Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, Los Angeles County Super. Ct. No. SC 083902, Valerie Baker, Judge.
Lerner & Weiss and Kevin H. Park for Plaintiff and Appellant.
Gordon & Rees, David C. Capell and Angie M. Bickel for Defendant and Respondent.
FLIER, J.
Steve Cutter appeals from a judgment entered in favor of respondent Greenwich Insurance Company (Greenwich). The trial court found after a court trial that Greenwich did not breach a duty to defend its insured against appellant’s complaint in the underlying action, nor did it breach the implied covenant of good faith and fair dealing, under its insured’s commercial general liability insurance policy. We conclude as a matter of law that Greenwich had no duty to investigate facts and evidence outside the four corners of the policy and the underlying complaint under the circumstances presented by the evidence. Rather, the trial court properly found that no extrinsic information was presented that would or should have alerted Greenwich of a further need to investigate coverage. We therefore affirm.
FACTS AND PROCEDURAL HISTORY
1. Background
Greenwich issued a commercial general liability insurance policy to its insured, Stephen M. Hartunian. The policy did not include workers’ compensation coverage or coverage for bodily injury to an employee.
Appellant worked for the insured at a commercial property on North Verdugo Avenue in Glendale, California. Appellant fell on the insured’s property and sustained injuries.
2. Underlying Complaint
Appellant filed suit against the insured in the superior court. Appellant’s amended complaint (complaint) alleged he was an employee of the insured and sought recovery for (1) negligence, (2) breach of contract for unpaid employee wages and benefits, and (3) violation of the Racketeer Influenced and Corrupt Organizations Act, title 18 United States Code section 1961 et seq. (RICO) for nonpayment of employee wages and benefits.
The allegations common to all causes of action stated as follows. The insured “at all times mentioned was [appellant’s] employer . . . .” Appellant and the insured “entered into an oral agreement for the employment of [appellant] by [the insured] as a construction manager, purchasing agent, remodeler, landscaper, property manager, negotiator, contractor, and manager” of the insured’s property. The insured was “required” to secure payment of workers’ compensation benefits under the Labor Code pursuant to the employment but failed to do so in violation of statute.
In the first cause of action for negligence, appellant alleged that in September 2001 he was “on the premises for an intended purpose, namely, in the course and scope of his employment.” The premises were not well lighted or kept free of debris and were maintained in a dangerous and unsafe condition. As a result, appellant fell and struck the ground, injuring his hand, foot and knee.
In the second cause of action, for recovery of unpaid wages and breach of contract, appellant alleged he was employed by the insured from May 2001 to January 2002, pursuant to the oral employment agreement. Under the terms of employment, appellant was to “oversee the construction, maintenance, leasing, tenant relations, purchasing, disbursements, tenant union dealings, remodeling of units, landscaping, reconstruction and expansion of building.” In return, appellant was to be paid certain compensation. The insured terminated appellant’s employment in January 2002. At the time of termination, appellant had not been paid his accrued wages under the employment agreement, and his expenses were only partially paid. As of his termination, appellant had accrued “state and federal matching employment funds, including Social Security, disability, and unemployment compensation, none of which were paid” by the insured, in violation of state and federal law. Appellant requested reasonable attorney fees and penalties under the California Labor Code for failure to pay earned wages.
In the third cause of action for RICO violations, appellant alleged that the insured had a practice of “attempting to hide a true employment relationship with its employees by unlawfully claiming independent contractor status to circumvent federal and state employment laws, including workman compensation, disability, and unemployment insurance payments.”
3. Tender of Defense
About nine months after appellant set forth these allegations, in May 2003, the insured through his agent tendered the defense of the action to Greenwich under his commercial general liability policy.
4. Denial of Coverage
In July 2003, Greenwich wrote to the insured denying coverage under two exclusions: (1) the employer’s liability exclusion, excluding coverage for bodily injury to an employee; and (2) the workers’ compensation exclusion, excluding coverage for obligations under any workers’ compensation or similar law. In September 2003, Greenwich sent other correspondence to the insured reiterating the basis for the denial. In each letter, Greenwich requested additional information from the insured but received none. Greenwich therefore closed its file on the insured’s claim.
In paragraph 1, under “COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY,” the policy contains the following insuring agreement: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply. We may at our discretion investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.” (Italics added.)
5. Insured’s Settlement and Assignment of Claim
The insured never disputed Greenwich’s coverage denial. Two months later, the insured settled the underlying lawsuit and assigned his rights under the commercial general liability insurance policy to appellant.
6. Present Bad Faith Action
As the insured’s assignee, appellant sued Greenwich, Greenwich’s claims administrator (Fleming & Hall Administrators, Inc.) (F&H) and the insured’s workers’ compensation carriers alleging the insurers had breached their duty to defend and indemnify the insured against appellant’s complaint. Appellant did not dispute that his allegations as worded in the underlying complaint excluded coverage under the policy. Rather, appellant alleged Greenwich failed to investigate and was obliged to defend its insured in the underlying action. Appellant contended Greenwich should have defended the underlying complaint against its insured and asserted appellant’s independent contractor status only as an affirmative defense to the underlying complaint.
Appellant also filed a workers’ compensation claim, which was resolved by a third party compromise and release.
7. Trial, Judgment and Appeal
After dismissing F&H and settling with the other carriers, appellant proceeded to a one-day bifurcated court trial in the current action. The court ordered the issue of liability to be tried first, before any trial on damages. Appellant was present at trial. However, he did not testify.
After hearing evidence in the first phase, the trial court found Greenwich had no duty to defend its insured and therefore had no liability under its policy.
The court determined that appellant did not meet his burden of proving his claims for breach of contract and implied covenant of good faith. The court ruled the evidence and case law established Greenwich did not have a duty to defend the insured against the underlying complaint, and appellant’s claim as an assignee of the insured thus also failed.
In its statement of decision, the trial court found that appellant “did not show that the damages sought in the underlying complaint were potentially covered by the policy. There is no evidence before this court that [appellant] was an independent contractor or that such evidence was provided to Greenwich at any time.” The court stated that “[t]here is no case law requiring an insurer to go beyond the allegations, the policy and the extrinsic facts known to the insurer and investigate the facts in order to establish coverage. [Appellant] would require Greenwich to investigate facts that the insured never saw fit to provide to Greenwich. Under the facts and circumstances presented by the evidence, Greenwich did not have a duty to anticipate a defense of no employment relationship when the underlying complaint alleges an employment relationship. . . . Greenwich did not have a duty to speculate about ways in which the underlying complaint might have been amended to allege a potentially covered claim. The case law does not impose this duty on insurers.”
The trial court issued a judgment for Greenwich and denied appellant’s motion for new trial. This appeal followed.
DISCUSSION
On appeal, appellant raises a number of contentions that boil down to the argument that the trial court erred in ruling as a matter of law that Greenwich had no duty to investigate facts and evidence outside the four corners of the underlying complaint and any extrinsic evidence known to Greenwich. Specifically, appellant argues that Greenwich failed in its duty to defend its insured because it did not contact the insured to determine appellant’s employment status, nor did it investigate any facts to determine whether the insured had affirmative defenses available to defeat appellant’s claims in the underlying action. Appellant contends that failure to investigate alone is a violation of the duty to defend despite a lack of coverage under the policy. Appellant asserts Greenwich was obligated to undertake its insured’s defense in the first instance, asserting the insured’s lack of liability only as a matter of affirmative defense in the underlying action. Appellant’s contention is not supported by applicable legal principles.
In determining whether a particular policy provides a potential for coverage, and thus a duty to defend, we must be guided by the principle that interpretation of an insurance policy is a question of law. (Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390.) A liability insurer owes a broad duty to defend its insured against lawsuits that generate a potential for indemnity. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 (Gray).) The duty to defend is broader than the duty to indemnify, and an insurer may owe a duty to defend its insured in an action in which no damages are ultimately awarded. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295 (Montrose); Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081 (Horace Mann).) Whether an insurer owes a duty to defend depends on the allegations in the underlying complaint, the policy and the facts known to the insurer. (Montrose, supra, at pp. 295-296, 300.) With respect to the complaint, an insurer must defend when the lawsuit “potentially seeks damages within the coverage of the policy.” (Gray, supra, at p. 275, italics omitted.) However, if “ ‘ “there is no possibility of coverage, there is no duty to defend . . . .” ’ ” (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 19 (Waller); see also Kazi v. State Farm Fire & Casualty Co. (2001) 24 Cal.4th 871, 879-880.)
As our Supreme Court has recognized, “if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance.” (Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal.4th 643, 655 (Scottsdale); see also Waller, supra, 11 Cal.4th at p. 26.)
The duty to defend and the extent of that duty are premised on basic contract principles: the insured pays for, and reasonably can expect, a defense against third party claims that are potentially covered by the policy, and no more; the insurer in turn sets its premium to cover the cost of defense of claims that are potentially covered by the policy, but not claims for which there is no potential coverage. (Scottsdale, supra, 36 Cal.4that p. 659.) Otherwise, the insured would receive a windfall and be unjustly enriched since it did not bargain for defense of noncovered claims. (Ibid.)
Whether an insurer owes a duty to defend typically is made in the first instance by comparing the allegations of the complaint with the policy terms; facts that are extrinsic to the complaint generate a duty to defend if they reveal a possibility that the claim may be covered by the policy. (Waller, supra, 11 Cal.4th at p. 19.) Thus, the relevant inquiry asks what facts did the insurer know at the time the insured tendered the defense of the underlying lawsuit, both from the allegations on the face of the third party complaint and from extrinsic information available to the insurer at the time, and whether these known facts created a potential for coverage under the terms of the policy. (Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114 (Gunderson).)
Appellant claimed in the underlying complaint that he was an employee of the insured. He did not allege in the complaint that he was an independent contractor. An allegation that appellant was an independent contractor would have been in direct conflict with appellant’s claims for entitlement to workers’ compensation benefits as an employee, for recovery under the employee wage and hour statutes, and appellant’s assertion of claimed RICO violations by the insured. Appellant did not allege or provide any evidence that he would or could have amended the underlying complaint to allege any damages covered by the policy. In denying coverage, Greenwich through F&H expressly invited the insured on four occasions to provide additional information it may have that could affect Greenwich’s determination of coverage or information that it felt Greenwich should consider. The insured did not provide any additional information to Greenwich or object to the denial of coverage. He introduced no evidence at trial showing he was an independent contractor or that the damages sought in the underlying complaint potentially were covered by the policy. The trial court concluded there was no evidence before the court that appellant was an independent contractor or that such evidence had been provided to Greenwich at any time. The record amply supports such finding.
Appellant cites Tibbs v. Great American Ins. Co. (9th Cir. 1985) 755 F.2d 1370 (Tibbs), for the proposition that Greenwich had a “duty to investigate independent contractor status when used as a defense for coverage.” As appellant concedes, Tibbs is not binding on this court. (Alameida v. State Personnel Bd. (2004) 120 Cal.App.4th 46, 61.) Moreover, Tibbs is not helpful to appellant.
In Tibbs, the insurer issued a liability policy to Tibb’s employer, covering Tibbs as an employee and additional insured. After the policy was issued and before the occurrence in question, the employer attempted to change Tibbs’s status from an employee to independent contractor and informed Tibbs he would need to provide his own liability insurance. However, the employer never changed the liability policy to remove Tibbs from coverage as an additional insured, and an incident occurred in which a third party was injured. The injured party subsequently sued Tibbs, as well as others. The insurer engaged an attorney to defend the other defendants but not Tibbs. After a jury returned a verdict in favor of all defendants, Tibbs sued the insurer for breach of the duty of good faith and fair dealing by failing to defend him in the underlying action. (Tibbs, supra, 755 F.2d at p. 1373.)
The bad faith action proceeded to trial and resulted in a punitive damages award. On appeal, the insurer did not dispute the district court’s interpretation that the liability policy did cover Tibbs, but it claimed that Tibbs had to be an intended beneficiary of the insurance contract before it had a duty to defend him. (Tibbs, supra, 755 F.2d at p. 1374.) The appellate court found the employer’s intent to remove Tibbs from the policy coverage irrelevant, pointing to the plain language of the policy extending liability coverage to employees, including Tibbs. (Ibid.) The court found substantial evidence supported the jury’s punitive damage award. Before coverage was denied, the insurer’s own employees had advised that Tibbs was probably entitled to a defense. Yet, the insurer’s chief in-house counsel did not compare Tibbs’s claim with the policy or even inspect the policy before denying coverage. When informed the judge presiding over the underlying action thought Tibbs was entitled to a defense, the chief counsel declared, “ ‘F___ the judge.’ ” (Id. at p. 1375.) Such circumstances are wholly distinguishable from the present case. The plain language of the present policy excludes liability coverage and the letters to the insured denying coverage explained the policy provisions excluding coverage.
Appellant also relies on Cal-Farm Ins. Co. v. TAC Exterminators, Inc. (1985) 172 Cal.App.3d 564 (Cal-Farm), which appellant states was a case in which a general liability carrier was “forced to defend the employer in a third-party claim even where there was a stipulation to employment status of the decedent.” In Cal-Farm, however, there was a factual dispute concerning the applicability of an ambiguous exclusion clause. The court effectively held that the insurer “could not rely on an exclusion limiting liability assumed under contract where the validity of the written indemnification agreement was at issue in the very action for which a defense was sought.” (Id. at p. 581.) That is not the situation here, since coverage did not turn on facts to be litigated in the underlying action and no such evidence was presented.
Appellant argues, based on F&H’s claims manual, that Greenwich violated its own policy by failing to investigate the insured’s claim. He argues this amounted to a breach of the implied covenant of good faith and fair dealing.
This contention is not persuasive. First, the F&H claims manual was never admitted into evidence and thus the argument lacks evidentiary foundation. Additionally, appellant misconstrues the insurer’s duty to investigate and the risk it runs if it fails to undertake an adequate investigation. The risk an insurer takes when it denies coverage without investigation is that the insured later may be able to prove a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage. In such event, the insurer would be liable for the costs of defense previously incurred by the insured and exposure to liability in tort. (American Internat. Bank v. Fidelity & Deposit Co. (1996) 49 Cal.App.4th 1558, 1571 (American).)
Appellant appears to argue for the first time in his reply brief that the trial court erred in excluding evidence of the claims manual. Points raised for the first time in a reply brief need not be considered unless good cause is shown for failure to raise the point earlier. (Heiner v. Kmart Corp. (2000) 84 Cal.App.4th 335, 351; Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 894, fn. 10; see 9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 616, pp. 647-648 [improper and unfair to raise new points on reply].) For that reason, we do not consider this issue.
Under the facts as found by the trial court, Greenwich fully satisfied its duty when it examined the underlying complaint and compared it to the insurance policy. (American, supra, 49 Cal.App.4th at p. 1571; Horace Mann, supra, 4 Cal.4th at p. 1081.) There was no evidence presented at trial showing that either appellant or the insured provided or could have provided Greenwich with extrinsic evidence establishing a duty to defend. The trial court properly concluded there was no extrinsic information that “should have alerted a reasonable insurer of the need to further investigate.” (Eigner v. Worthington (1997) 57 Cal.App.4th 188, 198.) This finding is supported by the record.
In this respect, appellant’s assertions that the adjustor “falsely” stated in the denial letters that an investigation had been conducted regarding the underlying claim are not well founded.
Contrary to appellant’s claim in his opening brief, appellant did not move the court to reopen his case to permit the insured to testify on this issue. Near the end of appellant’s case-in-chief, appellant told the court he intended to call the insured but the earliest the insured could testify was the following day. The court asked appellant for an offer of proof of the insured’s expected testimony, and appellant informed the court the insured would testify “[i]n regard to the question before us, the duty to defend, the fact that he was the insured. He did pay the policy premium.” (Italics added.) When the court indicated that fact was undisputed, appellant responded, “That would be my only offer on that subject.” (Italics added.) Appellant then rested without making any offer of proof that the insured would have confirmed appellant’s status as an independent contractor. Nor did he indicate any desire to testify himself regarding his employment status. After final argument, appellant moved for leave to reopen his case solely to place his settlement agreement with the insured in evidence. The court granted that motion. Appellant later moved for a new trial, claiming the court had not allowed the insured to testify. The court rejected this claim noting the record established appellant had a reasonable opportunity to call the insured and offered no adequate excuse for the insured’s failure to appear to testify.
Appellant cites County of San Bernardino v. Pacific Indemnity Co. (1997) 56 Cal.App.4th 666, arguing that “[a]n insurer cannot avoid its duty to defend based on a coverage defense that depends on facts in dispute in the underlying lawsuit.” County of San Bernardino is a case in which the insurer claimed it had no duty to defend because there was no “occurrence” during the policy period and because the insured had available a statute of limitations defense in the underlying complaint. (Id. at pp. 686, 687-688.) Whether there was a duty to defend hinged on issues of fact to be determined in the underlying action. In the present case, Greenwich denied coverage because there was not even a potential for coverage under the policy, and appellant failed to establish at trial any extrinsic information that should have alerted Greenwich to the potential for coverage.
Appellant also argues Greenwich breached its duty to defend by permitting appellant to be the “arbiter of the policy’s coverage,” which is prohibited by Gray, supra, 65 Cal.2d at page 276. In Gray, the disputed fact was whether the insured’s conduct was negligent or intentional. The court found the insurer had a duty to defend because until the underlying action was resolved there was a potential for coverage. (Id. at p. 272.) Here, appellant’s allegations did not raise the possibility that the insured might become liable for covered damages. Appellant alleged he was an “employee” of, or was “employed by,” the insured. He also alleged violations of certain employment laws and sought damages only available to an employee. And, he alleged the insured unlawfully claimed he was an independent contractor. The insured’s potential liability was defined by those allegations. Adjudication of the underlying complaint would not have changed the defined issues.
As the record reflects, there is simply no evidence that the insured, as appellant contends, could have “defend[ed] the action with facts within his possession which defeat employee status.” (Italics omitted.) The underlying complaint was couched entirely in terms of appellant’s status as the insured’s employee. The allegations of the complaint defined and confined the insurer’s coverage duties. (Uhrich v. State Farm Fire & Casualty Co. (2003) 109 Cal.App.4th 598, 611; see also, Gray, supra, 65 Cal.2d at p. 276 [“the duty to defend should be fixed by the facts which the insurer learns from the complaint, the insured, or other sources”].)
Nor need we contemplate what appellant could have pleaded in his complaint. “An insured may not trigger the duty to defend by speculating about extraneous ‘facts’ regarding potential liability or ways in which the third party claimant might amend its complaint at some future date. . . . ‘Our Supreme Court, anticipating imaginative counsel and the likelihood of artful drafting, has indicated that a third party is not the arbiter of the policy’s coverage. [Citations.] A corollary to this rule is that the insured may not speculate about unpled third party claims to manufacture coverage.’ [Citation.]” (Gunderson, supra, 37 Cal.App.4th 1106, 1114; see also Friedman Prof. Management Co., Inc. v. Norcal Mutual Ins. Co. (2004) 120 Cal.App.4th 17, 34-35 [universe of facts bearing on whether claim is potentially covered includes extrinsic facts known to insurer at inception of suit as well as facts in complaint, but not “made up” facts]; Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992) 10 Cal.App.4th 533, 539 [“We . . . are unwilling to characterize the straightforward provisions of the policy to find coverage where none exists”].)
In this case, there were no disputed facts to consider. There is no evidence Greenwich was ever made aware of “the insured’s version of the real facts or his affirmative defenses,” as appellant suggests. When there is no potential for coverage, and no duty to defend under the policy terms, there can be no action for breach of the implied covenant of good faith and fair dealing, because the covenant is based on the contractual relationship between the insurer and its insured. (Waller, supra, 11 Cal.4th at p. 36.) As a matter of law, therefore, Greenwich also did not breach any implied covenant of good faith and fair dealing owed to the insured.
DISPOSITION
The judgment is affirmed. Greenwich is to recover costs on appeal.
We concur: COOPER, P. J., RUBIN, J.
Under paragraph 2, “Exclusions,” the policy states, “This insurance does not apply to: [¶] . . . [¶] d. Workers’ Compensation and Similar Laws [¶] Any obligation of the insured under a workers’ compensation, disability benefits or unemployment compensation law or any similar law. [¶] e. Employer’s Liability [¶] ‘Bodily Injury’ to: [¶] (1) An ‘employee’ of the insured arising out of and in the course of: [¶] (a) Employment by the insured; or [¶] (b) Performing duties related to the conduct of the insured’s business . . . .” (Italics added.)