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Total Call International, Inc. v. Peerless Insurance Co.

January 21, 2010


APPEAL from a judgment of the Superior Court of Los Angeles County, Jane L. Johnson, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC396192).

The opinion of the court was delivered by: Manella, J.


In the underlying action for breach of insurance contract and bad faith, appellant Total Call International, Inc. (TCI) asserted that respondent Peerless Insurance Company (Peerless) had improperly declined to defend TCI in litigation arising out of its advertising activities. The trial court sustained Peerless's demurrer to TCI's complaint without leave to amend. We affirm.


TCI's complaint against Peerless, filed August 12, 2008, alleges the following facts: TCI provides telecommunication services and products, including prepaid domestic and international phone cards. The cards enable people, many of whom are immigrants, to make calls to their home countries. The prepaid phone card industry is competitive, and providers such as TCI operate on thin profit margins. Most providers rely on "point of sale" advertising, that is, billboards and posters at gas stations and other places where cards are sold that state the price of the provider's card and amount of paid minutes. Because cost is the determinative factor for most consumers, they typically buy the least expensive card advertised on the billboards and posters.

TCI's complaint further alleges that Peerless issued a commercial general liability policy to TCI, effective from July 13, 2006 to July 13, 2007. The policy's coverage provisions stated: "We will pay those sums that the insured becomes legally obligated to pay as damages because of `personal and advertising injury' to which this insurance applies. We will have the right and duty to defend the insured against any `suit' seeking those damages." The policy defined "[p]ersonal and advertising injury" to mean "injury... arising out of" several enumerated "offenses," including the "[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services." Under an exclusion entitled "Quality [o]r Performance of Goods -- Failure to Conform [t]o Statements" (nonconformity exclusion), the policy precluded coverage for "`[p]ersonal and advertising injury' arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured's] `advertisement.'"

TCI's complaint further alleges that in March 2007, two competitors of TCI -- namely, IDT Telecom, Inc. and Union Telecard Alliance, LLC (collectively "IDT") -- sued TCI, alleging that they had suffered damages as the result of TCI's advertising activities. Peerless declined to provide TCI a defense in the IDT action on the ground that IDT had alleged only that TCI's advertising misrepresented TCI's own phone cards. In view of these allegations, Peerless asserted that IDT's claims fell outside the policy's coverage for advertising injury and were otherwise barred from coverage by the nonconformity exclusion. In November 2007, TCI entered into a settlement with IDT.

TCI's complaint asserts claims for breach of insurance contract, bad faith, unfair business practices (Bus. & Prof. Code, § 17200 et seq.), and declaratory relief against Peerless. Peerless demurred to TCI's complaint, contending that Peerless had properly declined to defend TCI in the IDT action. On November 4, 2008, the trial court sustained the demurrer without leave to amend. In ruling, the trial court concluded that although IDT's claims potentially constituted advertising injury under the policy, they were barred from coverage by the nonconformity exclusion. An order of dismissal was entered in Peerless's favor on November 17, 2008. This appeal followed.


TCI contends the trial court erred in sustaining the demurrer without leave to amend. As explained below, TCI is mistaken.

A. Standards of Review

"Because a demurrer both tests the legal sufficiency of the complaint and involves the trial court's discretion, an appellate court employs two separate standards of review on appeal. [Citation.]... Appellate courts first review the complaint de novo to determine whether or not the [] complaint alleges facts sufficient to state a cause of action under any legal theory, [citation], or in other words, to determine whether or not the trial court erroneously sustained the demurrer as a matter of law. [Citation.]" (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879, fn. omitted.) "Second, if a trial court sustains a demurrer without leave to amend, appellate courts determine whether or not the plaintiff could amend the complaint to state a cause of action. [Citation.]" (Id. at p. 879, fn. 9.)

Under the first standard of review, "we examine the complaint's factual allegations to determine whether they state a cause of action on any available legal theory. [Citation.] We treat the demurrer as admitting all material facts which were properly pleaded. [Citation.] However, we will not assume the truth of contentions, deductions, or conclusions of fact or law [citation], and we may disregard any allegations that are contrary to the law or to a fact of which judicial notice may be taken. [Citation.]" (Ellenberger v. Espinosa (1994) 30 Cal.App.4th 943, 947.) Moreover, because the policy and the competitors' complaint constitute the "foundation" of TCI's claims and are incorporated into TCI's complaint, we may properly rely on these documents in assessing whether TCI's claims are legally tenable. (4 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 430, p. 564.)

Under the second standard of review, the burden falls upon the plaintiff to show what facts he or she could plead to cure the existing defects in the complaint. (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 890.) "To meet this burden, a plaintiff must submit a proposed amended complaint or, on appeal, ...

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