Wayne Merritt Motor Co, Inc et al v. American International Goup, Inc et al

Filing 34

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS re 18 MOTION to Dismiss Plaintiffs' Second Amended Complaint filed by New Hampshire Insurance Company Signed by Judge Lucy Koh on October 21, 2011. (jflc1, COURT STAFF) (Filed on 10/21/2011)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

United States District Court
For the Northern District of California

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WAYNE MERRITT MOTOR CO., INC. DBA )
RV’S OF MERRITT, WAYNE MERRITT,
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PEGGY MERRITT,
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Plaintiffs,
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v.
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NEW HAMPSHIRE INSURANCE
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COMPANY, and Does 2-100,
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Defendants.
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)

Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT’S
MOTION TO DISMISS

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Plaintiffs Wayne Merritt Motor Co., Inc. dba RV’s of Merritt, Wayne Merritt and Peggy

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Merritt (“Plaintiffs”) bring this diversity action against Defendant New Hampshire Insurance

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Company (“Defendant”), alleging tort and contract claims related to Defendant’s refusal to fully

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indemnify Plaintiffs for a judgment rendered against them in state court. Defendant moves to

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dismiss for failure to state a claim, or alternatively, for a more definite statement or to strike. For

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the following reasons, the Court GRANTS IN PART AND DENIES IN PART Defendant’s motion

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to dismiss.

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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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I. BACKGROUND

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Plaintiffs owned and operated a dealership specializing in recreational vehicles (“RVs”)

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called “RV’s of Merritt” in Scotts Valley, California. SAC ¶ 6. Plaintiffs purchased from

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Defendant a Garage Liability insurance policy (the “GL policy”), as well as several other insurance

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products. Id. ¶ 7. The GL policy required an annual premium payment of $22,136. Id. ¶ 25.

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The GL policy’s “declarations page” “prominently” stated that the policy provided

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$1,000,000 in “single occurrence coverage” and $2,000,0000 in” aggregate coverage.” Id. ¶ 9.

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The policy was accompanied by an addendum labeled “GARAGE POLICY EXTENSION

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ENDORSEMENT” (the “endorsement”). Id. ¶ 12. On the tenth page of the endorsement, there

United States District Court
For the Northern District of California

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was a provision entitled “LIMIT OF INSURANCE,” which stated that coverage for each “suit” or

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claim for “product related damage” was limited to $25,000 (the “cap provision”). Id. ¶ 14.

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In 2007, Plaintiffs were sued in state court over conduct related to the sale of an RV (the

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“state court action.”). Defendant undertook at least some aspects of Plaintiffs’ defense. In June

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2007, Defendant rejected an initial settlement offer of $110,000. Id. ¶¶ 20-21. A mediation was

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held in October 2008. Id. ¶ 20. Defendant “refused to settle and forced litigation, which caused

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[Plaintiff] Wayne [Merritt] to undergo a surgery for Diverticulitis in December 2008.” Id. ¶ 21.

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Mr. Merritt was hospitalized for five days. Id. ¶ 22. Plaintiff Peggy Merritt was “forced to handle

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both the litigation and her husband’s hospitalization, [which] caused her needlessly extreme

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emotional distress.” Id. ¶ 22.

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On September 2, 2009, the jury in the state court action returned a special verdict holding

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Plaintiffs liable for intentional misrepresentation, concealment, negligent misrepresentation,

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unlawful practice in the sale of consumer goods, breach of contract and breach of the implied

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covenant of good faith and fair dealing. See ECF No. 27-1 (Request for Judicial Notice), Ex. A

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(Certified Copy of Special Verdict Form, Agard, et al. v. Wayne Merritt Motor Co., et al., Santa

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Cruz County Superior Court Case No. CV 157820). 1 After issuance of the verdict, the parties

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The Court takes judicial notice of the certified copy of the special verdict form in the state
court action. See Rosen v. St. Joseph Hosp. of Orange County, 193 Cal. App. 4th 453, 457 (Cal.
Ct. App. 2011) (certified copies of a special verdict, judgment, and minute order recording the
jury’s verdict are properly subject to judicial notice).
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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settled for $177,000, approximately $77,000 of which was attributable to attorney’s fees (the

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“settlement award”). SAC ¶ 18. Defendant indemnified Plaintiffs for the entire attorney’s fees

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award. Id. ¶ 19. However, claiming that the cap provision limited any further liability, Defendant

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indemnified Plaintiffs for only $25,000 of the remaining $100,000 owed under the settlement. In

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order to pay the remaining $75,000, Plaintiffs had to obtain a loan and place a deed of trust on their

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property. Id. ¶ 24.
Subsequently, Plaintiffs filed a complaint against Defendant 2 in state court alleging causes

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of action for (1) breach of contract, (2) breach of the implied covenant of good faith and fair

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dealing, (3) negligence, (4) unfair business practices, (5) intentional infliction of emotional distress,

United States District Court
For the Northern District of California

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(6) interference with a protected property interest, (7) fraud, (8) reformation, and (9) violations of

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Cal. Ins. Code § 785. Plaintiffs sought general, special and punitive damages, attorney’s fees,

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reformation and injunctive relief. Defendant removed the action on April 11, 2011 under 28

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U.S.C. § 1332(a). Plaintiffs filed a Second Amended Complaint (“SAC”), the first in federal court,

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on May 16, 2011.

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II. LEGAL STANDARD

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Dismissal under Fed. R. Civ. P. 12(b)(6) for failure to state a claim is “proper only where

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there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable

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legal theory.” Shroyer v. New Cingular Wireless Services, Inc., 606 F.3d 658, 664 (9th Cir. 2010)

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(quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). In considering whether the

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complaint is sufficient to state a claim, the court must accept as true all of the factual allegations

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contained in the complaint. Ashcroft v. Iqbal, ––– U.S. ––––, ––––, 129 S.Ct. 1937, 1949 (2009).

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While a complaint need not include detailed factual allegations, it “must contain sufficient factual

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matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Id. (quoting Bell

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Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Courts are not bound to accept as true “a

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legal conclusion couched as a factual allegation.” Id.

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The state court complaint also named American International Group, Inc. (“AIG”) as a
defendant. See ECF No. 1 (Notice of Removal). The Second Amended Complaint does not
include AIG.
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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If the court concludes that the complaint should be dismissed, it must then decide whether

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to grant leave to amend. “[A] district court should grant leave to amend even if no request to

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amend the pleading was made, unless it determines that the pleading could not possibly be cured

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by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (quoting Doe

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v. United States, 58 F.3d 494, 497 (9th Cir. 1995)).

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Under Fed. R. Civ. P. 12(e), “[a] party may move for a more definite statement of a

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pleading to which a responsive pleading is allowed but which is so vague or ambiguous that the

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party cannot reasonably prepare a response.”

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United States District Court
For the Northern District of California

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III. DISCUSSION
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First Cause of Action: Breach of Contract
In order to state a claim for breach of contract, a plaintiff must allege (1) the existence of a

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valid contract, (2) performance by the plaintiff or excuse for nonperformance, (3) breach by the

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defendant and (4) damages. First Commercial Mortgage Co. v. Reece, 89 Cal. App. 4th 731, 745

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(Cal. Ct. App. 2001). Here, the dispute centers on whether Defendant breached its obligation under

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the GL Policy by refusing to indemnify Plaintiffs for the entire amount of the settlement award.

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SAC ¶ 42. Based on the briefing, it appears the parties agree that Plaintiffs’ breach of contract

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claim turns on whether the cap provision is found to be unenforceable.

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a.

Plaintiffs have pled facts sufficient to show that the cap provision is
unenforceable

“Unquestionably, California insurers may rely on endorsements to modify printed terms of

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a form policy.” Haynes v. Farmers Ins. Exch., 32 Cal.4th 1198, 1208 (Cal. 2004). However, “an

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insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear.”

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State Farm Mut. Auto. Ins. Co. v. Jacober, 10 Cal.3d 193, 201 (Cal. 1973). As the California

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Supreme Court has explained:

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We have declared time and again any exception to the performance of the basic
underlying obligation must be so stated as clearly to apprise the insured of its effect.
Coverage may be limited by a valid endorsement and, if a conflict exists between
the main body of the policy and an endorsement, the endorsement prevails. But to
be enforceable, any provision that takes away or limits coverage reasonably
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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expected by an insured must be conspicuous, plain and clear. Thus, any such
limitation must be placed and printed so that it will attract the reader’s attention.
Such a provision also must be stated precisely and understandably, in words that are
part of the working vocabulary of the average layperson. The burden of making
coverage exceptions and limitations conspicuous, plain and clear rests with the
insurer.

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Haynes, 32 Cal.4th at 1204 (internal citations and quotations marks omitted).
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Construed in the light most favorable to the non-moving party, Plaintiffs’ allegations
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establish a reasonable expectation that the GL Policy provided $1,000,0000 in single occurrence
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coverage. In determining whether coverage is consistent with the objectively reasonable
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expectations of an insured, “the court must interpret the language in context, with regard to its
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intended function in the policy … The court may also rely on common sense in determining the
United States District Court
For the Northern District of California

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insured’s objectively reasonable expectations.” Farmers Ins. Exch. v. Knopp, 50 Cal. App. 4th
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1415, 1422 (Cal. Ct. App. 1996).
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Here, Plaintiffs allege that the declarations page for the GL Policy “prominently stated there
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was $1,000,000 in single occurrence coverage, and $2,000,0000 in aggregate coverage.” SAC ¶ 9.
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The declarations’ description of coverage is relevant in ascertaining an insured’s reasonable
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expectations. See, e.g., Haynes, 32 Cal.4th 1198 (liability limitations described in the declarations
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pages establish a reasonable expectation of coverage). Moreover, it is clearly rational for a person
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purchasing insurance to assume that a $22,136 premium payment buys more than $25,000 in
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coverage. The fact that the GL Policy covered a dealership selling RVs, many of which cost
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thousands of dollars, also suggests that Plaintiffs were reasonable to expect extensive coverage.
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Because Plaintiffs reasonably expected $1,000,000 in coverage, any limiting clause must be
“conspicuous, plain and clear.” Id. As noted above, the cap provision appears in a document
entitled “GARAGE LIABILITY EXTENSION ENDORSEMENT.” SAC ¶ 12. Such language
creates the impression that the endorsement expands coverage, rather than limiting it. In addition,
although the cap provision is included in a subsection plainly labeled “LIMIT OF INSURANCE,”
that subsection is “buried” ten pages into the endorsement. SAC ¶ 14. Obscuring a term that
reduces coverage by 97.5 percent in an endorsement rather than on the declarations page can hardly
be said to conform with the insurer’s “obligation … to apprise the insured” of coverage limitations.
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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Id. (an endorsement limiting liability that appeared on an insurance policy’s 24th page, was not

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clearly referenced in the policy’s declarations, and was not “bolded, italicized, enlarged,

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underlined, in different font, capitalized, boxed, set apart, or in any other way distinguished from

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the rest of the fine print,” was inconspicuous and therefore unenforceable); see also Thompson v.

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Mercury Cas. Co., 84 Cal. App. 4th 90, 97 (Cal. Ct. App. 2000) (a limitation appearing in an

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unnumbered policy addendum instead of “in the ‘Liability’ section of the policy, where an average

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layperson would expect to find it,” was unenforceable). For purposes of a motion to dismiss, the

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Court finds Plaintiffs’ allegations sufficient to show that the cap provision is not “conspicuous,

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plain and clear” and is therefore unenforceable.

United States District Court
For the Northern District of California

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Hadland v. NN Investors Life Ins. Co., 24 Cal. App. 4th 1578, 1586 (Cal. Ct. App. 1994),

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cited by Defendant, does not compel a different conclusion. The Hadland court noted the “general

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rule that the receipt of a policy and its acceptance by the insured without an objection binds the

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insured as well as the insurer and he [or she] cannot thereafter complain that he [or she] did not

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read it or know its terms. It is a duty of the insured to read his [or her] policy.” Id. (citing Aetna

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Casualty & Surety Co. v. Richmond, 76 Cal. App. 3d 645, 652 (Cal. Ct. App. 1977)). However, the

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court went on to state that an “insured [is] bound by clear and conspicuous provisions in the policy

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even if evidence suggests that the insured did not read or understand them.” Id. (citing Sarchett v.

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Blue Shield of California, 43 Cal.3d 1, 15 (Cal. 1987)). Finding that the terms of the policy were

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clear, the Hadland court held that the insured was bound by them. Because the Court does not find

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that the provision at issue here was sufficiently conspicuous, Hadland does not apply.

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b.

The factual allegations provide sufficient notice of Plaintiffs’ claim for relief

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Defendant also argues that Plaintiffs have failed to state a claim for breach of contract

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because they do not identify“what portion of their policy was arguably breached … or whether or

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how there was any claim actually covered under the policy that was not paid.” ECF No. 18

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(Motion to Dismiss) at 6. To the contrary, the complaint clearly states that Defendant “breached

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the GL policy by failing to pay benefits owed.” SAC ¶ 42. Plaintiffs repeatedly emphasize their

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understanding that the GL Policy obligated Defendant to indemnify them for up to $1,000,000 in

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losses, and that Defendant thus breached the contract by asserting the cap provision. As such,
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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Defendant has been “put on notice of the legal theories that could hold [it] liable to … for breach of

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contract.” Dion LLC v. Infotek Wireless, Inc., C 07-1431SBA, 2007 WL 3231738 (N.D. Cal. Oct.

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30, 2007).

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c.

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The Court declines to address Defendant’s argument under California
Insurance Code section 533 because it was raised for the first time on reply

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Finally, Defendant argues in its Reply Brief that even if the contract was breached, any

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relief is precluded by Cal. Ins. Code § 533. Section 533 provides: “An insurer is not liable for a

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loss caused by the willful act of the insured.” Defendant contends that because the jury in the state

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court action found Plaintiffs liable for fraud, the GL policy did not require Defendant to indemnify

United States District Court
For the Northern District of California

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Plaintiffs at all.
Since this argument was not raised in Defendant’s motion to dismiss, Plaintiffs have not

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had an opportunity to respond. The Court therefore declines to consider whether Section 533

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applies in this case. See Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) (“The district court

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need not consider arguments raised for the first time in a reply brief.”). However, if Plaintiffs

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choose to amend their complaint, Defendant may include this argument in any subsequent motion

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to dismiss.
Because Plaintiffs have sufficiently alleged facts showing that the cap provision is invalid,

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the Court DENIES the motion to dismiss Plaintiffs’ claim for breach of contract.

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2.

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Second Cause of Action: Breach of the Covenant of Good Faith and Fair Dealing
“Under California law, all insurance contracts contain an implied covenant of good faith

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and fair dealing which requires each contracting party to refrain from doing anything to injure the

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right of the other to receive the benefit of the agreement.” Hanson By & Through Hanson v.

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Prudential Ins. Co. of Am., 783 F.2d 762, 766 (9th Cir. 1985). The covenant prevents a party from

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acting in bad faith to frustrate the contract’s actual benefits. Guz v. Bechtel Nat. Inc., 24 Cal.4th

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317, 353 n. 18 (Cal. 2000). A claim for breach of the implied covenant of good faith and fair

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dealing requires that: “(1) benefits due under the policy must have been withheld; and (2) the

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reason for withholding benefits must have been unreasonable or without proper cause.” Love v.

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Fire Ins. Exch., 221 Cal. App. 3d 1136, 1151 (Cal. Ct. App. 1990). The mere denial of benefits
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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does not demonstrate bad faith. See Safeco Insurance Co. of America v. Guyton, 692 F.2d 551, 557

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(9th Cir. 1982) (where policy dispute involved a genuine legal issue concerning liability, insurer

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could not have been acting in bad faith by refusing to pay claim); but see Egan v. Mut. of Omaha

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Ins. Co., 24 Cal.3d 809, 817 (Cal. 1979) (finding bad faith where insurer denied claim without an

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investigation); Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376 (Cal. Ct. App.

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1970) (inaccurately characterizing an insured’s illness to minimize coverage could constitute bad

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faith); Richardson v. Employers Liab. Assur. Corp., 25 Cal. App. 3d 232, 239 (Cal. Ct. App. 1972)

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(finding bad faith on the part of an insurer that withheld payment knowing that benefits were owed,

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forced an arbitration hearing despite having no defense and required plaintiffs to resort to litigation

United States District Court
For the Northern District of California

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to have the award judicially confirmed).
Plaintiffs allege that Defendant “made a cost benefit analysis” and denied their claim under

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a provision it knew to be illegal under “basic California insurance law.” See SAC ¶ ¶ 36-37.

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Essentially, Plaintiffs argue that although Defendant complied with the plain terms of the contract,

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it did so in bad faith. Generally, where an insurer denies coverage under an unenforceable

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provision, the proper remedies are restitution or contract damages. See McBride v. Boughton, 123

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Cal. App. 4th 379, 388 (Cal. Ct. App. 2004) (noting that “restitution may be awarded in lieu of

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breach of contract damages when the parties had an express contract, but it was procured by fraud

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or is unenforceable or ineffective for some reason.”). Plaintiffs cite no authority for the rather

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novel proposition that an insurer can be held liable in tort for accurately applying a contractual

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limitation it knows to be invalid. Compare Opsal v. United Services Auto. Assn., 2 Cal. App. 4th

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1197, 1205 (Cal. Ct. App. 1991) (denial of benefits based on insurer’s interpretation of dicta in a

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Supreme Court opinion was “erroneous” but not done in bad faith); Gruenberg v. Aetna Ins. Co., 9

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Cal.3d 566, 583 (Cal. 1973) (noting that bad faith generally involves fraud or “an intention to …

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not perform a fixed promise”). Nevertheless, the Court agrees that such conduct might give rise to

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a cause of action for bad faith if a plaintiff could plead facts demonstrating that the decision to

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deny a claim was made or ratified by someone who knew the limitation was unenforceable. See

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Richardson, 25 Cal. App. 3d at 239 (denial of benefits constituted bad faith because the insurer’s

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own investigation revealed the claim to be “completely valid”). Here, Plaintiffs’ assertion that
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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Defendant “must be aware of basic California insurance law regarding disclosure of exclusions and

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limitations” simply because it is a “sophisticated business operation” falls short of that standard.

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SAC ¶ 37. 3 Accordingly, the Court GRANTS Defendant’s motion to dismiss Plaintiffs’ second

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cause of action for bad faith WITHOUT PREJUDICE.

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3.

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Third Cause of Action: Negligence
In order to state a claim for negligence under California law, a plaintiff must establish four

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required elements: (1) duty; (2) breach; (3) causation; and (4) damages. Ileto v. Glock Inc., 349

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F.3d 1191, 1203 (9th Cir. 2003) (citing Martinez v. Pacific Bell, 225 Cal. App. 3d 1557 (Cal. Ct.

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App. 1990)). Whether a legal duty arises is a “question of law which is simply an expression of the

United States District Court
For the Northern District of California

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sum total of the policy considerations that lead a court to conclude that a particular plaintiff is

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entitled to protection.” Id. (internal citations omitted).

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Relying on Logan v. John Hancock Mut. Life Ins. Co., 41 Cal. App. 3d 988, 996 (Cal. Ct.

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App. 1974), Plaintiffs argue that Defendant had an “affirmative duty to point out and explain the

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limitations in coverage because they were so inconsistent with their reasonable expectations of

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coverage.” SAC ¶ 51. In Logan, a Navy serviceman applied to purchase a life insurance policy at

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an insurance sales office. During the application process, the serviceman was not informed by the

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insurance agent that the policy excluded coverage for death resulting from intoxication or

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participation in a felony. After the serviceman had completed the application, but before he

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received the written policy in the mail, he was killed in a drunk-driving accident. Citing the

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intoxication exclusion, the insurer refused to pay any benefits under the policy. The Court of

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Appeal rejected the insurer’s position, holding that “where a policy has not yet been issued, all

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standard exclusions to the insurance coverage, which the insured would not reasonably expect,

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must be called clearly and plainly to the attention of the insured if the insurer is to be permitted to

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rely on these exclusions to avoid payment of benefits under the policy.” Logan, 41 Cal. App. 3d at

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Plaintiffs argue that Defendant was “put on notice of its unreasonable position with
correspondence from the Law Firm of Adelson, Hess and Kelly, and it continued to deny coverage,
and thus ratified and approved its wrongful conduct.” SAC ¶ 33. Plaintiffs do not explain who
“Adelson, Hess and Kelly” is nor what the firm’s alleged correspondence contained. The Court
therefore does not reach the issue of whether a legal opinion from a law firm regarding the
enforceability of a contract could ever be the basis for a bad faith claim.
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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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996.

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Plaintiffs also cite Fields v. Blue Shield of California, 163 Cal. App. 3d 570, 579 (Cal. Ct.

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App. 1985), in which a health insurer denied coverage for psychiatric care based on an express

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limitation in a written insurance policy. The court found that because the “limitation of coverage

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was placed, not in the limitation or exclusion section, but at the end of benefit granting provisions,”

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it was not “clear” and “conspicuous” and was therefore unenforceable. Id. at 57.

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Neither Logan nor Fields suggests that an insurer who fails to “warn” an insured regarding
coverage limitations may be held liable for negligence. 4 Rather, both cases simply affirm the

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general rule of contracts that in order to be enforceable, provisions limiting coverage under an

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United States District Court
For the Northern District of California

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insurance policy must be clear and conspicuous. The fact that the cap provision may be invalid

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could justify contract damages, but does not give rise to a separate cause of action for negligence.

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Because the Court reaches this conclusion as a matter of law, the Court GRANTS the motion to

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dismiss Plaintiffs’ third cause of action WITH PREJUDICE.

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4.

Fourth Cause of Action: California Business and Professions Code § 17200

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California Business and Professions Code § 17200 proscribes “unlawful, unfair or

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fraudulent” business acts or practices. “[T]he Legislature . . . intended by this sweeping language

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to permit tribunals to enjoin on-going wrongful business conduct in whatever context such activity

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might occur.” Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th

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163, 181 (Cal. 1999) (internal citations omitted).

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Under California law, a duty to warn an individual of dangers to which he has been or will
be exposed turns on: (1) “the nature of the relationship between the party who has knowledge of
the danger and the party who is threatened with potential injury;” (2) “the seriousness of the
potential injury;” (3) “the extent to which the potential injury is a foreseeable result of the
defendant's conduct;” (4) “the extent of the burden on the defendant of imposing a duty to warn;”
and (5) “the likelihood that a warning will have a practical effect.” Molsbergen v. United States,
757 F.2d 1016, 1021 (9th Cir. 1985) (internal citations omitted). Elsewhere in the complaint,
Plaintiffs allege that Defendant had a “special relationship with Plaintiffs that involved fiduciarylike duties of honesty, fairness, decency, humanity and integrity.” SAC ¶ 46. However, Plaintiffs
make no further argument regarding the existence of a duty to warn, nor do they cite any case
applying the “duty to warn” factors to the relationship between an insurer and an insured. The
Court therefore declines to reach the issue of whether an insurance contract could ever give rise to
a duty to warn sufficient to establish liability for negligence.

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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

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Plaintiffs allege that it was “unfair, unlawful and fraudulent to suggest and represent

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$1,000,000 in coverage…and then to bury in small print in a document purporting to extend

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coverage a monetary cap of $25,000, particularly when it is common knowledge that most people

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do not read their entire policies.” SAC ¶ 54 (emphasis in original). Rather than dispute whether

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such conduct is covered by Section 17200, Defendant argues that Plaintiffs’ claim is precluded by

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the holdings of Moradi–Shalal v. Fireman's Fund Ins. Cos., 46 Cal.3d 287 (Cal. 1988) and Textron

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Fin. Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 118 Cal. App. 4th 1061, 1070 (Cal. Ct. App.

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2004).

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In Moradi-Shalal, the California Supreme Court held that the Unfair Insurance Practices

United States District Court
For the Northern District of California

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Act (“UIPA”), Cal. Ins. Code, § 790 et seq., which prohibits “unfair and deceptive acts or practices

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in the business of insurance,” does not create a private cause of action. See Moradi-Shalal, 46 Cal.

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3d at 304. Instead, enforcement of the UIPA is left primarily to the California Insurance

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Commissioner. Id. In 1996, the California Court of Appeal found that Moradi-Shalal did not bar

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unfair competition claims against insurers based on common law theories, even though such

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alleged misconduct may also violate the provisions of the UIPA. See State Farm Fire & Casualty

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Co. v. Superior Court, 45 Cal. App. 4th 1093 (Cal. Ct. App. 1996). Therefore, when an insurer

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surreptitiously reduced the earthquake coverage offered in its homeowner insurance policies,

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plaintiffs were not precluded by Moradi-Shalal from bringing claims based on fraud, intentional

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infliction of emotional distress and bad faith under Section 17200. Id. at 1108.

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In 2004, the Court of Appeal expressly disagreed with State Farm in Textron Fin. Corp. v.

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Nat'l Union Fire Ins. Co. of Pittsburgh. The Textron court cautioned that “parties cannot plead

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around Moradi–Shalal’s holding by merely relabeling their cause of action as one for unfair

23

competition.” Textron, 118 Cal. App. 4th at 1070. The court further reasoned that State Farm’s

24

persuasiveness had been “undercut” by Cel–Tech Communications, Inc. v. Los Angeles Cellular

25

Telephone Co., 20 Cal.4th 163 (Cal. 1999), which disapproved of State Farm’s “amorphous”

26

construction of the term “unfair business practice” as any conduct that “offends an established

27

public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially

28

injurious to consumers.” Textron, 118 Cal. App. 4th at 1071-72 (citing State Farm Fire, 45 Cal.
11
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

App. 4th at 1103-04. Instead, Cel–Tech required that “any finding of unfairness to competitors

2

under section 17200 be tethered to some legislatively declared policy or proof of some actual or

3

threatened impact on competition.” Id. at 1072 (citing Cel–Tech, 20 Cal.4th at 186-87). With this

4

holding in mind, the Textron court concluded that where an insured’s unfair competition claim is

5

based on “the type of activities covered by the UIPA,” it is barred by Moradi-Shalal. Id. (claims

6

related to the insurer’s misrepresentation of both the terms of its policies and its obligations under

7

them were foreclosed by Moradi-Shalal); see also Safeco Ins. Co. v. Superior Court, 216 Cal. App.

8

3d 1491, 1494 (Cal. Ct. App. 1990) (“We have no difficulty in deciding the Business and

9

Professions Code provides no toehold for scaling the barrier of Moradi-Shalal … . To permit

United States District Court
For the Northern District of California

10

plaintiff to maintain this action would render Moradi-Shalal meaningless.”).

11

Here, Plaintiffs’ unfair competition claim is based on the allegation that Defendant

12

misrepresented the coverage provided under the policy by “burying” a limitation of liability clause

13

in the endorsement. SAC ¶ 54. As such, the claim is clearly premised on the kind of conduct

14

covered by the UIPA. See Cal. Ins. Code § 790.03(h)(1) (prohibiting “knowingly …

15

misrepresenting to claimants pertinent facts or insurance policy provisions relating to any

16

coverages at issue.”). While this area of California law is unsettled, 5 the Court agrees with Textron

17

that Plaintiffs may not plead around Moradi-Shalal by simply claiming a violation of the UCL

18

rather than the UIPA. However, because Plaintiffs may be able to plead a UCL claim that is not

19

based on conduct covered by the UIPA, the Court GRANTS the motion to dismiss Plaintiffs’

20

fourth cause of action WITHOUT PREJUDICE.

21

5.

22

Fifth Cause of Action: Intentional Infliction of Emotional Distress
Under certain circumstances, an insurance carrier’s conduct in handling a claim may result

23

in liability for intentional infliction of emotional distress. Hailey v. California Physicians’ Service,

24

5

25
26
27

The California Supreme Court is currently reviewing the Court of Appeal’s decision in
Zhang v. Superior Court, 100 Cal. Rptr. 3d 803 (Cal. Ct. App. 2009), which disagreed with Textron
and held that Moradi-Shalal only barred UCL claims “if a plaintiff relies on conduct that violates
the Unfair Insurance Practices Act, but is not otherwise prohibited.” Id. at 807. If the California
Supreme Court upholds Zhang, Plaintiffs are invited to move for reconsideration of this Court’s
Order.

28
12
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

158 Cal. App. 4th 452, 473-74 (Cal. Ct. App. 2007) (internal citations omitted). To state a cause of

2

action for emotional distress, the plaintiff must allege “(1) extreme and outrageous conduct by the

3

defendant with the intention of causing, or reckless disregard of the probability of causing,

4

emotional distress; (2) the plaintiff’s suffering severe or extreme emotional distress; (3) and actual

5

and proximate causation of the emotional distress by the defendant’s outrageous conduct.” Id. The

6

conduct alleged must “go beyond all possible bounds of decency, and … be regarded as atrocious,

7

and utterly intolerable in a civilized community.” Coleman v. Republic Indemnity Ins. Co., 132

8

Cal. App. 4th 403, 416 (Cal. Ct. App. 2005). Behavior may be considered outrageous if a

9

defendant (1) abuses a relation or position which gives him power to damage the plaintiff’s

10
United States District Court
For the Northern District of California

1

interest; (2) knows the plaintiff is susceptible to injuries through mental distress; or (3) acts

11

intentionally or unreasonably with the recognition that the acts are likely to result in illness through

12

mental distress. Hailey, 158 Cal. App. 4th at 474.

13

In the insurance context, courts have rejected liability for emotional distress where the

14

insurer simply delayed or denied insurance benefits, Coleman, 132 Cal.App.4th at 417, refused to

15

accept a settlement demand within policy limits, Isaacson v. California Ins. Guarantee Assn., 44

16

Cal.3d 775, 788–89 (Cal. 1988), or failed to investigate a claim and accused the insured of “trying

17

to put something over on” the insurer, Ricard v. Pacific Indemnity Co. 132 Cal.App.3d 886, 889,

18

895 (Cal. Ct. App. 1982). On the other hand, insurers have been held liable for emotional distress

19

after attempting to induce an insured to surrender his policy by sending false and threatening

20

letters, Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376 (Cal. Ct. App. 1970),

21

frivolously delaying disability payments despite knowledge of the insured’s “fragile emotional

22

condition,” Hernandez v. General Adjustment Bureau, 199 Cal.App.3d 999 (Cal. Ct. App. 1988),

23

or by rescinding coverage without good cause after learning that an insured has suffered an

24

accident, Hailey, 158 Cal. App. 4th at 474.

25

a.

Plaintiffs’ allegations are insufficient to state a claim for emotional distress

26

In this case, Plaintiffs allege two separate grounds for recovery. First, Plaintiffs assert that

27

the policy was “intentionally designed” to mislead Defendant’s clients, and that Defendant “knew

28

or must have known it was violating California law [and] that the imposition of the coverage
13
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

limitation was bound to cause great financial hardship and/or emotional distress to Wayne &

2

Peggy.” SAC ¶ 58-59. Second, Plaintiffs claim that because Defendant chose to litigate the state

3

court action instead of settling, Wayne Merritt was forced to undergo surgery for Diverticulitis,

4

leaving Peggy to “handle both the litigation and her husband’s hospitalization, [causing] her

5

needlessly extreme emotional distress.” Id. ¶ 21-22.

6

Plaintiffs’ first claim is unavailing. Where an insurer has been held liable for the infliction

7

of emotional distress, courts have invariably found it relevant that the responsible parties had

8

knowledge of a specific plaintiff’s vulnerabilities. See Fletcher, 10 Cal. App. 3d 376 (conduct

9

occurred after claims adjuster learned that plaintiff had become disabled); Hernandez, 199 Cal.

United States District Court
For the Northern District of California

10

App. 3d at 1007 (claims adjusters knew of plaintiff’s susceptibility to mental distress and repeated

11

attempts at suicide); Hailey, 158 Cal. App. 4th at 474 (“Blue Shield knew about Steve’s car

12

accident, severe physical injuries, disability, and liability for mounting medical bills. Given these

13

circumstances, Blue Shield knew it would cause plaintiffs to suffer emotional distress if it

14

rescinded Steve’s health care coverage.”). In addition, all three cases dealt with health care

15

policies, which are inherently likely to involve extremely sensitive situations. In contrast, the

16

complaint does not allege that Defendant had any special knowledge about Plaintiffs when

17

designing the GL policy, but rather that Defendant should have known the limitation was “bound to

18

cause financial hardship and/or emotional distress.” SAC ¶ 59. Such an allegation is not enough to

19

find Defendant’s conduct “outrageous.”

20

The second theory is also insufficient to support recovery for emotional distress. An

21

insurer who undertakes the defense of an insured may decide whether or not to settle a claim, so

22

long as the decision is not unreasonable. See Risely v. Interinsurance Exch. of Auto. Club, 183 Cal.

23

App. 4th 196, 208 (Cal. Ct. App. 2010) (where the insured is facing potential liability in excess of

24

the policy and the settlement offer is within policy limits, a decision to litigate may be

25

unreasonable). The Court views with some skepticism Defendant’s rejection of the settlement

26

offer when Plaintiffs were responsible for paying most of the potential damages. However,

27

Plaintiffs do not suggest that Defendant did not believe the decision was in their best interests.

28

Compare Fletcher, 10 Cal. App. 3d 376 (letter accusing plaintiff of having an undisclosed medical
14
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

condition was based on a “complete absence of any investigation…[or] any facts.”); Hernandez,

2

199 Cal. App. 3d at 1007 (payments were repeatedly late although there was “no question” plaintiff

3

was entitled to benefits). Nor do they contend that the strategy was intended to cause emotional

4

distress, even though it allegedly did so. SAC ¶ 18-20. Thus, although Defendant’s refusal to

5

settle appears in hindsight to be a mistake, it was not “outrageous.” However, because there may

6

be a set of facts on which Defendant could be liable for emotional distress, the Court GRANTS

7

Defendant’s motion to dismiss Plaintiffs’ fifth cause of action WITHOUT PREJUDICE.

8

6.

9

Sixth Cause of Action: Interference with a Protected Property Interest
Plaintiffs allege that they held a “protected property interest” in their insurance policy, and

United States District Court
For the Northern District of California

10

that Defendant interfered with that interest by “refusing to pay benefits owed.” SAC ¶ 63-65.

11

Plaintiffs rely on Fletcher, 10 Cal. App. 3d at 401-02, in which the California Court of Appeal held

12

that where an insurer is found liable for the tort of intentional infliction of emotional distress, “such

13

conduct …constitutes a tortious interference with a protected property interest of its insured for

14

which damages may be recovered to compensate for all detriment proximately resulting therefrom,

15

including economic loss as well as emotional distress resulting from the conduct or from the

16

economic losses caused by the conduct, and, in a proper case, punitive damages.”

17

Plaintiffs cite no case adopting Fletcher’s endorsement of the tort of interference with a

18

protected property interest. The District Court for the Eastern District of California has recently

19

explained that “subsequent courts have characterized the ‘tortious interference with a protected

20

property interest’ language in Fletcher as more appropriately appraised as a claim for tortious

21

breach of a duty imposed by the contractual implied covenant of good faith and fair dealing.”

22

Valley Air Conditioning & Repair, Inc. v. Benefit Life Ins. Co., 2007 U.S. Dist. LEXIS 70111, *8

23

(E.D. Cal. Sept. 19, 2007) (citing Hand v. Farmers Ins. Exchange, 23 Cal. App. 4th 1847, 1854

24

(Cal. Ct. App. 1994); McDowell v. Union Mut. Life Ins. Co., 404 F. Supp. 136, 146 (C.D. Cal.

25

1975)). The Valley Air court therefore dismissed the plaintiff’s claim for interference with a

26

protected property interest, but allowed amendment of his breach of the covenant of good faith and

27

fair dealing claim to “include factual allegations that Plaintiff has suffered economic loss as a result

28
15
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

of [the insurer’s] alleged wrongful withholding of insurance proceeds.” Valley Air, 2007 U.S. Dist.

2

LEXIS 70111 at *11-12.

3

The Court agrees that Plaintiffs’ claim is better characterized as a breach of the covenant of

4

good faith and fair dealing. Plaintiffs may amend their breach of the covenant of good faith and

5

fair dealing claim as described by Valley Air. Therefore, the Court GRANTS Defendant’s motion

6

to dismiss Plaintiffs’ sixth cause of action WITH PREJUDICE.

7

7.

8
9

Seventh Cause of Action: Fraud
Plaintiffs’ seventh cause of action in fact includes claims for (1) intentional

misrepresentation, (2) concealment, (3) promise without intention of performing, and (4) negligent

United States District Court
For the Northern District of California

10

misrepresentation. SAC ¶¶ 66-75. Except for the claim for negligent misrepresentation, all of

11

these are species of fraud. See Starnet Int'l AMC Inc. v. Kafash, 09-CV-04301-LHK, 2011 WL

12

31269 (N.D. Cal. Jan. 5, 2011) (“Intentional misrepresentation is a claim for fraud.”); Baggett v.

13

Hewlett-Packard Co., 582 F. Supp. 2d 1261, 1267 (C.D. Cal. 2007) (noting that the

14

misrepresentation element of a fraud claim may be proved by showing concealment); Lazar v.

15

Superior Court, 12 Cal. 4th 631, 638 (Cal. 1996) (“‘Promissory fraud’ is a subspecies of the action

16

for fraud and deceit.”). Under California law, the “indispensable elements of a fraud claim include

17

a false representation, knowledge of its falsity, intent to defraud, justifiable reliance, and damages.”

18

Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. Cal. 2003) (internal citations

19

omitted). Negligent misrepresentation requires a similar showing, although the intent requirement

20

is relaxed. See Nat. Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Servs. Grp.,

21

Inc., 171 Cal.App.4th 35, 89 (Cal. Ct. App. 2009). In the instant case, Defendant focuses on

22

Plaintiffs’ alleged inability to show reliance and failure to plead with sufficient particularity.

23

a.

24

Plaintiffs are not barred from showing reasonable reliance simply because
they received the GL Policy

25

Defendant first argues that where an insured fails to read and ascertain the terms of an

26

insurance policy, there can be no reasonable reliance as a matter of law. Defendant cites Hadland,

27

24 Cal. App. 4th at 1586, in which the California Court of Appeal upheld a trial court finding that

28

because the insured admitted he had not read the policy, there was “no evidence of justifiable
16
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

reliance because … the plaintiff is up against the case law duty to read.” As noted above, Hadland

2

is inapplicable here because the cap provision is not clear and conspicuous. Furthermore, unlike in

3

Hadland, Plaintiffs have not indicated that they failed to read the GL policy.

4

Defendant also relies on Brown v. Wells Fargo Bank, N.A., 168 Cal. App. 4th 938, 959

5

(Cal. Ct. App. 2008). In Brown, the court held that where the parties to a contract are dealing at

6

arm’s length, it is “not reasonable to fail to read a contract.” Id. However, “if the defendant is in a

7

fiduciary relationship with the plaintiff which requires the defendant to explain the terms of a

8

contract between them, the plaintiff’s failure to read the contract would be reasonable.” Id.
California courts have recognized that insurance providers are subject to fiduciary or

10
United States District Court
For the Northern District of California

9

fiduciary-like duties. See, e.g., Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 820 (Cal. 1979)

11

(“Insurers hold themselves out as fiduciaries, and with the public’s trust must go private

12

responsibility consonant with that trust.”); 20th Century Ins. Co. v. Superior Court, 90 Cal. App.

13

4th 1247, 1266 (Cal. Ct. App. 2001) (“The significant public interest in the special relationship

14

between the insured and insurer justifies the availability of tort remedies, and distinguishes

15

insurance contracts from other types of contracts.”). In addition, as noted above, the California

16

Supreme Court has explicitly held that “the burden of making coverage exceptions and limitations

17

conspicuous, plain and clear rests with the insurer.” Haynes, 32 Cal. 4th at 1204 (internal citations

18

omitted). The Court therefore concludes that Plaintiffs’ receipt of the policy alone does bar their

19

allegations that they reasonably relied on the prominently displayed coverage description contained

20

in the declarations.

21

b.

Plaintiffs’ fraud claims are not pled with sufficient particularity

22

Fed. R. Civ. P. 9(b) requires that, when averments of fraud are made, the allegations must

23

“be specific enough to give defendants notice of the particular misconduct . . . so that they can

24

defend against the charge and not just deny that they have done anything wrong.” Vess, 317 F.3d at

25

1105 (internal citations and quotation marks omitted). Allegations of fraud must be accompanied

26

by “the who, what, when, where, and how” of the misconduct charged. Id. (internal citations

27

omitted). “[A] plaintiff must set forth more than the neutral facts necessary to identify the

28
17
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is

2

false.” Decker v. Glenfed, Inc. (In re Glenfed, Inc. Sec. Litig.), 42 F.3d 1541, 1548 (9th Cir. 1994).

3

Defendant contends that Plaintiffs have failed to adequately plead the reliance and damages

4

elements of their fraud claims under the stricter standard of Rule 9(b). Defendant relies on

5

McManus v. American Express Tax & Bus. Servs., 67 F. Supp. 2d 1083, 1089 (D. Ariz. 1999), in

6

which the court held that “a mere conclusory allegation of reliance is not sufficient to defeat a

7

motion to dismiss: the plaintiff must plead specific facts explaining how he relied on the

8

representation and why that reliance was reasonable.” The McManus court found that because the

9

plaintiff had not alleged “a single concrete action or decision he claims to have made in reliance

United States District Court
For the Northern District of California

10

upon Defendants’ compilation of … financial statements,” he could not state a claim for fraud. Id.

11

at 1089.

12

While McManus is not binding precedent in the Northern District of California, the Court

13

agrees that the reliance and damages elements of Plaintiffs’ claims must be pled with particularity.

14

See Kearns v. Ford Motor Co., 567 F.3d 1120, 1127 (9th Cir. 2009) (where a plaintiff claims fraud,

15

the “entire complaint must … be pleaded with particularity.”) (emphasis added). Plaintiffs have

16

not asserted that they took any action in reliance on Defendant’s alleged misrepresentations

17

regarding the policy’s coverage. They have also failed to show that they suffered any damages as a

18

result of Defendant’s alleged fraud, rather than its breach of contract. See Brewer v. Indymac

19

Bank, 609 F. Supp. 2d 1104, 1121 (E.D. Cal. 2009) (“[I]n an action for fraud and deceit a cause of

20

action is stated when the facts constituting the fraud are alleged and a resulting injury is pleaded.”)

21

(citing Hartzell v. Myall, 115 Cal.App.2d 670, 677 (Cal. Ct. App. 1953) (emphasis added). That is,

22

Plaintiffs must explain why discovering the cap provision at the time of the state court action

23

caused harm beyond simply depriving them of a benefit owed under the contract. Because reliance

24

and resulting damages are essential elements of all four fraud-related claims, the Court GRANTS

25

Defendant’s motion to dismiss Plaintiffs’ seventh cause of action. However, as Plaintiffs may be

26

able to allege facts sufficient to state a claim for fraud, dismissal is WITHOUT PREJUDICE.

27

8.

28

Eighth Cause of Action: Reformation
To state a claim for reformation under California law, a plaintiff must plead that “by reason
18

Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

of fraud practiced by one of the parties, or of the mutual mistake of the parties or of a mistake of

2

one of them, which the other at the time knew or suspected, there were omitted from the instrument

3

certain material terms and conditions. In other words, that the language of the writing failed, for

4

some reason, to express the intention of the parties.” Philips Med. Capital, LLC v. Med. Insights

5

Diagnostics Ctr., Inc., 471 F. Supp. 2d 1035, 1046-47 (N.D. Cal. 2007) (quoting Pascoe v.

6

Morrison, 219 Cal. 54, 56 (Cal. 1933)).

7

Here, Plaintiffs seek reformation of the GL policy to “conform to Plaintiffs’ understanding

8

[that the contract provides] $1,000,000 in coverage.” SAC ¶ 82. Plaintiffs must therefore show

9

that any “misunderstanding” regarding the terms of the contract was the result of fraud, mutual

United States District Court
For the Northern District of California

10

mistake or unilateral mistake. As discussed above, Plaintiffs have failed to state a claim for fraud,

11

and clearly do not allege mutual mistake. See Renshaw v. Happy Valley Water Co., 114 Cal. App.

12

2d 521, 524 (Cal. Ct. App. 1952) (mutual mistake requires a showing that the parties “share[d] the

13

same misconception”). Plaintiffs also have not pled facts sufficient to justify reformation on the

14

basis of unilateral mistake. See Spiegler v. Home Depot U.S.A., Inc., 552 F. Supp. 2d 1036, 1055

15

(C.D. Cal. 2008) (in order to be granted reformation based on unilateral mistake, a plaintiff must

16

show that he “made a mistake at the time of contracting, and that the mistake was known to or

17

suspected by defendants”). Constructive notice of the other party’s mistake is not a sufficient

18

ground for reformation. La Mancha Dev. Corp. v. Sheegog, 78 Cal. App. 3d 9, 16 (Cal. Ct. App.

19

1978). The complaint does not allege that Defendant knew or suspected at the time of contracting

20

that Plaintiffs did not understand the policy’s coverage to be limited to $25,000. Indeed, Plaintiffs

21

fail to allege any facts concerning Defendant’s knowledge of Plaintiffs’ state of mind.

22

Accordingly, the Court GRANTS Defendant’s motion to dismiss the eighth cause of action

23

WITHOUT PREJUDICE.

24

9.

25

Ninth Cause of Action: Violation of Insurance Code § 785.
California Insurance Code section 785 states: “All insurers, brokers, agents, and others

26

engaged in the transaction of insurance owe a prospective insured who is 65 years of age or older, a

27

duty of honesty, good faith, and fair dealing. This duty is in addition to any other duty, whether

28

express or implied, that may exist.”
19
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

The complaint does not allege that either Wayne or Peggy Merritt is “65 years of age or

2

older.” In their opposition, Plaintiffs note that Wayne Merritt was over 65 years old at the time

3

coverage was obtained. However, “in determining the propriety of a Rule 12(b)(6) dismissal, a

4

court may not look beyond the complaint to a plaintiff’s moving papers, such as a memorandum in

5

opposition to a defendant’s motion to dismiss.” Schneider v. California Dept. of Corr., 151 F.3d

6

1194, 1201 n.1 (9th Cir. 1998) (emphasis in original). The Court therefore GRANTS Defendant’s

7

motion to dismiss the ninth cause of action WITHOUT PREJUDICE.

8

10.

9

a.

10
United States District Court
For the Northern District of California

Claims for Damages
Plaintiffs state a claim for general and special damages

Defendant complains that the SAC provides insufficient “notice of the damages sought to

11

be recovered.” MTD ¶ 10. However, in Paragraph 39 of the SAC, Plaintiffs allege that as a result

12

of Defendant’s conduct, they have “sustained financial losses, severe emotional distress, medical

13

bills, including hospitalization, attorney fees and costs, [and] damage to credit.” Such allegations

14

are sufficient to withstand a motion to dismiss claims for damages. See Jenkins v. Commonwealth

15

Land Title Ins. Co., 95 F.3d 791, 799 (9th Cir. 1996) (“Jenkins’ allegation that he has, as a ‘direct

16

and proximate result’ of Commonwealth’s violation, ‘sustained special and general damages’

17

suffices to withstand a motion to dismiss under Rule 12(b)(6).”). 6 The Court therefore DENIES

18

Defendant’s motion to dismiss Plaintiffs’ claims for general and special damages.

19

b.

20

Defendant also moves to dismiss Plaintiffs’ claim for punitive damages. Under California

Plaintiffs do not state a claim for punitive damages

21

law, punitive damages may be appropriate “where it is proven by clear and convincing evidence

22

that the defendant has been guilty of oppression, fraud, or malice.” Cal. Civ. Code § 3294. Malice

23

may be shown where the defendant exhibits “the motive and willingness to vex, harass, annoy, or

24

injure,” Nolin v. Nat'l Convenience Stores, Inc., 95 Cal. App. 3d 279, 285 (Cal. Ct. App. 1979), or

25
26
27
28

6

Defendant does not challenge the propriety of Plaintiffs’ request for attorney’s fees under
Cal. Code Civ. P. § 1021.5, Cal. Bus. & Prof. Code § 17200, Spiegler v. Home Depot U.S.A., Inc.,
552 F. Supp. 2d 1036, 1055 (C.D. Cal. 2008). and Brandt v. Superior Court, 37 Cal. 3d 813 (Cal.
1985). Nor does Defendant appear to question whether Plaintiffs’ alleged losses are causally
connected to Defendant’s conduct. The Court therefore does not reach the issue of whether such
awards would be appropriate at this time.
20
Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

a “conscious disregard of the rights and safety of others,” Potter v. Firestone Tire & Rubber Co., 6

2

Cal.4th 965, 1000 (Cal. 1993). Of course, “the mere allegation that an intentional tort was

3

committed is not sufficient to warrant an award of punitive damages. Not only must there be

4

circumstances of oppression, fraud or malice, but facts must be alleged in the pleading to support

5

such a claim.” Grieves v. Superior Court, 157 Cal. App. 3d 159, 166 (Cal. Ct. App. 1984).

6

Punitive damages may not be awarded for breach of contract. City of Hope Nat. Med. Ctr.

7

v. Genentech, Inc., 43 Cal.4th 375, 392 (Cal. 2008). On the other hand, punitive damages may be

8

appropriate where an insurer commits fraud or breaches the covenant of good faith and fair dealing.

9

See, e.g., Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 817 (Cal. 1979) (allowing a punitive

United States District Court
For the Northern District of California

10

damages award against an insurer that acted in bad faith by failing to properly investigate its

11

insured’s claim).

12

The Court has dismissed Plaintiffs’ claims for fraud, intentional infliction of emotional

13

distress, and breach of the covenant of good faith and fair dealing. Punitive damages are therefore

14

unavailable. However, because these claims were dismissed without prejudice, the Court

15

GRANTS the motion to dismiss Plaintiffs’ claim for punitive damages WITHOUT PREJUDICE.

16
17

IV. CONCLUSION

18

In sum, the Court denies Defendant’s motion to dismiss Plaintiffs’ claim for breach of

19

contract and for special and general damages. The second, fourth, fifth, seventh, eighth and ninth

20

causes of action and the claim for punitive damages are dismissed without prejudice. The third and

21

sixth causes of action are dismissed with prejudice.

22

If Plaintiffs wish to amend their complaint, they must do so within 21 days of this order.

23

Plaintiffs may not add new claims or parties without seeking Defendant’s consent or leave of the

24

Court pursuant to Fed. R. Civ. P. 15.

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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS

1

IT IS SO ORDERED.

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Dated: October 21, 2011

_________________________________
LUCY H. KOH
United States District Judge

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United States District Court
For the Northern District of California

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Case No.: 11-CV-01762-LHK
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS