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Bernstein v. Nautilus Insurance Co.

United States District Court, S.D. California

July 24, 2017

ZOE BERNSTEIN, a minor, by her Guardian ad Litem Kelsie Valdez, Plaintiff,
v.
NAUTILUS INSURANCE COMPANY, Defendant.

          ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

          Hon. M. James Torenz United States District Judge.

         In this insurance breach of contract and bad faith action, Defendant Nautilus Insurance Company (“NIC”) filed a motion to dismiss for failure to state a claim. Plaintiff Zoe Bernstein opposed and NIC replied. The Court decides this matter on the briefs without oral argument. See Civ. L. R. 7.1.d.1. For the reasons stated below, Defendant's motion is granted.

         I. Background

         Plaintiff was injured in a single car accident. She filed a personal injury complaint in San Diego County Superior Court against the driver and owner of the vehicle, David Bernstein (the “Underlying Action”). (See doc. no. 1-2 (“Compl.”) at 3.) Mr. Bernstein was employed by Pierview Investments II, Corp. (“Pierview”). The operative complaint in the Underlying Action alleged that the accident was caused by his negligence in the course and scope of his employment with Pierview.

         At the relevant time, Pierview was covered by a commercial general liability policy issued by NIC (the “Policy”).[1] Pierview tendered the defense of the Underlying Action to NIC, which NIC refused. The Underlying Action settled with Plaintiff taking judgment against Pierview for $6, 240, 893.37, and Pierview assigning its rights and interests in the Policy to Plaintiff.

         Subsequently, Plaintiff filed this action against NIC pursuant to California Insurance Code § 11580(b)(2) for breach of contract and breach of the implied covenant of good faith and fair dealing. Plaintiff alleged that NIC breached its duty to defend and indemnify Pierview in the Underlying Action. NIC removed the action to this Court based on diversity jurisdiction under 28 U.S.C. § 1332, and filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

         II. Discussion

         A Rule 12(b)(6) motion tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In reviewing a Rule 12(b)(6) motion, the Court must assume the truth of all factual allegations and construe them most favorably to the nonmoving party. Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997, 999 n.3 (9th Cir. 2006). “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.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Dismissal is warranted where the complaint lacks a cognizable legal theory. Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (internal quotation marks and citation omitted). Alternatively, a complaint may be dismissed where it presents a cognizable legal theory, yet fails to plead essential facts under that theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984).

         A. Breach of Insurance Contract

         Plaintiff claims that NIC breached its insurance contract by failing to defend and indemnify Pierview. NIC counters the case should be dismissed because it had no duty to do either. To prevail on a claim for breach of duty to defend,

the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. The duty to defend exists if the insurer becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement.

Delgado v. Interins. Exch. of Auto. Club of S. Cal., 47 Cal.4th 302, 308 (2009) (emphasis in original, internal quotation marks and citations omitted). "The nature and kinds of risks covered by the insurance policy establish the scope of duty to defend." Essex Ins. Co. v. City of Bakersfield, 154 Cal.App.4th 696, 704 (2007) (citing Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 19 (1995). "'If, as a matter of law, neither the complaint nor the known extrinsic evidence indicate any basis for potential coverage, the duty to defend does not arise in the first instance.'" Essex, 154 Cal.App.4th at 704 (quoting Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 655 (2005). Duty to defend, "which applies even to claims that are groundless, false, or fraudulent, is separate from and broader than the insurer's duty to indemnify." Waller, 11 Cal.4th at 19 (internal quotation marks and citation omitted).

         NIC contends that the Policy's auto exclusion precludes coverage, and the Underlying Action therefore did not trigger a duty to defend. "An insurer is ... obligated to provide a defense even when an exclusion applies but may be reasonably interpreted to be inapplicable to the alleged facts." Essex, 154 Cal.App.4th at 704 (citation omitted). Accordingly, an insurer cannot escape its duty by means of an exclusionary clause that is unclear. Id. at 705 (citation omitted). Plaintiff maintains that the Policy's auto exclusion is at best ambiguous and does not clearly exclude coverage for bodily injuries arising from Plaintiff's auto accident.

         The parties' arguments are focused on policy interpretation. "Interpretation of an insurance policy is a question of law. While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply." Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 1115 (1999) (internal brackets, quotation marks and citations omitted).[2]

         The starting point of policy interpretation is its express language. If the language is unambiguous, the court need not look further.

Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. Such intent is to be inferred, if possible, ...

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