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G. Neil Tocher et al v. Sequoia Insurance Company

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Shasta)


September 15, 2011

G. NEIL TOCHER ET AL., PLAINTIFFS AND APPELLANTS,
v.
SEQUOIA INSURANCE COMPANY, DEFENDANT AND RESPONDENT.

(Super. Ct. No. 166700)

The opinion of the court was delivered by: Mauro,j.

Tocher v. Sequoia Ins.

CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

Plaintiffs G. Neil Tocher and Missy Ann Tocher, doing business as Lone Rancher Enterprises, LP (the Tochers), sued defendant Sequoia Insurance Company (Sequoia) after Sequoia denied the Tochers' tender of defense in an underlying arbitration proceeding. The Tochers now appeal from the judgment entered pursuant to stipulation after the trial court determined that the counterclaims in the underlying arbitration proceeding were not covered by the Sequoia policy.

The Tochers contend on appeal that coverage existed under the personal injury liability provision of the Sequoia policy. We conclude, however, that the insurance covered claims arising from operations usual or incidental to farming, but the arbitration counterclaims pertained to hydroelectric power generation and did not involve "farming" as defined in the Sequoia policy.

Accordingly, there are no triable issues of material fact. We will affirm the judgment.

BACKGROUND

The Tochers own a 547-acre farm and cattle ranch (known as the Twin Valley Ranch) located near Whitmore, California (the property). The property has many lakes, watering ponds and pastures.

On September 25, 2007, the Tochers entered into a written 45-year lease and land use agreement (the lease agreement) with Shasta View, Inc., doing business as T.V. Ranch Hydro Management (Shasta View). The lease agreement was "for the lease, licensing and utilization of California State Water Resource Control Board (SWRCB) Water Use Permit #021001 and Water Use License #01334, Federal Energy Regulatory Commission (FERC) Exemption Project No. 6905-CA[,] and water conveyance facilities, penstock, powerhouse and transmission lines existing on [the Tochers'] property . . . for the purpose of [the] generation, sale and delivery of electrical energy for the mutual profit of [the Tochers and Shasta View] and in a manner which will not detract from the agricultural activities on [the property]." The lease agreement provided that the Tochers' and Shasta View's names would be listed as co-owners on California State Water Resources Control Board (SWRCB) water use permits and licenses and Federal Energy Regulatory Commission (FERC) exemptions and licenses, and for the equal sharing of all permit, licensing, and exemption fees.

Under the lease agreement, Shasta View would pay the Tochers $400,000 and 35 percent of all monies Shasta View received from the sale of the hydroelectric power generated at the property, minus expenses for taxes on the improvements and equipment used in, and insurance for, the hydroelectric power operation. The lease agreement required the Tochers to make all water not used on the property available to Shasta View for power generation, and it required Shasta View to purchase, install, operate, and maintain new power-producing equipment at the powerhouse located on the property and to pay for any modification, maintenance, or repair to the forebay, penstocks, springs, or Murphy ditch. The lease agreement contained a mandatory arbitration provision.

Sequoia issued a policy of insurance to the Tochers covering farming operations on the property during the period August 23, 2008, to August 23, 2009 (Sequoia Policy). The Sequoia Policy provided first-party property coverage and third-party liability coverage. The farmowners policy declarations to the Sequoia Policy identified the Tochers as the named insureds and described the Tochers' business as "Grazing Land Leased to Others."

The Sequoia Policy covered damages because of "personal injury" if caused by an offense "[a]rising out of . . . operations usual or incidental to 'farming.'" The Sequoia Policy defined "personal injury" as injury other than "bodily injury" arising out of, among other offenses, the oral or written publication of material that disparaged an organization's goods, products, or services. "Farming" was defined as "the operation of an agricultural or aquacultural enterprise." The Sequoia Policy did not define the terms "agricultural" and "aquacultural."

On December 1, 2008, the Tochers filed a demand for arbitration with the American Arbitration Association against Shasta View. The Tochers alleged that Shasta View breached the lease agreement by authorizing the construction of modifications to the powerhouse and the penstock and installing power-producing equipment without notifying the proper government agencies and obtaining necessary permits, thereby exposing the Tochers to adverse actions by those government agencies.

Shasta View filed an answer and counterclaims against the Tochers in the arbitration proceeding, alleging the following: In 1984, the Tochers constructed a hydroelectric facility on the property and entered into a 20-year power purchase agreement with Pacific Gas & Electric (PG&E) for the purchase of power generated by the Tochers' hydroelectric facility. The Tochers' agreement with PG&E expired in 2004.

Thereafter, the Tochers removed the original turbine and generator from the powerhouse on the property. On September 25, 2007, Shasta View entered into the lease agreement for the purpose of generating, selling, and delivering hydroelectric power for the mutual profit of the Tochers and Shasta View.

The lease agreement authorized Shasta View to "restore" the hydroelectric facility on the property and provided for a sharing of revenues between the parties when a new power purchase agreement with PG&E was executed. Upon the Tochers' insistence, in early October 2007, Shasta View began clearing and other maintenance work on the forebay and the Murphy ditch, a two-and-a-half-mile spring-fed stream that served as the water supply for the hydroelectric facility. The Tochers insisted that Shasta View begin work on the forebay and the Murphy ditch even though Shasta View had not yet resolved "equipment specification" issues nor determined how the hydroelectric power would be marketed. The Tochers demanded that the Murphy ditch be made leak-proof.

The Tochers wanted Shasta View to complete maintenance and improvement work on the forebay and the Murphy ditch because the Tochers wanted that system to irrigate their ranch, to their sole benefit and not because of any need of the hydroelectric power operation. Shasta View undertook "major tasks" to sign a power purchase agreement with PG&E. However, the Tochers' breaches and purported termination of the lease agreement prevented Shasta View from executing a contract with PG&E and completing necessary applications with FERC. Pursuant to the Tochers' instruction, their engineer produced a report criticizing Shasta View's "entire approach to the FERC Application." The Tochers' engineer told FERC that Shasta View violated FERC requirements. As a result of this contact, on September 24, 2008, FERC directed Shasta View to cease all work at the hydroelectric facility. The Tochers asked FERC to "flag" exemption project No. 6905-CA so that any document submitted to FERC must be approved by G. Neil Tocher. Shasta View was attempting to remedy the deficiencies identified by FERC and was proceeding with its FERC application when the Tochers purported to terminate the lease agreement.

Shasta View sought specific performance of the lease agreement or, in the alternative, in excess of $3.9 million in damages.

On January 21, 2009, the Tochers tendered the defense of the Shasta View counterclaims to Sequoia. The Tochers asserted that the counterclaims were covered under the "personal injury" liability and the "occurrence-based property damage" provisions of the Sequoia Policy. In particular, the Tochers asserted that the hydroelectric facility constituted an "aquacultural enterprise" and "farming."

On January 29, 2009, Sequoia denied the Tochers' tender of defense, claiming that it had no duty to defend because (1) the alleged "personal injury" did not arise out of the Tochers' "farming" operations, and (2) the Shasta View counterclaims were excluded under the "business pursuits" provision of the Sequoia Policy.

The Tochers sued Sequoia in Shasta County Superior Court, asserting causes of action for breach of contract, breach of the duty of good faith and fair dealing, and declaratory relief. The Tochers alleged the following: The Sequoia Policy covered damages arising out of the oral or written publication of material that disparaged an organization's goods, products, or services. Shasta View accused the Tochers of disparaging Shasta View to government agencies, lenders, and service and material suppliers, thereby interfering with Shasta View's ability to perform under the lease agreement and resulting in damages to Shasta View. In particular, Shasta View alleged that (1) pursuant to the Tochers' instruction, the Tochers' engineer produced a report criticizing Shasta View's "entire approach to the FERC application," (2) the Tochers' engineer told FERC that Shasta View violated FERC requirements, causing FERC to order Shasta View to stop all work at the hydroelectric facility, and (3) the Tochers asked FERC to flag FERC project exemption No. 6905-CA. Sequoia denied the Tochers' tender of defense without proper cause; failed to compensate the Tochers for the defense costs associated with the Shasta View action; failed to investigate the Tochers' claim; failed to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under its insurance policies; misrepresented the pertinent facts or insurance policy provisions; and failed to promptly provide a reasonable explanation of the basis relied upon in the Sequoia Policy for the denial of the Tochers' claim.

On December 23, 2009, the Tochers filed a motion for summary adjudication against Sequoia. The trial court granted Sequoia's request that it take judicial notice that the term "aquaculture" meant "the cultivation of aquatic plants or animals in natural or controlled marine or freshwater environments, particularly for food." The trial court further found that the common definition of the term "agricultural" was "the science, art, or occupation concerned with cultivating land, raising crops, and feeding, breeding, and raising livestock." The trial court concluded that even if Shasta View's counterclaims against the Tochers satisfied the definition of "personal injury" under the Sequoia Policy, the policy only provided coverage for conduct arising out of operations usual or incidental to "farming," and any "personal injury" alleged against the Tochers did not arise out of operations usual or incidental to "farming" because the parties' power-generation operation did not constitute an "agricultural" or "aquacultural" operation. The trial court found that the electricity generated under the lease agreement was not for the purpose of facilitating the cultivation of any crops or the raising of livestock, whether land- or water-based. Instead, the electricity was generated and sold for the sole purpose of producing a profit for the Tochers and Shasta View. The trial court denied the Tochers' motion for summary adjudication in an order dated June 22, 2010.

Although Sequoia did not move for summary adjudication or judgment in its favor, on September 2, 2010, the parties filed a stipulation providing that (1) the trial court's determinations regarding the Tochers' summary adjudication motion -- that the Shasta View counterclaims were not covered by the Sequoia Policy -- effectively adjudicated the entire dispute between the parties, (2) that a judgment in favor of Sequoia and against the Tochers could be entered based on the trial court's summary adjudication order, and (3) that Sequoia was the prevailing party in the action. Judgment was entered on September 3, 2010, in accordance with the parties' stipulation.

DISCUSSION

I

As a threshold procedural matter, Sequoia argues that the Tocher appeal is defective because the notice of appeal failed to identify the summary adjudication order. We disagree.

A notice of appeal must refer to an appealable judgment or order. (Cal. Rules of Court, rule 8.100(a)(1).) An order denying a motion for summary adjudication is not an appealable order but may be reviewed on appeal from the final judgment. (Lackner v. LaCroix (1979) 25 Cal.3d 747, 753; Waller v. TJD, Inc. (1993) 12 Cal.App.4th 830, 836.) Here, the notice of appeal referred to the judgment entered on September 3, 2010, pursuant to the parties' stipulation for the entry of a final judgment.

On this record, the purpose and intent of the appeal is clear and Sequoia does not claim to have been misled or prejudiced by the notice of appeal. (Poggetto v. Bowen (1936) 18 Cal.App.2d 173, 176 [denying respondent's motion to dismiss the appeal where no one was misled by the error in the notice of appeal and the appellant's intent was apparent].) The parties stipulated to a final judgment so the Tochers could appeal the trial court's determination that the Shasta View counterclaims were not covered by the Sequoia Policy, a determination that the parties agreed disposed of the Tochers' entire case. Under the circumstances, we will consider the appeal on its merits.*fn1

II

A liability insurer must defend its insured against claims that seek damages against the insured on any theory that, if proved, would be covered by the policy. (Mirpad, LLC v. California Ins. Guarantee Assn. (2005) 132 Cal.App.4th 1058, 1068.) "'"To prevail [on the issue of the duty to defend], the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. . . . [¶] Nevertheless, the obligation to defend is not without limits. "Rather, such a duty is limited by 'the nature and kind of risk covered by the policy.'" [Citations.] "'[T]he duty to defend derives from the insurer's coverage obligations assumed under the insurance contract.' [Citation.] Thus, 'where there is no potential for coverage, there is no duty to defend.'"' [Citations.]" (Uhrich v. State Farm Fire & Casualty Co. (2003) 109 Cal.App.4th 598, 608, italics omitted.) Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 299-300.)

We determine whether a duty to defend exists in a given case by examining the terms of the insurance policy, the allegations of the third-party claim, and all facts known to the insurer from any source, including facts extrinsic to the third-party claim and those facts the insurer "might have ascertained had [it] diligently pursued the requisite inquiry" into the details surrounding the tender of defense. (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at pp. 295, 300; California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 36-37.)

The interpretation of an insurance policy as applied to undisputed facts is a question of law which we resolve de novo. (Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 802.) Because insurance policies are contracts, "[t]he rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. [Citations.]" (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.) "'"'The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties.' 'Such intent is to be inferred, if possible, solely from the written provisions of the contract.'"'" (Aerojet-General Corp. v. Commercial Union Ins. Co. (2007) 155 Cal.App.4th 132, 140.)

The Sequoia Policy provides in pertinent part:

"COVERAGE I - PERSONAL AND ADVERTISING INJURY LIABILITY "1. Insuring Agreement

"a. We will pay those sums that the 'insured' becomes legally obligated to pay as damages because of 'personal injury' or 'advertising injury' to which this insurance applies. We will have the right and duty to defend the 'insured' against any 'suit' seeking those damages. However, we will have no duty to defend the 'insured' against any 'suit' seeking damages for 'personal injury' or 'advertising injury' to which this insurance does not apply. We may at our discretion investigate any 'occurrence' or offense and settle any claim or 'suit' that may result. . . . [¶] . . . [¶] No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under the Additional Coverages.

"b. This insurance applies to 'personal injury' only if caused by an offense:

"(1) Committed during the policy period; and

"(2) Arising out of personal activities or out of operations usual or incidental to 'farming,' excluding advertising, publishing, broadcasting or telecasting done by or for you."

"SECTION IV - DEFINITIONS

"[¶] . . . [¶] 2. 'Bodily injury' means bodily injury, sickness or disease sustained by a person, and includes death resulting from any of these at any time. [¶] . . . [¶]

"6. 'Farming' means the operation of an agricultural or aquacultural enterprise, and includes the operation of roadside stands, on your farm premises, maintained solely for the sale of farm products produced principally by you. Unless specifically indicated in the Declarations, 'farming' does not include:

"a. Retail activity other than that described above; or

"b. Mechanized processing operations. [¶] . . . [¶]

"16. "Personal injury" means injury, other than 'bodily injury,' arising out of one or more of the following offenses: [¶] . . . [¶]

"d. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services . . . ."*fn2

Next, we examine the allegations in Shasta View's counterclaims to determine whether they fall within the policy coverage for "personal injury" liability.

Shasta View alleged that the Tochers breached the lease agreement by (1) requiring Shasta View to begin maintenance and improvement work on the forebay and the Murphy ditch immediately after the execution of the lease agreement, before "equipment specification" issues and marketing plans were determined; (2) requiring Shasta View to begin installing a turbine and generator, even though the Tochers knew or should have known that a building permit had not been issued for this work; and (3) interfering with Shasta View's performance under the agreement and by purporting to terminate the agreement without valid cause.

Pursuant to the unambiguous language of the Sequoia Policy, the first two counterclaims were not claims for "personal injury" within the meaning of the Sequoia Policy because they did not involve the oral or written publication of material that disparaged goods, products, or services. Moreover, the Tochers have not identified any facts that would show a "personal injury" in connection with these claims for damages. Accordingly, Shasta View's counterclaims based on the Tochers' demand for work on the forebay and the Murphy ditch and demand to install a turbine and generator were not covered by the Sequoia Policy.

Regarding the third counterclaim, the Tochers contend that Shasta View stated a "personal injury" claim because it accused the Tochers of disparaging Shasta View's performance under the lease agreement in order to interfere with Shasta View's efforts to complete its work on the hydroelectric facility.*fn3 But even if we assume that the third counterclaim asserted disparagement of Shasta View's goods, products or services and thus constituted a claim for "personal injury" as defined by the Sequoia Policy, the Tochers must also establish that the alleged disparagement arose out of operations usual or incidental to the Tochers' "farming" operations. The Tochers cannot do so on this record.

The Sequoia Policy defined "farming" as "the operation of an agricultural or aquacultural enterprise." The trial court took judicial notice of the fact that the term "aquaculture" meant "the cultivation of aquatic plants or animals in natural or controlled marine or freshwater environments, particularly for food" and the trial court also found that the term "agricultural" meant "the science, art, or occupation concerned with cultivating land, raising crops, and feeding, breeding, and raising livestock." The Tochers do not challenge these definitions of the terms "agricultural" and "aquacultural."

We have found no California case interpreting insurance policy language similar to the particular language at issue here, i.e., "[a]rising out of . . . operations usual or incidental to 'farming.'" In other factual contexts, however, courts have interpreted the terms "farming" and "farming operations" in insurance policies to include the raising and grazing of animals (Wint v. Fidelity & Casualty Co. (1973) 9 Cal.3d 257, 262-263; Aetna Casualty & Surety Co. v. Brethren Mut. Ins. Co. (Md.Ct.App. 1977) 379 A.2d 1234, 1243), the sale of cattle by a cattle rancher (Reinsurance Ass'n of Minnesota v. Timmer (Minn. 2002) 641 N.W.2d 302, 306, 309-310), the preparation and sale of potato seed by a potato farming business (St. Paul Fire & Marine Ins. Co. v. Three "D" Sales (D.C.N.D. 1981) 518 F.Supp. 305, 309), the sale of hay bales by hay farmers (National Farmers Union Property & Casualty Co. v. Iverson (D.C.S.D. 1972) 346 F.Supp. 660, 664), and crop dusting that damaged another farmer's crops (Mills v. Agrichemical Aviation, Inc. (N.D. 1977) 250 N.W.2d 663, 668).

G. Neil Tocher declared that he owned a "farm and cattle ranch" and maintained "stock ponds" on the property. But there is no evidence that Shasta View was engaged in any cattle ranching or other "agricultural" operation at the property or that Shasta View had any involvement with the stock ponds on the property. Hydroelectric power generation is not "aquaculture," the cultivation of aquatic plants or animals.

The alleged disparagement of Shasta View's performance under the lease agreement relates to Shasta View's performance in the hydroelectric power operation, not in any "farming" operation. Shasta View alleged that the Tochers' engineer contacted FERC, the agency with primary regulatory control over the hydroelectric power operation, to discuss Shasta View's alleged violations of FERC requirements. Shasta View further alleged that the Tochers asked FERC to flag the FERC project exemption applicable to the parties' hydroelectric power operation. There is no evidence that the communications between the Tochers, their engineer and FERC concerned any "agricultural" or "aquacultural" operation or that Shasta View accused the Tochers of disparaging Shasta View's performance of "agricultural" or "aquacultural" activities.

Nonetheless, the Tochers argue that potential coverage exists because the required maintenance of the forebay and the Murphy ditch arose out of the Tochers' "farming" operations. In G. Neil Tocher's reply declaration, the Tochers asserted that the forebay and the Murphy ditch had a dual purpose as part of the hydroelectric power system and also as part of the irrigation, water-conservation, erosion-control, flood-control and fire-suppression systems for the Tochers' ranch.

The fact that the forebay and the Murphy ditch served a dual purpose does not establish that Shasta View was involved in farming activities. Instead, the record establishes that Shasta View was involved in power generation, not farming. The express purpose of the lease agreement was the "generation, sale and delivery of electrical energy" which could not "detract" from the agricultural activities on the property. Thus, the lease agreement clearly differentiated between the purpose of the agreement -- power generation -- and the other farming activities on the property. Shasta View alleged in its counterclaims that the Tochers' demands concerning the forebay and the Murphy ditch breached the lease agreement because the demands did not pertain to power generation. Shasta View's counterclaims mirrored the terms of the lease agreement, asserting that the hydroelectric power operation was for the parties' mutual benefit while the irrigation system was for the Tochers' sole benefit. The Tochers have not established that the alleged disparagement of Shasta View pertained to any farming activities by Shasta View.

Thus, although the Tochers' motive in requesting work on the forebay and the Murphy ditch may have related to their farming operation, the Shasta View counterclaims for which the Tochers sought insurance coverage related only to the hydroelectric power operation.

The Tochers contend that Shasta View's failure to repair and maintain the forebay and the Murphy ditch was detrimental to the Tochers' agricultural activities and, for this reason, the Tochers terminated the lease agreement. This argument improperly focuses on the Tochers' claims against Shasta View, not on the Shasta View counterclaims for which the Tochers sought insurance coverage.

Finally, the Tochers assert that the heart of the dispute with Shasta View was the allocation of water from the forebay to either the irrigation system or the hydroelectric facility. But the portions of Shasta View's counterclaims cited by the Tochers do not establish a dispute over allocation of water on the property. Rather, the cited excerpts show a dispute about whether improvement and maintenance work on the forebay and the Murphy ditch was required under the lease agreement. The Tochers did not cite any other fact in the record to support their claim that the parties' dispute concerned the use or allocation of water. Our review of Shasta View's counterclaims disclosed no allegation about such a dispute.

"Courts will not indulge in forced construction so as to fasten liability on an insurance carrier which it has not assumed." (Johnson v. First State Ins. Co. (1994) 27 Cal.App.4th 1079, 1083.) The evidence in the record shows that Shasta View's counterclaims arose out of the hydroelectric power operation on the property and that such claims were not within the objectively reasonable contemplation of the "personal injury" liability coverage of the Sequoia Policy. Because the undisputed facts eliminate any possibility of coverage for Shasta View's counterclaims under the Sequoia Policy, the trial court correctly determined that Sequoia did not owe the Tochers a duty of defense.

DISPOSITION

The judgment is affirmed. Shasta View shall recover its costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)

We concur: BLEASE , Acting P.J. BUTZ ,J.


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