Opinion
Case No. 02-213-IEG (JFS)
June 6, 2002
Presently before the Court is defendants Allstate Insurance Company and Allstate Property and Casualty Company's (collectively referred to as "defendants") motion for partial summary judgment. Defendants seek summary judgment of plaintiffs Paul and Loretta Onder's ("plaintiffs") first cause of action for breach of contract. For the reasons stated herein, the Court grants defendants' motion for partial summary judgment.
BACKGROUND
This case arises from a dispute between plaintiffs and defendants regarding coverage under a homeowners insurance policy issued by defendants insuring plaintiffs' real property in Ramona, California. Plaintiffs obtained this homeowners' insurance policy from defendants in 1994. The policy insures plaintiffs' real property in the amount of $300,000 for personal injury and/or property damage and has been renewed by plaintiffs annually since 1994. In March of 1999, plaintiffs also purchased an umbrella policy from defendants, which provides excess coverage in the amount of $1,000,000 once the limits of the homeowners' policy are exhausted.
Plaintiffs' interaction with defendants leading to this lawsuit began in the Spring of 2000, when their homeowners' association, the San Diego Country Estate Association ("the association") informed them that a portion of their swimming pool and other property improvements encroached on the association's common area. The association demanded that plaintiffs remove the pool and threatened suit against plaintiffs for trespass, property damage, and other injuries to the association's property. Plaintiffs' counsel sent defendants a letter on December 15, 2000, stating that his clients had been informed of the encroachment by the association "[o]n or about August 24, 2000" and that "[t]he association demands immediate removal of all improvements on the property in question and threatens litigation." (See Pls.' Ex. A.) Plaintiffs' counsel further stated in the letter that he "believe[d] [defendants'] insured should be immediately granted coverage under the policy for defense and indemnity." (See id.) In response to this letter, defendants opened a claim file for plaintiffs. (See Almeida Decl. ¶ 3.) At this time, there was no pending lawsuit against plaintiffs. However, plaintiffs contend that their letter of December 15, 2000 constituted the tender of their claim. (See Pls.' Opp'n at 2.)
On February 2, 2001, plaintiffs filed an action against the association in the San Diego Superior Court, alleging causes of action for quiet title, injunction, and prescriptive easement ("the underlying action"). On April 2, 2001, the association filed a cross-complaint against plaintiffs for injunctive and declaratory relief, breach of contract, and negligent trespass. On June 26, 2001, plaintiffs sent defendants another letter, attaching, for the first time, their complaint and the association's cross-complaint in the underlying action. (See Defs.' Ex. 4.) Thus, defendants claim that plaintiffs did not tender defense of the underlying suit until June 26, 2001. (See Defs.' Mem. P. A. at 7.)
Plaintiffs also asserted causes of action against the sellers of their property for breach of contract and against their real estate agents for fraud and breach of California Civil Code section 1102 et seq.
The association filed a first amended cross-complaint on May 24, 2001.
On July 13, 2001, defendants sent plaintiffs a letter stating that they were "in the process of making a coverage determination" and that they hoped to "have this investigation completed within the next 14 days." (See Pls.' Ex. C.) On August 31, 2001, defendants sent a letter to plaintiffs accepting their tender and stating that defendants would cover only the cross-complaint in the underlying action, with no reservation of rights. (See Defs.' Ex. 6.) The correspondence also indicated that defendants would reimburse plaintiffs for reasonable defense fees and costs incurred between the tender of the cross-complaint and the date upon which tender was accepted. Defendants reimbursed plaintiffs for their attorney fees incurred between June 26, 2001 and August 31, 2001. (See Bedard Decl. ¶¶ 7, 8; Defs.' Exs. 7, 8.)
Plaintiffs filed the instant action in California state court in December 2001, alleging that defendants failed to conduct a prompt and complete investigation of the facts and circumstances giving rise to the tender; failed to respond to the tender within a reasonable time; and failed to pick up all of the covered claims, including the need to quiet title. Plaintiffs seek to recover money owed under the policies and to enjoin defendants from continuing to deny covered claims tendered by plaintiffs. The complaint asserts three causes of action against defendants: (1) breach of written contract; (2) breach of the covenant of good faith and fair dealing; and (3) injunctive relief and restitution pursuant to Cal. Bus. Prof. Code § 17200 ("UCL").
Defendants removed plaintiffs' action on February 4, 2002. Defendants filed motions to dismiss and to strike on February 6, 2002. On March 15, 2002, the Court issued an order denying defendants' motion to dismiss plaintiffs' third cause of action, denying defendants' motion to strike plaintiffs' prayer for restitution from the third cause of action, and granting defendants' motion to strike plaintiffs' request for attorney fees from plaintiffs' third cause of action. Defendants filed the instant motion for partial summary judgment on April 30, 2002. In their motion, defendants seek summary judgment of plaintiffs' breach of contract claim. Defendants contend that plaintiffs have received all policy benefits to which they are entitled under the contract. Plaintiffs filed an opposition to the motion on May 17, 2002, asserting five bases upon which defendants allegedly breached the contract. Defendants filed a reply on May 24, 2002. The Court now turns to the instant motion for partial summary judgment.
DISCUSSION
I. LEGAL STANDARD FOR SUMMARY JUDGMENT UNDER FED. R. Civ. P.56
Summary judgment is proper where "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A material issue of fact is present when a factual determination must be made by a jury to determine the rights of the parties under the substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Act Up!/Portland v. Bagley, 988 F.2d 868, 873 (9th Cir. 1993). A dispute is only "genuine" when "the evidence presented is such that a jury applying that evidentiary standard could reasonably find for either the plaintiff or the defendant." Anderson, 477 U.S. at 255. In deciding a motion for summary judgment, the Court must examine all the evidence in a light most favorable to the non-moving party. See United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
A moving party who bears the burden of proof at trial is entitled to summary judgment only when the evidence indicates that no genuine issue of material facts exists. Fed.R.Civ.P. 56(c); Celotex, 477 U.S. at 325. If the moving party does not bear the burden of proof at trial, he may discharge his burden of showing that no genuine issue of material fact remains by demonstrating that "there is an absence of evidence to support the non-moving party's case." Celotex, 477 U.S. at 325. The moving party is not required to produce evidence showing the absence of genuine issue of material fact on such issues, nor must the moving party support its motion with evidence negating the nonmoving party's claim. Lujan v. National Wildlife Fed'n, 497 U.S. 871, 885 (1990); United Steelworkers v. Phelps Dodge Corp., 865 F.2d 1539, 1542 (9th Cir.), cert. denied, 493 U.S. 809 (1989). Instead, "the motion may, and should, be granted so long as whatever is before the District Court demonstrates that the standard for the entry of judgment, as set forth in Rule 56(c), is satisfied." Lujan, 497 U.S. at 885 (quoting Celotex, 477 U.S. at 323).
Once the moving party meets the requirement of Rule 56 by either showing that no genuine issue of material fact remains or that there is an absence of evidence to support the non-moving party's case, the burden shifts to the party resisting the motion, who "must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). It is not enough for the party opposing a properly supported motion for summary judgment to "rest on mere allegations or denials of his pleadings." Id. Genuine factual issues must exist that "can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. at 250. To make such a showing, the nonmoving party must go beyond the pleadings to designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 325. Such evidence need not be in a form admissible at trial to avoid summary judgment. Id. The moving party is entitled to judgment as a matter of law if the nonmovant fails to make a sufficient showing of an element of its case with respect to which it has the burden of proof. Id.
II. ANALYSIS
Defendants contend that they are entitled to summary judgment on plaintiffs' breach of contract claim because they have paid for plaintiffs' defense of the association's cross-complaint from the date of plaintiffs' tender: June 26, 2001. Defendants contend that plaintiffs are not legally entitled to reimbursement for fees incurred before the association filed its cross-complaint, fees incurred prior to plaintiffs' tender of the cross-complaint, or fees incurred by plaintiffs' pursuit of affirmative relief against the association. In their opposition, plaintiffs contend that a genuine issue of material fact exists with respect to their entitlement to recover for breach of contract with respect to the following: (1) defendants' failure to pay interest on the attorney fees incurred by plaintiffs between June 26 and August 31, 2001; (2) defendants' failure to reimburse plaintiffs for non-voluntary pre-tender expenses associated with actions required under the policies; (3) defendants' failure to promptly investigate the claim plaintiffs tendered on December 15, 2000; (4) defendants' refusal to litigate the quiet title action filed by plaintiffs against their homeowners' association; and (5) defendants' alleged breach of good faith and fair dealing in refusing to pay benefits owed under the policy until the filing of the instant action.
A. Interest on Attorney Fees Incurred between June 26, 2001 and August 31, 2001
Plaintiffs first contend that defendants are not entitled to summary judgment on the breach of contract claim because defendants have failed to pay interest on the attorney fees incurred by plaintiffs between the date upon which the suit was tendered, June 26, 2001, and August 31, 2001, when defendants assumed coverage of plaintiffs' defense of the association's cross-complaint. Plaintiffs argue that they are entitled to interest on the fees under California Civil Code § 3287(a). Section 3287(a) provides as follows:
Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor from paying the debt.
Cal. Civil Code § 3287(a). Plaintiffs assert that damages are certain in this case, as there is "no dispute as to [the] amount or liability concerning plaintiffs' attorneys' fees incurred between June 26, 2001 and August 31, 2001." (See Pls.' Opp'n at 5.) Thus, plaintiffs contend that defendants are still in breach of their contract with plaintiffs by failing to pay interest on the fees, and that summary judgment should not be granted with respect to the breach of contract claim.
Defendants argue that plaintiffs' reliance on California Civil Code § 3287(a) is misplaced because it applies after plaintiffs have established a breach of contract. See Steiny and Co., Inc. v. Cal. Elec. Supply Co., Inc., 79 Cal.App.4th 285, 294 (Cal.Ct.App. 2000) ("Civil Code section 3287 creates the right to prejudgment interest on damages."). Plaintiffs cannot use section 3287, which pertains to damages, to show that there is a genuine issue of material fact with respect to the breach of contract claim itself. North Oakland Med. Clinic v. Rogers, 65 Cal.App.4th 824, 830 (Cal.Ct.App. 1998) ("It is well established that prejudgment interest is not a cost, but an element of damages."). Rather, plaintiffs must first show they are entitled to damages by establishing that defendants breached a provision of the insurance contract by failing to pay interest on the fees. See Sampson v. Century Indem. Co., 8 Cal.2d 476, 479 (Cal. 1937) (noting that absent a provision for payment of interest in an insurance policy, the company is not liable for interest). Plaintiffs have failed to show that the insurance contract requires defendants to pay interest on attorney fees incurred by plaintiffs. Thus, defendants' failure to pay interest on the fees cannot establish a genuine issue of material fact with respect to the breach of contract claim. Unless plaintiffs can show that they are entitled to damages for breach of contract based upon defendants' violation of a policy provision, section 3287(a) does not apply.
Furthermore, although plaintiffs assert that "there is no dispute as to amount or liability concerning plaintiffs' attorneys' fees incurred between June 26, 2001 and August 31, 2001," defendants have already paid these fees. Thus, the fees do not constitute damages, or "damages certain," subject to interest assessment under section 3287(a). For the above reasons, plaintiffs have failed to show that defendants' failure to pay interest on the attorney fees incurred from June 26 to August 31, 2001 creates a genuine issue of material fact with respect to plaintiffs' breach of contract claim.
B. Plaintiffs' Costs Incurred prior to June 26, 2001
Plaintiffs next argue that defendants are not entitled to summary judgment on the breach of contract claim because plaintiffs are entitled to (1) "non-voluntary costs" incurred by plaintiffs in fulfilling their contractual duties under the policy and (2) damages for defendants' alleged breach of their duty to investigate plaintiffs' claim. Plaintiffs allegedly incurred these costs prior to forwarding the association's cross-complaint to defendants on June 26, 2001.
1. Non-Voluntary Costs
Plaintiffs contend that defendants breached the contract because the contract required plaintiffs to promptly notify defendants of any "occurrence" to which the policy may apply, yet defendants failed to reimburse plaintiffs for the expenses incurred in fulfilling these duties. Plaintiffs further contend that they are entitled to reimbursement for expenses incurred in gathering information and documents relating to plaintiffs' tender, which defendants requested plaintiffs to assemble. (See Tremblay Decl. ¶ 8.)
Although plaintiffs contend that they are entitled to reimbursement for the above costs, plaintiffs point to no contractual provision or representation from defendants providing that plaintiffs would be compensated for such expenses. Plaintiffs also do not specify what costs they incurred at defendants' request. Nor do plaintiffs identify any costs incurred in notifying defendants of their claim. Even assuming that plaintiffs incurred costs in "compliance with contractual obligations," plaintiffs' argument that these costs resulted from "non-voluntary" acts fails to establish a genuine issue of fact with respect to their breach of contract claim. The only case plaintiffs cite in support of their "non-voluntary costs" argument is Pacific Telephone v. PG E, 170 Cal.App.2d 387, 392 (Cal.Ct.App. 1959). However, Pacific Telephone did not involve an insurer's reimbursement of pre-tender costs. Rather, Pacific Telephone involved the issue of whether Pacific Telephone made a "voluntary" payment or paid the amount pursuant to a contract of indemnity. See id.
The issue of voluntary payments in the context of insurance contracts involves an insurer's ability to gain control over the defense and settlement of a claim upon accepting a defense tendered by the insured. To this end, insurance contracts may include a "no voluntary payments" provision to ensure that an insured does not incur costs without the insurer's permission. However, an insurance contract's inclusion of a "no voluntary payments" provision "d[oes] not preclude insureds, as a matter of law, from recovering pre-tender defense costs." See Faust v. The Travelers, 55 F.3d 471, 473 (9th Cir. 1995). Whether pre-tender payments are recoverable by an insured as "involuntary payments" depends upon whether the payments were "out of the insured's control." See Tradewinds Escrow, Inc. v. Truck Ins. Exch., 118 Cal.Rptr. 561, 566 (Cal.Ct.App. 2002). California courts have stated that "[t]his situation might occur where the insured is unaware of the identity of the insurer or the contents of the policy," id., or where the insured is "faced with a situation requiring immediate response to protect its legal interests." See Jamestown Builders, Inc. v. Gen. Star Indem. Co., 77 Cal.App.4th 341, 348 (Cal.Ct.App. 1999). Where the facts are undisputed, voluntariness may be decided as a matter of law. See id.
In this case, plaintiffs have failed to show that the contract provided for reimbursement of the cost of notifying defendants of a potential claim. Nor have plaintiffs shown that they incurred pre-tender costs that were out of their control in a manner recognized by California courts. Plaintiffs did not forward the cross-complaint to defendants until three months after its filing. In Faust, the Ninth Circuit found that no genuine issue of material fact existed and the insurer was entitled to judgment as a matter of law as to the voluntariness of pre-tender costs where the insured did not tender defense of a suit against the insured for more than four months after its filing. See Faust, 55 F.3d at 473. Similarly, in this case, plaintiffs have failed to establish a genuine issue of material fact with respect to the above pre-tender costs given the absence of a contract provision obligating reimbursement and plaintiffs' failure to forward the cross-complaint immediately after its filing.
2. Defendants' Failure to Investigate Plaintiffs' Claim
Plaintiffs next contend that summary judgment of their breach of contract claim is inappropriate because a genuine issue of material fact exists with respect to whether defendants breached their duty to promptly investigate claims submitted by their insured. (See Pls.' Mem. P. A. at 6-7 (citing Cal. Ins. Code § 790.03(h); 10 Cal. Code Regs. § 2695.5).) Plaintiffs emphasize that California Insurance Code § 790.03(h) requires insurers to "adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies." See Cal. Ins. Code § 790.03(h). Plaintiffs contend that defendants failed to promptly investigate their claim after receiving plaintiffs' letter of December 15, 2000 in which plaintiffs informed defendants that their homeowners' association "threaten[ed] litigation" to force plaintiffs to remove their property improvements from the association's common property. (See Pls.' Ex. A.)
Plaintiffs are correct in that California Insurance Code § 790.03 (h) obligates insurers to promptly investigate claims by their insured. However, the California Supreme Court recently stated that "while insurers are subject to administrative sanctions for violating statutory prohibitions against unfair and deceptive claims settlement practices (See Ins. Code, §§ 790.03, subd. (h), 790.035, 790.05, 790.07, 790.09), statutory violations do not give rise to a private right of action for tort damages." Cates Constr., Inc. v. Talbot Partners, 21 Cal.4th 28, 50-51 (Cal. 1999). Furthermore, defendants' alleged breach of its duty to investigate relates to plaintiffs' claim for breach of the implied covenant of good faith and fair dealing rather than its breach of contract claim. See Frommoethelydo v. Fire Ins. Exch., 42 Cal.3d 208, 220 (Cal. 1988). Significantly, defendants only seek summary judgment of plaintiffs' breach of contract claim, not plaintiffs' claim for breach of the implied covenant of good faith and fair dealing. Thus, disputed facts going to the bad faith issue are not relevant in the instant motion.
Finally, plaintiffs do not specify any portion of the contract that obligates defendants to investigate claims. Rather, the policies indicate that defendants "may investigate or settle any claim . . . for covered damages" and "may investigate and settle any claim . . . as [they] consider appropriate." (See Defs.' Ex. 1 at 00234, Ex. 2 at 00270 (emphasis added).) California courts distinguish between "claims" and "lawsuits," noting that "[w]hen no complaint has been filed, there is no `suit' the insurer has a duty to defend." Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal.4th 857, 869 (Cal. 1998). Furthermore, "the insurer's obligation to defend and investigate is not triggered until plaintiff tenders the defense of a third party lawsuit to the insurer." Icasiano v. Allstate Ins. Co., 103 F. Supp.2d 1187, 1191 (N.D. Cal. 2000). In the instant case, no lawsuit was filed against plaintiffs until their homeowners' association filed its cross-complaint on April 2, 2001. Plaintiffs did not inform defendants that a suit had been filed against them until June 26, 2001. Thus, plaintiffs did not tender defense of the lawsuit until June 26, 2001, and defendants' duty to defend did not arise until this date. Plaintiffs cannot show a genuine issue of material fact with respect to their breach of contract claim by contending that defendants failed to investigate prior to June 26, 2001.
C. Plaintiffs' Ongoing Costs
Plaintiffs contend that defendants are in breach of the contract because defendants refuse to reimburse plaintiffs for their ongoing costs in (1) the prosecution of their action against the homeowners' association to quiet title and (2) the prosecution of this action. Thus, plaintiffs argue that summary judgment of their breach of contract claim is inappropriate.
1. Costs of Prosecuting Plaintiffs' Action to Quiet Title
Plaintiffs' position is that defendants owe plaintiffs a duty to litigate plaintiffs' action to quiet title because the duty to defend "is not just to provide a defense, but to provide a proper defense." (See Pls.' Opp'n at 8.) Plaintiffs further contend that "[a]ny proper defense in an action for negligent trespass will necessarily include litigating the issue of whom the disputed property actually belongs to." (See id.) For these reasons, plaintiffs argue that defendants are in breach of their contractual duty to defend by failing to cover the costs of litigating plaintiffs' quiet title action against their homeowners' association. In support of their argument, plaintiffs cite to Travelers Ins. Co. v. Lesher, 187 Cal.App.3d 169, 191 (Cal.Ct.App. 1987) and Spindle v. Chubb/Pacific Indem. Group, 89 Cal.App.3d 706, 712 (Cal.Ct.App. 1979).
The cases cited by plaintiffs, however, do not stand for the proposition that an insurer's duty to defend encompasses a duty to file a complaint or cross-complaint or otherwise seek affirmative relief on behalf of its insured. Spindle merely states that "[n]ormally one of the principal benefits to an insured, as here, is the provision of a proper defense by the insurer to an action brought against the insured within the coverage of the policy." 89 Cal.App.3d at 712 (emphasis added). In Travelers Ins., a California appellate court stated that "[o]ther duties and obligations may attach if `necessary to assure the provision to [insured] of a proper defense by the insurer.'" 187 Cal.App.3d at 191. The Travelers Ins. Court did not conclude that pursuing affirmative relief on behalf of an insured is included within these "other duties and obligations." Rather, the Travelers Ins. court stated that an insurer may have "other duties and obligations" to refute the suggestion that "the insurer s only duty to its insured is to hire competent defense counsel." Id. (emphasis added). Thus, the cases cited by plaintiffs do not establish that an insurer's duty to defend extends to actions brought by the insured.
To the contrary, California law provides that an insurer has no duty to file a complaint on an insured's behalf where "nothing in the policy provisions imposes upon the insurer the duty to prosecute claims of the insured against third parties." James 3 Corp. v. Truck Ins. Exch., 91 Cal.App.4th 1093, 1104 (Cal. 2001) (citing Barney v. Aetna Cas. Sur, Co., 185 Cal.App.3d 966, 975 (Cal.Ct.App. 1986)). Where "there is nothing in the policy that contractually obligates [the insurer] to fund and prosecute an insured's affirmative relief counterclaims or cross-complaints," the insurer is under no duty to do so. Id.
Plaintiffs do not point to any contractual provision obligating defendants to pursue an action on plaintiffs' behalf to quiet title to the property in dispute in the underlying action. Absent such a provision, defendants are not contractually obligated to pursue affirmative relief on plaintiffs' behalf. Thus, defendants' ongoing refusal to cover plaintiffs' expenses in pursuing their action against the homeowners' association does not preclude the Court from granting summary judgment for defendants on plaintiffs' breach of contract claim.
2. Attorney Fees for the Instant Action
Plaintiffs' final argument in opposition of defendants' motion is that defendants are in breach of the contract because they have not reimbursed plaintiffs for their attorney fees incurred in pursuing this action. Plaintiffs emphasize that defendants did not pay the "undisputed amount" of attorney fees owed to plaintiffs for defense of the cross-complaint from June 26 through August 31 until after plaintiffs commenced the instant action. Plaintiffs contend that defendants violated the duty of good faith and fair dealing implied in the parties' contract by this delay, thereby entitling plaintiffs to reasonable attorney fees expended in the instant action to recover those benefits under Brandt v. Superior Court, 37 Cal.3d 813 (Cal. 1985). (See Pls.' Opp'n at 9.)
In Brandt v. Superior Court, the California Supreme Court held that an insured may recover attorney fees incurred in seeking benefits due under a policy in a tort action for breach of the implied covenant of good faith and fair dealing. 37 Cal.3d at 817 ("When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense."). Similarly, in the other case cited by plaintiffs, Foley v. Interactive Data Corp., 47 Cal.3d 654, 684 (Cal. 1988), the California Supreme Court discussed the scope of remedies available in an action for tort where an insurer unreasonably and in bad faith withholds payment of a claim to its insured. Thus, although defendants' failure to pay plaintiffs' attorney fees incurred between June 26 and August 31, 2001 might create a genuine issue of material fact with respect to plaintiffs' second cause of action for breach of the covenant of good faith and fair dealing, defendants have only moved for summary judgment of plaintiffs' breach of contract claim. Consequently, the fact that plaintiffs have incurred attorney fees in the instant action is irrelevant to plaintiffs' breach of contract claim.
CONCLUSION
For the reasons stated above, the Court finds that plaintiffs have failed to raise a genuine issue of material fact with respect to their breach of contract claim. Defendants have paid for the defense of the cross-complaint against plaintiffs from the date plaintiffs tendered the cross-complaint in accordance with the terms of the insurance policies. Thus, as a matter of law, plaintiff are not entitled to recover the costs described above in their breach of contract claim.
Consequently, the Court GRANTS defendants' motion for partial summary judgment. The Court ORDERS the Clerk of Court to enter judgment for defendants on plaintiffs' breach of contract claim.
IS SO ORDERED