Unpublished Disposition, 915 F.2d 1581 (9th Cir. 1990)

Nos. 89-15278, 89-15391 and 89-16342.

United States Court of Appeals, Ninth Circuit.

Before HUG, and SCHROEDER, Circuit Judges, and VON DER HEYDT, District Judge.

MEMORANDUM^** 

Appellants Gerald and Mattie Drake recovered a substantial judgment from appellants Abbas and Charlene Lebastchi for damages arising out of the Lebastchis' agent's misrepresentations of the quality of the motel the Drakes purchased from the Lebastchis. The Lebastchis' insurance company, Northern Insurance, filed this declaratory judgment to determine whether its insurance policy covered the judgment. In appeal numbers 89-15278 and 89-15391, the Drakes and Lebastchis appeal from the district court's award of summary judgment in favor of Northern.

The district court held that under California law, which all parties agree applies, the insurance policy in question did not cover the situation because the policy's coverage of "occurrences and accidents" did not encompass misrepresentations. This ruling is supported by Royal Globe Ins. Co. v. Whitaker, 181 Cal. App. 3d 532, 537, 226 Cal. Rptr. 435, 437-38 (Ct.App.1986) and American Guarantee & Liab. v. Vista Medical Supply, 699 F. Supp. 787, 790-91 (N.D. Cal. 1988). Appellants contend that the Drakes' judgment should be regarded as based upon negligent misrepresentation, and that there is a distinction to be drawn between negligent and intentional misrepresentations under California law for purposes of insurance coverage. The authority supporting that position and relied upon by Appellants is International Ins. Co. v. West American Ins. Co., 208 Cal. App. 3d 117, 255 Cal. Rptr. 912 (Ct.App.1989). The California Supreme Court, however, has ordered this opinion de-published, and there is therefore no authority to support Appellants' position that negligent misrepresentation constitutes an accidental occurrence for purposes of insurance coverage even assuming these misrepresentations were negligent as opposed to intentional.

The decisions of courts applying California law are contrary to appellants' position. California courts, in construing insurance contracts for nonaccidental acts, "focus not on the intent of the insured to cause harm, but upon the nature of the harmful act itself--whether it was an 'accident'." American Guar., 699 F. Supp. at 790 (citing Commercial Union Ins. Co. v. Superior Court, 196 Cal. App. 3d 1205, 242 Cal. Rptr. 454 (Ct.App.1987), review denied, 2-24-88); Royal Globe, 181 Cal.App.3d 532). "Purposeful acts do not create potential liability under" a policy providing coverage for occurrences or accidental events. Id. (citing St. Paul Fire and Marine Ins. Co. v. Superior Court, 161 Cal. App. 3d 1199, 1202, 208 Cal. Rptr. 5, 7 (Ct.App.1984)). In American Guar., 699 F. Supp. at 790-91, the court rejected a claimant's argument that his claim for negligent misrepresentation was an accidental occurrence. Rather, the court construed that claim as an unintended harm which flowed from the employer's purposeful act of wrongfully firing the claimant. In Hartford Fire Ins. Co. v. Karavan Enterprises, Inc., 659 F. Supp. 1077, 1081 (N.D. Cal. 1987), the court held that a claimant did not enjoy coverage for negligent infliction of emotional distress where that distress was really an unintended harm which flowed from a wrongful discharge. Similarly here, the Lebastchis' agent purposefully represented the Golden Eagle Motel as a new motel worth over $200,000. Although the agent might not have intended his representation to have injured the Drakes, the fact that unintended harm flowed from his purposeful representation does not create coverage.

Furthermore, even if negligent misrepresentation could in some cases constitute an accidental occurrence, the Drakes' claim against the Lebastchis had all the earmarks of a traditional fraud case. The Lebastchis sold the Golden Eagle Motel for $247,000 when in fact the Motel was merely worth $0-$15,000. We have difficulty believing a jury could have found that the Lebastchis' agent made so gross a misrepresentation without any knowledge or reckless disregard of its falsity. Neither the Drakes nor the Lebastchis have given us a basis for assuming, as a matter of law, that the jury based its verdict on a finding of negligent as opposed to intentional misrepresentation.

Appellants alternatively contend that there is policy coverage even if the conduct of the agent was not the type of activity covered by the policy because the Lebastchis incurred liability for the conduct of their agent under the doctrine of respondeat superior. Under the vicarious liability exception to the general rule that intentional acts are not covered by insurance policies, an insured may receive coverage for the intentional acts of its agent when the insured is vicariously as opposed to directly liable. This doctrine, however, serves as an exception to contractual or statutory exclusions for intentional acts, as opposed to an exception to lack of coverage under the policy in the first place. See, e.g., Arenson v. National Auto. and Casualty Ins. Co., 45 Cal. 2d 81, 286 P.2d 816, 818 (1955) (exclusion within insurance policy excluding coverage for intentional acts did not bar liability where insured liable under respondeat superior); Fireman's Fund Ins. Co. v. City of Turlock, 170 Cal. App. 3d 988, 1000-01, 216 Cal. Rptr. 796, 803-04 (Ct.App.1985) (insured covered for intentional acts of its agent where liability imposed upon insured under doctrine of respondeat superior, Insurance Code Sec. 533 which bars coverage as a matter of public policy does not apply). Because the issue here is policy coverage, the vicarious liability exception does not apply and the authority cited by the Drakes is inapposite.

Appellants also contend that coverage under the policy exists by reason of the contract's provision covering "advertising injury." While the bodily injury and property damage clause of the contract provides broad coverage for occurrences "arising out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental to the business of the named insured conducted at or from the insured premises," the section governing advertising injury is restricted to "advertising injury ... arising out of the conduct of the named insured's business...." Here, the contract identifies the insured's business as "The Golden Eagle Motel." We agree with the district court that the sale of a business is not part of the conduct of that business. The Lebastchis and the Drakes claim that the Lebastchis engaged in the business of investing in as opposed to operating motels. Nowhere, however, does the contract indicate that the Lebastchis were in the business of buying and selling motels and the policy in question provides coverage for a specific motel, as opposed to coverage for an investor holding a number of motels.

Furthermore, even if we were to assume that the sale of the motel was conduct within the course of the Lebastchis' business, misrepresentation in the quality of the motel to a potential buyer does not constitute "unfair competition" for purposes of advertising injury. The insurance policy defines "advertising injury" as a series of common law torts, including the common law tort of "unfair competition." Under the common law, "competitive injury originally composed an essential element of the tort of 'unfair competition.' " Barquis v. Merchants Collection Ass'n of Oakland, Inc., 7 Cal. 3d 94, 109, 101 Cal. Rptr. 745, 756, 496 P.2d 817, 828 (1972). Although California courts have read the state's unfair competition statute, Cal.Bus. & Prof.Code Secs. 17200 and 17500, to include fraud upon consumers, "courts have retained the more restrictive common law meaning of unfair competition in the interpretation of insurance policies, even when the term in a state statute has been interpreted more expansively." Westfield Ins. Co. v. TWT, Inc., 723 F. Supp. 492, 496 (N.D. Cal. 1989) (citing Ruder and Finn, Inc. v. Seaboard Sur. Co., 52 N.Y.2d 663, 439 N.Y.S.2d 858, 422 N.E.2d 518 (N.Y.1981); Pine Top Ins. Co. v. Public Utility Dist., 676 F. Supp. 212 (E.D. Wash. 1987); Seaboard Sur. Co. v. Ralph Williams' Northwest Chrysler Plymouth, Inc., 81 Wash. 2d 740, 504 P.2d 1139 (1973)). Because the Drakes were not in competition with the Lebastchis, they cannot state a claim for unfair competition for purposes of insurance coverage. See, id.

The Drakes also contend that even if there was no coverage under the policy requiring Northern to pay the judgment against the Lebastchis, the policy nevertheless requires Northern to pay the Drakes' attorneys fees awarded by the court in the Lebastchi litigation. Their argument is based upon the supplemental payments provision of the policy which provides:

The Company will pay, in addition to the applicable limit of liability: (a) all expenses incurred by the Company, all costs taxed against the insured in any suit defended by the Company and all interest on the entire amount of any judgment therein which accrues after entry of the judgment and before the Company has paid or tendered or deposited in court that part of the judgment which does not exceed the limit of the Company's liability thereon....

We agree with Northern that this provision does not amount to a commitment to pay court costs and fees against the insured regardless of the existence of coverage. The provision is a commitment that if there is coverage, litigation costs will be paid over an above any "applicable limit of liability." Since in this case there is no coverage, there is no applicable limit of liability which would trigger the application of the supplementary payments clause.

The Lebastchis appeal the district court's order denying their counter-motion to continue summary judgment to permit discovery under Fed. R. Civ. P. 56(f), their counter-motion to enlarge time for discovery, and their counter-motion to compel discovery. Although the Lebastchis did demonstrate diligence in pursuing discovery, they made no specific showing of need for further discovery. The Lebastchis received Northern's responses to discovery after the hearing on their motion, but failed both below and on appeal to show that the discovered facts gave rise to any material issues regarding the scope of coverage. Accordingly, the district court did not abuse its discretion when it denied the Lebastchis' counter-motions. See United States v. $5,644,540.00 in U.S. Currency, 799 F.2d 1357, 1363-64 (9th Cir. 1986).

The Lebastchis claim error in connection with the dismissal of their counterclaim and third-party complaint based upon common law bad faith and statutory bad faith under California Insurance Code Sec. 790.03(h). Some bad faith claims may lie against an insurer who has no obligation to indemnify under the policy. Travelers Ins. Co. v. Lesher, 187 Cal. App. 3d 169, 231 Cal. Rptr. 791 (Ct.App.1986), review denied February 11, 1987. See generally, B.R. Ostrager and T.R. Newman, Handbook on Insurance Coverage Disputes Sec. 10.02 P. 317 (3d ed. 1990). Because Northern's policy did not cover the acts at issue, the Lebastchis bad faith claims stemming from the Insurance Company's failure to indemnify and breach of contract were properly dismissed. See Suarez v. Life Ins. Co. of North America, 206 Cal. App. 3d 1396, 1497, 254 Cal. Rptr. 377, 383-84 (Ct.App.1988); Allstate Ins. Co. v. Gilbert, 852 F.2d 449, 454 (9th Cir. 1988).

The Lebastchis alleged that the insurers flagrantly misrepresented the terms and conditions of the insurance contract as part of a scheme to deny coverage. However, they failed to allege specific facts in support of this general assertion. In his declaration, Mr. Lebastchi merely states that he asked for the best coverage available and that he did not recall receiving a policy other than a binder. Neither of these allegations are strong enough to create a material issue of fact. The district court, therefore, did not err in granting summary judgment on the misrepresentation claims.

The Lebastchis also alleged that Northern failed to promptly provide them with a reasonable explanation for denial of a claim or for an offer of a compromise settlement. Again, the Lebastchis have not alleged any specific facts in support of this claim. The record reflects that Northern informed the Lebastchis early on, in a letter dated June 14, 1985, that coverage under the policy was questionable. The letter explained "the allegations of the complaint do not necessarily fit the definition of an occurrence as defined in the policy." The letter expressly stated that Northern undertook the defense under a reservation of rights and could contest coverage at a later date.

In addition, the Lebastchis alleged that Northern breached its common law and statutory duty to act in good faith by not attempting to effectuate prompt, fair and equitable settlement as required under section 790.03(h) (5). The record reflects that Northern participated in settlement negotiations and offered to pay $10,000 of the $45,000 offer and later $100,000 of the $210,000 offer. Northern also explained to the Lebastchis that it refused to pay more than these amounts because it believed no coverage existed under the policy for more than the amount offered. In the end, Northern did in fact pay the Drakes $100,000. The Lebastchis have failed to cite any authority for the proposition that an insurer who has no obligation to indemnify must contribute higher sums to a settlement where it has made clear that its refusal to pay rests on its belief that it has no duty to indemnify under the policy. In sum, because Northern participated in settlement negotiations, offered to pay a significant percentage of the settlement offers (i.e., $100,000 of the $210,000 offer), and fully informed the Lebastchis of the reasons behind its refusal to pay more, we find that Northern struck a proper balance between its own interests and that of its insured, as required under California law, and therefore did not breach its duty to act in good faith. See generally, Ostrager & Newman Handbook on Insurance Coverage Disputes Sec. 10.02 P. 317 (citing Allen v. Allstate Ins. Co., 656 F.2d 487, 489 (9th Cir. 1981)).

Summary judgment on the Drakes' claims under California Insurance Code sections 790.03(h) (1) and (3) for misrepresentation of the insurance policy provisions and for failure to properly investigate claims was appropriate because the Drakes, like the Lebastchis, failed to allege specific facts in support of these claims. Summary judgment was similarly appropriate on the Drakes' claims for violation of subsections 790.03(h) (5) and (12) and Insurance Code Sec. 11580 because there was no coverage under the policy, and as discussed at length above, Northern participated in the settlement negotiations in good faith. Suarez, 206 Cal. App. 3d at 1497; Gilbert, 852 F.2d at 454.

The district court correctly granted summary judgment in favor of Northern on the Drakes' interference with prospective economic advantage claim. Such a claim requires "defendants' commission of acts designed to disrupt " an economic relationship. Olivet v. Frishling, 104 Cal. App. 3d 831, 837, 164 Cal. Rptr. 87, 89-90 (1980) (citation omitted) (emphasis added). Northern did not perform any such acts here. It attempted to arrange a settlement with the bankruptcy trustee of the Drakes' estate upon the request and consent of the Lebastchis' attorney. Interference with prospective economic advantage requires interference by a third party. Fisher v. San Pedro Peninsula Hosp., 214 Cal. App. 3d 590, 262 Cal. Rptr. 842, 858 (Ct.App.1989). Here, Northern became involved in the bankruptcy proceeding through the Lebastchis and hence did not interfere as a third party upon the economic relationship between the Lebastchis and the Drakes.

The district court, however, may have erred in granting summary judgment on the Drakes' subsection 790.03(h) (13) claim. That provision makes it an unfair practice for an insurance company to "fail to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement." The district court dismissed on the ground that no claim for violation of that section could be pursued in the absence of coverage. A California court of appeal has recently held that a violation of this provision does not depend upon a finding of coverage. Judah v. State Farm and Casualty Co., 217 Cal. App. 3d 1181, 266 Cal. Rptr. 455, 463 (Ct.App.1990), review granted, 268 Cal. Rptr. 541, 789 P.2d 341 (Apr. 19, 1990). Cf. Carter v. Superior Court, 194 Cal. App. 3d 424, 427-28, 239 Cal. Rptr. 723 (Ct.App.1987); Lesher, 187 Cal. App. 3d at 190. The record reflects that the Drakes' attorney repeatedly asked Northern to explain why it would not contribute greater sums to the various settlement offers, and that Northern apparently never explained that it believed coverage did not exist under the policy. Northern's attorney repeatedly stated that it owed no such duty to the Drakes. In Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880, 153 Cal. Rptr. 842, 592 P.2d 329 (1979), the California Supreme Court recognized the right of third-party claimants to institute damage actions against an insurer for violating section 790.03. That decision was later overturned by the California Supreme Court in Mordai-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287, 250 Cal. Rptr. 116, 758 P.2d 58 (1988). This decision, however, applied prospectively only. See generally Ostrager & Newman Handbook on Insurance Coverage Disputes Sec. 10.03(a) p. 321. Northern does not dispute on appeal that its alleged breach occurred in the window period where it owed a duty under the Insurance Code to third-parties such as the Drakes. Had Northern explained that it believed no coverage existed, the Drakes may have settled for less and spared themselves additional litigation costs. We, therefore, remand to the district court for a consideration of this claim.

We find no merit to the remainder of the Lebastchis' claims of procedural irregularities on the part of the district court.

In Appeal No. 89-16342, the Lebastchis appeal the summary judgment awarded Maryland Casualty Company on the Lebastchis' claim that because of Maryland's and Northern's alleged fraud and bad faith, the applicable insurance document is a binder issued by Maryland. The Lebastchis maintain that the district court erred in dismissing their claims in this action based upon his rulings in the case involved in the companion case. The Lebastchis contend that the district court in the other case never ruled on the merits of the claims they here wish to assert. While the record in the two cases has become unnecessarily complex, it does reflect that the fraud claims against Maryland were part and parcel of the bad faith claims asserted against Northern in the previous action. As discussed above, we find those claims to lack merit.

We decline to impose sanctions.

The judgment in No. 89-16342 is AFFIRMED. The judgment in No. 89-15391 is also AFFIRMED. The judgment in 89-15278 is AFFIRMED in part and REVERSED and REMANDED in part.