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EVERETT ASSOCIATES, INC. v. TRANSCONTINENTAL INS. CO.

March 7, 2001

EVERETT ASSOCIATES, INC., A CALIFORNIA CORPORATION, DBA LIVING EARTH CRAFTS, AND DONALD PAYNE, AN INDIVIDUAL, PLAINTIFFS,
v.
TRANSCONTINENTAL INSURANCE COMPANY, A NEW YORK CORPORATION, AND AMERICAN NATIONAL FIRE INSURANCE COMPANY, A NEW YORK CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Conti, District Judge.

ORDER GRANTING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

I. INTRODUCTION

Plaintiffs Everett Associates, Inc. ("Everett") and Donald Payne ("Payne") bring the above-captioned action against Defendant insurance companies Transcontinental Insurance Company ("Transcontinental") and American National Fire Insurance Company ("American") for claims resulting from their refusal to defend and indemnify Plaintiff in an underlying patent infringement lawsuit.

In this third round of summary judgment motions, Defendants seek summary judgment on Plaintiffs' claims for (1) negligence; (2) negligent infliction of emotional distress; (3) emotional distress damages for breach of contract; (4) indemnification; and (5) recovery of the Clark settlement as damages for breach of contract.

II. BACKGROUND

On June 9, 1998, Everett tendered the defense of the Clark action to American National Fire Insurance Company ("American"). (FAC, Ex. M). American had issued Everett a CGL policy (policy no. PAC8683340-01) covering from November 1, 1995 to November 1, 1996. On July 14, 1998, American denied a duty to defend or indemnify. (FAC, Ex. N) Everett and Payne eventually settled the Clark litigation on November 25, 1998 agreeing to pay Clark $25,000 for past infringement, $225,000 to cover Clark's attorney fees, and a $5.00 per unit royalty on future sales with an annual minimum payment of $26,500. (Cox. Decl., Ex. F, Confidential Settlement Agreement).

On November 26, 1997, Everett and Payne filed suit against Transcontinental and American. In the First Amended Complaint, Plaintiffs assert the following eight causes of action against each Defendant: (1) Declaratory Relief re: duty to defend (Claims One & Two); (2) Declaratory Relief re: duty to indemnify (Claims Three & Four); (3) Negligence (Claims Five & Six); (4) Breach of Contract re: failure to defend (Claims Seven & Eight); (5) Breach of Contract re: failure to indemnify (Claims Nine & Ten); (6) Breach of Duty of Good Faith and Fair Dealing (Claims Eleven & Twelve); (7) Negligent Infliction of Emotional Distress (Claims Thirteen & Fourteen); and (8) Intentional Infliction of Emotional Distress (Claims Fifteen & Sixteen).

On May 26, 1999, the Court found on summary judgment that Defendants breached their duty to defend. On May 22, 2000, the Court assessed damages equal to $380,809.52 in attorney fees from defending the Clark action and $10,733.11 in prejudgment interest for Defendants' failure to defend. The Court did not address whether Plaintiff was entitled to any additional damages, such as the Clark settlement and emotional distress. The Court also found on summary judgment that Defendants did not breach the implied covenant of good faith and fair dealing. The Court granted summary judgment in favor of American on Plaintiffs' claim for intentional infliction of emotional distress against American. On January 29, 2001, Plaintiffs dropped their intentional infliction of emotional distress against Transcontinental. Defendants then filed a joint two-part motion for summary judgment. As a result, the issues remaining to be addressed via summary judgment are whether: (1) Plaintiffs' negligence claims are viable; (2) Plaintiff Payne's negligent infliction of emotional distress claims; (3) Plaintiff Payne can recover emotional distress damages as a remedy for breach of contract; (4) Transcontinental has a duty to indemnify Plaintiffs for the Clark settlement; and (5) Plaintiffs are entitled to the Clark settlement as damages for breach of duty to defend.

III. LEGAL STANDARD

Summary judgment is proper only when there is no genuine issue of material fact and, when viewing the evidence in the light most favorable to the nonmoving party, the movant is clearly entitled to prevail as a matter of law. See Fed.R.Civ.P. 56(c); Cleary v. News Corp., 30 F.3d 1255, 1259 (9th Cir. 1994). Once a summary judgment motion is made and properly supported, the nonmoving party may not rest on the mere allegations of its pleadings, but must set forth specific facts showing that there is a genuine issue for trial. See Fed R. Civ. P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The court is not to make findings of fact, but to perform the threshold inquiry to determine whether there exists any "genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

If the factual context makes the nonmoving party's claim implausible, that party must come forward with more persuasive evidence than would otherwise be necessary to show that there is a genuine issue for trial. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Moreover, if the nonmoving party has the burden of proof on a given issue, the moving party can prevail by demonstrating "that there is an absence of evidence to support the nonmoving party's case." Celotex, 477 U.S. at 325, 106 S.Ct. 2548.

IV. DISCUSSION

A. Negligence

Plaintiffs allege that Transcontinental breached a duty of due care owed them by failing to consult with an attorney regarding a novel legal issue affecting the scope of coverage. Whether California law recognizes a negligent investigation cause of action against an insurer is a question of law appropriate for the court to address on summary judgment. Although contract and tort are distinct branches of California law, "the same wrongful act may constitute both a breach of contract and an invasion of an interest protected by the law of torts." North American Chemical Co. v. Superior Court, 59 Cal.App.4th 764, 774, 69 Cal.Rptr.2d 466 (1997). Where the cause of action "arises from breach of a promise set forth in contract, the action is ex contractu, but where it arises from a breach of duty growing out of contract[,] it is ex delicto." Id. at 775, 69 Cal.Rptr.2d 466. As a result, "[e]ven where there is a contractual relationship between the parties, a cause of action in tort may sometimes arise out of the negligent manner in which the contractual duty is performed." Eads v. Marks, 39 Cal.2d 807, 810, 249 P.2d 257 (1952). Thus, failure to use reasonable care in performing contractual duties may give rise to actions sounding in tort and in contract. See, e.g., North American Chemical Co., 59 Cal.App.4th 764, 69 Cal.Rptr.2d 466 (allowing tort action where defendant negligently failed to perform its duties to bag and ship plaintiffs product); Allred v. Bekins Wide World Van Services, 45 Cal.App.3d 984, 989, 120 Cal.Rptr. 312 (1975) (finding defendant mover bound, as a matter of law, to use reasonable care and skill and negligent failure to do so is a tort as well as a breach of contract); Eads, 39 Cal.2d 807, 249 P.2d 257; (allowing claim for negligent milk delivery).

An insurance contract generally imposes three duties on an insurer: (1) the duty to make immediate inquiry into the facts of any serious accident as soon as practicable after its occurrence; (2) the duty to employ competent counsel to represent its insured and to provide adequate funds for the defense of the suit; and (3) the duty to keep abreast of the progress and status of the litigation so that it may act intelligently and in good faith on settlement offers. Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, 882, 110 Cal.Rptr. 511 (1973).

Defendants argue that when an insured refuses to defend, extra-contractu damages attach only if the refusal is made in bad faith, and not for mere negligence in handling or investigating the claim. In other words, the insurer is liable for tort damages only for breach of the implied covenant of good faith and fair dealing, and its insured may not support a cause of action in negligence against it. Plaintiffs argue that because an insurer has the duty to make an investigation, an insurer can be liable for the negligent investigation of its claim, even when the insurer did not breach the covenant of implied faith and fair dealing.

The case law is unclear whether the negligent investigation is a breach of the implied covenant of good faith and fair dealing, a predicate to breach of the duty to defend, or sustainable as an independent tort. In Egan v. Mutual of Omaha Ins. Co., the California Supreme Court found the insurer breached the covenant of good faith and fair dealing when it failed to throughly investigate the foundation for denying disability payments to its insured. 24 Cal.3d 809, 817-19, 169 Cal.Rptr. 691, 620 P.2d 141 (1979). The court held that "it is essential that an insurer fully inquire into possible bases that might support the insured's claim," and "an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial." Id. at 818-19, 169 Cal.Rptr. 691, 620 P.2d 141. It viewed failure to do so as a breach of the implied covenant of good faith and fair dealing.*fn2 See id. at 818-19, 169 Cal.Rptr. 691, 620 P.2d 141. See also, California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal.App.3d 1, 50-51, 221 Cal.Rptr. 171 (1985) (treating allegation of inadequate investigation as an allegation of breach of the implied covenant).

More recently, in Eigner v. Worthington, 57 Cal.App.4th 188, 66 Cal.Rptr.2d 808 (1997), the court treated negligent investigation as both a predicate for breach of the duty to defend and a possible breach of the implied covenant. ...


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