Century Surety Company v. Cal-Regent Insurance Services Corporation et al, No. 3:2013cv01488 - Document 71 (S.D. Cal. 2015)
Court Description: ORDER Denying 48 Motion for Summary Judgment. Signed by Judge Jeffrey T. Miller on 9/3/2015. (rlu)
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Century Surety Company v. Cal-Regent Insurance Services Corporation et al Doc. 71 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 CENTURY SURETY COMPANY, CASE NO. 13cv1488 JM(JMA) 11 Plaintiff, v. CAL-REGENT INSURANCE SERVICES CORPORATION and STATE NATIONAL INSURANCE COMPANY, INC., ORDER DENYING MOTION FOR SUMMARY JUDGMENT 12 13 14 15 16 17 Defendants. ______________________________ CAL-REGENT INSURANCE SERVICES CORPORATION, Counterclaimant, 18 19 20 21 v. CENTURY SURETY COMPANY, Counterdefendant. 22 23 24 25 26 27 28 Plaintiff Century Surety Company (“Century”) moves for summary judgment or, alternatively, for partial summary judgment. Defendants Cal-Regent Insurance Services Corporation (“Cal-Regent”) and State National Insurance Company, Inc. (“State National”) separately oppose Century’s motion and join in each other’s opposition. Pursuant to Local Rule 7.1(d)(1), the court finds the matters presented -1- 13cv1488 Dockets.Justia.com 1 appropriate for decision without oral argument. For the reasons set forth below, the 2 court denies Century’s motion for summary judgment. 3 BACKGROUND 4 The First Amended Complaint “(FAC”) 5 The FAC, filed on August 14, 2013, seeks declaratory relief and rescission of the 6 errors and omissions insurance policy issued to Cal-Regent. “Cal-Regent provides 7 insurance-related services and, at all relevant times, acted as a managing general agent 8 for State National, including with respect to the issuance of liability insurance policies 9 underwritten by State National and the handling of claims arising under those policies.” 10 (FAC. ¶6). On May 25, 2011, Cal-Regent submitted to Century an Application for 11 Agents and Brokers Errors and Omissions Insurance (“Application”) to obtain 12 insurance covering potential errors or omissions arising in the course of Cal-Regent’s 13 business as a managing general agent. (FAC ¶9). Based upon representations by Cal14 Regent in the Application, Century issued Commercial Lines Policy CCP 707046 (the 15 “E & O Policy”) to Cal-Regent for the policy period of June 22, 2011 to June 22, 2012. 16 (FAC ¶10). One provision in the Application represented, in effect, that Cal-Regent, 17 after a “comprehensive internal inquiry of investigation,” was unaware of any fact, 18 circumstance, situation, incident, or allegation “which might afford grounds for any 19 claim such as would fall under the proposed insurance.” (FAC ¶9). At the heart of 20 Century’s complaint is the allegation that the Application contains material 21 misrepresentations. 22 In the FAC, Century seeks a declaration that it has no obligation to defend or 23 indemnify Cal-Regent in connection with State National’s indemnity claims in the 24 Arizona arbitration proceeding. Century seeks to rescind the E & O Policy based upon 25 the alleged misrepresentations contained in the Application. 26 The Underlying Claim and the Bad Faith Action 27 On December 30, 2010, a bad faith lawsuit was commenced against State 28 National in the Superior Court for Maricopa County, Arizona (the “Bad Faith Action”) -2- 13cv1488 1 by Brian Waldersen and his parents (the “Waldersens”). The Bad Faith Action arose 2 out of a single-vehicle accident that occurred in Sonora, Mexico on February 9, 2007. 3 A passenger in the vehicle, Brian Waldersen, was seriously injured. The Waldersens 4 then sued the owner of the vehicle, Sullivan Car Company, and the driver, Heath 5 Sullivan (the “Sullivans”), for Brian’s injuries. 6 The Sullivans sought coverage for the claims asserted against them under an 7 insurance policy issued to Sullivan Car Company by State National through its 8 managing general agent, Cal-Regent (the “Garage Policy”). (FAC ¶13). Notice of the 9 Waldersens’ claims was provided to State National, Cal-Regent, and Vista Claims 10 Services (“Vista Claims”), the agent adjusting claims for policies issued by State 11 National and Cal-Regent. State National, Cal-Regent, and Vista determined that the 12 policy provisions did not provide coverage for accidents in Mexico and denied the 13 claim. The current parties generally agree that the disputed Garage Policy provision 14 was formatted in such a manner as to create an ambiguity concerning the scope of the 15 coverage territory. 16 After State National issued a denial letter, the Sullivans demanded the $1 million 17 policy limits and advised State National that if the policy limits were not tendered, the 18 Waldersens and the Sullivans intended to settle their dispute, including a stipulated 19 judgment not to execute in favor of the Sullivans as permitted by Arizona state law. 20 (FAC ¶¶16, 17). In response to the demand letter, Vista Claims (the third party claims 21 administrator employed by Cal-Regent) retained counsel who opined that the Sullivan 22 policy did not provide coverage for Waldersens’ claims because the accident occurred 23 outside the coverage territory. Cal-Regent acknowledges that it knew of the accident, 24 and had agreed that the policy did not provide coverage for the Waldersens’ claim, 25 prior to completing the Application for insurance. 26 On December 29, 2009, the Sullivans stipulated to judgment in the amount of 27 28 -3- 13cv1488 1 $30 million and assigned all their rights to the Waldersens.1 The Waldersens agreed 2 not to execute on the stipulated judgment and, on December 30, 2010, the Waldersens 3 filed the Bad Faith Action against State National and Vista Claims in the State of 4 Arizona. Ultimately, in March 2013, State National and Vista Claims entered into a 5 $4 million settlement with the Waldersens. 6 On April 19, 2012, Cal-Regent first provided notice to Century of circumstances 7 connected to the Waldersens’ bad faith claim. Cal-Regent also tendered the State 8 National claim to Century, seeking coverage under the E & O Policy. (FAC ¶29). 9 The Arbitration 10 On August 1, 2013, State National commenced an action against Cal-Regent in 11 Arizona State court alleging claims for breach of contract, contractual indemnification 12 and negligence. (Century Exh. 27). State National seeks to recover the $4 million 13 settlement of the Waldersens’ claim based upon the formatting issue in the Garage 14 Policy. The parties then agreed to submit the dispute to arbitration and dismissed the 15 state court action. Century agreed to defend Cal-Regent subject to a reservation of 16 rights. Century continues to pay Cal-Regent’s defense costs in the arbitration 17 proceeding. 18 The Counterclaim 19 On August 8, 2013, Cal-Regent filed a counterclaim against Century alleging 20 three claims for relief: breach of contract, breach of the covenant of good faith and fair 21 dealing, and breach of fiduciary duty. On April 19, 2012, Cal-Regent alleges that it 22 tendered notice of the Waldersens’ claims to Century and sought both defense and 23 indemnity under the 2011 E & O Policy. Cal-Regent alleges that Century acted in bad 24 faith when it failed to make any attempt to resolve the claims of the Waldersons and 25 State National. 26 27 1 The agreement entered into between the Sullivans and the Waldersens is known as a “Damron” agreement under Arizona law. Under this agreement, the insured 28 stipulates to a judgment and assigns to the claimant all rights the insured has against the insurer and, in exchange, the claimant provides a covenant not to sue the insured. -4- 13cv1488 1 DISCUSSION 2 Legal Standards 3 A motion for summary judgment shall be granted where “there is no genuine 4 issue as to any material fact and . . . the moving party is entitled to judgment as a matter 5 of law.” FED. R. CIV. P. 56(c); Prison Legal News v. Lehman, 397 F.3d 692, 698 (9th 6 Cir. 2005). The moving party bears the initial burden of informing the court of the 7 basis for its motion and identifying those portions of the file which it believes 8 demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 9 477 U.S. 317, 323 (1986). There is “no express or implied requirement in Rule 56 that 10 the moving party support its motion with affidavits or other similar materials negating 11 the opponent’s claim.” Id. (emphasis in original). The opposing party cannot rest on 12 the mere allegations or denials of a pleading, but must “go beyond the pleadings and 13 by [the party’s] own affidavits, or by the ‘depositions, answers to interrogatories, and 14 admissions on file’ designate ‘specific facts showing that there is a genuine issue for 15 trial.’” Id. at 324 (citation omitted). The opposing party also may not rely solely on 16 conclusory allegations unsupported by factual data. Taylor v. List, 880 F.2d 1040, 17 1045 (9th Cir. 1989). 18 The court must examine the evidence in the light most favorable to the non- 19 moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962). Any doubt 20 as to the existence of any issue of material fact requires denial of the motion. Anderson 21 v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). On a motion for summary judgment, 22 when “‘the moving party bears the burden of proof at trial, it must come forward with 23 evidence which would entitle it to a directed verdict if the evidence were 24 uncontroverted at trial.’” Houghton v. South, 965 F.2d 1532, 1536 (9th Cir. 1992) 25 (emphasis in original) (quoting International Shortstop, Inc. v. Rally's, Inc., 939 F.2d 26 1257, 1264-65 (5th Cir. 1991), cert. denied, 502 U.S. 1059 (1992)). 27 The Motion 28 Century argues that it is entitled to summary judgment on its rescission claim -5- 13cv1488 1 because there is no genuine issue of material fact that Cal-Regent made material 2 misrepresentations in its 2011 Application for insurance. “When a policyholder 3 conceals or misrepresents a material fact on an insurance application, the insurer is 4 entitled to rescind the policy.” Cal. Civ. Code §1689. Rescission is the appropriate 5 remedy whether the concealment is “intentional or unintentional.” Cal. Ins Code §331. 6 Ordinary rules of contract interpretation apply to insurance contracts. “The 7 fundamental goal of contractual interpretation is to give effect to the mutual intention 8 of the parties. If the contractual language is clear and explicit, it governs.” Bank of 9 West v. Superior Court (Industrial Indemnity Co.), 2 Cal. 4th 1254 (1992). Where an 10 ambiguity exists in an insurance policy, and the insurer caused the ambiguity, the 11 “ambiguities in a policy of insurance are construed against the insurer.” Crawford v. 12 Weather Shield Mfg., Inc., 44 Cal.4th 541, 551 (2008). 13 The parties dispute whether the May 25, 2011 Application contains material 14 misrepresentations. The parties agree that Cal-Regent was under a duty to disclose 15 whether it was “aware of any fact, circumstance, situation, incident or allegation of 16 negligence or wrongdoing, which might afford grounds for any claim such as would 17 fall under the proposed insurance.” (SUM No. 45). While the parties characterize the 18 evidence differently, the following summarizes pertinent portions of the undisputed 19 evidentiary record. 20 The Misrepresentations 21 In broad brush, Century argues that Cal-Regent failed to disclose the Sullivan 22 claim at the time of completing the Application on May 25, 2011, and therefore 23 summary judgment on its rescission claim is appropriate. 24 Richard Nagby (“Nagby”) is the president and CEO of Cal-Regent. In 2000, 25 Nagby became a managing general agent under the name Cal-Regent by “representing 26 insurance carriers by marketing garage liability insurance programs” to automobile 27 dealers and various other garage risks such as auto repair shops. (Maricopa Nagby 28 Decl. ¶5). (Nagby Decl. ¶3 - 4). “In its capacity as managing general agent and -6- 13cv1488 1 program underwriter, Cal Regent’s duties included marketing, reviewing insurance 2 applications, providing insurance quotes and binding coverage.” (Nagby Decl., Ct. 3 Dkt. 58-2, ¶3). 4 At the time of completing the Application, Cal-Regent had entered into a quota 5 share agreement and general agency agreement (“Agreement”) with State National and 6 State Automobile Mutual Insurance Company. The Agreement provides that Cal7 Regent has claims handling authority. (Nagby Decl. Ct. Dkt. 58-2, ¶4). Cal-Regent 8 does not possess its own claims-handling staff. Pursuant to the Agreement, Cal-Regent 9 would hire claims adjusters to adjust claims. Such a process allowed Cal-Regent “to 10 be kept in the proverbial loop with regard to the status of the claims.” Id. The 11 Agreement also contained an indemnification provision which required Cal-Regent to 12 indemnify State National for any claim or expense incurred by State National relating 13 to Cal-Regent’s conduct. 14 Following the accident in Mexico on February 7, 2007, the Sullivans notified 15 State National of the Waldersen accident and State National requested that Cal-Regent 16 adjust the Waldersens’ claims. Cal-Regent, in turn, employed Vista Claims to adjust 17 the Waldersens’ claims. Based upon the information provided by Cal-Regent, on July 18 11, 2008, Vista Claims provided a denial letter to the Waldersons on the ground that 19 the accident occurred outside the Garage Policy’s coverage territory. Cal-Regent 20 approved the denial of the claim. (Century Exh. 7). 21 On July 27, 2009, the Waldersens demanded the $1 million policy limits of the 22 Garage Policy to settle their claims against Sullivan. In response, on July 31, 2009, 23 Vista Claims referred the claim for a coverage opinion by Brian Worthington, Esq., a 24 partner in the San Diego law firm of Ryan, Mercaldo & Worthington. On August 7, 25 2009, Worthington emailed Vista Claims and stated that he had reviewed the denial 26 letter. The email stressed that he needed to see the actual Garage Policy, and not an 27 electronic exemplar of the disputed language. (Century Exh. 13). Worthington based 28 his review on an exemplar of the policy, and not the actual policy provided to the -7- 13cv1488 1 Sullivans. On or about August 10, 2009, Worthington completed his coverage opinion 2 and concluded that State National did not have a duty to defend nor indemnify because, 3 among other things, the Garage Policy did not provide coverage for accidents occurring 4 outside the United States. (Century Exh. 14). The court highlights that the coverage 5 opinion was entirely based on standardized provisions prepared by the Insurance 6 Service Office (“ISO”) – provisions not precisely contained in the Garage Policy issued 7 to the Sullivans.2 8 The Garage Policy provided a $1 million limit of liability and was in place at the 9 time of the 2007 Waldersen/Sullivan accident in Mexico. (SUM Nos. 8, 9). The policy 10 consisted of standard coverage forms provided by the ISO. Cal-Regent used the 2000 11 ISO form. The standard provision concerning the coverage territory for the Garage 12 Policy provides: 13 “7. Policy Period, Coverage Territory 14 Under this Coverage Form, we cover: 15 a. "Bodily injury", "property damage" and "losses" occurring; and 16 17 b. "Covered pollution cost or "expense" arising out of "accidents" occurring 18 during the policy period shown in the Declarations and within the coverage territory. 19 The coverage territory is: 20 21 22 23 24 25 a. The United States of America;” (Ct. Dkt. 48-10 at p.65) (“the ISO Policy”). An analysis of this provision is detailed in the Worthington coverage letter. (Century Exh. 14). The coverage opinion concluded that both subparagraphs (a) and (b) are modified by the separate phrase 2 The reinsurer, Odyssey Re reviewed and agreed with the denial of coverage. 26 (Nagby Decl., Ct. Dkt. 58-2, ¶7). In connection with its review of coverage, on July 14, 2008, Odyssey Re communicated to State National its request for a copy of the 27 actual Policy because it “[c]an’t tell if the email is communicating the policy wording exactly how it is written in the policy (paragraph structure which could be received 28 differently on my end then how it was typed on your end could be material.” (Century Exh. 7). -8- 13cv1488 1 “during the policy period shown in the Declarations and within the coverage territory,” 2 thus limiting coverage to the United States. 3 The actual policy provided to the Sullivans, and unknown to Richard Nagby until 4 August 2012, contains what he describes as a computer formatting error: 5 6 “7. Policy Period, Coverage Territory Under this Coverage Form, we cover: 7 a. "Bodily injury", "property damage" and "losses" occurring; and 8 9 11 b. "Covered pollution cost or "expense" arising out of "accidents" occurring during the policy period shown in the Declarations and within the coverage territory. 12 The coverage territory is: 13 a. The United States of America;” 10 14 (Ct. Dkt. 48-10 at p.47 - 48) (“The State National Policy”). 15 The court has little difficulty in concluding that the Garage Policy provision is 16 hopelessly ambiguous. As formatted, only subparagraph (b), related to pollution costs, 17 contains a coverage territory limitation. Subparagraph (a), related to bodily injury, is 18 not so limited. While subparagraph (a) contains the word “occurring,” suggestive of 19 a forthcoming modification, no such modification is forthcoming because the document 20 was formatted in such a manner to create ambiguities. The disputed policy language 21 requires the assistance of state laws to resolve the ambiguities contained in the Sullivan 22 Policy. 23 The parties do not dispute that the State National Policy provision is ambiguous 24 and therefor subject to state rules of construction. Shortly after discovery of the mis25 formatted provision in August 2012, (Nagby Decl.¶15), the bad faith action settled and 26 was dismissed in March 2013. Arizona law, like California law, seeks to construe the 27 plain and ordinary meaning of policy language. Keggi v. Northbrook Prop. & Cas. Ins. 28 Co., 199 Ariz. 43, 13 P.3d 785, 788 (Ariz. Ct.App. 2000); Powerine Oil Co., Inc. v. -9- 13cv1488 1 Superior Court, 37 Cal.4th 377, 390 (2005). “[I]nsurance coverage is ‘interpreted 2 broadly so as to afford the greatest possible protection to the insured, [whereas] . . . 3 exclusionary clauses are interpreted narrowly against the insurer.” TRB Investments, 4 Inc. v. Fireman's Fund Ins. Co., 40 Cal.4th 19, 28, (2006); MacKinnon v. Truck Ins. 5 Exchange, 31 Cal.4th 635, 647–648 (2003). If the plain language of the policy is 6 capable of two or more reasonable constructions, the provision is “ambiguous.” Id. 7 “Language in a contract must be interpreted as a whole, and in the circumstances of the 8 case, and cannot be found to be ambiguous in the abstract.” Id. An ambiguous 9 insurance provision is construed broadly in favor of the insured and in order to protect 10 a reasonable expectation of coverage. Id. In other words, an ambiguous clause “will 11 be construed to provide coverage.” Keggi, 13 P.3d at 788; Sec. Ins. Co. of Hartford v. 12 Andersen, 158 Ariz. 426, 428, 763 P.2d 246, 248 (1988) (“[W]here ambiguity in an 13 insurance contract exists, the policy will be construed against the insurer.”). 14 Century comes forward with substantial evidence to show that Cal-Regent was 15 aware of the Waldersens’ claim at the time of completing the Application on May 25, 16 2011. Century primarily relies upon evidence that Cal-Regent (1) issued the policy to 17 Sullivan on behalf of State National; (2) acted as the program manager and participated 18 in the decision to deny coverage; (3) obtained a coverage opinion based upon the ISO 19 Policy, and not the State National Policy actually provided to Sullivan; (4) entered into 20 an agreement with State National whereby it promised to indemnify and hold State 21 National harmless from any liability arising from the parties contractual relationship; 22 and (5) assumed the obligation to adjust and pay claims, thus obtaining further actual 23 knowledge about the Sullivan accident. However, the only evidence of Cal-Regent’s 24 knowledge of the improperly formatted provision is Nagby’s declaration that he did not 25 know until August 2012 that the State National Policy did not conform to the ISO 26 Policy. The court notes that the August 10, 2009 coverage letter clearly analyzes the 27 ISO Policy, and not the operative State National Policy, and therefore supports the view 28 that Cal-Regent did not have actual knowledge of the potential claim at the time of - 10 - 13cv1488 1 completing the Application for insurance.3 2 Rescission is appropriate wherever there is concealment, “whether intentional 3 or unintentional.” Cal. Ins. Code §331. Concealment is defined as “[n]eglect to 4 communicate that which a party knows, and ought to communicate. . . .” Cal. Ins. Code 5 §330. On the evidentiary record, whether Cal-Regent knew or should have known that 6 the printed Garage Policy varied from the electronic version presents a question of fact, 7 not appropriately resolved on a motion for summary judgment. Furthermore, whether 8 Cal-Regent conducted a reasonably diligent investigation to discover, and then 9 disclose, the actual Garage Policy also presents questions of fact not appropriately 10 resolved on this motion for summary judgment. Similarly, in order to prevail on its 11 claim as a matter of law, Century must identify a legal basis to impute knowledge of 12 the Garage Policy to Cal-Regent prior to completion of the Application. While there 13 may be a legal basis to attribute knowledge of the Garage Policy to Cal-Regent, 14 Century fails to cite pertinent legal authorities (i.e. legal authorities that may impute 15 knowledge of a corporation’s documents, computer systems, employees, or agents to 16 the corporation itself). 17 In conclusion, Century fails to demonstrate that there are no genuine issues of 18 material fact and law. The court denies summary judgment on whether the Application 19 contains misrepresentations. 20 Materiality 21 Even assuming Century could establish a misrepresentation, such 22 misrepresentation must be material. The court concludes that whether the alleged 23 misrepresentations in the Application are material presents a question of fact. See Cal. 24 Ins. Code §334. An insurer may waive its right to rescind the insurance policy when, 25 3 The court notes that prior to issuing the coverage letter, on August 7, 2009, 26 Worthington requested that he be provided with an actual copy of the Garage Policy to verify the terms and conditions of the State National Policy. The undisputed 27 evidence reveals that Worthington had based his initial assessment of the Garage Policy on the ISO Policy, and not the operative State National Policy. As the August 28 10, 2015, coverage letter was based upon an analysis of the ISO Policy, it appears that Worthington was never provided with a copy of the actual Garage Policy. - 11 - 13cv1488 1 upon learning the true state of affairs, the insurer renews the policy. DuBeck v. John 2 Hancock Mut. Ins. Co., 234 Cal.App.4th 1254, 1265 (2015). “In general, to constitute 3 a waiver, there must be an existing right, a knowledge of its existence, an actual 4 intention to relinquish it, or conduct so inconsistent with the intent to enforce the right 5 as to induce a reasonable belief that it has been relinquished.” Pacific Business 6 Connections, Inc. v. St. Paul Surplus Lines Ins. Co., 150 Cal.App.4th 517, 525, 58 7 Cal.Rptr.3d 450 (2007). 8 Here, Century comes forward with evidence to show that it would not have 9 issued the E & O Policy had it known about the existence of the Waldersens’ claims 10 and the State National Policy. (Gookin Decl.) In contrast, Cal-Regent’s evidence 11 shows that, after the disclosure concerning the Waldersens’ claims and the formatting 12 error, Century renewed the E & O Policy. Waiver is ordinarily a question for the trier 13 of fact; “[h]owever, where there are no disputed facts and only one reasonable 14 inference may be drawn, the issue can be determined as a matter of law.” Gill v. Rich, 15 128 Cal.App.4th 1254, 1264, 28 Cal.Rptr.3d 52 (2005). On this record, the court finds 16 that genuine issues of material fact prevent summary judgment on the materiality of the 17 undisclosed information in the Application because a reasonable jury could infer, based 18 upon the entirety of the factual record, that Century waived its right to rescind the E & 19 O Policy. 20 In sum, the court denies Century’s motion for summary judgment. 21 IT IS SO ORDERED. 22 DATED: September 3, 2015 23 Hon. Jeffrey T. Miller United States District Judge 24 25 cc: All parties 26 27 28 - 12 - 13cv1488
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