entitled to summary judgment on these claims.
C. Sass's Motion for Leave to Amend
Sass is seeking leave to amend to allege new bases for the claims addressed in Reliance's motion for summary judgment. Sass claims it is doing so only "out of an abundance of caution." Such caution on the part of Sass is unnecessary.
As to Sass's claims for bad faith and breach of fiduciary duty, its complaint is sufficient to put Reliance on notice of the nature of the claims against it. In the light of this decision and this court's previous Order, the only factual issue left to be decided on Sass's claims for bad faith and breach of fiduciary duty is whether Reliance's denial of coverage was wrongful, or without proper cause. Sass's complaint alleges this adequately.
As to Sass's claims for fraud and intentional misrepresentation, they have been rendered a nullity by this court's previous Order, and Reliance is entitled to partial summary judgment. See supra part IV.B.2. Thus, amendment of the complaint on those two claims would be futile. See Lockman Foundation v. Evangelical Alliance Mission, 930 F.2d 764, 772 (9th Cir. 1991) (leave to amend improper if amendment would be futile). Sass's motion for leave to amend is denied.
D. Sass's Motion to Stay the Proceedings
The court has broad discretion to stay a declaratory judgment proceeding on insurance coverage pending the outcome of the underlying action against the insured. Terra Nova Ins. Co. Ltd v. 900 Bar, Inc., 887 F.2d 1213, 1224-25 (3d Cir. 1989). As noted above, this court is ordering Reliance to defend Sass in the Underlying Lawsuits. See supra part IV.A.2. Sass now moves to stay the declaratory proceeding on the coverage issue pending resolution of the Underlying Lawsuits.
There are no Ninth Circuit cases addressing the issue directly. The Third Circuit, though, has set forth a list of factors for the district court to consider in deciding whether to exercise its discretion. See Terra Nova, 887 F.2d at 1224-25. The district court should consider: (1) the likelihood that the declaration will resolve the uncertainty of obligation which gave rise to the controversy; (2) the convenience of the parties; (3) the public interest in the settlement of the uncertainty of obligation; (4) the availability and convenience of other remedies; and (5) whether the same factual question lies at the heart of both the insurance coverage dispute and the underlying action. Id.; see also Remington Arms v. Liberty Mutual Ins., 748 F. Supp. 1057, 1063 (D. Del. 1990).
Obviously, a declaratory judgment in this case will resolve the uncertainty of obligation between Sass and Reliance. A declaration either for or against Sass would be extremely helpful to the parties in guiding their future course of conduct. See Remington Arms, 748 F. Supp. at 1062.
With respect to the convenience of the parties, Sass would prefer to avoid expending effort now to establish its right to indemnification, because Reliance is obligated to defend it in the meantime in the Underlying Lawsuits. On the other hand, it would be extremely unfair to Reliance not to allow it to adjudicate its defense that Sass had prior knowledge of the claims that led to the Underlying Lawsuits. The court in Remington Arms resolved this issue in favor of the insurer, on the theory that where it is the insured that brought the declaratory action in the first place, "the scales tip in favor of [the insured's] desire to go forward on the indemnification claims." Id. This reasoning is applicable here. When Sass brought this action it immediately moved for summary judgment on the indemnification issue, which was denied because the court found a triable issue of fact in Reliance's defense. Now, Sass is turning around and requesting a stay of the same proceeding, attempting to turn its temporary victory on the duty to defend issue into a permanent one. This court believes that on the balance, the equities favor allowing Reliance to adjudicate its defense in this declaratory proceeding, instead of waiting for the results of the Underlying Lawsuits.
The third factor to consider is the public's interest in the settling the uncertainty of the obligation. This obviously cuts in favor of denying the stay requested by Sass. The public, including the plaintiffs in the Underlying Lawsuits, has a substantial interest in knowing whether the ultimate liability, if any, for the Bonds' collapse in the market will fall on Sass or its insurer.
The other remedy at issue--proceeding to trial on the indemnification issue--is more convenient than staying the action, as the parties are currently involved in discovery on this issue. It would be inconvenient to stay these proceedings now, only to have to begin them again, potentially, at a later date.
The final factor for the court to consider is whether it would be required to make factual findings which are also subject to determination in the Underlying Lawsuits. Sass notes that there are many factual issues which are common to this action and the Underlying Lawsuits. For example, the key issue in the declaratory proceeding is whether Sass had knowledge of any wrongful acts on its part. A finding on this issue certainly would be relevant in the Underlying Lawsuits on the issue of whether Sass breached any duty owed its clients.
Sass contends that if this factual issue is determined adversely to it in this action, the plaintiffs in the Underlying Lawsuits possibly could estop Sass from relitigating it in the Underlying Lawsuits. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 58 L. Ed. 2d 552, 99 S. Ct. 645 (1979) ("offensive" collateral estoppel by non-party allowed where defendant was party in prior action). Sass is concerned that this would put Reliance in the position of aiding the plaintiffs in the Underlying Lawsuits, by litigating crucial issues for them in the declaratory proceeding. Because Reliance has a duty to defend Sass from these very same plaintiffs, Reliance has a conflict of interest. Sass contends that this warrants a stay of the declaratory proceeding.
This potential conflict of interest, however, most likely will not arise. It is settled law that when an insurer has a conflict of interest with its insured based on possible non-coverage under the policy, the insurer must defend by paying the insured's attorneys' fees for an independent counsel of the insured's choice. See San Diego Fed. Credit Union v. Cumis Ins. Soc., 162 Cal. App. 3d 358, 361, 208 Cal. Rptr. 494 (1984). Thus, Reliance is not necessarily put in the position of arguing one side of the factual issues in this action, and then actually litigating the opposite side in the Underlying Lawsuits. Reliance needs only to pick up the tab for Sass's defense. It does not have to actually participate in the Underlying Lawsuits, and, in fact, it must not do so if any conflict of interest exists.
Moreover, the mere possibility of collateral estoppel does not justify a stay of the declaratory proceeding. Sass is fully aware of the stakes in this litigation, so it has every incentive to litigate the factual issues to the best of its ability. If Sass does so and happens to lose, it cannot claim to be prejudiced in any sense by being precluded from litigating the same issues in the Underlying Lawsuits.
Sass also contends that a stay is necessary to protect its reasonable expectations under the Policy. Sass claims that it could not reasonably expect to face the superior resources of its insurer in this action, particularly when it paid for a policy obligating Reliance to defend it in the Underlying Lawsuits. Though the court is sympathetic to this argument, it cannot be said that an insured reasonably expects that its insurer will not litigate a possible defense against it, if such defense has a factual basis.
On the balance, this court finds that the above factors do not justify staying the declaratory proceeding on the coverage issue. Sass's motion to stay the proceeding is denied.
In accordance with the foregoing, it is hereby ORDERED that:
Sass's motion for partial summary judgment is GRANTED. Reliance is hereby ORDERED to provide Sass with a defense in the Underlying Lawsuits.
Reliance's motion for partial summary judgment is GRANTED in part and DENIED in part:
As to Sass's claims for bad faith and breach of fiduciary duty, Reliance's motion for summary judgment is DENIED;
As to Sass's claims for fraud and negligent misrepresentation, Reliance's motion for summary judgment is GRANTED.
Sass's motion for leave to amend is DENIED.
Sass's motion to stay the declaratory proceeding on the indemnification issue is DENIED.
IT IS SO ORDERED.
Dated: November 6, 1992.
United States District Judge