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March 20, 1995

GENERAL STAR INDEMNITY COMPANY, a Connecticut corporation, Plaintiff,

The opinion of the court was delivered by: WILLIAM H. ORRICK

 Defendants Schools Excess Liability Fund's and Employers Reinsurance Corporation's motions to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure having come before the Court, and the Court, having considered the pleadings and having had the benefit of oral argument of counsel, grants the motions to dismiss.


 General Star Indemnity Company ("General Star") brings this action for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, indemnity, and contribution against Schools Excess Liability Fund ("SELF") and Employers Reinsurance Corporation ("Employers"). The action was brought for the purpose of determining rights and duties concerning written contracts of insurance and insurance coverage. General Star seeks $ 300,000 in defense fees and $ 400,000 for indemnity payments, exclusive of interest and costs, arising from a suit brought against the Berkeley Unified School District ("BUSD").

 General Star serves as a general commercial liability insurer to BUSD. SELF provided excess workers' compensation and employers liability coverage to BUSD. (See First Am. Compl., filed Sept. 12, 1994, Ex. B.) The SELF policy provided up to $ 10,000,000 in coverage, subject to and in excess of a $ 250,000 retained limit for each occurrence. Employers also provided an excess workers' compensation and employers liability policy for BUSD. (Id., Ex. C.)

 Background of the Underlying Action

 On or about June 12, 1992, Patricia H., Jackie H. and Rebecca H. filed Patricia H. v. Berkeley Unified School District, No. C-92-2337 WHO, alleging constitutional violations, civil rights violations, and pendent state law claims against BUSD and certain BUSD employees. The central allegations in the complaint alleged that Charles Ray Hamilton ("Hamilton"), a BUSD teacher, molested Jackie H. and Rebecca H. while he was dating their mother, Patricia H. Patricia H., like Hamilton, was an employee of BUSD.

 The complaint included a 42 U.S.C. § 1983 cause of action on behalf of Patricia H., alleging that her supervisor, Anton Jungherr ("Jungherr"), Associate Superintendent for Business Services for BUSD, deprived her of her rights as secured by the Constitution of the United States, including the First Amendment. Specifically, she alleged that Jungherr engaged in a course of conduct intended to humiliate, harass, and intimidate her for the purpose of undermining her attempts to obtain relief for the injuries inflicted on her children by Hamilton. She further alleged that as a result of Jungherr's conduct, on September 9, 1991, she was unable to continue working and filed a workers' compensation claim for stress-related on-the-job injury. (See First Am. Compl., Ex. D P 38.)

 On April 15, 1992, BUSD tendered its defense and indemnity in the Patricia H. action to General Star. After issuing a preliminary denial of coverage on January 28, 1993, General Star agreed to provide a defense to BUSD under its policy, subject to a reservation of rights. On February 22, 1994, BUSD tendered its defense and indemnity in Patricia H. to SELF. SELF declined defense and indemnity on the grounds that its memorandum of coverage did not provide for defense in a civil action.

 Patricia H. was settled on July 28, 1994. Plaintiffs were paid in excess of $ 800,000 by General Star, National Union Fire Insurance Company, and BUSD collectively. In connection with the settlement, BUSD has assigned to General Star all assignable claims that it has against SELF and Employers. General Star is pursuing these claims in this action.

 The issue now before the Court is whether General Star's first amended complaint ("complaint") states a claim upon which relief can be granted.



 A motion to dismiss under Rule 12(b)(6) should only be granted if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). A court must accept as true all material allegations in the complaint, as well as reasonable inferences to be drawn therefrom. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).

 In order to properly rule on this motion to dismiss, the Court must apply California law in interpreting the insurance contracts between BUSD and SELF and BUSD and Employers. Although insurance contracts often have special features, ordinary rules of contract interpretation still apply. Bank of the West v. Superior Court, 10 Cal. Rptr. 2d 538, 544-45, 2 Cal. 4th 1254, 1264, 833 P.2d 545 (1992). The court must interpret the contracts to give effect to the mutual intent of the parties. Cal. Civ. Code § 1636 (Deering 1994). The written language of the contract governs if it is clear and explicit. Cal. Civ. Code § 1638. If the insurance policy is ambiguous and

an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist (i.e., the insurer) in order to Protect the insured's reasonable expectation of coverage.

 La Jolla Beach & Tennis Club, Inc. v. Industrial Indem. Co., 36 Cal. Rptr. 2d 100, 105, 9 Cal. 4th 27, 37, 884 P.2d 1048 (1994) (citations omitted).


 In its complaint, General Star asks that the Court declare that SELF and Employers each had a duty to defend and indemnify BUSD for the Patricia H. claim. Because an insurance company's duty to defend is much broader than the duty to indemnify, the Court will first address whether a duty to defend arose under either policy.

 The California Supreme Court has defined the contours of the duty to defend in Gray v. Zurich Insurance Co., 54 Cal. Rptr. 104, 65 Cal. 2d 263, 419 P.2d 168 (1966). The court held that the duty to defend could arise in one of two ways: (1) when the policy language is ambiguous and the insured has a reasonable expectation of coverage based on the "nature and kind of risk covered by the policy," Id. at 111, 65 Cal. 2d at 273-75; or (2) when the underlying action potentially sought damages covered by the indemnity provisions of the policy. Id. at 112, 65 Cal. 2d at 275, 277.

 Further, the Gray court held that the duty to defend "should be fixed by the facts which the insurer learns from the complaint, the insured, or other sources." 54 Cal. Rptr. at 113, 65 Cal. 2d at 276. Additionally, the insurer must defend the entire action, even if only one claim is potentially covered by the insurance. Devin v. United Servs. Auto Ass'n, 8 Cal. Rptr. 2d 263, 268, 6 Cal. App. 4th 1149, 1157 (1992). However, "the insurer's obligation is not unlimited; the duty to defend is measured by the nature and kinds of risks covered by the policy." Insurance Co. of the West v. Haralambos Beverage Co., 241 Cal. Rptr. 427, 430, 195 Cal. App. 3d 1308, 1316 (1987) (quoting Giddings v. Industrial Indem. Co., 169 Cal. Rptr. 278, 280, 112 Cal. App. 3d 213, 218 (1980). ...

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