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Kenneth Cornell; Beth Cornell v. Federal Insurance Company; Does 1 Through 100

May 30, 2012


The opinion of the court was delivered by: Honorable Janis L. SammartinoUnited States District Judge


Presently before the Court is Defendants' motion to strike portions of Plaintiffs' Complaint (ECF No. 4-3) and to dismiss the Complaint for failure to state a claim (MTD, ECF No. 4-1). Plaintiffs filed a statement of non-opposition (ECF No. 6) to Defendants' motion to strike the following sentence from Paragraph 26 of the Complaint: "Despite its obligation to respond to an insured's inquiries in a prompt manner, CHUBB has unreasonably refused to respond at all to this most recent request for a defense." Accordingly, the Court STRIKES that sentence from Plaintiffs' Complaint. Plaintiffs also filed an opposition to Defendant's motion to dismiss (Opp'n to MTD, ECF No. 5), and Defendant replied (Reply ISO MTD, ECF No. 7). The Court took these matters under submission without oral argument pursuant to Local Rule 7.1. For the reasons stated below, Defendant's motion to dismiss is GRANTED.


Plaintiffs, husband and wife Kenneth and Beth Cornell ("Plaintiffs"), are California citizens and real estate developers. Defendant Federal Insurance Company ("FIC") is a New Jersey corporation and member of the Chubb Group of Insurance Companies. In brief, the instant dispute has arisen because Plaintiffs were sued twice in state court, and they sought defense and indemnification under their insurance policy with Defendant for those lawsuits. Defendant rejected their request as outside Plaintiffs' personal liability coverage. In the case presently before this Court, Plaintiffs state six causes of action against Defendant arising out of this rejection. The first four are breach of contract claims for failure to defend, failure to indemnify, and "bad faith" breach of the implied covenant of good faith and fair dealing in failing to defend and indemnify. The fifth cause of action is for contract reformation, and the sixth requests declaratory relief.

There are two insurance policies relevant to the instant dispute. The Primary Policy is CHUBB Masterpiece policy number 12755469-01, effective July 7, 2006 through July 7, 2007, and the Excess Policy is policy number 12755469-04, effective January 25, 2007 through January 25, 2008. (Compl. Exs. C, D.) In general, these policies provide Plaintiffs homeowners and personal liability insurance. The Primary Policy provides Plaintiffs $1,000,000 of personal liability coverage, and the Excess Policy provides another $1,000,000 for covered damages in excess of all underlying insurance covering those damages.*fn2 (See Compl. Ex. D.) Plaintiffs claim they were induced to purchase the Policy by Defendant's advertising that they included coverage for "Personal Injury (libel & slander)" and "Incidental Business at Home." (See Compl. Ex. E.) "Plaintiffs anticipated conducting incidental business at their home, such as the exploration of a new business venture not arising out of any of their established businesses." (Compl. ¶ 17.)

On November 24, 2009, Kristine N. Tran filed a lawsuit ("Tran lawsuit") against Plaintiffs in San Diego Superior Court, Kristine N. Tran v. William S. McCulley, et al., Case No. 37-2009- 00087241-CU-CO-CTL. (Compl. Ex. A.) On September 1, 2010, Susannah Smith filed a second lawsuit ("Smith lawsuit") against Plaintiffs, also in San Diego Superior Court, Susannah Smith v. Ken Cornell, et al., Case No. 37-2010-00099335-CU-CL-CTL. (Compl. Ex. B.) Both lawsuits contain allegations arising out of several failed or fraudulent real estate development investments in and around San Diego between 2006 and 2007, including claims alleging breaches of contract, the implied covenant of good faith, fiduciary duty, California securities laws, civil conspiracy, fraud, negligence, and accounting.

Plaintiffs tendered these actions to Defendant on February 23, 2011, on the grounds that they "contain sufficient allegations, including causes of action for negligence arising from an incidental business pursuit, which raise a potentiality of coverage and trigger the duty to defend." Defendant requested more information, which Plaintiffs provided, and subsequently denied Plaintiffs' request for coverage on March 4, 2011. Plaintiffs now claim Defendant failed to "analyze[ ] the correct policies and facts both alleged and available by extrinsic evidence," leading Defendant to improperly eschew its duty to defend in these lawsuits. Apparently, Defendant "unreasonably ignored" the "incidental business away from home" and "incidental business at home" exceptions to the Policies' general exclusion of business pursuits from covered liabilities.


Federal Rule of Civil Procedure 12(b)(6) permits a party to raise by motion the defense that the complaint "fail[s] to state a claim upon which relief can be granted," generally referred to as a motion to dismiss. The Court evaluates whether a complaint states a cognizable legal theory and sufficient facts in light of Federal Rule of Civil Procedure 8(a), which requires a "short and plain statement of the claim showing that the pleader is entitled to relief." Although Rule 8 "does not require 'detailed factual allegations,' . . . it [does] demand[] more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In other words, "a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 557).

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (quoting Twombly, 550 U.S. at 570); see also Fed. R. Civ. P. 12(b)(6). A claim is facially plausible when the facts pled "allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). That is not to say that the claim must be probable, but there must be "more than a sheer possibility that a defendant has acted unlawfully." Id. Facts "'merely consistent with' a defendant's liability" fall short of a plausible entitlement to relief. Id. (quoting Twombly, 550 U.S. at 557). Further, the Court need not accept as true "legal conclusions" contained in the complaint. Id. This review requires context-specific analysis involving the Court's "judicial experience and common sense." Id. at 679 (citation omitted). "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not 'show[n]'-'that the pleader is entitled to relief.'" Id. Moreover, "for a complaint to be dismissed because the allegations give rise to an affirmative defense[,] the defense clearly must appear on the face of the pleading." McCalden v. Ca. Library Ass'n, 955 F.2d 1214, 1219 (9th Cir. 1990) (internal quotations omitted).

Where a motion to dismiss is granted, "leave to amend should be granted 'unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.'" DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). In other words, where leave to amend would be futile, the Court may deny leave to amend. See Desoto, 957 F.2d at 658; Schreiber, 806 F.2d at 1401.


At the core of this dispute is whether the Policy triggers Defendant's duty to defend Plaintiffs in the underlying lawsuits. For the reasons discussed below, the Court finds it does not. Plaintiffs have not alleged the type of damages covered by the Policy. Instead, the underlying lawsuits are specifically excluded from the Policies.

1. Duty to Defend

An insurer must defend any action that seeks damages potentially covered by the insurance policy, either as alleged in the third party complaint or known to the insurer at the time of the insured's tender of defense. Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1996). Conversely, the insurer owes no duty to defend when the third party action "can by no conceivable theory" raise a single issue that could bring it within the policy coverage. Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993).

"While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply." N. Am. Bldg. Maint., Inc. v. Fireman's Fund Ins. Co., 40 Cal. Rptr. 3d 468, 479 (Cal. Ct. App. 2006). A court must interpret a contract "to give effect to the mutual intention of the parties as it existed at the time of contracting." Cal. Civ. Code § 1636. For written contracts, "the intention of the parties is to be ascertained from the writing alone, if possible." Id. § 1639; see also Haynes v. Farmers Ins. Exch., 89 P.3d 381, 385 (Cal. 2004) (applying § 1639 to an insurance contract). The contract language, therefore, determines its interpretation "if the language is clear and explicit." Cal. Civ. Code § 1638; see also Bank of the W. v. Superior Court, 833 P.2d 545, 551 (Cal. 1992); Blackhawk Corp. v. Gotham Ins. Co., 63 Cal. Rptr. 2d 413, 418 (Cal. Ct. App. 1997) ("[W]here the language of a contract is clear, we ascertain intent from the plain meaning of its terms and go no further."). The contract's ...

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