United States District Court, S.D. California
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS' REQUEST FOR SUMMARY-ADJUDICATION AS TO
Thomas J. Whelan United States District Judge.
insurance-coverage dispute, Plaintiffs Plum Healthcare Group,
LLC, GI Plum Holdco, LLC and Quince Holdings LLC dba Pueblo
Springs Rehabilitation Center are suing Defendants OneBeacon
Professional Insurance and Homeland Insurance Company of New
York for breach of contract, and breach of the covenant of
good faith and fair dealing (i.e., “bad faith”).
The lawsuit arises from Homeland's refusal to defend and
indemnify Plaintiffs in an underlying personal-injury
August 9, 2017, this Court issued an order on the
parties' cross-motions for summary adjudication. (See
MSJ Order [Doc. 61].) The MSJ Order found, among other
things: (1) Defendants breached the duty to defend
Plaintiffs; (2) Defendants did not have a duty to indemnify
Plaintiffs under the policy; and (3) disputed issues of
material fact existed regarding whether Defendants breached
the duty of good faith and fair dealing by refusing to defend
Plaintiffs in the underlying action. (Id. 7:16-18,
19:1-4, 21:14-16.) Defendants' motion also sought to
establish, assuming they breached the duty to defend,
Plaintiffs did not suffer damages because defense expenses in
the underlying litigation did not exceed the policy's
$250, 000 deductible. (Defs' Notice [Doc. 41]
2:1-4.) Plaintiffs opposed by arguing the deductible was
satisfied because it includes defense expenses and the cost
to settle the underlying case. (Pls' Opp'n
[Doc. 47] 16:23-17:4.)
problem with Plaintiffs' argument is this Court's
finding that Homeland did not have a duty to indemnify under
the policy. Because no indemnity is due for the settlement
costs, and defense expenses alone are insufficient to satisfy
the deductible, Plaintiffs could not have suffered damages
under a breach of contract analysis. Accordingly, the MSJ
Order acknowledged Defendants' argument appeared
meritorious with respect to the breach of contract claim.
(MSJ Order 22:1-5.) However, because Plaintiffs'
breach of the covenant of good faith and fair dealing cause
of action survived Defendants' motion, the Court ordered
the parties to file supplemental briefs on whether Plaintiffs
could still seek damages for bad-faith. (Id.
parties have now filed their supplemental briefs. For the
reasons that follow, the Court finds (1) Plaintiffs suffered
no damages under the breach of contract cause of action, but
(2) Plaintiffs may seek recovery of their defense expenses
and settlement costs as damages under the breach of the
covenant of good faith and fair dealing cause of action.
Breach of Contract.
argue Plaintiffs suffered no damages from the breach of the
duty to defend because defense expenses did not exceed the
deductible. (Defs' P&A [Doc. 41-1]
16:12-17:4.) In their opposition, Plaintiffs appear to be
contending that the $250, 000 deductible was satisfied by
combining defense expenses and the cost of settling the
underlying case. (Pls' Opp'n 16:26-27.)
Plaintiffs' argument lacks merit.
Order found that under the policy's insured v. insured
exclusion, Homeland did not have a duty to indemnify
Plaintiffs for the settlement. (MSJ Order
16:5-19:6.) Because Plaintiffs are not entitled to settlement
costs under the policy, those costs cannot be used to satisfy
the deductible. See James B. Lansing Sound, Inc. v.
National Union Fire Ins. Co., 801 F.2d 1560, 1569 (9th
Cir. 1986) (rejecting insured's contention that uncovered
losses can be used to satisfy the deductible). Additionally,
because it is undisputed that Plaintiffs' defense
expenses did not exceed the policy deductible (Pls'
Sep. State. [Doc. 47-2] Nos. 3, 46), Plaintiffs did not
suffer damages under the breach of contract claim.
their supplemental brief, Defendants appear to raise two
arguments precluding Plaintiffs from recovering their defense
expenses and settlement costs as bad-faith damages. First,
they argue that in order “[t]o recover damages on a
‘bad faith' theory, ‘benefits due
under the policy must have been withheld.”
(Defs' Supp. Brief [Doc. 63] 4:8-9, citing
Love v. Fire Ins. Exchange, 221 Cal.App.3d 1136,
1151 (1990) (italics applied).) “Because no policy
benefits ever became due to Plaintiffs, it follows that no
damages can be recovered for breach of the duty of good faith
and fair dealing.” (Id. 4:18-21.) Next,
Defendants appear to suggest that under Hogan v. Midland
National Insurance Company, 3 Cal.3d 553 (1970),
Plaintiffs' cannot recover the settlement costs because
there is no indemnity obligation. (Id. 5:5-7.)
Plaintiffs, on the other hand, cite a number of California
appellate cases in support of their claim for bad-faith
damages. (Pls' Supp. Brief [Doc. 62] 1:4-3:28.)
initial matter, neither party has cited a California Supreme
Court case addressing whether an insured can recover defense
expenses or a judgment as damages for an insurer's
bad-faith refusal to defend, where it is ultimately
determined that there is no coverage under the policy.
Additionally, this Court has been unable to find a case from
the State's highest court addressing the issue. The
absence of a California Supreme Court case has led to
confusion and disagreement among the lower courts regarding
the issue. See, e.g., Everett Associates Inc. v.
Transcontinental Ins. Co., 159 F.Supp.2d 1196, 1210
(N.D.Cal. 2001) (in finding the insurer was not liable for
the settlement of an uncovered claim under breach of contract
theory, the court recognized confusion “because where
the failure to defend also violates the covenant of good
faith and fair dealing, courts have generally held the
insurer liable for the full settlement.”) For the
reasons that follow, the Court finds Plaintiffs may recover
their defense expenses and settlement costs as damages, if a
jury finds Defendants breached the duty of good faith and
first argument-that Plaintiffs cannot recover bad-faith
damages because no monies are due under the policy-lacks
merit under the facts of this case. In Schwartz v. State
Farm Fire and Cas. Co., 88 Cal.App.4th 1329 (2001), the
insured, Alan Schwartz, and a guest, Elliot Weinstein, were
severely injured in an automobile accident by an uninsured
motorist. Schwartz had two insurance policies that included
uninsured motorist coverage: a primary policy with USAA with
limits of $500, 000 per person, and an umbrella policy with
defendant State Farm, which provided $2 million in coverage.
Weinstein was considered an additional insured under both
polices, and after the accident, Weinstein and Schwartz filed
claims with USAA and State Farm.
primary carrier, USAA, processed Weinstein's claim first,
and he then filed a claim with State Farm that exceeded the
$2 million policy limit. Because Schwartz's claim was
still being processed by USAA, Schwartz's attorney
contacted State Farm to remind it that his client was also
making a policy limit demand to State Farm and, therefore, he
suggested that before State Farm paid Weinstein's claim,
it should either withhold enough funds to also compensate
Schwartz or interplead the $2 million to permit division
between the competing claims. State Farm ignored ...