Gemcap Lending LLC v. Scottsdale Indemnity Company et al

Filing 31

MINUTES (IN CHAMBERS) MOTION TO DISMISS (Dkt. 16, Filed February 9, 2016) by Judge Christina A. Snyder: The FAC is DISMISSED without prejudice. Plaintiff is granted 21 days leave in which to amend the complaint. (SEE CIVIL MINUTES FOR SPECIFICS) (bp)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

Present: The Honorable

Date

March 17, 2017

CHRISTINA A. SNYDER

Catherine Jeang
Deputy Clerk

Not Present
Court Reporter / Recorder

N/A
Tape No.

Attorneys Present for Plaintiffs:

Attorneys Present for Defendants:

Not Present

Not Present

Proceedings:

I.

(IN CHAMBERS) - MOTION TO DISMISS (Dkt. 16, Filed
February 9, 2016)

INTRODUCTION

On November 24, 2015, plaintiff GemCap Lending, LLC (“GemCap”) brought this
action against defendant Scottsdale Indemnity Company (“Scottsdale”) in Los Angeles
Superior Court. Dkt. 1. On December 29, 2015, Scottsdale removed the action to federal
court, asserting diversity jurisdiction. Dkt. 1. On January 5, 2016, Scottsdale filed a
motion to dismiss this action pursuant to Federal Rule of Civil Procedure 12(b)(6). Dkt.
8. In response, GemCap filed the operative First Amended Complaint (“FAC”) on
January 26, 2016. Dkt. 14 (FAC). The FAC asserts claims for breach of contract, breach
of the implied duty of good faith and fair dealing, and a judgment holder direct action
under California Insurance Code section 11580, et seq.
On February 9, 2016, Scottsdale filed the instant motion to dismiss the FAC
pursuant to Federal Rule of Civil Procedure 12(b)(6). Dkt. 16 (“Motion”). On March 8,
2016, Gemcap filed an opposition to the instant motion. Dkt. 23 (“Opp’n”). On March
21, 2016, Scottsdale filed a reply. Dkt. 26 (“Reply”). On April 6, 2016, the Court
vacated the hearing on the instant motion and took the matter under submission. Dkt. 28.
Having carefully considered the parties’ arguments, the Court finds and concludes
as follows.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:15-cv-09942-CAS(FFMx)

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

II.

Date

‘O’

March 17, 2017

BACKGROUND

Plaintiff GemCap Lending, LLC is an asset-based commercial lender. FAC ¶ 6.
Non-party CROP USA Insurance Agency, Inc. (“Crop”) is a managing general insurance
agency that sells insurance policies, primarily policies issued by Diversified Crop
Insurance Services, Inc. ("Diversified"). According to the operative complaint, Crop’s
business “depended almost entirely on sales performed by Crop’s agents and subagents,”
and in order to “maintain Crop’s business, including its revenue stream, Crop’s agents
and subagents needed to be timely paid.” Id. ¶ 12. However, in 2011, Crop experienced
cash flow issues and therefore needed to obtain a loan. Id. GemCap accordingly met
with Crop’s principals to discuss a potential loan to fund its operations. Id. ¶ 15. During
these meetings, Crop represented to GemCap it had cash flow issues due to the periodic
nature of insurance commissions payments. Id. On November 23, 2011, GemCap and
Crop executed a loan agreement for a $5 million revolving credit facility. Id. The credit
limit was eventually raised to $10 million on February 4, 2013. Id. Throughout the term
of the loan, GemCap alleges that Crop negligently misrepresented its financials as it
made advances on the line of credit, in violation of the loan agreement. Id. On July 13,
2013, Crop defaulted on the loan with GemCap. Id. ¶ 16.
On July 30, 2013, GemCap initiated a lawsuit against Crop in the Central District
of California arising from Crop’s alleged breach of the loan agreement. Id. ¶ 16; see
GemCap Lending I LLC v. Crop USA Ins. Agency, Inc., Case No. 13-cv-05504 (C.D.
Cal) (hereafter, the “underlying action”).1 Crop was insured by Scottsdale Indemnity
Company under a professional liability policy (“the Policy”) covering the period at issue
in the underlying action. Accordingly, Crop tendered the complaint in the underlying
action to Scottsdale, seeking to invoke Scottsdale’s purported duty to defend Crop under
the Policy. FAC ¶ 17. On September 3, 2013, Scottsdale rejected Crop’s request for a
defense in the underlying action, and Crop accordingly bore the burden of its own
defense in the underlying action. Id. ¶¶ 18-19.

1

GemCap’s initial complaint in the underlying case was filed on July 30, 2013.
GemCap v. Crop, Dkt. 1. GemCap ultimately filed a second amended complaint in that
action on December 31, 2013. Id., Dkt 102. The Court refers to these documents as
“Underlying Compl.” and “Underlying SAC,” respectively.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

Ultimately, in September 2014, Crop stipulated to a $12,126,534.61 judgment in
the underlying action.2 Id. ¶ 26, see GemCap v. Crop, Dkt. 325. On March 17, 2015,
Crop also assigned all of its rights under the Scottsdale policy to GemCap.3 FAC ¶ 27.
GemCap, having been assigned Crop’s right to initiate an action against Scottsdale,
initiated the instant suit on November 24, 2015. In this suit, GemCap argues that
Scottsdale’s denial of Crop’s tender of a defense was wrongful and constitutes a breach
of the Policy between Crop and Scottsdale. See generally FAC. GemCap seeks as
damages all unreimbursed costs Crop bore defending the underlying lawsuit. Id. at 9. In
the instant motion to dismiss, as discussed infra, Scottsdale maintains that the underlying
lawsuit only asserted claims that lay outside the coverage of Crop’s professional services
liability policy, such that Scottsdale had no duty to defend Crop in the underlying action.
See Motion at 2–3.
III.

LEGAL STANDARD

A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal
sufficiency of the claims asserted in a complaint. Under this Rule, a district court
properly dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence
of sufficient facts alleged under a cognizable legal theory.’” Conservation Force v.
Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep’t,
901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6)
motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to
provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted).
“Factual allegations must be enough to raise a right to relief above the speculative level.”
Id. (internal citations omitted).

2

The district court would later adopt and approve the stipulated judgment on April
12, 2015.
3

The Court assumes arguendo, for the purposes of this order, that this assignment
was valid.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all
material allegations in the complaint, as well as all reasonable inferences to be drawn
from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be
read in the light most favorable to the nonmoving party. Sprewell v. Golden State
Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to
dismiss can choose to begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth. While legal conclusions can
provide the framework of a complaint, they must be supported by factual allegations.”
Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service,
572 F.3d 962, 969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the
non-conclusory ‘factual content,’ and reasonable inferences from that content, must be
plausibly suggestive of a claim entitling the plaintiff to relief.”). Ultimately,
“[d]etermining whether a complaint states a plausible claim for relief will . . . be a
context-specific task that requires the reviewing court to draw on its judicial experience
and common sense.” Iqbal, 556 U.S. at 679.
Unless a court converts a Rule 12(b)(6) motion into a motion for summary
judgment, a court cannot consider material outside of the complaint (e.g., facts presented
in briefs, affidavits, or discovery materials). In re American Cont’l Corp./Lincoln Sav. &
Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev’d on other grounds sub nom
Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court
may, however, consider exhibits submitted with or alleged in the complaint and matters
that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon
Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); Lee v. City of Los Angeles,
250 F.3d 668, 689 (9th Cir. 2001).
As a general rule, leave to amend a complaint which has been dismissed should be
freely granted. Fed. R. Civ. P. 15(a). However, leave to amend may be denied when “the
court determines that the allegation of other facts consistent with the challenged pleading
could not possibly cure the deficiency.” Schreiber Distrib. Co. v. Serv-Well Furniture
Co., 806 F.2d 1393, 1401 (9th Cir. 1986); see Lopez v. Smith, 203 F.3d 1122, 1127 (9th
Cir. 2000).

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:15-cv-09942-CAS(FFMx)

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

IV.

Date

‘O’

March 17, 2017

DISCUSSION
A.

Legal Standard Regarding the Duty to Defend under California Law

In California, an insurer’s duty to defend its insured is broad. Pension Trust Fund
for Operating Engineers v. Federal Ins. Co., 307 F.3d 944, 949 (9th Cir. 2002). An
insured is entitled to a defense “if the underlying complaint alleges the insured’s liability
for damages potentially covered under the policy.” Montrose Chemical Corp. v. Superior
Court, 6 Cal. 4th 287, 299 (1993) (emphasis in original). “The duty to defend is broader
than the duty to indemnify, and it may apply even in an action where no damages are
ultimately awarded.” Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (2005).
Whether there is a duty to defend turns upon “those facts known by the insurer at the
inception of a third party lawsuit.” Montrose, 6 Cal. 4th at 295 (emphasis added). Thus,
“[d]etermination of the duty to defend depends, in the first instance, on a comparison
between the allegations of the complaint and the terms of the policy.” Scottsdale Ins.
Co., 36 Cal. 4th at 654.
“[T]he duty also exists where extrinsic facts known to the insurer suggest that the
claim may be covered.” Id.; see also Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 19
(1995) (explaining that the duty to defend exists if the insurer “becomes aware of, or if
the third party lawsuit pleads, facts giving rise to the potential for coverage under the
insuring agreement.”). “When determining whether a particular policy provides a
potential for coverage and a duty to defend, [courts] are guided by the principle that
interpretation of an insurance policy is a question of law.” Waller, 11 Cal. 4th at 18.
“Moreover, that the precise causes of action pled by the third-party complaint may fall
outside policy coverage does not excuse the duty to defend where, under the facts
alleged, reasonably inferable, or otherwise known, the complaint could fairly be
amended to state a covered liability.” Scottsdale Ins. Co., 36 Cal. 4th at 654.
Failure to defend an insured is excused only when “the third party complaint can
by no conceivable theory raise a single issue which could bring it within the policy
coverage.” Montrose, 6 Cal. 4th at 300. Accordingly, an insurer who receives tender
indicating potential for coverage “cannot ‘wait out’ discovery before determining its duty
to defend; that is precisely why the California Supreme Court requires defense even on
the basis of potential coverage.” Tower Ins. Co. of New York v. Capurro Enterprises
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

Inc., No. C 11-03806 SI, 2011 WL 6294485, at *7 (N.D. Cal. Dec. 15, 2011) (citing
Montrose, 6 Cal. 4th at 299)). However, although the duty to defend is “broad, [it] is not
unlimited; it is measured by the nature and kinds of risks covered by the policy.” Waller,
11 Cal. 4th at 19.
B.

The Allegations in the Underlying Action

In order to determine whether GemCap has stated a claim for relief here the Court
must evaluate whether there was a possibility of a covered claim based on the facts pled
in the underlying complaint. The original underlying complaint alleged the following
facts: In 2011, Crop’s president and prinicpal, R. John Taylor (“Taylor”), approached
GemCap seeking a loan. Id. ¶ 30. GemCap provided Crop with a line of credit based on
Taylor’s representation that Crop’s income was paid in intervals, and, therefore, the
company needed funds to cover daily operations during intermittent revenue gaps - “in
other words, for working capital.” Id. The underlying complaint alleged that, in truth,
Taylor was overstretched financially and needed money to fund other entities, some
unrelated to Crop, as well as his personal debts. Id.
GemCap, in reliance upon Taylor’s representations agreed to provide a loan to
Crop with a revolving line of credit. Id. ¶ 31. The loan agreement between GemCap and
Crop provided that Crop could use the funds “solely” for certain, enumerated purposes.
Id. ¶ 33. Use of the funds for other purposes would result in a default. Id. The
enumerated purposes included paying for investments in specified companies, repaying
debts, payment of fees relating to the loan and Crop’s day-to-day working capital needs.
Id. ¶ 42. The loan was secured by collateral in the form of a security interest in Crop’s
future premiums and commissions, plus all other assets. Id. ¶ 34.
In 2012, GemCap discovered that Taylor had impermissibly diverted loan proceeds
to Pacific Empire Radio Corporation (“PERC”), a radio station in which Taylor
maintained an ownership interest. Id. ¶ 46. To avoid being found in default, Crop agreed
to pay a $10,000 fee. Id. With Crop’s prior improper diversion of loan funds in mind,
GemCap performed an audit of Crop’s financial disclosures in April, 2013. Id. GemCap
discovered that Crop had provided erroneous Borrowing Certificates and, in reliance
upon those certificates, GemCap had extended a “massive overadvance” to Crop. Id. ¶
47. Specifically, GemCap discovered that, while the federal Risk Management Agency
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

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Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

(“RMA”) capped insurance commissions at 62% of administrative and operating
expenses, Crop had requested funds based upon a cap of 80%. Id. The overadvance was
in excess of $5.7 million. Id. ¶ 48. At the time, GemCap had loaned Crop approximately
$12.7 million. Id. ¶ 49. After further investigation, GemCap discovered Taylor had been
diverting loan funds to personal expenses, his mortgage, PERC, other businesses in
which Taylor had invested, and various other activities “unrelated to Crop’s insurance
activities.” Id. ¶ 50. GemCap sent a notice of default to Crop on July 16, 2013. Id. ¶ 51.
The underlying action was filed on July 30, 2013.4
C.

Crop’s Insurance Policy with Scottsdale

GemCap’s claims against Scottsdale are all predicated upon Scottsdale’s purported
duty to defend Crop in the underlying action. The scope of said duty depends upon the
mutual intent of the parties as expressed in the insurance policy issued by Scottsdale to
Crop. See PMI Mort. Ins. Co. v. American Intern. Spec. Lines Ins. Co., 394 F.3d 761,
764 (9th Cir. 2005). The parties do not dispute the text of the Policy, which provides, in
pertinent part, that Scottsdale shall:
pay on behalf of the Insured any Damages as a result of a Claim first made
against the Insured . . . for a Wrongful Act of the Insured . . . . [and that
Scottsdale has] the right and duty to defend any Claim to which this
insurance applies . . . even if the allegations of the Claim are groundless,
false, or fraudulent.
FAC, Ex. A (“Policy”) at 6 (emphasis added). In the policy, a “Wrongful Act” is defined
as:

4

The underlying second amended complaint added more detail regarding the
specific companies for which the loan funds were to be used, Underlying SAC ¶¶ 43–45,
alleged in more detail how Taylor impermissibly commingled loan funds between
companies not specified in the loan agreement, ¶¶ 45–46, and alleged with greater
specificity the extent of GemCap’s collateral security interest in various entities related to
Crop, ¶¶ 50–55.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.
any actual or alleged negligent act, error or omission, including a Personal
Injury, committed solely in the performance or failure to perform
Professional Services.

Id. at 8 (emphasis added). “Professional Services” are defined as:
Insurance services performed for others for a fee or commission . . . as a . . .
general agent . . . including any of the following services: notary, premium
financing, claims handling or adjusting, risk management or loss control
services.
Id.
D.

GemCap’s Claims Against Scottsdale

GemCap argues that it alleged conduct in the underlying action which related to
Crop’s “professional services,” as defined in the Policy. GemCap argues that Crop’s
accounting methods, or alleged lack thereof, were “professional services” within the
meaning of the Policy because Crop’s failure to adhere to certain accounting principles
adversely affected its business as an insurance agent and its relationship with Diversified,
whose policies Crop sold. The underlying complaint alleged facts relating to Crop’s
submission of incorrect accounting records to GemCap. GemCap appears to argue that
because “both the Diversified contract and [Federal Crop Insurance Corporation
(“FCIC”)] regulations required Crop to keep detailed and accurate accounting records,”
FAC ¶ 13, any accounting failures at Crop are professional services under the Policy.
GemCap is incorrect.
The language of the Policy does not support such a strained reading, nor does
GemCap aver that the Policy language is ambiguous. To the extent possible, the mutual
intentions of Crop and Scottsdale should be inferred “solely from the written provisions of
the [policy] contract.” PMI Mort Ins. Co., 394 F.3d at 764. The Policy appears to require
Scottsdale to defend Crop against claims predicated upon Crop’s negligence in the
performance of “[i]nsurance services performed for others for a fee or commission.”
Preparation and provision of financial documents in a company’s loan application are not
“insurance services.” Nor was Crop accused in the underlying action of providing
documents to GemCap “for a fee or commission.” Crop provided accounting documents
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

to GemCap in the hope of obtaining and retaining a revolving line of credit. Whereas one
might, perform insurance services “for a fee or commission,” those words are not
normally understood to mean “in a loan application” or “for a loan.” Therefore claims
based upon Crop’s disclosures to GemCap during loan negotiations do not appear to be
“insurance services.” The foregoing interpretation of the phrase “insurance services” is
bolstered by the language accompanying the phrase in the Policy. The Policy describes
“insurance services” as including actions normally associated with insurance and
insurance sales, namely, “notary, premium financing, claims handling or adjusting, risk
management or loss control.” Policy at 8. The underlying action did not allege
negligence in the performance of those activities or any other potential “insurance
services.”
GemCap argues that its contract with Diversified required it to abide by certain
accounting principles and that GemCap’s audit exposed errors in Crop’s accounting. This
strained connection between Crop’s loan application and insurance business does not
place Crop’s loan application within the ambit of “insurance services.” Crop’s loan
application was not “insurance services” as those words would ordinarily be read. “In
construing the terms of a professional liability policy, we look to their ordinary and
normal use in that profession.” Inglewood Radiology Med. Grp., Inc. v. Hosp. Shared
Servs., Inc., 217 Cal. App. 3d 1366, 1369, 266 Cal. Rptr. 501 (Ct. App. 1989). GemCap
does not aver that “insurance services” has a different meaning in the insurance industry
than it ordinarily would, nor does GemCap argue that “insurance services” has a special or
ambiguous meaning in the context of the Policy.
Consistent with the Court’s interpretation of the Policy here, “California state courts
have uniformly held that insurance policies covering ‘professional services’ reach only
those acts committed by the insured or in his or her capacity as a professional—they do
not cover general administrative activities that occur in all types of businesses.” PMI
Mort Ins. Co., 394 F.3d at 766; see also General Acc. Ins. Co. v. Namesnik, 790 F.2d
1397, 1400 (9th Cir. 1986) (professional services policy for attorneys does not cover
attorney’s conduct in soliciting funds from clients, since such conduct did not involve
legal services); Blumberg v. Guarantee Ins. Co., 192 Cal.App.3d 1286 (1987)
(professional services policy for attorneys does not cover suit between partnered attorneys
arising out a partnership dispute). “The dispositive question is whether the alleged
injuries occurred during the performance of professional services.” PMI Mort Ins. Co.,
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

394 F.3d at 767 (citing Tradewinds Escrow, Inc. v. Truck Ins. Exch., 92 Cal.App.4th 704
(2002)).
In this respect Inglewood Radiology Med. Grp, Inc. v. Hospital Shared Services,
Inc., is instructive. 217 Cal.App.3d 1366 (1989). In Inglewood Radiology, a medical
group carried insurance covering liability arising from the rendering of “professional
services,” defined as those “services performed in the practice of a physician, surgeon or
dentist.” Id. at 1368. When the medical group was sued by a former employee-physician
for wrongful termination, the insurer refused to defend the action as being outside the
policy. Id. When the insured medical group brought suit, the court found that a “business
or administrative decision” cannot be considered the rendering of the doctor’s
“professional service.” Id. at 1370. The medical group advanced a similar argument to
GemCap’s here. The insured medical group argued that “only a trained physician, in
exercising the physician's expertise, could determine to fire a physician employee.” Id.
Here, by analogy, GemCap argues that only an insurance agent like Crop uses
certain accounting practices and that Crop’s alleged negligence in the underlying action
was in its accounting disclosures to GemCap. The Inglewood Radiology court rejected
the medical group’s argument, reasoning that, where a managing-physician terminates an
employee, the decision is in that manager’s capacity as an employer. Id. The manager is
not “rendering professional services” as those terms are ordinarily understood, even if the
decision related to their respective medical knowledge. Id. Similarly, here, Crop’s
provision of financial disclosures to GemCap were not “insurance services” despite
potentially relating to Crop’s insurance related accounting methods - Crop was accused in
the underlying action of erroneous disclosures during a business and administrative
decision unconnected to the provision of insurance services. Accordingly, the underlying
complaint did not implicate Scottsdale’s duty to defend Crop in the underlying action.
The facts alleged were not potentially within the scope of the Policy.
However, the analysis does not end with a comparison of the Policy and the facts
alleged in the underlying complaint. Scottsdale was required to consider any available
extrinsic facts in determining whether any covered claim was possible in the underlying
action. Montrose, 6 Cal.4th at 296. GemCap makes repeated mention of this aspect of
California law, but does not allege in the complaint or its opposition to this motion that
Scottsdale had any specific extrinsic information which should have affected Scottsdale’s
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-09942-CAS(FFMx)

March 17, 2017

Title

GEMCAP LENDING, LLC v. SCOTTSDALE INDEMNITY CO., ET
AL.

duty to defend. Instead, the FAC summarily asserts that the underlying “complaint, [and]
available extrinsic evidence and inferences” gave rise to Scottsdale’s duty to defend
without distinguishing between the two sources of information. FAC ¶ 34.
“An 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 v. Fire Ins. Exchange, 37 Cal.App.4th
1106, 1114 (1995). GemCap is correct in its assertion that an insurer’s duty to defend is
often broader than its duty to indemnify. Horace Mann, 4 Cal.4th at 1081. However, it is
not limitless. An insurer is not required to defend against claims which do not raise any
possibility of coverage. In this case, the Policy did not extend to the underlying action.
GemCap’s claims, all of which are premised upon Scottsdale’s failure to perform its duty
to defend, therefore must be DISMISSED.
It is difficult to discern how plaintiff might cure the foregoing deficiency insofar as
plaintiff’s claims appear to be limited by the allegations in the underlying complaint and
language of the Policy. However, plaintiff has requested leave to amend the FAC, should
it be dismissed. Plaintiff may yet be aware of extrinsic information affecting Scottsdale’s
purported duty to defend or may be able to allege facts supporting a different
interpretation of “insurance services” in the Policy. Accordingly, plaintiff will be
permitted 21 days leave in which to file an amended pleading.
V.

CONCLUSION

The FAC is DISMISSED without prejudice. Plaintiff is granted 21 days leave in
which to amend the complaint.
IT IS SO ORDERED.
00
Initials of Preparer

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:

00

CMJ

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