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Progressive West Insurance Co. v. Dallo

September 10, 2008


The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court


Presently before the Court is Plaintiff's motions to partially dismiss (1) the Counterclaim of defendant Jonathan Dallo ("Jonathan") and (2) the Second Amended Counterclaim of defendants Michael Dallo, Mona Dallo, and Dallo & Co., Inc. (collectively "Dallo Co. and Parents"). For the reasons set forth below, the Court GRANTS IN PART and DENIES IN PART Plaintiff's motions.


I. Factual Background

Sometime during 2000 or 2001, Dallo & Co., Inc. began using Michael Kennedy and Kennedy Insurance Agency Inc. ("Kennedy Insurance") for its insurance needs. (Second Am. Countercl. ¶ 12) ("SACC"). As of late 2005, the vehicles driven by Michael, Mona and Jonathan Dallo were insured under a Unigard fleet policy, as arranged by Kennedy Insurance. Id. at ¶ 17. In late 2005, Kennedy Insurance had all commercial liability and automobile insurance for Dallo & Co., Inc. placed with Unigard Insurance Company. Id. at ¶ 18. However, in early January 2006, Kennedy Insurance informed Dallo & Co., Inc. that, in order to maintain its coverage, Jonathan would have to be excluded from the policy. Id. at ¶¶ 18, 19. Michael Kennedy told Michael Dallo that Jonathan would need to obtain substitute insurance, but assured Michael Dallo that Kennedy Insurance would obtain appropriate coverage for Jonathan. Michael Kennedy asked Michael Dallo to designate which car he believed Jonathan was most likely to drive. Michael Kennedy chose to have the vehicles insured under a policy of automobile insurance ("the Policy") with Plaintiff Progressive West Insurance Co. ("Progressive"). The Policy provided $500,000 in personal injury liability coverage. Id. at ¶ 35. Under the policy, Progressive promised to "pay damages . . . for bodily injury for which an insured person becomes legally responsible because of an accident arising out of the ownership, maintenance, or use of the vehicle." Id. at ¶ 37.

On June 28, 2006, Jonathan Dallo, the adult son of Mona and Michael Dallo, was involved in a motor vehicle accident that resulted in the death of Jodi Burnett. (SACC ¶ 24.) Burnett's husband and family filed a lawsuit in San Diego Superior Court ("Burnett Lawsuit"), asserting claims against Jonathan Dallo, Michael Dallo, Mona Dallo, and Dallo & Co., Inc. (collectively "Counterclaimants"). (SACC ¶ 44.)

The Counterclaimants allege they properly tendered their claims related to the Burnett Lawsuit, but Progressive initially denied coverage. (SACC ¶ 41.) Progressive allegedly denied the claim without conducting an "appropriate investigation"; Progressive failed to take statements from the Counterclaimants and did not await answers to questions already posed to the Counterclaimants. After counsel for Dallo Co. and Parents re-tendered the claim to Progressive with additional information, Progressive agreed to defend all the Counterclaimants. (SACC ¶ 14.) Progressive undertook this defense under a reservation of Progressive's rights to recoup its defense costs and any indemnity payment based on its position that the Policy did not cover Jonathan Dallo's use of the BMW vehicle he was driving at the time of the accident. (SACC ¶¶ 14, 21.)

The SACC alleges that despite Progressive's agreement to provide a defense for all the Counterclaimants, Progressive never actually undertook the defense of Dallo Co. and Parents because Dallo Co. and Parents had a conflict of interest with Jonathan that precluded joint representation. At the first mediation session of the Burnett Lawsuit, Dallo Co. and Parents allege they were not represented by independent counsel. (SACC ¶¶ 62- 70.) However, Dallo Co. and Parents acknowledge that separate counsel appeared for Jonathan at the second mediation session. Furthermore, Progressive eventually secured separate counsel for Dallo & Co., Inc. (Kimberly Oberrecht) and Michael and Mona Dallo (David Peck) shortly before the second mediation session. However, "counsel never took over the defense in a substantive way." (SACC ¶ 72.) Dallo & Co., Inc. rejected Ms. Oberrecht's representation at the second mediation. Michael and Mona Dallo rejected the representation of Mr. Peck because they did not want to jeopardize their rights to the larger Unigard insurance policy. (See SACC ¶ 77.) Accordingly, Dallo Co. and Parents "severed" their ties with Jonathan and Progressive and made an independent settlement with the Burnetts under the Unigard policy, using $1,000,000 from the policy and $250,000 from their own funds.

The Burnett Lawsuit against Jonathan settled after the second mediation. Progressive allegedly knew Dallo Co. and Parents had abandoned coverage and accepted an offer to settle the Burnett claims against Jonathan for the Policy limit. (SACC ¶ 78.) Pursuant to the settlement agreement, Progressive paid its $500,000 policy limit on behalf of Jonathan only.

II. Procedural Background

On July 16, 2007, Progressive filed its First Amended Complaint asking for (1) a declaration that the Policy does not cover claims arising out of the accident in the Burnett Lawsuit; (2) a judgment for reimbursement from the Counterclaimants of defense costs incurred during Progressive's defense of the Burnett Lawsuit; and (3) a judgment for reimbursement of the $500,000 paid to the Burnett Lawsuit plaintiffs as part of the settlement agreement. (Doc. No. 6.) On August 8, 2007, Dallo Co. and Parents filed a motion to dismiss. In an October 30, 2007 Order, this Court rejected the argument of Dallo Co. and Parents and denied the motion. (Doc. No. 14.)

On November 9, 2007, Dallo Co. and Parents filed counterclaims against Progressive, asking for a declaration regarding the rights and duties under the Policy and asserting causes of action for (1) breach of contract, (2) bad faith, and (3) intentional infliction of emotional distress. (Doc. No. 17.) On November 29, 2007, Progressive filed a motion to dismiss, alleging Dallo Co. and Parents failed to state a claim for these various actions because Progressive paid all benefits due under the Policy. (Doc. No. 18.) The Court granted Progressive's motion to dismiss with leave to amend. (Doc. No. 29.)

On February 28, 2008, Dallo Co. and Parents filed their First Amended Counterclaim. (Doc. No. 31.) However, on March 18, 2008, Dallo Co. and Parents filed a motion to modify the case management conference order and to allow them to file their Second Amended Counterclaim. (Doc. No. 32.) Jonathan filed an accompanying motion for joinder and leave to file a counterclaim. (Doc. No. 34.) Progressive filed opposition to both motions. (Doc. Nos. 37, 38.) The Court granted both Dallo Co. and Parents' motion and Jonathan's motion. (Doc. No. 46.)

Pursuant to that order, Dallo Co. and Parents filed their Second Amended Counterclaim on May 29, 2008, alleging (1) negligence, (2) misrepresentation, (3) breach of an oral contract, (4) reformation, (5) declaratory relief, (6) breach of contract, (7) bad faith breach of an insurance contract, and (8) violation of California Business and Professions Code Section 17200, et seq. (Doc. No. 47.) Jonathan filed his Counterclaim for (1) negligence, (2) misrepresentation, (3) breach of an oral contract, (4) reformation, (5) declaratory relief, and (6) breach of contract on June 6, 2008. (Doc. No. 49.)

Progressive has filed a motion to dismiss counts (6), (7), and (8) of Dallo Co. and Parents' Second Amended Counterclaim pursuant to Fed. R. Civ. P. Rule 12(b)(6). (Doc. No. 57.) Progressive also filed a motion to dismiss count (6) of Jonathan's counterclaim pursuant to Fed. R. Civ. P. 12(b)(6). (Doc. No. 56.) Dallo Co. and Parents opposed the motion (Doc. No. 66) as did Jonathan (Doc. No. 65). Progressive filed its reply on August 29, 2008. (Doc. No. 70.)

The Court found the matter fully briefed and amenable for disposition without oral argument pursuant to Local Rule 7.1(d)(1) and the hearing date was vacated.

Standard of Review

A motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) tests the legal sufficiency of the claims asserted in the complaint. Fed. R. Civ. P. 12(b)(6); Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). To avoid a Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations; rather, it must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, --- U.S. ----, 127 S.Ct. 1955, 1974 (2007).

In deciding a motion to dismiss for failure to state a claim, the court's review is limited to the contents of the complaint. Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996); Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). The court must accept all factual allegations pled in the complaint as true, and must construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir.1996); Mier v. Owens, 57 F.3d 747, 750 (9th Cir.1995) (citing Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). In spite of the deference the court is bound to pay to the plaintiff's allegations, it is not proper for the court to assume that "the [plaintiff] can prove facts which [he or she] has not alleged." Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). Furthermore, a court is not required to credit conclusory legal allegations cast in the form of factual allegations, unwarranted deductions of fact, or unreasonable inferences. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981).

A court may dismiss a complaint without granting leave to amend only if it appears with certainty that the plaintiff cannot state a claim and any amendment would be futile. See Fed. R. Civ. P. 15(a) (leave to amend "shall be freely given when justice so requires"); DeSoto v. Yellow Freight Systems, Inc., 957 F.2d 655, 658 (9th Cir.1992); Albrecht v. Lund, 845 F.2d 193, 195 (9th Cir. 1988); Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986) ("leave to amend should be granted unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.").


I. Scope of the Leave to Amend

i. Parties' Arguments

Progressive argues Dallo Co. and Parents exceeded the limitations of the scope of permissible amendments set forth in the Court's Order Granting the Plaintiff's Motion to Dismiss. (Doc. No. 29.) In that order, argues Progressive, the Court only granted leave to amend to "address[ ] the deficiencies set forth above. . . ." (Doc. No. 29, 10:4-7.) Progressive argues any amendments that do not specifically address deficiencies raised in that order are, therefore, beyond the scope of the order and improper. Progressive applies this argument to the breach of contract claim, the bad faith breach of contract claim, the intentional infliction of emotional distress claim, and the California Business and Profession Code section 17200 claim.

Dallo Co. and Parents argue the limitations in the Court's Order Granting the Plaintiff's Motion to Dismiss but Allowing Leave to Amend were superceded by the Court's subsequent order granting Dallo Co. and Parents leave to amend the Second Amended Counterclaim.

ii. Analysis

Progressive's argument misinterprets the record. The order Progressive relies upon, in fact, permits only amendments designed to correct the noted deficiencies. (Doc. No. 29.) However, the Court subsequently granted Dallo Co. and Parents leave to file their SACC, notwithstanding the prior order. (Doc. No. 46.) Progressive opposed the motion and fully briefed the issues on the merits, but never argued the additional proposed grounds in the proposed SACC exceeded the scope of the Court's prior order. The Court granted Dallo Co. and Parents leave to file the SACC, cognizant of the prior order and with full knowledge of the contents of the proposed SACC. ...

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