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Plum Healthcare Group, LLC v. Onebeacon Professional Insurance

United States District Court, S.D. California

November 15, 2017

PLUM HEALTHCARE GROUP, LLC, et al., Plaintiffs,
v.
ONEBEACON PROFESSIONAL INSURANCE, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' REQUEST FOR SUMMARY-ADJUDICATION AS TO PLAINTIFFS' DAMAGES

          Hon. Thomas J. Whelan United States District Judge.

         In this 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 lawsuit.

         On 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.)

         One 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. 22:10-13.)

         The 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.

         I. Analysis

         A. Breach of Contract.

         Defendants 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.

         The MSJ 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.

         B. Bad Faith.

         In 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.)

         As an 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 fair dealing.

         Defendants' 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.

         The 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 ...


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