Gemini Insurance Company v. Western Marine Insurance Services Corporation

Filing 65

ORDER denying 54 Motion for leave to file a first amended answer signed by Judge Kimberly J. Mueller on 8/6/13. (Kaminski, H)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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ORDER

vs.

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No. 210-cv-03172-KJM-JFM

GEMINI INSURANCE COMPANY, a
corporation,
Plaintiff,

WESTERN MARINE INSURANCE
SERVICES CORPORATION, a California
corporation,
Defendant.

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This matter is before the court on defendant’s motion for leave to file a first

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amended answer. This matter was decided without a hearing. For the following reasons,

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defendant’s motion is DENIED.

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I.

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FACTS AND PROCEDURAL HISTORY
Plaintiff alleges effective July 1, 2004 that plaintiff and defendant entered into a

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contract entitled “Program Administrator Agreement” (“PAA”) appointing defendant to

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administer, underwrite, and issue insurance policies insured by plaintiff. (Compl. ¶ 7, ECF 1.)

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Plaintiff also alleges defendant “[a]greed to defend, indemnify and hold Gemini harmless from

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and against all claims, actions, causes of action, liability or loss which result from any real or

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alleged negligent or willful acts, errors, or omissions of Westmar, or the servants, employees,

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representatives, producers, or brokers of Westmar in the performance of breach of duties under

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the PAA.” (Id.)

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Defendant issued plaintiff insurance policy number WGP0000073-00 to Wesco

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Sales Corporation (“Wesco”) with a term of August 6, 2004 to August 6, 2005. (Id.) The policy

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included blanket coverage for all of Wesco’s locations. (Id.) However when Wesco renewed its

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policy the following year, the renewed policy did not include blanket coverage, instead including

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limits based on per location coverage. (Id.) Under the renewed policy Wesco made a claim to

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plaintiff for damage to Wesco docks, unaware the renewed policy did not include blanket

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coverage. (Id.) When Wesco did not receive blanket coverage for its claim, it filed an action

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against plaintiff for breach of contract and breach of the covenant of good faith and fair dealing.

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(Id. at 4.) Plaintiff settled with Wesco, and agreed to pay Wesco $950,000. (Id.) Plaintiff alleges

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on May 7, 2009, defendant agreed to indemnify plaintiff for the settlement with Wesco. (Id.)

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Plaintiff now alleges defendant is in breach of contract for refusing to indemnify plaintiff’s

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settlement with Wesco, and was negligent in failing to notify Wesco the renewal policy would

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not include blanket coverage. (Id. at 4-5.)

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In defendant’s original answer to plaintiff’s complaint, defendant admitted it

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“[e]ntered a Program Administrator Agreement with Gemini effective July 1, 2004.” (Answer

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¶ 7, ECF 9.) In defendant’s proposed amended answer, defendant admits it entered into a

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“Program Administrator Agreement” (PAA) with Berkeley Underwriting Partners LLC

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(Berkeley) effective July 1, 2004, but denies entering the PAA with Gemini. (Proposed Am.

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Answer ¶ 7, ECF 54.) Defendant asserts the admission in the first answer was a mistake, based

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on a prior attorney’s work referring to both Berkeley and Gemini collectively as “Gemini.”

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(Decl. of Steven W. Yuen ¶ 7, ECF 54-1). Plaintiff asserts the defendant’s proposed amendment

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would be futile as by “entering into an agreement with Gemini’s agent, BUP [Berkeley],

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Westmar also entered into an agreement with Gemini.” (Opp’n to Mot. for Leave to Am. Answer

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¶ 2, ECF 59). Defendant argues the proposed amendment supports their defense that plaintiff

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lacks standing to sue, and thus would not be futile. (Reply to Opp’n to Mot. for Leave to Am.

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Answer ¶ 3, ECF 62.)
Plaintiff filed the original complaint with this court on November 23, 2010.

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Defendant filed its original answer on February 17, 2011. On March 18, 2013 defendant filed a

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motion for leave to file its first amended answer according to Federal Rule of Civil Procedure 15

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(a)(1)(B)(2). On April 9, 2013, plaintiff filed its opposition to defendant’s motion for leave to

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amend, and on April 19, defendant its reply.
II.

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STANDARD

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Federal Rule of Civil Procedure 15(a)(2) states “[t]he court should freely give

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leave to [to amend its pleading] when justice so requires” and the Ninth Circuit has “stressed

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Rule 15’s policy of favoring amendments.” Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d

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1149, 1160 (9th Cir. 1989). “In exercising its discretion [regarding granting or denying leave to

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amend] ‘a court must be guided by the underlying purpose of Rule 15 -- to facilitate decision on

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the merits rather than a pleading or the technicalities.”” DCD Programs, Ltd. v. Leighton,

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833 F.2d 183, 186 (9th Cir. 1987) (quoting United States v. Webb, 655 F.2d 977, 979 (9th Cir.

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1981)). However, “the liberality in granting leave to amend is subject to several limitations.

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Leave need not be granted where the amendment of the complaint would cause the opposing

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party undue prejudice, is sought in bad faith, constitutes an exercise in futility, or creates undue

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delay.” Ascon Properties, 866 F.2d at 1160 (internal citations omitted).

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Here, the PAA contains a choice-of-law provision designating Illinois state law as

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controlling. (Compl., Ex. 1, ¶ 10.5, ECF 1.) “When a federal court sits in diversity, it must look

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to the forum state’s [California] choice of law rules to determine the controlling substantive

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law.” Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002). “When parties to a contract bargain for

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an explicit choice of law provision, courts applying California’s choice-of-law rules are guided

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by the California Supreme Court’s decision in Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th

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459 [] (1992).” Nuvo Research Inc. v. McGrath, C 11-4006 SBA, 2012 WL 1965870, at *3 (N.D.

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Cal. 2012).
In Nedlloyd, the California Supreme Court determined that the proper test for

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determining whether to enforce a choice of law provision is: (1) whether the chosen state has a

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substantial relationship to the parties or their transaction, or (2) whether there is any other

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reasonable basis for the parties’ choice of law. Nedlloyd, 3 Cal. 4th at __. If either of these two

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prongs is satisfied, the court must determine whether the chosen forum’s law is contrary to a

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fundamental policy of California. Id. If there is no conflict, the court enforces the parties’ choice

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of law. Id.

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Given that Berkeley is listed as a resident of Illinois in the PAA, there is a

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reasonable basis for the parties to choose Illinois law as controlling. (ECF 1, Ex 1, 15.)

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Furthermore, nothing in the record indicates enforcing Illinois law would be contrary “to some

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fundamental principle of justice, some prevalent conception of morals, some deep-seated

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tradition of the commonweal.” Brack v. Omni Loan Co., Ltd., 80 Cal. Rptr. 3d 275, 282 (Cal.

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App. 4th Dist. 2008) (internal citations omitted). Thus, the choice-of-law provision in the PAA is

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valid and enforceable.

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However, this court’s application of Federal Rule of Civil Procedure15 is
controlling, as the Rule 15 standard for granting leave to amend is procedural. Goldberg v. Pac.

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Indem. Co.. 627 F.3d 752, 755 (9th Cir. 2010); see also Gasperini v. Ctr. for Humanities, Inc.,

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518 U.S. 415, 427 (1996) (Stevens, Scalia dissenting) (“Under the Erie doctrine, federal courts

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sitting in diversity apply state substantive law and federal procedural law.”). Nevertheless, the

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question of the futility of the alleged defense is a question of substance; thus, Illinois state law is

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controlling for that issue alone. Wetterman v. Monaco Coach Corp., 141 F. Supp. 2d 1263, 1264

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(D. Or. 2001) (citing Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) for principle that when

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determining futility of an amendment, state substantive law is controlling).
III.

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ANALYSIS
A court may deny leave to amend for several reasons, including (1) a showing of

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prejudice to the other party, (2) bad faith by the moving party, or (3) futility of the proposed

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amendment. See e.g., Bowles v. Reade 198 F.3d 752, 758 (9th Cir. 1999). Viewing the facts in

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light most favorable to the moving party as required, nothing in the defendant’s motion suggests

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plaintiff would be prejudiced or the defendant is acting in bad faith in requesting leave to amend,

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as discussed below. However, because there is no set of facts that could be proven under the

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proposed amendment to constitute a valid defense, the amendment is futile.
First, there would be no prejudice to plaintiff in granting defendant’s motion to

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amend. When determining if there is a showing of prejudice, the court will often look to any

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additional litigation expenses that would be incurred by the nonmoving party, or any undue delay

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the amendment would cause to litigation. Ascon Properties, 866 F.2d at 1160 (internal citations

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omitted) (moving parties’ new theory would impose undue additional discovery costs on

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opposing counsel, and moving parties’ multiple amendments had caused undue delay). Here,

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neither party has initiated discovery or made their initial disclosures under Federal Rule of Civil

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Procedure 26. Moreover, this is the defendant’s first motion to amend.

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Second, the record does not suggest the defendant’s amendment is proposed in

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bad faith. A moving party may be found to be acting in bad faith if the amendment was filed to

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cause “mere undue delay.” Johnson v. Hewlett-Packard Co., 809 F. Supp. 2d 1114, 1122 (N.D.

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Cal. 2011). For the reasons discussed above, the amendment would not cause undue delay.

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However, the proposed amendment would be futile. When determining whether

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an amended answer would be futile, the court applies the test for a motion to dismiss under

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Federal Rule of Civil Procedure 12(b)(6). See Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214

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(9th Cir. 1988) (citing Baker v. P. Far E. Lines, Inc., 451 F. Supp. 84, 89 (N.D. Cal. 1978); a

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proposed amendment is futile only if no set of facts can be proven to support a valid and

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sufficient claim or defense).
Neither the facts pled in the original answer nor those in the proposed amendment

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would establish a valid defense for defendant, if proven. Defendant asserts the proposed

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amendment preserves its fourteenth affirmative defense, that plaintiff lacks standing to sue.

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Under Illinois law, the agency relationship between plaintiff and Berkeley gives plaintiff

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standing to sue unless it is excluded as a party by the form or terms of the agreement. See Lake

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Shore Mgt. Co. v. Blum, 235 N.E.2d 366, 368 (Ill. App. 1st Dist. 1968) (“[a] third party who

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deals with the agent of a partially disclosed principal is liable to the principal unless he is

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excluded as a party by the forms or terms of the agreement”). Although questions of agency

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relationship are generally questions of fact left for the jury, if the “parties relationship is so clear

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as to be undisputed,” then agency may be determined as a matter of law. Citicorp Sav. Of Ill. V.

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Rucker, 692 N.E.2d 1319, 1325 (Ill. App. 1st Dist. 1998).

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Here, the express terms of the PAA clearly establish the plaintiff is a party to the

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agreement executed between Berkeley and defendant. Nowhere do the terms of the PAA

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explicitly exclude the plaintiff from the agreement. The defendant cites paragraph 1 of the PAA,

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where Berkeley and Western are named as parties to the PAA, as excluding the plaintiff from the

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agreement. (ECF 62.) However, paragraph 2 of the PAA expressly identifies Berkeley as the

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agent of “the insurance companies in exhibit A.” (Compl., Ex. 1, ECF 1). The plaintiff is listed

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as an insurance company in Exhibit A. (Id.) Thus, the terms of the PAA do not exclude the

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plaintiff from the agreement, but rather expressly establish Berkeley as plaintiff’s agent.

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Compare Wargel v. First Nat. Bank of Harrisburg, 460 N.E.2d 331, 334 (Ill. App. 5th Dist.

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1984) (citing Mills v. State National Bank 329 N.E.2d 255 (1975) for proposition that agent is

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generally defined as one who undertakes to manage some affairs to be transacted for another by

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his authority) with PAA, ¶ 3, (“[c]ompany is contracted as the manager of the insurance

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companies designated in Exhibit A…”). There is a legally sufficient agency relationship giving

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plaintiff standing to sue whether or not the amended answer is allowed. See Lake Shore Mgt. Co,

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235 N.E.2d at 368.
Second, the form of the PAA does not imply plaintiff’s exclusion as a party to the

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contract. As defendant correctly notes, an integration clause may prevent the use of extrinsic

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evidence when interpreting the terms of contract. See L.D.S., LLC v. S. Cross Food, Ltd.,

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954 N.E.2d 696, 705 (Ill. App. 1st Dist. 2011). However, “[a]gency may be established and its

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nature and extent shown by parol evidence…if the evidence indicates one individual acting for

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others under circumstances implying knowledge on the part of the supposed principals of such

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acts, a prima facie case of agency is established.” Mateyka v. Schroeder, 504 N.E.2d 1289, 1294

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(Ill. App. 5th Dist. 1987) (citation omitted). Moreover, a contract made by an agent in his own

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name may be shown by parol evidence to be that of the principal “[w]here the transaction relates

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to the affairs of the principal and not the personal affairs of the agent.” Queen Ins. Co. of Am. v.

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Citro, 58 F.2d 107, 110 (7th Cir. 1932).

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As the plaintiff here is the actual provider of the insurance package in dispute, the

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transaction made by plaintiff’s agent Berkeley with defendant directly relates to the plaintiff as

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Berkley’s principal. Therefore, extrinsic evidence may be used to support finding an agency

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relationship between Berkeley and plaintiff. See id. In both the defendant’s original answer to the

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complaint, and its proposed amended answer, defendant admits to issuing plaintiff’s insurance

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packages to Wesco. Moreover the record indicates defendant issued over 4,000 of plaintiff’s

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insurance policies, making it clear Berkeley was acting on behalf of plaintiff and putting

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defendant on notice it may be liable to plaintiff. (Decl. of Steven R. Gabor ¶ 3, ECF 59-2.)
Nothing in the form of the PAA, or the surrounding circumstances of the PAA’s

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drafting, establish plaintiff as excluded as a party to the contract between Berkeley and the

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defendant. Even if the proposed amendment was allowed, the plaintiff would have standing to

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sue based on the agency relationship between Berkeley and plaintiff.

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IV.

CONCLUSION
Defendant’s attempt to amend its answer to the complaint is futile as no set of

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facts supports the defendant’s affirmative defense that plaintiff lacks standing to sue. Miller v.

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Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988) (citing Baker v. P. Far E. Lines, Inc.,

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451 F. Supp. 84, 89 (N.D. Cal. 1978)). The motion is denied.

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IT IS SO ORDERED.
DATED: August 6, 2013.

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UNITED STATES DISTRICT JUDGE

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