J&J Pumps, Inc. v. Star Insurance Company
Filing
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MEMORANDUM AND ORDER signed by Judge William B. Shubb on 6/9/11 GRANTING 18 Motion to Dismiss. Complaint and action herein DISMISSED. CASE CLOSED. (Meuleman, A) Modified on 6/10/2011 (Meuleman, A).
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UNITED STATES DISTRICT COURT
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EASTERN DISTRICT OF CALIFORNIA
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NO. CIV. 2:11-599 WBS CMK
J & J PUMPS, INC., a
California corporation,
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MEMORANDUM AND ORDER RE:
MOTION TO DISMISS
Plaintiff,
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v.
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STAR INSURANCE COMPANY, a
Michigan corporation; and DOES
1 through 10, inclusive,
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Defendants.
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/
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----oo0oo---20
Plaintiff J & J Pumps, Inc. (“J & J”), filed this
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action against defendant Star Insurance Company (“Star”) arising
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from defendant’s denial of plaintiff’s claim under an employee
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dishonesty provision of a property insurance policy.
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has filed a motion to dismiss for failure to state a claim upon
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which relief can be granted pursuant to Federal Rule of Civil
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Procedure 12(b)(6).
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I.
(Docket No. 18.)
Factual and Procedural Background
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Defendant
Defendant issued a Commercial Lines Policy to plaintiff
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for October 1, 2009, through October 1, 2010, and a renewed
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policy for October 1, 2010, through October 1, 2011 (collectively
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“Policies”).
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(“Compl.”) ¶ 4 (Docket No. 1).)
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General Liability, Inland Marine, and Commercial Property
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Coverage Parts.
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Building and Personal Property Coverage Form.
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“We will pay for direct physical loss of or damage to Covered
(Notice of Removal; Demand for Jury Trial Ex. A
The Policies contain Commercial
The Commercial Property Coverage Part includes a
This form states:
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Property at the premises described in the Declarations caused by
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or resulting from any Covered Cause of Loss.”1
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B, at B-50 (Docket No. 18).)
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(Def.’s Mot. Ex.
“Covered Property” is defined as “Building,” “Your
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Business Personal Property,” and “Personal Property of Others,”
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and these three terms are defined.
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Property . . . consist[s] of the following unless otherwise
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specified in the Declarations or on the Your Business Personal
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Property - Separation of Coverage form: (1) Furniture and
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fixtures; (2) Machinery and equipment; (3) “Stock”; (4) All other
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personal property owned by you and used in your business; . . .
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.”
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another section, which expressly states that Covered Property
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does not include, inter alia: “Accounts, bills, currency, food
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stamps or other evidences of debt, money, notes, or securities.”
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(Id. Ex. B, at B-51.)
(Id.)
“Your Business Personal
The definition of Covered Property is limited by
The Commercial Property Coverage Part also includes a
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Unless significant, this Order omits the bolding of
text in the Policies.
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Causes of Loss - Special Form.
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Causes of Loss: When Special [sic] is shown in the Declarations,
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Covered Causes of Loss means Risks of Direct Physical Loss unless
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the loss is: 1.
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Limited in Section C., Limitations.”
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(emphasis added).)
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This form states: “A. Covered
Excluded in Section B., Exclusions; or 2.
(Id. Ex. B, at B-89
The Exclusions section states:
We will not pay for loss or damage caused by or resulting
from any of the following: . . . (h) Dishonest or
criminal act by you, any of your partners, members,
officers,
managers,
employees
(including
leased
employees),
directors,
trustees,
authorized
representatives or anyone to whom you entrust the
property for any purpose: (1) Acting alone or in
collusion with others; or (2) Whether or not occurring
during the hours of employment. This exclusion does not
apply to acts of destruction by your employees (including
leased employees); but theft by employees (including
leased employees) is not covered.
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(Id. Ex. B-90-91.)
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The Commercial Property Coverage Part also includes a
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Property Special Broadening Endorsement, which expressly states
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that it modifies the Building and Personal Property Coverage Form
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and Causes of Loss - Special Form.
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II, Covered Property, states that Scheduled Coverages include:
In the endorsement, Section
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11.
Employee Dishonesty
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You may extend the insurance
Business Personal Property to:
that
applies
to
Your
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(a)
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Loss or damage to any property, other than
contraband or property in the course of
illegal transportation or trade, resulting
from
dishonest
acts
committed
by
an
“employee”, whether identified or not, acting
alone or in collusion with other persons,
except you or a partner, with the manifest
intent to:
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(1)
Cause you to sustain loss; and also
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(2)
Obtain
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financial
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benefit
(other
than
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employee benefits earned in the normal
course
of
employment,
including:
salaries, commissions, fees, bonuses,
promotions, awards, profit sharing or
pensions) for: a-the “employee”; or b-any
person intended by the “employee” to
receive that benefit.
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. . .
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(Id. Ex. B, at B-69.)
In a separate provision, the endorsement also states:
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“12.
Money and Securities
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applies to Your Business Personal Property to apply to loss of
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your ‘money’ and ‘securities’ resulting directly from ‘theft’,
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disappearance or destruction . . . .”
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“Theft” is “any act of stealing.”
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last page of the endorsement concludes by stating, “All other
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terms and conditions of this policy remain unchanged.”
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B, at B-87.)
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You may extend the Insurance that
(Id. Ex. B, at B-71.)
(Id. Ex. B, at B-87.)
The
(Id. Ex.
In May of 2010, plaintiff allegedly discovered that one
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of its employees had failed to pay plaintiff’s taxes to the
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Internal Revenue Service (“IRS”) and California Employment
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Development Department (“EDD”).
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employee] was hiding the money that should have been used to pay
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those tax deposits in an undefined account with intent to benefit
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herself, financially, and embezzle said funds.”
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appears from the Complaint that the employee did not take the
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money, but only hid it in a different account that was apparently
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still within plaintiff’s control.
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losses as a result of the employee’s conduct in the form of
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approximately $40,000.00 in penalties and interest on the unpaid
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taxes.
(Compl. ¶ 8.)
(Id. ¶ 10.)
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“Rather, [the
(Id.)
It
However, plaintiff sustained
On November 3, 2010, plaintiff submitted a claim to
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defendant for benefits under the Employee Dishonesty provision of
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the Property Special Broadening Endorsement.2
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defendant’s request, plaintiff later provided a “Proof of Loss -
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Employee Dishonesty Form” and additional documents.
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January 17, 2011, defendant’s claims administrator, Meadowbrook
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Insurance Group (“Meadowbrook”), denied plaintiff’s claim.
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¶ 12.)
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was that the employee had not actually received the benefit of
(Id. ¶ 11.)
At
(Id.)
On
(Id.
The Complaint alleges that defendant’s basis for denial
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her dishonest acts.
(Id. ¶ 24.)
On February 1, 2011, plaintiff
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filed the instant action in state court, bringing three claims:
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(1) breach of contract, (2) breach of the implied covenant of
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good faith and fair dealing, and (3) declaratory relief.
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March 3, 2011, defendant removed the action to this court
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pursuant to 28 U.S.C. § 1441(a).
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prejudice defendant’s first motion to dismiss because neither
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party had provided the court with the complete Policies, instead
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only providing the court with the Property Special Broadening
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Endorsement.
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II.
On
The court denied without
Discussion
To survive a motion to dismiss, a plaintiff must plead
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“only enough facts to state a claim to relief that is plausible
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on its face.”
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(2007).
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than a sheer possibility that a defendant has acted unlawfully,”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
This “plausibility standard,” however, “asks for more
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The Complaint does not mention the Money and Securities
provision in the Property Special Broadening Endorsement, instead
alleging that it submitted a claim for benefits under the
Employee Dishonesty provision.
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Ashcroft v. Iqbal, --- U.S. ----, ----, 129 S. Ct. 1937, 1949
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(2009), and “[w]here a complaint pleads facts that are ‘merely
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consistent with’ a defendant’s liability, it ‘stops short of the
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line between possibility and plausibility of entitlement to
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relief.’”
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whether a plaintiff has stated a claim, the court must accept the
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allegations in the complaint as true and draw all reasonable
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inferences in favor of the plaintiff.
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U.S. 232, 236 (1974), overruled on other grounds by Davis v.
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Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322
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(1972).
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Id. (quoting Twombly, 550 U.S. at 557).
In deciding
Scheuer v. Rhodes, 416
“When ruling on a Rule 12(b)(6) motion to dismiss, if a
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district court considers evidence outside the pleadings, it must
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normally convert the 12(b)(6) motion into a Rule 56 motion for
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summary judgment, and it must give the nonmoving party an
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opportunity to respond.”
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907 (9th Cir. 2003).
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court may “consider certain materials--documents attached to the
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complaint, documents incorporated by reference in the complaint,
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or matters of judicial notice--without converting the motion to
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dismiss into a motion for summary judgment.”
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document is incorporated by reference “if the plaintiff refers
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extensively to the document or the document forms the basis of
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the plaintiff’s claim.”
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United States v. Ritchie, 342 F.3d 903,
The Ninth Circuit has held, however, that a
Id. at 908.
A
Id.
Defendant has provided plaintiff’s claim for benefits,
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(Def.’s Mot. Ex. A), and plaintiff has provided defendant’s
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denial letter.
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declines to consider these documents because the Complaint does
(Schulz Decl. Ex. 1 (Docket No. 21).)
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The court
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not refer “extensively to the document[s]” and the documents do
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not “form[] the basis” of plaintiff’s claims.
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at 908.
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defendant has provided because the Complaint both refers
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extensively to them and they form the basis of plaintiff’s
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claims.
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Ritchie, 342 F.3d
However, the court will consider the Policies that
(See Def.’s Mot. Exs. B-C.)
The elements of a claim for breach of contract are: (1)
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the existence of the contract; (2) performance by the plaintiff
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or excuse for nonperformance; (3) breach by the defendant; and
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(4) damages.
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4th 731, 745 (2d Dist. 2001).
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whether plaintiff has sufficiently alleged defendant’s breach of
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the contract.
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First Commercial Mortg. Co. v. Reece, 89 Cal. App.
The issue in the instant motion is
“While insurance contracts have special features, they
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are still contracts to which the ordinary rules of contractual
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interpretation apply.”
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Cal. 4th 377, 390 (2005) (quoting Bank of the West v. Super. Ct.,
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2 Cal. 4th 1254, 1264 (1992)) (internal quotation marks omitted).
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The parties’ mutual intention governs and should be inferred, if
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possible, from the written provisions.
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explicit’ meaning of these provisions, interpreted in their
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‘ordinary and popular sense,’ unless ‘used by the parties in a
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technical sense or a special meaning is given to them by usage,’
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controls judicial interpretation.”
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Inc., 11 Cal. 4th 1, 18 (1995) (quoting AIU Ins. Co. v. Super.
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Ct., 51 Cal. 3d 807, 819-20 (1990)) (internal quotation mark and
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citations omitted).
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Powerine Oil Co., Inc. v. Super. Ct., 37
Id.
“The ‘clear and
Waller v. Truck Ins. Exch.,
“A policy provision will be considered ambiguous when
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it is capable of two or more constructions, both of which are
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reasonable.
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whole, and in the circumstances of the case, and cannot be found
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to be ambiguous in the abstract.”
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. . it is resolved by interpreting the ambiguous provisions in
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the sense the promisor . . . believed the promisee understood
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them at the time of formation.
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not eliminate the ambiguity, ambiguous language is construed
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against the party who caused the uncertainty to exist.”
But language in a contract must be interpreted as a
Id.
“If there is ambiguity .
If application of this rule does
AIU Ins.
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Co., 51 Cal. 3d at 822 (citation omitted).
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context, [courts] generally resolve ambiguities in favor of
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coverage.
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clauses of insurance policies broadly, protecting the objectively
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reasonable expectations of the insured.”
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omitted).
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“In the insurance
Similarly, [courts] generally interpret the coverage
Id. (citations
“An endorsement modifies the basic insuring forms of
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the policy and is an integral part of the policy. . . . An
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endorsement can expand or restrict the coverage otherwise
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provided by the policy.”
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153 Cal. App. 4th 1436, 1463 (2d Dist. 2007).
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an endorsement means nothing.
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policy form a part of the insurance contract, and the policy of
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insurance with the endorsements and riders thereon must be
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construed together as a whole.”
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Ins. Co., 107 Cal. App. 4th 438, 451 (2d Dist. 2003)).
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Frontier Oil Corp. v. RLI Ins. Co.
“Standing alone,
Endorsements on an insurance
Id. (quoting Adams v. Explorer
Defendant argues that plaintiff does not sufficiently
allege breach of contract because the triggering event for
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property insurance did not occur in this case.3
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requirement for recovery under a contract of property insurance
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is that the insured property has sustained physical loss or
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damage.”
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623 (2d Dist. 2007) (emphasis added).
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loss be ‘physical’ . . . is widely held to exclude alleged losses
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that are intangible or incorporeal, and, thereby, to preclude any
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claim against the property insurer where the insured merely
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suffers a detrimental economic impact unaccompanied by a
“[T]he threshold
Simon Mktg. v. Gulf Ins. Co., 149 Cal. App. 4th 616,
“The requirement that the
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distinct, demonstrable, physical alteration of the property.”
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Id. (quoting 10A Couch on Insurance § 148:46 (3d ed. 2005)).
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In Simon Marketing, two similar employee dishonesty
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provisions in two separate property insurance policies were at
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issue.
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promotion and marketing of games for McDonald’s Corporation and
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its franchisees.
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game pieces, which led to lawsuits against the plaintiff and
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allegedly the loss of the plaintiff’s entire business.
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619, 621.
The plaintiff in Simon Marketing was responsible for
Id. at 618.
The plaintiff’s employee stole
Id. at
The court in Simon Marketing affirmed the trial court’s
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grant of summary judgment in favor of the insurers and held that
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“the termination of Simon’s business because McDonald’s and
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others cancelled their contracts with Simon is not the physical
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loss, or damage, to insured property.
Nor are payments to settle
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In its memorandum in support of its motion to dismiss,
defendant has not raised the issue of whether an employee must
receive the benefit of her dishonest act for the Employee
Dishonesty provision to apply, the ground on which it allegedly
relied to deny plaintiff’s claim.
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litigation, defense costs and costs of winding up its business
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physical damage to property.”
Id. at 623.
The court elaborated:
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The fact is that not every dishonest act of an employee
is an insured loss under a contract of property
insurance. There must be loss of, or damage to, insured
property; to use Couch’s phrase, “detrimental economic
impact unaccompanied by a distinct, demonstrable,
physical alteration of the property” is not compensable
under a contract of property insurance.
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Id. (quoting 10A Couch on Insurance § 148:46) (citation omitted).
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Here, the court notes that the Building and Personal
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Property Coverage Form and Causes of Loss - Special Form, which
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the endorsement modifies, is consistent with the requirement of
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physical loss or damage discussed in Simon Marketing.
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forms expressly include a requirement that the plaintiff suffer a
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“direct physical loss of or damage to” Covered Property caused by
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Covered Causes of Loss, and Covered Causes of Loss are defined as
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“Risks of Direct Physical Loss” unless limited or excluded.4
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(Def.’s Mot. Ex. B, at B-50, B-89 (emphases added).)
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These
While the Causes of Loss - Special Form expressly
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excludes dishonest or criminal acts, the Property Special
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Broadening Endorsement states that Scheduled Coverages include:
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In Ward General Insurance Services, Inc. v. Employers
Fire Insurance Co., 114 Cal. App. 4th 548, 555 (4th Dist. 2003),
the court considered substantially similar provisions in a
Business and Personal Property coverage form and determined that
an endorsement had not modified the requirements. Id. (“The
Electronic Equipment and Software Coverage form, which the
parties agree was part of the policy, expressly modifies the
[Building and Personal Property coverage] form. But the
provision in the BPP form requiring a ‘direct physical loss of or
damage to Covered Property . . . caused by or resulting from any
Covered Loss’ is not modified. This form does amend the ‘Causes
of Loss — Special Form,’ but only to narrow the exclusions. It
does not modify or amend the basic requirement that the loss
result from a ‘RISK[] OF DIRECT PHYSICAL LOSS.’”) (omission and
second alteration in original).
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“11.
Employee Dishonesty
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applies to Your Business Personal Property to: (a) Loss or damage
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to any property, other than contraband or property in the course
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of illegal transportation or trade, . . . .”
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69.)
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You may extend the insurance that
(Id. Ex. B, at B-
Defendant argues, and the court agrees, that the
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purpose and effect of the Employee Dishonesty provision is to
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restore in part coverage excluded under the Causes of Loss -
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Special Form,5 a form that expressly requires physical loss or
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damage.
The court is also persuaded by the reasoning in Simon
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Marketing, which involved substantially similar employee
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dishonesty provisions in property insurance policies and in which
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the court interpreted the policies as requiring physical loss or
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damage.6
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The payment of tax penalties and interest simply do not
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constitute physical loss or damage.
Thus, plaintiff must allege physical loss or damage.
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Plaintiff appeared to agree with this proposition in
its opposition memorandum. (Pl.’s Opp’n at 9:22-24 (“As STAR
notes, the policy initially excludes loss or damage caused by
dishonest acts of employees, but reinstates that coverage under
the broadening endorsement.”) (emphasis added) (Docket No. 21).)
However, when asked by the court at the hearing, plaintiff’s
counsel disagreed with this proposition.
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In that case, involving two policies (“Gulf” and
“Federal” policies), the Gulf policy covered “loss of, and loss
from damage to” covered property, which was money, securities,
and tangible property with intrinsic value, caused by employee
dishonesty. Simon Mktg. v. Gulf Ins. Co., 149 Cal. App. 4th 616,
619 (2d Dist. 2007). The Gulf policy specifically excluded the
loss of the ability to realize income caused by the loss of or
damage to covered property and liability to a third party for
damages. Id. The Federal policy covered direct losses of money,
securities, or other property caused by an employee’s theft or
forgery. Id. The Federal policy also excluded the inability to
realize income and fees, costs, and expenses incurred in legal
proceedings. Id.
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Plaintiff essentially concedes that physical loss or
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damage did not occur, but advances two primary arguments against
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the requirement.
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from this case on the basis that the Employee Dishonesty
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provision here does not specifically exclude the loss of the
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ability to realize income caused by the loss of or damage to
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Covered Property or liability to a third party for damages, as
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the policies in Simon Marketing did.
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Marketing did not rely on that provision to find a requirement of
First, plaintiff distinguishes Simon Marketing
However, the court in Simon
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physical loss or damage.
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exclusions only as “underlin[ing] the fact the policies [] insure
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against physical loss of or damage to property, and not against
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detrimental economic impact unaccompanied by a distinct,
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demonstrable, physical alteration of the property.”
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149 Cal. App. 4th at 624; see also id. (stating in dictum that
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“[i]t is also true that the bulk of the losses and damages
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claimed by Simon in its discovery responses were excluded by the
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provisions of the Gulf and Federal policies. . . . [because]
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[l]oss of income is excluded under both policies, which
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effectively excludes the loss of Simon’s business, measured by
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its loss of income”).
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Instead, the court pointed to the
Simon Mktg.,
Second, plaintiff argues that the Employee Dishonesty
23
provision extends the definition of “Your Business Personal
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Property” to money, and plaintiff suffered a loss of money when
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it paid its tax penalties and interest.
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interpretation is based on the Employee Dishonesty provision
27
stating that plaintiff may extend “Your Business Personal
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Property” to “[l]oss or damage to any property, other than
12
Plaintiff’s
1
contraband or property in the course of illegal transportation or
2
trade . . . .”
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points to a separate provision in the endorsement, “12. Money and
4
Securities,” which provides that plaintiff may extend “Your
5
Business Personal Property to apply to loss of your ‘money’ and
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‘securities’ resulting directly from ‘theft,’ disappearance or
7
destruction while: . . . .”
8
added).)
9
bullion in current use and having a face value and travelers
(Def.’s Mot. Ex. B, at B-69.)
Plaintiff also
(Id. Ex. B, at B-71 (emphasis
“Money” is defined as “currency, coins, bank notes, and
10
checks, register, checks and money orders held for sale to the
11
public.”
12
“negotiable and nonnegotiable instruments or contracts
13
representing ‘money’ or other property . . . .”
14
B-86.)
15
money, plaintiff must still allege physical loss or damage.
16
Simon Mktg., 149 Cal. App. 4th at 619 (stating that the policies
17
defined covered property as, inter alia, money).
18
(Id. Ex. B, at B-86.)
“Securities” is defined as
(Id. Ex. B, at
However, even if the Employee Dishonesty provision covers
See
Because plaintiff fails to allege physical loss or
19
damage, the court will dismiss the claim for breach of contract.
20
As plaintiff “does not allege or argue any unusual circumstances,
21
a finding that no insurance benefits were owed precludes a
22
finding of breach of the implied covenant of good faith and fair
23
dealing based on the failure to pay the same benefits.”
24
Towing, Inc. v. Progressive Cas. Ins. Co., Civil No. 09cv943,
25
2010 WL 3521971, at *4 (S.D. Cal. Sept. 8, 2010).
26
court will also dismiss the claims for breach of the implied
27
covenant of good faith and fair dealing and declaratory relief.
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IT IS THEREFORE ORDERED that defendant Star Insurance
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Angelo’s
Thus, the
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Company’s motion to dismiss be, and the same hereby is, GRANTED;
AND IT IS FURTHER ORDERED that the complaint and action
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herein be, and the same hereby are, DISMISSED.
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DATED: June 9, 2011
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