Scottsdale Insurance Company v. CNC Technologies LLC et alREPLY NOTICE OF MOTION AND MOTION for Summary Judgment as to Scottsdale's First Amended Complaint and Defendants' Counter-Claim 132C.D. Cal.November 5, 20181 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL\38902526\1 COZEN O’CONNOR Valerie D. Rojas (SBN 180041) vrojas@cozen.com Michael V. Ruocco (SBN 297414) mruocco@cozen.com 601 South Figueroa Street, Suite 3700 Los Angeles, California 90017 Telephone: (213) 892-7965 Facsimile: (213) 784-9076 Attorneys for Plaintiff and Counter-Defendant SCOTTSDALE INSURANCE COMPANY UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SCOTTSDALE INSURANCE COMPANY, an Ohio corporation, Plaintiff, v. CNC TECHNOLOGIES, LLC, a California corporation, RONALD MAGOCSI, JAMES HYMAN, ALEX GIUFFRIDA, BABETTE SCHRANK, and KEITH HANEY, Defendants. ________________________________ AND RELATED MATTERS Case No. 2:17-cv-03190 VAP (Ex) SCOTTSDALE INSURANCE COMPANY’S REPLY BRIEF IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT, OR IN THE ALTERNATIVE, PARTIAL SUMMARY JUDGMENT [Filed Concurrently with Evidentiary Objections to Declarations of Joseph Preis and Alex Giuffrida; Reply to Response to Statement of Uncontroverted Facts; Response to Defendants’ Additional Undisputed Facts. Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 1 of 19 Page ID #:5015 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 i TABLE OF CONTENTS Page MEMORANDUM OF POINTS AND AUTHORITIES 1 I. INTRODUCTION AND SUMMARY OF ARGUMENT 1 II. ARUGMENT Error! Bookmark not defined. A. Scottsdale Complied with Blue Ridge and is Entitled to Seek Reimbursement of the Uncovered Settlement Payment 2 B. Scottsdale Did Not Waive Its Right to Seek Reimbursement from the Defendants Nor is it Estopped from Seeking Reimbursement 5 1. Defendants Were Always Aware Scottsdale was Defending and Indemnifying them Under a Reservation of Rights 5 2. Scottsdale had No Obligation to Provide Independent Counsel 7 C. Scottsdale Produced Evidence that the Settlement Payment was for an Uncovered Claim and Defendants Produced No Evidence that the Helinet Claim was Covered 10 D. CNC’s Bad Faith Claim Fails Because Scottsdale’s Decision to File a Declaratory Relief Action Was Reasonable 11 E. CNC’s Punitive Damages Claim Fails as a Matter of Law 14 F. CNC’s Claim for Attorney’s Fees Fails as a Matter of Law 15 III. CONCLUSION 15 Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 2 of 19 Page ID #:5016 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ii TABLE OF AUTHORITIES Page(s) Cases Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38 (1997) ............................................................................................... 11 American Medical International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, 244 F.3d 715 (9th Cir. 2001) ................................................................................... 12 Atlas Assurance Co. v. McCombs Corp. 146 Cal.App.3d 135 (1983) ..................................................................................... 13 Basich v. Allstate Ins. Co., 87 Cal.App.4th 1112 (2001) .................................................................................... 15 Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489 (2001) ....................................................................................... passim Brandt v. Superior Court, 37 Cal.3d 813 (1985) ............................................................................................... 15 Citi-Wide Preferred Couriers, Inc. v. Golden Eagle Ins. Corp., 114 Cal.App.4th 906 (2017) .................................................................................... 14 Dalrymple v. United Servs. Auto. Assn., 40 Cal.App.4th 497 (1995) ...................................................................................... 13 Dynamic Concepts v. Truck Ins. Exch., 61 Cal.App.4th 999 (1998) ........................................................................................ 8 Endurance Am. Specialty Ins. Co. v. Lance-Kashian & Co., No. CV F 10-1284 LJO DLB, 2010 WL 3619476 (E.D. Cal. Sept. 13, 2010) .......................................................................................................................... 9 Gafcon, Inc. v. Ponsor & Assoc., 98 Cal.App.4th 1388 (2002) ...................................................................................... 8 Hunter v. Watson 12 Cal. 363 (1859) ..................................................................................................... 6 Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 3 of 19 Page ID #:5017 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iii James 3 Corp. v. Truck Ins. Exch., 91 Cal.App.4th 1093 (2001) ...................................................................................... 8 Long v. Century Indemnity Co., 163 Cal.App.4th 1460 (2008) .................................................................................... 9 Mossman v. Superior Court, 22 Cal.App.3d 706 (1972) ......................................................................................... 6 Old Republic Ins. Co. v. FSR Brokerage, Inc., 80 Cal.App.4th 666 (2000) ................................................................................ 12, 13 Phillips & Associates v. Navigators Ins. Co., 764 F.Supp.2d 1174 (D. Ariz. 2011) ......................................................................... 4 Progressive West Ins. Co. v. Dallo, 2007 WL 3225439 (S.D. Cal.) ................................................................................... 4 Shanahan v. State Farm Gen. Ins. Co., 193 Cal.App.4th 780 (2011) .................................................................................... 11 State Farm Fire & Casualty Co. v. Jioras 24 Cal.App.4th 1619 (1994) .................................................................................... 10 Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269 (1994) .................................................................................... 15 Travelers Casualty Insurance Co. of America v. Mesriani & Associates, 2015 WL 12746710 (C.D. Cal. 2015) ..................................................................... 12 Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1 (1995) .............................................................................................. 6, 12 White v. Western Title Ins. Co., 40 Cal.3d 870 (1985) ............................................................................................... 13 Statutes Ins. Code § 2860 ......................................................................................................... 7, 8 Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 4 of 19 Page ID #:5018 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 LEGAL\38902526\1 MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION AND SUMMARY OF ARGUMENT Defendants Alex Giuffrida, Ronald Magocsi, James Hyman, Babette Schrank, and Keith Haney (“Individual Defendants”) and CNC Technologies, LLC (“CNC”) (collectively “Defendants”) contend that Scottsdale’s motion for summary judgment (“Motion”) should be denied because Scottsdale supposedly failed to satisfy the requirements to bring a claim for reimbursement of settlement funds paid on behalf of its insured under Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 502 (2001). However, the undisputed evidence shows Scottsdale reserved “all” rights, including the right to seek reimbursement of amounts paid on Defendants’ behalf, notified Defendants of Scottsdale’s intent to accept Helinet’s final settlement offer prior to accepting it, and obtained Defendants’ consent to settlement, as well as their signatures on the settlement agreement after notifying their coverage counsel Scottsdale would be seeking reimbursement of the $600k1 (“Settlement Payment”) made to settle the uncovered action styled Helinet Aviation Services, LLC. v. Ronald Magocsi, et al., (“Underlying Action”). Further, although Defendants alleged that Scottsdale waived its right to seek reimbursement of settlement funds paid on Defendants’ behalf, the undisputed evidence shows Scottsdale never intentionally relinquished its right to seek reimbursement nor did it lead Defendants to believe Scottsdale would pay the settlement without seeking reimbursement from the Defendants. To the contrary, Scottsdale advised Defendants’ coverage counsel it would be seeking reimbursement of the amount it paid prior to settling the Underlying Action. Scottsdale’s coverage position, defense, and indemnification of Defendants in the Underlying Action pursuant to a reservation of rights was repeatedly and unambiguously expressed to Defendants. Similarly, contrary to Defendants’ contention, Scottsdale is not estopped from seeking reimbursement of the 1 Defendants’ Counsel testified under penalty of perjury that Scottsdale paid 600k to settle the Helinet claim. See Ruocco Dec., ¶ 8, Exhibit N. Defendants also admit this in opposition to Scottsdale’s UF 22. Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 5 of 19 Page ID #:5019 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 LEGAL\38902526\1 Settlement Payment for failing to provide independent counsel because Scottsdale had no duty to provide Defendants with independent counsel as there was no actual or potential conflict of interest. Moreover, contrary to Defendants’ position, Scottsdale produced evidence that the Settlement Payment was for uncovered claims and Defendants produced no evidence the Underlying Action was actually covered. Finally, because there is no coverage for the Underlying Action, CNC’s claim for breach of the implied covenant of good faith and fair dealing (“bad faith) fails as a matter of law. Even if there was coverage (there is not), Scottsdale’s decision to seek reimbursement was reasonable because Scottsdale satisfied the Blue Ridge requirements and there is at least a genuine dispute as to coverage. Likewise, CNC’s claim for punitive damages fails because CNC failed to provide evidence to suggest any of Scottsdale’s conduct was despicable, deceptive, or performed for the purpose of injuring the Defendants. Finally, it is undisputed CNC failed to produce any invoices to support its claim for attorney’s fees and therefore it cannot meet the burden of establishing that it incurred fees that were reasonable and necessary to obtain wrongfully withheld policy benefits. II. ARGUMENT A. Scottsdale Complied with Blue Ridge and is Entitled to Seek Reimbursement of the Uncovered Settlement Payment Defendants argue “Scottsdale has not offered any evidence that it ever expressly reserved the right to seek reimbursement under Blue Ridge,” and that “Scottsdale’s reservation of rights was too late because it waited more than two years, until the eve of the trial in the coverage action, before citing Blue Ridge.” Opp., 11:6-7, 13:10-12. Defendants’ argument is unpersuasive because the evidence shows Scottsdale satisfied each prong under Blue Ridge by: (1) immediately reserving rights under the Policy on April 18, 2016 and continually reminding the Defendants (on May 16, 2016, January 27, 2017, and February 15, 2017) that Scottsdale was defending under a complete reservation of rights UFs 13-20, 22 27-30; (2) notifying Defendants of its intent to Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 6 of 19 Page ID #:5020 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 LEGAL\38902526\1 accept Helinet’s final settlement offer prior to doing so (admitted in discovery) UF 35; and (3) obtaining Defendants consent to the settlement. UFs 36-37, 39; AUFs 17, 31-32. It cannot be disputed that Scottsdale has an implied-in-law right to reimbursement from Defendants for the Settlement Payment it made on their behalf to settle the Underlying Action. See Blue Ridge Ins. Co., supra, 25 Cal.4th at 493. A prerequisite for a reimbursement claim includes: “(1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement.” Id. (emphasis added) see also Progressive West Ins. Co. v. Dallo, 2007 WL 3225439 (S.D. Cal.). Contrary to Defendants’ position, Scottsdale satisfied all three Blue Ridge prongs. First, Defendants argue Scottsdale never reserved its rights or mentioned the words Blue Ridge. However, on April 18, 2016 Emil Soskin (“Soskin”) advised Defendants that “Scottsdale reserves all rights for this matter under the Policy.” UFs 13-15. Scottsdale reiterated its reservation of rights to Defendants again on May 19, 2016, January 27, 2017, and February 15, 2017. UFs 16, 27. Moreover, Scottsdale specifically advised that it would be seeking reimbursement and Blue Ridge does not require an insurer specifically reference Blue Ridge in order to preserve its right to reimbursement. UF 39. Second, Defendants misleadingly argue they “proffered overwhelming evidence that Scottsdale did none of the things required by Blue Ridge prior to the filing of the instant action.” Opp., 12:22-24. However, Defendants confirmed and admitted in their responses to requests for admission (“RFAs”) that Scottsdale advised Defendants of its intent to accept Helinet’s final settlement offer prior to doing so, which clearly satisfies the second Blue Ridge prong. UF 35. Third, Defendants argue Scottsdale did not make an express offer to the Defendants to assume their own defense of the Underlying Action. However, no such offer was necessary because the Defendants consented to the Settlement Payment. The Blue Ridge Court analyzed how this requirement has been interpreted in the past, noting Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 7 of 19 Page ID #:5021 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 LEGAL\38902526\1 that when the insureds know from the outset that they could be held responsible for payments the insurer makes, “there is in fairness no need for the insurer to offer the defense to the insured.” Blue Ridge, supra, 106 Cal.Rptr.2d at 535 (citing Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal.App.4th 1372 (1993); see also Phillips & Associates v. Navigators Ins. Co., 764 F.Supp.2d 1174, 1177 (D. Ariz. 2011) (finding Blue Ridge requirements were satisfied and insurer not required to offer insureds opportunity to assume their own defense because insureds were aware of reservation of rights from the outset and did not disagree on whether to accept the settlement); Progressive W. Ins. Co. v. Dallo, No. 07CV1003IEGBLM, 2007 WL 3225439, at *8 (S.D. Cal. Oct. 30, 2007) (concluding insurer was not required to offer insureds opportunity to assume their own defense for insurer to preserve right to reimbursement because the insureds assented to the reasonableness and desirability of a policy limits settlement). Here, Defendants clearly assented to the Settlement Payment in March 2017. Further, the Defendants demanded Scottsdale settle for 720k in February 2017. On February 16, 2017 Joseph Preis, (“Preis” or “coverage counsel”) told Kandawalla via email that: “[a]s you know, your client can’t consider coverage defenses in considering a policy limits demand and we firmly demand that your client satisfy the policy limits demand.” UF 31, Exhibit I at 3. Moreover, Defendants consented to the Settlement Payment and were ecstatic when the case resolved on March 20, 2017 with Ronald Magocsi stating “No words can say or express my gratitude. You rock!!!!!” AUF 25. On March 21, 2017 before Defendants signed the settlement agreement, Scottsdale emailed Defendants’ coverage counsel, and advised that Scottsdale would be seeking reimbursement. Defendants signed the settlement agreement and release between March 23, 2017 and March 27, 2017 knowing full well Scottsdale had reserved its right to seek reimbursement. AUF 32; UF 39. Finally, Defendants’ argument that “the allocation provision does not give Scottsdale the right to seek reimbursement and is ambiguous as to whether [the Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 8 of 19 Page ID #:5022 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 LEGAL\38902526\1 Parties] had to reach an agreement as to allocation before a settlement offer could be made” is misplaced because none of the Settlement Payment was for covered claims and the allocation provision in this Policy pertains only to the duty to defend and not the duty to indemnify. AUF 2. Moreover, the allocation provision in the Policy is not ambiguous. Id. Finally, the allocation in no way negates Scottsdale’s right to reimbursement because Scottsdale has an implied-in-law right to reimbursement under Blue Ridge. See Blue Ridge Ins. Co., supra, 25 Cal.4th at 493 In sum, Scottsdale satisfied the Blue Ridge requirements and is entitled to seek reimbursement. B. Scottsdale Did Not Waive Its Right to Seek Reimbursement from the Defendants Nor is it Estopped from Seeking Reimbursement 1. Defendants Were Always Aware Scottsdale was Defending and Indemnifying them Under a Reservation of Rights Defendants argue “Scottsdale waived its right to seek reimbursement” because Stephen Erigero of Ropers, Majeski, Kohn, Bentley P.C. (“Erigero” or “defense counsel”) represented to Defendants that “Scottsdale would pay the settlement without seeking contribution from Defendants” and Defendants relied on the representation to their detriment. Opp., 17:4-5, 19:22-14. However, Scottsdale’s coverage position and its defense and indemnification of Defendants pursuant to a reservation of rights was repeatedly expressed to Defendants, and at no point did Scottsdale intentionally relinquish its right to reimbursement or lead Defendants to believe Scottsdale would forego its right to seek reimbursement from the Defendants. In California, the general rule is that “waiver requires the insurer to intentionally relinquish its right to deny coverage and that a denial of coverage on one ground does not, absent clear and convincing evidence to suggest otherwise, impliedly waive grounds not stated in the denial. Waiver depends solely on the intent of the waiving party, and is not established merely by evidence the insurer failed to specify the exclusion in a letter reserving rights.” Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 32, 900 (1995)(citing State Farm Fire & Casualty Co. v. Jioras 24 Cal.App.4th 1619, 1628 (1994)). Here, Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 9 of 19 Page ID #:5023 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 LEGAL\38902526\1 there is no evidence Scottsdale intentionally relinquished its right to seek reimbursement or led Defendants to believe Scottsdale would pay the settlement without seeking reimbursement. Defendants claim defense counsel “represented that the settlement was done with Scottsdale’s money, with no mention that Scottsdale might seek reimbursement.” Opp., 16:10-13. Defendants also misleading argue that “at no time prior to the [March 20, 2017] settlement did Erigero advise Defendants or Preis that Scottsdale expected Defendants to contribute to the $600k settlement, or that Scottsdale was reserving the right to seek reimbursement.” Opp., 13-15; Preis Dec., ¶ 12. However, in addition to Scottsdale’s April 18, 2016 reservation of rights, its May 16, 2016 coverage letter and further reservation of rights, on January 27, 2017 Soskin emailed Preis and Erigero and said: Scottsdale’s position is that no indemnity coverage is available under the Policy for the damages sought by the Plaintiff as outlined in their mediation brief. The damages for salaries are restitution and disgorgement, which are not insurable under California Law. The damages stemming from the NYPD contract are based on alleged wrongful acts of sabotage committed by the individual defendants when employed by Helinet in an uninsured capacity. Having said that, Scottsdale will contribute up to $300k on a cost of defense costs of avoidance basis to settle the matter at mediation. However, should this amount not be enough to settle the case, the insureds should contribute amounts that represent their uninsured exposure as any prudent insured would. UF 22. Scottsdale clearly told defense counsel and coverage counsel it expected Defendants to contribute to the settlement and had continually reserved its rights as communications to an attorney are imparted on to the attorney’s client. See Mossman v. Superior Court, 22 Cal.App.3d 706 (1972) (Since the attorney-client relationship is analogous to that of an agent-principal, the general rule that knowledge of the agent is constructive knowledge of the principal is also applicable to the attorney-client context); see also Hunter v. Watson 12 Cal. 363 (1859). Further, on February 15, 2017 Scottsdale sent another letter to Defendants’ coverage counsel that reminded Defendants of the reservation of rights and explained again why coverage for the Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 10 of 19 Page ID #:5024 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 LEGAL\38902526\1 Underlying Action was limited under the Policy. On March 20, 2017, defense counsel told coverage counsel and the Defendants that Scottsdale was willing to advance 500k to settle the case and clarified this offer did not include money from the individual Defendants (given their refusal to offer any money to settle the claim.) AUF 24. Defense Counsel’s statement that “it is the carrier’s money” was not an intentional relinquishment of any right or an indication Scottsdale was waiving its right to reimbursement but instead served as clarification that the settlement offer did not include any money from the Defendants at that time. The Parties ultimately agreed to settle the case for 600k on March 20, 2017. However, it cannot be disputed that defense counsel never told Defendants that Scottsdale would forego its right to reimbursement. As further evidence of Scottsdale’s intention to seek reimbursement, before advancing the Settlement Payment, Scottsdale emailed coverage counsel on March 21, 2017 and specifically advised that Scottsdale would be seeking reimbursement. In response, Defendants executed the settlement agreement and release between March 23, 2017 and March 27, 2017 knowing full well Scottsdale had reserved its right to seek reimbursement. AUF 29. In sum, Scottsdale never intentionally relinquished its right to seek reimbursement and instead continually reminded Defendants throughout the Underlying Action that it was defending and indemnify Defendants subject to a reservation of rights. 2. Scottsdale had No Obligation to Provide Independent Counsel Defendants argue that “Scottsdale waived or is estopped from seeking reimbursement because Scottsdale undertook the defense of Defendants in the Helinet Action in violation of California law by not providing independent counsel as required by California Civil Code 2860.” Opp., 17:11-14. Defendants’ argument regarding independent counsel is baseless. Defendants cite to Insurance Code section 2860 (the “Cumis” statute), which states in pertinent part: (a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 11 of 19 Page ID #:5025 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 LEGAL\38902526\1 provide independent counsel to represent the insured … (b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage …. Id. (emph. added) However, Scottsdale had no duty to provide independent counsel because there was no actual or potential conflict of interest. Section 2860(a) is only applicable to, and is dependent upon, an actual conflict of interest. See, e.g., Dynamic Concepts v. Truck Ins. Exch., 61 Cal.App.4th 999, 1007 (1998) (“The conflict must be significant, not merely theoretical, actual, not merely potential.”). Moreover, under California law, an insurer’s reservation of rights under an insurance policy does not create a per se conflict of interest. James 3 Corp. v. Truck Ins. Exch., 91 Cal.App.4th 1093, 1102 (2001). Rather, only when the coverage issues asserted by the insurer can be controlled by appointed counsel is there an actual conflict. Id; Gafcon, Inc. v. Ponsor & Assoc., 98 Cal.App.4th 1388, 1421 (2002) (“[C]ourts of appeals, including ours, repeatedly recognize a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights. There must also be evidence that the outcome of the coverage issue can be controlled by counsel first retained by the insurer for the defense of the underlying claim.”). Here, it is Helinet’s allegations of wrongful acts by the Individual Defendants, not the adjudication of facts, on which the application of exclusion C(1)(j) (Individual Defendants acting outside their insured capacities) and exclusion C(2)(a) (no coverage for breach of contract) depend on. Moreover, Defendants’ argument that “Scottsdale’s express reservation of rights based on the exclusion for any dishonest, deliberately, fraudulent or criminal act clearly triggered the right to independent counsel” is flawed. Opp., 17:28-18:3. Scottsdale’s rights under exclusion C(1)(f) (“Dishonesty/Fraud Exclusion”) did not create any actual, let alone potential, conflict of interest between Scottsdale and defense counsel as this exclusion does not actually limit or bar coverage unless and until a “final judgment” is entered against the Defendants establishing such conduct. That triggering condition distinguishes this exclusion from the conflict scenario anticipated in Long v. Century Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 12 of 19 Page ID #:5026 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 LEGAL\38902526\1 Indemnity Co., 163 Cal.App.4th 1460, 1471 (2008), which Defendants cited in their Opposition. Unlike Long, where the Court was concerned about the characterization of the insured's actions as being intentional and dishonest, the Dishonesty/Fraud Exclusion in Scottsdale’s Policy is not triggered by mere allegations of dishonest or fraudulent misconduct. Rather, subject to everything else, Scottsdale would continue to provide a full defense for a claim that solely alleged intentional, or even willful, wrongdoing, unless and until a final judgment establishing such conduct has been entered by a judge or jury. AUF 5. See Endurance Am. Specialty Ins. Co. v. Lance-Kashian & Co., No. CV F 10-1284 LJO DLB, 2010 WL 3619476, at *8 (E.D. Cal. Sept. 13, 2010) (rejecting an insured’s contention that a reservation of rights under a conduct-based exclusion created a conflict because “a court or jury, not defense counsel, will determine if the insureds engaged in intentional acts not subject to coverage”). In Endurance, the court held that an insurer’s reservation of rights based on similar conduct exclusions that required a final judgment or adjudication did not support a finding of a conflict of interest: [T]he insureds fail to explain how their defense counsel are able to control the underlying action’s outcome to create an actual conflict of interest, despite the ROR letter’s reference to the intentional acts exclusion or Endurance’s failure to obtain a written waiver. As Endurance notes, a court or jury, not defense counsel, will determine if the insureds engaged in intentional acts not subject to coverage. The insureds’ actual conflict of interest arguments fail to support dismissal of Endurance's claims. Id. Similar to the insurer’s reservation of rights in Endurance, Scottsdale’s reservation of rights based on the Dishonesty/Fraud Exclusion did not create an actual conflict of interest because it did not give defense counsel the ability to steer this matter away from coverage. Therefore, Defendants were never entitled to independent counsel. Finally, under California law, in order to prevail on a claim for estoppel, the insured must show that an insurer, knowing the grounds for non-coverage, provided a defense under the policy without a reservation of rights, and the insured reasonably relied on this apparent unconditional defense to his detriment. See State Farm Fire & Casualty Co. v. Jioras, 24 Cal.App.4th 1619, 1626 (1994) (citing Miller v. Elite Ins. Co., Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 13 of 19 Page ID #:5027 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 LEGAL\38902526\1 100 Cal.App.3d 739, 754-755 (1980)). Scottsdale informed Defendants from the very outset (April 18, 2016) that it would defend subject to a reservation of rights, and provided Defendants and coverage counsel with detailed coverage letters (on May 19, 2016 and February 15, 2017) identifying various coverage defenses that might preclude or limit coverage for the Underlying Action under the Policy. Defendants cannot prove they believed Scottsdale was unconditionally indemnifying them in the Underlying Action, such that Scottsdale is estopped from seeking reimbursement. C. Scottsdale Produced Evidence that the Settlement Payment was for an Uncovered Claim and Defendants Produced No Evidence that the Helinet Claim was Covered Defendants argue that “Scottsdale has offered no evidence that the settlement payment in the Helinet Action was for noncovered claims as it has offered no evidence Defendants actually committed any wrongful acts at all and would have been found liable for noncovered claims.” Opp., 14:12-15. Defendants cite to the settlement agreement, which was predicated upon a recital that “Defendants … denied and continue to deny Helinet’s allegations that they engaged in any wrongful activities” and none of the parties admits any liability to any other party,” as evidence that no wrongful acts were actually committed such that none of the exclusions apply. AUFs 31-32. However, Defendants are mistaken as wrongful act is defined under the Policy as “any actual or alleged error, omission, misleading statement, misstatement, neglect, breach of duty or act allegedly committed or attempted ….” UF 6. Scottsdale produced evidence demonstrating the alleged wrongful acts occurred while the Individual Defendants were employed by Helinet in an uninsured capacity. UF 45. Specifically, Helinet alleges that the Individual Defendants sabotaged Helinet’s contracts, solicited its clients, and destroyed company documents prior to their departure, while employed by Helinet. Scottsdale’s evidence of these allegations includes: (1) the Helinet complaint; (2) the Helinet mediation brief; (3) the declaration of Kathryn Purwin; and (4) the expert report of Bernie Heinze. UFs 45-49. Defendants cite to paragraph 63 in the Helinet complaint which states “Defendants continue to ... Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 14 of 19 Page ID #:5028 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 LEGAL\38902526\1 seek business from Plaintiff’s existing clients through their utilization, divulging and disclosure of Plaintiff’s company information ….” Scottsdale agreed to defend based on this vague allegation in Helinet’s complaint. However, the divulging of company information took place while the Individual Defendants were employed at Helinet. Further, the evidence received thereafter including Helinet’s mediation brief, Kathryn Purwin’s declaration, and Defendants’ discovery responses demonstrate the alleged wrongful acts occurred while Defendants were acting in an uninsured capacity as employees of Helinet. Moreover, Defendants’ argument that they did not commit any wrongful acts pursuant to the settlement agreement is immaterial because the Policy specifically excludes “Loss on account of any Claim for a Wrongful Act actually or allegedly committed or attempted by any of the Directors and Officers.” Whether coverage of the Underlying Action is barred by exclusion C(1)(j) (Individual Defendants acting outside their insured capacities) is determined by the allegations in the Underlying Action alone and the Policy exclusion does not require that the allegations actually be proven. Shanahan v. State Farm Gen. Ins. Co., 193 Cal.App.4th 780, 786 (2011) (“[W]hether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy”); Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 56 (1997) (insurer only owes a duty to indemnify insureds for claims actually covered). Here, Defendants submitted no evidence that any of the wrongful acts took place while the Individual Defendants were acting in their insured capacity as Directors and Officers of CNC, which is why Scottsdale does not have a duty to indemnify Defendants. D. CNC’s Bad Faith Claim Fails Because Scottsdale’s Decision to File a Declaratory Relief Action Was Reasonable CNC argues it “is entitled to maintain its [bad faith] claim . . . because Scottsdale unreasonably and without proper cause brought this action to seek return of policy benefits.” Opp., 20:24-28. CNC also argues that Scottsdale’s decision to bring this Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 15 of 19 Page ID #:5029 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 LEGAL\38902526\1 Motion despite this Court’s denial of Scottsdale’s motion to dismiss is evidence of bad faith. Opp., 21:1-26. However, CNC is incorrect and Scottsdale did not commit bad faith by filing a declaratory relief action, which was a reasonable and appropriate course of action where no insurance benefits were due under the Policy. Old Republic Ins. Co. v. FSR Brokerage, Inc., 80 Cal.App.4th 666, 687-688 (2000). Further, Scottsdale’s decision to file this Motion is not evidence of bad faith because the evidence obtained during discovery further demonstrates Scottsdale is entitled to seek reimbursement. First and foremost, an insured cannot maintain a claim for bad faith where no Policy benefits are due. American Medical International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, 244 F.3d 715, 719 (9th Cir. 2001); Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 35-36 (1995). “If a party does not have any rights under an agreement in the first place, there are no contractual rights to injure.” Travelers Casualty Insurance Co. of America v. Mesriani & Associates, 2015 WL 12746710, *5 (C.D. Cal. 2015). Stated differently, if an insured is not owed additional benefits under the policy, there are no injured contractual rights. In this case, Scottsdale defended the insureds subject to a complete reservation of rights. Scottsdale owed no duty to indemnify Defendants in the Underlying Action, as exclusions C(1)(j) (Individual Defendants acting outside their insured capacities) and C(2)(a) (no coverage for breach of contract) barred coverage of the Underlying Action, which is why CNC’s bad faith claim fails as a matter of law. Second, CNC’s argument that Scottsdale brought this declaratory relief action without proper cause is unpersuasive because Scottsdale satisfied the requirements in Blue Ridge and Scottsdale is not obligated to indemnify Defendants because coverage is excluded under the Policy. It is well established that “[a]bsent other facts, the mere filing of an action to declare the insurer's rights and duties relative to an insurance policy cannot form the basis of breach of the duty of good faith and fair dealing. Assuming the insurer has not otherwise abandoned, compromised or rejected the insured's claim, an action seeking declaratory relief does not in any way frustrate the insured's enjoyment of his contract rights.” Atlas Assurance Co. v. McCombs Corp. 146 Cal.App.3d 135, 150 Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 16 of 19 Page ID #:5030 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 LEGAL\38902526\1 (1983). See also Old Republic Ins. Co., supra, 80 Cal.App.4th at 687-688 (initiation of litigation against its insured (e.g., to recoup benefits paid) does not, by itself, constitute actionable bad faith). “A determination of an insurer's liability for bad faith requires a close examination of the validity and good faith of the underlying declaratory relief litigation.” Dalrymple v. United Servs. Auto. Assn., 40 Cal.App.4th 497, 516–17 (1995). Here, Scottsdale’s decision to file an action for declaratory relief against the Defendants was made in good faith because Scottsdale satisfied the requirements under Blue Ridge. Moreover, there is no evidence suggesting Scottsdale acted unreasonably in investigating the Underlying Action or paying benefits under the Policy, especially because Scottsdale fully defended and indemnified Defendants in the Underlying Action with the Defendants’ understanding that Scottsdale would seek reimbursement. Even if CNC were able to establish that the Policy provides coverage for the Underlying Action (it cannot), Scottsdale’s decision to file this action was not unreasonable because there was at least a genuine dispute involving coverage. Additionally, Defendants argue that Scottsdale committed bad faith by bringing a motion for summary judgment after the Court denied its previous motion to dismiss because “Scottsdale has offered nothing new in the [motion for summary judgment] to justify its position that CNC cannot state a counterclaim for bad faith.” Opp., 21:20-21. However, Scottsdale’s decision to bring a motion for summary judgment is not evidence of bad faith because Scottsdale obtained evidence during discovery demonstrating compliance with Blue Ridge, including emails evidencing Defendants’ consent to the settlement and discovery responses proving Scottsdale notified Defendants of its intent to accept Helinet’s final settlement demand prior to doing so. Moreover, CNC incorrectly likens the facts of this case to those in White v. Western Title Ins. Co., 40 Cal.3d 870, 886 (1985) where the insurer lost its motion for summary judgment, offered nuisance-value settlements, and made no attempt to appraise Plaintiffs’ loss until after its motion for summary judgment was denied. Here, Scottsdale fully defended and indemnified Defendants to ensure Defendants were protected from excessive exposure, Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 17 of 19 Page ID #:5031 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 LEGAL\38902526\1 obtained a reasonable settlement on Defendants behalf, and chose to seek reimbursement given the lack of coverage under the Policy. In sum, CNC’s claim for bad faith fails because it cannot be said that Scottsdale’s decision to seek reimbursement was unreasonable. E. CNC’s Punitive Damages Claim Fails as a Matter of Law CNC failed to submit any evidence proving Scottsdale’s conduct was despicable, deceptive, or performed for the purpose of injuring the Defendants. Instead, CNC argues it “has a claim for punitive damages because Scottsdale did not have probable cause to seek reimbursement” and cites Citi-Wide Preferred Couriers, Inc. v. Golden Eagle Ins. Corp., 114 Cal.App.4th 906, 914 (2017) arguing that “an insurer could even be liable for malicious prosecution for bringing suit for additional premium from an insured, despite the fact that the insurer was entitled to some money.” In Citi-Wide the Court held that “a malicious prosecution action can be maintained where most but not all of the amount sought in the underlying action was claimed without probable cause.” Id. at 908. However, Citi-Wade is easily distinguishable from the facts here because Scottsdale had an honest belief and reasonable basis for its reimbursement claim. In Citi-Wide, the insurer claimed it miscalculated the insured’s premium, billed the insured the additional amount, and then sued for the outstanding premium knowing all along the insured did not owe that amount. Unlike the insurer in Citi-Wide, Scottsdale had a reasonable belief it complied with the Blue Ridge requirements. UFs 13-20, 22 27-30. Further Scottsdale’s coverage position was reasonable because the evidence from the Underlying Action suggests the Individual Defendants committed wrongful acts in an uninsured capacity at Helinet. Moreover, regardless of this Court’s ruling regarding coverage or CNC’s claim for bad faith, there is no question Scottsdale is entitled to summary judgment on Defendants’ claim for punitive damages. In the insurance context, to recover punitive damages, the conduct at issue must rise to the level that “could be described as evil, criminal, recklessly indifferent to the rights of the insured, or [having] a vexatious Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 18 of 19 Page ID #:5032 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 LEGAL\38902526\1 intention to injure.” Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269, 1288 (1994). “[A]ny evidence submitted in response to a motion for summary adjudication must necessarily meet that standard.” Basich v. Allstate Ins. Co., 87 Cal.App.4th 1112, 1121 (2001). Here, regardless of whether this Court finds Scottsdale’s coverage position was incorrect (it was not), or that it acted unreasonably by seeking reimbursement of the Settlement Payment (it did not), Scottsdale is entitled to judgment as a matter of law on CNC’s punitive damages claim because there is no evidence Scottsdale’s conduct was despicable, deceptive, or performed for the purpose of injuring the Defendants. F. CNC’s Claim for Attorney’s Fees Fails as a Matter of Law It is undisputed CNC failed to produce any evidence to support its claim for attorney’s fees during discovery. CNC willfully withheld these documents despite Scottsdale’s discovery requests. Thus, CNC is unable to prove the fees incurred were reasonable or necessary to compel wrongfully withheld benefits under the Policy. See Brandt v. Superior Court, 37 Cal.3d 813, 820 (1985) III. CONCLUSION Scottsdale respectfully requests that this Court grant its Motion. DATED: November 5, 2018 COZEN O’CONNOR By:/s/Valerie D. Rojas Valerie D. Rojas Michael Ruocco Attorneys for Plaintiff and Counter-Defendant SCOTTSDALE INSURANCE COMPANY Case 2:17-cv-03190-VAP-E Document 151 Filed 11/05/18 Page 19 of 19 Page ID #:5033