Opinion
No. CV-F-05-0736 REC LJO, (Docs. 30 41).
May 16, 2006
ORDER GRANTING SFPUD'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING CLARENDON'S MOTION FOR SUMMARY JUDGMENT.
On Monday, May 8, 2006, the Court heard Sierra Foothills Public Utility District's ("SFPUD") Motion for Partial Summary Judgment as to the Issue of Clarendon's Duty to Defend and Clarendon America Insurance Company's ("Clarendon") Motion for Summary Judgment. Upon due consideration of the written and oral arguments of the parties and the record, the Court GRANTS SFPUD's motion and DENIES Clarendon's motion, as set forth herein.
I. Factual Background
A. The Underlying Lawsuit
On April 17, 2003, David E. Englert filed a lawsuit against SFPUD in Madera County Superior Court, Case No. MCV 020596. The complaint in that action (the "Underlying Complaint") contained two causes of action: for Breach of Contract and for Wrongful Termination in Violation of Public Policy. The allegations in the Underlying Complaint are as follows.
SFPUD employed Mr. Englert as its General Manager, for which Mr. Englert received salary and benefits. SFPUD led Mr. Englert to believe that he would not be terminated except for good cause. On or about October 17, 2002, SFPUD terminated Mr. Englert without good cause and ceased paying his wages and benefits.
Mr. Englert further alleged that over the two years prior to his termination, SFPUD had paid money to Steve Varner and Dennes Coombs. Mr. Varner and Mr. Coombs did not perform any services or provide SFPUD any benefits in exchange for those payments. Mr. Englert determined that the payments jeopardized the financial stability of SFPUD. Consequently, he refused to sign any more checks payable to Mr. Varner or Mr. Coombs. He also withheld support for Mr. Varner's and Mr. Coombs's attempts to control the disbursement of SFPUD funds to its board and to control personnel decisions affecting the operation of Riverbend Golf Course, which SFPUD operated.
Riverbend Operations, Inc. ("ROI"), of which Mr. Englert was president, managed SFPUD's facilities. Mr. Varner was an authorized signatory on a checking account ROI maintained at United Security Bank. After Mr. Englert refused to authorize the payments, Mr. Varner directed SFPUD or ROI staff to fill out checks payable to himself, which he proceeded to cash.
Mr. Varner and Mr. Coombs sought to punish Mr. Englert for his attempts to stop the payments. SFPUD, by and through its Chairman, Terry Holmes, initiated a campaign of harassment and unwarranted criticism against Mr. Englert.
In October of 2002, Mr. Englert provided written notice to United Security Bank indicating that Mr. Varner was not authorized to withdraw funds or sign ROI checks. Immediately thereafter, SFPUD terminated Mr. Englert.
Mr. Englert alleges several instances of misconduct by SFPUD after his termination. SFPUD falsely accused Mr. Englert of financial improprieties with public funds, publicly disclosed privileged employment matters, refused to return Mr. Englert's personal property, attempted to have Mr. Englert arrested, and circulated false rumors that Mr. Englert would soon be arrested and that he was dishonest.
On or about March 19, 2004, Mr. Englert won a judgment of $1,765,943 in the underlying action. SFPUD appealed the judgment. At the time of these motions, the appeal was still pending.
B. The Policy
SFPUD is the named insured under Public Officials Liability Coverage Policy Number HX00001199 (the "Policy") issued by Clarendon. The Policy was effective from December 28, 2001, to December 28, 2003. Section I.1 of the Policy provides coverage, in relevant part, as follows:
We Agree:
. . .
B. With the "Governmental Entity" that if, during the "policy period," any "claim" or "claims" are first made against the "Insured," individually or collectively for a "wrongful act," we will pay in accordance with the terms of this policy, and on behalf of the "Governmental Entity," all "loss" which the "Governmental Entity" shall become legally obligated to pay or for which the "Governmental Entity" may be required by law to indemnify the "Insured";. . . .
Sommer Decl. Ex. A (emphasis in original).
Terms that the Policy defines in Section VII appear in boldface throughout the Policy. The Court, in all quotations from the Policy, has attempted to reproduce the original emphasis.
The Policy, in Section VII.5, defines "Insureds" as
those persons acting within the scope of their official duties who were, now are or shall be lawfully elected or lawfully appointed officials or members or employees or volunteers of the "Governmental Entity" or members of commissions, boards, or other unites operated by and under the jurisdiction of such "Governmental Entity" and within apportionment of the total operating budget indicated in the application form,. . . .Id.
The Policy, at Section VII.10, defines "wrongful act" as
any actual or alleged error or misstatement or act or omission or neglect or breach of duty including misfeasance, malfeasance, and nonfeasance by the "Insured" in the discharge of their "official duties" with the "Governmental Entity," individually or collectively, or any matter claimed against them solely by reason of their being or having been duly elected or appointed officials.Id.
The Policy, in Section I.2, also excludes from coverage "ANY `CLAIM' OR `CLAIMS' BASED UPON OR ATTRIBUTABLE TO:"
B. . . .
(3) wrongful entry or eviction or other invasion of the right of privacy;
. . .
O. any `wrongful act' . . . which shall be deemed uninsurable under the law pursuant to which this policy shall be construed;
. . .
V. . . . claims by any `Insured' against the `Government Entity.Id.
C. The Tender
On or about June 3, 2003, SFPUD tendered the underlying action to Clarendon for defense and indemnification. The materials SFPUD tendered on that date include the Underlying Complaint; the Management Agreement between SFPUD and ROI; minutes from a Special Board Meeting of SFPUD on October 11, 2002; notice to Mr. Englert that SFPUD was terminating ROI's management services, dated October 11, 2002; minutes from SFPUD's Special Board Meeting held October 17, 2002; and SFPUD Board of Directors Resolution 2002-02. See Enns Decl. Ex. 1. Clarendon declined defense of SFPUD by letter of June 11, 2003. See Enns Decl. Ex. 2.
On April 5, 2004, after the judgment had been entered in the underlying action, SFPUD again tendered the defense, which Clarendon denied in a letter of April 12, 2004. On May 12, 2004, October 11, 2004, and January 31, 2005, SFPUD sent Clarendon further communications arguing that it had a duty to defend the underlying action. Clarendon at no point accepted defense of the action.
II. Procedural History
On May 5, 2005, SFPUD filed a Complaint in the Fresno County Superior Court for Breach of Contract, Breach of the Covenant of Good Faith and Fair Dealing, Fraud, and Declaratory Relief. On June 7, 2005, Clarendon removed the case to this Court.
On March 17, 2006, Clarendon filed its Motion for Summary Judgment. Clarendon contends that it did not have a duty to defend the underlying action. Consequently, Clarendon argues, SFPUD's claims for Breach of Contract, Bad Faith, and Fraud also fail as a matter of law. On March 27, 2006, SFPUD filed is Motion for Partial Summary Judgment as to the Issue of Clarendon's Duty to Defend.
III. Legal Standard
Summary judgment is proper when it is shown that there exists "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. A fact is "material" if it is relevant to an element of a claim or a defense, the existence of which may affect the outcome of the suit. T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986)). Materiality is determined by the substantive law governing a claim or a defense. Id. The evidence and all inferences drawn from it must be construed in the light most favorable to the nonmoving party. Id.
The initial burden in a motion for summary judgment is on the moving party. The moving party satisfies this initial burden by identifying the parts of the materials on file it believes demonstrate an "absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The burden then shifts to the nonmoving party to defeat summary judgment. T.W. Elec., 809 F.2d at 630. Where a court decides cross motions for summary judgment, neither party is entitled to summary judgment if a genuine issue exists as to any material fact. United States v. Fred A. Arnold, Inc., 573 F.2d 605, 606 (9th Cir. 1978) (citing Fed.R.Civ.P. 56(c)).
The nonmoving party "may not rely on the mere allegations in the pleadings in order to preclude summary judgment," but must set forth by affidavit or other appropriate evidence "specific facts showing there is a genuine issue for trial." Id. (citing Fed.R.Civ.P. 56(e)). The nonmoving party may not simply state that it will discredit the moving party's evidence at trial; it must produce at least some "significant probative evidence tending to support the complaint." Id. (citing First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 290, 88 S. Ct. 1575, 20 L. Ed. 2d 569 (1968)).
IV. SFPUD's Motion for Summary Judgment
A. An Insurer's Duty to Defend
A liability insurer has a broad duty to defend the insured against claims that create a potential for indemnity. Montrose Chem. Corp. v. Super. Ct., 6 Cal. 4th 287, 295 (1993). This means that "the carrier must defend a suit which potentially seeks damages within the coverage of the policy." Id. (quotingHorace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081 (1993)). Hence, the duty to defend is broader than the duty to indemnify, sometimes requiring that an insurer defend the insured even in an action in which no damages are awarded. Id. (citingHorace Mann, 4 Cal. 4th at 1081).
The first step to determine whether the insurer has a duty to defend is to compare the allegations of the complaint with the terms of the policy. Id. (citing Horace Mann, 4 Cal. 4th at 1081). Facts outside the complaint may also be relevant where they reveal that a possibility exists that the claim may be covered by the policy. Id. (citing Horace Mann, 4 Cal. 4th at 1081). These facts outside the complaint can trigger a duty to defend "even though the face of the complaint does not reflect a potential for liability under the policy." Id. at 296 (citingGray v. Zurich Ins. Co., 65 Cal. 2d 263, 276 (1966)). This is because, in light of pleading rules allowing liberal amendment, the third party plaintiff should not be the arbiter of coverage. Id. (citing Gray, 65 Cal. 2d at 276). "The scope of the duty [to defend] does not depend on the labels given to the causes of action in the third party complaint; instead it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy." Cunningham v. Universal Underwriters, 98 Cal. App. 4th 1141, 1148 (2002). The insured is entitled to a defense if facts in the complaint and in other materials tendered to the insurer indicate that "the complaint might be amended to give rise to a liability that would be covered under the policy." Montrose, 6 Cal. 4th at 299 (citing Gray, 65 Cal. 2d at 275-76).
California courts resolve in the insured's favor any doubts as to whether the facts establish the insurer's duty to defend.Id. at 299-300. "[T]he insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage." Id. at 300 (quoting Gray, 65 Cal.2d at 276 n. 15) (Montrose`s emphasis). This means that, to prevail, "the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot." Id. (Montrose`s emphasis) Facts that merely tend to show that the claim is not covered, or is unlikely to be covered, do not eliminate the possibility that the action will fall within a policy's coverage and "therefore add no weight to the scales." Id. On the other hand, the duty to defend "may exist even where coverage is in doubt and ultimately does not develop." Id. at 295.
To prevail in demonstrating that it does not have a duty to defend, Clarendon must present "evidence that the underlying claim cannot come within the policy coverage by virtue of the scope of the insuring clause or the breadth of an exclusion."Id. at 301. The duty to defend also extends to claims that are not covered, so long as any claim discloses the potential for liability under the policy. Rosen v. Nations Title Ins. Co., 56 Cal. App. 4th 1489, 1496-97 (1997).
B. Interpreting Insurance Contracts
California courts construe insurance contracts, like contracts generally, to give effect to the mutual intentions of the parties. Boghos v. Certain Underwriters at Lloyds of London, 36 Cal. 4th 495, 501 (2005). Contractual language governs where it is "clear and explicit." Id. (quoting Bank of the W. v. Super. Ct., 2 Cal. 4th 1254, 1264 (1992)). Ambiguous terms are interpreted to protect the "`objectively reasonable expectations of the insured.'" Bank of the W., 2 Cal. 4th at 1265 (quotingAIU Ins. Co. v. Super. Ct., 51 Cal. 3d 807, 822 (1990)).
Insurance policies are written in two parts: "an insuring agreement which defines the type of risks being covered, and exclusions, which remove coverage for certain risks which are initially within the insuring clause." Rosen, 56 Cal. App. 4th at 1497. A court first construes coverage provision to determine whether they extend to the claim at issue. Id. If a claim falls within the coverage provisions but also within an exclusion, the policy does not cover the claim. Id.
C. Potential Coverage Based on Conversion
SFPUD claims that the Underlying Complaint and the materials it tendered on June 3, 2003, contain facts that present potential for covered liability for conversion:
Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion are the plaintiff's ownership or right to possession of the property at the time of the conversion; the defendant's conversion by a wrongful act or disposition of property rights; and damages. It is not necessary that there be a manual taking of the property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use.Farmers Ins. Exch. v. Zerin, 53 Cal. App. 4th 445, 451-52 (1997). A person who refuses to return the property of another or who prevents another from retrieving his property can be liable for conversion. Gruber v. Pac. States Sav. Loan Co., 13 Cal. 2d 144, 147 (1939) (holding that landlord was liable for conversion where it refused to allow tenant access to his personal property); see also Price v. Hovsepian, 114 Cal. App. 2d 385, 388 (1952) (defendant who locked plaintiffs out of an apartment containing their property could be liable for conversion).
The Underlying Complaint alleges that "[f]ollowing [Mr. Englert]'s termination, SFPUD . . . refused to return Plaintiff's personal property,. . . ." Clarendon's Request for Judicial Notice ("RJN") Ex. 1 at 5. This allegation appears under the heading "Second Cause of Action for Wrongful Termination in Violation of Public Policy." Clarendon's RJN Ex. 1 at 4-5. The language appears to state a claim for conversion under California law. It indicates that the property in question belonged to Mr. Englert and that SFPUD denied him access to it in retaliation for the manner in which he performed his duties as General Manager.
1. Coverage of Claims Where SFPUD is Sole Defendant
Clarendon contends that Mr. Englert's claims against SFPUD are not potentially covered by the Policy because they are not claims against an "Insured." Section I.1 of the Policy provides coverage for "any `claim' or `claims' are first made against the `Insured,' individually or collectively for a `wrongful act.'" Sommer Decl. Ex. A. In such a case, Clarendon promises to "pay in accordance with the terms of this policy, and on behalf of the `Governmental Entity,' all `loss' which the `Governmental Entity' shall become legally obligated to pay or for which the `Governmental Entity' may be required by law to indemnify the `Insured.'" Id. Under Section VII.5, "Insureds" are "those persons acting within the scope of their official duties who were, now are or shall be lawfully elected or lawfully appointed officials or members or employees or volunteers of the `Governmental Entity'. . . ." Id.
Clarendon argues that the Underlying Complaint cannot trigger coverage under the Policy because only SFPUD was named a defendant, but not any of its officials, members, employees, or volunteers (collectively "Insureds"). In support, Clarendon citesOlympic Club v. Those Interested Underwriters at Lloyd's London (Olympic Club), 991 F.2d 497, 502-04 (9th Cir. 1993). That case involved interpretation of a Director's and Officer's Liability Policy that required the insurer to pay all "loss" arising from claims based on the policyholder entity's directors' and officers' "wrongful acts." Id. at 499. The court held that coverage would turn on "whether the underlying lawsuits are against the [entity] for the [entity]'s own policies, or are against the [entity] because of `wrongful acts' of its directors and employees that are `imputed to [the entity] as their principal.'" Id. at 500. The court determined that the underlying claims sought relief solely based on longstanding policies of the entity. Id. The underlying claims did not allege that the directors and employees themselves had committed any "wrongful acts." Id.
Even if the Policy here functions similarly to that in Olympic Club, coverage does not properly turn on whether any Insured is named as a defendant in the Underlying Complaint, as Clarendon contends. The Olympic Club court looked past the absence of a named officer defendant to determine whether the underlying lawsuits alleged the requisite "wrongful act" under the Policy.Id. Similarly here, an analysis of the wrongful acts and the actors alleged to have committed them is necessary.
Clarendon's reading of the Policy appears to interpret the phrase "any `claim' or `claims' are first made against the `Insured'" to refer only to causes of action naming an Insured as defendant. See Sommer Decl. Ex. A. This reading, however, is doubtful in light of the Policy's definition of "claim": " `Claim' means a demand for `damages' received by the `Governmental Entity' or the `Insured' including the service of `suit' or institution of arbitration proceedings against the `Governmental Entity' or the `Insured.'" Id. (italics added). Inserting the relevant portions of this definition of "claim" into the coverage language reads as follows: "any [demand for `damages' received by the `Governmental Entity' or the `Insured' including the service of `suit' is] first made against the `Insured.'" The clause concerning the "demand for `damages' received by the `Governmental Entity'" has no meaning if the "first made against the `Insured'" restricts coverage to lawsuits naming an Insured as defendant.
Clarendon's reading also causes the Court to wonder what effect remains for the language in Section I.1 indicating that Clarendon will pay according to the terms of the Policy "all `loss' which the `Governmental Entity' shall become legally obligated to pay." Id. Furthermore, as defined in Section VII.6 of the Policy, "loss" includes "any amount which the `Governmental Entity' or the `Insured' is legally obligated to pay as `damages,'. . . ." Sommer Decl. Ex. A. It does not appear that SFPUD could have a legal obligation to pay "damages," a term defined in Section VII.3 as "compensatory money damages only," on a claim brought against one of its Insureds. See id.
Moreover, Exclusion V contains language that specifically excludes coverage for "claims by any `Insured' against the `Government Entity.'" Id. Such an exclusion would be unnecessary if only claims naming Insured as defendant fall within the definition of coverage and those brought against the "Government Entity" fall outside.
At oral argument, Clarendon contended that these provisions referring to SFPUD's own liability have meaning because they refer to coverage of SFPUD for suits by Insureds against SFPUD seeking indemnity. Clarendon contended that, for instance, the definition of "loss" included the language "any amount which the `Governmental Entity' . . . is legally obligated to pay as `damages'" to indicate that indemnity actions against SFPUD are covered. The passage, however, refers to amounts that SFPUD is "legally obligated to pay" separately from amounts it must pay to indemnify Insureds: " `Loss' shall mean any amount which the `Governmental Entity' or the `Insured' is legally obligated to pay as `damages,' or for which the `Governmental Entity' is required to indemnify the `Insured,'. . . ." Sommer Decl. Ex. A (italics added). If both clauses are to retain meaning, the Policy must be read cover amounts that SFPUD is legally obligated to pay other than amounts it is required to pay to indemnify an Insured. See Cal. Civ. Code § 1641 ("The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.").
A more plausible reading of Section I.1 requires an inquiry, similar the analysis in the Olympic Club case Clarendon cites, into whether the underlying action seeks to recover based on a "wrongful act" of one of SFPUD's Insureds. Clarendon does not explain why a claim cannot be "against" someone for his wrongful act unless he is a defendant in the lawsuit that arises therefrom. Rather, it seems logically possible to classify a lawsuit naming a public entity as a defendant and alleging misconduct by an officer of that entity to be a claim against the officer. Given the dissonance between Clarendon's reading and the other language of the Policy, accepting the latter explanation is better than foreclosing it. Under such a reading, defining whether a claim is "first made against the `Insured' . . . for a `wrongful act'" turns on whom plaintiff alleges to have committed the wrongful act, rather than on which name appears in the caption or the heading of the cause of action.
In Toledo-Lucas County Port Authority v. Axa Marine Aviation Insurance (UK), Ltd., 368 F.3d 524 (6th Cir. 2004), the court interpreted a Public Officials Liability policy that covered claims for certain types of misconduct "by an officer and/or commissioner and/or employee and/or committee member in the discharge of his/her duties as such and claimed against him/her solely by reason of his/her capacity as such with a port or harbor commission named herein." Id. at 527 (emphasis added). The court read that language to require the insurer to defend and indemnify claims against the insured public entity based on its employees' acts. Id. at 533. The court described the general nature of public officials liability policies, like the one at issue in this case: "Public Officials Liability coverage, accordingly, does not necessarily require a claim or demand to be made against an individual employee; a claim or demand against the [entity] for damages on account of an individual employee's wrongdoing solely in his or her capacity as [the entity's] employee will suffice." Id.; see also City of Flint v. Lexington Ins. Co., 293 F.3d 956, 958 (6th Cir. 2002) ("Public Officials and Employees Liability Insurance Policy" covered suit against insured entity only).
Had the parties intended to restrict coverage to suits in which officials, members, employees, or volunteers were defendants, they could have done so with direct explicit language to that effect. Toledo-Lucas, 368 F.3d at 531. Instead, they included language that explicitly contemplated coverage for claims made in lawsuits filed against SFPUD. The Court finds that the phrase limiting coverage to "any `claim' or `claims' are first made against the `Insured'" does not preclude coverage of causes of action in which only SFPUD is a defendant.
2. Wrongful Act of an Insured
Coverage under the Policy turns, not on whom the Underlying Complaint names as defendant, but instead on whether the conduct alleged constitutes a wrongful act by an Insured — an officer, member, employee, or volunteer of SFPUD. See Olympic Club, 991 F.2d at 500. Under Section VII.10 of the Policy, a "wrongful act" is
any actual or alleged error or misstatement or act or omission or neglect or breach of duty including misfeasance, malfeasance, and nonfeasance by the "Insured" in the discharge of their "official duties" with the "Governmental Entity," individually or collectively, or any matter claimed against them solely by reason of their being or having been duly elected or appointed officials.
Sommer Decl. Ex. A.
Clarendon does not address whether any of SFPUD's Insureds engaged in the conduct giving rise to the allegations of conversion in the Underlying Complaint. The Underlying Complaint states that "SFPUD, by and through its Chairman Terry Holmes, initiated a campaign of harassment and unwarranted criticism against Plaintiff in the performance of his duties as General Manager." Clarendon's RJN Ex. 1 at 4. The next paragraph contains the facts supporting a claim for conversion: "[f]ollowing [Mr. Englert]'s termination, SFPUD . . . refused to return Plaintiff's personal property,. . . ." Clarendon's RJN Ex. 1 at 4. The actor in that paragraph is simply "SFPUD." The language does not explicitly state that this action was performed "by and through" any Insured.
Nevertheless, this language shows that there is potential that SFPUD will face covered liability in the underlying action. The language stating that Chairman Terry Holmes, an officer of SFPUD, had initiated the harassment campaign indicates that Mr. Englert is likely contending that SFPUD was acting through Mr. Holmes when it refused to return the property. Even if the allegation is not that Mr. Holmes refused to return the property, the allegation, if true, tends to show, and may even logically necessitate, that an Insured committed a wrongful act. In any event, Clarendon must prove that, based on the information tendered, conduct on which the Underlying Complaint is based cannot possibly give rise to covered liability. The Underlying Complaint raises the possibility that an Insured, and not simply SFPUD, committed a wrongful act giving rise to the tort of conversion.
3. Failure to "Advise" or Request Reconsideration
Clarendon further contends that SFPUD "never advised" Clarendon that a claim for conversion triggered its duty to defend and did not "seek reconsideration" of Clarendon's denial on this basis. Clarendon's Opp'n 35:12-18. SFPUD's role in determining whether a potential coverage triggers a duty to defend ends when it submits materials demonstrating a potential for coverage. See Montrose, 6 Cal. 4th at 295-96. Any failure of SFPUD to guide Clarendon in Clarendon's interpretation of those materials does not impair SFPUD's right to a defense in the case that the tendered materials demonstrate a potential for covered liability.
The insurer determines at the inception of the third party lawsuit whether the duty to defend exists "by reference to the policy, the complaint and all facts known to the insurer from any source." Safeco Ins. Co. of Am. v. Parks (Parks), 122 Cal. App. 4th 779, 791 (2004) (quoting Gray, 65 Cal. 2d at 300) (emphasis in original). "The risk that an insurer takes when it denies coverage without investigation is that the insured may later be able to prove that a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage." Am. Int'l. Bank v. Fid. Deposit Co., 49 Cal. App. 4th 1558, 1571 (1996). The only duty that California courts place on the insured is to tender to the insurer the complaint and any extrinsic facts that show a potential for coverage. Montrose, 6 Cal. 4th at 295. Doing so triggers the duty to defend until "it has been shown that there is no potential for coverage." Id. (emphasis in original).
Forcing the insurer, rather than the insured, to perform the legwork of thoroughly examining the tendered evidence, underlying complaint, and policy comports with the relative expertise of the parties and with the policy behind the duty to defend. The insurer is likely more familiar with the law concerning coverage and is undoubtedly more familiar with the terms of the policy. This puts the insurer in a better position than the insured to determine how the underlying complaint or tendered materials may trigger the potential for coverage. Moreover, requiring the insured to correctly interpret the manner in which the complaint and extrinsic evidence might trigger coverage under the policy practically necessitates that the insured retain legal counsel for this purpose. This necessity undermines the insured's "significant" motive for purchasing insurance: "the right to call upon the insurer's superior resources" to ameliorate potential legal expenses. See Montrose, 6 Cal. 4th at 295-96.
Accordingly, SFPUD's failure to advise Clarendon that Mr. Englert made a claim for conversion or to request reconsideration of Clarendon's denial on that basis does not affect Clarendon's duty to defend.
4. Duty to Defend Unpled Claims
Clarendon argues that the absence of a claim for conversion in the Underlying Complaint militates against a finding that SFPUD potentially faced covered liability for such a claim. Clarendon asserts that it is not required to speculate about claims that Mr. Englert did not plead. In support, Clarendon cites Gunderson v. Fire Insurance Exchange (Gunderson), 37 Cal. App. 4th 1106, 1114 (1995).
At issue in Gunderson was whether the insured had established a potential for covered liability under a policy covering "property damage," defined as "physical injury to or destruction of tangible property, including loss of its use." Id. at 1115. The complaint featured no claims for property damage but merely sought injunctive and declaratory relief regarding an easement.Id. The insured contended that certain extrinsic evidence, including a series of letters to insured from counsel for the underlying plaintiff and discovery requests in the underlying case, demonstrated a potential coverage. Id. None of the extrinsic evidence was ever tendered to the insurer. Id. at 1117. The court rejected the insured's argument that the underlying plaintiff might have amended her complaint to state a claim for property damage. Id.
It does not appear that the court in Gunderson intended its holding to contradict or question the well-established rule that the insurer may be required to defend in circumstances where "the complaint might be amended to give rise to a liability that would be covered under the policy." Montrose, 6 Cal. 4th at 299 (citing Gray, 65 Cal. 2d at 275-76). The court in Gunderson held that "[a]n 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." Gunderson, 37 Cal. App. 4th at 1114 (emphasis added). This admonition is consistent with the Supreme Court of California's directive in Montrose that the insurer need only consider the facts in the complaint and in any other materials the insured tenders. 6 Cal. 4th at 295-96. Nothing in Gunderson relieves the insurer of its duty to defend a lawsuit alleging facts that demonstrate a potential for liability simply based on the causes of action the complaint contains. Here, as discussed above, the Underlying Complaint contains facts that support a claim for conversion. The absence of a cause of action labeled "conversion" does not affect Clarendon's duty to defend.
5. Insured-Versus-Government-Entity Exception
Clarendon contends that no potential for coverage existed because Mr. Englert was an employee of SFPUD and, as such, his claims were excluded under Policy Section I.2.V's Insured-versus-Government-Entity exclusion ("Exclusion V").
SFPUD contends that the materials it tendered to Clarendon in the letter of June 3, 2003, establish that Mr. Englert's claims triggered a duty to defend under the Policy based on his potential status as an independent contractor.
The parties do not dispute that the Underlying Complaint indicates that Mr. Englert was "employed" by SFPUD. SFPUD's Opp'n 21:4-6; see Clarendon's RJN Ex. 1 at 3-4. Neither party contends that this language is dispositive as to whether Mr. Englert is an Insured, triggering Exclusion V. The terminology in an agreement between a worker and the party for whom the work is performed "is not conclusive" as to the nature of their relationship. See Kowalski v. Shell Oil Co., 23 Cal. 3d 168, 176 (1979). It follows that Mr. Englert's unilateral characterization of the relationship in the Underlying Complaint is not determinative of his employment status.
The parties vigorously dispute whether the materials tendered along with the Underlying Complaint on June 3, 2003, demonstrate that Exclusion V applies. SFPUD contends that the tendered materials demonstrate that a possibility exists that Mr. Englert was an independent contractor and therefore not an Insured under Exclusion V. Clarendon does not argue that Exclusion V would still apply in the case that Mr. Englert was an independent contractor under California law.
The Supreme Court of California enumerated factors to consider in determining whether an individual performing a service is an employee or an independent contractor in S.G. Borello Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). The most significant factor concerns whether that individual has the right to control the details of his work.Id. at 350. The right of the party for whom the service is performed to discharge the worker at will without cause is also strong evidence of an employment relationship. Id. Additional factors to consider include the following:
(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.Id. at 351.
Under the Management Agreement (the "Agreement"), a copy of which SFPUD tendered to Clarendon, ROI agreed with SFPUD to manage the Riverbend Golf Club. Enns Decl. Ex. 1. The Agreement, on page 45, is signed by Mr. Englert as "President" of ROI. Id. The Agreement provides, on page 7, that ROI, as Operator, with the approval of SFPUD "shall have the authority and responsibility to . . . hire, train, and supervise the general manager. . . ." Id. The Agreement also provides, on pages 10 and 11, that ROI will submit for SFPUD's approval an "Annual Plan" including a budget that details employee compensation.Id. The "Annual Plan" also included "[a]n operating business plan for the Facility setting forth a marketing and promotions plan, a schedule of proposed golf charges, an operating schedule . . . and a maintenance plan." Id.
The facts do not foreclose the possibility that Mr. Englert was not an Insured under the Policy, but was instead an independent contractor. The Agreement indicates that ROI, of which Mr. Englert was president, has a central role in supervising the General Manager position that Mr. Englert held. ROI, not SFPUD, had primary responsibility for drafting the Annual Plan governing compensation and business operations. These details signal a significant degree of autonomy from SFPUD in the manner in which ROI and Mr. Englert carried out management duties.
The other materials that SFPUD originally tendered are not as descriptive as the Agreement, but do tend to show that the relationship between Mr. Englert and SFPUD paralleled the relationship of ROI and SFPUD. The minutes of the SFPUD Special Board Meeting on October 11, 2002, list as a single "Consideration/action," SFPUD's "Termination of Riverbend Operations, Inc., and David E. Englert as Interim General Manager of the Sierra Foothills Public Utility District ('SFPUD')." Enns Decl. Ex. 1. The notice to Mr. Englert that SFPUD was terminating ROI's services, dated October 11, 2002, and the minutes from SFPUD's Special Board Meeting held October 17, 2002, also indicate that SFPUD viewed its relationship to Mr. Englert as closely linked to its relationship to ROI. Enns Decl. Ex. 1.
Since SFPUD prevails if it can merely "show that the underlying claim may fall within policy coverage," Clarendon faces a difficult task at this stage. See Montrose, 6 Cal. 4th at 300. Clarendon does not argue that the Underlying Complaint and the other materials initially tendered foreclose the possibility that Mr. Englert was an independent contractor. The strongest statement Clarendon makes about the materials initially tendered is that "the totality of the circumstances was that Englert was suing in his individual capacity as a former employee of SFPUD." Clarendon's Opp'n 20:17-18. Such facts that merely tend to show that SFPUD's claim is not covered, without foreclosing the possibility of coverage, have no weight in a determination of duty to defend. See Montrose, 6 Cal. 4th at 300.
Clarendon appears to place the burden on SFPUD to explicitly enunciate the reason that the claims were potentially covered. Clarendon points out that SFPUD never told Clarendon that failing to provide a defense "was improper because Englert was not an employee of SFPUD." Clarendon's Opp'n 20:28-21:2. Clarendon continues, "After the denial letter was sent, moreover, SFPUD never requested reconsideration by CLARENDON informing CLARENDON that the documents it provided in any way demonstrated Englert was not its former employee as General Manager." Clarendon's Opp'n 21:2-5.
It appears that Clarendon would have the Court deny SFPUD its defense, despite tendering facts that demonstrate the possibility that Mr. Englert's claims fell outside Exclusion V. Clarendon does not cite, nor is the Court aware of, any authority that requires an insured to assist the insurer in applying the extrinsic evidence to the policy to determine whether coverage is possible. Such a burden on the insured would be inconsistent with the duty of an insurer to compare the claims in the complaint and any other facts before it with the terms of the policy to determine whether coverage is appropriate. See Gray, 65 Cal. 2d at 276; Montrose, 6 Cal. 4th at 300. The Court therefore finds it irrelevant that SFPUD did not assert that Mr. Englert was an independent contractor rather than an employee at the time of the initial tender or following Clarendon's denial of the defense.
Clarendon argues that this case is analogous to Parks, where a California Court of Appeal found that the evidence tendered to the insurer did not trigger a duty to defend. 122 Cal. App. 4th at 791. In that case, potential coverage, and consequently the duty to defend, turned on whether the underlying defendant was an insured by virtue of being a member of the policyholder's household. Id. at 784. No evidence was available to the insurer indicating that the underlying defendant was a member of the household. Id. at 793-94.
Instead, the policyholder, the underlying defendant, and another resident represented to the insurer and to law enforcement that the underlying defendant was not a member of the household. Id. at 792. The policyholder, the other resident, and the underlying defendant did not disclose evidence tending to show a familial relationship, such as evidence that the policyholder disciplined the underlying defendant or provided her with financial support. Id. at 793. The underlying defendant listed the policyholder's residence on her vehicle registration and some tax documents, but no one informed the insurer of those facts. Id. at 792. Because the residents and the underlying defendant presented a "united front" to the insurer in denying her status a member of the household, the undisputed facts established that the underlying defendant was not insured under the policy. Id. at 793-94. Consequently, the insurer did not have a duty to defend. Id. at 794.
The initial tender in this case is distinguishable from that inParks. In Parks, all of the evidence tendered indicated that the claims were undisputedly not covered by the policy. Id. at 794. In addition, the insured herself affirmatively asserted, both to the insurer and to law enforcement, that no facts that might trigger coverage existed. Id. at 792. Here, SFPUD merely tendered to Clarendon evidence that described Mr. Englert's claims and his relationship to SFPUD. See Enns Decl. Ex. 1. At the time of tender, SFPUD did not attempt to characterize Mr. Englert as an employee or as an independent contractor. It merely left that determination, and the determination of potential coverage, up to Clarendon.
In this case, the evidence of coverage was not one-sided as it was in Parks. Here, the determination of whether Mr. Englert was an employee and hence was an Insured appears to require a complex analysis of a variety of facts. See S.G. Borello, 48 Cal. 3d at 351. Evidence that SFPUD tendered indicated that primary responsibility for supervising Mr. Englert and determining the manner in which he carried out his duties may have fallen to ROI, a company of which Mr. Englert was president, rather than to SFPUD. These facts indicated that the most significant factor in determining independent contractor status, that is, whether an individual has the right to control the details of his work, might weigh against a decision that Mr. Englert was an employee. Id. at 350. Nevertheless, Clarendon denied SFPUD a defense on the basis that Mr. Englert was an employee. In effect, this denial amounted to Clarendon's assertion that, based on the evidence before it, Mr. Englert could not possibly be an independent contractor. The evidence SFPUD initially tendered at least signaled a possibility that Mr. Englert was an independent contractor and, as such, not subject to Exclusion V. The Court finds that, as a matter of law, Clarendon's decision that the materials tendered did not indicate a possibility that Mr. Englert was an independent contractor was incorrect. Accordingly, a claim of conversion by Mr. Englert can trigger Clarendon's duty to defend notwithstanding Exclusion V.
Because the Underlying Complaint and the other materials tendered establish that SFPUD potentially faced covered liability for conversion based on Mr. Englert's claims, the Court finds, as a matter of law, that Clarendon had a duty to defend SFPUD as of the tender of June 3, 2003.
SFPUD asserts that Clarendon's investigation of the claim was inadequate because it failed to obtain and consider in its denial certain correspondence mentioned in the Underlying Complaint or consider Mr. Englert's Internal Revenue Service Form 1099. SFPUD also contended that communications it sent after June 3, 2003, indicate that Clarendon had a duty to defend. Additionally, SFPUD claims that it potentially faced covered liability for claims based on wrongful termination and invasion of privacy. Because the Court finds that the materials SFPUD tendered on June 3, 2003, establish a potential for coverage of a claim for conversion as a matter of law, it need not consider other arguments in favor of the potential for coverage. Furthermore, because none of the evidence to which Clarendon objects bears on the Court's findings, the Court need not decide the merits of the objections.
V. Clarendon's Motion for Summary Judgment
Clarendon seeks summary adjudication that Clarendon did not have a duty to defend SFPUD against Mr. Englert's claim as of June 3, 2003. Clarendon also sought summary judgment on SFPUD's breach of contract, bad faith, and fraud claims, based on the absence of its duty to defend. SFPUD has shown that Clarendon had a duty to defend as a matter of law. Accordingly, Clarendon's motion for summary judgment is denied.
ACCORDINGLY:
1. SFPUD's Motion for Partial Summary Judgment as to the Issue of Clarendon's Duty to Defend is GRANTED.
2. Clarendon's Motion for Summary Judgment is DENIED.
IT IS SO ORDERED.