Diamond State Insurance Company v. Marin Mountain Bikes, Inc. et al

Filing 43

ORDER by Judge Claudia WilkenGRANTING IN PART, AND DENYING IN PART, DIAMONDS FIRST 32 MOTION TO DISMISS AND TO STRIKE, GRANTING MARIN MOUNTAIN BIKES LEAVE TO FILE ITS PROPOSED AMENDED AFFIRMATIVE DEFENSES, DEEMING REPLY BRIEF A MOTION TO STRIKE THE AMENDED AFFIRMATIVE DEFENSES, GRANTING DIAMONDS SECOND 36 MOTION TO STRIKE AND DISMISS, AND RESETTING DEADLINE TO HEAR CASE DISPOSITIVE MOTIONS. (ndr, COURT STAFF) (Filed on 9/10/2012)

1

IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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DIAMOND STATE INSURANCE COMPANY,

No. C 11-5193 CW

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Plaintiff,
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v.
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MARIN MOUNTAIN BIKES, INC.; and
ATB SALES LIMITED,

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Defendants.
United States District Court
For the Northern District of California

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________________________________/
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AND ALL RELATED COUNTERCLAIMS
________________________________/

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ORDER GRANTING IN
PART, AND DENYING
IN PART, DIAMOND’S
FIRST MOTION TO
DISMISS AND TO
STRIKE (Docket No.
32), GRANTING
MARIN MOUNTAIN
BIKES LEAVE TO
FILE ITS PROPOSED
AMENDED
AFFIRMATIVE
DEFENSES, DEEMING
REPLY BRIEF A
MOTION TO STRIKE
THE AMENDED
AFFIRMATIVE
DEFENSES, GRANTING
DIAMOND’S SECOND
MOTION TO STRIKE
AND DISMISS
(Docket No. 36),
AND RESETTING
DEADLINE TO HEAR
CASE DISPOSITIVE
MOTIONS

Plaintiff Diamond State Insurance Company first moves to
21
strike Defendant Marin Mountain Bikes, Inc.’s affirmative defenses
22
and to dismiss Marin’s counterclaims or require a more definite
23
statement.

Marin opposes Diamond’s first motion to the extent

24
that it seeks to prevent Marin from amending its affirmative
25
defenses and counterclaims, but does not otherwise oppose the
26
motion.

In a second motion, Diamond also moves to strike or

27
dismiss Marin’s first amended counterclaims (1ACC).
28

Marin opposes

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Diamond’s second motion.

Having considered the papers filed by

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the parties on both motions and the parties’ arguments at the

3

hearing on the second motion, the Court GRANTS Diamond’s first

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motion in part and DENIES it in part, and GRANTS Diamond’s second

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motion.

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BACKGROUND

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The following facts are taken from Marin’s 1ACC and from

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certain other documents of which the Court takes judicial notice.1
At all times relevant to this action, Diamond provided

10
United States District Court
For the Northern District of California

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liability insurance to Marin, which designs and makes bicycles.

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1

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With each of its motions, Diamond has filed a request for
judicial notice. In the first request for judicial notice (1RJN),
Diamond seeks judicial notice of five exhibits. In the second
request for judicial notice (2RJN), Diamond seeks judicial notice
of ten exhibits, the first five of which are identical to the five
exhibits attached to the 1RJN. Because the 2RJN encompasses the
1RJN, the Court will address the 2RJN only.
In the 2RJN, Diamond requests that the Court take judicial
notice of various documents filed in this action and in other
related actions filed in the Northern District of California and
in the United Kingdom. Marin opposes the request, arguing that
Diamond improperly asks the Court to take judicial notice of the
facts asserted in the documents and not simply of the fact that
these documents were filed.
Exhibits A, B, C, D, F, G and H to the 2RJN are documents
that the parties have filed in the instant case. These documents
are part of the record of the instant case and, as such, judicial
notice is not required.
Exhibits E, I and J consist of documents filed in other
cases. The Court takes judicial notice of the existence of these
documents, as well as of other documents filed in the docket of
ATB Sales Ltd. v. Marin Mtn. Bikes, Inc., Case No. 11-4755 (N.D.
Cal.), but declines to take judicial notice of the truth of the
matters asserted in these documents. See, e.g., McMunigal v.
Bloch, 2010 U.S. Dist. LEXIS 136086, *2 n.1 (N.D. Cal.) (granting
judicial notice of documents filed in another lawsuit for purposes
of noticing the existence of the lawsuit, claims made in the
lawsuit, and that various documents were filed, but not for the
truth of the matters asserted therein).
2

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1ACC ¶¶ 1-2.

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in part, at Section 1, Coverage A for bodily injury and property

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damage liability,

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1. Insuring Agreement

5

a.
We will pay those sums that the insured
becomes legally obligated to pay as damages because
of “bodily injury” or “property damage” to which
this insurance applies. We will have the right and
duty to defend the insured against any “suit”
seeking those damages.

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7
8
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b.
This insurance applies to “bodily injury”
. . . only if:

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United States District Court
For the Northern District of California

The parties agree that the insurance policy states

(1) The “bodily injury” . . . is caused by an
“occurrence” that takes place in the “coverage
territory”; and

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(2) The “bodily injury” . . . occurs during
the policy period. . .

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15
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17
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1ACC ¶ 11; Compl. ¶ 8; Answer ¶ 8.

In the 1ACC, Marin alleges

that the above language appeared on the first page of the insuring
agreement.

1ACC ¶ 34.

The parties also agree that the following

definitions are contained in the policy:

19

3. “Bodily injury” means bodily injury, sickness or
disease sustained by any person . . .

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4. “Coverage territory” means:

21
22
23

a.
The United States of America (including its
territories and possessions), Puerto Rico and
Canada;

25

b.
International waters or airspace, provided
that the injury or damage does not occur in the
course of travel or transportation to or from any
place not included in a. above; or

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c.

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All parts of the world if:
(1)

The injury or damage arises out of:

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3

(a) Goods or products made or sold by
you in the territory described in a.
above; or

1
2

(b) The activities of a person whose
home is in the territory described in a.
above, but is away for a short time on
your business; and

3
4
5

(2) The insured’s responsibility to pay
damages is determined in a “suit” on the
merits, in the territory described in a. above
or in a settlement we agree to.

6
7
. . .
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13. “Occurrence” means an accident . . .
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1ACC ¶ 11; Compl. ¶ 8; Answer ¶ 8.2

“Suit” is also defined as “a

United States District Court
For the Northern District of California

10
civil proceeding in which damages because of ‘bodily injury’ . . .
11
are alleged.”

1ACC ¶ 11.

In the 1ACC, Marin alleges that section

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c(2) of the definition of coverage territory appears on the
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eleventh page of the insuring policy.

Id. at ¶ 34.

14
Marin sells bicycles to ATB Sales Limited (ATB), a company
15
that distributes Marin’s bicycles in the United Kingdom only.

Id.

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at ¶¶ 1, 3.

“Diamond issued an ‘Additional Insured-Vendors’

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endorsement to the Policy naming ATB as an additional insured
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under the Policy and promising to provide liability coverage to
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ATB ‘with respect to liability arising out of your operations or
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premises owned by or rented to you.’”

1ACC ¶ 3.

See also id. at

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2

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25
26
27
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Diamond’s complaint and Marin’s answer contain more
complete policy language than the 1ACC, from which certain words
appear to have been removed for the sake of brevity. Cf. 1ACC
¶ 11 with Compl. ¶ 8 and Answer ¶ 8. The Court recites the longer
policy language here for ease of reading only. Any differences
between the language in the complaint and answer and the 1ACC are
not material to the outcome of the instant motions. Further, the
longer policy language is subject to judicial notice, because it
is not subject to reasonable dispute and it is “capable of
accurate and ready determination by resort to sources whose
accuracy cannot reasonably be questioned” by these parties, namely
their own complaint and answer. Fed. R. Evid. 201(b).
4

1

¶ 35 (alleging that the “endorsement stated that the who is an

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insured provision of the Policy was ‘amended to include’” ATB “‘as

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an insured but only with respect to liability arising out of your

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operations or premises owned by or rented to you.’”).

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endorsement, Diamond “promised to cover ATB for, among other

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things, “‘[b]odily injury’. . . arising out of ‘your products’

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. . . which are distributed or sold in the regular course of the

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vendor’s business. . . .”

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listed ATB’s United Kingdom address.

Id. at ¶ 4.

In the

The endorsement schedule

Id. at ¶ 3.

Marin alleges

United States District Court
For the Northern District of California

10

that ATB distributes Marin bikes only in the United Kingdom and

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Diamond understood this at all times relevant.

Id. at ¶¶ 3-4.

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In April 2002 in the United Kingdom, Alan Ide suffered

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serious injuries in an accident while riding a bicycle that was

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designed and made by Marin.

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sold the bicycle in the United States to ATB pursuant to a 1999

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written agreement between Marin and ATB.

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learned of the accident when Ide brought suit in the United

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Kingdom against ATB, Marin and Fairly Bike Manufacturing Company,

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which assembled the bicycle’s components.

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refers to this suit as the “Ide action.”

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Id. at ¶ 1.

Marin had originally

Id. at ¶ 1.

Marin first

Id. at ¶¶ 5.

Marin

Id.

In his suit, Ide alleged that the handlebar of the bicycle he

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was riding was defective and therefore broke, causing his

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injuries.

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designed in part, selected for use on the bicycle, and assembled

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under the supervision of, Marin’s Director of Product Development

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who lived in the United States.

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Development carried out these activities, which Ide argued made

Id. at ¶ 6.

The handlebar on Ide’s bicycle was

Id.

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The Director of Product

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Marin liable for his injuries, while he was temporarily away for a

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short time in China on Marin’s business.

Id.

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Upon learning of the Ide suit, Marin immediately notified

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Diamond of it and demanded that Diamond provide a defense to Marin

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and ATB.

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it had no such duty under the policy.

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and defend the Ide action, and ATB did appear and defend at its

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own expense.

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Id. at ¶ 5.

Diamond refused to defend either, claiming
Id.

Marin did not appear

Id.

Ide was awarded judgment against ATB and Marin in the Ide

United States District Court
For the Northern District of California

10

action.

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Marin refers to as the ATB action, ATB moved to recover from Marin

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the amount of the settlement paid to Ide as well as the cost of

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ATB’s defense.

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brought in the United Kingdom.

15

Statement, Docket No. 23, 2; see also 2RJN, Ex. E, Ex. 1

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(complaint filed in the ATB action).

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obtained judgment against Marin for more than one and a half

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million dollars.

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Id. at ¶ 7.

Id.

ATB settled with Ide.

Id.

Then, in what

The parties agree that this action was
See, e.g., Joint Case Management

In the ATB action, ATB

1ACC ¶ 7.

On September 23, 2011, ATB filed a separate federal action

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against Marin in the Northern District of California, seeking to

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enforce the foreign judgment against Marin.

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ATB Sales Ltd. v. Marin Mtn. Bikes, Inc., Case No. 11-4755 (N.D.

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Cal.).

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Diamond was not named as a party in the enforcement action.

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ATB brought the enforcement action, Marin again demanded that

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Diamond defend Marin.

27
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Compl., Docket No. 1,

Marin refers to this as the enforcement action.

Id.

Diamond refused again.

1ACC ¶ 8.
When

Id.

On October 24, 2011, Diamond filed the instant suit against
ATB and Marin, seeking a declaratory judgment that it did not have
6

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a duty to defend or indemnify Marin in connection with the United

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Kingdom accident.

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Compl. ¶¶ 9-13.

Marin and ATB agreed to a settlement of the enforcement

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action in late 2011.

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notice of settlement in the enforcement action.

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Docket No. 15.

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dismissal of ATB’s claims with prejudice.

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Docket Nos. 16, 17.

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Id.

On May 2, 2012, ATB and Marin filed a
Case No. 11-4755,

The parties subsequently filed a stipulation for
Case No. 11-4755,

At a case management conference in the instant action on May

United States District Court
For the Northern District of California

10

2, 2012, the Court set May 30, 2012 as the deadline to add

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additional parties or claims.

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Docket No. 28.

On May 16, 2012, Marin filed its answer to Diamond’s

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complaint and asserted two counterclaims against Diamond for

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breach of the insurance contract and breach of the covenant of

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good faith and fair dealing.

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17
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Docket No. 30.

On May 18, 2012, Diamond voluntarily dismissed its claims
against ATB in the current case.

Docket No. 31.

On June 11, 2012, Diamond filed its first motion to strike

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Marin’s affirmative defenses and to dismiss its counterclaims or

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for a more definite statement.

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Docket No. 32.

On June 25, 2012, Marin filed its opposition to Diamond’s

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motion.

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proposed amended affirmative defenses.

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Docket No. 33.

With its opposition, Marin submitted

On July 2, 2012, Diamond filed its reply in support of its

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motion to strike and to dismiss.

Docket No. 34.

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Diamond argued that the proposed amended affirmative defenses were

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defective.

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In the reply,

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Later on July 2, 2012, Marin filed amended counterclaims for

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breach of the insurance contract, tortious breach of the covenant

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of good faith and fair dealing, and fraud.

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Docket No. 35.

On July 25, 2012, the Clerk issued a notice, stating that the

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Court, on its own motion, took Diamond’s first motion to strike

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and to dismiss under submission on the papers.

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Later on July 25, 2012, Diamond filed a second motion to

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dismiss or strike Marin’s amended counterclaims.

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The Court held a hearing on Diamond’s second motion on August 30,

United States District Court
For the Northern District of California

10

2012.

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Docket No. 36.

LEGAL STANDARD
I.

Motion to Dismiss
A complaint must contain a “short and plain statement of the

14

claim showing that the pleader is entitled to relief.”

Fed. R.

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Civ. P. 8(a).

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state a claim, dismissal is appropriate only when the complaint

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does not give the defendant fair notice of a legally cognizable

18

claim and the grounds on which it rests.

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Twombly, 550 U.S. 544, 555 (2007).

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complaint is sufficient to state a claim, the court will take all

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material allegations as true and construe them in the light most

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favorable to the plaintiff.

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896, 898 (9th Cir. 1986).

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to legal conclusions; “threadbare recitals of the elements of a

25

cause of action, supported by mere conclusory statements,” are not

26

taken as true.

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(citing Twombly, 550 U.S. at 555).

On a motion under Rule 12(b)(6) for failure to

Bell Atl. Corp. v.

In considering whether the

NL Indus., Inc. v. Kaplan, 792 F.2d

However, this principle is inapplicable

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

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8

When granting a motion to dismiss, the court is generally

2

required to grant the plaintiff leave to amend, even if no request

3

to amend the pleading was made, unless amendment would be futile.

4

Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911

5

F.2d 242, 246-47 (9th Cir. 1990).

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amendment would be futile, the court examines whether the

7

complaint could be amended to cure the defect requiring dismissal

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“without contradicting any of the allegations of [the] original

9

complaint.”

10
United States District Court
For the Northern District of California

1

Cir. 1990).

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II.

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In determining whether

Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th

Motion to Strike
Pursuant to Federal Rule of Civil Procedure 12(f), the court

13

may strike from a pleading “any redundant, immaterial, impertinent

14

or scandalous matter.”

15

avoid spending time and money litigating spurious issues.

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Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993),

17

rev’d on other grounds, 510 U.S. 517 (1994).

18

if it has no essential or important relationship to the claim for

19

relief plead.

20

and is not necessary to the issues in question in the case.

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“Superfluous historical allegations are a proper subject of a

22

motion to strike.”

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they are often used as delaying tactics and because of the limited

24

importance of pleadings in federal practice.

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922 F. Supp. 1450, 1478 (C.D. Cal. 1996).

26

granted unless it is clear that the matter to be stricken could

27

have no possible bearing on the subject matter of the litigation.

Id.

The purpose of a Rule 12(f) motion is to

Matter is immaterial

Matter is impertinent if it does not pertain

Id.

Id.

Motions to strike are disfavored because

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9

Bureerong v. Uvawas,

They should not be

1

Colaprico v. Sun Microsystems, Inc., 758 F. Supp. 1335, 1339 (N.D.

2

Cal. 1991).

3
4
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DISCUSSION
I.

Motion to strike affirmative defenses
Diamond seeks to strike Marin’s affirmative defenses.

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does not oppose the request that its affirmative defenses be

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stricken, but requests leave to file its proposed amended

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affirmative defenses.

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Marin

of prejudice to the opposing party, leave to amend should be

If a defense is stricken, “[i]n the absence

United States District Court
For the Northern District of California

10

freely given.”

11

Cir. 1979).

12

by allowing Marin to amend the affirmative defenses.

13

replies that the proposed amended affirmative defenses are still

14

defective and that leave to amend should not be granted.

15

Wyshak v. City Nat’l Bank, 607 F.2d 824, 826 (9th

Diamond does not contend that it would be prejudiced
Instead, it

In its motion, Diamond did not argue that leave to amend the

16

affirmative defenses should be denied or that any possible

17

amendment would be futile as a matter of law.

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attacks the proposed amendments in its reply brief, Marin did not

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have an opportunity to respond its arguments or to defend the

20

sufficiency thereof.

21

Because Diamond

Accordingly, the Court GRANTS Diamond’s motion to strike the

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original affirmative defenses.

The Court further GRANTS Marin

23

leave to file its proposed amended affirmative defenses, and DEEMS

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Diamond’s reply brief to be a motion to strike the amended

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affirmative defenses.

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Marin may file a response to Diamond’s motion to strike the

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amended affirmative defenses, in a single brief of fifteen pages.

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Within one week thereafter, Diamond may file a reply in further

Within two weeks of the date of this Order,

10

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support of the motion to strike the amended affirmative defenses,

2

contained in a brief of eight pages or less.

3

II.

Motions to dismiss or strike counterclaims

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A. Marin’s original counterclaims

5

Diamond seeks dismissal of Marin’s original counterclaims and

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asks that the Court deny Marin leave to amend.

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oppose dismissal of its original counterclaims, but does oppose

8

Diamond’s request that it not be permitted to amend the

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counterclaims.

United States District Court
For the Northern District of California

10

Marin does not

Marin asserts that it does not need leave of the Court to

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amend its counterclaims and that it may do so as a matter of

12

right.

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15

Rule 15(a)(1) provides,

A party may amend its pleading once as a matter of
course within: . . . if the pleading is one to which a
responsive pleading is required, 21 days after service
of a responsive pleading or 21 days after service of a
motion under Rule 12(b), (e), or (f), whichever is
earlier.

16
Federal Rule of Civil Procedure 15(a)(1)(B).

A counterclaim is a

17
pleading to which a responsive pleading is required.

See Federal

18
Rule of Civil Procedure 12(a)(1)(B).
19
Marin has not previously amended its counterclaims or any
20
other pleading.

Thus, it was permitted to amend its pleading as a

21
matter of right within twenty-one days of the date on which
22
Diamond filed its motion under Rule 12(b), (e), and (f), or by
23
July 2, 2012.

Marin did so.

Because Marin filed its amended

24
counterclaims as a matter of right, Diamond’s first motion to
25
dismiss the original counterclaims and that Marin not be granted
26
leave to amend is DENIED AS MOOT.
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11

1

In its second motion to dismiss or strike, Diamond suggests

2

in a footnote that the amended counterclaims exceeded the breadth

3

of amendments permissible as a matter of right because Marin did

4

not assert a fraud counterclaim in its original answer and added

5

it into the 1ACC, for the first time, after the deadline to assert

6

new claims had passed.

7

the fraud counterclaim on this basis and only moved to dismiss the

8

fraud counterclaim under Federal Rules of Civil Procedure 8(a),

9

9(b) and 12(b)(6).

Diamond, however, did not move to strike

See Mot. at 1.

In the relevant footnote,

United States District Court
For the Northern District of California

10

Diamond stated that it “notes that Marin’s filing of this new

11

fraud cause of action violates” the scheduling order.

12

n.6.

13

notice that it was doing so, the Court does not reach the merits

14

of this argument.

Mot. at 19,

Because Diamond did not move on this basis or put Marin on

15

B. Marin’s 1ACC

16

In its second motion to dismiss or strike, Diamond moves to

17

dismiss all three of Marin’s amended counterclaims.

18

to strike portions of the second counterclaim as immaterial.

19
20

It also moves

1. Breach of contract
In the 1ACC, Marin alleges Diamond owed a duty to defend both

21

Marin and ATB in the Ide action, because “Ide alleged in a ‘suit’

22

that he suffered ‘bodily injury’ arising out of an ‘occurrence’

23

when the Bicycle broke when he was riding it in in April 2002

24

during the policy period,” the product was sold in the United

25

States and the injury arose from activities of the Director of

26

Product Development while he was temporarily away from the United

27

States on Marin’s business.

28

that provision (c)(2) of the definition of coverage territory does

1ACC ¶¶ 1, 6, 12.

12

Marin also avers

1

not apply to the duty to defend, because such an application

2

“would render the contractual promise to defend meaningless and

3

illusory.”

4

breached the duty to defend by failing to “defend or indemnify”

5

Marin and ATB in the Ide action and failing to “defend or

6

indemnify” Marin in the ATB and enforcement actions.

7

Id. at ¶ 13.

Marin further alleges that Diamond

Id. at ¶ 14.

Diamond moves to dismiss this claim on the basis that Marin

8

has not plead that provision (c)(2) of the definition of coverage

9

territory was met.

Diamond repudiates any suggestion that it also

United States District Court
For the Northern District of California

10

seeks to dismiss this claim on the basis that Marin has not

11

properly alleged that either subpart of provision (c)(1) of this

12

definition was met.

13

has not, and cannot, plead that the Ide and ATB actions, which

14

addressed the merits of Ide’s claims against ATB and ATB’s claims

Reply at 4 n.9.3

Diamond argues that Marin

15
16
3

17
18
19

In its motion, Diamond argued that Marin had not met either
subpart of (c)(1). Even if Diamond had not disclaimed this
argument, the Court would have rejected it. Diamond first
disputed the factual accuracy of Marin’s allegations that the bike
was sold in the United States. Mot. at 10, n.1. An evidentiary
argument such as this is improper for a motion to dismiss and the
Court disregards it.

20
21
22
23
24
25
26
27

Second, Diamond contended, “According to the appellate
opinion in the Ide Action, Ide claimed there was a ‘defect in the
handlebar because it had insufficient strength to withstand the
loads imposed upon it in ordinary use as a mountain bike.’” Mot.
at 11, n.1 (quoting RJN Ex. I ¶ 10). Diamond also asserted that
Marin did not allege that the selection of this handlebar “was
made during the alleged trip to China.” Id. However, Marin did
make such an allegation. See 1ACC ¶ 6 (“The handlebar on Ide’s
Bicycle was designed in part, selected for use on the Bicycle, and
assembled under the supervision of, Marin’s Director of Product
Development who lived in the United States. Marin’s Director of
Product Development did all of those things--design work on the
allegedly defective handlebar and oversight of the assembly of
Marin bicycles--while he was temporarily away for a short time in
China on Marin’s business.”).

28
13

1

against Marin respectively, created a potential for a judgment on

2

the merits in the United States of America, Puerto Rico or Canada,

3

because both were filed in the United Kingdom.

4

contends that the enforcement action filed in the Northern

5

District of California cannot satisfy this requirement.

6

also argues that the additional insured coverage is not rendered

7

illusory by such a restriction because, although ATB may

8

exclusively distribute bicycles in the United Kingdom, it could

9

still be sued in the United States.

Diamond further

Diamond

Finally, Diamond argues that

United States District Court
For the Northern District of California

10

Marin improperly seeks damages beyond its own expenses incurred in

11

defending the Ide and ATB actions and that it did not incur any

12

such expenses.

13

Marin responds that provision (c)(2) is not a venue clause,

14

that Diamond’s construction would require that “Marin is required

15

to lose in Court on the merits of a covered claim before Diamond

16

State is required to defend,” which is illogical.

17

contends that this subsection is deceptive, buried deep within the

18

policy and void.

19

ambiguous and cannot be applied to ATB.

20

that it sufficiently plead a basis for damages.

21

Marin also

Marin further argues that the subsection is
Finally, Marin contends

California substantive insurance law governs this diversity

22

case.

23

Cir. 2001).

24

policy and whether it provides coverage is a question of law to be

25

decided by the court.

26

1, 18 (1995).

27
28

Freeman v. Allstate Life Ins. Co., 253 F.3d 533, 536 (9th
Under California law, interpretation of an insurance

Waller v. Truck Ins. Exchange, 11 Cal. 4th

An insurance carrier “owes a broad duty to defend its insured
against claims that create a potential for indemnity.”
14

Horace

1

Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081 (1993); see

2

also Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966) (“We

3

point out that the carrier must defend a suit which potentially

4

seeks damages within the coverage of the policy.”).

5

this rule is the principle that the duty to defend is broader than

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the duty to indemnify; an insurer may owe a duty to defend its

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insured in an action in which no damages ultimately are awarded.”

8

Horace Mann Ins., 4 Cal. 4th at 1081.

9

is not unlimited; it is measured by the nature and kinds of risks

United States District Court
For the Northern District of California

10

covered by the policy.

“Implicit in

However, the duty to defend

Waller, 11 Cal. 4th at 19.

The burden is on the insured to establish the existence of a

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12

potential for coverage.

13

Cal. 4th 287, 300 (1993).

14

establish the existence of the defense duty must be resolved in

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the insured’s favor.

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burden, the insurer must establish the absence of any such

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potential for coverage.

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that the underlying claim may fall within policy coverage; the

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insurer must prove that it cannot.”

20

Montrose Chem. Corp. v. Super. Ct., 6
Any doubt as to whether the facts

Id. at 299-200.

Id.

Once the insured meets its

Thus, “the insured need only show

Id.

“The determination whether the insurer owes a duty to defend

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usually is made in the first instance by comparing the allegations

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of the complaint with the terms of the policy.

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the complaint also give rise to a duty to defend when they reveal

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a possibility that the claim may be covered by the policy.”

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Horace Mann Ins., 4 Cal. 4th at 1081.

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continuing one, arising on tender of defense and lasting until the

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underlying lawsuit is concluded.

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295.

Facts extrinsic to

The duty to defend is a

Montrose Chem., 6 Cal. 4th at

15

1

Based on the allegations in the 1ACC and the relevant policy

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language, the Court finds that Marin has not properly plead that

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Diamond breached its duty to defend in denying coverage to Marin.

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Provision 1(b)(1) sets forth that the policy covers occurrences

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that take place within the coverage territory.

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coverage territory in turn sets forth that the policy covers any

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occurrence that takes place within the United States, Puerto Rico

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or Canada, or “all other parts of the world” if certain conditions

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are met, including that liability is determined in a suit on the

The definition of

United States District Court
For the Northern District of California

10

merits in the United States, Puerto Rico or Canada or in a

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settlement to which Diamond agreed.

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This reading does not require that Marin first lose a suit in

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the United States, Puerto Rico or Canada before the duty to defend

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is triggered, as it contends.

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defend is based on the potential for coverage, not the certainty

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of coverage.

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Puerto Rico or Canada that created the potential for meeting the

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other requirements set forth in the policy, the duty to defend may

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have arisen.

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certainty before it is required to defend.

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Ide and ATB initiated suits in the United Kingdom, not in the

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United States, Puerto Rico or Canada, based on an occurrence that

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also took place in the United Kingdom, there was no possibility

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that the litigation could result in a “suit on the merits” in the

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United States, Puerto Rico or Canada, and thus the possibility of

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coverage was eliminated.

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As explained above, the duty to

If a suit had been filed in the United States,

The insurer cannot wait until coverage is a
Here, however, because

The Court also does not find that Marin has adequately plead
that the territorial limitation was an inconspicuous exclusion and
16

1

therefore unenforceable.

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the grant of coverage and not in an exclusion, a significant

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distinction.

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6
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8
9

United States District Court
For the Northern District of California

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12

The territorial limitation appears in

As the California Court of Appeal has explained,

An insurance policy is written in two parts: the
insuring agreement defines the type of risks which are
covered, while the exclusions remove coverage for
certain risks which are initially within the insuring
clause. . . . Therefore, before even considering
exclusions, a court must examine the coverage provisions
to determine whether a claim falls within the potential
ambit of the insurance. . . . This is significant for
two reasons. First, when an occurrence is clearly not
included within the coverage afforded by the insuring
clause, it need not also be specifically excluded. . . .
Second, although exclusions are construed narrowly and
must be proven by the insurer, the burden is on the
insured to bring the claim within the basic scope of
coverage, and (unlike exclusions) courts will not
indulge in a forced construction of the policy’s
insuring clause to bring a claim within the policy’s
coverage.

13

Collin v. American Empire Ins. Co., 21 Cal. App. 4th 787, 802-803

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(1994) (internal quotation marks and formatting omitted).

15

because this definition is part of the insuring agreement and not

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part of an exclusion, the burden of proof is on Marin to establish

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that its claim falls within the scope of coverage.

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Marin’s description of the policy in the 1ACC, the fact that there

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was a territorial limitation to the insurance coverage was

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disclosed on the first page of the agreement, which stated that

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the coverage was restricted to instances in which “The ‘bodily

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injury’ or ‘property damage’ is caused by an ‘occurrence’ that

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takes place in the ‘coverage territory.’”

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the insured was on notice that the policy did not provide

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unlimited worldwide coverage.

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contention is supported by its allegations that the font of the

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definition text was small and that the language was obscured by

Thus,

According to

1ACC ¶¶ 11, 34.

Thus,

Further, although Marin argues its

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17

1

the fact that the coverage premiums took into account domestic and

2

international sales, neither of these allegations is made in the

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1ACC itself but are asserted without citation only in the

4

opposition brief.

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urges, the policy suggested that it covered all international

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claims because it contained an “all parts of the world” coverage

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provision.

8

these words is the coverage territory definition itself, which

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immediately follows these words with the word “if” and sets forth

Finally, the Court does not find that, as Marin

The only policy language quoted in the 1ACC that uses

United States District Court
For the Northern District of California

10

the limitations on that coverage.

Thus, although the policy did

11

provide that it covered certain claims related to events that took

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place in “all parts of the world,” it set forth restrictions on

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such coverage.

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Marin also contends that the coverage limitation, if applied

15

to ATB, would render the additional-insured endorsement issued to

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it illusory.

17

no coverage or benefit to the insured.

18

Reeder, 221 Cal. App. 3d 961, 978 (1990); see also Sdr Co. v. Fed.

19

Ins. Co., 196 Cal. App. 3d 1433, 1437 (1987) (“the law does not

20

countenance such a nullity, for to do so would disappoint the

21

reasonable expectations of the insured, violate the general rules

22

of construing insurance contracts and most particularly

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exclusions, in favor of the insured”).

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only distributes Marin bikes in the United Kingdom, which Diamond

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knew, and that the additional-insured endorsement provided ATB

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with coverage for “‘[b]odily injury’. . . arising out of ‘your

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products’. . . which are distributed or sold in the regular course

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of the vendor’s business. . . .”

An insurance policy is illusory only if it provides
See Maryland Cas. Co. v.

Marin alleges that ATB

1ACC ¶¶ 3-4.
18

Marin argues that

1

limiting coverage for ATB only to suits brought in the United

2

States, Puerto Rico and Canada renders the endorsement illusory

3

because ATB did not do business in any of these countries and as

4

such no litigant could ever obtain jurisdiction over it in these

5

countries.

6

impossible” for ATB to use the coverage as Marin contends, because

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lack of personal jurisdiction is merely a defense that ATB could

8

choose to assert or waive and that, if ATB chose to assert this

9

defense, Diamond would be obliged to provide such a defense.

Diamond responds that it would not be “absolutely

United States District Court
For the Northern District of California

10

Further, it is not impossible that ATB could be sued in United

11

States, Puerto Rico and Canada.

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might travel to the United Kingdom, get injured while using a

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Marin bicycle there and then choose to sue ATB in the United

14

States after returning home.

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true, do not establish that the possibility of utilizing the

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coverage was a nullity rather than merely remote.

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the definition of coverage territory does not render the

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additional-insured endorsement illusory and Marin did not properly

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plead that Diamond breached the duty to defend in denying coverage

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to ATB.

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For example, an American tourist

Marin’s allegations, accepted as

Accordingly,

Because Marin has not properly plead that Diamond breached

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its duty to defend either ATB or Marin, the Court GRANTS Diamond’s

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motion to dismiss Marin’s first amended counterclaim.

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also grants Marin leave to amend to remedy the deficiencies

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discussed above if it can truthfully do so.

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19

The Court

2. Breach of the Implied Covenant of Good Faith and Fair
Dealing

1
2

Because the Court finds that Marin has not properly alleged

3

that Diamond breached its contract with Marin by refusing to

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defend it or ATB in the United Kingdom actions, the Court also

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grants Diamond’s motion to dismiss Marin’s claim for breach of the

6

implied covenant of good faith and fair dealing.

7

is clear, that without a breach of the insurance contract, there

8

can be no breach of the implied covenant of good faith and fair

9

dealing.”

“California law

Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d

United States District Court
For the Northern District of California

10

1025, 1034 (9th Cir. 2008) (citing Waller v. Truck Ins. Exch.,

11

Inc., 11 Cal. 4th 1, 35-36 (1995)).

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if it amends the breach of contract claim as discussed above.

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Marin may reassert this claim

Because the Court dismisses this claim, it does not reach

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Diamond’s request to strike as immaterial Marin’s allegation

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related to “other wrongful, illegal conduct including violation of

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law and regulations by which Defendant is bound.”

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18

3. Fraud
Diamond seeks to dismiss the fraud counterclaim on the basis

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that Marin impermissibly seeks to turn its breach of contract

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counterclaim into a tort claim.

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no tort cause of action will lie where the breach of duty is

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nothing more than a violation of a promise which undermines the

23

expectations of the parties to an agreement.’”

24

Arts Inc., 2011 U.S. Dist. LEXIS 109735 (N.D. Cal.) (quoting

25

Oracle USA, Inc. v. XL Global Servs., Inc., 2009 U.S. Dist. LEXIS

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59999, at *4 (N.D. Cal.)).

27

allegations center on purported false representations that Diamond

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made in the insurance contract itself.

“The ‘rule in California is that

Antonick v. Elec.

Here, almost all of Marin’s fraud

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See, e.g., 1ACC ¶ 36

1

(“Diamond’s interpretation of the Policy, that Diamond’s duty to

2

defend the insured is conditioned on there first being a

3

determination of the insured’s liability to pay damages for the

4

alleged bodily injury, renders the promise of such coverage so

5

illusory as to be a fraud on the insureds.”) (emphasis omitted);

6

¶ 39 (“At all times relevant, Plaintiff Marin relied on Diamond’s

7

representation in Policy [sic], that Diamond would provide Marin

8

and ATB a defense to ‘suits’ alleging ‘bodily injury’ arising out

9

of an ‘occurrence’ such as the Ide Action.”).

United States District Court
For the Northern District of California

10

Marin responds that it made allegations of misconduct that go

11

beyond Diamond’s breach of the policy.

12

paragraphs in support of this argument.

13

paragraph twenty-one, which appears in the breach of covenant

14

claim and is incorporated by reference into the fraud claim.

15

this paragraph, Marin alleges that Diamond engaged in misconduct

16

including “unreasonable delays in acting upon Marin’s and ATB’s

17

claims” and “unreasonable and improper investigation and handling

18

of Marin’s and ATB’s claims.”

19

paragraph, Marin has not alleged any specific misrepresentations

20

made by Diamond, other than those it alleges appeared in the

21

policy itself.

22

It points to two specific
First, it points to

1ACC ¶ 21(c),(d).

In

However, in this

Second, Marin states in its opposition that, in paragraph 35

23

of the 1ACC, it plead that “at the issuance of the Additional

24

Insured Endorsement, Diamond State misrepresented that it would

25

provide a defense to ATB in any action alleging bodily injury

26

against ATB.”

27

suggests that Diamond made this misrepresentation somewhere other

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than in the policy endorsement itself, this does not reflect what

Opp. at 21.

However, to the extent that Marin

21

1

is alleged in paragraph 35 of the 1ACC.

2

alleged that “the Additional Insured endorsement . . . was

3

provided to ATB per an understanding with Marin, and also appeared

4

to be a representation that Diamond would defend ATB in any action

5

alleging bodily injury against ATB.”

6

only a violation of a promise purportedly made the contract

7

itself.

8
9

In that paragraph, Marin

1ACC ¶ 35.

This alleges

Accordingly, the Court GRANTS Diamond’s motion to dismiss the
fraud counterclaim.

Marin is granted leave to amend to assert

United States District Court
For the Northern District of California

10

actionable fraudulent representations about the coverage that

11

would be provided for ATB made outside of the policy language

12

itself.

13

CONCLUSION

14

For the reasons set forth above, the Court GRANTS in part

15

Diamond’s first motion to strike and to dismiss and DENIES it in

16

part (Docket No. 32).

17

motion to dismiss or strike (Docket No. 36).

18

The Court also GRANTS Diamond’s second

The Court GRANTS Marin leave to file its proposed amended

19

answer.

20

three days of the date of this Order.

21

Marin shall file its amended answer in the docket within

The Court DEEMS Diamond’s reply brief to its first motion to

22

strike and to dismiss (Docket No. 34) to be a motion to strike the

23

amended affirmative defenses.

24

this Order, Marin may file a response to Diamond’s motion to

25

strike the amended affirmative defenses, in a single brief of

26

fifteen pages.

27

reply in further support of the motion to strike the amended

28

affirmative defenses, contained in a brief of eight pages or less.

Within two weeks of the date of

Within one week thereafter, Diamond may file a

22

1

The Court will resolve the motion to strike the amended

2

affirmative defenses on the papers.

3

If Marin intends to file amended counterclaims, it shall do
so within seven days of the date of this Order.

5

remedy the deficiencies identified above as to the counterclaims

6

for breach of contract, tortious breach of the covenant of good

7

faith and fair dealing, and fraud, and may not assert new

8

counterclaims.

9

shall respond to them within fourteen days after they are filed.

10
United States District Court
For the Northern District of California

4

If Diamond moves to dismiss or strike the amended counterclaims,

11

Marin shall respond to the motion within fourteen days after it is

12

filed.

13

thereafter.

14

the papers.

15

Marin may only

If Marin files amended counterclaims, Diamond

Diamond’s reply, if necessary, shall be due seven days
Any motion to dismiss or strike will be decided on

The Court RESETS the deadline to hear dispositive motions for

16

Thursday, December 13, 2012 at 2:00 p.m. and notes that the dates

17

for the pretrial conference and two-day jury trial may need to be

18

continued.

19

IT IS SO ORDERED.

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21

Dated:

9/10/2012

CLAUDIA WILKEN
United States District Judge

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