Casa Nido Partnership v. Kwon et al

Filing 144

ORDER Denying 130 Plaintiff's Motion for Leave to File Third Amended and Supplemental Complaint. Signed by Judge Edward M. Chen on 11/21/2022. (emcsec, COURT STAFF) (Filed on 11/21/2022)

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Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 1 of 13 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 CASA NIDO PARTNERSHIP, Plaintiff, 8 9 v. 10 JAE KWON, et al., United States District Court Northern District of California 11 Case No. 20-cv-07923-EMC ORDER DENYING PLAINTIFF’S MOTION FOR LEAVE TO FILE THIRD AMENDED AND SUPPLEMENTAL COMPLAINT Defendants. Docket No. 130 12 13 I. 14 15 16 17 18 19 INTRODUCTION This is an environmental cleanup case brought by Plaintiff Casa Nido Partnership (“Casa Nido”) against several defendants, including Defendants Catherine O’Hanks (“O’Hanks”) and Sentry Insurance Company (“Sentry”). Casa Nido is the owner of the building in which O’Hanks operated a dry-cleaning business from 1960 to 1992. See Docket No. 88 (“SAC”). Sentry issued an insurance policy to O’Hanks with Casa Nido listed as an “Additional Insured.” Id. Casa Nido alleges O’Hanks, while operating the facility, released Tetrachloroethylene (“PCE”) onto the floor 20 and into the groundwater below the facility, for which Casa Nido spent hundreds of thousands of 21 dollars remediating. Id. Casa Nido alleges it is entitled to indemnification and contribution from 22 23 24 O’Hanks under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Id. O’Hanks counter-claimed against Casa Nido. See Docket No. 51 (“CC”). In response, 25 Casa Nido sent a Tender of Defense and Indemnity to Sentry, claiming Sentry has a duty to defend 26 Casa Nido against O’Hanks’s counter-claim. SAC ¶¶ 34–40. In a letter sent to Casa Nido on 27 March 25, 2021, Sentry informed Casa Nido that it determined it has no duty to defend or 28 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 2 of 13 1 indemnify. Id.; see also Docket No. 64, Ex. E (“Denial Letter”). Casa Nido claims that Sentry’s 2 denial of coverage constitutes breach of contract and a breach of the covenant of good faith and 3 fair dealing. SAC ¶¶ 97–100, 103–14. Sentry filed a motion to dismiss Casa Nido’s breach of 4 contract claim, which the Court denied. See Docket No. 104 (“MTD Order”). Now pending is Casa Nido’s motion for leave to file a third amended and supplemental United States District Court Northern District of California 5 6 complaint. See Docket No. 130 (“TAC Mot.”); Docket No. 130-1 Ex. A (“Proposed TAC”). Casa 7 Nido seeks to add allegations that Sentry breached the covenant of good faith and fair dealing. 8 Sentry argues the proposed amendments are futile because the allegations are legally and factually 9 incorrect. See Docket No. 131 (“Opp.”). Sentry further argues the proposed supplemental 10 allegations are prejudicial because they involve activity protected by California’s anti-SLAPP 11 statute. See id. The Court does not analyze Sentry’s anti-SLAPP argument as each of Casa 12 Nido’s disputed amendments and supplements are denied as futile.1 II. 13 14 A. RELEVANT BACKGROUND Sentry’s Motion to Dismiss Previously, Sentry moved to dismiss Casa Nido’s first amended complaint (“FAC”), 15 16 arguing its policy did not apply to the pollution at issue. See Docket No. 71 (“FAC Reply”). The 17 basic Sentry policy excludes coverage of property damage caused by pollution. See Docket No. 18 74-1 (“Sentry Policy”) § (B)(1)(f). However, Casa Nido has additional coverage through a Dry 19 Cleaners Endorsement (“DCE”). See id. § (II)(M). The DCE provides an exception to the 20 pollution exclusion: 1. The pollution liability exclusion (B.1.f.) does not apply to “bodily injury” or “property damage” covered by the following paragraph. 21 22 2. This insurance applies to “bodily injury” or “property damage” arising from the actual, alleged or threatened discharge, dispersal, release or escape of pollutants. 23 24 25 26 27 28 1 Though it does not address the merits, the Court notes its concern with the use of an anti-SLAPP claim in this context. The Ninth Circuit has decided numerous conflicts between California’s antiSLAPP statute and the Federal Rules of Civil Procedure. See, e.g., CoreCivic, Inc. v. Candide Grp., LLC, 46 F.4th 1136, 1140–41 (9th Cir. 2022). In each, the Ninth Circuit has opted to apply the anti-SLAPP statute. See id. However, Sentry seeks to invoke the anti-SLAPP statute in response to litigation activity within this federal suit. This raises serious questions about whether such potential interference with federal procedure may properly be countenanced. 2 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 3 of 13 United States District Court Northern District of California 1 Id. §§ (II)(M)(1) –(2). 2 Even so, the Sentry policy only covers pollution-based property damage “[t]hat occurs 3 during the policy period,” id. § (A)(1), and the DCE explains that “[f]or purposes of pollution 4 liability…” property damage “occurs” when it “first manifests itself.” Id. §§ (II)(M)(1)-(2). In 5 denying coverage, Sentry asserted that the California Supreme Court, in Montrose Chem. Corp. v. 6 Admiral Ins. Co., 10 Cal.4th 645, 674 (1995), defined “manifest” as “that point in time when 7 appreciable damage occurs and is or should be known to the insured, such that a reasonable 8 insured would be aware that his notification duty under the policy has been triggered.” MTD 9 Order at 2. Thus, because Casa Nido’s FAC alleged the property damage was not and should not 10 have been known to Plaintiff prior to 2016—twenty-six years after the Policy expired on August 11 15, 1990—Sentry determined that the pollution did not manifest in the policy period, and therefore 12 the policy did not apply to Casa Nido. See FAC Reply at 8; see also Docket No. 108 at 8–10 13 (“Hr’g Tr.”). 14 Casa Nido opposed dismissal of the FAC on three grounds. First, Casa Nido argued that 15 Sentry misinterpreted Montrose because the Montrose court specifically rejected the 16 “manifestation” standard in favor of the alternative “continuous injury trigger” theory. MTD 17 Order at 1. Second, Casa Nido argued Montrose was in the first party context, and therefore 18 inapplicable to its tender for defense in the third-party context. See Hr’g Tr. at 8–10. Third, Casa 19 Nido argued that the Montrose definition of the manifestation trigger did not apply because the 20 Sentry policy predates Montrose, and a “plain reading of the DCE makes clear that manifestation 21 occurs at the time of discharge or release of pollutants, not at the time pollution was discovered.” 22 MTD Order at 2. 23 While the Court denied Sentry’s motion to dismiss, it did not do so because it agreed with 24 Casa Nido’s legal arguments. See MTD Order. Instead, the Court concluded that “Montrose is 25 inapposite because the California Supreme Court specifically noted that the insurance policy in 26 Montrose did not have language requiring manifestation. In contrast, the DCE explicitly states: 27 ‘For purposes of pollution liability…occurrence is the date on which…property damage first 28 manifests itself.’” Id. at 1. Nor did the Court determine the definition of manifest applied or 3 United States District Court Northern District of California Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 4 of 13 1 whether that definition would be affected by a third-party or first-party insurance context. Id. at 2, 2 n.2. Rather, the Court denied dismissal because the FAC plausibly alleged breach of contract 3 under either definition. Id. at 2 (“These facts are sufficient for a plausible claim that there was 4 actual release within the policy period, as well as a plausible inference of appreciable damage 5 under Montrose’s known or should have known standard.”). 6 B. Casa Nido’s Proposed TAC 7 1. Proposed Amendments 8 Casa Nido seeks to amend its complaint by adding three arguments to its claim that Sentry 9 breached the covenant of good faith and fair dealing: (1) Sentry consciously misrepresented the 10 applicability of Montrose by claiming it “applied to third party claims…even though Montrose 11 specifically held that it only applied to first party claims”; (2) Sentry “critically and fundamentally 12 misrepresented the terms of its own policies” by denying coverage based on the extent of 13 pollution; and (3), Sentry interpreted the term “expenses” in the DCE as including “legal costs 14 incurred by Sentry pursuant to its duty to defend,” (thereby diminishing the sum available for 15 indemnification) despite the contrary holding in Okada v. MGIG Indemnity Corporation, 823 F.2d 16 276 (9th Cir. 1986). See Proposed TAC ¶¶ 111–15. 17 2. Supplement 18 Casa Nido seeks to supplement its complaint by adding the rather novel allegation that 19 Sentry breached the covenant of good faith and fair dealing by failing to fund the defense against 20 O’Hanks’s counterclaim despite the Court’s denial of Sentry’s MTD. See id. ¶¶ 117–21. Casa 21 Nido’s argument is as follows: (1) in California the duty to indemnify and defend arises if the 22 insured proves the “mere existence of a potential for coverage”; (2) this Court found Casa Nido’s 23 claim was plausible when it denied Sentry’s MTD; (3) the Court’s denial of Sentry’s MTD and 24 finding Casa Nido’s claim was plausible proves “the mere existence of a potential for coverage”; 25 and (4) therefore, Sentry breached the covenant of good faith and fair dealing by not then fulfilling 26 its duty to indemnify and defend once the MTD was denied. Id. 27 28 4 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 5 of 13 III. 1 2 A. Leave to Amend A party may amend a pleading once as a matter of course within twenty-one days after 3 4 serving it. Fed. R. Civ. P. 15(a)(1). Thereafter, amendment is only allowed after obtaining leave 5 of the court, or by consent of the adverse party. Fed. R. Civ. P. 15(a)(2). Generally, Rule 15 6 advises the court that “leave shall be freely given when justice so requires.” Id. However, “the 7 grant or denial of a subsequent opportunity to amend is within the discretion of the District Court.” 8 Foman v. Davis, 371 U.S. 178, 182 (1962). In determining whether leave should be granted 9 pursuant to a District Court’s discretion, the Supreme Court has stated that: 10 [i]n the absence of any apparent or declared reason—such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.—the leave sought should, as the rules require, be “freely given.” 11 United States District Court Northern District of California LEGAL STANDARD 12 13 14 Id. 15 In the Ninth Circuit, the above listed factors—often referred to as the Foman factors—are 16 not weighted equally. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051–52 (9th Cir. 17 2003) (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185 (9th Cir. 1987)). Rather, courts 18 have held that “the crucial factor is the resulting prejudice to the opposing party.” Howey v. 19 United States, 481 F.2d 1187, 1190 (9th Cir. 1973). However, a motion may be denied on 20 grounds of futility of the proposed amendments irrespective of prejudice. See generally Hoang v. 21 Bank of Am., N.A., 910 F.3d 1096, 1103 (9th Cir. 2018); see also Ecological Rights Found. v. Pac. 22 Gas & Elec. Co., 713 F.3d 502, 520 (9th Cir. 2013). A proposed amendment is futile if “no set of 23 facts can be proved under the amendment to the pleadings that would constitute a valid claim or 24 defense.” Miller, 845 F.2d at 214. Thus, “[f]or purposes of assessing futility…the legal standard 25 is the same as it would be on a motion to dismiss under FRCP 12(b)(6).” Flores-Mendez v. Zoosk, 26 Inc., No. C 20-04929 WHA, 2022 WL 357500, at *1 (N.D. Cal. Feb. 7, 2022) (citing Miller, 845 27 F.2d at 214). 28 5 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 6 of 13 1 B. Supplemental pleadings are governed by Rule 15(d), which provides, “[o]n motion and 2 United States District Court Northern District of California Leave to Supplement 3 reasonable notice, the court may…permit a party to serve a supplemental pleading setting out any 4 transaction, occurrence, or event that happened after the date of the pleading to be supplemented.” 5 Fed. R. Civ. P. 15(d). New claims, new parties, and allegations regarding events that occurred 6 after the original complaint was filed are all properly permitted under Rule 15(d). See Griffin v. 7 Cnty. School Bd. of Prince Edward Cnty., 377 U.S. 218, 226 (1964); see also Eid v. Alaska 8 Airlines, Inc., 621 F.3d 858, 874 (9th Cir. 2010) (“Rule 15(d) provides a mechanism for parties to 9 file additional causes of action based on facts that didn’t exist when the original complaint was 10 filed.”); Keith v. Volpe, 858 F.2d 467, 473 (9th Cir. 1988) (“Rule 15(d) is intended to give district 11 courts broad discretion in allowing supplemental pleadings.”). Importantly, Rule 15(d) “is a tool 12 of judicial economy and convenience” and “is intended to give district courts broad discretion in 13 allowing supplemental pleadings.” Keith, 858 F.2d at 473. The rule “enabl[es] a court to award 14 complete relief, or more nearly complete relief, in one action, and to avoid the cost, delay and 15 waste of separate actions which must be separately tried and prosecuted.” Id. (emphasis added) 16 (quoting New Amsterdam Casualty Co. v. Waller, 323 F.2d 20, 28–29 (4th Cir. 1963)). Therefore, 17 because the goal of Rule 15(d) is to promote judicial efficiency, supplementation is generally 18 favored. See Planned Parenthood of S. Ariz. v. Neely, 130 F.3d 400, 402 (9th Cir. 1997) (citing 19 Keith, 858 F.2d at 473). “The legal standard for granting or denying a motion to supplement 20 under Rule 15(d) is the same as for amending one under 15(a).” Lyon v. U.S. Immigr. & Customs 21 Enf’t, 308 F.R.D. 203, 214 (N.D. Cal. 2015). 22 C. 23 Breach of Insurance Contract An insurer breaches its insurance contract if it withholds benefits due under the contract. 24 Evergrow Indus. Co. v. Travelers Ins. Co., 37 F. App’x 300, 301 (9th Cir. 2002). An insurer has a 25 duty to defend against lawsuits brought against its insured that potentially seek covered damages. 26 Id. (citing Collin v. Am. Empire Ins. Co., 21 Cal. App. 4th 787, 803 (Ct. App. 1994)). “[T]he 27 determination whether the insurer owes a duty to defend usually is made in the first instance by 28 comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the 6 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 7 of 13 1 complaint give rise to a duty to defend when they reveal a possibility that the claim may be 2 covered by the policy.” Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 19 (Cal. 1995). 3 4 Cal.4th at 18. “Interpretation of insurance contracts under California law requires [that courts] 5 employ general principles of contract interpretation.” Manzarek v. St. Paul Fire & Marine Ins. 6 Co., 519 F.3d 1025, 1031 (9th Cir. 2008) (citing MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 7 (2003)). 8 9 10 11 United States District Court Northern District of California The interpretation of the terms of an insurance policy is a question of law. Waller, 11 12 13 14 15 16 17 The California Supreme Court explained: The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the contract. The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’, controls judicial interpretation.” A policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable. But language in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract. Courts will not strain to create an ambiguity where none exists. Waller, 11 Cal.4th at 18–19 (citations omitted). 18 In an insurance coverage dispute, “coverage is interpreted broadly so as to afford the 19 greatest possible protection to the insured, [whereas] exclusionary clauses are interpreted narrowly 20 against the insurer.” Manzarek, 519 F.3d at 1032 (citing MacKinnon, 31 Cal.4th at 648). An 21 “exclusionary clause must be conspicuous, plain and clear.” Manzarek, 519 F.3d at 1032 (quoting 22 MacKinnon, 31 Cal.4th at 648) (internal quotation marks and citation omitted). 23 “The burden is on the insured to establish that the claim is within the basic scope of 24 coverage and on the insurer to establish that the claim is specifically excluded.” MacKinnon, 31 25 Cal.4th at 648. If the insurer can show the occurrence is specifically excluded, the burden shifts 26 back to the insured to show an “exception affords coverage.” Aydin Corp. v. First State Ins. Co., 27 18 Cal.4th 1183, 1192 (1998), as modified on denial of reh’g (Oct. 14, 1998). 28 7 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 8 of 13 1 D. “To establish breach of the implied covenant [of good faith and fair dealing], the insured 2 United States District Court Northern District of California Breach of the Covenant of Good Faith and Fair Dealing 3 must show that: (1) benefits due under the policy were withheld, and (2) such withholding was 4 unreasonable.” O’Keefe v. Allstate Indem. Co., 953 F. Supp. 2d 1111, 1115 (S.D. Cal. 2013). 5 Ordinarily, “reasonableness of an insurer’s claims-handling conduct is…a question of fact [and 6 only] becomes a question of law where the evidence is undisputed and only one reasonable 7 inference can be drawn from the evidence.” Nieto v. Blue Shield of California Life & Health Ins. 8 Co., 181 Cal. App. 4th 60, 86 (2010) (citing Chateau Chamberay Homeowners Ass’n v. 9 Associated Int’l Ins. Co., 90 Cal. App. 4th 335; Carlton v. St. Paul Mercury Ins. Co., 30 Cal. App. 10 4th 1450, 1456 (1994)). However, “[w]hen the issue of the insurer’s objective reasonableness 11 depends on an analysis of legal precedent, reasonableness is a legal issue” for the Court. See 12 CalFarm Ins. Co. v. Krusiewicz, 131 Cal. App. 4th 273, 287 (2005). Thus, “a court may 13 ‘conclude as a matter of law that an insurer’s denial of a claim is not unreasonable,’ provided that 14 ‘there existed a genuine issue as to the insurer’s liability.’” SM 10000 Prop., LLC v. Allianz Glob. 15 Risks US Ins. Co., No. 19-CV-03054-PJH, 2021 WL 1299071, at *19 (N.D. Cal. Apr. 7, 2021); 16 Mosley v. Pac. Specialty Ins. Co., 49 Cal. App. 5th 417, 435 (2020), as modified on denial of reh’g 17 (June 24, 2020). The standard for determining whether a genuine issue exists “is entirely 18 objective.” Patel v. Am. Econ. Ins. Co., No. 12-CV-04719-WHO, 2014 WL 1862211, at *6 (N.D. 19 Cal. May 8, 2014). “Disposition turns on whether the insurer can establish that, at the time it 20 disputed the claim, and given what it knew or should have known, a carrier, reasoning objectively, 21 could rationally have taken the positions on the issues that the defendant took.” Id. (internal 22 citation and quotation marks omitted). IV. 23 24 25 A. ANALYSIS Leave to Amend Casa Nido seeks to add allegations that Sentry breached the covenant of good faith and fair 26 dealing. Therefore, if Casa Nido’s amendments do not plausibly allege that Sentry breached the 27 covenant of good faith and fair dealing, i.e., unreasonably withheld policy benefits, see O’Keefe, 28 953 F. Supp. 2d at 1115, the amendments are futile and leave to amend will be denied. 8 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 9 of 13 1 1. 2 Casa Nido’s proposed amendment to paragraph 111 asserts Sentry breached the covenant 3 of good faith and fair dealing because it “misrepresented to its insured Casa Nido that the 4 Montrose decision applied to third party claims…even though Montrose specifically held that it 5 only applies to first party claims.” Proposed TAC ¶ 111. Sentry argues that this amendment 6 would be futile because “a cursory reading of the Montrose decision makes clear that it was a 7 third-party case.” Opp. at 7. 8 9 United States District Court Northern District of California Montrose The central question in Montrose was which insurance coverage trigger applies to thirdparty comprehensive general liability (“CGL”) policies. See Montrose, 10 Cal.4th 645. In 10 reaching its decision, the court examined and defined four types of coverage triggers, including the 11 manifestation trigger and the continuous liability trigger. Id. at 673–74. The court ultimately held 12 that the continuous liability trigger applies to third-party CGL claims, see id. at 689, and thus its 13 definition of the manifestation trigger is dictum. See Sonic-Calabasas A, Inc. v. Moreno, 57 14 Cal.4th 1109, 1158 (2013) (“Dicta consists of observations and statements unnecessary to the 15 appellate court’s resolution of the case.”) (internal citation omitted). 16 Importantly, Sentry’s policy at issue is not a CGL policy in which the continuous liability 17 trigger applies under Montrose; rather, the DCE in Sentry’s policy specifically provides that the 18 manifestation trigger applies and thus differs from that in Montrose. See MTD Order at 1. 19 Nonetheless, in denying coverage to Casa Nido, Sentry cited Montrose for its definition of the 20 manifestation trigger. See Denial Letter at 12. 21 To that end, Casa Nido’s focus on whether Montrose was in the first or third-party context 22 misses the point. Sentry’s letter explaining its denial of coverage does not refer to the first or 23 third-party context of Montrose. See generally Denial Letter. Instead, Sentry relied on Montrose 24 solely for its definition of the manifestation trigger. Id. at 12. Hence, the relevant question here is 25 whether Sentry’s reliance on dictum from the Supreme Court of California was unreasonable. See 26 O’Keefe, 953 F. Supp. 2d at 1115. 27 28 It was not unreasonable to look to dictum from the Supreme Court of California when interpreting California insurance law. “Even if properly characterized as dictum, statements of the 9 United States District Court Northern District of California Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 10 of 13 1 Supreme Court [of California] should be considered persuasive.” United Steelworkers of Am. v. 2 Bd. of Educ., 162 Cal. App. 3d 823, 835 (1984) (citing Nolan v. Transocean Air Lines, 365 U.S. 3 293, 296 (1961) (affirming a decision that relied on dicta from the California Supreme Court)). 4 Accord Hubbard v. Superior Ct., 66 Cal. App. 4th 1163, 1169 (1997) (“Generally speaking, follow 5 dicta from the California Supreme Court.”). Accordingly, the Court DENIES leave to amend. 6 2. Misrepresentation of the Sentry Policy 7 Casa Nido argues Sentry breached the covenant of good faith and fair dealing by denying 8 coverage “on the basis that the extent of the PCE subsurface contamination was not determined 9 until after the policy period ended” even though “the [DCE] in the Sentry Policies…expressly 10 provided that it was the discharge or release of contaminants during the policy period that 11 triggered coverage.” Proposed TAC ¶ 113 (emphasis added). Sentry argues that Casa Nido’s 12 amendment is futile because its letter denying coverage makes clear that denial was based on the 13 fact “that the subject contamination did not manifest itself until after the Policy had expired…” 14 Opp. at 7 (quoting Denial Letter) (emphasis in original). In response, Casa Nido states that 15 “disputed issues of fact go to the merits of the pleadings and do not render the pleadings futile.” 16 See Docket No. 132 at 6 (“Reply”). 17 Here, the contents of the letter at issue are clear—Sentry denied coverage based on its 18 belief that the pollution manifested outside of the policy period, not because of the extent of the 19 pollution. See generally Denial Letter. Even viewing the letter in the light most favorable to Casa 20 Nido, it does not have a viable claim; Sentry consistently based its reasoning on when the 21 pollution manifested. Id. at 1, 7, 12–14. Accordingly, the Court DENIES leave to amend. 22 3. 23 Casa Nido argues Sentry breached the covenant of good faith and fair dealing by 24 unreasonably interpreting the term “expenses” in the DCE as including “legal costs incurred by 25 Sentry pursuant to its duty to defend,” (thereby diminishing the sum available for indemnification) 26 despite the contrary holding in Okada. See Proposed TAC ¶¶ 114 (citing Okada, 823 F.2d 276). 27 28 Okada The plaintiffs in Okada, insureds under a Directors and Officers Errors and Omissions Policy (“D&O”), sought a declaratory judgment that the defendant insurer had a contemporaneous 10 United States District Court Northern District of California Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 11 of 13 1 duty to defend a pending legal action. Okada, 823 F.2d at 279. Section 1 of the Okada D&O 2 included the cost of “defense of legal actions” in its definition of Loss. Id. at 280. However, the 3 insurer argued Section 5(a) qualified the contemporaneous duty to pay costs by giving it the right 4 of approval over such “costs, charges, and expenditures.” Id. The insurer also argued that Section 5 5(c) further limited payments because payment of “expenses,” unlike “costs, chargers, and 6 expenditures,” were not subject to contemporaneous payment requirements, but left entirely within 7 the discretion of the insurer. Id. at 280–81. In sum, the insurer argued that “the defense of legal 8 actions [was] covered by the policy, that costs, charges and expenses must be approved by [the 9 insurer], but that expenses [were] excluded from the general duty of contemporaneous payment.” 10 Id. at 281. The Ninth Circuit held that the insurer had a contemporaneous duty to defend because 11 the inconsistent use of the term “expenses” across different sections rendered it ambiguous, and 12 ambiguities must be interpreted in the insured’s favor. Id. 13 The issue here is whether costs of defense are included in the DCE’s pollution limit of 14 $100,000. If it is, Sentry’s liability would be substantially limited because the legal costs would 15 erode the $100,000 limit; however, the erosion would leave Casa Nido uncovered for much of the 16 pollution damage. See Proposed TAC ¶ 114; Id. ¶ 121; see also Opp. at 9. The DCE’s “Pollution 17 Liability Insurance” provision states that “a separate pollution limit of $100,000 applies to all 18 damages, including sums paid under Coverage Extension – Supplementary Payments, for all 19 occurrences during the policy period.” Sentry Policy § (II)(M)(2)(a). The Supplementary 20 Payments provision states that the insurer is responsible for “all expenses we incur.” Sentry 21 Policy § (A)(1)(e). Thus, “Sentry has taken the position that the $100,000 limit includes defense 22 fees and costs.” Opp. at 9. 23 Casa Nido contends this interpretation is unreasonable because the term “expenses” is 24 ambiguous and should be interpreted in its, the insured’s, favor. See Proposed TAC ¶ 114 (citing 25 Okada, 823 F.2d 276). However, Casa Nido’s reliance on Okada is misplaced. “A provision of 26 an insurance contract does not become ambiguous merely because the parties disagree about its 27 meaning, or because they can point to conflicting interpretations of the clause by different courts.” 28 Jones v. IDS Prop. Cas. Ins. Co., 27 Cal. App. 5th 625, 637 (2018) (internal quotation marks and 11 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 12 of 13 1 citation omitted). Otherwise, “an insurance company could never argue in favor of its side in a 2 pure question of law if there were some court somewhere that had taken the opposite view.” Id. 3 (internal quotation marks and citation omitted). Here, Sentry’s interpretation is based on specific 4 language of the DCE which differs from the context and language at issue in Okada. See Sentry 5 Policy § (II)(M)(2)(a); § (A)(1)(e). Sentry’s interpretation, whether ultimately correct or not, is 6 not unreasonable as a matter of law because Sentry has sufficiently established a “genuine issue” 7 of liability. See SM 10000 Prop., LLC, 2021 WL 1299071, at *19. Accordingly, the Court 8 DENIES leave to amend. 9 B. United States District Court Northern District of California 10 Leave to Supplement Casa Nido seeks to file the following supplemental claim in their TAC. See Proposed 11 TAC ¶¶ 117–21. According to Casa Nido, the Court’s denial of Sentry’s motion to dismiss means 12 Casa Nido has stated a plausible claim that they are covered by the insurance policy, and because 13 Casa Nido’s claim is plausible, there are not “undisputed facts” that “conclusively show liability 14 would be excluded under the policy.” Reply at 10 (citing Nat’l Auto. & Cas. Ins. Co., 223 Cal. 15 App. 3d at 463). Therefore, Casa Nido argues Sentry should be required to fund Casa Nido’s 16 defense against O’Hanks’s counterclaim because “[a]n insurer may properly refuse to defend only 17 where undisputed facts conclusively show liability would be excluded under the policy.” Id. Casa 18 Nido essentially asserts that the Court’s denial of Sentry’s motion to dismiss is a “transaction, 19 occurrence, or event that happened after the date of the pleading to be supplemented.” Fed. R. 20 Civ. P. 15(d). 21 The Court’s denial of Sentry’s motion to dismiss in and of itself does not provide a 22 supplemental basis of Sentry’s liability. There is no direct equivalence between the relatively 23 foregoing standard of 12(b)(6) plausibility for pleading purposes and the showing needed to 24 trigger coverage. Otherwise, a court’s determination that a claim should move past the pleading 25 stage would, in coverage cases such as this, regularly and automatically result in a judgment for 26 the insured on the merits. 27 28 Furthermore, the denial of a 12(b)(6) motion is not a final determination on the merits. See, e.g., Meek v. Cnty. of Riverside, 183 F.3d 962 (9th Cir. 1999) (“a district court’s denial of a 12 Case 3:20-cv-07923-EMC Document 144 Filed 11/21/22 Page 13 of 13 1 12(b)(6) motion generally is not a reviewable final order”); Linares v. McLaughlin, 423 F. App’x 2 84 (2d Cir. 2011) (“The denial of a defendant’s motion to dismiss is not a final determination on 3 the merits barring further litigation of the claims in question under the doctrine of res judicata.”) 4 (emphasis in original). Casa Nido’s attempt to import final effect to this Court’s denial of the 5 prior 12(b)(6) motion fails. The Court DENIES leave to supplement. V. 6 7 8 9 10 United States District Court Northern District of California 11 CONCLUSION The Court DENIES Casa Nido’s motion for leave to file a third amended and supplemental complaint with regard to all disputed paragraphs. The Court GRANTS Casa Nido’s motion for leave to amend ¶¶ 107 and 108; these are uncontested. This order disposes of Docket No. 130. 12 13 IT IS SO ORDERED. 14 15 Dated: November 21, 2022 16 17 18 ______________________________________ EDWARD M. CHEN United States District Judge 19 20 21 22 23 24 25 26 27 28 13

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