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City of Escondido v. General Reinsurance Corp.

United States District Court, S.D. California

December 18, 2019

CITY OF ESCONDIDO, Counter Defendant.


          Hon. Michael M. Anello, United States District Judge.

         On April 4, 2019, Plaintiff City of Escondido (“Plaintiff” or “City”) filed a Complaint for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief in San Diego County Superior Court against Defendants General Reinsurance Corporation (“GRC”) and Genesis Management and Insurance Services Corporation (“Genesis”). Doc. No. 1-2.[1] Defendants removed the action to this Court on May 9, 2019. Doc. No. 1.

         On May 23, 2019, Plaintiff filed the First Amended Complaint (“FAC”), adding causes of action for concealment and negligent misrepresentation. Doc. No. 8 (“FAC”). Genesis then moved to dismiss the FAC pursuant to Federal Rule of Civil Procedure 12(b)(6). Doc. No. 10-1. On August 29, 2019, the Court granted Genesis's motion to dismiss without prejudice and with leave to amend. Doc. No. 16 at 15.

         On September 3, 2019, Plaintiff filed the operative Second Amended Complaint (“SAC”) asserting causes of action for (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) concealment; (4) negligent misrepresentation; (5) false promise; and (6) declaratory relief. Doc. No. 17 (“SAC”). Genesis now moves to dismiss Plaintiff's claims pursuant to Federal Rule of Civil Procedure 12(b)(6). Doc. No. 18. For the following reasons, the Court GRANTS Genesis's motion.

         I. Background[2]

         GRC is an insurance company and Genesis is a wholly owned subsidiary of GRC. SAC ¶¶ 1-2. From February 1, 1990 to May 15, 1994, Defendants insured Plaintiff “for workers' compensation payments to Plaintiff's covered employees and allocated investigation, adjustment[, ] and legal expenses . . . .” Id. ¶ 8. Plaintiff alleges that the insurance policy was issued by GRC, but that it “was directed by [D]efendants solely to Genesis with respect to claims, questions[, ] and reimbursement requests involving the policy, ” and “was directed by [D]efendants to submit all its claims status reports solely to Genesis representatives . . . .” Id. ¶ 2. According to Plaintiff, it only communicated with Genesis, who was the “sole decision maker and entirely controlled whether or not reimbursements were to be issued to [Plaintiff] under the policy.” Id. “Over the course of more than 15 years in dealing with [Plaintiff] concerning the policy, GRC and Genesis acted jointly through Genesis, with Genesis conducting all the communications with [Plaintiff] concerning the policy” such that “Genesis is the alter ego of GRC.” Id. ¶ 2, 3.

         Plaintiff alleges that the policy requires Defendants to indemnify Plaintiff when its expenditures on a worker's compensation claim falling within the policy period exceed the policy's $250, 000 self-insured retention. Id. ¶ 8. During the policy period, Plaintiff “paid or incurred liability to pay workers' compensation claims plus allocated investigation, adjustment[, ] and legal expenses in excess of $250, 000” on three claims: (1) GRC claim number 6040678 for claimant Paula Westenberger (“Westenberger Claim”); (2) GRC claim number 6037896 for claimant Aida Faeldan (“Faeldan Claim”); and (3) GRC claim number 6034852 for claimant Michael Gain (“Gain Claim”) (collectively, the “Three Underlying Claims”). Id. ¶ 10.

         Plaintiff timely submitted requests for indemnity to Defendants for amounts in excess of $250, 000 for each of the Three Underlying Claims. Id. ¶ 11. Each time, Plaintiff alleges Defendants “refused to pay [Plaintiff] and . . . adopted a pattern and practice of wrongful and bad faith claims evaluations, during which [D]efendants have withheld benefits under the pretext of continuing to investigate while they assert a variety of challenges and excuses . . . .” Id. Additionally, “[D]efendants have refused to reasonably and timely investigate, refused to provide legitimate, reasonable[, ] or accurate reasons for their refusal to provide benefits owed, and have unreasonably withheld benefits owed to Plaintiff.” Id. ¶ 12.

         A. The Westenberger Claim

         Mrs. Westernberger injured her low back on July 30, 1993, while working as an employee of Plaintiff. Id. ¶ 16, 17. She became temporarily totally disabled due to increased pain. Id. ¶ 17. When conservative treatment proved ineffective, Mrs. Westenberger underwent several failed back surgeries. Id. ¶¶ 16-17. In December 1995, Mrs. Westenberger began working at the City Heights Town Council (“CHTC”). Id. ¶ 19. When her pain increased, she was referred to a pain management specialist, which included a series of back injections to alleviate back pain. Id. She also received a right hip injection, which caused complications necessitating a right hip replacement. Id. ¶ 16. As a result, Mrs. Westenberger developed a left foot deformity requiring multiple surgeries. Id. “These surgeries were complicated by the development of reflex sympathetic dystrophy (‘RSD').” Id. ¶ 22. “[S]he was diagnosed with left foot neurologic problems and complex regional pain syndrome (‘CRPS'). Id. ¶ 16. Mrs. Westenberger's worker's compensation case determined that her “right hip replacement, left foot deformity, left foot neurological problems, and CRPS were all causally related to her industrial injury suffered while working [for Plaintiff].” Id. Thus, Plaintiff was responsible for paying for Mrs. Westenberger's treatment for these conditions. Id.

         During the worker's compensation proceeding, Plaintiff sought a right of contribution against CHTC and its insurer for costs associated with Mrs. Westenberger's right hip problems and right hip replacement. Id. ¶ 34. Ultimately, 50% of Mrs. Westenberger's right hip problems were apportioned to the 1993 back injury, and 50% were apportioned to her full-time work at CHTC. Id. ¶ 35. However, CHTC “is a nonprofit community advocacy group with no assets and it had no worker's compensation insurance” during the time Mrs. Westenberger was working full-time. Id. ¶ 37. Thus, Plaintiff, with Defendants' concurrence, abandoned the contribution claim. Id. As a result, Defendants purportedly knew that Plaintiff faced “near certain joint and several liability” for the costs of Mrs. Westenberger's past and future treatment that would likely exceed $1 million. Id. ¶ 31.

         In 2011, Defendants authorized Plaintiff to offer a structured settlement of $1.25 million to Mrs. Westenberger. Id. The “Compromise and Release” would release Plaintiff from further disability payments and any obligation to pay for Mrs. Westenberger's future medical care. Id. Genesis advised Plaintiff that it would initially fund all components of the settlement, but that Genesis would reimburse Plaintiff for “each such settlement payment after [Plaintiff] submitted a request for reimbursement to Genesis.” Id. ¶ 80. Mrs. Westenberger rejected the offer because she believed her future medical care would exceed the settlement amount. Id. ¶ 31.

         In May 2012, Plaintiff and Mrs. Westenberger entered into a “Stipulation with Request for Award.” Id. ¶ 25. “Defendants authorized and approved of [Plaintiff] entering into [the] ‘Stipulation with Request for Award' which stated [Plaintiff] was liable for all future medical care for [Mrs. Westenberger's] ‘low back, hips, left foot, psyche, and RSD . . . .'” Id. ¶ 31.

         Plaintiff alleges that Geneis's actions were part of a scheme where Genesis would give authorization for settlement and then refuse reimbursement:

The scheme works like this: the City was instructed to keep Genesis apprised of claims and obtain Genesis'[s] approval before settling any claim that would trigger payment of any benefits under the Policy, which it did. Genesis approves the settlement, the City settles, but then GRC/Genesis refuse to pay and raise knowingly false excuses for denying coverage. To escape liability, GRC says it never approved the settlement, and Genesis says it never had authority to approve the settlement and owes no duty of care to the City. With respect to the Westenberger claim, Genesis approved the City's settlement and promised the City it would be reimbursed for its settlement payments to Westenberger. However, GRC/Genesis have refused to reimburse the City. Genesis states it did not have authority to approve the settlement. GRC seeks to pretend it is a separate entity from Genesis that did not know what Genesis knew and did not authorize or ratify the things that Genesis did. GRC claims it was not advised and did not know about the Westenberger claim or the proposed settlement, although Genesis was fully informed of all material facts related to the Westenberger claim. GRC states the City's payments to Westenberger were unauthorized, not related to Westenberger's industrial injury and thus not covered under the Policy.

Id. ¶ 3; see also ¶¶ 62-68, 70-78, 80-82. “Prior to 2012[, ] Defendants reimbursed [Plaintiff] approximately $800, 000 on the Westenberger claim.” Id. ¶ 32. However, “[s]ubsequent to the May 2012 Stipulation with Request for Award[, ] Defendants made only a single reimbursement in 2015 and in 2018 Defendants began raising numerous objections to [Plaintiff's] additional reimbursement requests.” Id. Plaintiff alleges that the “objections are meritless and are based upon false and intentionally inaccurate grounds as well as knowing misrepresentations of California law and the terms of the Policy.” Id.; see also Id. ¶¶ 32-45, 68 (listing examples of Defendants' objections).

         B. The Faeldan Claim

         On September 1, 1993, Ms. Faeldan “experienced right arm and elbow pain in connection with pushing a steel cabinet file and lifting boxes of police files” while working as a data entry operator for Plaintiff's Police Department. Id. ¶ 46. Conservative treatment minimally improved her pain and Ms. Faeldan returned to work with limited use of her right arm. Id. She then developed pain in her left arm and elbow from overuse. Id. Ms. Faeldan “eventually had surgery on her left elbow[ and] was diagnosed with bilateral carpal tunnel syndrome[ and] myofascial pain syndrome.” Id. She “received psychiatric treatment in connection with her injuries and inability to work.” Id.

         In June 2008, Defendants issued Plaintiff a check for $8, 132.18 to reimburse Plaintiff for the amounts expended in excess of the policy's retention on the Faeldan claim. Id. ¶ 47. Years later, Plaintiff began making monthly life pension payments to Ms. Faeldan pursuant to an earlier stipulation and award. Id. ¶ 48. These payments exceeded the policy's retention on the Faeldan claim. Id. Plaintiff made numerous reimbursement requests to Defendants for these payments to no avail. Id. ¶ 49.

         C. The Gain Claim

         On May 16, 1993, Mr. Gain was working as a fire investigator for Plaintiff “when he fell through the second story of a fire damaged building, suffering significant injuries to his neck, low back, right shoulder, and right knee.” Id. ¶ 51. As of 2008, “Defendants had reimbursed Plaintiff approximately $133, 000, ” but determined that they overpaid Plaintiff by $58, 000. Id. Plaintiff “issued a check to Defendants in 2009 for $58, 481.75.” Id. After 2009, Plaintiff has paid over $17, 000 in life pension payments to Mr. Gain. Id. ¶ 52. For several years, Plaintiff has submitted proper reimbursement requests for these life pension payments but has not received any reimbursement from Defendants. Id. ¶ 53. Most of these requests have been ignored, “except for once when Defendants incorrectly asserted the retention had not been exceeded.” Id. Defendants ignored Plaintiff's response with documentation showing the exceeded retention. Id. In August 2017, Defendants asked for more information regarding a reimbursement request. Id. After receiving the information, Defendants did not reimburse Plaintiff. Id. Since then, all of Plaintiff's requests and e-mails to Defendants have been ignored. Id.

         II. Legal Standard

         A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief . . . .” Fed.R.Civ.P. 8(a)(2). However, plaintiffs must also plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Fed.R.Civ.P. 12(b)(6). The plausibility standard thus demands more than a formulaic recitation of the elements of a cause of action, or naked assertions devoid of further factual enhancement. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Instead, the complaint “must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).

         In reviewing a motion to dismiss under Rule 12(b)(6), courts must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). The court need not take legal conclusions as true merely because they are cast in the form of factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987). Similarly, “conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).

         Additionally, allegations of fraud or mistake require the pleading party to “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). The context surrounding the fraud must “be ‘specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.'” Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001)). “‘Averments of fraud must be accompanied by “the who, what, when, where, and how” of the misconduct charged.' A party alleging fraud must ‘set forth more than the neutral facts necessary to identify the transaction.'” Kearns, 567 F.3d at 1124 (first quoting Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003); and then quoting In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994)), superseded by statute on other grounds.

         Where dismissal is appropriate, a court should grant leave to amend unless the plaintiff could not possibly cure the defects in the pleading. Knappenberger v. City of Phoenix, 566 F.3d 936, 942 (9th Cir. 2009).

         III. Discussion

         A. Claims Based on Contract

         In its previous order granting dismissal, the Court held that Plaintiff failed to allege breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief based on breach of contract because it had “not adequately pled facts to find Genesis liable under either an alter ego theory of liability or a joint venture theory.” Doc. No. 16 at 10-11. Now, Genesis argues that Plaintiff alleges no contractual relationship and Plaintiff's liability theories remain insufficient. Doc. No. 18-1 at 9. Plaintiff responds that it has alleged sufficient facts under California law to support liability under both theories. Doc. No. 20 at 11-16.

         1. Existence of a Contract

         The first element for a California breach of contract claim is “the existence of a contract.” EPIS, Inc. v. Fidelity & Guaranty Life Ins. Co., 156 F.Supp.2d 1116, 1124 (N.D. Cal. 2001) (citing Reichert v. General Ins. Co., 68 Cal. 2d 822, 830 (Cal. 1968)). A defendant must have been a consenting party to the contract at issue to be liable for breach of contract and breach of the implied covenant of good faith and fair dealing. Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973) (holding that the non-insurer defendants were not parties to the insurance contract and cannot be liable for breach of the implied covenant of good faith and fair dealing); Minnesota Mut. Life Ins. Co. v. Ensley, 174 F.3d 977, 981 (9th Cir. 1999) (holding ...

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