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April 1, 1993

FOXFIRE, INC., JAMES G. SULLIVAN, and TOYON ASSOCIATES, INC., Defendants. FOXFIRE, INC. a California Corporation, Plaintiff, v. NEW HAMPSHIRE INSURANCE COMPANY, a New Hampshire Corporation and DOES 1-25, inclusive, Defendants.


The opinion of the court was delivered by: MARILYN HALL PATEL

New Hampshire Insurance Company ("NHICO") filed civil action number C-91-2940 seeking a declaratory judgment that it has no duty to defend or indemnify its insured, Foxfire, Inc. ("Foxfire") in connection with an action ("underlying action") brought in Contra Costa County, California, Superior Court against Foxfire and its principal, James G. Sullivan ("Sullivan") by Toyon Associates, Inc. ("Toyon"). *fn1" Foxfire, in turn, filed civil action number C-91-3464 against NHICO. *fn2"

 After consolidation, this court stayed the instant actions pending the California Supreme Court's decision in Bank of the West v. Superior Court, 2 Cal. 4th 1254, 833 P.2d 545 (1992). The consolidated actions were returned to the active calendar after a decision was rendered in Bank of the West on July 30, 1992.

 These consolidated actions are now before the court on cross-motions for summary judgment. NHICO moves for a judicial declaration that it has no duty to defend or indemnify its insured. Foxfire moves for summary judgement on the first, second, and third claims for relief in its complaint: (1) breach of insurance contract; (2) breach of the covenant of good faith and fair dealing; and (3) breach of fiduciary duty. See Ex. 1., at 7-10.

 Having considered the papers submitted and the arguments of the parties, the court enters the following Memorandum and Order.


 NHICO issued a comprehensive general liability policy to Foxfire which became effective on December 19, 1989 ("The Policy"). See Ex. 1.A. Under the business liability coverage of the Policy, NHICO agreed to pay on behalf of the insured all sums for which the insured might become liable in damages for, among other things, advertising injury caused by unfair competition. Ex. 1.A, ยง II at 11 & 14. Foxfire alleges that NHICO's duty to defend arose when Foxfire was sued by Toyon in the underlying action.

 I. The Underlying Action

 Sullivan developed a revenue enhancement consulting practice while working as a C.P.A. for KM Peat Marwick and later Coopers & Lybrand. His clientele included hospitals and other health care facilities. Toyon is a health care consulting and software design firm which does medical care cost and fiscal consulting, but not revenue enhancement work. In the summer of 1988 Sullivan entered into an employment agreement with Toyon. Ex. 1.B at 2. The agreement, detailed in a letter dated July 26, 1988, provided that Sullivan would bring his existing clients with him to Toyon and establish and manage a revenue enhancement services branch of Toyon exclusively for Toyon's clients. Ex. 1.B.i. Sullivan was to receive a salary, benefits and an annual bonus. Id. at 2.

 In mid-1989 Sullivan decided to form his own revenue enhancement firm, Ex. 1.B at 4, and informed Toyon of this decision. The Toyon complaint alleges that discussions ensued between Sullivan and Toyon which allowed Sullivan to set up a separate business entity, Foxfire, for his revenue enhancement services. Id. Pursuant to these discussions, Foxfire and Toyon allegedly entered into an oral agreement whereby Foxfire was allowed to provide services to both Sullivan's and Toyon's clients and in return Foxfire agreed to lease space from Toyon for a three year term and pay for the use of Toyon office equipment. Ex. 1.B at 4-5. On December 22, 1989 Sullivan mailed, on Toyon letterhead, a letter ("Sullivan letter") to all Toyon clients announcing the formation of Foxfire. Ex. 1.D.

 II. Tender of Defense

 Foxfire tendered defense of the underlying action to NHICO on February 22, 1990. Ex. 1.E. NHICO denied coverage in a letter dated February 25, 1990. Ex. 1.F. The NHICO letter also requested a response from Foxfire regarding any disagreement with its denial. Foxfire apparently did not respond to this initial letter. On March 11, 1991 a follow up letter was sent to Foxfire. Ex. 4. On April 1, 1991, Foxfire responded and expressed disagreement with NHICO's position on coverage. At that time, Foxfire reiterated its demand that NHICO accept its tender of defense citing Bank of the West v. Superior Court, 226 Cal. App. 3d 835, 277 Cal. Rptr. 219 (1991), superseded, Bank of the West v. Superior Court, 2 Cal. 4th 1254, 833 P.2d 545 (1992); Demonet Industries v. Transamerica Ins. Co., 227 Cal. App. 3d 744, 278 Cal. Rptr. 178 (1991), vacated, Bank of the West v. Superior Court, 2 Cal. 4th 1254, 833 P.2d 545 (1992); and Keating v. National Union Fire Ins. Company, 754 F. Supp. 1431 (C.D. Cal. 1990). Ex. 1.G. On May 29, 1991 NHICO again rejected the tender of defense based on the California Supreme Court's grant of review in Bank of the West. Ex. 1.H.

 The underlying action settled in July 1991. Foxfire wrote to NHICO on July 18, 1991 demanding reimbursement for attorneys' fees and costs incurred in defending that action. Ex. 1.i. Upon review of the settlement documents in the underlying action, Foxfire discovered that NHICO had undertaken the defense of Toyon against Foxfire's wrongful eviction claim pursuant to a general liability policy issued by NHICO to Toyon. Ex. 1 at 10.

 NHICO filed its declaratory relief action with this court on September 10, 1991. NHICO now moves for summary judgment of the grounds that it has no duty to defend Foxfire. Foxfire filed its action against NHICO October 3, 1991. Foxfire now cross-moves for summary judgment on the grounds that NHICO's refusal to defend Foxfire was a breach of the covenant of good faith and fair dealing, breach of the Policy itself, and a breach of fiduciary duty. Resolution of the competing motions depends upon the language of the Policy and whether Foxfire's acts as alleged in the underlying action created a potential for liability giving rise to a duty to defend under the Policy.


 Under Federal Rule of Civil Procedure 56, summary judgment shall be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial . . . since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). See also T.W. Elec. Serv. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (the non-moving party may not rely on the pleadings but must present significant probative evidence supporting the claim); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (a dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the non-moving party.").

 The court's function, however, is not to make credibility determinations. Anderson, 477 U.S. at 249. The inferences to be drawn from the facts must be viewed in a light most favorable to the party opposing the motion. T.W. Elec. Serv., 809 F.2d at 631.

 Cases involving "interpretation of insurance contracts raise questions of law and thus are particularly amendable to summary judgment". John Deere Ins. Co. v. Shamrock Industries, Inc., 696 F. Supp. 434, 438 ...

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