Opinion
No. C 02-02916 CRB
March 3, 2003
ORDER
Now before the Court are plaintiff's motion for summary judgment and defendant's cross-motion for summary judgment. After carefully considering the papers filed by the parties, and having had the benefit of oral argument, plaintiffs motion is DENIED and defendant's motion is GRANTED.
I. BACKGROUND
Plaintiff GDF International ("GDFI") is a judgment creditor of Utility.com, Inc. ("UCI"), having obtained a $10,000,000 default judgment against UCI in the case of GDF Int'l S.A. v. Utility.Com Inc., et al., Case No. C 01-2601 (N.D. Cal. 2001). Defendant Associated Electric Gas Insurance Services Limited ("AEGIS") insured UCI and its officers and directors pursuant to a Directors and Officers Liability Insurance Policy ("DO policy") and related endorsements.
The facts that led to this lawsuit are undisputed UCI became insolvent in January 2001, and on March 5, 2001, UCI executed an Assignment for the Benefit of Creditors. On May 2, 2001, Benjamin T. Reyes, III, General Counsel and Secretary of UCI, sent a letter to AEGIS notifying it of a potential claim by GDFI against the officers and directors of UCI. AEGIS replied to UCI by letter on May 29, 2001, stating that Mr. Reyes' letter was insufficient to constitute a valid notice of claim pursuant to the policy. On July 9, 2001, GDFI sued UCI and three of its officers for securities fraud based on allegations that the officers made false statements relating to GDFI's $10,000,000 investment in UCI's preferred stocks Mr. Reyes forwarded a copy of the complaint to AEGIS the following day. The individual officers were voluntarily dismissed and no appearance was made on behalf of UCI. The Court granted a default judgment against UCI and in favor of GDFI for $10,000,000. GDFI delivered a conformed copy of the judgment to AEGIS on or about May 29, 2002, with a demand that AEGIS pay the judgment AEGIS refused, and continues to deny liability for any portion of the judgment Plaintiff brings this direct action against AEGIS to collect the judgment against UCI under California Insurance Code § ll580, or, in the alternative, as an intended third-party beneficiary of the AEGIS insurance policy.
II. LEGAL STANDARD
Summary judgment is proper 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 a judgment as a matter of law." Fed.R.Civ.P.56(c). An issue is "genuine" only if there is a sufficient evidentiary basis on which a reasonable fact finder could find for the nonmoving party, and a dispute is "material" only if it could affect the outcome of the suit under governing law. See Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248-49 (1986). A principal purpose of the summary judgment procedure is to identify and to dispose of factually unsupported claims. See Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial."Matsushita Elec. Ind. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986.)
III. DISCUSSION
A party's standing to bring a legal challenge is a threshold issue that must be resolved prior to reaching the merits of the party's claim. See Scott v. Pasadena Unified School Dist., 306 F.3d 646, 654 (9th Cir. 2002). In order to establish standing, a plaintiff must show that he has suffered the "invasion of a legally protected interest" Id. (emphasis added). That interest may be protected by law or by contract. See e.g.,Hatchwell v. Blue Shield of Calif., 198 Cal.App.3d 1027, 1034 (1988) (party to a contract has standing to sue for its enforcement).
Plaintiff asserts that it has standing to bring a direct action against AEGIS by virtue of California Insurance Code section 11580 or, in the alternative, as an intended third-party beneficiary under the AEGIS insurance policy issued to UCI. For the reasons discussed below, neither theory is availing.
B. Insurance Code Section § 11580
California Insurance Code § 11580 ("section 11580") enables a judgment creditor, in certain situations, to bring a direct action against a liability insurer when the insured is bankrupt or insolvent. The statute provides:
A policy insuring against losses set forth in subdivision (a) shall not be issued or delivered to any person in this state unless it contains the provisions set forth in subdivision (b). Such policy, whether or not actually containing such provisions, shall be construed as if such provisions were
embodied therein
(a) Unless it contains such provisions, the following policies of insurance shall not be thus issued or delivered
(1) Against loss or damage resulting from liability for injury suffered by another person other than (i) a policy of workers' compensation insurance, or(ii)apolicy issued by a nonadmitted Mexican insurer solely for the use in the Republic of Mexico.
(2)Against loss of or damage to property caused by draught animals or any vehicle, and for which the insured is liable, other than a policy which provides insurance in the Republic of Mexico, issued or delivered in this state by a nonadmitted Mexican insurer.
(b) Such policy shall not be thus issued or delivered to any person in this state unless it contains all the following provisions:
(1) A provision that the insolvency or bankruptcy of the insured will not release the insurer from the payment of damages for injury sustained or loss occasioned during the life of such policy.
(2) A provision that whenever a judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment
Subdivision (a) of the statute identifies the specific types of insurance policies that require the direct action provision described in subdivision (b). See Wright v. Fireman's Fund Ins. Co., 11 Cal.App.4th 998, 1014-15 (1992). The direct action provision "allows an injured person who has secured a judgment in an action based upon bodily injury, death, or property damage to bring an action against the insurer on the policy."People ex rel. City of Willits v. Certain Underwriters at Lloyd's of London, 97 Cal.App.4th 1125, 1130 (2002).
In order to bring this direct action against AEGIS, plaintiff must satisfy both subdivisions of section 11580 by demonstrating:
1) it obtained a judgment for bodily injury, death, or property damage,
2) the judgment was a n insured under a policy that insures against loss or damage resulting from liability for personal injury or insures against loss of or damage to property caused by a vehicle or draught animal
3) the liability insurance policy was issued by the defendant insurer,
4) the policy covers the relief awarded in the judgment,
5) the policy either contains a clause that authorizes the claimant to bring an action directly against the insurer or the was issued or delivered in California and insures against loss or damage resulting from liability for personal injury or insures against loss of or damage to property caused by a vehicle or draught animal.Willits, 97 Cal.App.4th at 1130 n2 (citing Wright, 11 Cal.App.4th at 1015) (emphasis added).
Defendant contends that plaintiff cannot satisfy elements 1, 2, and 5 for two reasons. First, the AEGIS DO policy insured against losses resulting from liability for wrongful acts" committed by UCI's directors and officers, not for personal injury or property damage. See Cal. Ins. Code § 11580(a). Second, the judgment obtained in the underlying matter was based on securities fraud, not bodily injury, death, or property damage. See id. 11580(b)(2).
Defendant argues that the AEGIS policy, which insured UCI and its directors and officers against losses based on a director or officer's "wrongful act," is not the type of policy within the scope of subdivision (a). The policy defines "wrongful act" as "any actual or alleged breach of duty, neglect, error, misstatement, misleading statement or omission . . . ." Although California courts have not ruled definitively on whether a DO policy falls within the purview of subdivision (a), such a policy generally does not insure against liability for either personal injuries or property damage as required by the statute.
However, it is unnecessary at this time for the Court to determine whether subdivision (a) encompasses DO policies as a matter of law because plaintiff in this case cannot satisfy subdivision (b). The judgment in the underlying action was not based upon bodily injury, death, or property damage. See Xebec Dev. Partners. Ltd. v. Nat'l Union Fire Ins. Co., 12 Cal.App.4th 501, 527 (1993).
In Xebec, the defendant insurance company appealed from a $7 million judgment against it and in favor of plaintiff based on claims against its insured for diversion of research and development funds under its DO policy. Id. at 515-17. Defendant's policy covered losses arising from the "wrongful acts" of its directors and officers and defined "wrongful act" as any breach of duty, neglect, error, misstatement, misleading statement, [or] omission Id. at 516. Plaintiff brought a direct suit against the insurer under section 11580, and as the assignee of defendant's insureds. Id. at 527. The appellate court noted that the trial court never determined whether plaintiff a third-party creditor, could sue the DO insurer directly under section 11580, but stated that "[i]n any event, [plaintiff] could not properly have proceeded under subdivision (b)(2) because [the] underlying action. . . patently was not `based upon bodily injury, death, or property damage' within the meaning of the section" Id. at 527 (citing Rolf Homes, Inc. v. Super. Ct, 186 Cal.App.2d 876, 880-81 (1960) (liability for malpractice and fraud under errors and omissions policy did not come within either subdivision of section 11580)).
Plantiff contends that Xebec should not be followed because the language in Xebec was dicta and because Xebec cited Rolf Homes, a case that was disapproved of in Willits. See 97 Cal.App.4th at 1131 n4. The holding in Willits, however, does not disturb the statement in Xebec that a judgment arising from wrongful acts committed by directors and officers is not within the purview of subdivision (b)(2). Willits merely disapproved of Rolf Homes to the extent it interpreted the statute to require a draught animal or a vehicle to cause the property damage. See id. Plaintiff must still demonstrate that the underlying judgment was based upon personal injury, death, or property damage. See id. at 1130.
Plaintiff asserts that subdivision (b) is satisfied here because the underlying judgment for securities fraud constitutes property damage. Plaintiffs theory is based solely on the definition of "intangible property' "in an outdated edition of Black's Law Dictionary, which refers to stock certificates as an example of intangible property. Plaintiff supplies no authority, however, in support of its theory that a decline in the value of intangilAe property is a form of "property damage" within the meaning of the statute. Indeed, Xebec, which involved the improper diversion of investment funds, suggests otherwise. See Xebec, 12 Cal.App.4th at 527 (diversion of investment funds is not within the scope of subdivision (b)(2)).
Intangible property: As used chiefly in the law of taxation, this term means such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stock bonds, promissory notes, copyrights, and franchises." Black's Law Dictionary (6th ed. 1990).
Since plaintiff has not demonstrated that the underlying judgment is based on personal injury, death, or property damage, it does not have standing under section 11580.
B. Intended Third-Party Beneficiary Under the AEGIS Insurance Policy
In the alternative, plaintiff asserts that it has standing as an intended third-party beneficiary under the DO policy that AEGIS issued to UCI.
As a general rule, absent an assignment of rights or final judgment involving section 11580, a third-party claimant may not bring a direct action against an insurance company on an insurance contract because the insurer owes a duty only to the insured. See Harper v. Wausau Ins. Co., 56 Cal.App.4th 1079, 1086 (1997). However, California Civil Code section 1559 provides an exception: "A contract, made expressly for the benefit of a third person, maybe enforced by him at any time before the parties there to rescind it." Id. (quoting Cal. Civ. Code § 1559). "It is not necessary that an express beneficiary be specifically identified in the contract, he or she may enforce it if he or she is a member of a class for whose benefit the contract was created." Soderberg v. McKinney, 44 Cal.App.4th 1760, 1773 (1996). But if the third party is merely an "incidental beneficiary" of the policy, it has no grounds for recovery.See American Home Ins. Co. v. Travelers Indem. Co., 122 Cal.App.3d 951, 967 (1981).
The party claiming to be an intended third-party beneficiary bears the burden of proving that the contracting parties actually promised the performance that the third-party beneficiary seeks. See Whiteside v. Tenet Healthcare Corp., 101 Cal.App.4th 693, 708 (2002). "Generally, a policy of indemnity insurance will not inure to a third party's benefit unless the contract makes such an obligation express, and any doubt should be construed against such intent" American Home, 122 Cal.App.3d at 967. For a third party to qualify as an intended beneficiary under a contract, the intent of the contracting parties must appear from the terms of the contract. See Charles Lowe Co. v. Xomox Corp., 1999 WL 1293362, at *6 (N.D. Cal. 1999). Thus, the determination whether a third party is an intended beneficiary or merely an incidental beneficiary to the contract "involves construction of the parties' intent, gleaned from reading the contract as a whole in light of the circumstances under which it was entered." Jones v. Aetna Cas. Surety Co., 26 26 Cal.App.4th 1717, 1724 (1994).
Here, the relevant provisions of the agreement are found in the insuring agreement and the corporate entity coverage endorsement Section I (A)-the Insuring Agreement — covers losses that the directors and officers are legally obligated to pay. The "Corporate Entity Coverage Endorsement" covers claims made against the Company.
The Insuring Agreement states:
(1) The insurer shall pay on behalf of the directors and officers any and all sums which they shall become legally obligated to pay as ultimate net loss for which the company has not provided reimbursement, by reason of any wrongful act. . .
(2) The insurer shall pay on behalf of the company any and all sums it has incurred, . . . as ultimate net loss, to indemnify directors or officers for ultimate net loss which they are legally obligated to pay by reason of any wrongful act . . . .
The Corporate Entity Coverage Endorsement states:
(A). . . [I]f the Company is made a defendant in any suit or proceeding in which a director or officer is also a defendant, in his respective capacity as a director or officer, the insurer shall pay on behalf of the company for any and all stuns required to reimburse it for ultimate net loss it has incurred in connection with claims made against the company in such suit or proceeding . . .
As defined in the policy and the endorsement, "ultimate net loss" includes the total indemnity and defense cost with respect to each wrongful act covered under the policy. "Indemnity' "means all stuns which the company, directors, or officers become "legally obligated to pay as damages, whether by adjudication or compromise with the consent of the insurer. . . ." Section (G)(2)(i) of the endorsement states that "the bankruptcy or insolvency of the company shall not relieve the insurer of any of its obligations under this endorsement"
According to plaintiff, language in the policy providing that the insurer shall make payments "on behalf of' the insured demonstrates an intent to pay third parties. Plaintiff claims that because the policy was intended to cover losses sustained by individuals judicially determined to have been injured by the wrongful conduct of the insured, plaintiff, as a member of that class, is an intended beneficiary and should be allowed to enforce AEGIS's obligation to pay on behalf of UCI.
However, an insurer's duty to settle a case runs to the insured, not the injured claimant See Murphy v. Allstate Ins. Co., 17 Cal.3d 937, 941 (1976). As the California Supreme Court explained in Murphy, "[t]he duty to settle is implied in law to protect the insured," and "does not directly benefit the injured claimant" Id. "A third party should not be permitted to enforce covenants made not for his benefit, parties' intent to benefit him." Id. at 944. Because the duty to settle is intended to benefit the insured and not the injured claimant, the third party has no direct right to sue the insurer to recover. Id. at 944; see also Jane D. v. Ordinary Mut., 32 Cal.App.4th 643, 650 (1995) (a third party claimant cannot bring an action upon a duty owed to the insured).
By contrast, a medical-payment provision is widely recognized as a provision intended to benefit third parties. In Harper v. Wausau Ins. Co., 56 Cal.App.4th 1079, 1083 (1997), plaintiff, who was injured in a slip and fall accident, sued an insurer as a third-party beneficiary under the medical-payment provision in the property owner's insurance policy. Under the terms of the policy, the provision was triggered whenever an injury occurred on the property without regard to fault Id. at 1090. The court determined that plaintiff was an intended beneficiary under the policy, explaining:
The express language of [the medical payment provision] plainly indicates it is meant to directly confer a benefit upon third parties who are injured on the owner's property. The payment is premised on the happening of the event and is not premised on fault Thus, the insurer undertook a separate and direct obligation to pay the medical expenses of any persons injured on the owner's property regardless of its insured's negligence. Accordingly, the payments were plainly intended to directly benefit [the third party] plaintiff and were not incidental or remote.Id. As an intended third-party beneficiary, plaintiff had a right to enforce the contract Id. at 1091. By contrast, liability provisions do not provide for payment without regard to fault and hence do not create a right of enforcement on the part of the injured party. See Id. at 1090-91.
Here, GDFI attempts to turn a liability provision into a third-party beneficiary provision Unlike the policy in Harper, however, the AEGIS policy is a typical third-party liability policy where the insurer assumes a contractual duty to pay judgments the insured becomes legally obligated to pay as damages. See San Diego Housing Comm'n v. Indus. Indem. Co., 68 Cal.App.4th 526, 538 (1998) (a third-party liability policy "provides coverage for liability of the insured to a "third party' [e.g., a CGL policy, a directors and officers liability policy, or an errors and omissions policy]"). Whereas the medical-payment provision in Harper provided for payment without regard to fault, the AEGIS policy requires fault before coverage for a third party is triggered. The AEGIS policy does not contain a separate obligation to GDFI or to any class of persons, nor does it provide coverage for anything other than liability. If every liability provision were interpreted to make the injured party a third-party beneficiary of the policy, the third party would have no need to sue the insured, and instead would sue the insurer directly. Such a result would be contrary to the general rule that a third party cannot sue an insurer directly without an assignment or judgment under section 11580 of the Insurance Code. See Harper, 56 Cal.App.4th at 1086.
In short, GDFI has failed to show that the terms of the policy indicate the parties' intent to benefit GDFI or a class to which GDFI belongs. Rather, the terms of the AEGIS policy show an intent to protect the insureds from losses they become legally obligated to pay. Even though GDFI would stand to gain from the contract's enforcement, it is merely an incidental beneficiary who would "fortuitously" benefit from AEGIS's agreement to indemnify UCI. American Home, 122 Cal.App.3d at 967. Accordingly, the fact that the policy's existence might benefit GDFI "is insufficient to entitle him or her to demand enforcement" Jones. 26 Cal.App.4th at 1725.
IV. CONCLUSION
Since plaintiff lacks standing to bring this action, plaintiffs motion for summary judgment is hereby DENIED and defendant's cross-motion for summary judgment is hereby GRANTED.