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Wayne Merritt Motor Co., Inc. Dba Rv's of Merritt, Wayne v. New Hampshire Insurance

October 21, 2011


The opinion of the court was delivered by: Lucy H. Koh United States District Judge


Plaintiffs Wayne Merritt Motor Co., Inc. dba RV's of Merritt, Wayne Merritt and Peggy Merritt ("Plaintiffs") bring this diversity action against Defendant New Hampshire Insurance Company ("Defendant"), alleging tort and contract claims related to Defendant's refusal to fully 22 indemnify Plaintiffs for a judgment rendered against them in state court. Defendant moves to 23 dismiss for failure to state a claim, or alternatively, for a more definite statement or to strike. For 24 the following reasons, the Court GRANTS IN PART AND DENIES IN PART Defendant's motion 25 to dismiss.

called "RV's of Merritt" in Scotts Valley, California. SAC ¶ 6. Plaintiffs purchased from

Defendant a Garage Liability insurance policy (the "GL policy"), as well as several other insurance 5 products. Id. ¶ 7. The GL policy required an annual premium payment of $22,136. Id. ¶ 25. 6

The policy was accompanied by an addendum labeled "GARAGE POLICY EXTENSION


Plaintiffs owned and operated a dealership specializing in recreational vehicles ("RVs")

The GL policy's "declarations page" "prominently" stated that the policy provided

$1,000,000 in "single occurrence coverage" and $2,000,0000 in" aggregate coverage." Id. ¶ 9. 8

ENDORSEMENT" (the "endorsement"). Id. ¶ 12. On the tenth page of the endorsement, there 10 was a provision entitled "LIMIT OF INSURANCE," which stated that coverage for each "suit" or 11 claim for "product related damage" was limited to $25,000 (the "cap provision"). Id. ¶ 14.

In 2007, Plaintiffs were sued in state court over conduct related to the sale of an RV (the

"state court action."). Defendant undertook at least some aspects of Plaintiffs' defense. In June 14 2007, Defendant rejected an initial settlement offer of $110,000. Id. ¶¶ 20-21. A mediation was 15 held in October 2008. Id. ¶ 20. Defendant "refused to settle and forced litigation, which caused 16

Mr. Merritt was hospitalized for five days. Id. ¶ 22. Plaintiff Peggy Merritt was "forced to handle 18 both the litigation and her husband's hospitalization, [which] caused her needlessly extreme 19 emotional distress." Id. ¶ 22. 20


[Plaintiff] Wayne [Merritt] to undergo a surgery for Diverticulitis in December 2008." Id. ¶ 21. 17

On September 2, 2009, the jury in the state court action returned a special verdict holding

Plaintiffs liable for intentional misrepresentation, concealment, negligent misrepresentation, 22 unlawful practice in the sale of consumer goods, breach of contract and breach of the implied 23 covenant of good faith and fair dealing. See ECF No. 27-1 (Request for Judicial Notice), Ex. A 24

Cruz County Superior Court Case No. CV 157820).*fn1 After issuance of the verdict, the parties 26

(Certified Copy of Special Verdict Form, Agard, et al. v. Wayne Merritt Motor Co., et al., Santa 25

settled for $177,000, approximately $77,000 of which was attributable to attorney's fees (the 2

"settlement award"). SAC ¶ 18. Defendant indemnified Plaintiffs for the entire attorney's fees 3 award. Id. ¶ 19.However, claiming that the cap provision limited any further liability, Defendant 4 indemnified Plaintiffs for only $25,000 of the remaining $100,000 owed under the settlement. In 5 order to pay the remaining $75,000, Plaintiffs had to obtain a loan and place a deed of trust on their 6 property. Id. ¶ 24. 7

8 of action for (1) breach of contract, (2) breach of the implied covenant of good faith and fair 9 dealing, (3) negligence, (4) unfair business practices, (5) intentional infliction of emotional distress,

U.S.C. § 1332(a). Plaintiffs filed a Second Amended Complaint ("SAC"), the first in federal court, 14 on May 16, 2011. 15 16

18 there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable 19 legal theory." Shroyer v. New Cingular Wireless Services, Inc., 606 F.3d 658, 664 (9th Cir. 2010) 20

(quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). In considering whether the 21 complaint is sufficient to state a claim, the court must accept as true all of the factual allegations 22 contained in the complaint. Ashcroft v. Iqbal, ------ U.S. --------, --------, 129 S.Ct. 1937, 1949 (2009). 23

While a complaint need not include detailed factual allegations, it "must contain sufficient factual 24 matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (quoting Bell 25

Subsequently, Plaintiffs filed a complaint against Defendant*fn2 in state court alleging causes

(6) interference with a protected property interest, (7) fraud, (8) reformation, and (9) violations of

Cal. Ins. Code § 785. Plaintiffs sought general, special and punitive damages, attorney's fees,

United States District Court

For the Northern District of California

reformation and injunctive relief. Defendant removed the action on April 11, 2011 under 28 13


Dismissal under Fed. R. Civ. P. 12(b)(6) for failure to state a claim is "proper only where

Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Courts are not bound to accept as true "a 26 legal conclusion couched as a factual allegation." Id. 27

2 to grant leave to amend. "[A] district court should grant leave to amend even if no request to 3 amend the pleading was made, unless it determines that the pleading could not possibly be cured 4 by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (quoting Doe 5

Under Fed. R. Civ. P. 12(e), "[a] party may move for a more definite statement of a

7 pleading to which a responsive pleading is allowed but which is so vague or ambiguous that the 8 party cannot reasonably prepare a response."

13 valid contract, (2) performance by the plaintiff or excuse for nonperformance, (3) breach by the 14 defendant and (4) damages. First Commercial Mortgage Co. v. Reece, 89 Cal. App. 4th 731, 745 15

(Cal. Ct. App. 2001). Here, the dispute centers on whether Defendant breached its obligation under 16 the GL Policy by refusing to indemnify Plaintiffs for the entire amount of the settlement award. 17

SAC ¶ 42. Based on the briefing, it appears the parties agree that Plaintiffs' breach of contract 18 claim turns on whether the cap provision is found to be unenforceable. 19

If the court concludes that the complaint should be dismissed, it must then decide whether

v. United States, 58 F.3d 494, 497 (9th Cir. 1995)). 6


1.First Cause of Action: Breach of Contract

United States District Court

For the Northern District of California

In order to state a claim for breach of contract, a plaintiff must allege (1) the existence of a

a. Plaintiffs have pled facts sufficient to show that the cap provision is


"Unquestionably, California insurers may rely on endorsements to modify printed terms of

a form policy." Haynes v. Farmers Ins. Exch., 32 Cal.4th 1198, 1208 (Cal. 2004).However, "an

insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear."

State Farm Mut. Auto. Ins. Co. v. Jacober, 10 Cal.3d 193, 201 (Cal. 1973). As the California

Supreme Court has explained:

We have declared time and again any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.

Coverage may be limited by a valid endorsement and, if a conflict exists between the main body of the policy and an endorsement, the endorsement prevails. But to be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be conspicuous, plain and clear. Thus, any such limitation must be placed and printed so that it will attract the reader's attention.

Such a provision also must be stated precisely and understandably, in words that are part of the working vocabulary of the average layperson. The burden of making

coverage exceptions and limitations conspicuous, plain and clear rests with the insurer. Haynes, 32 Cal.4th at 1204 (internal citations and quotations marks omitted). 5

6 establish a reasonable expectation that the GL Policy provided $1,000,0000 in single occurrence 7 coverage. In determining whether coverage is consistent with the objectively reasonable 8 expectations of an insured, "the court must interpret the language in context, with regard to its 9 intended function in the policy . The court may also rely on common sense in determining the 10 insured's objectively reasonable expectations." Farmers Ins. Exch. v. Knopp, 50 Cal. App. 4th 1415, 1422 (Cal. Ct. App. 1996).

Here, Plaintiffs allege that the declarations page for the GL Policy "prominently stated there Construed in the light most favorable to the non-moving party, Plaintiffs' allegations 13 was $1,000,000 in single occurrence coverage, and $2,000,0000 in aggregate coverage." SAC ¶ 9. 14

The declarations' description of coverage is relevant in ascertaining an insured's reasonable 15 expectations. See, e.g., Haynes, 32 Cal.4th 1198 (liability limitations described in the declarations 16 pages establish a reasonable expectation of coverage). Moreover, it is clearly rational for a person 17 purchasing insurance to assume that a $22,136 premium payment buys more than $25,000 in 18 coverage. The fact that the GL Policy covered a dealership selling RVs, many of which cost 19 thousands of dollars, also suggests that Plaintiffs were reasonable to expect extensive coverage. 20

Because Plaintiffs reasonably expected $1,000,000 in coverage, any limiting clause must be "conspicuous, plain and clear." Id. As noted above, the cap provision appears in a document 22 entitled "GARAGE LIABILITY EXTENSION ENDORSEMENT." SAC ¶ 12. Such language 23 creates the impression that the endorsement expands coverage, rather than limiting it. In addition, 24 although the cap provision is included in a subsection plainly labeled "LIMIT OF INSURANCE," 25 that subsection is "buried" ten pages into the endorsement. SAC ¶ 14. Obscuring a term that 26 reduces coverage by 97.5 percent in an endorsement rather than on the declarations page can hardly 27 be said to conform with the insurer's "obligation . to apprise the insured" of coverage limitations.

Id. (an endorsement limiting liability that appeared on an insurance policy's 24th page, was not 2 clearly referenced in the policy's declarations, and was not "bolded, italicized, enlarged, 3 underlined, in different font, capitalized, boxed, set apart, or in any other way distinguished from 4 the rest of the fine print," was inconspicuous and therefore unenforceable); see also Thompson v. 5

Mercury Cas. Co., 84 Cal. App. 4th 90, 97 (Cal. Ct. App. 2000) (a limitation appearing in an 6 unnumbered policy addendum instead of "in the 'Liability' section of the policy, where an average 7 layperson would expect to find it," was unenforceable). For purposes of a motion to dismiss, the 8

Court finds Plaintiffs' allegations sufficient to show that the cap provision is not "conspicuous, 9 plain and clear" and is therefore unenforceable.

Hadland v. NN Investors Life Ins. Co., 24 Cal. App. 4th 1578, 1586 (Cal. Ct. App. 1994),

cited by Defendant, does not compel a different conclusion. The Hadland court noted the "general rule that the receipt of a policy and its acceptance by the insured without an objection binds the 13 insured as well as the insurer and he [or she] cannot thereafter complain that he [or she] did not 14 read it or know its terms. It is a duty of the insured to read his [or her] policy." Id. (citing Aetna 15

Casualty & Surety Co. v. Richmond, 76 Cal. App. 3d 645, 652 (Cal. Ct. App. 1977)). However, the 16 court went on to state that an "insured [is] bound by clear and conspicuous provisions in the policy 17 even if evidence suggests that the insured did not read or understand them." Id. (citing Sarchett v. 18

Blue Shield of California, 43 Cal.3d 1, 15 (Cal. 1987)). Finding that the terms of the policy were 19 clear, the Hadland court held that the insured was bound by them. Because the Court does not find 20 that the provision at issue here was sufficiently conspicuous, Hadland does not apply.

23 because they do not identify"what portion of their policy was arguably breached . or whether or 24 how there was any claim actually covered under the policy that was not paid." ECF No. 18 25

(Motion to Dismiss) at 6. To the contrary, the complaint clearly states that Defendant "breached 26 the GL policy by failing to pay benefits owed." SAC ¶ 42. Plaintiffs repeatedly emphasize their 27 understanding that the GL Policy obligated Defendant to indemnify them for up to $1,000,000 in 28 losses, and that Defendant thus breached the contract by asserting the cap provision. As such,

b. The factual allegations provide sufficient notice of Plaintiffs' claim for relief

Defendant also argues that Plaintiffs have failed to state a claim for breach of contract Defendant has been "put on notice of the legal theories that could hold [it] liable to . for breach of 2 contract." Dion LLC v. Infotek Wireless, Inc., C 07-1431SBA, 2007 WL 3231738 (N.D. Cal. Oct. 3 30, 2007).

c. The Court declines to address Defendant's argument under California

Insurance Code section 533 because it was raised for the first time on reply Finally, Defendant argues in its Reply Brief that even if the contract was breached, any relief is precluded by Cal. Ins. Code § 533. Section 533 provides: "An insurer is not liable for a loss caused by the willful act of the insured." Defendant contends that because the jury in the state court action found Plaintiffs liable for fraud, the GL policy did not require Defendant to indemnify Plaintiffs at all.

Since this argument was not raised in Defendant's motion to dismiss, Plaintiffs have not had an opportunity to respond. The Court therefore ...

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