alleged Alvarado and Naimco were liable for damages as a result of the alleged misrepresentation. In July 1992, the claims were tendered to American Title for defense. In September 1992, American Title denied coverage and refused to provide a defense to Alvarado and Naimco in the second action.
On December 23, 1993, Alvarado and Naimco executed a Stipulation for Entry of Judgment in the second action. The stipulation provided for the entry of judgment against Alvarado and Naimco in the amount of $ 100,000, plus attorney's fees in the amount of $ 30,736.37, and costs of $ 755.25, for a total sum of $ 131,491.62. In addition, Alvarado and Naimco assigned any rights they possessed against American Title to Somerset. In exchange, Somerset provided Alvarado and Naimco with a covenant not to execute the stipulated judgment against them. The judgment was entered without court approval of the settlement on February 22, 1993.
Somerset then filed this action against American Title. In this action, Somerset alleges claims for breach of the covenant of good faith and fair dealing, breach of contract, and for declaratory relief. American Title now moves the court to dismiss the complaint.
A. STANDARD FOR A MOTION TO DISMISS
When ruling on a motion to dismiss, the court must accept all material allegations of fact as true and must construe those allegations in the light most favorable to the nonmovant. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). If the complaint fails to state a claim, the court should grant leave to amend unless it appears beyond a doubt the plaintiff would not be entitled to relief under any set of facts proved. Halet v. Wend Inv. Co., 672 F.2d 1305, 1309 (9th Cir. 1982).
B. APPLICATION OF STANDARD
1. DUTY TO DEFEND
The defendant first argues the court should dismiss the complaint because the claims asserted in the second state court action were not potentially covered under the title insurance policy and, thus, it did not have a duty to defend. An insurer's duty to defend is broader than the duty to indemnify. State Farm v. Eddy, 218 Cal. App. 3d 958, 965, 267 Cal. Rptr. 379 (1990). The duty to defend is measured at the outset of the litigation and arises only when the facts alleged "give rise to a potentially covered claim." Devin v. United Svcs. Auto Assn., 6 Cal. App. 4th 1149, 1157 (1992). If the claims asserted against the insured are not potentially covered under the policy, the insurer has no duty to defend. Keating v. National Union, 995 F.2d 154, 156 (9th Cir. 1993).
The court finds the claims asserted by Somerset against the insured in the second state court action were not potentially covered under the title insurance policy and, consequently, American Title did not have a duty to defend the insured. The claims asserted against the insured in the underlying action were premised upon allegations that the insured made tortious misrepresentations. Somerset brought a tort action against the insured based on the insured's misrepresentations rather than a defect in title. If the insured had not made the alleged misrepresentation, Somerset would not have viable tort claims against the insured. Although asked directly by the court during oral argument, counsel for the plaintiff was unable to identify the claim asserted against the insured which triggered the duty to defend.
California courts have recognized no action for negligent misrepresentation exists, based on the title policy alone, when a defect in title is discovered. Walters v. Marler, 83 Cal. App. 3d 1, 18, 147 Cal. Rptr. 655 (1978); Lawrence v. Chicago Title, 192 Cal. App. 3d 70, 75, 237 Cal. Rptr. 264 (1987). As reasoned by the Lawrence court,
The insurer does not represent expressly or impliedly that the title is as set forth in the policy; it merely agrees that, and the insured only expects that, the insurer will pay for any losses resulting from, or he will cause the removal of, a cloud on the insured's title within the policy provisions. . . .