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HealthSmart Benefit Solutions, Inc. v. InterWest Insurance Services, Inc.

United States District Court, E.D. California

July 29, 2016

INTERWEST INSURANCE SERVICES, INC. and DOES 1 through 10, Defendants.



         Plaintiff HealthSmart Benefit Solutions, Inc., (“Plaintiff”) alleges that its insurance broker, Defendant InterWest Insurance Services, Inc. (“Defendant”), created a coverage gap when it purchased replacement liability insurance for Plaintiff. After Plaintiff’s policy claims were denied by both of its insurance providers based on the existence of that coverage gap, Plaintiff filed suit against them. By way of this action, Plaintiff seeks recovery from Defendant for the litigation costs of that dispute and accordingly brings claims for negligence, breach of contract and declaratory relief. Jurisdiction is premised on diversity of citizenship.[1] Currently pending is Defendant’s Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).[2] ECF No. 6. For the following reasons, the Motion is DENIED in its entirety.


         Between December 31, 2012, and December 31, 2013, Lloyd’s, London (“Lloyd’s”) provided Plaintiff with professional liability insurance coverage. In or around December 2013, Plaintiff retained Defendant as its insurance broker. Plaintiff specifically wanted Defendant to procure insurance coverage that would allow Plaintiff to seamlessly maintain its professional liability coverage once its policy with Lloyd’s expired.

         Defendant procured a policy for Plaintiff through Hudson Specialty Insurance Company (“Hudson”). Hudson’s policy was in effect from December 31, 2013, to December 31, 2014. On December 18, 2013, while Lloyd’s’ policy was still in effect, Plaintiff was added as a defendant in a Louisiana lawsuit (hereafter “Opelousas”). Plaintiff was not served with the Opelousas “Amended Petition” until January 15, 2014, after Lloyd’s’ policy ended. Opelousas was a putative class action lawsuit alleging violations of Louisiana’s Preferred Provider Organization Act.

         Plaintiff believed that its insurance policies covered any exposure it had to the Opelousas lawsuit. Accordingly, it contacted both Lloyd’s and Hudson immediately upon service of the “Amended Petition.” Both insurance providers denied coverage on the Opelousas claim based on the purported coverage gap at the heart of this lawsuit.

         Specifically, Lloyd’s policy requires written notice of any claims “as soon as practicable but in any event the earlier of 30 days after [Plaintiff] first receive[s] notice of any Claim made against [Plaintiff] or [Plaintiff] first become[s] aware of any specific act, error or omission which is reasonably expected to give rise to a claim, or the end of the Policy Period.” ECF No. 1 at ¶ 15. Because Plaintiff did not submit written notice by “the end of the Policy Period, ” Lloyd’s denied coverage for the Opelousas claim.

         Hudson’s policy contains an exclusion for claims “based upon … any prior and/or pending civil … proceeding” that arose before December 31, 2013. Id. at ¶ 19. Hudson denied Plaintiff’s “prior and/or pending civil proceeding” claim because Opelousas initially arose before Hudson’s policy went into effect.

         Plaintiff sued Lloyd’s and Hudson for denying its claims under the policies, incurring $900, 000 in attorney’s fees and costs. Plaintiff alleges these litigation costs were directly and proximately caused by Defendant’s creation of a gap in insurance coverage. For its part, Defendant maintains that it had no duty to obtain Plaintiff’s policy without a coverage gap and that essential elements of an oral contract have not been alleged by Plaintiff.


         On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) “requires only ‘a short and plain statement of the claim showing that the pleader is entitled to relief’ in order to ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.’” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, “a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. (internal citations and quotations omitted). A court is not required to accept as true a “legal conclusion couched as a factual allegation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). “Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed. 2004) (stating that the pleading must contain something more than “a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”)).

         Furthermore, “Rule 8(a)(2) . . . requires a showing, rather than a blanket assertion, of entitlement to relief.” Twombly, 550 U.S. at 555 n.3 (internal citations and quotations omitted). Thus, “[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only ‘fair notice’ of the nature of the claim, but also ‘grounds' on which the claim rests.” Id. (citing Wright & Miller, supra, at 94, 95). A pleading must contain “only enough facts to state a claim to relief that is plausible on its face.” Id. at 570. If the “plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.” Id. However, “[a] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and ‘that a recovery is very remote and unlikely.’” Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).


         Defendant’s Motion makes three arguments to support its contention that the Court must dismiss the Complaint. First, Defendant contends that Plaintiff’s negligence claim must be dismissed because insurance brokers owe no general duty of care to their clients to procure replacement insurance without a coverage gap. Second, Defendant argues that Plaintiff’s breach of contract claim must be dismissed because it fails to allege facts sufficient to establish the formation of an oral contract. Specifically, Plaintiff ...

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