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Orange County Plastering Company, Inc., A California Corporation v. American Home Assurance Company


October 28, 2011


The opinion of the court was delivered by: Dean D. Pregerson United States District Judge


Presently before the court is Defendant American Home Assurance Company's Motion to Dismiss Plaintiff Orange County Plastering Company, Inc.'s claim for breach of the covenant of good faith and fair dealing (and corresponding request for attorneys' fees). After reviewing the parties' moving papers and considering the arguments therein, the court DENIES the Motion.

I. Background

Plaintiff Orange County Plastering Company, Inc. ("OCP") is a licensed California contractor performing lath and plastering work. Defendant American Home Assurance Company ("AHAC") is an admitted insurer, licensed to provide insurance policies and coverage in California. (1st Am. Compl. ("FAC") ¶¶ 1-2.) OCP entered into a construction subcontract with general contractor Suffolk Construction Company ("Suffolk"), to provide labor and materials on a condominium project ("Project") in the City of Pasadena. Pursuant to the subcontract, AHAC provided two insurance policies, covering the construction and OCP ("Policies"). (Id. ¶¶ 6-8.)

Disputes arose between OCP and Suffolk, and OCP filed suit against Suffolk on April 8, 2010, for breach of contract and related claims based on Suffolk's withholding of payment. Suffolk filed a first amended cross-complaint against OCP on December 30, 2010 ("Underlying Action"), alleging that OCP's defective work caused water intrusion damage at the Project. In late 2010 and early 2011, OCP returned to the Project at Suffolk's request, to assist in repair work for the water intrusion damage, incurring $704,204 in costs. (Id. ¶¶ 9-11.) Pursuant to the Policies, OCP tendered the defense of the Underlying Action to AHAC, on February 7, 2011. OCP provided AHAC a copy of the cross-complaint from the Underlying Action and documentation supporting OCP's defenses. OCP also requested reimbursement for the $704,204 in remediation work. (Id. Ex. 2 at 1-2.) On May 13, 2011, AHAC denied OCP's claims, based on a "Builder's Risk Exclusion" to the Policies, precluding coverage for defective work by the insured, and an "Exclusion for Water Seepage, Leakage or Intrusion from Exterior Wall Applications" resulting from insured's work. (Id. Ex. 3 at 2, 10-11.)

On June 8, 2011, OCP asked AHAC to reevaluate its claim denial, providing additional information that OCP was not at fault for the water intrusion. Among other things, OCP stated that: (1) it had complied with and exceeded certain lath and plaster work standards; (2) the water intrusion "was caused by the window subcontractor's faulty work"; and (3) the Underlying Action included a $120,000 demand for repainting. (Id. Ex. 4.) AHAC responded with a letter, dated that same day, again denying coverage. AHAC did not specifically address OCP's contentions that it complied with lath and plaster work standards and that window subcontractors caused the water intrusion. But AHAC did explain that it based its denial of coverage on the allegations in the Underlying Action, not their validity. AHAC also stated that the paint-related damages did not change the analysis, because they were subject to exclusions as well. (Id. Ex. 5.)

OCP therefore brought suit in Los Angeles County Superior Court, on June 30, 2011, and AHAC removed the action to federal court, on August 3, 2011. (Dkt. No. 1.) OCP filed a first amended complaint on August 15, 2011, for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) declaratory relief. (Dkt. No. 7.) Defendant then filed this Motion to Dismiss the second claim pursuant to Federal Rule of Civil Procedure 12(b)(6), alleging that OCP fails to assert facts sufficient to find bad faith. (Dkt. No. 11.)


Federal Rule of Civil Procedure 12(b)(6) requires courts to dismiss claims for which no relief can be granted. When considering a 12(b)(6) motion, "all allegations of material fact are accepted as true and should be construed in the light most favorable to the plaintiff." Resnick v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000). In Ashcroft v. Iqbal, the Supreme Court explained that a court should first "identify[] pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." 129 S. Ct. 1937, 1950 (2009). Next, the court should identify the complaint's "well-pleaded factual allegations, . . . assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id.; see also Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) ("In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." (internal quotation marks omitted)).


In California, "[i]n addition to the right to sue an insurer in contract, if the insurer acts unreasonably and without proper cause in failing to investigate a claim, refusing to provide a defense, or either delaying or failing to pay benefits due under the policy, the insured can sue in tort for breach of the covenant of good faith and fair dealing." Richards v. Sequoia Ins. Co., 195 Cal. App. 4th 431, 438 (2011) (citing Emerald Bay Cmty. Ass'n v. Golden Eagle Ins. Corp., 130 Cal. App. 4th 1078, 1093 (2005)); see also Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 818-19 (1979) (holding that an insurer "must give at least as much consideration to the [insured's] interests as it does to its own").

Upon receiving actual notice of a claim, an insurer must inquire into all possible bases that might support the claim. See Egan, 24 Cal. 3d at 819. Unreasonable delays in claim handling can demonstrate bad faith. See Fleming v. Safeco Ins. Co., 160 Cal. App. 3d 31, 37 (1984); Carlton v. St. Paul Mercury Ins. Co., 30 Cal. App. 4th 1450, 1459 (1994). An insurer's refusal to reconsider a denial can also be evidence of bad faith. See Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., Inc., 78 Cal. App. 4th 847, 880 (2000). The ultimate test of bad faith liability is whether a refusal or alleged delay was unreasonable. Chateau Chamberay Homeowners v. Associated Int'l Ins. Co., 90 Cal. App. 4th 335, 346 (2001) (citing Opsal v. United Servs. Auto. Ass'n, 2 Cal. App. 4th 1197, 1205 (1991)).

The court concludes that OCP has alleged sufficient facts -taken as true and with all reasonable inference therefrom - to support its claim for breach of the implied covenant of good faith and fair dealing. If OCP can establish that AHAC owed it a duty to defend or reimburse its remediation costs under the Policies, then AHAC's alleged delay, failure to respond to OCP's communications, and same-day denial of OCP's reconsideration request could rise to the level of unreasonableness.*fn1

To elaborate, OCP contends that AHAC refused to respond to its initial claim request, despite "numerous telephone calls, emails, letters, and faxes," forcing OCP to file a formal grievance with the California Department of Insurance. According to OCP, AHAC finally responded to the claim more than three months later, "only after the State opened up a formal investigation." (FAC ¶ 13.)

As discussed, an unreasonable delay by an insurer can demonstrate bad faith. A prompt response to a tender of defense is particularly important, given the breadth of the duty and the insured's potential accumulation of legal costs in the interim. See Montrose Chem. Corp. v. Super. Ct. of L.A. County, 6 Cal. 4th 287, 300 (1993) (holding that the duty to defend is triggered when there is "a bare 'potential' or 'possibility' of coverage"); Anthem Elec., Inc. v. Pac. Employers Ins. Co., 302 F.3d 1049, 1054 (9th Cir. 2002) ("Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor."). (FAC ¶ 28 ("OCP has been compelled to incur damages in excess of $30,000 just in defense of [the Underlying Action] . . . .").)

Although neither party has addressed the issue, it also appears that the alleged delay violated the California Code of Regulations' requirement that "[u]pon receiving proof of claim, every insurer [with exceptions not relevant here] shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part." Cal. Code Regs., tit. 10, § 2695.7(b). Violations of the regulations can be evidence of bad faith. See Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062, 1078 (2007); Safeco Ins. Co. of Am. v. Parks, 170 Cal. App. 4th 992, 1006-07 (2009); Yang v. Peoples Benefit Ins. Co., No. CIV F 06-458, 2007 WL 1555749 at *8 (E.D. Cal. May 25, 2007) ("Bad faith is also reflected by the many instances where [Defendant] failed to follow the California insurance code and the regulations promulgated thereunder.").

Lastly, OCP's allegations that AHAC (1) failed to meaningfully consider OCP's request for reconsideration, given AHAC's same-day response, and (2) refused to provide a copy of one of the two Policies, despite OCP's repeated requests, may lend support to OCP's claim of unreasonable claim handling by AHAC. (FAC ¶¶ 8, 16-17.)


In sum, Plaintiff OCP has alleged facts that plausibly give rise to an entitlement to relief on its claim for breach of the implied covenant of good faith and fair dealing. Defendant's contentions are more properly brought in a motion for summary judgment, once the factual record has been fully developed. The court therefore DENIES Defendant AHAC's Motion to Dismiss.


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