ORDER (1) GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT (Doc. 25); and (2) GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT (Doc. 26)
Before the Court are cross-motions for summary judgment filed by Plaintiff Mary-Ellen Hardin ("Hardin") and Defendant Greenwich Insurance Company ("Greenwich"). (Hardin's Motion for Partial Summary Judgment ("Hardin MPSJ," Doc. 26); Greenwich's Motion for Summary Judgment ("Greenwich MSJ," Doc. 25).) Each party seeks summary judgment in its favor regarding Greenwich's duty to defend Hardin in an underlying state court action. Having considered the briefing and supporting documentation submitted by the parties, having heard oral argument, and having taken the matters under submission, the Court GRANTS in part and DENIES in part Greenwich's Motion for Summary Judgment, and GRANTS in part and DENIES in part Hardin's Motion for Partial Summary Judgment.
Hardin is the co-founder of Community Dental Services, Inc. ("CDS"), a subsidiary of Dental Technology, Inc. ("DTI") that operates dental clinics throughout the State of California. (Greenwich's Statement of Genuine Issues in Opp'n to Pl.'s Mot. for Summ. J. ("Greenwich SGI") ¶¶ 1-3, Doc. 28-1.) Hardin served as the President and CEO of CDS from 1997 to April 2005, as a member of CDS's Board of Directors from 1997 to August 2011, and as Chairman of CDS's Board of Directors from 1997 to 2007. (Id. ¶¶ 4-6.)
Greenwich is an insurance company that provides corporate liability insurance to DTI and its subsidiaries, including CDS. At issue in this action is the scope of coverage Greenwich owes to Hardin pursuant to the Private Company Reimbursement Policy in effect between Greenwich and DTI from December 1, 2008 through December 1, 2009 (the "Policy"). (Id. ¶ 7; Hardin's Statement of Genuine Issues ("Hardin SGI") ¶ 1, Doc. 29-2.) The Policy requires Greenwich "to defend any Claim against any Insured covered under [the] Policy . . . ." (Ward Decl., Ex. 1 at 29, Doc. 25-4.) A "Claim" includes, inter alia, "any civil proceeding in a court of law or equity," and provides that "[a]ll Claims arising from Interrelated Wrongful Acts [-i.e., Wrongful Acts based upon or arising from the same or related facts, transactions, or events-] shall be deemed to constitute a single Claim . . . ." (Id. at 29-30, 32.) The Policy also contains an allocation provision, which provides:
If both Loss covered by this Policy and loss not covered by this Policy are incurred, either because a Claim made against the Insured contains both covered and uncovered matters, or because a Claim is made against both the Insured and others not insured under this Policy, the Insured and the insurer will use their best efforts to determine a fair and appropriate allocation of Loss between that portion of Loss that is covered under this Policy and that portion of Loss that is not covered under this Policy. (Id. at 31.)
Greenwich's obligations under the Policy are set forth in two coverage parts: a Management Liabilityand Company Reimbursement Coverage Part (the "D&O Coverage"), and an Employment Practices Liability Part (the "EPL Coverage"). (Hardin SGI ¶ 2.) The D&O Coverage requires Greenwich to "pay on behalf of the Insured Persons Loss resulting from a Claim first made against the Insured Persons during the Policy Period . . . for a Wrongful Act . . . ." (Ward Decl. Ex. 1 at 36.) "Insured Persons" include DTI and its subsidiaries, as well as "any past, present or future director or officer, or member of the Board of Managers" of DTI or its subsidiaries. (Id.; Hardin SGI ¶¶ 4-6.) A "Wrongful Act" includes, "with respect to any Insured Person of the Company, any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty but solely by reason of his or her status as such." (Ward Decl., Ex. 1 at 37.)
The D&O Coverage also contains several coverage exclusions. Pertinent to this action is the "Insured v. Insured Exclusion," which exempts from coverage any losses or defense costs in "connection with any Claim made against an Insured . . . brought by, or on behalf of, or at the direction of any Insured . . . ." (Id. at 37-38.)
The EPL Coverage requires Greenwich to "pay on behalf of the Insureds Loss resulting from a Claim first made . . . during the Policy Period . . . for a Wrongful Act." (Id. at 40.) An "Insured" under the EPL Coverage includes DTI and its subsidiaries, as well as "any past, present or future director, officer or employee of [DTI or its subsidiaries] including any part-time, seasonal, or temporary employee." (Id. at 29, 40.) A "Wrongful Act" includes:
(1) wrongful termination of employment whether actual or constructive;
(2) employment discrimination of any kind . . .;
(3) unwelcome sexual advances, requests for sexual favors, or other verbal, visual or physical conduct . . . or other harassment in the workplace;
(4) wrongful deprivation of career opportunity, negligent supervision, failure to grant tenure, employment related misrepresentations, retaliatory treatment against an employee of [DTI or its subsidiaries], failure to promote, demotion, wrongful discipline or evaluation, or negligent refusal to hire; [or]
(5) employment related libel, slander, humiliation, defamation, or invasion of privacy . . . .
(Id. at 41.) The EPL Coverage does not contain an Insured v. Insured Exclusion.
On March 10, 2009, Hardin filed a complaint against CDS in Orange County Superior Court, alleging that CDS failed to pay her compensation owed pursuant to an April 1, 2005, Deferred Compensation Letter and Chairman Agreement (the "Underlying Action"). (Hardin SGI ¶¶ 17, 20-23.) On August 3, 2009, CDS filed an Amended Cross-Complaint against Hardin in the Underlying Action (the "CDS Cross-Complaint"). (Id. ¶ 29; Ward Decl., Ex. 4.)
The CDS Cross-Complaint alleges that, in 1997, Hardin, CDS, and certain other entities entered into a Recapitalization Agreement pursuant to which Hardin sold her family trust's majority interest in CDS for $40 million. (Ward Decl., Ex. 4 ¶ 1.) As partial consideration for the payment, the Recapitalization Agreement contained a non-compete clause pursuant to which Hardin agreed not to participate in, or finance competing dental companies for a specified period of time. (Id. ¶ 35.) It also contained a non-solicitation clause pursuant to which Hardin agreed not to solicit or hire CDS employees for a certain period of time, or to induce customers or business relations to stop doing business with CDS. (Id. ¶ 45.) The CDS Cross-Complaint alleges that Hardin violated the non-compete and non-solicitation clauses by forming and participating in various competing businesses, and soliciting CDS employees, customers, clients, and vendors for the benefit of those businesses. (Id. ¶¶ 20-30; 32-51.) It further alleges that Hardin breached her fiduciary duties of loyalty, candor, and care as an officer and board member of CDS by participating in competing businesses, failing to disclose her participation in such businesses, soliciting employees, loaning to herself CDS funds without approval, misusing corporate funds, and submitting false claims to Denti-Cal. (Id. ¶¶ 52-71.)
On September 8, 2009, Hardin filed a cross-complaint in the Underlying Action against CDS, DTI, and certain additional entities including Liberty Partners Holdings 14, LLC ("LPH")-a shareholder of CDS and unitholder in CDS's parent company. (Hardin SGI ¶ 44; Ward Decl., Ex. 8.) On January 29, 2010, LPH filed a Cross-Complaint against Hardin and her husband (the "LPH Cross-Complaint"). (Hardin SGI ¶ 48; Ward Decl., Ex. 6.)
The LPH Cross-Complaint alleges that, beginning in 1995, and continuing through 2005, Hardin engaged in a fraudulent billing scheme as an officer and board member of CDS that caused CDS employees to submit false billing claims to the State of California to induce payments for services provided by unlicensed practitioners. (Ward Decl., Ex. 6 ¶ 15(a).) It further alleges that Hardin breached her fiduciary duties to CDS and its shareholders, including LPH, by failing to disclose the fraudulent billing scheme, and that Hardin fraudulently induced LPH through false representations and warranties regarding CDS's financial position and regulatory compliance to enter into various agreements, including: (i) the above-mentioned Recapitalization Agreement, (ii) a Chairman Agreement, (iii) an Executive Compensation Agreement providing Hardin deferred compensation for her work at CDS, (iv) a Contribution Agreement increasing Hardin's shares in CDS's holding companies, and (v) a Unitholder's Agreement regarding the composition of the board of CDS's holding company. (Id. ¶¶ 15(b)-(c), ...