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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 declines to consider whether Section 533

applies in this case. See Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) ("The district court

need not consider arguments raised for the first time in a reply brief."). However, if Plaintiffs

choose to amend their complaint, Defendant may include this argument in any subsequent motion

to dismiss.

Because Plaintiffs have sufficiently alleged facts showing that the cap provision is invalid,

the Court DENIES the motion to dismiss Plaintiffs' claim for breach of contract.

2. Second Cause of Action: Breach of the Covenant of Good Faith and Fair Dealing

"Under California law, all insurance contracts contain an implied covenant of good faith

and fair dealing which requires each contracting party to refrain from doing anything to injure the

right of the other to receive the benefit of the agreement." Hanson By & Through Hanson v.

Prudential Ins. Co. of Am., 783 F.2d 762, 766 (9th Cir. 1985). The covenant prevents a party from acting in bad faith to frustrate the contract's actual benefits. Guz v. Bechtel Nat. Inc., 24 Cal.4th 317, 353 n. 18 (Cal. 2000). A claim for breach of the implied covenant of good faith and fair dealing requires that: "(1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause." Love v.

Fire Ins. Exch., 221 Cal. App. 3d 1136, 1151 (Cal. Ct. App. 1990). The mere denial of benefits does not demonstrate bad faith. See Safeco Insurance Co. of America v. Guyton, 692 F.2d 551, 557 2

(9th Cir. 1982) (where policy dispute involved a genuine legal issue concerning liability, insurer 3 could not have been acting in bad faith by refusing to pay claim); but see Egan v. Mut. of Omaha 4

Ins. Co., 24 Cal.3d 809, 817 (Cal. 1979) (finding bad faith where insurer denied claim without an 5 investigation); Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376 (Cal. Ct. App. 6

1970) (inaccurately characterizing an insured's illness to minimize coverage could constitute bad 7 faith); Richardson v. Employers Liab. Assur. Corp., 25 Cal. App. 3d 232, 239 (Cal. Ct. App. 1972) 8

(finding bad faith on the part of an insurer that withheld payment knowing that benefits were owed, 9 forced an arbitration hearing despite having no defense and required plaintiffs to resort to litigation 10 to have the award judicially confirmed).

Essentially, Plaintiffs argue that although Defendant complied with the plain terms of the contract, 14 it did so in bad faith. Generally, where an insurer denies coverage under an unenforceable 15 provision, the proper remedies are restitution or contract damages. See McBride v. Boughton, 123 16

Cal. App. 4th 379, 388 (Cal. Ct. App. 2004) (noting that "restitution may be awarded in lieu of 17 breach of contract damages when the parties had an express contract, but it was procured by fraud 18 or is unenforceable or ineffective for some reason."). Plaintiffs cite no authority for the rather 19 novel proposition that an insurer can be held liable in tort for accurately applying a contractual 20 limitation it knows to be invalid. Compare Opsal v. United Services Auto. Assn., 2 Cal. App. 4th 21

Supreme Court opinion was "erroneous" but not done in bad faith); Gruenberg v. Aetna Ins. Co., 9 23

Cal.3d 566, 583 (Cal. 1973) (noting that bad faith generally involves fraud or "an intention to . 24 not perform a fixed promise"). Nevertheless, the Court agrees that such conduct might give rise to 25 a cause of action for bad faith if a plaintiff could plead factsdemonstrating that the decision to 26 deny a claim was made or ratified by someone who knew the limitation was unenforceable. See 27

Richardson, 25 Cal. App. 3d at 239 (denial of benefits constituted bad faith because the insurer's 28 own investigation revealed the claim to be "completely valid"). Here, Plaintiffs' assertion that

Plaintiffs allege that Defendant "made a cost benefit analysis" and denied their claim under a provision it knew to be illegal under "basic California insurance law." See SAC ¶ ¶ 36-37. 13

1197, 1205 (Cal. Ct. App. 1991) (denial of benefits based on insurer's interpretation of dicta in a Defendant "must be aware of basic California insurance law regarding disclosure of exclusions and 2 limitations" simply because it is a "sophisticated business operation" falls short of that standard. 3

SAC ¶ 37.*fn3 Accordingly, the Court GRANTS Defendant's motion to dismiss Plaintiffs' second 4 cause of action for bad faith WITHOUT PREJUDICE. 5

7 required elements: (1) duty; (2) breach; (3) causation; and (4) damages. Ileto v. Glock Inc., 349 8

App. 1990)). Whether a legal duty arises is a "question of law which is simply an expression of the 10 sum total of the policy considerations that lead a court to conclude that a particular plaintiff is App. 1974), Plaintiffs argue that Defendant had an "affirmative duty to point out and explain the 14 limitations in coverage because they were so inconsistent with their reasonable expectations of 15 coverage." SAC ¶ 51. In Logan, a Navy serviceman applied to purchase a life insurance policy at 16 an insurance sales office. During the application process, the serviceman was not informed by the 17 insurance agent that the policy excluded coverage for death resulting from intoxication or 18 participation in a felony. After the serviceman had completed the application, but before he 19 received the written policy in the mail, he was killed in a drunk-driving accident. Citing the 20 intoxication exclusion, the insurer refused to pay any benefits under the policy. The Court of 21

Appeal rejected the insurer's position, holding that "where a policy has not yet been issued, all 22 standard exclusions to the insurance coverage, which the insured would not reasonably expect, 23 must be called clearly and plainly to the attention of the insured if the insurer is to be permitted to 24 rely on these exclusions to avoid payment of benefits under the policy." Logan, 41 Cal. App. 3d at 25

3. Third Cause of Action: Negligence

In order to state a claim for negligence under California law, a plaintiff must establish four

F.3d 1191, 1203 (9th Cir. 2003) (citing Martinez v. Pacific Bell, 225 Cal. App. 3d 1557 (Cal. Ct. 9

entitled to protection." Id. (internal citations omitted).

Relying on Logan v. John Hancock Mut. Life Ins. Co., 41 Cal. App. 3d 988, 996 (Cal. Ct. 996. 2 Plaintiffs also cite Fields v. Blue Shield of California, 163 Cal. App. 3d 570, 579 (Cal. Ct. App. 1985), in which a health insurer denied coverage for psychiatric care based on an express 4 limitation in a written insurance policy. The court found that because the "limitation of coverage 5 was placed, not in the limitation or exclusion section, but at the end of benefit granting provisions," 6 it was not "clear" and "conspicuous" and was therefore unenforceable. Id. at 57. 7

8 coverage limitations may be held liable for negligence.*fn4 Rather, both cases simply affirm the 9 general rule of contracts that in order to be enforceable, provisions limiting coverage under an 10 insurance policy must be clear and conspicuous. The fact that the cap provision may be invalid

Neither Logan nor Fields suggests that an insurer who fails to "warn" an insured regarding

could justify contract damages, but does not give rise to a separate cause of action for negligence.

United States District Court

For the Northern District of California

Because the Court reaches this conclusion as a matter of law, the Court GRANTS the motion to 13 dismiss Plaintiffs' third cause of action WITH PREJUDICE 16 fraudulent" business acts or practices. "[T]he Legislature . . . intended by this sweeping language 17 to permit tribunals to enjoin on-going wrongful business conduct in whatever context such activity 18 might occur." Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th 19

163, 181 (Cal. 1999) (internal citations omitted).


4. Fourth Cause of Action: California Business and Professions Code § 17200

California Business and Professions Code § 17200 proscribes "unlawful, unfair or Plaintiffs allege that it was "unfair, unlawful and fraudulent to suggest and represent

$1,000,000 in coverage.and then to bury in small print in a document purporting to extend 3 coverage a monetary cap of $25,000, particularly when it is common knowledge that most people 4 do not read their entire policies." SAC ¶ 54 (emphasis in original). Rather than dispute whether 5 such conduct is covered by Section 17200, Defendant argues that Plaintiffs' claim is precluded by 6 the holdings of Moradi--Shalal v. Fireman's Fund Ins. Cos., 46 Cal.3d 287 (Cal. 1988) and Textron 7

2004). 9 Commissioner. Id. In 1996, the California Court of Appeal found that Moradi-Shalal did not bar 14 unfair competition claims against insurers based on common law theories, even though such 15 alleged misconduct may also violate the provisions of the UIPA. See State Farm Fire & Casualty 16

Co. v. Superior Court,45 Cal. App. 4th 1093 (Cal. Ct. App. 1996). Therefore, when an insurer 17 surreptitiously reduced the earthquake coverage offered in its homeowner insurance policies, 18 plaintiffs were not precluded by Moradi-Shalal from bringing claims based on fraud, intentional 19 infliction of emotional distress and bad faith under Section 17200. Id. at 1108. 20


Fin. Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 118 Cal. App. 4th 1061, 1070 (Cal. Ct. App. 8

In Moradi-Shalal, the California Supreme Court held that the Unfair Insurance Practices

Act ("UIPA"), Cal. Ins. Code, § 790 et seq., which prohibits "unfair and deceptive acts or practices

in the business of insurance," does not create a private cause of action. See Moradi-Shalal, 46 Cal.

United States District Court

For the Northern District of California

3d at 304. Instead, enforcement of the UIPA is left primarily to the California Insurance 13

In 2004, the Court of Appeal expressly disagreed with State Farm in Textron Fin. Corp. v.

Nat'l Union Fire Ins. Co. of Pittsburgh. The Textron court cautioned that "parties cannot plead 22 around Moradi--Shalal's holding by merely relabeling their cause of action as one for unfair 23 competition." Textron, 118 Cal. App. 4th at 1070. The court further reasoned that State Farm's 24 persuasiveness had been "undercut" by Cel--Tech Communications, Inc. v. Los Angeles Cellular 25

Telephone Co.,20 Cal.4th 163 (Cal. 1999), which disapproved of State Farm's "amorphous" 26 construction of the term "unfair business practice" as any conduct that "offends an established 27 public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially 28 injurious to consumers." Textron, 118 Cal. App. 4th at 1071-72 (citing State Farm Fire,45 Cal. App. 4th at 1103-04. Instead, Cel--Tech required that "any finding of unfairness to competitors 2 under section 17200 be tethered to some legislatively declared policy or proof of some actual or 3 threatened impact on competition." Id. at 1072 (citing Cel--Tech,20 Cal.4th at 186-87). With this 4 holding in mind, the Textron court concluded that where an insured's unfair competition claim is 5 based on "the type of activities covered by the UIPA," it is barred by Moradi-Shalal. Id. (claims 6 related to the insurer's misrepresentation of both the terms of its policies and its obligations under 7 them were foreclosed by Moradi-Shalal); see also Safeco Ins. Co. v. Superior Court, 216 Cal. App. 8

Professions Code provides no toehold for scaling the barrier of Moradi-Shalal . . To permit 10 plaintiff to maintain this action would render Moradi-Shalal meaningless."). 11


3d 1491, 1494 (Cal. Ct. App. 1990) ("We have no difficulty in deciding the Business and 9

Here, Plaintiffs' unfair competition claim is based on the allegation that Defendant misrepresented the coverage provided under the policy by "burying" a limitation of liability clause 13 in the endorsement. SAC ¶ 54. As such, the claim is clearly premised on the kind of conduct 14 covered by the UIPA. See Cal. Ins. Code § 790.03(h)(1) (prohibiting "knowingly . 15 misrepresenting to claimants pertinent facts or insurance policy provisions relating to any 16 coverages at issue."). While this area of California law is unsettled,*fn5 the Court agrees with Textron 17 that Plaintiffs may not plead around Moradi-Shalal by simply claiming a violation of the UCL 18 rather than the UIPA. However, because Plaintiffs may be able to plead a UCL claim that is not 19 based on conduct covered by the UIPA, the Court GRANTS the motion to dismiss Plaintiffs' 20 fourth cause of action WITHOUT PREJUDICE. 21


23 in liability for intentional infliction of emotional distress. Hailey v. California Physicians' Service, 24

158 Cal. App. 4th 452, 473-74 (Cal. Ct. App. 2007) (internal citations omitted). To state a cause of 2 action for emotional distress, the plaintiff must allege "(1) extreme and outrageous conduct by the 3 defendant with the intention of causing, or reckless disregard of the probability of causing, 4 emotional distress; (2) the plaintiff's suffering severe or extreme emotional distress; (3) and actual 5 and proximate causation of the emotional distress by the defendant's outrageous conduct." Id. The 6 conduct alleged must "go beyond all possible bounds of decency, and . be regarded as atrocious, 7 and utterly intolerable in a civilized community." Coleman v. Republic Indemnity Ins. Co., 132 8

Cal. App. 4th 403, 416 (Cal. Ct. App. 2005). Behavior may be considered outrageous if a 9 defendant (1) abuses a relation or position which gives him power to damage the plaintiff's 10 interest; (2) knows the plaintiff is susceptible to injuries through mental distress; or (3) acts intentionally or unreasonably with the recognition that the acts are likely to result in illness through

United States District Court

For the Northern District of California

mental distress. Hailey, 158 Cal. App. 4th at 474. 13

14 insurer simply delayed or denied insurance benefits, Coleman, 132 Cal.App.4th at 417, refused to 15 accept a settlement demand within policy limits, Isaacson v. California Ins. Guarantee Assn., 44 16

Cal.3d 775, 788--89 (Cal. 1988), or failed to investigate a claim and accused the insured of "trying 17 to put something over on" the insurer, Ricard v. Pacific Indemnity Co. 132 Cal.App.3d 886, 889, 18

895 (Cal. Ct. App. 1982). On the other hand, insurers have been held liable for emotional distress 19 after attempting to induce an insured to surrender his policy by sending false and threatening 20 letters, Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376 (Cal. Ct. App. 1970), 21 frivolously delaying disability payments despite knowledge of the insured's "fragile emotional 22 condition," Hernandez v. General Adjustment Bureau, 199 Cal.App.3d 999 (Cal. Ct. App. 1988), 23 or by rescinding coverage without good cause after learning that an insured has suffered an 24 accident, Hailey, 158 Cal. App. 4th at 474. 25


27 the policy was "intentionally designed" to mislead Defendant's clients, and that Defendant "knew 28 or must have known it was violating California law [and] that the imposition of the coverage

In the insurance context, courts have rejected liability for emotional distress where the

a. Plaintiffs' allegations are insufficient to state a claim for emotional distress

In this case, Plaintiffs allege two separate grounds for recovery. First, Plaintiffs assert that limitation was bound to cause great financial hardship and/or emotional distress to Wayne & 2

Peggy." SAC ¶ 58-59. Second, Plaintiffs claim that because Defendant chose to litigate the state 3 court action instead of settling, Wayne Merritt was forced to undergo surgery for Diverticulitis, 4 leaving Peggy to "handle both the litigation and her husband's hospitalization, [causing] her 5 needlessly extreme emotional distress." Id. ¶ 21-22. 6

7 of emotional distress, courts have invariably found it relevant that the responsible parties had 8 knowledge of a specific plaintiff's vulnerabilities. See Fletcher, 10 Cal. App. 3d 376 (conduct 9 occurred after claims adjuster learned that plaintiff had become disabled); Hernandez, 199 Cal. 10



Plaintiffs' first claim is unavailing. Where an insurer has been held liable for the infliction

App. 3d at 1007 (claims adjusters knew of plaintiff's susceptibility to mental distress and repeated

attempts at suicide); Hailey, 158 Cal. App. 4th at 474 ("Blue Shield knew about Steve's car accident, severe physical injuries, disability, and liability for mounting medical bills. Given these 13 circumstances, Blue Shield knew it would cause plaintiffs to suffer emotional distress if it 14 rescinded Steve's health care coverage."). In addition, all three cases dealt with health care 15 policies, which are inherently likely to involve extremely sensitive situations. In contrast, the 16 complaint does not allege that Defendant had any special knowledge about Plaintiffs when 17 designing the GL policy, but rather that Defendant should have known the limitation was "bound to 18 cause financial hardship and/or emotional distress." SAC ¶ 59. Such an allegation is not enough to 19 find Defendant's conduct "outrageous." 20

The second theory is also insufficient to support recovery for emotional distress. An

21 insurer who undertakes the defense of an insured may decide whether or not to settle a claim, so 22 long as the decision is not unreasonable. See Risely v. Interinsurance Exch. of Auto. Club, 183 Cal. 23

App. 4th 196, 208 (Cal. Ct. App. 2010) (where the insured is facing potential liability in excess of 24 the policy and the settlement offer is within policy limits, a decision to litigate may be 25 unreasonable). The Court views with some skepticism Defendant's rejection of the settlement 26 offer when Plaintiffs were responsible for paying most of the potential damages. However, 27

Plaintiffs do not suggest that Defendant did not believe the decision was in their best interests. 28

Compare Fletcher, 10 Cal. App. 3d 376 (letter accusing plaintiff of having an undisclosed medical condition was based on a "complete absence of any investigation.[or] any facts."); Hernandez, 2

199 Cal. App. 3d at 1007 (payments were repeatedly late although there was "no question" plaintiff 3 was entitled to benefits). Nor do they contend that the strategy was intended to cause emotional 4 distress, even though it allegedly did so. SAC ¶ 18-20. Thus, although Defendant's refusal to 5 settle appears in hindsight to be a mistake, it was not "outrageous." However, because there may 6 be a set of facts on which Defendant could be liable for emotional distress, the Court GRANTS 7

Defendant's motion to dismiss Plaintiffs' fifth cause of action WITHOUT PREJUDICE. 8


10 that Defendant interfered with that interest by "refusing to pay benefits owed." SAC ¶ 63-65.

6. Sixth Cause of Action: Interference with a Protected Property Interest

Plaintiffs allege that they held a "protected property interest" in their insurance policy, and

Plaintiffs rely on Fletcher, 10 Cal. App. 3d at 401-02, in which the California Court of Appeal held

United States District Court

For the Northern District of California

that where an insurer is found liable for the tort of intentional infliction of emotional distress, "such 13 conduct .constitutes a tortious interference with a protected property interest of its insured for 14 which damages may be recovered to compensate for all detriment proximately resulting therefrom, 15 including economic loss as well as emotional distress resulting from the conduct or from the 16 economic losses caused by the conduct, and, in a proper case, punitive damages." 17

18 protected property interest. The District Court for the Eastern District of California has recently 19 explained that "subsequent courts have characterized the 'tortious interference with a protected 20 property interest' language in Fletcher as more appropriately appraised as a claim for tortious 21 breach of a duty imposed by the contractual implied covenant of good faith and fair dealing." 22

(E.D. Cal. Sept. 19, 2007) (citing Hand v. Farmers Ins. Exchange, 23 Cal. App. 4th 1847, 1854 24

1975)). The Valley Air court therefore dismissed the plaintiff's claim for interference with a 26 protected property interest, but allowed amendment of his breach of the covenant of good faith and 27 fair dealing claim to "include factual allegations that Plaintiff has suffered economic loss as a result 28

Plaintiffs cite no case adopting Fletcher's endorsement of the tort of interference with a

Valley Air Conditioning & Repair, Inc. v. Benefit Life Ins. Co., 2007 U.S. Dist. LEXIS 70111, *8 23 (Cal. Ct. App. 1994); McDowell v. Union Mut. Life Ins. Co., 404 F. Supp. 136, 146 (C.D. Cal. 25 of [the insurer's] alleged wrongful withholding of insurance proceeds." Valley Air, 2007 U.S. Dist. 2

LEXIS 70111 at *11-12. 3

4 good faith and fair dealing. Plaintiffs may amend their breach of the covenant of good faith and 5 fair dealing claim as described by Valley Air. Therefore, the Court GRANTS Defendant's motion 6 to dismiss Plaintiffs' sixth cause of action WITH PREJUDICE. 7


9 misrepresentation, (2) concealment, (3) promise without intention of performing, and (4) negligent 10 misrepresentation. SAC ¶¶ 66-75. Except for the claim for negligent misrepresentation, all of these are species of fraud. See Starnet Int'l AMC Inc. v. Kafash, 09-CV-04301-LHK, 2011 WL 31269 (N.D. Cal. Jan. 5, 2011) ("Intentional misrepresentation is a claim for fraud."); Baggett v. 13 Hewlett-Packard Co., 582 F. Supp. 2d 1261, 1267 (C.D. Cal. 2007) (noting that the 14 misrepresentation element of a fraud claim may be proved by showing concealment); Lazar v. 15

Superior Court, 12 Cal. 4th 631, 638 (Cal. 1996) ("'Promissory fraud' is a subspecies of the action 16 for fraud and deceit."). Under California law, the "indispensable elements of a fraud claim include 17 a false representation, knowledge of its falsity, intent to defraud, justifiable reliance, and damages." 18

Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. Cal. 2003) (internal citations 19 omitted). Negligent misrepresentation requires a similar showing, although the intent requirement 20 is relaxed. See Nat. Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Servs. Grp., 21 Plaintiffs' alleged inability to show reliance and failure to plead with sufficient particularity.

The Court agrees that Plaintiffs' claim is better characterized as a breach of the covenant of

7. Seventh Cause of Action: Fraud

Plaintiffs' seventh cause of action in fact includes claims for (1) intentional Inc., 171 Cal.App.4th 35, 89 (Cal. Ct. App. 2009). In the instant case, Defendant focuses on 22

a. Plaintiffs are not barred from showing reasonable reliance simply because

they received the GL Policy

Defendant first argues that where an insured fails to read and ascertain the terms of an insurance policy, there can be no reasonable reliance as a matter of law. Defendant cites Hadland, 24 Cal. App. 4th at 1586, in which the California Court of Appeal upheld a trial court finding that because the insured admitted he had not read the policy, there was "no evidence of justifiable reliance because . the plaintiff is up against the case law duty to read." As noted above, Hadland 2 is inapplicable here because the cap provision is not clear and conspicuous. Furthermore, unlike in 3

Defendant also relies on Brown v. Wells Fargo Bank, N.A., 168 Cal. App. 4th 938, 959

(Cal. Ct. App. 2008). In Brown, the court held that where the parties to a contract are dealing at 6 arm's length, it is "not reasonable to fail to read a contract." Id. However, "if the defendant is in a 7 fiduciary relationship with the plaintiff which requires the defendant to explain the terms of a 8 contract between them, the plaintiff's failure to read the contract would be reasonable." Id. 9

Hadland, Plaintiffs have not indicated that they failed to read the GL policy. 4


California courts have recognized that insurance providers are subject to fiduciary or

10 fiduciary-like duties. See, e.g., Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 820 (Cal. 1979) 11

For the Northern District of California

("Insurers hold themselves out as fiduciaries, and with the public's trust must go private 12 responsibility consonant with that trust."); 20th Century Ins. Co. v. Superior Court, 90 Cal. App. 13

4th 1247, 1266 (Cal. Ct. App. 2001) ("The significant public interest in the special relationship 14 between the insured and insurer justifies the availability of tort remedies, and distinguishes 15 insurance contracts from other types of contracts."). In addition, as noted above, the California 16

Supreme Court has explicitly held that "the burden of making coverage exceptions and limitations 17 conspicuous, plain and clear rests with the insurer." Haynes, 32 Cal. 4th at 1204 (internal citations 18 omitted). The Court therefore concludes that Plaintiffs' receipt of the policy alone does bar their 19 allegations that they reasonably relied on the prominently displayed coverage description contained 20 in the declarations.

b. Plaintiffs' fraud claims are not pled with sufficient particularity Fed. R. Civ. P. 9(b) requires that, when averments of fraud are made, the allegations must

"be specific enough to give defendants notice of the particular misconduct . . . so that they can 24 defend against the charge and not just deny that they have done anything wrong." Vess, 317 F.3d at 25 1105 (internal citations and quotation marks omitted). Allegations of fraud must be accompanied 26 by "the who, what, when, where, and how" of the misconduct charged. Id. (internal citations 27 omitted). "[A] plaintiff must set forth more than the neutral facts necessary to identify the transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is 2 false." Decker v. Glenfed, Inc. (In re Glenfed, Inc. Sec. Litig.), 42 F.3d 1541, 1548 (9th Cir. 1994). 3

4 elements of their fraud claims under the stricter standard of Rule 9(b). Defendant relies on 5

Defendant contends that Plaintiffs have failed to adequately plead the reliance and damages

McManus v. American Express Tax & Bus. Servs., 67 F. Supp. 2d 1083, 1089 (D. Ariz. 1999), in 6 which the court held that "a mere conclusory allegation of reliance is not sufficient to defeat a 7 motion to dismiss: the plaintiff must plead specific facts explaining how he relied on the 8 representation and why that reliance was reasonable." The McManus court found that because the 9 plaintiff had not alleged "a single concrete action or decision he claims to have made in reliance 10 upon Defendants' compilation of . financial statements," he could not state a claim for fraud. Id.

agrees that the reliance and damages elements of Plaintiffs' claims must be pled with particularity.

See Kearns v. Ford Motor Co., 567 F.3d 1120, 1127 (9th Cir. 2009) (where a plaintiff claims fraud, 15 the "entire complaint must . be pleaded with particularity.") (emphasis added). Plaintiffs have 16 not asserted that they took any action in reliance on Defendant's alleged misrepresentations 17 regarding the policy's coverage. They have also failed to show that they suffered any damages as a 18 result of Defendant's alleged fraud, rather than its breach of contract. See Brewer v. Indymac 19

Bank, 609 F. Supp. 2d 1104, 1121 (E.D. Cal. 2009) ("[I]n an action for fraud and deceit a cause of 20 action is stated when the facts constituting the fraud are alleged and a resulting injury is pleaded.") 21

Plaintiffs must explain why discovering the cap provision at the time of the state court action 23 caused harm beyond simply depriving them of a benefit owed under the contract. Because reliance 24 and resulting damages are essential elements of all four fraud-related claims, the Court GRANTS 25

Defendant's motion to dismiss Plaintiffs' seventh cause of action. However, as Plaintiffs may be 26 able to allege facts sufficient to state a claim for fraud, dismissal is WITHOUT PREJUDICE. 27

To state a claim for reformation under California law, a plaintiff must plead that "by reason

at 1089.

While McManus is not binding precedent in the Northern District of California, the Court (citing Hartzell v. Myall, 115 Cal.App.2d 670, 677 (Cal. Ct. App. 1953) (emphasis added). That is,

of fraud practiced by one of the parties, or of the mutual mistake of the parties or of a mistake of 2 one of them, which the other at the time knew or suspected, there were omitted from the instrument 3 certain material terms and conditions. In other words, that the language of the writing failed, for 4 some reason, to express the intention of the parties." Philips Med. Capital, LLC v. Med. Insights 5

Diagnostics Ctr., Inc., 471 F. Supp. 2d 1035, 1046-47 (N.D. Cal. 2007) (quoting Pascoe v. 6

Here, Plaintiffs seek reformation of the GL policy to "conform to Plaintiffs' understanding

[that the contract provides] $1,000,000 in coverage." SAC ¶ 82. Plaintiffs must therefore show 9 that any "misunderstanding" regarding the terms of the contract was the result of fraud, mutual 10 mistake or unilateral mistake. As discussed above, Plaintiffs have failed to state a claim for fraud, 11 and clearly do not allege mutual mistake See Renshaw v. Happy Valley Water Co.

Morrison, 219 Cal. 54, 56 (Cal. 1933)). 7


For the Northern District of California

. , 114 Cal. App.

2d 521, 524 (Cal. Ct. App. 1952) (mutual mistake requires a showing that the parties "share[d] the 13 same misconception"). Plaintiffs also have not pled facts sufficient to justify reformation on the 14 basis of unilateral mistake. See Spiegler v. Home Depot U.S.A., Inc., 552 F. Supp. 2d 1036, 1055 15

(C.D. Cal. 2008) (in order to be granted reformation based on unilateral mistake, a plaintiff must 16 show that he "made a mistake at the time of contracting, and that the mistake was known to or 17 suspected by defendants"). Constructive notice of the other party's mistake is not a sufficient 18 ground for reformation. La Mancha Dev. Corp. v. Sheegog, 78 Cal. App. 3d 9, 16 (Cal. Ct. App. 19

1978). The complaint does not allege that Defendant knew or suspected at the time of contracting 20 that Plaintiffs did not understand the policy's coverage to be limited to $25,000. Indeed, Plaintiffs 21 fail to allege any facts concerning Defendant's knowledge of Plaintiffs' state of mind. 22


26 engaged in the transaction of insurance owe a prospective insured who is 65 years of age or older, a 27 duty of honesty, good faith, and fair dealing. This duty is in addition to any other duty, whether 28 express or implied, that may exist."

Accordingly, the Court GRANTS Defendant's motion to dismiss the eighth cause of action 23

9. Ninth Cause of Action: Violation of Insurance Code § 785.

California Insurance Code section 785 states: "All insurers, brokers, agents, and others older." In their opposition, Plaintiffs note that Wayne Merritt was over 65 years old at the time 3 coverage was obtained. However, "in determining the propriety of a Rule 12(b)(6) dismissal, a 4 court may not look beyond the complaint to a plaintiff's moving papers, such as a memorandum in 5 opposition to a defendant's motion to dismiss." Schneider v. California Dept. of Corr., 151 F.3d 6

1194, 1201 n.1 (9th Cir. 1998) (emphasis in original). The Court therefore GRANTS Defendant's 7 motion to dismiss the ninth cause of action WITHOUT PREJUDICE. 8

of Defendant's conduct, they have "sustained financial losses, severe emotional distress, medical 13 bills, including hospitalization, attorney fees and costs, [and] damage to credit." Such allegations 14 are sufficient to withstand a motion to dismiss claims for damages. See Jenkins v. Commonwealth 15

Land Title Ins. Co., 95 F.3d 791, 799 (9th Cir. 1996) ("Jenkins' allegation that he has, as a 'direct 16 and proximate result' of Commonwealth's violation, 'sustained special and general damages' 17 suffices to withstand a motion to dismiss under Rule 12(b)(6).").*fn6 The Court therefore DENIES 18

Defendant's motion to dismiss Plaintiffs' claims for general and special damages.

21 law, punitive damages may be appropriate "where it is proven by clear and convincing evidence 22 that the defendant has been guilty of oppression, fraud, or malice." Cal. Civ. Code § 3294. Malice 23 may be shown where the defendant exhibits "the motive and willingness to vex, harass, annoy, or 24 injure," Nolin v. Nat'l Convenience Stores, Inc., 95 Cal. App. 3d 279, 285 (Cal. Ct. App. 1979), or 25

The complaint does not allege that either Wayne or Peggy Merritt is "65 years of age or

10. Claims for Damages

a. Plaintiffs state a claim for general and special damages

Defendant complains that the SAC provides insufficient "notice of the damages sought to

be recovered." MTD ¶ 10. However, in Paragraph 39 of the SAC, Plaintiffs allege that as a result

b. Plaintiffs do not state a claim for punitive damages

Defendant also moves to dismiss Plaintiffs' claim for punitive damages. Under California

a "conscious disregard of the rights and safety of others," Potter v. Firestone Tire & Rubber Co., 6 2

Cal.4th 965, 1000 (Cal. 1993). Of course, "the mere allegation that an intentional tort was 3 committed is not sufficient to warrant an award of punitive damages. Not only must there be 4 circumstances of oppression, fraud or malice, but facts must be alleged in the pleading to support 5 such a claim." Grieves v. Superior Court, 157 Cal. App. 3d 159, 166 (Cal. Ct. App. 1984).

Punitive damages may not be awarded for breach of contract. City of Hope Nat. Med. Ctr. v. Genentech, Inc., 43 Cal.4th 375, 392 (Cal. 2008). On the other hand, punitive damages may be 8 appropriate where an insurer commits fraud or breaches the covenant of good faith and fair dealing. 9

See, e.g., Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 817 (Cal. 1979) (allowing a punitive 10 damages award against an insurer that acted in bad faith by failing to properly investigate its 13 distress, and breach of the covenant of good faith and fair dealing. Punitive damages are therefore 14 unavailable. However, because these claims were dismissed without prejudice, the Court 15

GRANTS the motion to dismiss Plaintiffs' claim for punitive damages WITHOUT PREJUDICE.

19 contract and for special and general damages. The second, fourth, fifth, seventh, eighth and ninth 20 causes of action and the claim for punitive damages are dismissed without prejudice. The third and 21 sixth causes of action are dismissed with prejudice. Court pursuant to Fed. R. Civ. P. 15. 25 26 27 28

insured's claim).

United States District Court

For the Northern District of California

The Court has dismissed Plaintiffs' claims for fraud, intentional infliction of emotional


In sum, the Court denies Defendant's motion to dismiss Plaintiffs' claim for breach of

If Plaintiffs wish to amend their complaint, they must do so within 21 days of this order.

Plaintiffs may not add new claims or parties without seeking Defendant's consent or leave of the


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