El Gallo Giro Corporation v. Houston Casualty Company et al, No. 2:2012cv05422 - Document 38 (C.D. Cal. 2012)
Court Description: ORDER GRANTING DEFENDANTS CONVERTED MOTION FOR SUMMARY JUDGMENT 14 AND DENYING PLAINTIFFS MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE DUTY TO DEFEND 15 by Judge Otis D Wright, II . (lc). Modified on 11/16/2012 (lc).
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El Gallo Giro Corporation v. Houston Casualty Company et al Doc. 38 O 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 CENTRAL DISTRICT OF CALIFORNIA 9 10 EL GALLO GIRO CORP., 11 12 13 14 v. Plaintiff, HOUSTON CASUALTY CO., and; PROFESSIONAL INDEMNITY AGENCY, Inc. d/b/a “HCC SPECIALTY,” Case No. 2:12-cv-05422-ODW(JCx) ORDER GRANTING DEFENDANTS’ CONVERTED MOTION FOR SUMMARY JUDGMENT [14, 34] AND DENYING PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE DUTY TO DEFEND [15] Defendants. 15 16 This case concerns a checkbox. Yet in an insurance application, a checkbox 17 18 may be crucial in determining whether an insured is either entitled to a defense from 19 its insurer or is out of luck because it did not disclose seemingly superfluous 20 information. The parties here bring two motions before the Court: the first motion is 21 22 Defendants Houston Casualty Co. and Professional Indemnity Agency, Inc.’s (“PIA”) 23 Motion to Dismiss, which the Court converted to a motion for summary judgment; the 24 second is Plaintiff El Gallo Giro Corp.’s Motion for Partial Summary Judgment on the 25 Duty to Defend.1 (ECF Nos. 14, 15, 34.) For the reasons explained below, the Court 26 GRANTS Houston Casualty and PIA’s Motion and DENIES El Gallo Giro’s Motion. 27 28 1 Having considered the papers filed in support of and in opposition to these Motions, the Court deems the matters appropriate for decision without oral argument. Fed. R. Civ. P. 78; L.R. 7-15. Dockets.Justia.com I. 1 BACKGROUND El Gallo Giro is a California corporation that operates ten restaurants in Los 2 3 Angeles County. (Mot. Partial Summ. J. 2.) Houston Casualty is a foreign insurance 4 company that issued the insurance policy at the heart of this lawsuit. (FAC ¶ 2.) 5 Professional Indemnity Agency is a Texas corporation and the Director of Claims that 6 processes insurance claims for Houston Casualty. (Id. ¶ 3.) El Gallo Giro submitted an application dated February 3, 2011, for an 7 8 Employment Practices Liability Insurance policy to Houston Casualty. (Id. Ex. A 28– 9 34.) After receiving the application, Houston Casualty issued a policy to El Gallo 10 Giro. (FAC ¶ 6.) The policy covered El Gallo Giro from March 28, 2011, to March 11 28, 2012. (Id.) The policy requires Houston Casualty to defend El Gallo Giro against 12 any claim asserted against it and reported during the policy period that raises the 13 possibility of coverage. (Id. ¶ 7.) A claim is defined under the policy as a written 14 demand received by the insured alleging damages or the filing of a suit. (Id.) The 15 policy also requires Houston Casualty to indemnify El Gallo Giro from any damages 16 arising from a claim, subject to a $25,000 retention for each claim, up to a $1,000,000 17 limit of liability. (Id. ¶ 8.) In February 2011, after El Gallo Giro submitted its insurance application, El 18 19 Gallo Giro’s human resources manager and chief financial officer received notice of 20 an internal oral harassment complaint from employee Lisandra Valverde. (Mot. 21 Partial Summ. J. 4.) Valverde alleged that her supervisor, Raul Sanchez, sexually 22 harassed her. (Opp’n Partial Summ. J. 3.) El Gallo Giro conducted an internal 23 investigation of these allegations through MBA Associates, its third party human 24 resources administrator, but could not verify Valverde’s claims. (Mot. Partial Summ. 25 J. 4.) When MBA Associates interviewed Valverde during this investigation, El Gallo 26 Giro’s human resources manager was present to hear the nature of Valverde’s 27 allegations. (Sarris Decl. Ex. E ¶ 8.) 28 /// 2 1 On April 27, 2011, El Gallo Giro received a written demand from Valverde that 2 alleged damages resulting from workplace sexual harassment, battery, and retaliation. 3 (FAC ¶ 10.) This was the first time the corporation had received a written demand for 4 damages concerning the Valverde claim. (Id.) El Gallo Giro timely submitted the 5 claim to Houston Casualty; but Houston Casualty, “by and through” PIA, denied 6 coverage under the policy. (Id. ¶ 12.) 7 On June 21, 2011, Valverde filed suit against El Gallo Giro in Los Angeles 8 County Superior Court. (Id. ¶ 13.) The Valverde suit included not only the 9 allegations in her written demand, but also additional causes of action for termination 10 and retaliation resulting from El Gallo Giro’s alleged wrongful conduct in June 2011. 11 (Id.) El Gallo Giro also timely tendered the Valverde suit to Houston Casualty, 12 including Valverde’s proposed pre-trial settlement demand. (Id. ¶¶ 15, 28.) Again, 13 Houston Casualty, via PIA, denied coverage. (Id. ¶¶ 15, 29.) As a result, Houston 14 Casualty did not defend or indemnify El Gallo Giro in the Valverde suit. (Id. ¶¶ 16– 15 17.) This refusal to defend or indemnify continues today. (Id. ¶ 16.) II. 16 17 LEGAL STANDARD Summary judgment should be granted if there are no genuine issues of material 18 fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. 19 P. 56(c). The moving party bears the initial burden of establishing the absence of a 20 genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986). 21 Once the moving party has met its burden, the nonmoving party must go beyond the 22 pleadings and identify specific facts through admissible evidence that show a genuine 23 issue for trial. Id.; Fed. R. Civ. P. 56(c). Conclusory or speculative testimony in 24 affidavits and moving papers is insufficient to raise genuine issues of fact and defeat 25 summary judgment. Thornhill’s Publ’g Co. v. GTE Corp., 594 F.2d 730, 738 (9th 26 Cir. 1979). 27 28 A genuine issue of material fact must be more than a scintilla of evidence, or evidence that is merely colorable or not significantly probative. Addisu v. Fred 3 1 Meyer, 198 F.3d 1130, 1134 (9th Cir. 2000). A disputed fact is “material” where the 2 resolution of that fact might affect the outcome of the suit under the governing law. 3 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1968). An issue is “genuine” if 4 the evidence is sufficient for a reasonable jury to return a verdict for the nonmoving 5 party. Id. Where the moving and nonmoving parties’ versions of events differ, courts 6 are required to view the facts and draw reasonable inferences in the light most 7 favorable to the nonmoving party. Scott v. Harris, 550 U.S. 372, 378 (2007). III. 8 DISCUSSION El Gallo Giro’s FAC asserts five causes of action: (1) breach of contract (duty 9 10 to defend) against Houston Casualty; (2) breach of contract (duty to indemnify) 11 against Houston Casualty; (3) declaratory judgment against Houston Casualty; 12 (4) tortious interference with contract against PIA; and (5) breach of the implied 13 covenant of good faith and fair dealing against both Houston Casualty and PIA. (FAC 14 ¶¶ 19–46.) Houston Casualty and PIA’s converted motion for summary judgment 15 attacks all five causes of action, while El Gallo Giro’s Motion for Partial Summary 16 Judgment concerns only the first cause of action on the duty to defend. The Court 17 addresses each cause of action in turn. 18 A. 19 Duty to defend and duty to indemnify The duty to defend in California is broad and requires that an insurer defend its 20 insured against claims for damages that are potentially covered by the issued 21 insurance policy. Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1267 (9th Cir. 22 2010). To determine the legal question of whether the duty to defend exists, the court 23 compares the policy’s terms to the disputed claim. Montrose Chem. Corp. of Cal. v. 24 Superior Court, 6 Cal. 4th 287, 295 (1993). The court can also take into account 25 extrinsic facts that show the claim is potentially insurable. Id. 26 For an insured to prevail on the duty to defend, it must first establish that the 27 claim may be covered by the policy. Montrose, 6 Cal. 4th at 300. To defeat this 28 assertion, the insurer must then conclusively prove that there is no potential for 4 1 coverage under the policy’s terms. Id. Unless and until the insurer meets this burden, 2 it must defend its insured. Id. at 299–300. 3 To determine whether the Valverde suit is eligible for coverage, thus 4 establishing Houston Casualty’s duty to defend in the first instance, the Court looks to 5 the operative language in “SECTION I—Coverage” of the policy. (FAC Ex. A at 37.) 6 Subsection (1)(c) of this section states that coverage is available only if: 7 8 9 10 11 12 13 (1) a “claim” because of an “insured event” is first made against any insured in accordance with the WHEN COVERAGE IS PROVIDED (SECTION VII) and COVERAGE TERRITORY (SECTION VIII) sections; and ... (4) the “insured event” does not arise from any potential “claim” or circumstances of which any “management or supervisory employee” had knowledge prior to the effective date of the first Employment Practices Liability Insurance policy issued by us to the insured and continuously renewed and maintained in effect to the inception date of this Policy. 14 15 (Id.) This language makes clear that these two conditions to coverage must be met for 16 the policy to apply to any claim. 17 In its briefs, El Gallo Giro fails to show that it has satisfied the fourth condition 18 to coverage stated above. Subsection (1)(c)(4) states that the “insured event” must not 19 be based upon “any potential ‘claim’ or circumstances of which any ‘management or 20 supervisory employee’ had knowledge prior to the effective date” of the policy. (Id.) 21 El Gallo Giro argues that this prior knowledge provision applies only to potential 22 “claims,” or potential “written demands for damages” as defined by the policy. 23 (Reply Partial Summ. J. 3.) But this reading of subsection (1)(c)(4) conveniently 24 ignores the disjunctive “or.” The Court interprets the inclusion of the word “or” to 25 mean that either potential “claims” or “circumstances of which”—that the insured 26 knew of prior to the policy’s effective date—can preclude coverage for a claim. 27 28 The circumstance that El Gallo Giro knew about prior to the effective date of March 28, 2011, is Valverde’s sexual harassment complaint. Even though MBA 5 1 Associates’s investigation found no basis for the Valverde claim, this does not erase 2 the fact that El Gallo Giro was aware of the alleged sexual harassment. In fact, El 3 Gallo Giro’s human resources manager heard Valverde’s story firsthand because she 4 was present when MBA Associates interviewed Valverde. (Sarris Decl. Ex. E ¶ 8.) 5 This undermines El Gallo Giro’s “no” answer on its insurance application to this 6 question: “Are you aware of any facts, incidents, or circumstances, which may result 7 in a claim against you?” (FAC Ex. A at 28.) 8 9 And while “no” may have been the correct box to check on February 3, 2011, it was inappropriate once El Gallo Giro learned of Valverde’s sexual harassment 10 complaint on February 13, 2011. (Sarris Decl. Ex. E ¶ 8.) The insurance application 11 required El Gallo Giro to give notice of such an event: 12 13 14 15 16 The Applicant further represents that if the information supplied on this application changes between the date of the Application and the inception date of the policy period, the Applicant will immediately notify the insurer of such change.” (FAC Ex. A at 31.) El Gallo Giro argues that because the Valverde complaint was unsubstantiated, 17 it did not believe that there would be a “written claim for damages” in the future. 18 (Mot. Partial Summ. J. 4.) And so, El Gallo Giro contends it was justified in not 19 supplementing its insurance application or otherwise informing Houston Casualty of 20 the Valverde complaint. (Reply Partial Summ. J. 4.) 21 This position is tenuous because the insurance application does not exclude 22 coverage of pre-application events based on whether a formal, written claim was filed. 23 To the contrary, a written claim is not the only thing excluded—there is no coverage 24 for “any potential ‘claim’ or circumstances of which any ‘management or supervisory 25 employee’ had knowledge prior to the effective date of the . . . [i]nsurance policy.” 26 (FAC Ex. A at 37.) 27 28 The determinative factor in this analysis is the knowledge of “any potential ‘claim’ or circumstances of which.” El Gallo Giro’s arguments instead focus on 6 1 whether an actual claim was or would be filed. This knowledge-based interpretation 2 is apt and reconciles with the insurance application’s vantage towards full disclosure: 3 “Are you aware of any facts, incidents, or circumstances, which may result in a claim 4 against you?” (FAC Ex. A at 28.) 5 To be “aware” of a complaint is very different than believing the merits of a 6 complaint, or whether a complaint would materialize into an actual claim for damages. 7 To be “aware” is to “hav[e] or show[ ] realization, perception, or knowledge.” 8 Merriam-Webster’s Collegiate Dictionary 80 (10th ed. 2001). To “believe,” which is 9 what El Gallo Giro insists it did not do after investigating Valverde’s complaint, is 10 defined as “to accept as true, genuine, or real.” Id. at 104. And while it may be 11 entirely reasonable for El Gallo Giro to have not believed the merits of Valverde’s 12 complaint, or to have believed that it would never materialize into a claim, El Gallo 13 Giro still had knowledge of the sexual harassment complaint itself. 14 So because El Gallo Giro had this knowledge; however frivolous it thought the 15 complaint was; it should have notified Houston Casualty. Even frivolous allegations 16 have the potential to materialize into a lawsuit—and this one did. But by failing to 17 notify Houston Casualty, El Gallo Giro misrepresented its position and did not fulfill 18 all conditions to coverage under the policy. 19 Thus, the Valverde complaint is not covered under the insurance policy and 20 Houston Casualty’s duty to defend never arose. Scottsdale Ins. Co. v. MV Transp., 36 21 Cal. 4th 643, 657 (2005). Houston Casualty cannot be penalized for denying coverage 22 here. Am. Int’l Specialty Lines Ins. Co. v. Cont’l Cas. Ins. Co., 142 Cal. App. 4th 23 1342, 1374 (2006) (holding that the insurer properly denied coverage because “known 24 prior wrongful act[s] . . . [are] circumstance[s] that can reasonably be expected to lead 25 to a claim”). 26 And because the duty to indemnity turns on the same facts, the Court also finds 27 that Houston Casualty has no duty to indemnify El Gallo Giro for the Valverde 28 complaint. Accordingly, the Court GRANTS Houston Casualty and PIA’s Motion as 7 1 to El Gallo Giro’s first and second causes of action for breach of contract (duty to 2 defend and duty to indemnify) and DENIES El Gallo Giro’s related Motion. 3 B. Declaratory judgment In its third cause of action, El Gallo Giro seeks a judicial declaration of the 4 5 rights and obligations of the parties under the insurance policy. Based on the 6 discussion above, the Court hereby declares that Houston Casualty owes no obligation 7 to defend or indemnify El Gallo Giro for the Valverde complaint. 8 C. Tortious interference with contract To satisfactorily allege tortious interference with a contract in California, a 9 10 plaintiff must plead the following: “(1) a valid contract between plaintiff and a third 11 party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts 12 designed to induce a breach or disruption of the contractual relationship; (4) actual 13 breach or disruption of the contractual relationship; and (5) resulting damage.” CRST 14 Van Expedited, Inc. v. Werner Enters., Inc., 479 F.3d 1099, 1105 (9th Cir. 2007). 15 Here, El Gallo Giro alleges that it only contracted with Houston Casualty, not 16 PIA, to obtain the policy. (FAC ¶ 37.) And El Gallo Giro contends that PIA is a 17 stranger that induced Houston Casualty to breach its duties under the policy. (Id. 18 ¶ 38.) 19 Houston Casualty did not breach its contractual relationship with El Gallo Giro 20 because Houston Casualty did not have a duty to defend or indemnify. Thus, PIA 21 cannot be liable for tortious interference. Accordingly, the Court GRANTS Houston 22 Casualty and PIA’s Motion as to El Gallo Giro’s fourth cause of action for tortious 23 interference. 24 D. But given the discussion above, at least the fourth element is missing— Breach of the implied covenant of good faith and fair dealing 25 California law establishes that an insurer breaches the implied covenant of good 26 faith and fair dealing when it withholds policy benefits from its insured without proper 27 justification. Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001). El 28 Gallo Giro asserts this final cause of action against both Houston Casualty and PIA. 8 1 As discussed above, the Court finds that Houston Casualty; and PIA as its 2 agent; had no duty to defend or indemnify. Thus, there can be no breach of the 3 implied covenant of good faith and fair dealing where the denial of coverage was 4 reasonable or justified. Id. Thus, the Court GRANTS Houston Casualty and PIA’s 5 Motion as to El Gallo Giro’s fifth cause of action. IV. 6 CONCLUSION 7 For the above reasons, the Court GRANTS Houston Casualty and PIA’s 8 Motion for Summary Judgment and DENIES El Gallo Giro’s Motion for Partial 9 Summary Judgment. 10 IT IS SO ORDERED. 11 12 November 15, 2012 13 14 15 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 16 17 18 19 20 21 22 23 24 25 26 27 28 9
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