Opinion
No. C 00-3362 CRB
April 27, 2001
ORDER GRANTING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT
Now before the Court are the defendants' motions for summary judgment. Having carefully considered the parties' moving papers and supplemental letter briefs, and with the benefit of oral argument on April 20, 2001, the defendants' motions are hereby GRANTED.
BACKGROUND
The plaintiffs, a group of individuals, profit sharing plans, and trusts, retained The Goldworthy Corporation and Richard Aaron Peck, the Corporation's sole officer, director, and shareholder, to invest in mortgage loans, either directly or through shares in The Goldworthy Fund. Goldworthy serviced the mortgage loans and ordinarily paid to the plaintiffs the principal and interest due on the loans. However, when some of the loans were paid in full, Peck did not distribute the escrow funds to the plaintiffs; instead, he kept the funds and concealed that the loans had been repaid. The plaintiffs discovered in 1998 that Peck had embezzled funds from them since 1992 or 1993.
The Court will use the tern "Goldworthy" to refer collectively to the Corporation, the Fund, and Peck, except where otherwise noted.
Goldworthy was subsequently subject to administrative action by the California Department of Real Estate, and Peck pled guilty to mail fraud and money laundering in this Court.
The plaintiffs subsequently brought a civil suit against Goldworthy in San Francisco Superior Court. The complaint, containing fifty-nine causes of action and totaling nearly two hundred pages, alleged that Goldworthy had negligently failed to protect the plaintiffs' property and had committed negligent misrepresentations and that Peck had committed conversion. See O'Keefe Decl., Feb. 9, 2001, Ex. 4, at 47-52, 173-75, 177 (containing excerpts of the second amended complaint). As a result of Goldworthy's action, the plaintiffs claimed, they lost the use of the real property securing the loans, thereby sustaining property damage, and suffered physical and emotional distress, thereby sustaining bodily injury. The plaintiffs ultimately obtained a default judgment against Goldworthy in the amount of $2,466,931.20 for their investment losses.
The plaintiffs then brought the present suit against Goldworthy's insurers, State Farm Fire Casualty Company ("State Farm") and Commercial Union Insurance Company ("Commercial Union"), seeking payment of the underlying judgment. State Farm insured Goldworthy under two commercial general liability ("CGL") policies from November 13, 1992 to October 1, 1994, while Commercial Union insured Goldworthy under a series of CGL policies from August 31, 1994 to February 7, 1999.
At some point, Goldworthy assigned its interests in the insurance policies to the plaintiffs, enabling the plaintiffs to file suit against the insurers.
Both sets of policies provided coverage for damages caused by bodily injury, property damage, personal injury, or advertising injury. State Farm's policies excluded damages caused by the insured's rendering or failure to render any professional services. See O'Keefe Decl., Ex. 18, at 23, ¶ 10. The boilerplate language of the State Farm policies included optional coverage for injuries caused by employee dishonesty, but Goldworthy did not exercise that option on the State Farm policies. See id. at 13, ¶ 1. Goldworthy did, however, exercise that option on at least some of the Commercial Union policies.
DISCUSSION
State Farm and Commercial Union now move for summary judgment, asserting that their policies do not cover the plaintiffs' investment losses and that the defendants therefore have no duty to defend or indemnify Goldworthy. Both insurers contend that the plaintiffs' damages do not constitute property damage or bodily injury. State Farm also argues that the plaintiffs' injuries were not caused by an occurrence and are precluded by the professional services exclusion. The plaintiffs counter that their injuries qualify as property damage and bodily injury and that they may assert coverage under Commercial Union's employee dishonesty provision.
The plaintiffs contended in a case management conference statement that they might assert coverage under the personal injury or advertising injury provisions of the policies, but they have not made that argument in their opposition to the defendants' motions. Moreover, there is no arguable basis for coverage under those provisions.
I. STANDARD FOR SUMMARY JUDGMENT
Summary judgment is appropriate when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" only if there is sufficient evidence for a reasonable fact finder to find for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A fact is "material" if the fact may affect the outcome of the case. See id. at 248. "In considering a motion for summary judgment, the court may not weigh the evidence or make credibility determinations, and is required to draw all inferences in a light most favorable to the non-moving party." Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997).
II. WHETHER THE DEFENDANTS OWE COVERAGE
The interpretation of an insurance contract is a matter of law for the court. See Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 18 (1995). To determine whether the plaintiffs' losses are covered by the policies, this Court must look to the allegations of the plaintiffs' complaint against Goldworthy and compare those claims to the language of the insurance contracts. See id. at 23, 26. If the policies do not cover the injuries suffered by the plaintiffs, the defendants owe no duty to defend or indemnify Goldworthy. See Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 659 n. 9 (1995).
A. Property Damage
The plaintiffs contend that their investment losses constitute property damage within the meaning of the insurance contracts. The policies define property damage as "[p]hysical injury to or destruction of tangible property, including all resulting loss of use of that property" or as "[l]oss of use of tangible property that is not physically injured or destroyed, provided such loss of use is caused by physical injury to or destruction of other tangible property." O'Keefe Decl., Ex. 18, at 33, ¶ 14 (containing the State Farm policy); see Stuart Decl., Feb. 16, 2001, Ex. F, at 31, ¶ 12 (containing a substantially similar definition in the Commercial Union policy).
Economic losses such as the loss of an investment do not qualify as property damage under CGL policies. See Waller 11 Cal.4th at 15 ("[I]t is widely understood by both insureds and insurers that [CGL] policies are not intended to cover economic losses."); Id. at 26-27 ("It is well established that CGL policies do not provide coverage for intangible property losses, including economic losses."); Giddings v. Industrial Indem. Co., 112 Cal.App.3d 213, 219 (1980) ("To construe the explicit words `tangible property' to include intangible economic interests and property rights requires a strained and farfetched interpretation, doing violence to the plain language of the policies. Such an interpretation would rewrite the policies to fasten on the insurers a liability they have not assumed."); Id. ("Moreover, strictly economic losses like lost profits, loss of goodwill, loss of the anticipated benefit of a bargain, and loss of an investment, do not constitute damage or injury to tangible property covered by a [CGL] policy.").
If there is actual physical damage to property e.g., the presence of asbestos that physically damages a building) or a loss of use of tangible property (e.g., a farmer's inability to use his fields due to defective crops), then the insured's economic losses (e.g., the lower value of the property or the costs of abatement) may be a measure of the physical damage to the property and fall within the coverage of a CGL policy. See Hendrickson v. Zurich Am. Ins. Co., 72 Cal.App.4th 1084, 1091-92 (holding that a growers' loss of a field due to the delivery of defective plants qualified as property damage); Armstrong World Indus., Inc. v. Aetna Cas. Sur. Co., 45 Cal.App.4th 1, 93 (1996) (holding that the presence of asbestos in a building was within the scope of the property damage clause of a CGL policy).
However, economic losses standing alone without some physical damage to or loss of use of tangible property do not fall within the scope of a CGL policy. Tangible property "refers to things that can be touched, seen, and smelled." Kazi v. State Farm Fire Cas. Co., 24 Cal.4th 871, 880 (2001). As a result, damage to intangible property interests, such as the loss of non-possessory property rights, are not covered. See id. at 880-81 (holding that the loss of the use of an easement did not qualify as property damage under a CGL policy since an easement is an intangible property right more akin to the loss of an investment than fee simple property ownership).
Here, the plaintiffs merely possessed a security interest in the property in which they were investing, not a possessory interest. The plaintiffs' property interests were therefore intangible, and they did not suffer the loss of use of tangible property. See 4 Miller Starr, Cal. Real Est. § 10.32 (3d ed. 2000) (noting that a mortgage is not a conveyance, that the debtor remains in possession of the property, and that the mortgagee cannot obtain possession without foreclosure); id. § 10.46 (noting that the trustor or mortgagor is entitled to possession of real property and "all the other incidents of ownership, including the right to receive the rents and profits from the property" and that a lender is not entitled to possession of the security property absent foreclosure or a specific agreement to the contrary); Cal. Civ. Code § 2924 (providing that a mortgagee's interest in property is limited to the power to sell the property); Cal. Civ. Proc. Code § 726 (limiting actions to enforce a right secured by mortgage upon real property to suits brought in accordance with the chapter).
Accordingly, the plaintiffs may not assert coverage under the property damage provisions of the defendants' policies. The plaintiffs' intangible interest in the real estate that acted as security for the loans does not qualify as tangible property, and the plaintiffs therefore did not lose the use of tangible property when Goldworthy committed fraud. Instead, the plaintiffs lost their investment in the loans. Because the plaintiffs' damages are merely economic losses, the CGL policies do not provide coverage.
B. Bodily Injury
The plaintiffs also contend that the defendants owe coverage under the policies' bodily injury provisions. In the plaintiffs' view, the physical and emotional distress resulting from their investment losses qualify as bodily injury. The policies define bodily injury as "bodily injury, sickness or disease sustained by a person, including death resulting from the bodily injury, sickness or disease at any time." O'Keefe Decl., Ex. 18, at 30, ¶ 3; see Stuart Decl., Ex. E, at 29, ¶ 3 (containing a practically identical definition).
The plaintiffs' interpretation of the policies is incorrect. Emotional distress flowing from economic losses does not constitute bodily injury. See Waller, 11 Cal.4th at 23 (noting that CGL policies were "never intended to cover emotional distress damages that flow from an uncovered `occurrence,' and the parties could not reasonably have expected that coverage would be expanded merely because a claim of emotional or physical distress is alleged as a result of the economic loss"); McLaughlin v. National Union Fire Ins. Co., 23 Cal.App.4th 1132, 1150 (1994) ("[S]ince Plaintiffs' physical distress was induced by an uncovered economic loss it defies reason that bodily injury coverage would nevertheless independently obtain."); Chatton v. National Union Fire Ins. Co., 10 Cal.App.4th 846, 860 (1992) (noting that "loss of economic or pecuniary interest or for investment loss brought about by the negligent misrepresentations of the insured" is not covered by the bodily injury clause of a CGL policy). There were no allegations in the complaint that Goldworthy's employees directly caused emotional distress or physical injury; instead, the plaintiffs' damages were caused by investment losses. Because those losses do not constitute property damage, the plaintiffs cannot seek indemnification from the defendants under the bodily injury clauses of their policies.
C. The Employee Dishonesty Optional Coverage
The plaintiffs also assert coverage under the employee dishonesty provisions of some of Commercial Union's policies. That clause defines employee dishonesty as:
[D]ishonest 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:
(1) Cause you to sustain loss; and also
(2) obtain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment) for:
(a) The `employee', or
(b) Any person or organization intended by the `employee' to receive that benefit.
Bohachek Decl., Apr. 5, 2001, Ex. 15, at 2, ¶ D.3.a. The Commercial Union policies define an employee as "[an]y natural person . . . [w]hom you compensate directly by salary, wages or commissions; and . . . [w]hom you have the right to direct and control while performing services for you . . ." See id. at 5, ¶ C. 1.a. Commercial Union contends that Peck does not qualify as an employee under the policy. The plaintiffs assert that the dishonesty of Goldworthy's employees other than Peck caused their losses when those employees negligently communicated with the plaintiffs regarding their loan balances.
The plaintiffs' damages do not fall within the plain meaning of the policy as a matter of law. The policy makes it clear that an employee subject to the corporation's control must engage in dishonest acts with the intent of causing the insured to sustain loss and obtaining financial benefit for the employee. The undisputed facts show that Peck was the sole director, officer, and shareholder of Goldworthy, that he operated as the president, chief executive officer and chief financial officer, and that he did not have an immediate supervisor. See Bohachek Decl., Ex. 14, at CF 212, ¶¶ B.2 B.4, and CF 214, ¶ E.5 (containing Peck's responses to a questionnaire). As a result, no reasonable jury could find that Peck was an employee. See California Union Ins. Co. v. American Diversified Sav. Bank, 948 F.2d 556, 566 (9th Cir. 1991) (holding that officers who controlled the insured corporation did not qualify as employees). The policy therefore could not cover Peck's actions as a matter of law.
The plaintiffs contend that they dispute whether Peck was an employee and that they have therefore raised a genuine issue of material fact precluding summary judgment. In their view, they must be permitted to perform discovery to develop evidence regarding whether Peck was an employee covered by the policy. The plaintiffs misapprehend their burden at this stage of summary judgment proceedings. The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, discovery, and affidavits which demonstrate the absence of a genuine issue of material fact. See Celotex Corp. v. Cattrett, 477 U.S. 317, 323 (1986). Where the moving party will have the burden of proof on an issue at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. See id. Once the moving party meets this initial burden, however, the non-moving party must go beyond the pleadings and by its own evidence "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The non-moving party must "identify with reasonable particularity the evidence that precludes summary judgment." Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996) (quoting Richards v. Combined Ins. Co., 55 F.3d 247, 251 (7th Cir. 1995), and noting that it is not a district court's task to "scour the record in search of a genuine issue of triable fact"). If the non-moving party fails to make this showing, the moving party is entitled to judgment as a matter of law. See Celotex, 477 U.S. at 323.
Here, the plaintiffs have failed to set forth specific facts showing that there is a genuine issue for trial. There is no evidence in the record that would suggest that Peck was a mere employee subject to Goldworthy's control; instead, all of the available evidence indicates that Peck was the alter ego of the corporation and directed its fraudulent activities. The plaintiffs have therefore failed to satisfy their burden of identifying with reasonable particularity the evidence that precludes summary judgment. As a result, Commercial Union has met its burden and is entitled to summary judgment as to the employee dishonesty provisions of their policies with respect to Peck.
Moreover, because the plaintiffs alleged that Goldworthy's other employees were unaware of Peck's fraud, those employees could not have acted with the intent to cause Goldworthy to sustain loss or to obtain a financial benefit for themselves or another person. The plaintiffs therefore may not seek coverage under the employee dishonesty provisions of the Commercial Union policies.
CONCLUSION
Thus, because the plaintiffs did not suffer property damage, bodily injury, or damages caused by employee dishonesty as defined by the insurers' policies, the defendants' policies did not cover the plaintiffs' losses, and the insurers owed no duty to defend or indemnify Goldworthy. See Waller, 11 Cal.4th at 19 (noting that where there is no possibility of coverage, there is no duty to defend). As a result, the defendants could not have acted in bad faith, and the Court need not evaluate State Farm's claims that the plaintiffs' injuries were not caused by an occurrence or are excluded as being caused by the rendering of professional services. Accordingly, the defendants' motions for summary judgment are GRANTED.
IT IS SO ORDERED.
JUDGMENT
The Court having granted the defendants' motions for summary judgment, it is hereby ORDERED that judgment be entered in favor of the defendants State Farm Fire and Casualty Company and Commercial Union Insurance Company and against the plaintiffs Edward W. Beck et al.
IT IS SO ORDERED.