v. San Diego Unified Port District et al

Filing 20

ORDER Denying 15 Motion to Dismiss and Motion to Sever and Stay. Signed by Judge Roger T. Benitez on 7/6/2016. (knb)

FILED

I

JUL 06 2016

1

H

CLERK, U.S. DISTRICT COURT

U
_______________________________________~SO~U~TH~,E~RN~DIS~T~RI~CT~O~F~C~AL~~~
t~f

3

Illc CflEPUT\'
-----

I

4
5

6
7

8

UNITED STATES DISTRICT COURT

9

SOUTHERN DISTRICT OF CALIFORNIA

10
11

12

SAN DIEGO UNIFIED PORT
DISTRICT,
Plaintiff,

13

14
15
16
17

Case No.: 3:15-cv-1401-BEN-MDD

v.

ORDER:
(1) DENYING MOTION TO

NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA,
successor-in-interest to Landmark
Insurance Company,
Defendant.

18

DISMISS; and
(2) DENYING MOTION TO SEVER
AND STAY

[Docket No. 15]

19
Before this Court is a Motion to Dismiss the First Amended Complaint ("F AC")

20
21

pursuant to Federal Rule of Civil Procedure 12(b)(6) and a Motion to Sever and Stay

22

Certain Claims pursuant to Federal Rules of Civil Propedure 21 and 42, filed by

23

Defendant National Union Fire Insurance Company of Pittsburgh, PA ("National
Union"), successor-in-interest to Landmark Insurance Company ("Landmark"). (Docket

24
25

No. 15.) Plaintiff San Diego Unified Port District (the "Port") filed an Opposition, to

26

which Defendant replied. (Docket Nos. 16, 17.) For the reasons stated below, the Court

27
28

DENIES Defendant's Motions.

III

3: 15-cv-1401-BEN-MDD

1

BACKGROUND
National Union l sold the Port primary and umbrella liability insurance, promising

2
3

to defend and indemnify the Port against certain property damage liability claims or

4

L~wjll1its"-{EA<:::Jr~j_-8JN atiQnl!LUnkmi§~!l~4JQur prirnm),P9licies to th~ PwL

5

(collectively, "Primary Policies"). (FAC 'If'lf 6, 7 & Exs. A-D.) The parties agree that two

6

of the primary policies are exhausted ("Exhausted Primary Policies"). (F AC 'If 7 & Exs.

7

C, D (Policy Nos. SMP 8002308 & GLA 5000574.)) There are two other primary

8

policies, which the Port contends are not exhausted ("Unexhausted Primary Policies").

9

(FAC 'If 6 & Exs. A, B (Policy Nos. GLA 5000110 and SMP 8002932.))

10

National Union also sold the Port "the first layer of liability insurance directly

11

above the Unexhausted Primary Policies and Exhausted Primary Policies in the form of'

12

umbrella insurance ("Umbrella Policies"). (FAC'If 8 & Exs. E-H.) Coverage under the

13

four Umbrella Policies is triggered once the Primary Policies are exhausted. (FAC 'If'lf 15,

14

16.)

15

According to the FAC, the Port tendered, and National Union agreed to provide a

16

defense under the Unexhausted Primary Policies to certain claims ("Claims") and

17

lawsuits ("Suits") asserted against the Port. 2 (FAC 'If'lf 11, 12.) Subsequently, National

18

Union informed the Port that it "unilaterally would be assigning payments for one of the

19

Port's defense experts to [National Union's] indemnity obligation against the

20

Unexhausted Primary Policies' limits." (FAC'If 13.) National Union then tendered the

21
22
23
24
25

26
27
28

On January 1, 2012, Landmark merged into National Union, with National Union as the
surviving entity. Because National Union is the surviving company, this Order refers to
Defendant as National Union, even though the FAC makes allegations about Landmark.
2 The California Supreme Court has explained that a "suit" means a "civil action
commenced by filing a complaint," and "[a]nything short ofthis is a 'claim.'" FosterGardner, Inc. v. Nat'/ Union Ins. Co., 18 Cal. 4th 857, 878 (1998). A "claim" may be "a
demand for payment communicated in a letter, or a document filed to protect an injured
party's right to sue a governmental entity, or the document used to initiate a wide variety
of administrative proceedings." Id. at 879.
1

2

3: 15·cv-l401-BEN-MDD

I'
1

asserted remaining policy limits to the Port and informed the Port that "[National Union]

2

considered the Unexhausted Primary Policies to be exhausted and that it would cease

1-----1

3

defending the Port in the Claims and Suits." (FAC ~ 13.) National Union did not seek a

4

jll~icia,l<iej:t)rmiIl:iti()!l_(:o~c~rtling_e~1Lu§ti()l1.(EAC_~.l±'} .. 'fb(:)PQrt_C9l1t(:)~t~dN~ti()nal

5

Union's assertion that the Unexhausted Primary Policies were exhausted. (FAC ~ 15.)

6

The Port also asserted that even if the Unexhausted Primary Policies were exhausted, "the

7

terms of the Umbrella Policies would require National Union to drop down and defend

8

the Port in the Claims and Suits." (FAC ~ 15.)
National Union "repeatedly disputed" a defense obligation under the Umbrella

9
10

Policies. But on September 15,2015, between the filing of the original complaint and the

11

operative FAC, National Union acknowledged through a letter from counsel that it "has a

12

defense obligation to defend [S]uits in accordance with the terms of its [Ulmbrella

13

Policies." (FAC ~ 16; Mot. Ex.

14

Port has incurred its own defense costs for the Claims and Suits. (F AC ~ 18.)

l.?

As a result of National Union's failure to defend, the

15

On November 20,2015, the Port filed the FAC. The first claim for relief seeks a

16

declaratory judgment that the Unexhausted Primary Policies are not exhausted and thus

17

National Union must continue to defend Suits and Claims under them. The second and

18

third claims ask for a declaratory judgment that National Union must defend Suits and

19

Claims, respectively, under the Umbrella Policies. The fourth claim for relief asserts

20
21
Plaintiff referenced the September 15,2015 letter in the FAC but failed to attach it.
Defendant attached the letter to its Motion to Dismiss. Plaintiff did not dispute the
authenticity ofthe September 15, 2015 letter in its Opposition. Therefore, the September
15, 2011 letter is incorporated into the FAC by reference. See Daw Indus., Inc. v.
Proteor Holdings,S.A., No. 07-cv-1381, 2008 WL 251977, at *1 (S.D. Cal. Jan. 29,
2008) ("The 'incorporation by reference' doctrine permits district courts to consider, in
connection with a motion to dismiss, documents whose contents are alleged in the
Complaint and whose authenticity no party questions, but which are not physically
attached to plaintiffs pleading."). The Court may consider the letter now without
converting the motion to dismiss into a motion for summary judgment. Brown v. Allstate
Ins. Co., 17 F. Supp. 2d 1134, 1138 (S.D. Cal. 1998).
3

22
23

24
25
26
27
28

3
3:15-cv-1401-BEN-MDD

1 breach of contract, and the fifth claim pleads bad faith and a breach of the implied
2

covenant of good faith and fair dealing.

3

National Union moves to dismiss on several grounds. Principally, it argues that the

4flr~clajmfQILeli~£_JuLectaration_regarding.whetherthetwoUnexhaustedPrimary

5

Policies are exhausted-is dispositive and renders the second through fifth claims moot.

6

(Mot. at 2.) Therefore, the second through fifth claims should be

7

alternative, it moves to sever and stay the second through fifth claims for relief pending

8

resolution of the first claim. (Id. at 13-15.)

9

dismi~sed.

(Id.) In the

LEGAL STANDARD

10

Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint

11

if, taking all factual allegations as true and construing them in favor to the nonmoving

12

party, the complaint fails to state a plausible claim for relief on its face. Ashcroft v. Iqbal,

13

556 U.S. 662, 678 (2009); Bell At!. Corp. v. Twombly, 550 U.S. 544, 556-57 (2007).

14

Dismissal is appropriate if the complaint fails to state enough facts to raise a reasonable

15

expectation that discovery will reveal evidence of the matter complained of, or if the

16

complaint lacks a cognizable legal theory under which relief may be granted. Twombly,

17

550 U.S. at 556. "Threadbare recitals of the elements of a cause of action, supported by

18

mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678.

19

DISCUSSION4

20

The Court addresses each claim for relief that National Union moves to dismiss and

21

then discusses National Union's Motion to Sever and Stay.

22

I.

23
24

Second Claim for Relief

The second claim seeks a declaratory judgment that National Union must defend
Suits under the Umbrella Policies in the event of exhaustion of the primary layer of

25
26
27
28

The Court finds the Motions suitable for determination on the papers without oral
argument,· pursuant to Civil Local Rule 7.1.d.l.
4

4
3: 15-cv-1401-BEN-MDD

1

Insurance. (FAC, 30.) National Union argues that the second claim for relief is "moot"

2

and "does not present a controversy ripe for determination" because (1) if the Primary

---------~

3

Policies are not exhausted, there is no dispute about the Umbrella Policies, and (2) if the

4

11"i}1l~:poli(:ies~are~e:W~lJsted,Jh(!nN!ltiQnaLUnionhasalreadyacknowledgedinits ~

5

September 15, 2015 letter ("September letter") that it will defend Suits under the

6

Umbrella Policies. (Mot. at 7.) The Port contends that the September letter does not

7

moot the need for a judicial determination because it is not binding. (Reply at 3.)

8

Defendant's arguments, while styled as a Rule 12(b)(6) motion, challenge

9

Plaintiffs standing to bring a declaratory judgment action. Because standing "pertain[s]

10

to a federal court's subject-matter jurisdiction under Article III, [it is] properly raised in a

11

motion to dismiss under Federal Rule of Civil Procedure 12(b)(I), not Rule 12(b)(6)."

12

White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000); St. Clair v. City a/Chico, 880 F.2d

13

199,201 (9th Cir. 1989) ("[MJotions raising issue of ripeness are treated as brought under

14

Rule 12(b)(1) even if improperly identified by the moving party as brought under Rule

15

12(b)(6).") Thus, the Court interprets Defendant's Motion as a 12(b)(1) motion to

16

dismiss for lack of subject matter jurisdiction under the Declaratory Judgment Act.

17

The Declaratory Judgment Act states: "In a case of actual controversy within its

18

jurisdiction ... any court of the United States ... may declare the rights and other legal

19

relations of any interested parties seeking such declaration." 28 U.S.C. § 2201(a).

20

Accordingly, a district court must first inquire whether there is an actual controversy

21

within its jurisdiction. Am. States Ins. Co. v. Kearns, 15 FJd 142, 143 (9th Cir. 1994).

22

Second, ifthere is an actual controversy, the court must decide whether to exercise its

23

jurisdiction. Id. at 143-44.

24

A. Existence of Actual Controversy

25

An "actual controversy" exists when "there is a substantial controversy, between

26

parties having adverse legal interests, of sufficient immediacy and reality to warrant the

27

issuance of a declaratory judgment." Maryland Cas. Co. v. Pac. Coal & Oil Co., 312

28

U.S. 270, 273 (1941) (finding actual controversy between insurer and insured in
5
3:15-cv-1401-BEN-MDD

1 declaratory judgment action to determine whether insurer had duty to defend). In the
2

insurance setting, an "actual controversy" may exist even if defendant's liability is

3

contingent. See Sentry Ins. v. Provide Commerce, Inc., No. 14-cv-2868, 2016 WL

A_. 124J 55.1,_at>i<3c4(S,D.CaLMar,JO,. 2016). Indeed, "litigation_over insurance coverage
5

has become the paradigm for asserting jurisdiction despite 'future contingencies that will

6

determine whether a controversy ever actually becomes real. '" Assoc. Indem. Corp. v.

7

Fairchild Indus., Inc., 961 F.2d 32, 35 (2d Cir. 1992) (internal citation omitted). Courts

8

in this District have held that an insured may seek a declaration whether an insurer has a

9

duty to defend even if that liability has yet to develop. Sentry Ins., 2016 WL 1241553, at

10

*3-4; see also Am. States, 15 F.3d at 144 (actual controversy exists where insurer brought

11

declaratory judgment action to establish whether it had duty to defend or to indemnifY

12

insured).

13

The Court finds that there is an actual controversy because the Port has pled a

14

substantial controversy between parties having adverse interests. Specifically, the Port

15

has shown that the parties have taken different positions regarding Defendant's duty to

16

defend Suits under the Umbrella Policies. While National Union recently said it would

17

defend Suits under the Umbrella Policies in the September letter, "[v]oluntary

18

discontinuance of alleged illegal activity" by a defendant does not moot a case. Iron

19

Arrow Honor Soc'y v. Heckler, 464 U.S. 67, 72 (1983); see also Campbell-Ewald Co. v.

20

Gomez, 136 S. Ct. 663,670 (2016) (holding that an unaccepted offer of judgment does

21

not moot a case). National Union's agreement to provide a defense is not binding, and

22

declaratory judgment would offer relief from uncertainty and prevent duplicative

23

litigation in the future.

24

Furthermore, the Port has shown that the dispute, although related to a contingent

25

liability, is ripe for adjudication. The pendency of a decision whether the Unexhausted

26

Primary Policies are exhausted does not moot the need for judicial relief. See Fed. Ins.

27

Co. v. SafeNet, Inc., 758 F. Supp. 2d 251,262 (S.D.N.Y. 2010) (declaratory judgment

28

action appropriate to consider even where primary coverage has not been exhausted).
6

3: 15-cv-140 I-BEN-MDD

1 National Union contends that the Primary Policies are already exhausted. That issue will
2

be decided in this litigation. If National Union is correct, then the Umbrella Policies will

3

be triggered. As noted above, clarifying the parties' legal relations now will avoid future

---------------

4 .. litigatiQllQllthisj.sslle--<!udroayfaQilitate$_ettlement .discussions._ ..
5

B. Decision to Exercise Jurisdiction

6

Once a district court has determined whether an actual controversy exists, the court

7

must then determine whether to exercise its subject matter jurisdiction. Am. States., 15

8

F.3d at 143-44. In Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), the Supreme Court

9

provided guidance regarding a court's discretion to entertain declaratory relief. The

10

Brillhart factors require that in deciding whether to exercise its subject matter

11

jurisdiction, the court should (1) avoid needless determination of state laws; (2)

12

discourage litigants from filing declaratory actions as a means of forum shopping; and (3)

13

avoid duplicative litigation. Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 672 (9th

14

Cir. 2005) (internal citations omitted); see also Nat 'I Union Fire Ins. Co. v. Tokio Marine

15

& Nichido Fire Ins. Co., No. 1O-cv-1733, 2011 WL 5404115, at *3-4 (S.D. Cal. Nov. 8,

16

2011) (considering Brillhart factors in motion to stay declaratory judgment action).

17

"Essentially, the district court 'must balance concerns of judicial administration, comity,

18

and fairness to the litigants.'" Am. States, 15 F.3d at 144 (internal citations omitted).

19

The Court has considered the Brillhart factors and concludes that they weigh in

20

favor of the Court exercising jurisdiction. The claim involves a determination whether

21

the Umbrella Policies must drop down to cover Suits. "This evaluation should involve a

22

relatively straightforward analysis ofthe policy, without infringing on novel state law

23

issues." Progressive Cas. Ins. Co. v. Dalton, No. 12-cv-00713, 2012 WL 6088313, at *7

24

(E.D. Cal. Dec. 6,2012) (considering interpretation of insurance contract coverage). The

25

present action does not appear to be the result of forum shopping. There is no parallel

26

state court proceeding involving the same issues of state law. And, as previously noted,

27

exercising jurisdiction over this action would prevent duplicative litigation in the event

28

that the Unexhausted Primary Policies are deemed exhausted.
7
3:15-cv-1401-BEN-MDD

Because Plaintiff pleads an actual controversy and the Brillhart factors weigh in
favor of this Court exercising jurisdiction, Plaintiff has adequately stated a claim for a
declaratory judgment action. Therefore, Defendant's motion to dismiss or, in the
... llit~rIlatiY~,1() _severan<i§taytlle_s~(;Qlldc:laJm.f9u~liefi~LDENlED, ..

II.

Third Claim for Relief
The third claim for relief seeks a declaratory judgment that Defendant must defend

Claims under the Umbrella Policies if the primary layer of insurance is exhausted. (F AC
~

34.) National Union argues that the third claim fails as a matter oflaw because the

Umbrella Policies only apply to Suits, not Claims. (Mot. at 7.)5 The Port contends that
the policies' language supports its position. (Reply at 7.)
Interpretation of an insurance policy is a question oflaw and follows the general
rules of contract interpretation. 6 Powerine Oil Co. v. Super Ct., 118 P.3d 589,597 (Cal.
2005). The fundamental goal of contract interpretation is to give effect to the mutual
intention of the parties. Id. at 598. Such intent is to be inferred by looking "first to the
language of the contract in order to ascertain its plain meaning or the meaning a
layperson would ordinarily attach to it." Travelers Cas. & Sur. Co. v. Am. Int'l Surplus
Lines Ins. Co., 465 F. Supp. 2d 1005, 1012 (S.D. Cal. 2006). When the contract language

is not ambiguous, a court can resolve a motion to dismiss. Tri-Union Seafoods, LLC, 88
F. Supp. 3d at 1172. However, if a contract provision is capable of two or more
reasonable interpretations, considering the contract as a whole and the circumstances of
the case, the provision is ambiguous, and the court should deny the motion to dismiss.

National Union also asserts that the third claim for relief is moot until the Court resolves
whether the Unexhausted Primary Policies are exhausted. (Mot. at 2; Reply at 4.)
Consistent with its reasoning in Part I.A, the Court rejects that argument.
6 Because this action concerns issues of contract interpretation, a court can consider
contracts incorporated into the complaint without converting the motion to dismiss into a
motion for summary judgment. Tri-Union Seafoods, LLC v. Starr Surplus Lines Ins. Co.,
88 F. Supp. 3d 1156, 1172 (S.D. Cal. 2015).

5

8
3:15-cv-1401-BEN-MDD

1 Id.; Travelers Cas. & Sur. Co., 465 F. Supp. 2d at 1013; see also Martinez v. Welk Grp.,

2

Inc., No. 09-cv-2883, 2011 WL 90313, at *6 (S.D. CaLJan. 11,2011) ("Where the

3

[contract] language 'leaves doubt as to parties' intent,' the motion to dismiss must be

4

<ltmied. "1------------

.

5

A. Contract Terms and the Parties' Arguments

6

The interpretation of the language in the Insuring Agreements and Limit of

7

Liability sections of the four Umbrella Policies is disputed by the parties. (FAC Exs. E-

8

H.) The relevant language is the same in each policy and is reproduced below. The

9

Insuring Agreements state as follows:

10

11
12
13

14
15
16
17
18
19
20

21
22
23
24

I. COVERAGE. [National Union agrees to] pay on behalf of the Insured
that portion of the ultimate net loss in excess of the retained limit ... ,
which the Insured shall become legally obligated to pay as damages for
liability imposed upon the Insured by law, or liability assumed by the
Insured under contract. ...

II. DEFENSE, SETTLEMENT, SUPPLEMENTARY PAYMENTS. (The
provisions of this Insuring Agreement apply solely to occurrences
covered under this policy but not covered by any underlying policies
listed in the Schedule of Underlying Insurance or any other underlying
insurance providing coverage to the Insured.... This Insuring
Agreement shall also apply to occurrences not covered by any underlying
insurance due to exhaustion of any aggregate limits by reason of any
losses paid thereunder.)
[National Union] shall:
(a) defend any suit against the Insured ... seeking recovery for damages .
. . , but [National Union] shall have the right to make such
investigation and negotiation and settlement of any claim or suit as
may be deemed expedient by [National Union.]

25
26

(FAC Ex. E at 4.)

27

The Limit of Liability section states, in relevant part:

28

(B) In the event of ... exhaustion of the aggregate limits ofliability under
9
3:15-cv-1401-BEN-MDD

1

2

said underlying insurance by reason of losses paid thereunder during this
policy period, this policy shall ... (2) continue in force as underlying
I------'msurance.-------------------------~ ~---

3

4
5
6
7
8

9
10
11
12

13
14
15
16

17
18

19

20
21

22
23

24

25
26
27

28

(FAC Ex. E at 5, 13.)
The Port argues that National Union, the insurer that drafted both the Primary and
Umbrella Policies, demonstrated "explicit intent" to cover Claims in the Umbrella
Policies in two specific clauses. (Opp'n at 8.) First, the Port contends that the provision
that "[t]his Insuring Agreement shall also apply to occurrences not covered by any
underlying insurance due to exhaustion" means the Umbrella Policies will cover
occurrences that would have been covered under the Primary Policies had those policies
not been exhausted. (Id. at 7-8.) And because "the [P]rimary [P]olicies ... clearly cover
[C]laims, the reasonable interpretation of this provision is that the excess coverage
includes [C]laims." (Id. at 8.) Second, the Port argues that the language that "[i]n the
event of ... exhaustion ... , this policy shall ... continue in force as underlying
insurance" means that "[i]n any matter that would have been covered by an underlying
Primary Policy, but is not covered by reason of the Primary Policy's exhaustion, the
Umbrella Policy is to provide the same coverage as the Primary Policy," namely that the
Umbrella Policies will cover Claims. (Id. at 8.)
In contrast, National Union contends the Umbrella Policies only apply to Suits. It
notes that Part I of the Insuring Agreement requires the insurer to pay sums that the
insured is "legally obligated to pay as damages," which case law equates with Suits, not
Claims. (Mot. at 7.) Furthermore, National Union argues that, under Part I1(a), it is

required to "defend any suit," but is granted the discretionary right to investigate and
settle Claims. (Mot. at 8.) National Union objects to the Port's interpretation of the two
provisions noted above. First, National Union contends that the introductory language in
Part II of the Insuring Agreement ("This Insuring Agreement shall also apply to
occurrences not covered by any underlying insurance due to exhaustion ....") means that
the Umbrella Policies' defense obligations are "activated only when the underlying
\0

3: 15-cv-140 l-BEN-MDD

1 insurance is exhausted," not that they provide the same coverage. (Mot. at 13.) Second,
2

National Union argues that "phrase 'continue in force as underlying insurance' simply

3

means that the policy slips into the role of a primary policy, not that it suddenly adopts

A .the. terms_Qfthe_underl;y:ing primary policy." (Reply at

--I

n

I

5

B. Analysis

6

The Court concludes that the language governing National Union's defense

7

obligations is ambiguous. The policy reads that the insurer "shall defend any suit ... ,

8

but [the insurer] shall have the right to [investigate, negotiate, and settle] any claim or

9

suit." (FAC Ex. E at 4 (emphasis added.)) The California Supreme Court found similar

10

language to mean that "insurers are required to defend a 'suit,' but have discretion to

11

investigate and settle a 'claim. '" Foster-Gardner, Inc., 18 Cal. 4th at 863, 878, 880. 7

12

However, that language is modified by the two sentences in parentheses that begin the

13

section. Therein, the policy states that the umbrella insurance applies "to occurrences

14

covered under this policy but not covered by any underlying insurance .... This [policy]

15

shall also apply to occurrences not covered by any underlying insurance due to

16

exhaustion." (FAC Ex. E at 4 (emphasis added.)) It is the second sentence that conflicts

17

with the language about the insurer's defense duty and creates ambiguity that carmot be

18

resolved on a motion to dismiss.

19

Because words in a contract are to be interpreted in their ordinary and popular

20

sense, a layperson could interpret the second sentence in two possible ways, both

21

reasonable. See Legacy Vulcan Corp. v. Super. Ct., 110 Cal. Rptr. 3d 795,803 (Ct. App.

22

2d 2010). On one hand, he could find that the Umbrella Policies cover occurrences that

23

would have been covered by the underlying insurance if the underlying insurance was not

24

exhausted by payment of its limits. And because the Port attests, and National Union

25
26
27
28

The policy language in Foster-Gardner read: "[T]he company shall have the right and
duty to defend any suit against the insured ... and may make such investigation and
settlement of any claim or suit as it deems expedient." 18 Cal. 4th at 863.

7

11

3:15-cv-1401-BEN-MDD

1 does not dispute, that the underlying insurance covered both Suits and Claims arising
2

from occurrences,8 then a layperson could find that the Umbrella Policies must cover
------

3

----

-

----------

both Suits and Claims. On the other hand, a layperson could find that the more specific

4 . languageabQutthe.insurer' sdutytodefend Suits governs,andthaUhesecond sentence is
5

temporal in nature indicating that coverage under the Umbrella Policies (and its specific

6

terms) is triggered upon exhaustion of the underlying insurance.

7

The Court was unable to find any controlling authority construing the provisions in

8

question in connection with an umbrella insurance policy. The Court considered the

9

various policy provisions discussed by the parties and other contract language in light of

10

the rules governing contract interpretation, yet cannot say as a matter of law that the

11

contracts' terms unambiguously preclude a defense duty for Claims. The purpose of

12

umbrella insurance is to "fill any gaps in coverage left open by the [underlying

13

insurance.]" Wells Fargo Bankv. Cal. Ins. Guarantee Ass'n, 45 Cal. Rptr. 2d 537,539

14

n.2 (Ct. App. 1st 1995). This objective seemingly supports the Port's position.

15

Therefore, given the two possible layman's interpretations, the lack of controlling

16

authority, and the general goal of umbrella insurance, there is "doubt as to the parties'

17

intent" to include a duty to defend Claims under the Umbrella Policies. Martinez, 2011

18

WL 90313, at *7.

19

Thus, the Court concludes that an actual controversy exists and, consistent with its

20

reasoning above in Part I, it chooses to exercise jurisdiction over this declaratory

21

judgment action. The Court notes that, although it could not find California state court

22

decisions interpreting the provisions in question, the Court expects discovery to develop

23

evidence to aid in the Court's interpretation ofthe provisions such that the Court is not

24

involved in a "needless determination of state laws." Robinson, 394 F.3d at 672.

25
26
27
28

8 Occurrences are events that lead to injuries or damages. See, e.g., FAC Ex. A at 18, Ex.
C at 13, & Ex. E at 8.
12
3: IS-cv-1401-BEN-MDD

1

Accordingly, Defendant's motion to dismiss or, in the alternative, to sever and stay the

2

third claim is DENIED.9

3

III.

4

Fourth Claim for Relief

.... The.Port'sfourthclaim.forreliefallegesbreachesofNational Union' scontractual ...

5

duties to (1) payor reimburse for legal obligations arising out of Claims and Suits and (2)

6

defend the Port in Claims and Suits under the Unexhausted Primary Policies. (FAC ~

7

39.) To state a claim for breach of contract under California law, a plaintiff must allege:

8

(1) the existence of a contract; (2) its perfonnance or excuse for nonperformance; (3)

9

defendant's breach ofthe contract; and (4) resulting damage to plaintiff. Tri-Union

10

Seafoods, 88 F. Supp. 3d at 1173. In detennining whether a plaintiff has stated a claim

11

for breach of an insurance contract, a court must compare the allegations of the complaint

12

with the terms of the contract. Mortazavi v. Fed. Ins. Co., No. 13-cv-3141, 2014 WL

13

940328, at *2 (S.D. Cal. Mar. 11,2014).
National Union does not dispute (1) the existence of a contract or (2) the Port's

14
15

performance or excuse for nonperformance. Instead, it appears that National Union

16

contests the Port's pleading of breach and damages. National Union asserts that the FAC

17

admits that it has not breached its duty to defend because it agreed to continue defending

18

Suits and Claims pending judicial resolution of the exhaustion issue. (Mot. at 10, Ex. 1.)

19

It further argues that the Port's Opposition admits that National Union has paid some

20

defense costs and that the FAC does not allege any particular facts about unpaid defense

21

costs. (Mot. at 10; Reply at 8.)10

22
23
24
25
26
27
28

National Union is free to renew its arguments at the summary judgment stage if facts
developed in discovery support its legal theories. See, e.g., Travelers Indem. Co. of
Conn. v. Walker & Zanger, Inc., 221 F. Supp. 2d 1224 (S.D. Cal. 2002) (considering
whether duty to defend exists on motion for summary judgment).
10 Furthermore, Defendant repeats its argument that this claim for relief is moot. (Mot. at
10.) The Court rejects this argument. See supra Part I.A.
9

13
3: 15-cv-1401-BEN-MDD

1

Taking all factual allegations as true and construing them in the light most

2

favor~~I~to_~lail1tiff,

tht)<::0llrt5onc1 udes that Plaintiff has adequatelYl'lea~ed abreach

3

of contract. The Port alleged that National Union promised to defend and indemnify the

4

Port against Suits and Claims under the Unexhausted Primary Policies. (FAC ~ 9.) The

5

terms of the Unexhausted Primary Policies do not appear to rebut that allegation. (FAC

6

Ex. A at 15 & Ex. B at 45.) The Port also alleged that it tendered the Suits and Claims to

7

National Union, which National Union initially agreed to defend under the Unexhausted

8

Primary Policies. (FAC ~~ 11,12.) Subsequently, National Union informed the Port that

9

it considered the Policies exhausted and would cease defending the Port in the Suits and

10

Claims. (F AC ~ 13.) These allegations are adequate to plead breach. See Travelers

11

Indem. Co. a/Conn., 221 F. Supp. 2d at 1229-30 ("The duty to defend arises immediately

12

upon the insured's tender of a defense ... [and] continues until the underlying lawsuit is

13

concluded or until it has been shown that there is no potential for coverage." (emphasis in

14

original)).

15

As a result of National Union's actions, the Port incurred its own defense fees and

16

costs, specifically unreimbursed attorneys' fees, investigative costs, and expenses, as well

17

as "other foreseeable economic losses." (FAC ~18, 40.) Thus, the Port has alleged that it

18

has been injured as a result of Defendant's breach. See Stream Cast Networks, Inc. v.

19

IBIS LLC, No. CV 05-04239,.2006 WL 5720345, at *5 (C.D. Cal. May 2,2006) ("Under

20

Rule 8, the fact of damage-and the type of damage-can be alleged in conclusory

21

terms."). Therefore, Defendant's motion to dismiss the fourth claim for relief is

22

DENIED. As explained below, the Court also DENIES the motion to sever and stay the

23

fourth claim.

24

IV.

Fifth Claim for Relief

25

The Port's fifth claim for relief alleges bad faith and breach of the implied

26

covenant of good faith and fair dealing. "In the insurance context, the primary test of

27

whether an insurer breaches the implied covenant of good faith and fair dealing is

28

whether the insurer withheld payment of an insured's claim urrreasonably and in bad
14
3:15-cv-1401-BEN-MDD

1

faith .... [T]he insurer must engage in a conscious and deliberate act, which unfairly

2

frustrates the agreed common purposes and disappoints the reasonable expectations of the

3

other party thereby depriving that party ofthe benefits of the agreement." Mortazavi,

4

2014 WL 940328, at *3 (citing other sources). Bad faith is usually a fact question. Id.

5

National Union argues that there is no basis for a bad faith claim because it

6

continues to defend the Port in Suits and Claims subject to the resolution of the

7

exhaustion issue. (Mot. at 12, Ex. 1.) It also asserts that the Port only alleges legal

8

conclusions that are devoid of factual content. (Id. )11 The Port counters that it has

9

alleged sufficient facts to make out a bad faith claim. (Opp'n at 12-13.)

10

The Court agrees with the Port and finds that it has sufficiently alleged a breach of

11

the implied covenant of good faith and fair dealing. The Port alleges that National Union

12

abandoned the Port's defense after unilaterally assigning defense costs as indemnity

13

payments and asserting that the Policies were exhausted. National Union has provided no

14

authority to support its position that its later decision to provide a defense pending

15

resolution of the Policies' exhaustion somehow moots the legal effect of its prior conduct.
The truth of the Port's allegations is a question offact inappropriate for resolution

16
17

on a motion to dismiss. See McGregor v. Paul Revere Life Ins. Co., 92 F. App'x 412,

18

416 (9th Cir. 2004) (finding that reasonableness of insurer's conduct in denying coverage

19

was fact question). Therefore, Defendant's motion to dismiss the fifth claim for relief is

20

DENIED. The Court also DENIES the motion to sever and stay the fifth claim, as

21

explained below.

22

V.

23
24

Motion to Sever and Stay
National Union argues that in the alternative to dismissal, the second through fifth

claims for relief should be severed and stayed pending resolution of whether the

25
26
27
28

National Union again repeats its argument that the fifth claim for relief is moot pending
resolution of the first claim. (Mot. at 6.) The Court rejects this argument. See supra Part
LA.
11

15
3:15-cv-1401-BEN-MDD

1

Unexhausted Primary Policies are exhausted. A court, in its broad discretion, may sever

2

and stay claims. Fed. R. Civ. P. 21, 42(b); Landis v. N. Am. Co., 299 U.S. 254 (1936)

3

("[T]he powerto stay proceedings is incidental to the power inherent in every court to

4

control the disposition ofthe causes on its docket with economy of time and effort for

5

itself, for counsel, and for litigants.,,).12

6

The Court has considered the relevant factors and declines to sever and stay part of

7

this action. The Court has already explained that it will exercise jurisdiction over the two

8

declaratory relief actions related to the Umbrella Policies. See supra Part LB,

9

same reasoning applies to the Port's claims for breach of contract and breach of the

10

covenant of good faith and fair dealing. Judicial economy would not be served by

11

severance or stay because if the Unexhausted Primary Policies are exhausted, as National

12

Union asserts, the second through fifth claims will have to be decided. Severance or stay

13

would delay the progression of this case. Moreover, there is no risk of prejudice to either

14

party because it does not appear that the issues in this case overlap with the factual and

15

legal issues in the underlying Suits and Claims. Therefore, the Court exercises its

16

discretion and DENIES Defendant's Motion to Sever and Stay the second through fifth

17

claims for relief.

18

///

n.B.

The

19
20
21
22
23
24
25
26
27
28

12 In deciding whether to sever a claim, the court considers the following factors: "(1)
whether the claims arise out of the same transaction or occurrence; (2) whether the claims
present some common questions oflaw or fact; (3) whether settlement of the claims or
judicial economy would be facilitated; (4) whether prejudice would be avoided if
severance were granted; and (5) whether different witnesses and documentary proof are
required for the separate claims." Anticancer, Inc. v. Pfizer, Inc., No. l1-cv-l 07, 2012
WL 1019796, at *1 (S.D. Cal. Mar. 26, 2012). In determining whether to grant a stay, a
court considers: (1) "possible damage which may result from the granting of a stay," (2)
"the hardship or inequity which a party may suffer in being required to go forward," and
(3) "the orderly course of justice measured in terms of the simplifying or complicating of
issues, proof, and questions oflaw which could be expected to result from a stay."
CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962).
16

3:15-cv-1401-BEN-MDD

,

,

1

2
3
4

CONCLUSION

For the reasons stated above, the Court DENIES Defendant's Motion to Dismiss
and Motion to Sever and Stay Certain Claims,
IT IS SO ORDERED.

5
6
7

DATED: ~,---,-",,----, 2016
TEZ
Un' d States District Judge

8
9
10
11

12
13
14
15
16
17
18
19
20
21
22
23
24

25
26
27
28
17
3: IS-cv-1401-BEN-MDD