California Courts Maintain Position that EPL Policies Afford No Indemnity Coverage for Wage and Hour Claims

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1 2015 Newsletter EDITORS Terrence R. McInnis Ryan C. Tuley William D. Burger, Jr. CONTRIBUTORS Tara L. Goodwin Michael McCarthy Binh Duong T. Pham Dustin H. Thai FEATURED ARTICLE California Courts Maintain Position that EPL Policies Afford No Indemnity Coverage for Wage and Hour Claims By Binh Duong T. Pham While some EPL policies explicitly provide defense coverage for wage and hour suits subject to a sublimit, virtually all EPL policies exclude indemnity coverage for wage and hour claims. Nonetheless, given the substantial rise in wage and hour class actions being brought in California, and the significant cost associated with settling these lawsuits, California employers have not been deterred in attempting to pass the costs associated with these actions onto their EPL carriers. California courts, however, have repeatedly held that EPL policies do not afford indemnity coverage for wage and hour claims, although they have used different approaches to arrive at that conclusion. California Dairies, Inc. v. RSUI Indemnity Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009) is the seminal case interpreting California law on the issue. In California Dairies, the Eastern District of California held that, because some of the underlying wage and hour claims were matters of state law without an FLSA analogue, those claims were not similar to FLSA claims and therefore were not excluded by the policy s FLSA exclusion. Nevertheless, the district court concluded that the insurer had no duty to defend or indemnify the underlying wage and hour action because none of the underlying causes of action related to the enumerated offenses listed in the insurance policy s definition of Employment Practices Wrongful Acts. The Ninth Circuit affirmed the district court s ruling and held that, as a matter of law, the claims in the underlying wage and hour action did not arise out of Employment Practice Wrongful Acts. Cal. Dairies, Inc. v. RSUI Indem. Co., 462 Fed. Appx. 722, (9th Cir. 2011). The Central District of California subsequently addressed the issue of coverage for wage and hour claims in N.H. Ball Bearings, Inc. v. Nat l Union Fire Ins. Co., 2014 U.S. Dist. LEXIS (C.D. Cal. Mar. 10, 2014). The underlying complaint at issue in N.H. Ball alleged claims for failure to pay overtime, failure to pay minimum wages, inaccurate wage statements, unpaid wages at discharge, and unfair competition. In the coverage action, the insured argued pursuant to California Dairies that the underlying claims for failure to provide accurate wage statements and for the failure to pay non-discretionary bonuses at the time of discharge are not similar to FLSA claims and that coverage for those claims, therefore, was not precluded by the policy s FLSA exclusion. The district court rejected the insured s argument and held that the exclusion before it was broader than the FLSA exclusion at issue in California Dairies. Specifically, the N.H. Ball court noted that the exclusion before it contained exclusionary language barring coverage for any claim that relates to a failure to pay wages or improper deductions from pay, while the exclusion at issue in California Dairies did not contain such language. Among the most recent and most comprehensive cases interpreting California law on this issue is Admiral Ins. Co. v Kay Automotive Distributors, Inc., 2015 U.S. Dist. LEXIS (C.D. Cal. Jan. 29, 2015). Admiral involved an underlying action against the insured asserting causes of action for: (1) misrepresentations, (2) failure to pay minimum, regular, and overtime wages, (3) failure to provide mandated meal periods, (4) failure to provide mandated rest periods, (5) failure to make payments within the required time, (6) failure to provide itemized wage statements, (7) failure to maintain adequate records as to wages and

2 hours worked, (8) failure to reimburse business expenses, (9) violation of California s unfair competition statute, and (10) a claim under the Private Attorneys General Act ( PAGA ). The insured tendered the claim to its EPL carrier, which had issued a policy with an exclusion for all claims based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any federal, state, local or foreign wage and hour laws, including, without limitation, the Fair Labor Standards Act.... The carrier denied coverage for the lawsuit based on that exclusion, and the insured sued. The parties filed cross-motions for summary judgment, and the court granted the carrier s motion and denied the motion filed by the insured. The Admiral court rejected the insured s arguments that the exclusion was intended to refer only to wage and hour laws that were similar to the FLSA. According to the district court, the contract s plain and broad language referred to four possible sources of law dealing with wages and hours, and that the FLSA was only one of those sources. Based on the exclusion s reference to state wage and hour laws, the district court concluded that the exclusion encompassed claims under sections of the California Labor Code dealing with pay and hours of work regardless of whether those sections were similar to any provision of the FLSA. The court further noted that the exclusion not only barred claims directly authorized by wage and hour laws themselves, but also claims based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving such laws. Because the court concluded that no action would have been brought but for the wage and hour claims, it held that the exclusion eliminated indemnity coverage for all causes of action against the insured, including the misrepresentation, unfair competition, and PAGA claims. In summary, while California courts continue to hold that EPL policies do not afford indemnity coverage for wage and hour claims, careful consideration must be given to the precise language contained in the policy. Specific wording in several provisions of the policy, including the offenses listed in the policy s definition of Employment Practices Wrongful Act (or equivalent) and the scope of the policy s FLSA exclusion, can dictate what arguments are available to carriers responding to lawsuits involving wage and hour claims. California Insurance Case Summaries, April - September 2015 California Supreme Court Holds Carriers Can Sue Cumis Counsel for Repayment of Excessive Fees Hartford Cas. Ins. Co. v. J.R. Marketing, Inc., 61 Cal. 4th 988 (2015) In J.R. Marketing, L.L.C., the California Supreme Court held that, under certain circumstances, a carrier can sue Cumis counsel to recover excessive fees paid in an underlying litigation. In JR Marketing, the insurer, Hartford Casualty Insurance Company ( Hartford ), issued CGL policies to two insureds. In September 2005, a lawsuit was filed against the Insureds and several individuals alleging, among other things, intentional misrepresentation, breach of fiduciary duty, defamation, and conspiracy (the Marin Action ). The Insureds tendered the defense to Hartford. Hartford denied any duty to defend or indemnify on the grounds that the acts complained of occurred prior to the policies effective dates, and also on the ground that many of the individual defendants were not insured under the Hartford policies. The Insureds and several individual defendants filed a coverage action against Hartford (the Coverage Action ). On January 19, 2006, Hartford agreed to defend the Insureds and several individual defendants, subject to a reservation of rights. However, Hartford still refused to pay for any defense costs incurred prior to that date, and also refused to provide independent counsel in place of panel counsel. In July 2006, the trial court in the Coverage Action found that Hartford breached its duty to defend the Marin Action as of the date first tendered, and that Hartford was required to furnish Cumis counsel pursuant to Section 2860 of the California Civil Code ( Section 2860 ). Squire Sanders was hired to serve as Cumis counsel. In September 2006, the trial court issued an enforcement order (the Order ) requiring Hartford to pay all past and future defense costs in the Marin Action. The Order, which was drafted by Squire Sanders, further stated that Squire Sanders bills had to be reasonable and necessary, and that, because of Hartford s prior breach, Hartford would be precluded from invoking the rate provisions of Section Finally, the Order stated that, [t]o the extent Hartford seeks to challenge fees and costs as unreasonable or unnecessary, it may do so by way of reimbursement after resolution of the [Marin Action]. After the Marin Action concluded, Hartford filed claims against Squire Sanders. Asserting restitution and unjust enrichment, Hartford argued that it was entitled to reimbursement of a significant portion of defense fees incurred in defending individuals for whom coverage was not afforded under either CGL policy. Hartford also asserted that Squire Sanders fees were excessive, unreasonable, and unnecessary. Squire Sanders demurred, arguing that direct actions for reimbursement against Cumis counsel are disallowed. The trial court and appellate court agreed with Squire Sanders. The matter was appealed to the California Supreme Court. The California Supreme Court reversed, finding that Hartford could maintain an action for reimbursement directly against Squire Sanders. The Supreme Court reasoned that it was Squire Sanders (and not the Insureds) that would be unjustly enriched if Page 2 California Insurance Newsletter

3 it was allowed to retain unreasonable and unnecessary defense payments. In reaching its decision, the Supreme Court also emphasized that its holding relied upon the particular facts of the case, thereby limiting its ruling to the unusual scenario here, where there was an Order that i) required Hartford to pay for reasonable and necessary costs of Cumis counsel; and ii) provided that Hartford had a right to reimbursement where such costs were not reasonable or necessary. According to the Court, the terms of the Order removed from consideration (and thus the Court did not decide) the questions of: (1) whether an insurer who breaches its defense obligation has any right to recover from anyone excessive fees paid to Cumis counsel; (2) whether such disputes should be required to be resolved by arbitration pursuant to Section 2860; and (3) whether resolution of such a fee dispute should be resolved after or before the conclusion of the underlying litigation. California Supreme Court Holds That California Insurance Code Section 520 Prohibits a Carrier From Denying Coverage Based on Consentto-Assignment Clauses in its Policy if the Loss Happened Prior to the Assignment Fluor Corp. v. Superior Court, 61 Cal. 4th 1175 (August 20, 2015) In Fluor, the California Supreme Court overruled its prior decision in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal. 4th 934 (2003), and held that an insurance company may not utilize a consent-toassignment provision in its policy to deny coverage for a loss that occurred prior to the assignment. Fluor arose out of approximately 2500 underlying asbestos lawsuits (the Asbestos Lawsuits ) filed against Fluor Corporation beginning in the 1980s. Fluor s general liability carriers, led by Hartford Accident & Indemnity Company, defended and indemnified Fluor in the Asbestos Lawsuits for more than 25 years despite the fact that, in 2000, Fluor undertook a reverse spinoff through which the portion of its business which gave rise to the Asbestos Lawsuits was transferred to a newly formed subsidiary with the same name ( Fluor 2 ). In 2006, Fluor 2 filed a coverage suit against Hartford relating to issues not addressed in Fluor, and in 2009 Hartford filed a cross-complaint in which it sought a declaration that, because it had not consented to the reverse spinoff in 2000, the consent-to-assignment clause in each of its policies eliminated coverage for Fluor 2 in the Asbestos Lawsuits. In support of this argument, Hartford relied on Henkel, in which the California Supreme Court held that consent-to-assignment clauses are enforceable so long as the loss at issue has been reduced to a sum of money due or to become due under the policy. Henkel, 29 Cal. 4th at 944. Fluor 2 responded to this position by arguing that, in Henkel, the California Supreme Court neglected to consider California Insurance Code Section 520 ( Section 520 ), which prohibits an insurer from dishonoring an assignment after a loss has happened. The California Court of Appeal held in favor of Hartford, and Fluor 2 appealed to the California Supreme Court. The California Supreme Court reversed and overturned its decision in Henkel. In so doing, the court held that Section 520 s prohibition on coverage denials based on assignments after the loss has happened applies at the moment of the liability-creating occurrence. Because the underlying claimants were allegedly exposed to asbestos prior to the 2000 reverse spinoff, the court held that Fluor 2 was entitled to coverage. Insured Not Required to Plead Existence of a Within-Limits Settlement Demand in Order to State a Claim for Bad Faith Failure to Settle Aspen Specialty Ins. Co. v. Willis Allen Real Estate, 2015 U.S. Dist. LEXIS (S.D. Cal. June 15, 2015): In Aspen, the district court denied a liability carrier s motion to dismiss an insured s bad faith claim for failure to effectuate a settlement within policy limits despite the fact that the complaint failed to allege a within-limits demand. The court held that, to survive a motion to dismiss a claim for bad faith failure to settle, California law only requires the insured to allege some circumstance demonstrating that the insurer knew that a settlement within policy limits could be feasibly negotiated. In this case, the third-party claimants purchased a home through the insured, a real estate company. Thereafter, a landslide caused a significant portion of the claimants backyard to slide into an adjacent canyon. The claimants sued multiple defendants, including the insured, seeking rescission of the house purchase and recovery of the cost of making home improvements. The insured tendered the defense of the underlying lawsuit to its professional liability carrier, who agreed to defend and investigate the claims against the insured. During the underlying litigation, the parties engaged in settlement efforts, including mediation. The insured s defense counsel allegedly informed the carrier about the possibility of liability in excess of the policy limits and requested the authority to settle up to the policy limits. The insured also purportedly learned during settlement negotiations that it could resolve the underlying claim for substantially less than the policy limits, but the carrier nevertheless refused to Page 3 California Insurance Newsletter

4 give policy limits settlement authority and made settlement offers below the amount requested. The insured contended the carrier s lowball offers prevented a settlement from being effectuated and drew out settlement negotiations. The claimants eventually settled with the insured, but only after the claimants had settled with all other defendants. The settlement completely exhausted the policy and the insured was required to contribute substantial monies of its own. Before the settlement with the claimants was completed, the carrier filed a complaint against the insured seeking declaratory relief and rescission of the policy due to alleged misrepresentations. The insured counterclaimed for breach of contract and tortious breach of the implied covenant of good faith and fair dealing, alleging the carrier acted in bad faith when it ignored liability exposure and refused to give policy limits settlement authority. The carrier moved to dismiss the insured s counterclaim on the basis that it failed to allege that the claimants made a settlement demand within policy limits. In denying the insurer s motion to dismiss, the district court held that the insured s counterclaim pleaded sufficient facts that the carrier refused in bad faith a reasonable opportunity to settle. In so holding, the court stated that under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand. The court explained that, in a case where the insured is exposed to a judgment beyond policy limits, an insurer may be liable for bad faith failure to pursue a settlement if there is evidence either that: (1) the injured party has communicated to the insurer an interest in settlement or (2) some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated. The court further held that the other circumstance need not be presented by the claimant or injured party. Based on the foregoing, the court found that the insured sufficiently alleged such a circumstance, by alleging facts that: (1) the insured had informed the insurer that its conversations with the claimant suggested that a settlement for significantly less than the policy limits was possible; (2) the claimants engaged in mediation in hopes of settling the case; and (3) the insured s defense counsel warned the carrier of potential damages in excess of the policy limits and requested policy limits settlement authority, but the carrier refused. Accordingly, the court held that the insured s allegations were sufficient to survive the insurer s motion to dismiss. Relatedness of Claims is Not Properly Addressed on a Motion to Dismiss Where it Involves a Factual Inquiry Rancho Tehama Ass n v. Fed. Ins. Co., 2015 U.S. Dist. LEXIS (E.D. Cal. May 28, 2015): In Rancho Tehama, the district court held that, under the facts of the case before it, relatedness of claims could not be properly addressed on a motion to dismiss because it entailed a premature factual inquiry. The insured, which operated as a homeowners association, had directors and officers liability coverage under a policy and a policy issued by the insurer. The underlying plaintiff sued the insured during the policy period, but had previously threatened a lawsuit in a letter sent during the prior policy period. The insured tendered the underlying action to the insurer for defense and indemnity under the policy. The insurer took the position that earlier demand and the subsequent lawsuit were related and constituted a single claim first made during the policy period. The carrier therefore denied coverage on the ground that the insured failed to timely report the claimant s earlier demand. The insured filed a complaint for declaratory relief, breach of the insurance contract, and breach of the implied covenant of good faith and fair dealing. The insurer moved to dismiss. The district court denied the insurer s motion, finding that the issue of whether the earlier letter and the underlying action were Related Claims involved a factual inquiry that was premature for the court to conduct on a motion to dismiss. According to the court, it would have to determine the scope of each claim in order to determine whether they were related. However, the court could not determine the scope of either claim based solely on the allegations and documents attached to and referenced in the complaint. Insured Not Entitled to Coverage for Third Party Loss Where Indemnity Policy s Coverage Grants Require Direct Loss Taylor v. Fed. Ins. Co., 2015 U.S. Dist. LEXIS (C.D. Cal. June 18, 2015) In Taylor, the court held that the insured, an accounting firm that performed business management services, account oversight and tax planning, could not show it was entitled to coverage because the losses of client funds did not qualify as direct losses. A client of the insured gave the insured power of attorney over money held in the client s financial account. A hacker stole the client s account and sent multiple wire payment instructions to one of the insured s employees. Believing the s came from the client, the employee wired nearly $200,000 to bank accounts in Malaysia and Singapore. The insured was unable to recover approximately half of the transferred funds. The insured tendered the claim to its carrier, which had issued a policy covering direct Page 4 California Insurance Newsletter

5 losses due to, among other things, forgery and/or computer fraud. The carrier denied the claim and argued that the loss was not direct because it was suffered by the client and not the insured. The insured sued, and the carrier filed a motion for summary judgment. The court followed prior Ninth Circuit s opinions on the issue and held that direct loss meant loss of the insureds own money and not loss of client funds. Because the funds at issue belonged to the insured s client, the court granted the carrier s motion for summary judgment. Amounts Incurred in Lawsuit Involving Multiple Claims Must Be Allocated Equally as Between Multiple Retentions Absent Evidence Supporting an Alternative Allocation Evanston Ins. Co. v. N. Am. Capacity Ins. Co., 2015 U.S. Dist. LEXIS (E.D. Cal. June 10, 2015) In Evanston, the Eastern District of California, which previously held that each home involved in four underlying construction defect actions constituted a separate claim, held that amounts incurred in those actions must be allocated evenly as between the multiple retentions owed by the insured unless it was established that an unequal allocation was appropriate. Evanston and North American Capacity ( NAC ) mutually insured a contractor that was sued in four construction defect actions. Evanston agreed to defend and indemnify the contractor, but NAC denied coverage partially based on the position that each of the homes involved in the actions constituted a separate claim. Based on that position, NAC argued that the insured must satisfy multiple retentions for each underlying lawsuit and had failed to do so even after settlement of those actions. Evanston sued NAC for contribution and indemnity, and the parties filed cross-motions for partial summary judgment on that issue. The court ruled in NAC s favor. Subsequently, the parties filed cross-motions for summary judgment on NAC s duty to defend. NAC argued that, based on the court s prior ruling, the insured had not satisfied the retentions required for coverage under its policy and, therefore, NAC had no duty to pay anything on behalf of the insured. Evanston countered by arguing that, although the court had ruled that each of the underlying actions required the satisfaction of multiple retentions for indemnity purposes, the satisfaction of a single retention was sufficient to establish NAC s duty to defend. Evanston further argued that the court had not yet ruled on whether payments could be applied toward the full satisfaction of a single retention which, according to Evanston, would trigger NAC s duty to defend the entire action before the insured began to satisfy as second retention. Based on this position, Evanston argued that NAC s duty to defend was triggered upon payment of amounts equal to a single retention in NAC s policy and that NAC had a duty to contribute to defense fees incurred after that point. The court held that, absent evidence to the contrary, amounts incurred by the insured should be allocated evenly as between the multiple retentions at issue. The court further held that the record before it did not establish whether an uneven allocation because more money had been incurred in connection with one house than another was appropriate, and ordered further briefing from the parties on that issue. Contributions from Other Insurers May Satisfy the Insured s Obligations as to Self-Insured Retention Provisions Where the Policy Does not Provide Otherwise Cont l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 2015 U.S. Dist. LEXIS (E.D. Cal. June 19, 2015) In Continental, the court held that where a policy is silent as to what payments may satisfy a policy s Self-Insured Retention ( SIR ), a contribution from another insurer can satisfy the retention. Continental issued a CGL policy to its named insured ( Tasq ), which also provided coverage to an additional insured ( Crown ). Continental further provided a $25,000,000 umbrella policy to cover liability exceeding the primary policy limits. St. Paul issued a CGL policy to Crown, which included a $250,000 SIR. In defending and settling an underlying wrongful death suit against Crown and Tasq, Continental exhausted its primary policy and $2,500,000 of the limits of its umbrella policy. St. Paul refused to contribute to either the defense or the settlement based, in part, on the position that the SIR in its policy had not been satisfied. Continental sued St. Paul for contribution, and that suit proceeded to a bench trial and post-trial briefing on the SIR issue. Continental argued that its payment on behalf of its insured satisfied the SIR in St. Paul s policy, and St. Paul argued that only payments by the insured itself can satisfy that SIR. The court found in favor of Continental, and held that, under the terms of the policy before it, any payment on behalf of Crown could satisfy the SIR. Page 5 California Insurance Newsletter

6 Chemical Discharge Exclusion Triggered by Insured s 20-year Old Deposition Testimony Holloway Cleaners & Laundry Co. v. Central Nat l Ins. Co. of Omaha, Inc., No. 2:13-cv ODW (Ex) (C.D. Cal. April 23, 2015) In Holloway, the court granted a CGL carrier s motion for summary judgment and held that it did not have a duty to defend its insured in an underlying action alleging that the insured s conduct led to soil and groundwater contamination that damaged other properties. The court s ruling was based on a chemical discharge exclusion in the policy, which provided that the insurance did not apply to property damage arising out of the discharge or release of chemicals unless the discharge was sudden or accidental. The insurer based its denial on twenty-year old deposition testimony taken from the insured in connection with a prior lawsuit in which they admitted that their regular practice for disposing chemical waste was to throw such materials in the dumpster and other trash receptacles on the property. agreed to defend the insured and did not reserve its right to contest coverage until three weeks later. The court noted that the insured offered no authority requiring an insurer to reserve its right to contest coverage the instant it agrees to defend an insured. Further, the case cited by the insured to support its position, Miller v. Elite Ins. Co., 100 Cal. App. 3d 739, 754 (1980), was distinguishable because the insured in that case never reserved its right to contest coverage or communicated that there was a coverage dispute. Accordingly, the court held there was no waiver. Second, the insured objected to the admissibility of the extrinsic evidence including the deposition transcripts on three grounds: (1) the insurer violated discovery rules by not identifying the evidence in its initial disclosures and disclosing the transcripts after the close of discovery, (2) the transcripts are prejudicial to the insured in the underlying action, and (3) the content of the transcripts was disputed. The insured s primary argument against summary judgment was that additional evidence could be discovered during the course of the underlying action showing that the damage at issue was not caused by the insured s actions, but through some other sudden or accidental release of chemicals. The court held this argument alone, unsupported by a single piece of evidence to show that something else caused the contamination, was insufficient to create a genuine issue of material fact. The insured also presented two additional arguments. First, the insured argued that the carrier had waived its right to contest coverage because, in two s sent on the same day, the insurer With respect to the first argument, the court held that the insurer followed proper procedure because the insurer timely filed a supplemental discovery response specifically identifying the transcripts once it began preparing its MSJ and realized that the transcripts would be an active part of its defense. The court also rejected the insured s prejudice argument, noting that the insured, not the insurer, had moved the court to lift the prior stay of the coverage action. Finally, the court rejected the insured s final argument based on the position that the disputed nature of a document does not bear on whether it should be admitted into evidence. Professional Services Exclusion in a D&O Policy Barred Coverage for Underlying Claims for Failure to Render Payroll Services Begun v. Scottsdale Ins. Co., 2015 U.S. App. LEXIS (9th Cir. Cal. Aug. 18, 2015) In Begun, the Ninth Circuit affirmed the district court s determination that a professional service exclusion in a D&O policy precluded coverage for former directors of a payroll services company that allegedly stole a client s funds. The directors first tendered their defense while the underlying action was ongoing. The Ninth Circuit found that the district court properly found that the insurer had no duty to defend at the time of that tender because the claims in the underlying action centered on the former directors personal failure or their failure as the alter egos of the company to render payroll services, which qualified as professional services under California law. The former directors also tendered the defense to the insurer one month after the conclusion of the underlying action. They argued extrinsic evidence obtained during discovery in the underlying action showed that the claims against them arose from their actions as directors and officers, not for a failure to render professional services. The Ninth Circuit disagreed and held that, although the plaintiff in the underlying action made statements about defendants failures as officers, the plaintiff did so to substantiate his alter ego theory, not to hold them liable in these roles. The Ninth Circuit also held citing Monticello Insurance Company v. Essex Insurance Company, 162 Cal. App. 4th 1376 (2008) that even if the extrinsic evidence would otherwise have triggered the insurer s duty to defend, the insurer s denial was proper because it was not alerted to that evidence until after the conclusion of the lawsuit. Page 6 California Insurance Newsletter

7 Claimant s Assignee Unable to Pursue Breach of Contract Claim Against Carrier Because the Claimant Did Not Assert His Claim During the Policy Period Petersen v. Arch Ins. Co., 2015 U.S. Dist. LEXIS (C.D. Cal. June 30, 2015) In Petersen, the Central District of California granted the carrier s motion to dismiss and held that the claimant s assignee could not pursue a breach of contract claim against the carrier because the claimant did not make a claim against the insured attorney during the policy period. In Petersen, the plaintiff, an assignee of the underlying claimant s default judgment against the insured attorney, brought suit against the carrier for breach of contract. The carrier had issued a claimsmade-and-reported legal malpractice policy to the insured for the policy period of May 20, 2009 to May 20, The insured was allegedly negligent in his representation of the plaintiff during the policy period, but the plaintiff did not file his malpractice lawsuit until approximately two years after the expiration of the carrier s policy. The insured failed to respond and a default judgment was entered against the insured. The claimant ultimately assigned the default judgment to the insured, who filed suit against the carrier. The carrier filed a motion to dismiss, and the district court granted the motion, finding that the policy clearly explained that it covered only claims made during the policy period and the insured had not presented any evidence that the relevant claim was first made against him during that period. Affiliated Carrier Dismissed From Action Because it did not Issue the Policy in Question Wright v. Allstate Ins. Co. of Cal., 2015 U.S. Dist. LEXIS (N.D. Cal. Apr. 7, 2015) In Wright, the Northern District of California granted Allstate Insurance Company of California s ( Allstate California ) motion to dismiss, agreeing with Allstate California s argument that it could not be held liable for breach of contract and breach of the implied covenant of good faith and fair dealing because it was not a party to the insurance contract. Wright was brought by an insured under an automotive policy issued by Allstate Insurance Company ( Allstate ). The insured filed suit against Allstate California and Allstate, asserting breach of contract and breach of the implied covenant of good faith and fair dealing arising out of the defendants alleged failure to properly investigate and adjust a claim involving a vandalized car. Allstate California filed a motion to dismiss, arguing that neither of the insured s claims could proceed against it because it was not involved in the issuance of the policy and not a party to the insurance contract. The insured countered by arguing that Allstate California was a proper party because it handled his claim. The court agreed with Allstate California and held that in order to be liable for breach of contract and breach of implied covenant of good faith and fair dealing, a defendant must have been a consenting party to the contract at issue. In granting Allstate California s motion to dismiss, the court also held that the insured failed to plead sufficient facts to establish alter ego liability because the complaint contained no facts suggesting that Allstate California was an agent of Allstate. Sealed, Unserved Complaint Not Considered a Claim First Made During the Policy Period Braden P ship, LP v. Twin City Fire Ins. Co., Case No.14-cv (N.D. Cal. Apr. 3, 2015) In Braden P ship, the Northern District of California found that, under a general partners liability policy, a sealed and unserved complaint was not first-made against insured partner during the policy period, as the policy provided that a claim is first made on the date that a summons or similar document is first served upon [an insured]. Braden P ship arose out of a coverage dispute involving a general partners liability policy that was issued for the August 15, 2011 to June 1, 2012 policy period. The insured brought the coverage action against the carrier after the carrier denied coverage for a pending qui tam action that was filed against the insured by the Department of Justice. In its motion to dismiss, the carrier argued that, because the complaint in the qui tam action was sealed and remained unserved, it did not qualify as a claim first made during its policy period because the policy provided that a [c]laim shall be deemed to have been first made against a[n] [insured] on the date that a summons or similar document is first served upon such [insured].... The court found that the policy language unambiguously requires service of summons or a similar document to trigger coverage of a claim. Consequently, the court held that the carrier s coverage obligations were not triggered and granted the carrier s motion. Page 7 California Insurance Newsletter

8 Insurer Satisfied Duty to Defend By Obtaining Dismissal of Counterclaim Without Prejudice Haskins v. Emplrs. Ins. of Wausau, 2015 U.S. Dist. LEXIS (N.D. Cal. Aug. 26, 2015) In Haskins, the court granted the insurer s ( Wausau ) motion for summary judgment, finding that it did not breach its duty to defend the insured ( Haskins ) in connection with an underlying environmental cleanup action. Haskins owned commercial property in San Francisco, and Wausau provided Haskins with comprehensive general liability insurance for the property. Cherokee Acquisition Corporation ( Cherokee ) purchased the property adjoining Haskins property in 1999, at which time Cherokee performed an environmental cleanup. Cherokee failed to complete the cleanup and entered into a workplan with Haskins to address remaining contamination issues. When Cherokee did not perform pursuant to the plan, Haskins sued Cherokee, and Cherokee filed a counterclaim for cost recovery and contribution. Haskins tendered the counterclaim to Wausau on January 30, Wausau sent letters to Haskins in February and March requesting information, reserving its rights, and indicating that it was still investigating the claim. Thereafter, Wausau sent correspondence in April 2012, indicating that Wausau wanted to facilitate a settlement with Cherokee. Haskins did not object, and Wausau thereafter brokered a settlement agreement with Cherokee that contemplated a dismissal of Cherokee s claims for past costs with prejudice and a dismissal of Cherokee s claims for future costs without prejudice. Haskins refused to sign the settlement because the dismissal was, in part, without prejudice. Thereafter, Haskins and Cherokee entered into a stipulated judgment (without Wausau s consent) for $1.7 million. Haskins sued Wausau, and Wausau moved for summary judgment. The Court held that Wausau did not breach its duty to provide an immediate defense pursuant to 10 California Code of Regulations Section (b), which requires an insurer to accept or deny a claim within 40 days. Rather than apply the rigid 40 day requirement, the Court concluded that the inquiry is factbound, and that Wausau s communications indicating that it was conducting an investigation and willing to broker a settlement satisfied any immediate duty. The Court also concluded that the settlement agreement brokered by Wausau sufficiently discharged its duty to defend because it would have resulted in a dismissal of the litigation against Haskins, and therefore granted summary judgment in favor of Wausau. TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter. Visit us at troutmansanders.com Page 8 California Insurance Newsletter