The opinion of the court was delivered by: Conti, District Judge.
REVISED ORDER GRANTING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT
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.
The underlying patent case, Clark v. Living Earth Crafts, No. 97-351
(C.D.Cal. 1997) (the "Clark action"), involved a suit by Roland Clark
against Everett, dba Living Earth Crafts, alleging that Everett
advertised, offered to sell, manufactured, and sold portable massage
tables that infringed a patent owned by Clark.*fn1 Everett tendered the
defense of this action to Defendant Transcontinental on May 14, 1997.
(First Amended Complaint ("FAC"), Ex. D). Transcontinental issued a
Commercial General Liability ("CGL") insurance policy (policy no.
56819374) to Everett covering the period from November 1, 1996 to
November 1, 1998. Three times during 1997, Transcontinental denied a duty
to defend or indemnify under the policy. (FAC, Ex. G, Ex. I, & Ex. K). On
January 8, 1998, Clark amended the complaint to add Donald Payne, the
owner and CEO of Everett as a defendant. (Cox Decl., Ex. C).
Transcontinental received formal notice of the amendment adding Payne and
tender of the claim against Payne on November 18, 1998. (Hancock Decl.,
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.
(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.
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.
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 plaintiff's 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-contract
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 thoroughly 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