1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 PARKSIDE/EL CENTRO Case No.: 3:20-cv-01732-JAH-DDL HOMEOWNERS ASSOCIATION, a non- 11 profit mutual benefit organization, ORDER: 12 Plaintiff, (1) DENYING DEFENDANT’S 13 v. MOTION FOR SUMMARY 14 JUDGMENT; TRAVELERS CASUALTY
15 INSURANCE COMPANY OF (2) DENYING PLAINTIFF’S AMERICA, 16 MOTION TO AMEND; Defendant. 17 (3) DENYING PLAINTIFF’S 18 MOTION FOR PARTIAL SUMMARY JUDGMENT 19
20 (ECF Nos. 57, 23, 16)
21 22 INTRODUCTION 23 Pending before the Court is Defendant Travelers Casualty Insurance Company’s 24 Motion for Summary Judgment, (ECF No. 57), and Plaintiff Parkside/El Centro 25 Homeowners Association’s Motions to Amend, (ECF No. 23), and for Partial Summary 26 Judgment, (ECF No. 16). Defendant filed responses in opposition to Plaintiff’s motions, 27 28 1 (ECF Nos. 19, 30), and Plaintiff subsequently filed replies, (ECF Nos. 22, 32). 2 Additionally, Plaintiff filed a response in opposition to Defendant’s Motion for Summary 3 Judgment, (ECF No. 65), to which Defendant filed a reply, (ECF No. 69). Upon 4 consideration of the aforementioned motions, responses, replies, exhibits, and the relevant 5 law, IT IS HEREBY ORDERED Defendant’s Motion for Summary Judgment is DENIED, 6 Plaintiff’s Motion for Partial Summary Judgment is DENIED, and Plaintiff’s Motion to 7 Amend is DENIED. 8 BACKGROUND 9 I. PROCEDURAL BACKGROUND 10 Plaintiff filed this case on September 3, 2020, naming Travelers Casualty Insurance 11 Company as the only defendant. (“Compl”, ECF No. 1 at 1). Plaintiff brings two claims 12 against Defendant for (1) breach of contract and (2) breach of the duty of good faith and 13 fair dealing. (Compl. at ¶¶ 30-40). Defendant filed an answer on October 29, 2020. (See 14 ECF No. 9). Subsequently, on January 6, 2021, Plaintiff filed its Motion for Partial 15 Summary Judgment, asking this Court to find as a matter of law that Plaintiff’s ex-manager, 16 Linda C. Heater (“Heater”), was not an “insured” under Defendant’s Directors and Officers 17 Policy (“D&O Policy”). (“Pla’s Mot. for Part. Sum. Judg”, ECF No. 16-1 at 4). Based 18 upon Defendant’s response, which argues all employees are considered “insureds” under 19 the D&O Policy, (“Opp. to Mot. for Part. Sum. Judg”, ECF No. 19 at 25, 26), Plaintiff filed 20 a Motion to Amend to add a third cause of action, civil fraud, claiming Defendant 21 knowingly misrepresented who is considered an “insured” under the D&O Policy. (“Pla’s 22 Mot. to Amend”, ECF No. 23-1 at 2). Subsequently, Defendant filed its Motion for 23 Summary Judgment on September 3, 2021. (ECF No. 57 at 1). 24 25 26 1 Defendant also filed requests for judicial notice in support of its motion for summary 27 judgment and in opposition to Plaintiff’s motion for partial summary judgment. (ECF No. 57-4 at 1; ECF No. 20). Pursuant to Federal Rule of Evidence 201, the Court grants 28 1 II. FACTUAL BACKGROUND 2 Plaintiff is a nonprofit mutual benefit corporation and homeowners’ association 3 located in the County of Imperial in the State of California. (Compl. at ¶ 5). Defendant is 4 an insurance provider that issued a D&O Policy to Plaintiff, covering its directors and 5 officers from April 1, 2016, to April 1, 2017. (“Def’s MSJ”, ECF No. 57-1 at 6). This 6 D&O Policy operated on a claims-made basis. (Id. at 7; “Opp. to MSJ”, ECF No. 65 at 5). 7 Linda Heater served in the position of property manager from 1988 to August 14, 8 2014, for Parkside/El Centro Homeowners Association. (Judicial Reference Second 9 Amended Statement of Decision (“SOD”)2, ECF No. 57-4 at 66). Upon learning Plaintiff 10 had lost its Business Entity with the California Secretary of State, and was required to cease 11 and desist conducting business activity, (ECF No. 57-3 at 8), Plaintiff requested all 12 financial documents from Heater on July 31, 2014, and placed her on administrative leave, 13 (Id. at 11). After requesting Heater’s documents, Plaintiff’s Board unanimously agreed to 14 cease payment of any funds to Heater until the Board decided whether to proceed with 15 criminal charges. (Id. at 14). From 1988 to 2014, Heater stole more than $300,000 from 16 Plaintiff. (ECF No. 57-4 at 66.). By September 29, 2014, Plaintiff’s Board unanimously 17 passed a motion to present the information it had regarding Heater’s embezzlement of 18 funds to the El Centro Police Department, explaining a sergeant had communicated “[the 19 Board] may have enough information to file charges.” (ECF No. 57-3 at 17). In 2014, the 20 Imperial County District Attorney filed a criminal action against Heater. (Opp. to MSJ at 21 4). In October of 2016, Heater pled nolo contendre to a criminal charge of embezzlement. 22 (Pla’s Mot. for Part. Sum. Judg. at 5, 6). 23 Heater filed a complaint in superior court on April 5, 2016, against Plaintiff on 24 25 26 2 The SOD was attached to the Judgment entered against Plaintiff’s former directors. (SOD 27 at 66). The SOD was rendered by Judge Ronald S. Prager, serving as an appointed judicial referee; Judge Christine V. Pate later signed and entered a final Judgment consistent with 28 1 claims of misclassification as an independent contractor, failure to pay minimum wage, 2 failure to pay at least double minimum wage, failure to pay overtime, failure to provide 3 meal periods or pay compensation in lieu thereof, and failure to authorize and permit rest 4 periods or pay compensation in lieu thereof. (See ECF No. 57-4 at 15-23). Plaintiff filed 5 a cross-complaint that named Heater as a cross-defendant and asserted a claim of breach 6 of fiduciary duty against her. (ECF No. 57-4 at 45). The cross-complaint also named three 7 of Plaintiff’s former directors as cross-defendants. (ECF No. 57-4 at 25). 8 On September 24, 2019, a Judgment on Second Amended Cross-Complaint of 9 Parkside/El Centro Homeowners Association (“Judgment”) was entered against Plaintiff’s 10 former directors but not Heater. (“Judgment”, ECF No. 16-3 at 18). These former directors 11 were responsible for supervising Heater. (ECF No. 57-4 at 66). The SOD attached to the 12 Judgment explained the three former directors against whom judgment was entered 13 stipulated to liability for claims that alleged “negligence, a contractual breach, a negligent 14 breach of fiduciary duty, and other alleged negligent conduct.” (SOD at 67). According 15 to the SOD, culpability existed because Plaintiff “could not have discovered [Heater’s] 16 embezzlement because of the negligent conduct of” the former directors. (Id.) Following 17 the Judgment, the three former directors assigned their rights under Defendant’s D&O 18 Policy to Plaintiff.3 (ECF No. 65-1 at 10). 19 With the assigned rights of the former directors, Plaintiff presented a “Proof of 20 Claim” to Defendant, requesting reimbursement for a loss of $688,931 incurred by the 21 Judgment under the D&O Policy. (ECF No. 16-1 at 6). Defendant denied the claim, 22 explaining it did not fall under the coverage of the D&O Policy. (“Denial Letter”, ECF 23 No. 1-2 at 16). 24 25 26 27 28 1 DISCUSSION 2 I. MOTIONS FOR SUMMARY JUDGMENT 3 1. Legal Standard 4 Federal Rule of Civil Procedure 56 delegates authority to the Court to enter summary 5 judgment on claims or defenses that lack a factual foundation. Rule 56(c)(a) provides that 6 a motion for summary judgment shall be granted where “there is no genuine dispute as to 7 any material fact and the movant is entitled to judgment as a matter of law.” Initially, the 8 burden lies with the moving party to present a basis for its motion and demonstrate the 9 absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 10 (1986). While the moving party may support its motion, there is “no express or implied 11 requirement in Rule 56 that the moving party support its motion with affidavits or other 12 similar materials negating the opponent’s claim.” (Id.) The opposing party, in its response, 13 cannot rely on its denials of a pleading, but must “go beyond the pleadings and by [its] own 14 affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file’ 15 designate ‘specific facts showing that there is a genuine issue for trial.’” (Id. at 324) (citing 16 Fed. R. Civ. P 56(e)). The opposing party must provide more than conclusory allegations 17 that are unsupported by facts. Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989). 18 “The court must examine the evidence in the light most favorable to the non-moving 19 party.” United States v. Diebold, Inc., 369 U.S. 654. 655 (1962). If doubt exists as to the 20 existence of any issue of material fact, the court should deny the motion for summary 21 judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The burden on the 22 party moving for summary judgment is dependent on that party’s burden of proof at trial. 23 See C.A.R. Transp. Brokerage Co., Inc. v. Darden Restaurants, Inc., 213 F.3d 474, 480 24 (9th Cir. 2000); Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 25 1099, 1106 (9th Cir. 2000). 26 When the moving party would not bear the burden at trial, its burden for summary 27 judgment can be met by “either of two methods.” Nissan Fire and Marine Ins., 210 F.3d 28 at 1106. In such cases, the moving party may 1 produce affirmative evidence ... negating an essential element of the nonmoving party’s case, or, after suitable discovery, the moving party 2 may ... meet its initial burden of production “by ‘showing’—that is, 3 pointing out to the district court—that there is an absence of evidence to support the nonmoving party’s case.” 4
5 (Id. at 1105-06) (quoting Celotex, 477 U.S. at 325). The moving party cannot compel the 6 non-moving party to produce evidence for its claims or defenses by merely saying the non- 7 moving party has failed to provide any such evidence. Nissan Fire &Marine Ins., 210 F.3d 8 at 1005. Meaning, in a case where the moving party fails to meet its initial burden of 9 production, the non-moving party may defeat the motion for summary judgment without 10 producing anything. (Id. at 1102-03); see also Adickes v. S.H. Kress & Co., 398 U.S. 144, 11 160 (1970). On the other hand, if “a moving party carries its burden of production, the 12 nonmoving party must produce evidence to support its claim or defense.” Nissan Fire & 13 Marine Ins., 210 F.3d at 1103. Where the moving party has met its burden, the party 14 defending the motion 15 must do more than simply show that there is some metaphysical doubt as to the material facts[, but] must come forward with specific facts 16 showing that there is a genuine dispute for trial. Where the record taken 17 as a whole could not lead a rational trier of fact to find for the non- moving party, there is no genuine issue for trial. 18 19 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). 20 Weighing the evidence, determining credibility, and drawing inferences from the facts are 21 roles reserved for the jury and not to be exercised by the judge. Anderson, 477 U.S. at 255; 22 Nissan Fire & Marine Ins., 210 F.3d at 1103 (holding when the “nonmoving party produce 23 enough evidence to create a genuine issue of material fact, the nonmoving party defeats the 24 motion.”). “The district court may limit its review to the documents submitted for the 25 purpose of summary judgment and those parts of the record specifically referenced 26 therein.” Carmen v. San Francisco Unified Sch. Dist., 237 F.3d 1026, 1030 (9th Cir. 2001); 27 28 1 see Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996) (holding the court need not “scour 2 the record in search of a genuine issue of triable fact.”).4 3 2. Defendant’s Motion for Summary Judgment 4 In support of its Motion for Summary Judgment, Defendant argues “[a]ll 5 components of the loss … were complete and known before policy inception and the loss 6 was not an unknown contingency that could be insured.” (Def’s MSJ at 13). In essence, 7 Defendant argues a fortuity issue exists regarding the embezzlement loss. (Id.) 8 Additionally, Defendant argues the “personal profit” and “dishonest acts” exclusions in the 9 D&O Policy apply to this claim, thereby barring coverage per the language of the policy. 10 (Id. at 13-14). Last, Defendant argues its D&O Policy is a claims-made policy, and 11 Plaintiff failed to first make the claim for loss during the policy period. (Id. at 13) 12 a. Established Loss and Fortuity Argument 13 Defendant argues Heater’s embezzlement was an established loss, as it was 14 discovered more than a year before the D&O Policy incepted. (Def’s MSJ at 14). 15 Defendant argues that an event must be fortuitous, or unknown, to be insurable, and 16 therefore, an established loss is uninsurable. (Id. at 15). Under California law, “[i]nsurance 17 is a contract whereby one undertakes to indemnify another against loss, damage, or liability 18 arising from a contingent or unknown event.” Cal. Ins. Code § 22 (emphasis added). 19 Defendant relies on Insurance Code sections 22 and 2505 to argue events must be 20 fortuitous, i.e., contingent and unknown to be insurable under California law. (See Def’s 21 MSJ at 15). Based upon that premise, Defendant argues that because Plaintiff was aware 22 of the embezzlement, and had cooperated in criminal charges against Heater, before the 23
24 25 4 Motions for summary judgment and partial summary judgment are resolved under the same standard. See California v. Campbell, 138 F.3d 772, 780 (9th Cir. 1998). 26
27 5 “[A]ny contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, 28 1 policy incepted, Plaintiff’s claim is barred by lack of fortuity. (Id.) In opposition, Plaintiff 2 argues pre-policy losses are recoverable and fortuitous under a specific type of insurance 3 policy: claims-made third party liability policies. (Opp. to MSJ at 10). Plaintiff further 4 argues as of April 1, 2016, the date the policy took effect, there was no claim against the 5 three directors and, therefore, the loss was contingent and uncertain. (Opp. to MSJ at 11). 6 The Court must first determine what “triggers” coverage under the insurance policy 7 to resolve fortuity. See Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 8 45 Cal.App.4th 1, 39 (1996) (explaining that “‘trigger of coverage’ is a term of convenience 9 used to describe what must happen in the policy period to give rise to insurance 10 coverage.”). To do this, the Court must determine what type of policy Defendant issued. 11 See, e.g. Chu v. Canadian Indemnity Co., 224 Cal.App.3d 86, 95 (1990) (holding the 12 fortuity analysis differs between first party policies and third party policies, as third party 13 policies look to analogous concepts of “occurrence” and “accident,” rather than 14 “contingent” and “unknown,” to determine fortuity). 15 California treats third party liability policies differently than first party policies. See 16 Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 665 (1995) (“Montrose”). 17 A first party policy “provides coverage for loss or damages sustained directly by the 18 insured (e.g. life, disability, health, fire, theft and casualty insurance)[.]” Montrose, 10 19 Cal.4th at 663. On the other hand, third party liability policies obligate the insurer to 20 indemnify the insured for judgments the insured becomes legally obligated to pay as 21 damages for some harm caused by the insured. (Id.) Third party liability policies are 22 treated differently because the inherent risk is higher, and the scope of coverage is broader. 23 Garvey v. State Farm Fire & Casualty Co., 48 Cal.3d 395, 407 (1989) (“In liability 24 insurance, by insuring for personal liability, and agreeing to cover the insured for his own 25 negligence, the insurer agrees to cover the insured for a broader spectrum of risks.”). One 26 key difference between first party and third party policies is whether the “manifestation of 27 loss” rule for triggering insurance claims applies. Webcore-Obayashi Joint Venture v. 28 Zurich American Ins. Co., 476 F.Supp.3d 987, 993 (N.D. Cal. 2020). A “manifestation of 1 loss” policy is triggered at the time “appreciable damage occurs and is or should be known 2 to the insured, such that a reasonable insured would be aware that his notification duty 3 under the policy had been triggered.” Montrose, 10 Cal.4th at 674. However, this 4 “manifestation of loss” triggering analysis only applies to first party policies and does not 5 apply to third party liability policies. Webcore-Obayashi, 476 F.Supp.3d at 993. 6 The California Supreme Court has held a “directors’ and officers’ liability policy” 7 is a third party liability policy. Montrose, 10 Cal.4th at 663. Therefore, Defendant’s D&O 8 policy will be analyzed as a third party liability policy. Moreover, there is a distinction 9 between “claims-made” policies and “occurrence” policies that affects the fortuity analysis. 10 Claims-made policies cover claims “made and actually reported to the insured during the 11 period specified in the policy”, as opposed to occurrence policies, which “cover the insured 12 for any subsequent claim arising out of an occurrence that took place during the period 13 specified in the policy.” Burns v. Int’l Ins. Co., 709 F.Supp. 187, 189 (N.D. Cal. 1989). 14 Defendant’s D&O policy states: 15 A. INSURING AGREEMENT 16 1. We will reimburse you for “loss,” in excess of the Retained Limit shown in the Schedule 17 above, which you become legally obligated to 18 pay due to any civil claim(s): a. made against your “Directors” or 19 “Officers”; and 20 b. caused by a “wrongful act.” 2. We will pay, in excess of the Retained Limit 21 shown in the Schedule above, for “loss” which 22 an “insured” becomes legally obligated to pay due to any civil claim(s): 23 a. made against the “insured”; and 24 b. caused by a “wrongful act.” 3. This insurance applies only if a claim for 25 “loss” is first made against any “insured” 26 during the endorsement period. a. A claim for “loss by a person or 27 organization will be deemed to have 28 been made when notice of such claim is 1 received and recorded by an “insured” or by us, whichever comes first. 2 b. All claims for “loss” due to the same 3 “wrongful act” or interrelated acts will be deemed to have been made at the 4 time the first of those claims is made 5 against any “insured.” c. Written notice given by the “insured” 6 during the endorsement period of a 7 “wrongful act” which may result in a claim will be considered notice of a 8 claim made against the “insured” during 9 the endorsement period. 10 (“D&O Policy”, ECF No. 16-3 at 13). Here, though the contract does not explicitly refer 11 to itself as a “claims-made” policy, the language describes a claims-made policy upon 12 which the insured may make claims for losses incurred by civil lawsuits. Moreover, the 13 parties do not dispute that the D&O Policy is a claims-made policy. (See Def’s MSJ at 7; 14 Opp. to MSJ at 5). 15 Classifying Defendant’s D&O Policy as a claims-made policy is important because 16 indemnity under a claims-made policy is not contingent upon when the act complained of 17 occurred, but rather when the insured notifies the insurer of a claim made against the 18 insured for that act. See Pension Trust Fund for Operating Engineers v. Federal Ins. Co., 19 307 F.3d 944, 957 (9th Cir. 2002); see also Gilliam v. American Cas. Co., of Reading, 20 Pennsylvania, 735 F.Supp. 345, 350 (N.D. Cal. 1990); Brander v. Nabors, 443 F.Supp. 21 764, 767 (N.D. Miss. 1978). In other words, a claims-made policy can “theoretically 22 provide unlimited retroactive coverage.” Gilliam, 735 F.Supp. at 349 n. 4; see HB Dev., 23 LLC v. W. Pac. Mut. Ins., 86 F.Supp.3d 1164, 1178-79 (E.D. Wash. 2015); Colliers Lanard 24 & Axilbund v. Lloyds of London, 458 F.3d 231, 233 n.1 (3d Cir. 2006) (Holding that “[a] 25 ‘claims made’ policy provides retroactive coverage for liability arising out of acts which 26 occurred before the policy effective date provided that the claim is brought during the 27 policy period.”). These policies are retroactive in that the events that give rise to claims 28 against the insureds often occur before inception of the policy. However, a prospective 1 contingency still exists in the question of whether a claim will be brought against the 2 insured during the policy period. 3 It is common for claims-made policies to include provisions that limit the seemingly 4 unchecked retroactive nature of these policies. One way this is done is through a retroactive 5 date, which may “restrict[] the scope of coverage to exclude coverage for claims arising 6 from wrongful acts occurring prior to” that date. Fremont Indem. Co., Inc. v. California 7 Nat. Physician’s Ins. Co., 954 F.Supp. 1399, 1403 (C.D. Cal. 1997). However, no 8 retroactive date is listed in Defendant’s policy. (See D&O Policy). 9 Another means available to insurers to restrict the scope of a claims-made policy is 10 a “prior knowledge” provision. These provisions may state that a claims-made policy “does 11 not provide coverage if the insured had ‘knowledge of such wrongful act’ giving rise to the 12 claim prior to the inception of the Policy Period, even if the claim was tendered during the 13 Policy Period[.]” Associated Industries Ins. Co., Inc. v. McNicholas & McNicholas LLP, 14 495 F.Supp.3d 869, 873 (C.D. Cal. 2020). However, no prior knowledge provision is 15 included in Defendant’s policy. (See D&O Policy). 16 Additionally, claims-made policies “can be further classified as either claims-made- 17 and-reported policies, which require that claims be reported within the policy period, or 18 general claims-made policies, which contain no such reporting requirement.” Federal, 307 19 F.3d at 955. Here, the D&O Policy is a claims-made and reported policy because the plain 20 language states: “The insurance applies only if a claim for ‘loss’ is first made against any 21 ‘insured’ during the endorsement period,” and, “Written notice … during the endorsement 22 period … will be considered notice of a claim[.]” (D&O Policy at 13). Therefore, notice 23 is the event that triggers coverage, not the occurrence of the underlying event. Federal, 24 307 F.3d at 957. 25 Defendant relies on Montrose to establish the applicability of the “known or 26 apparent” loss language of Insurance Code sections 22 and 250 to third party liability 27 claims. (Def’s MSJ at 15). However, the Montrose court clearly distinguished the 28 occurrence-triggered General Liability Policy under review in that case from claims-made 1 third party liability policies, such as Defendant’s policy in this case. Montrose, 10 Cal.4th 2 at 687-88 (holding claims-made policies were specifically created to insure for a period 3 “without regard to the timing of the damage or injury”). Defendant argues “the discovery 4 of the loss for which reimbursement is sought[] pre-dates the D&O Policy by at least one- 5 year and nine months[.]” (Def’s MSJ at 14). On one hand, Defendant fails to acknowledge 6 the retroactive nature of a claims-made third party liability policy in its fortuity argument. 7 (See Id.) On the other, Defendant acknowledges that its “D&O Policy provides claims- 8 made coverage.” (Id. at 7) 9 Furthermore, Defendant improperly relies on Upper Deck Co. v. Endurance 10 American Specialty Ins. Co., No. 10-CV-1032-JM, 2011 WL 6396413 (S.D. Cal., Dec. 15, 11 2011) (“Upper Deck”) to apply the fortuity doctrine to claims-made policies, which are 12 retroactive in nature. Defendant interprets the Upper Deck holding to mean “insurance 13 only applies to prospective damage, not damage that is certain or has already occurred.” 14 (Def’s MSJ at 17). This is an erroneous generalization of the rule applied in Upper Deck. 15 In Upper Deck, like in this case, the court stated the defendant’s insurance policy was 16 “issued on a claims made and reported basis for the policy period[.]” Upper Deck Co. v. 17 Endurance American Specialty Ins. Co., No. 10-CV-1032-JM, 2011 WL 6396413, at *1 18 (S.D. Cal., Dec. 15, 2011). It is accurate to say that the Upper Deck court applied the 19 fortuity doctrine to a third party liability, claims-made insurance policy to bar coverage. 20 (Id. at *7) However, the court explained its rationale, stating, “[I]t is contrary to public 21 policy to permit a wrongdoer like Upper Deck to retain the benefit[.]” (Id.) There, the 22 “wrongdoer” “intentionally and willfully engaged in a scheme to violate the intellectual 23 property rights of [the plaintiff] for financial gain.” (Id.) Here, the individual who is 24 accused of intentional and willful wrong is Heater, which distinguishes this case because 25 Heater has been terminated and will not receive the “benefit” (i.e., insurance payout) of her 26 wrongdoing. (Pla’s Mot. for Part. Sum. Judg. at 9). 27 The Court notes Upper Deck held “third party liability insurance does not protect 28 against nonaccidental harm inflicted by the insured.” Upper Deck, No. 10-CV-1032-JM, 1 2011 WL 6396413, at *1. However, in Upper Deck, the intentional wrongdoer was seeking 2 compensation for the consequences of its actions. Here, Heater is the intentional wrongdoer 3 and does not stand to benefit from the insurance policy. 4 In this case, the parties do not dispute that Defendant’s D&O Policy is a third party, 5 claims-made liability policy, which is inherently retroactive as to the events giving rise to 6 the claim. In addition, while an intentional wrongdoer exists in the form of Heater and her 7 embezzlement, she does not stand to benefit from the adjudication here as Plaintiff has 8 been assigned all rights of the former directors under the policy. (ECF No. 65-1 at 10). 9 Therefore, because a contingency existed as to whether a claim would be made against 10 directors or officers during the policy period and Defendant’s D&O Policy contains neither 11 a retroactive date nor a “prior knowledge” provision, the Court finds this claim is not barred 12 by fortuity. 13 b. Enumerated Exclusions in the D&O Policy 14 Defendant argues several exclusions enumerated in the D&O Policy bar coverage in 15 this case, including exclusions (g) personal profit and (i) dishonest acts, as well as the bar 16 on recovery for “interrelated acts.” (Def’s MSJ at 13). 17 Interpretation of the language of an insurance policy is a question of law, and the 18 court must make an independent determination of the meaning of the language. See 19 Western Mutual Ins. Co. v. Yamamoto, 29 Cal.App.4th 1474, 1481 (1994); see also Century 20 Transit Systems, Inc. v. American Empire Surplus Lines Ins. Co., 42 Cal.App.4th 121, 125 21 (1996) (holding that “[a]bsent a factual dispute as to the meaning of policy language, [] the 22 interpretation, construction and application of an insurance contract is strictly an issue of 23 law.”); Waller v. Truck Ins. Exchange, 11 Cal.4th 1, 18 (1995). 24 The California Supreme Court has held: 25 Under statutory rules of contract interpretation, the mutual intention of 26 the parties at the time the contract is formed governs interpretation. 27 (Civ.Code, § 1636.) Such intent is to be inferred, if possible, solely from the written provisions of the contract. (Id., § 1639.) The “clear and 28 explicit” meaning of these provisions, interpreted in their “ordinary and 1 popular sense,” unless “used by the parties in a technical sense or a special meaning is given to them by usage” (id., § 1644), controls 2 judicial interpretation. (Id., § 1638.) Thus, if the meaning a lay person 3 would ascribe to contract language is not ambiguous, we apply that meaning. [Citations.] [¶] If there is ambiguity, however, it is resolved by 4 interpreting the ambiguous provisions in the sense the promisor (i.e., the 5 insurer) believed the promisee understood them at the time of formation. (Civ.Code, § 1649.) If application of this rule does not eliminate 6 the ambiguity, ambiguous language is construed against the party who 7 caused the uncertainty to exist. (Id., § 1654.) 8 AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 821-22 (1990). 9 Simply stated, ambiguity in an insurance policy’s language will be “declared and 10 construed against the insurer in order to protect the insured’s reasonable expectation of 11 coverage.” Cnty. of San Diego v. Ace Prop. & Cas. Ins. Co., 37 Cal.4th 406, 415 (2005) 12 (citing La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co., 9 Cal.4th 27, 37 13 (1994)); see Gray v. Zurich Ins. Co., 65 Cal.2d 253, 269 (1966); Continental Cas. Co. v. 14 Phoenix Constr. Co., 46 Cal.2d 423, 437 (1956). In California, insurance policy language 15 is ambiguous when it is “capable of two or more constructions, both of which are 16 reasonable.” Waller, 11 Cal.4th at 18. Moreover, “words used in an insurance policy are 17 to be interpreted according to the plain meaning which a layman would ordinarily attach 18 to them.” Reserve Ins. Co. v. Pisciotta, 30 Cal.3d 800, 807 (1982). However, before 19 concluding that an ambiguity exists and will be construed against the insurer, the court 20 must first determine whether coverage under such a construction would be consistent with 21 the insured’s “objectively reasonable expectations.” Jordan v. Allstate Ins. Co., 116 22 Cal.App.4th 1206, 1213-14 (2004) (citing Bank of the West v. Superior Court, 2 Cal.4th 23 1254, 1265 (1992)) (emphasis in original). To ensure this, the disputed language in the 24 policy must be viewed in the context of its intended function in the policy. (Id.) 25 Ambiguity in the terms of contract is not always a triable issue of a fact for purposes 26 of summary judgment; sometimes it is an issue of law. For purposes of summary judgment, 27 [i]nterpretation of the contract is an issue of law if a) the contract is not ambiguous, or b) the contract is ambiguous but no parol evidence is 28 1 admitted or the parol evidence is not in conflict. Furthermore, when two equally plausible interpretations of the language of a contract may be 2 made, parol evidence is admissible to aid in interpreting the agreement, 3 thereby presenting a question of fact which precludes summary judgment if the evidence is contradictory. 4 5 Centigram Argentina, S.A. v. Centigram Inc., 60 F.Supp.2d 1003, 1007 (N.D. Cal. 1999) 6 (internal citations and quotations omitted). Parol evidence is that which demonstrates oral 7 or written prior and contemporaneous agreements. Restatement (First) of Contracts § 237 8 (1932). Neither Plaintiff nor Defendant assert any evidence of an oral or written 9 contemporaneous agreement. (See Opp. to MSJ; see also Def’s MSJ). 10 Though insurance policies have their “special features, they are still contracts to 11 which the ordinary rules of contractual interpretation apply.” Palmer v. Truck Ins. 12 Exchange, 21 Cal.4th 1109, 1115 (1999) (quoting Bank of the West, 2 Cal.4th at 1264); see 13 City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 68 Cal. App. 4th 445, 14 473 (1998) (holding that while interpreting the language of a contract, “[it] must be 15 construed as a whole, with the various individual provisions interpreted together so as to 16 give effect to all, if reasonably possible or practicable.”) (citing Cal. Civ. Code § 1641). 17 Here, the language of Defendant’s D&O Policy provides definitions of terms 18 contained therein, including: 19 E. DEFINITIONS 4. “Directors” means all of your directors or 20 members of your Board of Governors or 21 Directors or trustees. 5. “Insured” means any person who has been, now 22 is, or shall become an “Officer” or “Director.” It 23 also includes the estate, heirs, or legal representatives of an “Officer” or “Director” 24 who dies or becomes incompetent. 25 7. “Officers” means the holders of the titles or positions specified by your charter or bylaws. 26 “Officers” also means employees, committee 27 members or any other person acting on the 28 1 behalf of or at the direction of the Board of Directors or an “Officer.” 2
3 (D&O Policy at 16) (emphasis added). 4 i. Whether Heater Can be Considered an “Insured” 5 According to Defendant, the D&O Policy’s exclusions (g), (i), and the bar on 6 recovery for “interrelated acts” all require Heater be an “insured” to apply to this case. (See 7 Def’s MSJ at 7; D&O Policy at 13, 14). Defendant argues the D&O Policy’s definition of 8 “insureds” includes “officers,” which include employees. (Def’s MSJ at 13, 14). 9 Defendant goes on to argue that because Heater was an employee of Parkside/El Centro 10 Homeowners Association, she is considered an “insured.” (Id.) Therefore, if Heater is not 11 an “insured” under the D&O Policy, the rest of Defendant’s arguments for summary 12 judgment fail. Plaintiff argues the correct interpretation of the D&O Policy is that 13 employees must be acting “on behalf of or at the direction of” directors or officers to be 14 considered an “insured.” (Opp. to MSJ at 18). 15 According to the D&O Policy’s definition, past directors and officers are considered 16 insureds and, likewise, claims made against past directors and officers may be coverable. 17 (D&O Policy at 16). Thus, the analysis for determining whether Heater is an “insured” 18 begins with answering whether she was a director or officer. It is not disputed that Heater 19 was employed by Plaintiff. (Def’s MSJ at 11; Compl. at ¶ 20). Therefore, the question is 20 whether the phrase, “acting on behalf of or at the direction of the Board of Directors or an 21 ‘Officer[,]’” modifies the word “employee” in the D&O Policy’s definition of an officer. 22 (D&O Policy at 16). 23 “A longstanding rule of statutory construction—the ‘last antecedent rule’— 24 provides that ‘qualifying words, phrases and clauses are to be applied to the words or 25 phrases immediately preceding and are not to be construed as extending to or including 26 others more remote.’” White v. County of Sacramento, 31 Cal.3d 676, 680 (1982) (quoting 27 Board of Port Com’rs. v. Williams, 9 Cal.2d 381, 389 (1937)); see Wilde v. City of 28 Dunsmuir, 9 Cal.5th 1105, 1127 (2020) (holding “as a very general rule, we understand a 1 qualifying phrase to apply only to the word or phrase that immediately precedes it and not 2 to the other words or phrases that appear earlier in a list or series.”). 3 While the last antecedent rule is good law, its applicability is conditional upon 4 certain requirements and exceptions. Wilde, 9 Cal.5th at 1127. For example, for the rule 5 to be applied, there must exist the “presence of multiple antecedents.” Old Republic 6 Construction Program Group v. The Boccardo Law Firm, Inc., 230 Cal.App.4th 859, 872 7 (2014). In the clause at issue here, the D&O Policy lists “employees, committee members 8 or any other person[.]” (D&O Policy at 16). As three antecedents are present in the clause, 9 this requirement is met. 10 However, the last antecedent rule has been described as “merely an aid to 11 construction,” meaning the rule must be set aside when “the clear intent of the parties is 12 opposed to the application of the rule.” Anderson v. State Farm Mut. Auto. Ins. Co., 270 13 Cal.App.2d 346, 249-50 (1969). One exception to the last antecedent rule is “when several 14 words are followed by a clause that applies as much to the first and other words as to the 15 last, ‘the natural construction of the language demands that the clause be read as applicable 16 to all.’” Renee J. v. Superior Court, 26 Cal.4th 735, 743 (2001) (quoting Wholesale T. 17 Dealers v. Nat’l etc. Co., 11 Cal.2d 634, 659 (1938)). Put simply, this exception applies 18 “when the qualifying language applies just as naturally to the earlier items in a list as the 19 later items.” Wilde, 9 Cal.5th at 1127 (citing Renee J., 26 Cal.4th at 743). Therefore, to 20 analyze the clause at issue in this case, the Court must ask whether the phrase, “acting on 21 the behalf of or at the direction of the Board of Directors or an ‘Officer,’” applies just as 22 naturally to “employee” as it does to “any other person.” (D&O Policy at 16). 23 Applying the modifier directly to the antecedent, the clause reads: “‘Officers’ also 24 means employees … acting on behalf of or at the direction of the Board of Directors or an 25 ‘Officer.’” (Id.) Without applying the modifier, the contract would construe “officers” 26 and “employees” to be synonymous. Because the D&O Policy is designed to reimburse its 27 insureds for civil claims made against its “‘Directors’ or ‘Officers’”, (D&O Policy at 13), 28 it is reasonable to conclude the policy would contractually extend coverage to employees 1 acting on behalf of a director or officer. However, it is also a reasonable interpretation of 2 the language of the D&O Policy’s definition to believe it was meant to cover all employees, 3 in the spirit of expanding the insured’s reasonable expectation of coverage. See Ace Prop. 4 & Cas. Ins. Co., 37 Cal.4th at 415. Where an insured had an “objectively reasonable 5 expectation there would be coverage under the policy consistent with the ambiguity,” the 6 ambiguity must be construed against the insurer. Clarendon America Ins. Co. v. North 7 American Capacity Ins. Co., 186 Cal.App.4th 556, 573 (2010). 8 The “reasonable expectation” of coverage denotes foresight on behalf of the 9 insureds. Jordan, 116 Cal.App.4th at 1213-14. Present claim aside, to construe all 10 “employees” to be “officers” would generally expand the scope of the D&O Policy’s 11 coverage. Meaning, to apply the last antecedent rule, and sever the modifier from the term 12 “employees,” would apply the D&O Policy to more individuals than if the modifier were 13 attached. Plaintiff’s reasonable expectation of coverage would have been greater by 14 applying Defendant’s interpretation of the clause. In this way, Plaintiff’s argument that 15 “employees” must be acting on the behalf of or at the direction of the Board of Directors 16 or Officers, (Opp. to MSJ at 19), contradicts its own use of Montrose to argue the Court 17 must rule “in favor of coverage.” (Id. at 20). 18 Because two or more reasonable interpretations of the term exist, Defendant’s D&O 19 Policy is ambiguous as to the definition of an “officer.” Waller 11 Cal.4th at 18. As a 20 matter of policy, when ambiguous language exists, insurance contracts are to be “construed 21 in favor of coverage.” Montrose, 10 Cal.4th at 668. Defendant’s interpretation of the 22 clause, by defining all “employees” as “officers,” is most favorable toward expanding 23 coverage. Therefore, the Court will interpret the D&O Policy to include “employees” 24 within the definition of “officers.” Because it is uncontested that Heater was employed by 25 Plaintiff, (Def’s MSJ. at 11; Compl. at ¶ 20), and because the plain language of the D&O 26 Policy states, “‘Insured’ means any person who has been, now is, or shall become an 27 ‘Officer’”, the Court finds Heater is an “insured” as a matter of law. 28 1 ii. Exclusion (i) – Bar on Claims Establishing an Officer’s 2 Affirmative Dishonesty or Actual Intent to Deceive or Defraud 3 Defendant’s D&O Policy enumerates several exclusions that can bar coverage, even 4 from an “insured”, including exclusion (i), which reads, in pertinent part: 5 B. EXCLUSIONS 6 1. This insurance does not apply to any claim: 7 i. if judgment adverse to your “Directors” or “Officers,” in “suit” brought against them, 8 will establish that their affirmative dishonesty 9 or actual intent to deceive or defraud was material to the cause of action so adjudicated. 10 11 (D&O Policy at 14) (emphasis added). Defendant argues Heater was an “officer,” that a 12 “suit” was brought against her in the form of a cross-complaint, and that there was an 13 adverse judgment from the cross-complaint that established her dishonesty. (Def’s MSJ at 14 25). The underlying judgment was entered after 15 the three former director cross-defendants stipulated to liability on the claims asserted against them in the Second Amended Cross-complaint 16 (SACC), only to the extent that the SACC alleges conduct arises to 17 negligence, a contractual breach, a negligent breach of fiduciary duty, and other alleged negligent conduct. 18 19 (SOD at 67). Defendant argues Heater’s embezzlement was “material to the negligence 20 allegations against the former directors.” (Def’s MSJ at 25). To support this, Defendant 21 points to statements in the SOD, including: 22 Heater intentionally and negligently did not provide bank statements to 23 the Board, and the Board member cross-defendants, in violation of their 24 fiduciary duties and negligently, signed blank or incomplete checks and did not review back-up bank documents[.] 25
26 (SOD at 66). The Judgment goes on to say: 27 The Association discovered that Heater had been stealing at least $1000 28 per month from the early 1990’s through 2009 for a total amount of 1 $338,324.95. The Association could not have discovered this embezzlement because of the negligent conduct of Erlenbusch, Mendez, 2 and Devoy. 3 4 (Id.) “Suit” is defined in Defendant’s D&O Policy as “a civil proceeding in which damages 5 to which this insurance applies are alleged.” (D&O Policy at 16). Plaintiff argues 6 Defendant has offered no civil proceeding that can establish Heater’s affirmative 7 dishonesty. (Opp. to MSJ at 17). Plaintiff asserts exclusion (i) only applies where a claim 8 is brought against the individual insured whose dishonesty or intent to deceive is being 9 established. (Id. at 16, 17). Furthermore, Plaintiff contends Heater made no claim and 10 never became legally obligated to pay a loss due to any civil claim. (Id.) The only 11 insurance claim made, according to Plaintiff, was for the Judgment against the three 12 directors. (Id.) 13 The Judgment arose out of Plaintiff’s rights and remedies to bring a civil claim of 14 negligence against its former directors. (ECF No. 57-4 at 45). In addition, after the former 15 directors stipulated to liability, there was a judgment by a court of law in the United States. 16 (Judgment at 18). Not only was the Judgment a civil proceeding, but the damages alleged 17 in that proceeding stemmed from the same embezzlement that is the underlying cause of 18 the insurance claim. (SOD at 66). However, for exclusion (i) of the D&O Policy to apply, 19 the adverse judgment must “establish” Heater’s “affirmative dishonesty or actual intent to 20 deceive or defraud was material to the cause of action so adjudicated.” (D&O Policy at 21 14) (emphasis added). Therefore, the Court must determine whether Heater’s affirmative 22 dishonesty or actual intent to deceive can be established by third parties (cross-defendant 23 directors) stipulating to negligence and breach of fiduciary duty. 24 Plaintiff argues the Judgment does not establish Heater’s dishonesty, or intent to 25 deceive or defraud, because she was dismissed from the suit and was not a party when 26 judgment was entered. (Opp. to MSJ at 17). In determining whether Heater’s affirmative 27 dishonesty or actual intent to deceive was established by the Judgment, the Court must 28 look at the claims upon which judgment was entered. It is long-established that 1 “negligence is an unintentional tort, a failure to exercise the degree of care in a given 2 situation that a reasonable man under similar circumstances would exercise to protect 3 others from harm.” Donnelly v. Southern Pac. Co., 18 Cal.2d 863, 869 (1941). Here, the 4 Superior Court found Plaintiff’s damages were caused by “the negligent conduct” of Dale 5 Erlenbusch, Scott Devoy, and Hernan Mendez, against whom the Judgment was entered. 6 (SOD at 66). However, the Judgment did not require the court to find Heater’s “affirmative 7 dishonesty” or “actual intent to deceive.” (See Donnelly, 18 Cal.2d at 869) (“If conduct is 8 negligent, it is not willful; if it is willful, it is not negligent.”). 9 Moreover, the Judgment lacked any claim that requires a showing of intent and was 10 not entered against Heater. (See Judgment). In addition, Heater either did not answer the 11 cross-complaint or Defendant chose not to include her response in its motion. (See ECF 12 No. 57-4). Because (1) the judgment was not entered against Heater; (2) the judgment did 13 not require a finding of intent on the part of Heater; and, (3) no defense is offered on her 14 behalf, the only way to establish her affirmative dishonesty is by inference. This Court is 15 not convinced that an inference can “establish” affirmative dishonesty or actual intent to 16 deceive or defraud according to a plain reading of the D&O Policy. Accordingly, the Court 17 finds, as a matter of law, exclusion (i) of the D&O Policy does not bar coverage in this 18 case. 19 iii. Exclusion (g) – Bar on an “Insured” Gaining Personal Profit 20 Another enumerated exclusion under Defendant’s D&O Policy states: 21 B. EXCLUSIONS 2. This insurance does not apply to any claim: 22 g. due to an “insured” gaining any personal 23 profit or remuneration or advantage to which the “insured” is not legally entitled. 24
25 (D&O Policy at 14). Defendant argues Heater, as an “insured,” gained personal profit from 26 her embezzlement, which was established by the Judgment and SOD, and therefore 27 coverage is barred by exclusion (g). (Def’s MSJ at 19). However, Plaintiff argues 28 1 exclusion (g) does not apply because the Judgment was based on the negligence of 2 Plaintiff’s former directors, not Heater’s embezzlement. (Opp. to MSJ at 17). 3 In exclusion (g), the words “due to” suggest causation. Meaning, the claim 4 triggering coverage under the policy cannot be “due to” or a result of an insured’s illegal 5 personal profiting. (Id.) The legal claim upon which judgment was granted triggered the 6 insurance claim, which arose out of the negligence of Dale Erlenbusch, Scott Devoy, and 7 Hernan Mendez. (SOD at 66). The Judgment was neither against Heater, nor did the 8 elements of negligence require the court to find her actions illegal. See, e.g., Bily v. Arthur 9 Young & Co., 3 Cal.4th 370, 413 n. 21 (1992). Furthermore, the Judgment explains: 10 The parties agreed that the directors did not act in the best interests of 11 the Association “and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar 12 circumstances as alleged in the SADD, the Parties (agreed) that (the 13 director) did not have any malicious or actual intent to deceive or defraud the Association during the period alleged in the SACC.” The parties 14 agreed that the directors did not gain any personal profit. “The Parties 15 further (agreed) that the appointed referee shall make necessary findings as to liability and causation consistent with this Agreement on liability 16 and causation and consistent with the allegations of the SACC, which 17 issues are no longer being contested by (the cross-defendant directors)[.”] 18
19 (Id. at 67-68) (emphasis added). In other words, there was no adversarial fact finding 20 process that affected the Judgment. As a result of Dale Erlenbusch, Scott Devoy, and 21 Hernan Mendez stipulating to liability, the Superior Court entered a judgment against them 22 for negligence. (Judgment at 19-21; SOD at 67). Negligence only requires a showing that 23 the defendant had a duty, breached that duty, and that its breach was a proximate cause to 24 actual damages. Peredia v. HR Mobile Services, Inc., 25 Cal.App.5th 680, 687 (2018). 25 The only relevance of Ms. Heater’s conduct to the Judgment on the cross-complaint was 26 in relation to proving damages. In a negligence claim, the plaintiff must prove “damages 27 with reasonable certainty” and “[t]he extent of such damage must be proven as a fact.” 28 Fields v. Riley, 1 Cal.App.3d 308, 313 (1969). Thus, the Superior Court’s Judgment 1 entered against the directors for negligence did not require any finding pertaining to 2 Heater’s personal gain or the illegality of that gain. It would be reasonable for a party to 3 conclude the Plaintiff’s cross-complaint against its directors was “due to” their negligence, 4 not Heater’s embezzlement. The Court finds that Heater’s personal gain is irrelevant to the 5 negligence claim against the former directors. 6 Heater’s conduct, in reality, was not accidental. As previously acknowledged, it is 7 undisputed by the parties that Heater embezzled money from Plaintiff and personally 8 profited from that embezzlement. (Pla’s Mot. for Part. Sum. Judg. at 8; Def’s MSJ at 7). 9 Therefore, another reasonable interpretation of exclusion (g) is to construe “due to” to 10 extend to the events that bring about a cause of action, not just the facts needed to prove 11 elements of a claim. In this case, the damages directly relate to Heater’s embezzlement, 12 (SOD at 67), and without damages, there would not be negligence. Accordingly, another 13 reasonable conclusion is that the cross-complaint was brought “due to” Heater’s illegal 14 personal gain. Because there are two or more reasonable constructions of the words “due 15 to” as applied to this case, exclusion (g) is ambiguous. 16 In this case, interpreting the words “due to” in a narrow sense as to relate only to 17 claims that require a showing of illegal personal gain provides the broadest reasonable 18 expectation of coverage under the plain language of the policy. Titan Corp. v. Aetna 19 Casualty & Surety Co., 22 Cal.App.4th 457, 469 (1994) (citing Producers Dairy Delivery 20 Co. v. Sentry Ins. Co., 41 Cal.3d 903, 912 (1986) (holding ambiguity should be resolved to 21 protect the insured’s “reasonable expectation of coverage.”)). Therefore, the Court finds, 22 as a matter of law, exclusion (g) does not bar coverage in this case. 23 iv. Insuring Agreement A(3)(b) – Bar on Interrelated Claims 24 Defendant argues Plaintiff’s claim is barred from coverage because the claim was 25 first made “in a demand against Heater through the police” in 2014. (Def’s MSJ at 18). 26 27 28 1 As the fortuity portion of this argument has been addressed, the Court now looks to the 2 policy language to determine whether the “interrelated acts” provision bars coverage 3 because of the prior criminal action against Heater. Defendant’s D&O Policy states: 4 A. INSURING AGREEMENT 5 3. This insurance applies only if a claim for “loss” is first made against any “insured” during the 6 endorsement period. 7 b. All claims for “loss” due to the same “wrongful act” or interrelated acts will be deemed to have 8 been made at the time the first of those claims 9 is made against any “insured.” 10 (D&O Policy at 13). The “interrelated acts” language of Defendant’s D&O policy has been 11 reviewed by California courts in other cases. However, unlike the D&O policy under 12 review here, other drafters have chosen to define “claims” in their contracts. See, e.g., 13 Homestead Ins. Co. v. American Empire Surplus Lines Ins. Co., 44 Cal.App.4th 1297, 1305 14 (1996). Nevertheless, the test for relatedness of claims in California is “whether a claim is 15 either logically or causally related to another claim.” Friedman Prof. Management Co., 16 Inc. v. Norcal Mutual Ins. Co., 120 Cal.App.4th 17, 21-22 (2004). 17 As discussed earlier, construing the ambiguous language of the contract in favor of 18 expanding the insured’s reasonable expectation of coverage, Heater is an “insured.” 19 Moreover, Heater’s embezzlement was discovered by Plaintiff in 2014. (ECF No. 57-3 at 20 17). As a result of Plaintiff reporting the embezzlement to law enforcement authorities, 21 there was a criminal charge of embezzlement brought against her, (Opp. to MSJ at 4), to 22 which she pled nolo contendre, (Pla’s Mot. for Part. Sum. Judg. at 5, 6). The underlying 23 cause of action that triggered Plaintiff’s Proof of Claim under the D&O Policy was based 24 on Heater’s embezzlement. (SOD at 66). The criminal charge and the subsequent lawsuit 25 against the former directors are based on the interrelated act of Heater’s embezzlement. 26 27 28 1 Therefore, the question for the Court is whether the criminal proceedings against Heater 2 qualify as claim for loss that is interrelated to the negligence of the three former directors. 3 In Defendant’s D&O policy—to determine what constitutes a “claim” under the bar 4 on interrelated claims provision—the Court must look to the context of the language in the 5 instrument as a whole. See Ace Property & Casualty Ins. Co., 37 Cal.4th at 415 (quoting 6 Bank of the West, 2 Cal.4th at 1265). Defendant’s D&O Policy states at the outset, “We 7 will reimburse you for … any civil claim(s)[.]” (D&O Policy at 13) (emphasis added). 8 Subsequently, section 3 of the D&O Policy omits the “civil” descriptor and simply refers 9 to a “claim for ‘loss[.]’” (Id.) In the context of “loss” being defined as the insured 10 becoming “legally obligated to pay … any civil claims(s)”, it would be reasonable to expect 11 the term “claim” in section 3 to refer to civil claims. (Id.) Moreover, the bar on interrelated 12 claims provision of the D&O Policy is contained within section 3, which may be reasonably 13 interpreted (in the context of the instrument as a whole) to refer specifically to interrelated 14 civil claims. The Court also notes “claim” has been defined as: “A demand for money, 15 property, or a legal remedy to which one asserts a right; esp., the part of a complaint in a 16 civil action specifying what relief the plaintiff asks for.” Claim, Black’s Law Dictionary 17 (11th ed. 2019) (emphasis added). This definition does not include criminal charges or 18 pleas. 19 On the other hand, “claims” is not modified by a descriptor, such as “civil” or 20 “criminal” or both, in section A(3)(b). It is ambiguous whether “claims” includes criminal 21 charges, even in the context of the language in the instrument as a whole. As with the other 22 ambiguous exclusions, the Court must find in favor of expanding the reasonable 23 expectation of coverage. Titan Corp., Cal.App.4th at 469. Here, a narrower interpretation 24 of “claims” in section A(3)(b), which views the term in light of the instrument as a whole 25 to apply only to civil claims, would provide the most coverage. Therefore, the Court finds, 26 as a matter of law, that section A(3)(b), the D&O Policy’s exclusion of interrelated claims, 27 only applies to interrelated civil claims. Accordingly, section A(3)(b) does not bar coverage 28 1 in this case because the prior interrelated claim asserted in Defendant’s argument is 2 criminal. 3 Therefore, because (1) Plaintiff’s claim is not barred by fortuity; (2) exclusions (g) 4 and (i) of Defendant’s D&O Policy do not apply to these facts, and (3) Heater’s criminal 5 conviction is not an interrelated claim based on a reasonable construction of the contract, 6 Defendant’s Motion for Summary Judgment is DENIED. 7 3. Plaintiff’s Motion for Partial Summary Judgment 8 Plaintiff’s Motion for Partial Summary Judgment asks the Court to find Heater was 9 not an “insured” or an “officer” during the period she was embezzling money. (Pla’s Mot. 10 for Part. Sum. Judg at 7). As discussed in detail above, the Court finds Heater is an 11 “insured” as a matter of law. Accordingly, the Court DENIES Plaintiff’s Motion for Partial 12 Summary Judgment. 13 II. PLAINTIFF’S MOTION TO AMEND 14 1. Legal Standard 15 According to Federal Rule of Civil Procedure 15(a), a party may amend its pleading 16 once as a matter of course within twenty-one days of service of a motion under Rule 12(b). 17 Otherwise, a party must obtain leave of the court or written consent from the adverse party 18 to amend. Fed. R. Civ. P. 15(a); Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 19 1061 (9th Cir. 2003) (citing Fed. R. Civ. P. 15(a)). Leave to amend “shall be freely given 20 when justice so requires.” Forman v. Davis, 371 U.S. 178, 182 (1962) (quoting Fed. R. 21 Civ. P. 15(a)). 22 In general, the policy behind Rule 15(a)(2) that “[t]he court should freely give leave 23 when justice so requires” is “to be applied with extreme liberality.” 24 Eminence Capital, LLC, 316 F.3d at 1051. This policy is applied liberally because the 25 underlying purpose of Rule 15(a) is to “facilitate decisions on the merits, rather than on 26 technicalities or pleadings.” James v. Pliler, 269 F.3d 1124, 1126 (9th Cir. 2001) (citing 27 United States v. Webb, 655 F.2d 977, 979-80 (9th Cir. 1981)). The Ninth Circuit has held 28 four factors govern the “propriety of a motion under Rule 15”: “(1) undue delay, (2) bad 1 faith, (3) futility of amendment, and (4) prejudice to the opponent.” Forman, 371 U.S. at 2 182; Yakama Indian Nation v. State of Wash. Dept. of Revenue, 176 F.3d 1241, 1246 (9th 3 Cir. 1999). Prejudice is the most important concern. Eminence Capital, LLC, 316 F.3d at 4 1052. However, the responding party bears the burden of demonstrating prejudice. DCD 5 Programs, Ltd. v. Leighton, 883 F.2d 183, 187 (9th Cir. 1987). When the responding party 6 fails to demonstrate prejudice and there lacks a strong showing of any other factor, trial 7 courts are presumed to grant leave to amend. Eminence Capital, LLC, 316 F.3d at 1052 8 (internal citation omitted); Bowles v. Reade, 198 F.3d 752, 757 (9th Cir. 1999). However, 9 this standard changes, and requires a party to demonstrate “good cause” to amend, when 10 the party’s motion is filed after the deadline set forth in the pretrial order. Fed. R. Civ. P. 11 16(b). 12 2. Analysis 13 Plaintiff seeks leave to amend its complaint to add a cause of action of fraud. (“Prop. 14 Amend. Compl”, ECF 23-2 at 10). In opposition, Defendant argues Plaintiff’s request to 15 amend should be denied as futile because the cause of action for fraud would not survive a 16 motion to dismiss. (“Def’s Opp. to Mot. to Amend”, ECF No. 30 at 9). 17 The futility of amendment can justify denial of a motion for leave to amend, 18 regardless of whether other factors are applicable. Bonin v. Calderon, 59 F.3d 815, 845 19 (9th Cir. 1995). A proposed amended pleading is futile if it would not be considered a 20 legally sufficient pleading, the same standard found in Federal Rule of Civil 21 Procedure 12(b)(6). See Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988). 22 Rule 12(b)(6) challenges the sufficiency of the complaint. Navarro v. Block, 250 23 F.3d 729, 732 (9th Cir. 2001). A complaint may be dismissed as a matter of law because 24 of a “lack of a cognizable legal theory or insufficient facts under a cognizable legal claim”. 25 See Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984). If the 26 plaintiff’s complaint fails to present a cognizable legal theory that shows the plaintiff may 27 be entitled to the relief sought by the complaint, or alternatively presents a legal theory but 28 fails to plead essential facts under that theory, the complaint must be dismissed. Robertson, 1 749 F.2d at 534. Although Rule 12(b)(6) does not require detailed essential facts, it must 2 plead sufficient facts that, if true, “raise a right to relief above speculative level.” Bell 3 Atlantic Corp. v. Twombly, 550 U.S. 544, 545 (2007). In light of that standard, Plaintiff’s 4 Proposed Amended Complaint must state a cognizable theory and assert sufficient facts 5 that, if true, would provide a right to relief. 6 Fraud has a heightened pleading standard compared to other causes of actions. Fed. 7 R. Civ. P. 9(b). Federal Rule of Civil Procedure 9(b) requires that, when fraud is alleged, 8 “a party must state with particularity the circumstances constituting fraud[.]” Any 9 allegations of fraud that do not meet the Rule 9 standard should be “disregarded” or 10 “stripped” from the claim. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 11 2003). Rule 9(b) requires that the circumstances constituting alleged fraud “be ‘specific 12 enough to give defendants notice of the particular misconduct … so that they can defend 13 against the charge and not just deny that they have done anything wrong.’” Bly-Magee v. 14 California, 236 F.3d 1014, 1019 (9th Cir. 2001) (quoting Neubronner v. Milken, 6 F.3d 15 666, 671 (9th Cir. 1993)). Moreover, “[a]verments of fraud must be accompanied by ‘the 16 who, what, when, where, and how’ of the misconduct charged.” Vess, 317 F.3d at 1106 17 (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). 18 Plaintiff’s proposed claim of fraud is based on parties interpreting the D&O Policy’s 19 definition of “Officer” differently. (Prop. Amend. Compl. at 10). In support of its claim 20 of fraud, Plaintiff alleges “Travelers did not intend and did not in fact apply the ‘conduct’ 21 condition of [D&O Policy’s definition of an ‘Officer’] to ‘employees’ or ‘committee 22 members’, but only to ‘other persons[.]’” (Id. at 11) There exists a cause of action for 23 parties aggrieved by differing and competing interpretations of ambiguous language in a 24 binding contract, and that cause of action is breach of contract. See Restatement (Second) 25 of Contracts § 236 cmt. a (1979). 26 Fraud requires a showing of "false representation, knowledge of its falsity, intent to 27 defraud, justifiable reliance, and damages." Moore v. Brewster, 96 F.3d 1240, 1245 (9th 28 Cir. 1996) (quotations omitted). The only “false representation” Plaintiff alleges in its 1 || Proposed Amended Complaint is the language of the definition of an “Officer” contained 2 ||in the D&O Policy. (See Prop. Amend. Compl. at 10, 11). Defendant argues, in opposition 3 this motion, that policy language is not “a false representation; it is a mutually agreed 4 ||upon term in a contract between the parties.” (Def’s Opp. to Mot. to Amend at 13, 14) 5 (citing Seattlehaunts, LLC v. Thomas Family Farm, LLC, 2020 U.S. Dist. LEXIS 166730 6 ||(W.D. Wash. Sept. 11, 2020)). The Court agrees. Fraud requires a falsity to exist and, 7 || where both parties read, reviewed, and agreed to the terms in a contract, and those terms 8 || have not been modified subsequent to that agreement, the terms cannot be false. They are 9 ||binding. Therefore, the remedy for a dispute over the term is breach of contract. The Court 10 || finds Plaintiff's Proposed Amended Complaint fails to allege a cognizable legal theory. 11 || Robertson, 749 F.2d at 534. Accordingly, Plaintiff's Motion to Amend is DENIED. 12 CONCLUSION 13 Based on the foregoing, IT IS HEREBY ORDERED: 14 1. Defendant’s requests for Judicial Notice, (ECF No. 57-4 at 1; ECF No. 20), are 15 GRANTED. 16 2. Plaintiff's Motion for Partial Summary Judgment is DENIED pursuant to 17 Federal Rule of Civil Procedure 56 and Local Rule 7.1. 18 3. Plaintiff's Motion to Amend is DENIED. 19 4. Defendant’s Motion for Summary Judgment is DENIED pursuant to Federal 20 Rule of Civil Procedure 56. 21 IT IS SO ORDERED. 22 || DATED: March 29, 2023 VU 23 24 JOE A. HOUSTON | 5 U)ITED STATES DISTRICT JUDGE 26 27 28