Berstein v. Nautilus Insurance Company et al

Filing 19

ORDER granting 3 Defendant's Motion to Dismiss for Failure to State a Claim. Signed by Judge M. James Lorenz on 7/24/2017. (sjt)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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ZOE BERNSTEIN, a minor, by her
Guardian ad Litem Kelsie Valdez,

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ORDER GRANTING DEFENDANT’S
MOTION TO DISMISS

Plaintiff,

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Case No.: 16-cv-02883-L-RBB

v.
NAUTILUS INSURANCE COMPANY,
Defendant.

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In this insurance breach of contract and bad faith action, Defendant Nautilus

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Insurance Company (“NIC”) filed a motion to dismiss for failure to state a claim.

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Plaintiff Zoe Bernstein opposed and NIC replied. The Court decides this matter on the

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briefs without oral argument. See Civ. L. R. 7.1.d.1. For the reasons stated below,

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Defendant’s motion is granted.

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I.

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BACKGROUND
Plaintiff was injured in a single car accident. She filed a personal injury complaint

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in San Diego County Superior Court against the driver and owner of the vehicle, David

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Bernstein (the “Underlying Action”). (See doc. no. 1-2 (“Compl.”) at 3.) Mr. Bernstein

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was employed by Pierview Investments II, Corp. (“Pierview”). The operative complaint

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in the Underlying Action alleged that the accident was caused by his negligence in the

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course and scope of his employment with Pierview.

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At the relevant time, Pierview was covered by a commercial general liability

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policy issued by NIC (the “Policy”).1 Pierview tendered the defense of the Underlying

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Action to NIC, which NIC refused. The Underlying Action settled with Plaintiff taking

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judgment against Pierview for $6,240,893.37, and Pierview assigning its rights and

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interests in the Policy to Plaintiff.

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Subsequently, Plaintiff filed this action against NIC pursuant to California

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Insurance Code § 11580(b)(2) for breach of contract and breach of the implied covenant

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of good faith and fair dealing. Plaintiff alleged that NIC breached its duty to defend and

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indemnify Pierview in the Underlying Action. NIC removed the action to this Court

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based on diversity jurisdiction under 28 U.S.C. § 1332, and filed a motion to dismiss for

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failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

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II.

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DISCUSSION
A Rule 12(b)(6) motion tests the sufficiency of the complaint. Navarro v. Block,

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250 F.3d 729, 732 (9th Cir. 2001). In reviewing a Rule 12(b)(6) motion, the Court must

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assume the truth of all factual allegations and construe them most favorably to the

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nonmoving party. Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997, 999 n.3 (9th Cir.

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2006). “To survive a motion to dismiss, a complaint must contain sufficient factual

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

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v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,

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570 (2007)). Dismissal is warranted where the complaint lacks a cognizable legal theory.

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Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010)

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(internal quotation marks and citation omitted). Alternatively, a complaint may be

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dismissed where it presents a cognizable legal theory, yet fails to plead essential facts

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The Policy is attached as Exhibit 1 to the Complaint. (See doc. no. 1-2 at 14-127.)
The page number references are to the page numbers assigned by the ECF system, rather
than the Policy’s own page numbers.
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under that theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.

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1984).

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A.

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Plaintiff claims that NIC breached its insurance contract by failing to defend and

Breach of Insurance Contract

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indemnify Pierview. NIC counters the case should be dismissed because it had no duty to

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do either. To prevail on a claim for breach of duty to defend,

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the insured must prove the existence of a potential for coverage, while the
insurer must establish the absence of any such potential. In other words, the
insured need only show that the underlying claim may fall within policy
coverage; the insurer must prove it cannot. The duty to defend exists if the
insurer becomes aware of, or if the third party lawsuit pleads, facts giving
rise to the potential for coverage under the insuring agreement.

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Delgado v. Interins. Exch. of Auto. Club of S. Cal., 47 Cal.4th 302, 308 (2009) (emphasis

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in original, internal quotation marks and citations omitted). "The nature and kinds of

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risks covered by the insurance policy establish the scope of duty to defend." Essex Ins.

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Co. v. City of Bakersfield, 154 Cal. App. 4th 696, 704 (2007) (citing Waller v. Truck Ins.

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Exchange, Inc., 11 Cal.4th 1, 19 (1995). "'If, as a matter of law, neither the complaint nor

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the known extrinsic evidence indicate any basis for potential coverage, the duty to defend

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does not arise in the first instance.'" Essex, 154 Cal. App. 4th at 704 (quoting Scottsdale

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Ins. Co. v. MV Transportation, 36 Cal.4th 643, 655 (2005). Duty to defend, "which

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applies even to claims that are groundless, false, or fraudulent, is separate from and

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broader than the insurer's duty to indemnify." Waller, 11 Cal.4th at 19 (internal quotation

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marks and citation omitted).

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NIC contends that the Policy’s auto exclusion precludes coverage, and the

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Underlying Action therefore did not trigger a duty to defend. "An insurer is ... obligated

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to provide a defense even when an exclusion applies but may be reasonably interpreted to

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be inapplicable to the alleged facts." Essex, 154 Cal. App. 4th at 704 (citation omitted).

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Accordingly, an insurer cannot escape its duty by means of an exclusionary clause that is

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unclear. Id. at 705 (citation omitted). Plaintiff maintains that the Policy's auto exclusion
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is at best ambiguous and does not clearly exclude coverage for bodily injuries arising

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from Plaintiff’s auto accident.
The parties’ arguments are focused on policy interpretation. "Interpretation of an

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insurance policy is a question of law. While insurance contracts have special features,

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they are still contracts to which the ordinary rules of contractual interpretation apply."

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Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 1115 (1999) (internal brackets, quotation

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marks and citations omitted). 2

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The starting point of policy interpretation is its express language. If the language
is unambiguous, the court need not look further.

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Under statutory rules of contract interpretation, the mutual intention of the
parties at the time the contract is formed governs interpretation. Such intent
is to be inferred, if possible, solely from the written provisions of the
contract.

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AIU Ins. Co. v. Super. Ct. (MFC Corp.), 51 Cal.3d 807, 822-23 (1990) (internal

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citations omitted).
[I]n interpreting an insurance policy, we seek to discern the mutual intention
of the parties and, where possible, to infer this intent from the terms of the
policy. When interpreting a policy provision, we must give its terms their
ordinary and popular sense, unless used by the parties in a technical sense or
a special meaning is given to them by usage. We must also interpret these
terms in context, and give effect to every part of the policy with each clause
helping to interpret the other.

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Essex, 154 Cal. App. 4th at 704-05 (internal quotation marks omitted, citing Haynes v.

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Farmers Ins. Exch., 32 Cal.4th 1198, 1204 (2004) and Palmer, 21 Cal.4th at 1115).

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While Defendant argues the Policy unambiguously precludes coverage for auto

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accidents, Plaintiff contends the auto exclusion is ambiguous, and should be construed in

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favor of greater coverage. Exceptions to coverage are interpreted against the insurer:

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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

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California substantive law applies in this diversity action. See Erie R.R. Co. v.
Tompkins, 304 U.S. 64 (1938).
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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
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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Essex, 154 Cal. App. 4th at 705 (quoting Haynes, 32 Cal.4th at 1204, internal quotation

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marks and brackets omitted).

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NIC's Commercial General Liability Coverage Form of the Policy begins with the

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admonition: “Various provisions in this policy restrict coverage. Read the entire policy

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carefully to determine rights, duties and what is and is not covered.” (Policy at 75.) The

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Policy further states:

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We will pay those sums that the insured becomes legally obligated to pay as
damages because of “bodily injury” … to which the insurance applies. We
will have the right and duty to defend the insured against any “suit” seeking
those damages. However, we will have no duty to defend the insured
against any “suit” seeking damages for “bodily injury” … to which this
insurance does not apply.

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(Id.) Accordingly, to determine whether the auto accident is covered, exclusions

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and limitations must be considered. The exclusions state in pertinent part:

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SECTION 1 – COVERAGES

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[¶]

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2. Exclusions

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This insurance does not apply to:

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[¶]

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g. Aircraft, Auto or Watercraft

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“Bodily injury” … arising out of the … use … of any … “auto”
… owned or operated by or rented or loaned to any insured.

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(Id. at 75, 76, 78. (emphasis in original) ("Exclusion g".) This exclusion is

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supplemented by the endorsement, which states in pertinent part:

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Exclusion g. Aircraft, Auto or Watercraft under paragraph 2., Exclusions
of Section I – Coverage A – Bodily Injury and Property Damage
Liability is replaced by the following:

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2.

Exclusions
This insurance does not apply to:
g. Aircraft, Auto or Watercraft

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“Bodily injury … arising out of the … use … of
any … “auto”… .”

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(Id. at 109 ("Endorsement").)
Plaintiff contends that Exclusion g, when read with the Endorsement, is vague and

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ambiguous. The Court disagrees. The Endorsement eliminates the language that requires

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the auto to be “owned or operated by or rented or loaned to any insured” for the exclusion

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to take effect, and clearly states that the Policy does not cover bodily injury arising from

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the use of “any ‘auto’.” Plaintiff claims injury from a negligently caused car accident,

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hence, the use of an “auto.” The remainder of Exclusion g, as modified by the

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Endorsement, does not change the fact that bodily injury arising from automobile use is

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excluded from coverage. It continues in pertinent part:

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This exclusion applies even if the claims allege negligence or other
wrongdoing in the supervision, hiring, employment, training, or monitoring
of others, if the “occurrence” which caused the “bodily injury” or “property
damage” involved the ownership, maintenance, use, or entrustment to others
of any aircraft, “auto” or watercraft.

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(Id.) It concludes with two provisions which limit Exclusion g, i.e., broaden coverage, in

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ways that are not relevant to Plaintiff's case -- with respect to (1) watercraft; and (2)

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bodily injury and property damage arising out of the operation of certain “mobile
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equipment” attached to a land vehicle. (Id.) Accordingly, bodily injury from an auto

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accident is clearly excluded from coverage. NIC therefore was not obligated to defend or

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indemnify.

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Plaintiff’s reliance on Essex Insurance Company v. City of Bakersfield is

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unpersuasive. In Essex, the insurance company brought an action seeking declaratory

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judgment that it was not obligated to defend or indemnify the city in a lawsuit stemming

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from an auto accident. The city was being sued by one of the drivers for creating a

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dangerous condition. Although the policy in Essex contained nearly identical auto

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exclusion language, the complaint survived the city’s motion to dismiss because the

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personal injury claim was not based on the use of the automobile but the city’s

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negligence in organizing a public event, which allegedly created a dangerous condition.

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Essex, 154 Cal. App. 4th at 708. The court acknowledged that the city was not liable for

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the negligent operation of the cars involved in the accident. Id. at 709. It concluded,

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however, that the dangerous condition was distinct from the ultimate auto accident, thus

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forming a separate basis for coverage to which the auto exclusion did not apply. Id. at

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708. The court reasoned that the policy was issued for the public event and the city

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reasonably expected to be covered against a lawsuit arising out of a claim that its

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negligence in organizing the event created a dangerous condition. Id. at 707. The court

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found that the auto exclusion was not clear enough to defeat the city’s reasonable

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expectation of coverage for claims arising out of a dangerous condition. Id. at 711.

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The Underlying Action is based solely on the negligent use of an automobile.

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Unlike Essex, there is no alternative basis upon which the Policy could provide coverage.

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Essex is therefore inapposite.

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/////

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B.

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Plaintiff also alleges that California Insurance Code § 11580(b)(2) entitles her to

Direct Action to Recover Policy Benefits

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recover the amount NIC owes to Pierview. Section 11580(b)(2) provides in pertinent

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part:

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A policy insuring against losses … shall not be … issued … unless it
contains … a provision that whenever judgment is secured against the
insured … in an action based upon bodily injury …, then an action may be
brought against the insurer on the policy and subject to its terms and
limitations, by such judgment creditor to recover on the judgment.

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The statute does not expand a carrier's liability, but provides a legal basis for a judgment

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creditor to bring a claim against the judgment debtor’s insurer. As an assignee and

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judgment creditor of Pierview, Plaintiff has the right to recover no more than the amount

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NIC owes Pierview. Since the Policy excluded auto accident coverage, NIC had no duty

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to defend or indemnify Pierview. In her capacity as Pierview's assignee, Plaintiff

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therefore cannot state a claim against NIC.

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C.

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Finally, Plaintiff alleges breach of the implied covenant of good faith and fair

Breach of the Implied Covenant of Good Faith and Fair Dealing

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dealing. “A ‘bad faith’ claim cannot be maintained unless policy benefits are due … .”

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McMillin Scripps N. P’ship v. Royal Ins. Co., 19 Cal. App. 4th 1215, 1222 (1993); see

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also Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225, 1235 (2008) (“As a general

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rule . . . there can be no breach of the implied covenant of good faith and fair dealing if

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no benefits are due under the policy.”). Since NIC had no duty to defend or indemnify

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Pierview, Plaintiff cannot state a claim for breach of the implied covenant of good faith

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and fair dealing.

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III.

CONCLUSION AND ORDER

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For the foregoing reasons, Defendant’s motion is granted. The Court next

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considers whether Plaintiff should be granted leave to amend. Rule 15 advises leave to

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amend shall be freely given when justice so requires. Fed. R. Civ. P. 15(a)(2). "This

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policy is to be applied with extreme liberality." Eminence Capital, LLC v. Aspeon, Inc.,

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316 F.3d 1048, 1051 (9th Cir. 2003) (internal quotation marks and citation omitted).

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In the absence of any apparent or declared reason – such as undue delay, bad
faith or dilatory motive on the part of the movant, repeated failure to cure
deficiencies by amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment, futility of
amendment, etc. – the leave sought should, as the rules require, be "freely
given."

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Foman v. Davis, 371 U.S. 178, 182 (1962). Dismissal without leave to amend is

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not appropriate unless it is clear the complaint cannot be saved by amendment. Id.

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Plaintiff has not requested leave to amend. Because it does not appear that

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Plaintiff can allege facts to state a claim, the complaint is dismissed without leave

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to amend.

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IT IS SO ORDERED.

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Dated: July 24, 2017

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