LA Terminals, Inc. v. United National Insurance Company

• Court: District Court, C.D. California
• Decided: September 30, 2020
• Docket: 8:19-cv-00286
• Status: Unknown

Opinion

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8 United States District Court 9 Central District of California

11 L.A. TERMINALS, INC. and SOCO Case No. 8:19-CV-00286-ODW (PVCx) WEST, INC., 12 Plaintiffs, ORDER DENYING DEFENDANT’S 13 v. MOTION TO DISMISS PLAINTIFFS’ 14 SECOND AMENDED COMPLAINT 15 UNITED NATIONAL INSURANCE [52] COMPANY,

16 Defendant. 17 18 I. INTRODUCTION 19 This action arises from an insurance coverage dispute between insureds, 20 Plaintiffs L.A. Terminals, Inc. (“LAT”), and Soco West, Inc. (“Soco”) (collectively, 21 “Plaintiffs”), and their insurance carrier, Defendant United National Insurance 22 Company (“Defendant” or “United National”). Plaintiffs allege that United National 23 has a duty to defend them in underlying environmental contamination lawsuits. 24 (Second Am. Compl. (“SAC”) ¶¶ 55–59, ECF No. 50.) United National moves to 25 dismiss the SAC arguing that it fulfilled its contractual obligations under the relevant 26 insurance policies (the “Motion”). (See Mot., ECF No. 52.) Plaintiffs opposed and 27 28 1 United National replied. (See Opp’n to Mot. (“Opp’n”), ECF No. 55; Reply, ECF 2 No. 56.) For the reasons that follow, the Court DENIES United National’s Motion.1 3 II. FACTUAL AND PROCEDURAL BACKGROUND 4 A. Parties and Pertinent Policies 5 The City of Los Angeles (the “City”), a non-party to this suit, owns an 6 approximately 0.74-acre property located at 560 Pier “A” Place in Wilmington, 7 California (the “Sliver Site”), and a surrounding 13.5-acre property, known as the Los 8 Angeles Refinery, Marine Terminal (the “Marine Terminal”). (SAC ¶¶ 10–12.) LAT 9 operated on the Sliver Site from approximately 1982 to 1992, storing and distributing 10 various chemicals including halogenated volatile organic compounds (“HVOCs”). 11 (Id. ¶¶ 11, 14, 17.) Soco is alleged to have conducted operations at the Sliver Site 12 with LAT during the same time period. (Id. ¶ 17.) 13 From 1982 through 1985, United National insured Plaintiffs under four primary 14 comprehensive general liability policies (the “Policies”). (Id. ¶ 5, Exs. 1–4, ECF 15 Nos. 50-1, 50-2, 50-3, 50-4.) Three of the Policies identify the City as an additional 16 insured. (Id. Ex. 2 (Policy No. GA81138) at 25; id. Ex. 3 (Policy No. GA81186) at 6; 17 id. Ex. 4 (Policy No. GA502997) at 8.) The Policies provide that United National 18 “shall have the right and duty to defend any suit against the insured seeking damages 19 on account of . . . property damage . . . .” (SAC ¶ 7.) The Policies further provide that 20 United National “will pay on behalf of the insured all sums which the insured shall 21 become legally obligated to pay as damages because of . . . property damage to which 22 this policy applies, caused by an occurrence . . . .” (Id. ¶ 6.) The Policies define 23 “property damage” as “physical injury to or destruction of tangible property,” and 24 define an “occurrence,” as “an accident, including continuous or repeated exposure to 25 substantially the same general conditions, which results in . . . property damage 26 neither expected nor intended from the standpoint of the insured.” (Id. ¶¶ 8–9.) The 27

28 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. 1 Policies exclude coverage for property damage that is caused by the “discharge, 2 dispersal, release or escape” of “irritants, contaminants or pollutants” (the “Qualified 3 Pollution Exclusion”). (Id. ¶ 27.) However, the Policies state the Qualified Pollution 4 Exclusion does not apply where the “discharge, dispersal, release or escape is sudden 5 and accidental.” (Id.) 6 B. The Underlying Actions 7 In January 2018, the City filed a complaint in Los Angeles Superior Court 8 against LAT and other defendants, not including Soco, captioned City of Los Angeles 9 v. L.A. Terminals, Inc., et al., No. NC061591, alleging environmental contamination 10 due to Plaintiffs’ operations at the Sliver Site (the “LASC Action”). (Id. ¶ 13.) In 11 March 2018, the City filed a first amended complaint in the LASC Action, alleging 12 that pollution at the Sliver Site had been ongoing “[s]ince 1947” and that it was 13 caused, in part, by hazardous materials that “leaked from storage tanks, pipes, spilled 14 or were disposed of on the ground, into the soil and seeped into the groundwater.” 15 (Id. ¶ 14; Req. Jud. Notice (“RJN”) Ex. 1 ¶¶ 18, 23, 31, ECF No. 54-1.) The City 16 further alleged that defendants “were negligent in . . . their receiving, storing and 17 handling of hazardous substances and chemicals on the [Sliver] Site premises.” (RJN 18 Ex. 1 ¶ 26.) In August 2018, LAT filed a cross-complaint in the LASC Action against 19 the City and other parties, contending that these parties were responsible for the 20 alleged pollution at the Sliver Site. (SAC ¶ 19.) In its cross-complaint, LAT 21 specifically alleged that the purported environmental contamination was “caused by 22 various sudden and accidental releases, and other discharges and releases of 23 [h]azardous [m]aterials.” (RJN Ex. 2 ¶ 20, ECF No. 54-2.) 24 In May 2019, the City filed a second amended complaint in the LASC Action 25 adding Soco as a defendant and specifying that the defendants’ alleged pollution 26 occurred “suddenly and accidentally, and over long periods of time.” (RJN Ex. 3 ¶¶ 9, 27 41, ECF No. 54-3.) In January 2020, the City filed a third amended complaint in the 28 LASC Action reiterating its allegations that defendants “spilled, leaked, discharged, 1 poured, and released, suddenly and accidentally, and over long periods of time . . . 2 chemicals, hazardous materials, contaminants and pollutants . . . near the Sliver Site 3 premises.” (RJN Ex. 4 ¶ 41, ECF No. 54-4.) 4 In August 2018, LAT initiated a separate action in the Central District of 5 California against the City and other third parties under the Comprehensive 6 Environmental Response, Compensation and Liability Act (CERCLA), captioned L.A. 7 Terminals, Inc. v. City of Los Angeles, et al., No. 2:18-cv-06754-MWF (RAOx), 8 involving the same alleged “sudden and accidental” environmental contamination at 9 issue in the LASC Action (the “Central District Action”). (SAC ¶ 20; RJN Ex. 5 ¶ 14, 10 ECF No. 54-5.) In December 2018, the City and third-party defendant Occidental 11 Chemical Corporation (“Occidental”) filed counterclaims against LAT and third-party 12 complaints against Soco for, among other claims, contribution and declaratory relief, 13 in the Central District Action. (SAC ¶ 21.) 14 C. Coverage Dispute 15 On May 4, 2018, LAT tendered the first amended complaint in the LASC 16 Action to United National for coverage under the Policies. (Id. ¶ 25.) In a letter dated 17 August 6, 2018, United National, relying on the Qualified Pollution Exclusion, 18 disclaimed any duty to defend or indemnify LAT because, at the time, the City had 19 not expressly alleged a “sudden and accidental” release of pollutants. (Id. ¶¶ 26–28.) 20 In a letter dated September 7, 2018, United National reaffirmed its denial of coverage 21 but invited LAT to submit facts and evidence “indicating that a[] sudden and 22 accidental release [had] occurred” at the Sliver Site. (Id. ¶ 37.) The City, as an 23 additional insured under the Policies, also tendered the cross-complaint in the LASC 24 Action to United National for coverage. (Id. ¶ 38.) United National agreed to defend 25 the City against LAT’s claims because the cross-complaint specifically alleged a 26 “sudden and accidental” release of hazardous materials. (Id. ¶ 39; RJN Ex. 2 ¶ 20.) 27 On February 15, 2019, Plaintiffs tendered the City and Occidental’s 28 counterclaims and third-party complaints filed against Plaintiffs in the Central District 1 Action to United National for coverage under the Policies. (SAC ¶¶ 21, 43.) 2 Occidental’s pleadings specifically alleged the “contamination at issue was caused, ‘in 3 whole or in part, by one or more releases of hazardous materials, including sudden and 4 accidental releases’” near the Sliver Site. (Id. ¶ 23.) On April 12, 2019, based on 5 Occidental’s “sudden and accidental” allegation, United National agreed to defend 6 Plaintiffs in the Central District Action subject to a reservation of rights. (Id. 7 ¶¶ 44–45.) United National also agreed to defend LAT in the LASC Action moving 8 forward, subject to a similar reservation of rights. (Id.) 9 United National appointed attorney John R. Brydon of Demler Armstrong & 10 Rowland as Plaintiffs’ defense counsel in the underlying litigation. (Id. ¶ 48.) 11 Plaintiffs rejected the appointment and requested independent counsel, arguing that 12 United National’s reservations and coverage of the City’s defense under the same 13 Policies created a conflict of interest. (Id. ¶¶ 46–48.) Plaintiffs also argued that 14 inserting new attorneys into the underlying litigation nearly a year after the LASC 15 Action commenced would be unreasonable and prejudicial to Plaintiffs. (Id. ¶ 49.) 16 United National disputes that Plaintiffs are entitled to independent counsel and, thus, 17 has not reimbursed Plaintiffs for any defense costs. (Id. ¶¶ 48–50.) 18 D. The Instant Action 19 On January 8, 2019, LAT filed this action in the Orange County Superior Court 20 and United National timely removed based on diversity jurisdiction. (Notice of 21 Removal ¶¶ 1–2, ECF No. 1.) Plaintiffs assert four causes of action against United 22 National for: (1) declaratory relief—duty to defend in the LASC Action; 23 (2) declaratory relief—right to independent counsel; (3) breach of the duty to defend; 24 and (4) breach of the covenant of good faith and fair dealing. (SAC ¶¶ 55–77.) 25 United National moves to dismiss the SAC in its entirety arguing that Plaintiffs cannot 26 plausibly allege that its initial denial of coverage was improper or that Plaintiffs are 27 entitled to independent counsel. (See generally Mot.) 28 1 III. LEGAL STANDARD 2 A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable 3 legal theory or insufficient facts pleaded to support an otherwise cognizable legal 4 theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). To 5 survive a dismissal motion, a complaint need only satisfy the minimal notice pleading 6 requirements of Rule 8(a)(2)—a short and plain statement of the claim. Porter v. 7 Jones, 319 F.3d 483, 494 (9th Cir. 2003). The factual “allegations must be enough to 8 raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 9 U.S. 544, 555 (2007). That is, the complaint must “contain sufficient factual matter, 10 accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. 11 Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). 12 The determination of whether a complaint satisfies the plausibility standard is a 13 “context-specific task that requires the reviewing court to draw on its judicial 14 experience and common sense.” Id. at 679. A court is generally limited to the 15 pleadings and must construe all “factual allegations set forth in the complaint . . . as 16 true and . . . in the light most favorable” to the plaintiff. Lee v. City of Los Angeles, 17 250 F.3d 668, 679 (9th Cir. 2001). However, a court need not blindly accept 18 conclusory allegations, unwarranted deductions of fact, and unreasonable inferences. 19 Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). 20 IV. REQUEST FOR JUDICIAL NOTICE 21 In conjunction with the Motion, United National requests that the Court take 22 judicial notice of the first, second, and third amended complaints, and the 23 cross-complaint in the LASC Action, as well as the complaint in the Central District 24 Action. (RJN, ECF No. 54.) Plaintiffs did not oppose United National’s request. 25 The Court may take judicial notice of court filings and other matters of public 26 record. Fed. R. Evid. 201(b); see U.S. ex rel Robinson Rancheria Citizens Council v. 27 Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992) (stating the court “may take notice of 28 proceedings [and related filings] in other courts, both within and without the federal 1 judicial system, if those proceedings have a direct relation to matters at issue”); see 2 United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (stating the court “may 3 consider certain materials . . . [including] matters of judicial notice” when ruling on a 4 Rule 12(b)(6) motion to dismiss). 5 Accordingly, the Court GRANTS United National’s unopposed RJN and takes 6 judicial notice of the pleadings filed in the underlying LASC and Central District 7 Actions, but not the truth of the facts contained therein. Lee, 250 F.3d at 690. 8 V. DISCUSSION 9 United National moves to dismiss the SAC on several grounds, including that: 10 (1) United National properly declined to defend LAT in the LASC Action because the 11 damage alleged in the first amended complaint fell within the Qualified Pollution 12 Exclusion; (2) no conflict of interest exists to warrant appointment of independent 13 defense counsel; (3) United National did not breach its duty to defend by refusing to 14 appoint independent counsel or reimburse Plaintiffs’ litigation costs; (4) United 15 National did not engage in unreasonable conduct. The Court addresses each argument 16 in turn. 17 A. Duty to Defend 18 Plaintiffs allege that United National was bound by an expansive duty to defend 19 the LASC Action from the initial tender pursuant to the Policies. (SAC ¶¶ 29–32; see 20 also Opp’n 9–15.) United National contests the applicability of the duty to defend and 21 counters that, based on the damages alleged in the LASC Action at the time of tender, 22 the Policies’ Qualified Pollution Exclusion barred coverage. (Mot. 9–17; Reply 1–6.) 23 An insurer’s duty to defend is broader than its duty to indemnify and may apply 24 even in an action where no damages are ultimately awarded. Horace Mann Ins. Co. v. 25 Barbara B., 4 Cal. 4th 1076, 1081 (1993). The duty to defend arises as soon as the 26 insured tenders a claim that involves a potentially covered loss. Montrose Chem. 27 Corp. v. Super. Ct., 6 Cal. 4th 287, 295 (1993) (“Montrose I”). “[T]he insured need 28 only show that the underlying claim may fall within policy coverage; the insurer must 1 prove it cannot.” Id. at 300 (emphasis in original). Even if the precise causes of 2 action pled by the third-party complaint fall outside of the policy coverage, the 3 insurer’s duty to defend may not be excused “where, under the facts alleged, 4 reasonably inferable, or otherwise known, the complaint could fairly be amended to 5 state a covered liability.” Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 6 (2005) (citing Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275–76 (1966)). The California 7 Supreme Court summarized general principles on this issue: 8 If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially 9 covered by the policy, the insurer’s duty to defend arises and is not 10 extinguished until the insurer negates all facts suggesting potential 11 coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for 12 potential coverage, the duty to defend does not arise in the first 13 instance. 14 Id. However, the insurer’s duty to defend does not extend to claims for which there is 15 no potential for liability coverage under the policy; this includes claims which fall 16 outside the scope of the policy or are expressly excluded under the policy. See Alterra 17 Excess & Surplus Ins. Co. v. Snyder, 234 Cal. App. 4th 1390, 1401–02 (2015). 18 Further, “[a]n insured may not trigger the duty to defend by speculating about 19 extraneous ‘facts’ regarding potential liability or ways in which the third party 20 claimant might amend its complaint at some future date.” Gunderson v. Fire Ins. 21 Exch., 37 Cal. App. 4th 1106, 1114 (1995). 22 Here, it is clear that the LASC Action is a “suit” seeking damages against the 23 insured Plaintiffs due to an “occurrence” causing “property damage” during the 24 Policies’ coverage period. (SAC ¶¶ 6–9.) Those bare facts alone give rise to a duty to 25 defend. See Atl. Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1034 26 (2002) (explaining the possibility of coverage, not the specific causes of action 27 asserted in the underlying complaint, triggers the duty to defend). United National 28 contends that, because the City did not specifically allege “sudden and accidental” 1 environmental contamination in the tendered complaint, the Qualified Pollution 2 Exclusion applied, and United National owed no duty to defend until Plaintiffs 3 presented evidence the exclusion did not apply. (See Mot. 10–14.) United National 4 misplaces the burden of proof. Once Plaintiffs showed there was a potential that the 5 alleged environmental contamination was sudden and accidental (i.e., a potential for 6 coverage), United National needed to conclusively refute that potential before denying 7 coverage. See Anthem Elecs., Inc. v. Pac. Empers. Ins. Co., 302 F.3d 1049, 1054–55 8 (9th Cir. 2002). 9 As Plaintiffs point out, the City alleged in the LASC Action that the defendants 10 there “were negligent in . . . their receiving, storing and handling of hazardous 11 substances and chemicals” resulting in contamination of the soil and groundwater on 12 the Sliver Site. (RJN Ex. 1 ¶ 26.) This suggests that the conduct on which Plaintiffs’ 13 liability hinges is alleged to be accidental. United National argues that the City’s 14 allegations of gradual, long-term pollution demonstrate that the environmental 15 contamination was not sudden, barring coverage under the Policies. (See Mot. 10–11; 16 Reply 1–3.) However, allegations of historic pollution do not foreclose the possibility 17 that the alleged property damage was caused, at least in part, by a sudden release of 18 contaminants. If anything, whether hazardous materials were suddenly or accidentally 19 discharged during Plaintiffs’ operations at the Sliver Site are factual questions that 20 support a finding of a duty to defend. Horace Mann, 4 Cal. 4th at 1081 (“Any doubt 21 as to whether the facts give rise to a duty to defend is resolved in the insured’s 22 favor.”). 23 Additionally, United National’s reliance on American States Insurance Co. v. 24 Sacramento Plating, Inc. to justify its coverage denial is inapposite, as that case 25 involved repeated “expected” incidents of environmental contamination. 861 F. Supp. 26 964, 969–70 (E.D. Cal. 1994). The Sacramento Plating court found that three 27 unintended large chemical spills “only contributed to contamination caused by 28 pollution occurring in the regular course of the plating operation” and, thus, the 1 pollution exclusion in the pertinent policies precluded coverage. Sacramento Plating, 2 861 F. Supp. at 971. In contrast, here the City did not allege that Plaintiffs expected or 3 intended to discharge hazardous materials while operating at the Sliver Site, but rather 4 that Plaintiffs did so negligently. (RJN Ex. 1 ¶ 26.) Indeed, the City’s subsequent 5 amended complaints describing Plaintiffs’ alleged negligent conduct as “sudden and 6 accidental” environmental contamination show there was a potential for coverage 7 from the inception of the LASC Action which should have triggered United National’s 8 duty to defend. Montrose I, 6 Cal. 4th at 300 (explaining that the “bare ‘potential’ or 9 ‘possibility’ of coverage” under an insurance policy will trigger the insurer’s duty to 10 defend). 11 Because the duty to defend is so broad as to encompass even a mere possibility 12 of coverage, Plaintiffs have plausibly alleged that United National owed a duty to 13 defend Plaintiffs in the LASC Action as soon as LAT tendered the first amended 14 complaint. Accordingly, the Court DENIES the Motion with respect to Plaintiffs’ 15 first cause of action. 16 B. Independent Counsel 17 Plaintiffs argue that they are entitled to independent defense counsel for three 18 main reasons. (SAC ¶¶ 60–68; see also Opp’n 15–19.) First, United National’s 19 agreement to defend the City and Plaintiffs—adverse parties in the underlying 20 litigation—created an untenable conflict of interest necessitating the appointment of 21 independent counsel. Second, United National’s agreement to defend Plaintiffs 22 subject to a reservation of rights to disclaim coverage also created a conflict. Third, 23 United National’s failure to defend Plaintiffs after the initial tender of the LASC 24 Action entitled Plaintiffs to direct their own defense. United National contends that 25 Plaintiffs’ conflict-of-interest theories are not supported by law and that it maintains 26 the right to control Plaintiffs’ defense. (Mot. 18–21; Reply 6–11.) 27 In some types of conflict of interest situations, the insurer must provide not only 28 a defense for the insured, but an independent attorney selected by the insured. See, 1 e.g., Previews, Inc. v. Cal. Union Ins. Co., 640 F.2d 1026, 1028 (9th Cir. 1981). This 2 is known as Cumis counsel, emanating from the California case San Diego Navy 3 Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358 (1984). 4 Cumis was later codified in California Civil Code Section 2860, which clarifies the 5 rights of the insurer in conflict of interest situations. See Cal. Civ. Code § 2680(b). 6 Not every conflict of interest triggers an obligation on the part of the insurer to 7 provide the insured with independent counsel at the insurer’s expense. See Golden 8 Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal. App. 4th 1372, 1394 (1993). Nor does 9 every reservation of rights entitle an insured to select Cumis counsel. See Cal. Civ. 10 Code § 2680(b). “For independent counsel to be required, the conflict of interest must 11 be ‘significant, not merely theoretical, actual, not merely potential.’” James 3 Corp. 12 v. Truck Ins. Exch., 91 Cal. App. 4th 1093, 1101 (2001) (quoting Dynamic Concepts, 13 Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1007 (1998)). 14 Some of the circumstances that may create a conflict of interest requiring the 15 insurer to provide independent counsel include: (1) where the insurer reserves its 16 rights on a given issue and the outcome of that coverage issue can be controlled by 17 counsel first retained by the insurer for the defense of the claim (Golden Eagle, 20 18 Cal. App. 4th at 1394–1395); (2) where the insurer insures both the plaintiff and the 19 defendant (O’Morrow v. Borad, 27 Cal. 2d 794, 799 (1946)); (3) where the insurer has 20 filed suit against the insured, whether or not the suit is related to the lawsuit the 21 insurer is obligated to defend (Truck Ins. Exch. v. Fireman’s Fund Ins. Co., 6 Cal. 22 App. 4th 1050 (1992)); (4) where the insurer pursues settlement in excess of policy 23 limits without the insured’s consent and leaves the insured exposed to claims by third 24 parties (Golden Eagle, 20 Cal. App. 4th at 1396); and (5) any other situation where an 25 attorney who represents the interests of both the insurer and the insured finds that his 26 or her “representation of the one is rendered less effective by reason of his [or her] 27 representation of the other.” (Id. (quoting Spindle v. Chubb/Pac. Indem. Grp., 89 Cal. 28 App. 3d 706, 713 (1979))). “The potential for conflict requires a careful analysis of 1 the parties’ respective interests to determine whether they can be reconciled (such as 2 by a defense based on total nonliability) or whether an actual conflict of interest 3 precludes insurer-appointed defense counsel from presenting a quality defense for the 4 insured.” Centex Homes v. St. Paul Fire & Marine Ins. Co., 19 Cal. App. 5th 789, 5 798 (2018) (citation omitted). 6 Plaintiffs aver that United National concurrently defending the City and 7 Plaintiffs in the underlying litigation under the same Policies presents an actual 8 conflict of interest requiring the appointment of independent counsel. (SAC ¶ 47.) 9 Indeed, “[t]here is a large block of authority recognizing what also seems relatively 10 obvious: when an insure[r] is obligated to provide defenses for two or more insureds 11 with adverse interests, there is a sufficient conflict of interest that the insurer must 12 provide independent counsel for each insured at its own expense.” Centex Homes v. 13 St. Paul Fire & Marine Ins. Co., 237 Cal. App. 4th 23, 28 (2015) (“Centex I”) 14 (citation omitted). Nevertheless, United National insists that Plaintiffs’ right to 15 independent counsel is unsupported by California law. United National relies 16 primarily on two cases to support its argument: Federal Insurance Co. v. MBL, Inc., 17 219 Cal. App. 4th 29 (2013) (“MBL”) and Centex I. However, the insurers in MBL or 18 Centex I, did not insure both sides of the litigation as United National does here. 19 In MBL, the federal government brought a CERCLA action against the property 20 owners and lessees of a dry-cleaning facility suspected of causing soil and 21 groundwater contamination to recover monitoring and remediation costs. MBL, 219 22 Cal. App. 4th at 33. The defendants subsequently filed third-party actions against, 23 among others, MBL, Inc., a supplier of dry-cleaning products, seeking indemnity, 24 contribution, and declaratory relief. Id. MBL, Inc. then filed a cross-claim which 25 named several additional cross-defendants. Id. at 35. The court determined that 26 MBL, Inc. was not entitled to independent counsel even though the insurers 27 simultaneously represented MBL, Inc. and some other third-party defendants and 28 cross-defendants because the parties were not “direct adversaries in the litigation.” Id. 1 at 46–47. The MBL court did not address whether MBL, Inc. would be entitled to 2 independent counsel if the insurers covered the federal government, the opposing 3 party in the underlying pollution dispute. In Centex I, a group of homeowners brought 4 a construction defect action against a developer for work performed by various 5 subcontractors. Centex I, 237 Cal. App. 4th at 25–26. The developer then sued the 6 subcontractors for indemnity, contribution, and repayment. Id. at 26. The court found 7 that the insurer defending the developer and the subcontractors did not create an 8 ethical conflict of interest requiring independent counsel. Id. at 28, 30–32. Like 9 MBL, Centex I is silent as to whether a conflict would exist if the insurer defended the 10 developer and subcontractors, as well as the homeowners, i.e. both sides of the 11 litigation. 12 The situation presented here is most analogous to the circumstances addressed 13 in O’Morrow v. Borad. In that case, an insurance company insured two drivers 14 involved in the same car accident. 27 Cal. 2d at 795. In the lawsuit between the 15 drivers, each claimed that he was entitled to recover for personal injuries and property 16 damage resulting from the collision. Id. at 796. The California Supreme Court held 17 that, under those facts, the insurance company could not control the defenses of the 18 two policyholders, and the driver who retained his own counsel was entitled to 19 reimbursement of his costs of suit and attorneys’ fees. Id. at 799–800. In the 20 underlying LASC Action, the City brought suit for environmental contamination 21 against Plaintiffs, and Plaintiffs filed a cross-complaint for indemnity, contribution, 22 declaratory relief, and breach of contract against the City. (See RJN Exs. 1, 2.) 23 United National first agreed to defend the City as an additional insured under the 24 Policies against Plaintiffs’ claims, and later agreed to defend Plaintiffs in the same 25 action against the City’s claims. Thus, unlike the insurers in MBL and Centex I, here 26 United National agreed to defend “truly adverse plaintiffs and defendants, not co- 27 defendants,” raising an untenable conflict of interest. Travelers Prop. v. Centex 28 Homes, No. C 10-02757 CRB, 2011 WL 1225982, at *8 (N.D. Cal. Apr. 1, 2011). 1 United National further argues that its concurrent defense of both sides of the 2 LASC Action raises no conflict because it split the claim files for each insured and 3 appointed segregated liability adjusters. (Mot. 20–21); see MBL, 219 Cal. App. 4th at 4 46 (finding no conflict where insurer retained different law firms to defend insureds, 5 assigned different claims adjusters, and ensured the adjusters did not discuss the 6 claims or access each other’s files). Yet, Plaintiffs allege that “United National had a 7 single claims professional, Randi Hoffman, handling all claims for insurance coverage 8 associated with the Underlying Actions . . . [and] commingling information” from the 9 policyholders. (SAC ¶ 41.) United National cites to documents produced in 10 discovery to assert that, when it agreed to defend Plaintiffs in April 2019, it “split the 11 liability file and appointed walled-off adjusters” to separately handle the City and 12 Plaintiffs’ insurance claims. (Mot. 21 & n.4.) However, United National’s reliance 13 on evidence outside of the pleadings to rebut Plaintiffs’ allegations is improper on a 14 motion to dismiss. See Ritchie, 342 F.3d at 907–08 (explaining that courts may not 15 normally consider materials outside of the pleadings when deciding a motion to 16 dismiss). 17 The Court accepts Plaintiffs’ factual allegations as true for the purposes of this 18 Motion and finds that Plaintiffs have stated a plausible claim for independent counsel. 19 See Lee, 250 F.3d at 679. Accordingly, the Court DENIES the Motion with respect to 20 Plaintiffs’ second cause of action.2 21 C. Breach and Bad Faith 22 “A breach of the duty to defend in itself constitutes only a breach of contract, 23 but it may also violate the covenant of good faith and fair dealing where it involves 24 unreasonable conduct or an action taken without proper cause.” Shade Foods, Inc. v. 25 Innovative Prods. Sales & Mktg., Inc., 78 Cal. App. 4th 847, 881 (2000) (citation 26 omitted). A breach of the covenant occurs when a party “engages in objectively 27 2 Because the Court finds that Plaintiffs have stated a plausible claim for independent counsel based 28 on Plaintiffs’ and the City’s adverse interests in the underlying LASC Action, the Court does not reach United National’s reservation-of-rights and failure-to-defend arguments for dismissal. 1 || unreasonable conduct, regardless of the actor’s motive.” Lincoln Gen. Ins. Co. v. 2 || Access Claims Adm’rs, Inc., 596 F. Supp. 2d 1351, 1368 (E.D. Cal. 2009) (internal 3 || quotation marks omitted). 4 Plaintiffs make numerous allegations which might establish that United 5 || National breached the Policies, including United National’s failure to provide 6 || Plaintiffs a timely defense, failure to provide counsel of Plaintiffs’ choosing to avoid 7 || conflicting representation, and failure to fund Plaintiffs’ independent counsel. (SAC 8 | 69-72.) Viewing the facts in the light most favorable to the non-moving party, the 9 | SAC adequately alleges that United National may have breached its duty to defend, 10 | and may have acted in bad faith in doing so. Therefore, Plaintiffs’ claims for breach 11 || of the duty to defend and breach of the covenant of good faith and fair dealing survive 12 || dismissal. Accordingly, the Court DENIES the Motion with respect to Plaintiffs’ 13 || third and fourth causes of action. 14 VI. CONCLUSION 15 For the foregoing reasons, the Court DENIES United National’s Motion to 16 || Dismiss Plaintiffs’ Second Amended Complaint. 17 18 IT IS SO ORDERED. 19 20 September 30, 2020 nN 21 WB wd

3 OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE

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