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Advanced Network, Inc v. Peerless Insurance Company

December 10, 2010


Super. Ct. No. 37-2007-00074740- CU-BC-CTL APPEAL from a judgment of the Superior Court of San Diego County, Steven R. Denton, Judge. Reversed with directions.

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


This is a dispute over insurance coverage under a commercial general liability (CGL) policy Peerless Insurance Company (Peerless) issued to Advanced Network, Inc. (ANI). On appeal, Peerless contends the court erred by finding an underlying action for the replacement of cash stolen by an ANI employee from one of its clients, a credit union, was an action for damages for the "loss of use" of property within the meaning of the policy. We agree with Peerless. " 'Loss of use' of property is different from 'loss' of the property." (Collin v. American Empire, Ins. Co. (1994) 21 Cal.App.4th 787, 818 (Collin).) As neither the allegations of the underlying complaint nor any extrinsic facts raised any coverage potential, Peerless had no duty of defense or indemnification. We reverse the judgment, which awarded ANI approximately $2 million in compensatory and punitive damages, and direct the court on remand to enter judgment for Peerless.


In May 1997 ANI contracted with Mission Federal Credit Union (Mission Federal) to service the cash distribution machines (CDMs) in its branch stores. An armored carrier would deliver cash to a Mission Federal branch, and a single ANI employee would later enter the branch during nonbusiness hours with a key and an alarm code, access the safe, remove cash designated for the CDMs and replenish them.

In December 2000 ANI assigned former employee Jacob Johnson to service Mission Federal's CDMs. In October 2004 it was discovered that Johnson had stolen approximately $2 million in cash from Mission Federal, which he concealed by submitting false records. Mission Federal made a demand on its fidelity bond holder, Cumis Insurance Society, Inc. (Cumis), and after applying a deductible Cumis paid it $1,954,627.

In August 2005 Cumis sued ANI in the federal district court for equitable subrogation, breach of contract and negligence, and for respondeat superior liability for Johnson's torts (Cumis Insurance Society, Inc. v. Advanced Network, Inc., Case No. 05CV1566 DMS (BCM) (Cumis action)). Shortly thereafter, Johnson pleaded guilty in a federal criminal case to misappropriating more than $2 million from Mission Federal between December 2000 and October 7, 2004.

ANI had a CGL policy with Peerless, with per occurrence and aggregate limits of $1 million and $2 million, respectively. The policy covered third party "property damage" caused by an "occurrence" during the policy period. The policy defined "property damage" as (1) "Physical injury to tangible property, including all resulting loss of use of that property," and (2) "Loss of use of tangible property that is not physically injured." ANI also had a $250,000 crime policy with Chubb Group of Insurance Companies (Chubb), and a $3 million commercial umbrella policy with Golden Eagle Insurance (Golden Eagle).

Through its insurance broker, Marrs Maddocks & Associates (Marrs Maddocks), ANI tendered the defense of the Cumis action to Golden Eagle. A claims consultant for Golden Eagle and Peerless, Adam Woellert, handled the matter. Although the tender did not mention the Peerless CGL policy, Woellert considered it in determining whether ANI had any coverage. After reviewing the complaint allegations and confirming with ANI's attorney that there were no other material facts, Woellert determined the CGL policy provided no coverage. Peerless took the position there was no "property damage" within the meaning of the CGL policy because money is not considered to be tangible property, and the theft of money was not a covered "occurrence" because it was not accidental. Peerless sent ANI letters denying coverage on these grounds.

In late 2006 ANI agreed to pay $1 million to Cumis to settle its action. Of that amount, Chubb contributed its $250,000 crime policy limit.

In September 2007 ANI commenced this action against Peerless for breach of contract and breach of the implied duty of good faith and fair dealing.*fn1 The parties both moved for summary judgment or summary adjudication. In its December 5, 2008 tentative ruling, the court denied Peerless's motion. The court rejected Peerless's theories, explaining that cash is tangible property, and there was an "occurrence" because from the standpoint of ANI, its employee's theft of cash was unforeseen and unintended. The court also found that while there was no known injury or damage to the stolen cash, there was potential coverage under the "property damage" provision of the CGL policy because Mission Federal "did sustain a 'loss of use' of the bills." The tentative ruling granted ANI's motion for summary adjudication of Peerless's duty to provide ANI a defense in the Cumis action.

At the hearing on the same date, Peerless argued the "loss of use" prong of the property damage provision is inapplicable because the Cumis action was not for loss of use of stolen cash, and rather was for the replacement value of the cash. Peerless cited Collin, supra, 21 Cal.App.4th 787. After taking the matter under submission, on December 11 the court affirmed its tentative ruling. Peerless then paid ANI $50,638.72 for attorney fees it incurred in the Cumis action.

Trial was held in February and March 2009. The parties' January 29, 2009 joint trial readiness conference report states Peerless disputed that "the loss of cash money is 'property damage' as that term is defined by the Peerless . . . polic[y]." In its trial brief, Peerless again raised the Collin opinion and argued the theft or conversion of cash does not fall within the "loss of use" prong of the policy's property damage provision. On the first day of trial, February 24, the court rejected Peerless's "loss of use" argument.

Trial proceeded on the remaining coverage issue, whether a policy exclusion pertaining to damage to property in the care, custody and control of ANI applied. The court found the exclusion inapplicable, directed a verdict in favor of ANI on its breach of contract cause of action, and awarded it $750,000 in damages for Peerless's failure to indemnify it in the Cumis action. The court denied Peerless's motion for non-suit on the issue of bad faith and allowed the matter to go to the jury. The jury found in ANI's favor and awarded it $2 million in punitive damages. The jury was also asked to determine whether ANI had any further contractual damage, and it awarded an additional $17,709.19 for attorney fees incurred in the Cumis action. Further, the court awarded ANI $170,675 in so-called "Brandt fees," which are attorney fees "incurred by the insured to obtain what it was owed under the contract." (Griffin Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal.App.4th 172, 211; see Brandt v. Superior Court (1985) 37 Cal.3d 813.) Judgment was entered on May 8, 2009.

Peerless moved for judgment notwithstanding the verdict (JNOV) or a new trial. The court denied the motion for JNOV and conditionally granted the motion for a new trial based on excessiveness of the punitive damage award, pending ANI's acceptance of a reduction of the award from $2 million to $1 million. ANI accepted the reduction and an amended judgment totaling $1,984,269.72 was entered on July 21, 2009. The court subsequently awarded ANI an additional $31,464.77 in attorney fees and costs.



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