Opinion
Case No.: 3:19-cv-01218-H-LL
09-01-2020
UNDERWATER KINETICS LLP, a California Limited Liability Partnership; Alan K. Uke, an individual, Plaintiffs, v. The HANOVER AMERICAN INSURANCE COMPANY, a New Hampshire Corporation; and Does 1 through 20, Defendants.
Craig A. Miller, Law Office of Miller & Calhoun, James H. Pyle, Law Offices of James H. Pyle, La Jolla, CA, for Plaintiffs. Stephen Michael Hayes, Tyler R. Austin, Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP, San Carlos, CA, for Defendants.
Craig A. Miller, Law Office of Miller & Calhoun, James H. Pyle, Law Offices of James H. Pyle, La Jolla, CA, for Plaintiffs.
Stephen Michael Hayes, Tyler R. Austin, Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP, San Carlos, CA, for Defendants.
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AS TO PLAINTIFF ALAN K. UKE
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AS TO PLAINTIFF UNDERWATER KINETICS LLP
MARILYN L. HUFF, District Judge
On July 8, 2020, Defendant The Hanover American Insurance Company filed a Motion for Summary Judgment or in the Alternative Partial Summary Judgment. (Doc. No. 26.) Defendant seeks summary judgment on Plaintiffs’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing. On July 27, 2020, Plaintiffs Underwater Kinetics LLP and Alan K. Uke filed their Opposition. (Doc. No. 29.) On August 3, 2020, Defendant filed its Reply. (Doc. No. 30.)
Defendant submitted motions to amend/correct Exhibit 17 of the original motion by substituting the draft transcript of Jon Pullin's deposition with the final transcript. (Doc. Nos. 27–28.) For good cause shown, the Court grants their motions to amend.
The Court held a hearing on the motion on August 10, 2020. (Doc. No. 34.) Craig A. Miller appeared on behalf of Plaintiffs, and Tyler R. Austin appeared on behalf of Defendant. (Id. ) Following the hearing, the Court requested supplemental briefing from the parties addressing coverage under the Business Income Form of the insurance policy. (Doc. No. 35.) Defendant filed its supplemental brief on August 21, 2020. (Doc. No. 36.) Plaintiffs filed their opposition to Defendant's supplemental brief on August 28, 2020. (Doc. No. 38.) For the reasons below, the Court denies in part and grants in part Defendant's motion for summary judgment.
Background
This case arises out of an insurance coverage dispute between Underwater Kinetics LLP and its insurer The Hanover American Insurance Company ("Hanover"). Underwater Kinetics LLP ("UK") is a manufacturer of scuba diving accessories, waterproof cases, and industrial flashlights. (Doc. No. 26-4 Ex. 1 Uke Depo. at RT: 16:24–17:2.) Alan K. Uke is the founder, President, and CEO of UK. (Doc. No. 1 Ex. 1 ¶ 4.) Between August 1, 2017 to August 1, 2018, UK was covered under The Hanover American Insurance Company Policy No. ZZ3 912145807 (the "Policy"). (Doc. No. 26-4 Ex. 15 at UWK_CP_001.) A. The Policy
The Policy named "Underwater Kinetics LLP" as the named insured and was effective from August 1, 2017 to August 1, 2018. (Id. at UWK_CP_002.) The Policy provided coverage relevant to the case at hand under a Building and Personal Property Coverage Form ("Property Form") and a Business Income (and Extra Expense) Coverage Form ("Business Income Form"). (Id. at UWK_CP_124, 140.) Both forms generally required a "direct physical loss" for coverage. (Id. ) The Policy also included a Gold Property Broadening Endorsement (the "Gold Endorsement"), which amended and extended the coverage provided under the Property Form and the Business Income Form. (Id. at UWK_CP_064.) The Gold Endorsement added three additional coverages relevant to this case: (1) an "E-Commerce" coverage, (2) an "Extra Expense" coverage, and (3) a "Prototypes" coverage. (Id. at UWK_CP_064–065.)
The E-Commerce coverage contained provisions for "Electronic Vandalism – Direct Damage," and "Electronic Vandalism – Interruption of Computer Operations." (Id. at UWK_CP_070.) The Direct Damage section of the E-Commerce coverage required a "direct physical loss," but the Interruption of Computer Operations section did not. (Id. at UWK_CP_70–71.) The Interruption of Computer Operations provision amended the Business Income Form to provide coverage "to a ‘suspension’ of ‘operations’ caused by an interruption in computer operations at the described premises due to ‘electronic vandalism’ anywhere in the world." (Id. ) The E-Commerce coverage provided that the most that would be paid "for all loss or damage from both Electronic Vandalism – Direct Damage and Electronic Vandalism – Interruption of Computer Operations in any one ‘occurrence’ is $10,000 or the Limit of Insurance shown in the Amended Limits Section of this Endorsement." (Id. at UWK_CP_071.) The Amended Limits Section of the Gold Endorsement showed a new limit for E-Commerce coverage of $350,000. (Id. at UWK_CP_064.)
The Gold Endorsement defined several key terms:
"Electronic vandalism" means "computer hacking", computer virus or a "denial of service attack".
"Occurrence" means all loss or damage that is attributable to:
a. An act, event, cause or series of similar, related acts, events or causes involving one or more persons; or
b. An act, event, cause or series of similar, related acts, event or causes not involving any person.
(Id. at UWK_CP_099, 101.) The Gold Endorsement also had an anti-stacking provision that limited the coverage UK was entitled to as follows:
If any of the property covered by this endorsement is also covered under any other provisions of the policy of which this endorsement is made a part, or if more than one coverage under this endorsement applies, in the event of loss or damage, you may choose only one of these coverages to apply to that loss. The most we will pay in this case is the limit of insurance applying to the coverage you select.
(Id. at UWK_CP_064.)
B. The Malware Attacks
Between October 3, 2017 and January 4, 2018, UK suffered a series of malware attacks. (Doc. No. 29-3 Uke Decl. ¶¶ 3–5.) The first intrusion in October "encrypted the electronic data in the company computer network, locked out its users, and physically damaged the tape backup system ...." (Id. ¶ 3.) On October 6, 2017, UK submitted a claim related to the October intrusion to Hanover and Hanover adjuster, Chris Guittar, began to process the claim. (Doc. No. 27 at 3.) That same day Guittar retained Loss Solutions Group ("LSG") to act as a technological consultant on the claim in order to provide "guidance for [the] insured, confirmation on cause of loss so [Hanover] can confirm coverage and [a] repair cost analysis." (Doc. No. 26-4 Ex. 2.) Concurrently, UK had directed its own IT provider, Corporate Technologies, to attempt to fix the damage caused by the hack. (Doc. No. 29 at 10.)
Barely over a month later, on November 14, 2017, UK's computer system was again attacked by a computer virus and rendered inoperable, "causing a suspension of its business operations." (Doc. No. 29-3 Uke Decl. ¶ 4.) On November 20, 2017, Guittar in a letter to the UK CEO, Alan Uke, acknowledged receipt of UK's new claim stemming from the November intrusion. (Doc. No. 29-4 Ex. 13.) In this correspondence, Guittar wrote that "[e]ach incident of loss would be a separate claim with applicable deductible" and that the E-Commerce coverage has a "policy period limit so that if it is determined their [sic] are separate losses the one policy period limit would apply for all events in the policy period." (Id. at 1–2.) The existence of a policy period limit would limit UK's coverage within a one-year period regardless of the number of incidents that it suffered.
Following the November malware attack, UK's IT provider, Corporate Technologies, mistakenly lost the data that was relevant to the first two attacks. (Doc. No. 26-4 Ex. 1 Uke Depo. at RT: 64:13-65:9, 70:2-71:22.) Following this, UK fired Corporate Technologies and hired SpotLink. (Doc. No. 29-3 Uke Decl. ¶ 4.) In correspondence between Hanover's IT consultant Jon Pullin ("Pullin"), of LSG, and Guittar, Pullin wrote that SpotLink had been "unable to tell if this current infection is the same as the previous one or is related to it in any way." (Doc. No. 29-4 Ex. 15.)
On January 4, 2018, Plaintiffs’ computer system was hacked for a third and final time. (Doc. No. 29-3 Uke Decl. ¶ 5.) The next morning, January 5, 2018, UK's IT consultant at SpotLink, David Wing, wrote to Alan Uke that the intrusion was the result of someone trying to "brute force the local administrator account ...." (Doc. No. 29-4 Ex. 18.) Shortly after this attack UK hired ICE Cyber Security ("ICE") to "analyze what's going on with the network ... [and] to get [UK] back up and running." (Doc. No. 26-4 Ex. 9 Rahseparian Depo. at RT: 12:20–14:2.)
In an internal note following the third attack, dated January 8, 2018, Guittar wrote that contrary to Hanover's prior representations to UK, there was in fact no policy period limit under UK's Policy and that coverage was on an occurrence basis. (Doc. No. 26-4 Ex. 7.) This significantly changed the nature of the coverage afforded to UK since each occurrence had a $350,000 limit regardless of the amount claimed in a year.
On January 29, 2018, Guittar wrote to UK's insurance broker, Jennifer Clements, and clarified that "the ecommerce coverage has a $350k occurrence limit" with a "$10k deductible" for each claim. (Doc. No. 29-4 Ex. 23.) On March 23, 2018, UK's controller Robert Emery ("Emery") wrote to Guittar arguing that the claims should be related because the "second hack was part of the first hack." (Doc. No. 26-4 Ex. 13.) A week later, March 30, 2018, Emery reiterated this position to UK's insurance broker. (Id. Ex. 14 at 1.) C. Ford Winslow's April 9, 2018 Email
On April 4, 2018, Ford Winslow, ICE's President, wrote to Hanover's IT consultant Jon Pullin, of LSG, to discuss ICE's ongoing work. (Id. Ex. 16.) Winslow wrote that the ICE team suspected the attacks were part of "an ongoing persistent malware or malicious attack that had been un-addressed by previous IT teams." (Id. ) That same day, Pullin specifically asked Winslow whether in his "professional opinion and based upon information provided to you by ICE Cybersecurity personnel involved in the matter, is it likely that the subsequent virus infections and network intrusions are directly related to the initial breach into Underwater Kinetics network?" (Id. Ex. 18 at 2.) On April 9, 2018, Winslow responded that "based on the information provided to me during the course of my work in this matter, not having access to all the prior parties’ work product, it is likely that an initial breach of the Underwater Kinetics network was the root cause of all subsequent infections ...." (Id. at 1.) Pullin forwarded this email to Guittar at Hanover indicating that he agreed that "the initial breach has most likely allowed subsequent events to continue to occur." (Id. )
Plaintiffs argue that "Pullin told Winslow that Hanover would pay ICE's bill if Mr. Winslow would opine that the three hacks were related and constituted a single occurrence under the Policy." (Doc. No. 29 at 13.) Mr. Winslow testified that Mr. Pullin told him that if the attacks "were rolled into one event, then that would speed the resolution of the matter and payment ...." (Doc. No. 29-4 Ex. 4 Winslow Depo. at RT: 31:11-24.) When asked if he emailed Mr. Pullin in order to figure out payment, Mr. Winslow testified "Absolutely." (Id. )
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D. Hanover Combines the Claims
On April 26, 2018, Hanover notified UK that based upon its review of the "relation of occurrences with our consultant Loss Solutions Group and your repair vendor Ice Security" the events were being combined as "one occurrence and one claim with a singular property damage deductible of $10,000 and one 24 hour waiting period." (Doc. No. 26-4 Ex. 20.) On June 6, 2018, UK, through its counsel, wrote to Hanover arguing that ICE could not be relied upon to determine that the malware events were related since ICE was only retained after the third incident and had no knowledge of the prior attacks. (Doc. No. 29-4 Ex. 28.) On July 20, 2018, UK again wrote to Hanover asking that "Hanover provide us with the new, additional facts it had in its file as of April 26 that establish the three separate cyber-attacks are properly treated as a single occurrence ...." (Id. Ex. 29.) In this correspondence, UK also contested that ICE had concluded that the events were related since Mr. Steven Rahseparian, the ICE technician who worked on UK's systems, disputed that "he ever offered the opinion that the three attacks are related." (Id. )
E. LSG's Report
On July 12, 2018, LSG delivered a six-page report to Hanover detailing its findings regarding the malware intrusions suffered by UK. (Doc. No. 26-4 Ex. 8.) In the report, LSG opined that "several factors presented commonality between the incidents which led to a conclusion that all of the aforementioned infections were related to the initial occurrence on October 3, 2017." (Id. at 4.) Among these common factors:
- It was noted that UKE01, ITMain, and the insured's Terminal Server were affected during each incident.
- The presence of encryption malware during each incident. Notably, .LOCK encryption.
- Reports of vendor errors by the insured and subsequent reported discharge of said vendor by the insured for such.
- Consistent issues with data backups and SAP utilization.
- User passwords were changed during each incident.
(Id. ) The report then went on to quote from ICE's President Ford Winslow's April 9th email that had also concluded that attacks were related. (Id. ) After Hanover received the final report from LSG, it issued final payment of $350,000 to UK. (Doc. No. 27 at 8.) On July 31, 2018, UK, through its counsel, wrote to Hanover protesting their decision to treat the different incidents as a single occurrence under the Policy. (Doc. No. 29-2 Ex. 31.) On August 29, 2018, Hanover responded by email and reaffirmed its decision to treat the three malware attacks as one incident. (Id. Ex. 32.)
Legal Standards
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure if the moving party demonstrates that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) ; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ; Fortune Dynamic, Inc. v. Victoria's Secret Stores Brand Mgmt., Inc., 618 F.3d 1025, 1031 (9th Cir. 2010). "A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Fortune Dynamic, 618 F.3d at 1031 (internal quotation marks and citations omitted); accord Anderson, 477 U.S. at 248, 106 S.Ct. 2505. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).
A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to establish an essential element of the nonmoving party's case that the nonmoving party bears the burden of proving at trial. Id. at 322–23, 106 S.Ct. 2548 ; Jones v. Williams, 791 F.3d 1023, 1030 (9th Cir. 2015). Once the moving party establishes the absence of a genuine issue of material fact, the burden shifts to the nonmoving party to "set forth, by affidavit or as otherwise provided in Rule 56, ‘specific facts showing that there is a genuine issue for trial.’ " T.W. Elec. Serv., 809 F.2d at 630 (quoting former Fed. R. Civ. P. 56(e) ); accord Horphag Research Ltd. v. Garcia, 475 F.3d 1029, 1035 (9th Cir. 2007). To carry this burden, the non-moving party "may not rest upon mere allegation or denials of his pleadings." Anderson, 477 U.S. at 256, 106 S.Ct. 2505 ; see also Behrens v. Pelletier, 516 U.S. 299, 309, 116 S.Ct. 834, 133 L.Ed.2d 773 (1996) ("On summary judgment, ... the plaintiff can no longer rest on the pleadings."). Rather, the nonmoving party "must present affirmative evidence ... from which a jury might return a verdict in his favor." Anderson, 477 U.S. at 256, 106 S.Ct. 2505.
When ruling on a summary judgment motion, the court must view the facts and draw all reasonable inferences in the light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372, 378, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007). The court should not weigh the evidence or make credibility determinations. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505. "The evidence of the non-movant is to be believed." Id. Further, the Court may consider other materials in the record not cited to by the parties, but it is not required to do so. See Fed. R. Civ. P. 56(c)(3) ; Simmons v. Navajo Cnty., 609 F.3d 1011, 1017 (9th Cir. 2010).
Discussion
Defendant seeks summary judgment, arguing that Hanover has paid all benefits to which UK is entitled, that Plaintiffs’ bad faith claims are barred by the genuine dispute doctrine, and that Plaintiffs have provided no evidence to support their claim for punitive damages. (Doc. No. 27 at 1–2.) Plaintiffs argue that Hanover has breached its contractual obligations under the Business Income Form coverage and has failed to justify treating the cyberattacks as one occurrence. (Doc. No. 29 at 16–19.) The Court will address each argument in turn.
I. Whether Hanover Has Paid All Benefits To Which UK May Be Entitled Under the Policy
Defendant argues that UK's breach of contract claim requires "UK to establish that it was deprived of a benefit owed under the Policy" and that UK "cannot dispute that Hanover had paid all benefits covered by the policy." (Doc. No. 27 at 2.) Plaintiffs argue that Hanover has deprived UK of benefits owed to it under the E-Commerce coverage, the Business Income Form, the Extra Expense coverage, and the Prototypes coverage. (Doc. Nos. 1 Ex. 1, Compl. ¶¶ 68–73; 29 at 16–22.)
The interpretation of an insurance policy is a question of law. Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal.4th 277, 172 Cal.Rptr.3d 653, 326 P.3d 253, 259 (2014). Such interpretation must give effect to "the mutual intention of the parties at the time the contract is formed ...." Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619, 627 (1995). To determine the intent of the parties behind an insurance contract, the Court "look[s] first to the language of the contract in order to ascertain its plain meaning," reading the language in its "ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage." Id. (internal citations and quotation marks omitted). Language in an insurance contract "must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract." Id. When there is ambiguity in an insurance policy, the policy's exclusions and exceptions are strictly construed against the insurer and liberally interpreted in favor of the insured in order to protect the insured's reasonable expectation of coverage. La Jolla Beach & Tennis Club, Inc. v. Indus. Indem. Co., 9 Cal.4th 27, 36 Cal.Rptr.2d 100, 884 P.2d 1048, 1053 (1994) ; see also Delgado v. Heritage Life Ins. Co., 157 Cal.App.3d 262, 203 Cal. Rptr. 672, 677 (1984). Given this framework, the Court turns to the Policy at issue.
A. The E-Commerce Coverage
First, the Court considers Plaintiffs’ argument that they are entitled to additional coverage under the E-Commerce coverage of the Policy. As discussed above, the E-Commerce coverage provides coverage for a disruption in services as a result of electronic vandalism with a $350,000 limit per occurrence. Occurrence is defined in the policy as:
All loss or damage that is attributable to:
a. An act, event, cause or series of similar, related acts, events or
causes involving one or more persons; or
b. An act, event, cause or series of similar, related acts, event or causes not involving any person.
(Doc. No. 26-4 Ex. 15 at UWK_CP_101.) The parties do not dispute that UK is entitled to some level of coverage under the E-Commerce coverage but instead dispute whether the separate attacks should be considered one "Occurrence" under the Policy. Defendant maintains that it properly considered the three malware attacks as a single Occurrence and paid out the appropriate limit of $350,000. (Doc. No. 27 at 12–16.) Plaintiffs vehemently disagree, arguing that Defendant has failed to prove that the three malware attacks should be considered a single Occurrence and that they are entitled to the $350,000 limit for each attack. (Doc. No. 29 at 18–19.)
When construing insurance policies, the Court interprets the text based on its plain meaning. See, e.g., Waller, 44 Cal.Rptr.2d 370, 900 P.2d at 627. Defendant argues that Courts have broadly interpreted "occurrence" definitions in similar insurance policies to include "multiple causative or similar acts." (Doc. No. 27 at 13.) Plaintiffs contend that under the definition of Occurrence in the policy, Defendant has to prove that the incidents were related. (Doc. No. 29 at 19.)
Under California law, "the term ‘related’ as it is commonly understood and used encompasses both logical and causal connections." Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal.4th 854, 21 Cal.Rptr.2d 691, 855 P.2d 1263, 1274 (1993) (holding " ‘related’ is not ambiguous and is not limited only to causally related acts.").
Defendant contends that it had "information from both sides’ experts that the three malware attacks were related or at the very least similar." (Doc. No. 27 at 13.) Hanover formed this opinion in part based on a report compiled by its IT expert Jon Pullin. Pullin's six-page report in turn relied heavily on a quotation from UK's expert Winslow. (Id. at 14.)
Plaintiffs point out that Winslow's sworn testimony, in this litigation, indicates that he provided this opinion in order to speed up payment from Hanover. (See Doc. No. 29-4 Ex. 4 Winslow Depo. at RT: 31:11–24.) Plaintiffs also argue that while Winslow was the CEO of the cybersecurity firm who helped remediate UK's system, he was not the actual technician who would be most familiar with the system itself. (Doc. No. 29 at 14.) That technician, Steven Rahseparian, disputed whether he had ever opined that the attacks were related. (Doc. No. 29-4 Ex. 29.) Rahseparian testified in this litigation that without a forensic analysis it would be impossible for him to make that determination. (Doc. No. 26-4 Ex. 9 Rahseparian Depo. at RT: 37:1–5 (Rahseparian: "[W]hen I was asked did I believe that this stemmed from -- was this a continuation of an attack, and I was like, it's impossible for me to truly determine and answer that truthfully because I don't know.")) Plaintiffs also attack the validity of Pullin's ultimate report pointing out that he had no personal knowledge of UK's computer network system and therefore was not qualified to opine on whether the attacks were related. (Doc. No. 29-4 Ex. 5 Pullin Depo. at RT: 147:24–148:15.)
In sum, there is substantial conflicting evidence from both sides about whether the malware attacks should properly be considered a single Occurrence. Ultimately this is a factual issue best reserved for the jury. Accordingly, Defendant has not carried its burden of showing that there is no genuine dispute of material fact on this issue and so summary judgment is inappropriate at this time. See Celotex, 477 U.S. at 323, 106 S.Ct. 2548. B. The Business Income Form
Next, the Court considers whether Plaintiffs are potentially owed additional benefits under the Business Income Form. Plaintiffs argue they are entitled to coverage under the "Additional Coverages," "Interruption of Computer Operations" section of the Business Income Form, (Doc. No. 29 at 16–18), which provides that Hanover will pay for the loss of business income sustained due to necessary suspension of operations "caused by an interruption in computer operations due to destruction or corruption of electronic data due to a Covered Cause of Loss." (Doc. No. 26-4 Ex. 15 at UWK_CP_141–43.)
However, as Defendant points out, that provision of the Business Income Form was expressly replaced and superseded by the E-Commerce coverage's "Electronic Vandalism – Interruption of Computer Operations" provision of the Gold Endorsement:
A. Coverage , Paragraph 5. Additional Coverages , subparagraph d. [Interruption of Computer Operations ] of Business Income (and Extra Expense) Coverage Form CP 00 30 ... is replaced by the following:
d. Electronic Vandalism – Interruption of Computer Operations
You may extend the insurance that applies to Business Income & Extra Expense to apply to a "suspension" of "operations" caused by an interruption in computer operations at the described premises due to "electronic vandalism" originating anywhere in the world.
(Id. at UWK_CP_070–71 (emphasis added).) Plaintiffs expressly acknowledge this fact in their supplemental brief: "[b]y its terms, the Gold Property Broadening Endorsement modifies the Business Income and Extra Expense Coverage Form, by deleting Paragraph 4, Additional Limitation – Interruption of Computer Operations, and replacing Paragraph 5 Additional Coverages, subparagraph d." (Doc. No. 38 at 13.)
The Gold Endorsement plainly amends the Business Income Form by deleting and replacing the original "Interruption of Computer Operations" provision with the E-Commerce coverage's "Electronic Vandalism – Interruption of Computer Operations" provision. Plaintiffs cannot recover under both provisions because there is no "both" – it is the same provision. As such, Plaintiffs cannot claim they are owed additional coverage under this provision of the Business Income Form because they have already received coverage under it; they received $350,000 from Hanover pursuant to the "Interruption of Computer Operations" section of the Business Income Form as amended by the E-Commerce coverage's "Electronic Vandalism – Interruption of Computer Operations" provision. (Doc. No. 36 at 4–5.) Plaintiffs attempt to argue that the provisions allow for stacking of coverage, (Doc. No. 38 at 14), but there is nothing to stack; there is only one provision, and Plaintiffs have already received coverage pursuant to it.
"In the absence of any ambiguity, ‘the courts have no alternative but to give effect to the contract of insurance as executed by the parties. Accordingly, when the terms of the policy are plain and explicit the courts will not indulge in a forced construction so as to fasten a liability on the insurance company which it has not assumed.’ " First Am. Title Ins. Co. v. XWarehouse Lending Corp., 177 Cal.App.4th 106, 98 Cal. Rptr. 3d 801, 807–09 (2009) (citing Jarrett v. Allstate Ins. Co., 209 Cal.App.2d 804, 26 Cal. Rptr. 231, 234 (1962) ). Drawing all reasonable inferences in favor of the non-moving party, UK, the Court concludes that the Business Income Form does not afford coverage in excess of what was paid by Hanover, making summary judgment for Defendant on this issue appropriate.
C. The Extra Expense Coverage
Next, the Court considers Plaintiffs’ argument that they are entitled to coverage under the Gold Endorsement's Extra Expense coverage. (Doc. No. 29 at 22.) Defendant argues that this coverage is limited by the Gold Endorsement's anti-stacking provision and also that the Policy limited coverage to only physical loss or damage. (Doc. No. 27 at 18.) The Court agrees that the anti-stacking provision applies.
The Extra Expense coverage clause in the Gold Endorsement provides that:
When a Covered Cause of Loss occurs to Covered Property at a location described in the declarations, we will pay for the reasonable and necessary extra expense you incur to continue as nearly as possible your normal business operations following the covered loss or damage.
(Doc. No. 26-4 Ex. 15 at UWK_CP_074.) Plaintiffs argue that the Gold Endorsement's anti-stacking provision does not apply to the Extra Expense coverage because "(1) the Policy specifically describes Extra Expense coverage as ‘Additional Coverage’; (2) the Policy states that ‘The amount payable under this Additional Coverage is additional insurance’; and (3) ... the anti-stacking provision precludes only the stacking of two coverages of the same type ...." (Doc. No. 29 at 22.) These arguments are all unavailing. The plain text of the anti-stacking clause sweeps broadly and states explicitly that the insured may "choose only one of these coverages to apply ...." (Doc. No. 26-4 Ex. 15 at UWK_CP_064.) E-Commerce coverage and Extra Expense coverage are both types of coverage listed under the Gold Endorsement and so subject to the anti-stacking clause. (Id. at UWK_CP_064–65) Furthermore, neither additional coverage nor additional insurance is a defined term in the Policy and there is no indication in the Policy that these terms were meant to have a special meaning. (Id. )
"In the absence of any ambiguity, ‘the courts have no alternative but to give effect to the contract of insurance as executed by the parties. Accordingly, when the terms of the policy are plain and explicit the courts will not indulge in a forced construction so as to fasten a liability on the insurance company which it has not assumed.’ " First Am. Title Ins. Co., 98 Cal. Rptr. 3d at 807–09 (citing Jarrett, 26 Cal. Rptr. at 234 ). Accordingly, since the anti-stacking provision is clear and prohibits coverage under both the E-Commerce clause and Extra Expense clause, the Court concludes that summary judgment on this issue is appropriate.
D. The Prototypes Coverage
Finally, the Court considers Plaintiffs’ argument that they are entitled to coverage under the Policy's Prototypes coverage. (Doc. No. 1 Ex. 1 ¶¶ 72–73.) The Prototypes coverage is one of the Scheduled Coverages added by the Gold Endorsement. (Doc. No. 26-4 Ex. 15 at UWK_CP_065, 84.) Defendant argues that this coverage, like the Extra Expense provision, is 1) limited by the Gold Endorsement's anti-stacking provision and 2) limited to only physical loss or damage. (Doc. No. 27 at 16–17.) Defendant also notes that UK failed to dispute that it cannot receive Prototypes coverage in its opposition to Defendant's motion for summary judgment. (Doc. No. 30 at 2.)
The Court agrees that the anti-stacking provision of the Gold Endorsement applies to the Prototypes coverage as well. The analysis is identical to that of the Extra Expense coverage: E-Commerce coverage and Prototypes coverage are both types of coverage listed under the Gold Endorsement and, thus are subject to the anti-stacking clause. (Doc. No. 26-4 Ex. 15 at UWK_CP_064.) Accordingly, since the anti-stacking provision is clear and prohibits coverage under both the E-Commerce coverage and Prototypes coverage, the Court concludes that summary judgment on this issue is appropriate.
II. Whether the Genuine Dispute Doctrine Bars Plaintiffs’ Bad Faith Claims
Next, Defendant argues that Plaintiffs’ bad faith claims are barred by the genuine dispute doctrine which Defendant argues only allows for liability when an insurer "withholds policy benefits unreasonably or without proper cause." (Doc. No. 27 at 18–19.) Plaintiffs contend that the genuine dispute rule "does not create a blanket immunity" and still requires an insurer to "to thoroughly and fairly investigate, process, and evaluate an insured's claim." (Doc. No. 29 at 23.) The Court agrees with Plaintiffs and concludes that summary judgment on this issue is inappropriate at this juncture.
"The key to a bad faith claim is whether or not the insurer's denial of coverage was reasonable." Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001). "[A]n insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith even though it might be liable for breach of contract." Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 68 Cal.Rptr.3d 746, 171 P.3d 1082, 1088–89 (2007) (quoting Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co., 90 Cal.App.4th 335, 108 Cal. Rptr. 2d 776, 784 (2001) ). The genuine dispute rule in the context of bad faith claims "allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable ...." Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002). However, "[t]he genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds." Wilson, 68 Cal.Rptr.3d 746, 171 P.3d at 1089.
"[T]he reasonableness of an insurer's claims-handling conduct is ordinarily a question of fact." Amadeo, 290 F.3d at 1161 (quoting Chateau Chamberay Homeowners Ass'n, 108 Cal. Rptr. 2d at 784 ). "[A]n insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably." Wilson, 68 Cal.Rptr.3d 746, 171 P.3d at 1089 (quoting Amadeo, 290 F.3d at 1161–62 ). Summary judgment is not appropriate when the insurer's interpretation of the policy is sufficiently "arbitrary or unreasonable" that a jury could conclude it was adopted in bad faith. Franceschi v. Am. Motorists Ins. Co., 852 F.2d 1217, 1220 (9th Cir. 1988).
Defendant urges the Court to follow the holding of the California Court of Appeals in 501 East 51t St., Long-Beach-10 LLC v. Koomin Best Ins. Co., Ltd., where the Court found summary judgment appropriate when an insurer had appropriately based "their claim denial on the final expert report, and there is no evidence that report was contrived or false." 47 Cal.App.5th 924, 260 Cal. Rptr. 3d 903, 914 (2020). Defendant argues that it properly based its claim denial decision on the reports of both sides experts. (Doc. No. 27 at 20–21.) Plaintiffs argue that Defendant's report was based on faulty evidence and disregarded the opinions of those who had firsthand knowledge of UK's computer system. (Doc. No. 29 at 23–28.) Plaintiffs also contend that Defendant refused to take the appropriate steps and investigative measures to actually determine whether the attacks were a single Occurrence or separate incidents. (Id. )
When viewing the facts in the light most favorable to the non-moving party, genuine issues of material fact remain. The parties dispute whether Defendant's investigation of the claim was arbitrary or unreasonable. Franceschi, 852 F.2d at 1220. Plaintiffs contend that Defendant made no effort to conduct a forensic analysis of UK's systems to determine whether the Occurrences were related. (Doc. No. 29 at 23, 27.) But Defendant points out that UK's second IT provider, Corporate Technologies, inadvertently lost the data that was relevant to the first two attacks. (Doc. No. 27 at 4.) Plaintiffs contend that Jon Pullin's report to Hanover relied on the technical evaluation of experts who had no first-hand knowledge of UK's system. (Doc. No. 29 at 24–25.) Defendant counters that the report relied on the opinions of the IT experts hired by Plaintiffs, among other information. (Doc. No. 27 at 7–8.)
Plaintiffs also contend that Jon Pullin promised financial remuneration to Ford Winslow in exchange for an official opinion that the claims should be treated as a single occurrence. (Doc. No. 29 at 13.) Defendant argues that Pullin adamantly denies this allegation, and points out that Pullin's conclusions were based on more than just Winslow's April 9, 2018 email. (Doc. No. 27 at 22–23.) Additionally, Plaintiffs suggest that Defendant was motivated to change positions on the number of occurrences after the adjuster realized there was no policy period limit. (Doc. No. 29 at 12.) Defendant disputes this characterization of the events, and points out that Plaintiffs themselves repeatedly requested that the claims be combined to one occurrence in order to avoid multiple deductibles and waiting periods. (Doc. No. 27 at 21–22.)
Ultimately, this is a factual issue best left for the jury to resolve. Franceschi, 852 F.2d at 1220. Accordingly, the Court denies Defendant's motion for summary judgment on the breach of implied covenant of good faith and fair dealings claim.
III. Alan Uke's Claims for Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing
Next, Defendant moves for summary judgment on Plaintiff Alan Uke's claims for breach of contract and breach of the covenant of good faith and fair dealing. Defendant argues that Uke cannot prevail on these claims because he was "not a named insured, and thus was not a party to the insurance contract in the first place." (Doc. No. 27 at 23.) Plaintiffs conceded during oral argument that it was unlikely that Plaintiff Uke is entitled to benefit under the policy since he was not a named insured. (Doc. No. 37 at 41.)
The terms of the Policy clearly state that it only covers those who are named in the Declaration. (Doc. No. 26-4 Ex. 15 at UWK_CP_183) ("You are insured if you are an employer shown as a Named Insured in the Declarations.") It is undisputed that the only Named Insured in the Declaration is Underwater Kinetics, LLP. (Id. at UWK_CP_002.) "If contractual language is clear and explicit, it governs." Powerine Oil Co., Inc. v. Superior Court, 37 Cal.4th 377, 33 Cal.Rptr.3d 562, 118 P.3d 589, 598 (2005). Since Plaintiff Uke is not entitled to benefits under the Policy, as a matter of law, he does not have standing to pursue a breach of contract or breach of the covenant of good faith and fair dealing claims. Accordingly, the Court grants Defendant's motion for summary judgment as it relates to Plaintiff Uke.
IV. Punitive Damages
Defendant next moves for summary judgment on Plaintiffs’ request for punitive damages, arguing that there is insufficient evidence "that Hanover acted with fraud, malice, or oppression during the handling of this claim." (Doc. No. 27 at 24–25.) Plaintiffs argue that Hanover's willful failure to conduct a forensic investigation can serve as a basis for punitive damages. (Doc. No. 29 at 28–29.)
In California, punitive damages are available "if in addition to proving a breach of the implied covenant of good faith and fair dealing proximately causing actual damages, the insured proves by clear and convincing evidence that the insurance company itself engaged in conduct that is oppressive, fraudulent, or malicious." PPG Indus. v. Transamerica Ins. Co., 20 Cal.4th 310, 84 Cal.Rptr.2d 455, 975 P.2d 652, 658 (1999). Some courts have found failure to conduct an adequate investigation to be sufficient to support jury findings or withstand summary judgment on a request for punitive damages. Harbison v. Am. Motorists Ins. Co., 636 F. Supp. 2d 1030, 1044 (E.D. Cal. 2009) (citing Amadeo, 290 F.3d at 1165 ). Moreover, determinations related to the assessment of punitive damages have traditionally been left to the discretion of the jury. Amadeo, 290 F.3d at 1165 (citing Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141, 147 (1979) ).
Given the factual disputes regarding the handling of the claims, the Court declines at this time to grant summary judgment to Defendant. Accordingly, the Court denies Defendant's motion for summary judgment on punitive damages.
Conclusion
For the reasons above, the Court grants in part and denies in part Defendant's motion for summary judgment. The Court grants summary judgment of Plaintiff Uke's claims for breach of contract and breach of the covenant good faith and fair dealing. The action will proceed on Plaintiff UK's claims in accordance with the above analysis.