Evanston Ins. Co. v. Harrison

• Court: District Court, E.D. California
• Decided: January 13, 2022
• Docket: 2:20-cv-01672
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 ----oo0oo---- 11 12 EVANSTON INSURANCE COMPANY, an No. 2:20-cv-01672 WBS KJN Illinois Corporation, 13 Plaintiff, 14 ORDER RE: COUNTER-DEFENDANT v. EVANSTON INSURANCE COMPANY’S 15 MOTION TO DISMISS BRIAN HARRISON, individually and 16 doing Business as KINGDOM OF HARRON PRODUCTIONS, and 17 CHRISTOPHER GELMS, an individual, 18 Defendants. 19

20 ----oo0oo---- 21 22 This case arises out of a dispute over whether 23 plaintiff Evanston Insurance Company (“Evanston”) has a duty to 24 indemnify or defend defendant Brian Harrison, individually and 25 doing business as “Kingdom of Harron Productions” (“Harrison”), 26 under a commercial general liability insurance policy issued to 27 Harrison by Evanston. Evanston has moved to dismiss Harrison’s 28 amended counterclaim for breach of the implied covenant of good 1 faith and fair dealing and his prayer for punitive damages in 2 connection with both his breach of covenant and breach of 3 contract counterclaims. (See Mot. (Docket No. 38-1).) 4 I. Factual and Procedural Background 5 Many of the relevant factual and procedural details are 6 explained in the court’s prior order, addressing Evanston’s 7 previous motion to dismiss. (See Docket No. 31.) In that order, 8 the court dismissed Harrison’s counterclaim for breach of 9 covenant, with leave to amend, on the basis that his counterclaim 10 did not plead facts plausibly demonstrating bad faith by 11 Evanston. (See id. at 6-10.) In his amended counterclaim, 12 Harrison has alleged additional facts that he argues are 13 sufficient to survive Evanston’s current motion. (See Opp’n at 14 5-6 (Docket No. 53).) The new, pertinent factual allegations are 15 as follows. 16 The plaintiff in the underlying action, Christopher 17 Gelms, sued Harrison alleging negligence and dangerous condition 18 after Gelms was pushed and fell while playing a tug-of-war game 19 at the fair, breaking his leg. (See Def.’s First Amended 20 Counterclaim (“FACC”) at ¶ 12 (Docket No. 33).) Based on 21 representations made to Harrison by representatives from 22 EventHelper.com, through which he purchased the operative 23 Evanston insurance policy (the “policy”), Harrison believed 24 Evanston would defend him from any suits alleging injury by 25 anyone at the fair and indemnify him for any damages. (See id. 26 at ¶¶ 10, 13.) He believed this because EventHelper.com did not 27 notify him of the policy exclusions upon which Evanston would 28 later rely in denying him coverage. (See id. at ¶ 15.) He 1 alleges the EventHelper.com representatives acted as Evanston’s 2 agents during this process. (See id.) 3 Upon receiving Harrison’s claim in the spring of 2019, 4 Evanston interviewed Starr White -- a volunteer with Quality 5 Pyrate Games, the group that organized and ran the tug-of-war 6 event -- and based both its initial denial of his claim and its 7 subsequent denial in June 2020 on this interview.1 (See id. at 8 ¶¶ 18, 20.) Harrison alleges that Evanston’s investigation into 9 the tug-of-war event and Gelms’s injury was inadequate, primarily 10 because Evanston did not interview Harrison or witnesses other 11 than White or Webster, demonstrating that its refusal to defend 12 and denial of coverage were in bad faith. (See id. at ¶¶ 18-24, 13 44-47.) 14 II. Discussion 15 “A motion to dismiss a counterclaim brought pursuant to 16 Rule 12(b)(6) is evaluated under the same standard as motion to 17 dismiss a plaintiff’s complaint.” Niantic, Inc. v. Gobal++, 19- 18 cv-03425 JST, 2020 WL 1548465, at *2 (N.D. Cal. Jan. 30, 2020). 19 The inquiry before the court is whether, accepting the factual 20 allegations in the complaint as true and drawing all reasonable 21

22 1 Evanston’s initial denial letter indicates that it also relied on information provided by Gelms’s fiancée, Kristy 23 Webster; although this detail is not noted in the body of the amended counterclaim, the letter is attached and referenced, and 24 the amended counterclaim states that the letter is “incorporated herein as though set forth in full.” (See FACC at ¶ 18, Ex. 2.) 25 Accordingly, the court will consider this detail in evaluating the instant motion. See United States v. Ritchie, 342 F.3d 903, 26 908 (9th Cir. 2003) (“A court may . . . consider . . . documents 27 attached to the complaint [and] documents incorporated by reference in the complaint . . . without converting the motion to 28 dismiss into a motion for summary judgment.”). 1 inferences in the non-moving party’s favor, the complaint has 2 stated “a claim to relief that is plausible on its face.” Bell 3 Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Courts are not, 4 however, “required to accept as true allegations that are merely 5 conclusory, unwarranted deductions of fact, or unreasonable 6 inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 7 988 (9th Cir. 2001); see Bell Atl. Corp., 550 U.S. at 555. 8 Accordingly, “for a complaint to survive a motion to dismiss, the 9 non-conclusory ‘factual content,’ and reasonable inferences from 10 that content, must be plausibly suggestive of a claim entitling 11 the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 12 962, 969 (9th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 13 662, 678 (2009)). 14 As a general rule, “a district court may not consider 15 any material beyond the pleadings in ruling on a Rule 12(b)(6) 16 motion.” Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 17 2001). “A court may, however, consider certain materials-- 18 documents attached to the complaint, documents incorporated by 19 reference in the complaint, or matters of judicial notice-- 20 without converting the motion to dismiss into a motion for 21 summary judgment.” United States v. Ritchie, 342 F.3d 903, 908 22 (9th Cir. 2003). 23 A. Implied Covenant of Good Faith and Fair Dealing 24 California law provides that “every contract imposes 25 upon each party a duty of good faith and fair dealing in its 26 performance and its enforcement.” Jonathan Neil & Assocs., Inc. 27 v. Jones, 33 Cal. 4th 917, 937 (2004). The precise nature and 28 extent of the duty imposed by the implied covenant depends on the 1 purpose underlying a contract. Id. The implied covenant cannot 2 impose substantive duties beyond those incorporated in the 3 specific terms of a contract. Guz v. Bechtel Nat’l, Inc., 24 4 Cal. 4th 317, 349 (2000). 5 Under California law, an insurer’s unreasonable refusal 6 to defend an insured is considered a breach of the implied 7 covenant of good faith and fair dealing and is actionable as a 8 tort. See Amato v. Mercury Cas. Co., 53 Cal. App. 4th 825, 831 9 (2d Dist. 1997). To plead a claim for tortious breach of the 10 implied covenant, a complaint must allege facts which demonstrate 11 a failure or refusal to discharge contractual responsibilities 12 “prompted not by an honest mistake, bad judgment, or negligence, 13 but rather by a conscious and deliberate act, which unfairly 14 frustrates the agreed common purposes and disappoints the 15 reasonable expectations of the other party.” Careau & Co. v. 16 Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371, 1395 (2d 17 Dist. 1990). 18 Withholding policy benefits, including by refusing to 19 defend the insured from suit, amounts to breach of the implied 20 covenant only if done unreasonably, without proper cause, or in 21 bad faith. See Campbell v. Super. Ct., 44 Cal. App. 4th 1308, 22 1321 (2d Dist. 1996); Love v. Fire Ins. Exch., 221 Cal. App. 3d 23 1136, 1151 (1st Dist. 1990); Tibbs v. Great Am. Ins. Co., 755 24 F.2d 1370, 1375 (9th Cir. 1985) (“Refusal to defend, without 25 more, does not constitute a breach of the implied covenant.”). 26 An insurer acts unreasonably if it “ignores evidence available to 27 it which supports the claim.” Wilson v. 21st Century Ins. Co., 28 42 Cal. 4th 713, 721 (2007) (citations omitted). 1 On the other hand, “an insurer denying . . . policy 2 benefits due to the existence of a genuine dispute with its 3 insured as to the existence of coverage liability . . . is not 4 liable in bad faith even though it might be liable for breach of 5 contract.” Id. at 723 (quoting Chateau Chamberay Homeowners 6 Ass’n v. Associated Intern. Ins. Co., 90 Cal. App. 4th 335, 347 7 (2d Dist. 2001)). A genuine dispute exists “where the insurer’s 8 position is maintained in good faith and on reasonable grounds.” 9 Id. Further, “where there is no possibility of coverage, there 10 is no duty to defend.” Waller v. Truck Ins. Exchange, Inc., 11 11 Cal. 4th 1, 19 (1995) (citation omitted). 12 Although in his amended counterclaim Harrison has put 13 forth additional facts about Evanston’s alleged omissions, they 14 remain insufficient to plausibly allege bad faith. As explained 15 in the court’s prior order, (see Docket No. 31 at 2-3), the 16 policy exclusions precluded coverage for injuries sustained at 17 the fair (1) “while . . . participating in any physical exercises 18 or games, sports, or athletic contests”; (2) “as a result of 19 participating in a demonstration, show, competition, contest or 20 athletic event”; or (3) due to an “assault or battery,” which 21 includes “claims . . . alleg[ing] negligence or other wrongdoing 22 in the supervision . . . [or] monitoring of others or failure to 23 protect or warn others” by any person. (See FACC, Exs. 2-3.)2 24 The basic allegations disclosed to Evanston by Webster 25 and White were that Gelms fell and broke his leg because someone 26

27 2 Although Evanston’s first denial letter relied only on the first two of these exclusions, its second denial letter 28 relied on all three. (See id.) 1 pushed him off a wooden block while he was playing tug-of-war at 2 the fair. (See FACC, Exs. 2-3.) These allegations, as presented 3 to Evanston, clearly suggested that all three exclusions applied 4 under their plain terms, and thus that Evanston had “reasonable 5 grounds” to believe Gelms’s claim was not covered under the 6 policy. Wilson, 42 Cal. 4th at 723; see also Raisin Bargaining 7 Ass’n v. Hartford Cas. Ins. Co., 715 F. Supp. 2d 1079, 1088-89 8 (E.D. Cal. 2010) (Wanger, J.) (mere difference of opinion between 9 insurer and insured insufficient to demonstrate bad faith).3 10 To allege that Evanston nonetheless acted unreasonably 11 or in bad faith by denying Harrison coverage without conducting 12 further interviews, Harrison was required to allege facts showing 13 that (1) Evanston knew or should have known that information 14 gained through further interviews could have yielded information 15 calling the exclusions’ applicability into question, thereby 16 “support[ing] the claim,” Wilson, 42 Cal. 4th at 7214; (2) the

17 3 “[T]he determination whether the insurer owes a duty to 18 defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.” 19 Waller, 11 Cal. 4th at 19. However, “[f]acts extrinsic to the complaint” may also inform whether a duty to defend exists, 20 depending on whether “they reveal a possibility that the claim may be covered by the policy.” Id. Accordingly, that Evanston 21 issued its first denial letter before Gelms’s underlying claim 22 was filed does not make its disclaimer of a duty to defend unreasonable, given the other sources of information to which it 23 had access. See Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 58 (1997) (although duty to defend “arises as 24 soon as tender is made, . . . . [i]t may be extinguished earlier, if it is shown that no claim can in fact be covered”) (citations 25 omitted.

26 4 Contrary to Evanston’s contention, (see Mot. at 2, 12- 27 13), Harrison is not required to demonstrate that further investigation would in fact have resulted in a change in 28 Evanston’s coverage position, see Wilson, 42 Cal. 4th at 721 (“To 1 explanation Evanston received as to how Gelms was injured was 2 clearly untrue, such that relying on it without conducting 3 further interviews was unreasonable; or (3) Evanston interpreted 4 and applied the exclusions in an unreasonable manner. See 5 Careau, 222 Cal. App. 3d at 1395; Campbell, 44 Cal. App. 4th at 6 1321. 7 In his amended counterclaim, Harrison has done none of 8 these. Although in his opposition he asserts that further 9 interviews “had the ability to be outcome determinative 10 concerning coverage,” (Opp’n at 6 (emphasis omitted)), the 11 amended counterclaim contains no facts suggesting why Evanston 12 should have believed this was so, given the exclusions’ readily 13 apparent applicability -- or even about what meaningful 14 information these interviews might have uncovered -- nor does the 15 opposition explain. The amended counterclaim likewise fails to 16 reference any reason Evanston should not have believed or relied 17 upon the information Webster and White provided, which suggested 18 Gelms’s claim fell squarely within the exclusions’ scope. And 19 although the amended counterclaim asserts that Evanston adopted 20 arbitrary and unreasonable interpretations of the policy’s 21 exclusions, it does not state what those interpretations were, 22 nor does Harrison explain why they were unreasonable. (See FACC 23 at ¶ 23; Opp’n.)5 Without any supporting facts, the court cannot 24 protect its insured’s contractual interest in security and peace 25 of mind, ‘it is essential that an insurer fully inquire into possible bases that might support the insured’s claim’ before 26 denying it.”) (quoting Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 27 809, 819 (1979)).

28 5 Prior decisions finding that the same or similar 1 credit these conclusory allegations. See Sprewell, 266 F.3d at 2 988. 3 At oral argument, counsel for Harrison contended that 4 the key allegations in Gelms’s underlying complaint6 were that 5 Harrison and the event operators were negligent in allowing 6 someone to enter the tug-of-war area and push Gelms. Counsel 7 contended that, accordingly, the cause of Gelms’s injury was the 8 failure to remove that person from the area, and thus the 9 exclusions were not implicated. Even assuming this theory were 10 supported by Gelms’s complaint, which is attached to the amended 11 counterclaim, (see FACC, Ex. 1), it fails to explain how Gelms’s 12 injury would not also have been sustained “while . . . 13 participating in . . . physical exercises or games, sports, or 14 athletic contests,” “as a result of participating in a 15 demonstration, show, competition, contest or athletic event,” or 16 as a result of “assault or battery.” 17 Moreover, coverage would appear to be precluded under 18 this theory as well, as it frames Gelms’s claim as one 19 “alleg[ing] negligence or other wrongdoing in the supervision 20 . . . [or] monitoring of others or failure to protect or warn 21 others.” (Id., Ex. 3.) And although Harrison’s counsel 22

23 exclusions applied in similar circumstances provide further support for the reasonableness of Evanston’s determinations. See 24 Essex Ins. Co. v. Insider Prod., LLC, 2:15-cv-09762 SVW RAO, 2016 WL 7655691, at *4 (C.D. Cal. June 29, 2016); United Specialty 25 Ins. Co. v. Silva, 17-cv-07231 JSC, 2018 WL 6591663, at *5-8 (N.D. Cal. Dec. 14, 2018). 26

27 6 Evanston issued its first denial letter before Gelms’s complaint was filed but assessed the complaint prior to issuing 28 its second denial letter. (See FACC, Exs. 2-3; Mot. at 12.) 1 contended at oral argument that the tug-of-war event was simply 2 “something done for show” and not truly a competition, the second 3 exclusion specifically accounts for injuries sustained through 4 participation in a “show” or “competition.” 5 Finally, even assuming that EventHelper.com 6 representatives acted as Evanston’s agents, allegations of bad 7 faith in dealings before the existence of a contract are 8 insufficient to state a claim for breach of the implied covenant 9 as a matter of California law. See McClain v. Octagon Plaza, 10 LLC, 159 Cal. App. 4th 784, 799 (2d Dist. 2008) (citing Racine & 11 Laramie, Ltd. v. Dep’t of Parks & Recreation, 11 Cal. App. 4th 12 1026, 1031-35 (4th Dist. 1992)); Hess v. Transamerica Occidental 13 Life Ins. Co., 190 Cal. App. 3d 941, 945 (1st Dist. 1987) (citing 14 Gibson v. Gov’t Emps. Ins. Co., 162 Cal. App. 3d 441, 448 (5th 15 Dist. 1984)). 16 It is true that an insurer has an “obligation to 17 thoroughly . . . investigate . . . the insured’s claim,” Wilson, 18 42 Cal. 4th at 723, and Harrison’s allegations suggest that here 19 this obligation may have gone unfulfilled. What the amended 20 counterclaim fails to allege, however, is that, given the 21 information before Evanston at the time, any alleged omissions in 22 Evanston’s investigation were unreasonable or evinced bad faith. 23 Accordingly, it fails to state a claim for breach of the implied 24 covenant of good faith and fair dealing. The court will 25 therefore grant Evanston’s motion to dismiss this count of 26 Harrison’s amended counterclaim. 27 B. Request for Punitive Damages 28 Evanston also requests dismissal of Harrison’s request 1 for punitive damages on his remaining breach of contract claim. 2 (See Mot. at 13-14.) Although the court previously denied 3 Evanston’s motion to dismiss the claim for punitive damages, it 4 did so on the basis that Evanston had made the request under 5 Federal Rule of Civil Procedure 12(f). (See Docket No. 31.) 6 Evanston has now done so pursuant to Rule 12(b)(6). (See Mot.) 7 “Under California law, . . . a party cannot collect 8 punitive damages for breach of contract awards.” BladeRoom Grp. 9 Ltd. v. Emerson Elec. Co., -- F.4th --, 2021 WL 6056194, at *12 10 (9th Cir. Dec. 21, 2021) (citing Applied Equip. Corp. v. Litton 11 Saudi Arabia Ltd., 7 Cal. 4th 503, 516 (1994)); see Harris v. 12 Atl. Richfield Co., 14 Cal. App. 4th 70, 77-80 (5th Dist. 1993) 13 (in California, punitive damages available for breach of contract 14 only where claim sounds in tort). This rule applies “no matter 15 how gross or willful” the breach. Tibbs v. Great Am. Ins. Co., 16 755 F.2d 1370, 1375 (9th Cir. 1985). 17 Federal district courts may dismiss portions of a 18 pleading seeking damages in response to a 12(b)(6) motion. See 19 Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970, 974 (9th 20 Cir. 2010). Dismissal of a request for punitive damages is 21 proper where a California plaintiff’s only remaining claim is for 22 breach of contract. See La Jolla Spa MD, Inc. v. Avidas Pharms., 23 LLC, 19-cv-1124 MMA (WVG), 2017 WL 4870374, at *7 (S.D. Cal. Oct. 24 27, 2017); R Power Biofuels, LLC v. Chemex LLC, 16-CV-00716 LHK, 25 2016 WL 6663002, at *21 (N.D. Cal. Nov. 11, 2016). Accordingly, 26 because the court will grant Evanston’s motion to dismiss 27 Harrison’s breach of implied covenant counterclaim, it will also 28 grant the motion to dismiss the amended counterclaim’s request eee mE ROI IEEE IRI II OE INO IRIE IE OSE IE IIE DS eee

1 for punitive damages. 2 IT IS THEREFORE ORDERED that Evanston’s motion to 3 dismiss the amended counterclaim’s second claim, for violation of 4 the implied covenant of good faith and fair dealing, be, and the 5 same hereby is, GRANTED. 6 IT IS FURTHER ORDERED that Evanston’s motion to dismiss 7 the amended counterclaim’s request for punitive damages be, and 8 the same hereby is, GRANTED.’ 9 Dated: January 13, 2022 eh tte Hh. LA bE—~ WILLIAM B. SHUBB 10 UNITED STATES DISTRICT JUDGE 11 12 13 14 15 16 17 18 19 20 21 7 Harrison has not specifically sought leave to amend. 22 (See Opp’n.) In light of the allegations presented in the amended counterclaim; the attached documents, including 23 Evanston’s denial letters; and discussion with the parties at oral argument, the court concludes that further amendment would 24 be futile. Accordingly, the court denies further leave to amend. See Doe v. Garland, 17 F.4th 941, 950 (9th Cir. 2021) (“A 29 district court acts within its discretion to deny leave to amend 26 when amendment would be futile.”) (citation omitted); In re Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005) (dismissal 27 without leave to amend proper if “it is clear .. . that the complaint [can]not be saved by any amendment”) (citation 28 | omitted). 12