Sharp v. Evanston Insurance

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
C.M. Meiers Company, Inc.
Debtor(s).
CHAPTER 11
Case No.: 1:12-bk-10229-MT
Adv No: 1:14-ap-01042-MT
Bradley D Sharp
Plaintiff(s),
v.
Essex Insurance Company
Defendant(s).
MEMORANDUM OF DECISION
RE: MOTION FOR SUMMARY JUDGMENT
Date: December 3, 2015
Time: 1:00 p.m.
Courtroom: 302
The Chapter 11 Trustee previously filed another adversary action captioned, Sharp v.
Herbert Rothman, et al., adversary case no. 1:12-ap-01118 MT (“Adversary Action”) against
C.M. Meiers’ former officers and directors, Herbert Rothman, Eric Rothman and Rebecca
Rothman, (the “Rothmans”). The Trustee’s Complaint and First Amended Complaint (“FAC”)
asserted claims against the Rothmans for, among other things, acts, errors and omissions
committed in regard to their Professional Services in connection with their control and
management of the C.M. Meiers’ (“CMM”) Insurance Trust Account. The Trustee now alleges
that Defendant Essex Insurance Company (“Essex”) wrongfully denied the coverage provided by
Essex’s Insurance Agents and Brokers Errors and Omissions Liability Insurance Policy, Policy
No. AB-351400 (the “Policy”) and failed to offer a defense, without assertion of a proper
reservation of rights, for the claims brought by the Trustee in the Rothmans Adversary Action.
FILED & ENTERED
MAR 20 2015
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Gonzalez
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The majority of the facts are undisputed. The questions are mainly whether genuine
issues of material fact exist as to whether Defendant Essex Insurance Company had a duty to
defend the Rothmans based on the insurance policy issued to CMM; whether by denying
coverage, Essex breached contractual obligations it owed to the Rothmans, and lastly, whether
based on its policy, after denying coverage without reserving its rights, Essex now has the duty
to indemnify under the Rothmans’ settlement agreement with the Trustee.
Summary judgment should be granted “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law. FRCP 56(c) (incorporated by FRBP 7056).
The moving party has the burden of establishing the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the
absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings
and identify facts that show a genuine issue for trial. Id. at 324. The court must view the
evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land
Co., 669 F.2d 1278, 1284 (9th Cir. 1982). All reasonable doubt as to the existence of a genuine
issue of fact should be resolved against the moving party. Hector v. Wiens, 533 F.2d 429, 432
(9th Cir.1976). The inference drawn from the underlying facts must be viewed in the light most
favorable to the party opposing the motion. Valadingham v. Bojorquez, 866 F.2d 1135, 1137
(9th Cir. 1989).
In addition, the interpretation of an insurance contract presents a question of law.
Stanford Ranch, Inc. v. Maryland Cas. Co., 89 F.3d 618, 624 (9th Cir. 1996). In the instant case,
the parties do not dispute the terms of the insurance contract, but disagree as to the proper
interpretation of the contract. Thus, because Defendant’s duty to defend rests on the construction
and interpretation of the contract, resolution by summary judgment is appropriate.
1. DECLARATORY RELIEF
The Trustee is seeking declaratory relief that (1) Essex’s insurance policy provides
coverage for the claims and losses incurred as a result of the Rothmans’ mismanagement of
CMM’s trust account (claim no. 3); (2) that Essex was obligated to provide a defense to the
Rothmans for the claims presented in the Trustee’s FAC; and (3) that Essex is liable for the
Trustee’s attorney’s fees incurred in obtaining coverage for the claim.
To prevail in an action seeking declaratory relief on the question of the duty to defend,
the insured must prove the existence of a potential for coverage, while the insurer must establish
the absence of any such potential. In other words, the insured need only show that the underlying
claim may fall within policy coverage; the insurer must prove it cannot. The duty to defend
exists if the insurer becomes aware of, or if the third party lawsuit pleads, facts giving rise to the
potential for coverage under the insuring agreement. Delgado v. Interinsurance Exch. of Auto.
Club of S. Cal., 47 Cal. 4th 302, 303, 97 Cal. Rptr. 3d 298, 300, 211 P.3d 1083, 1085 (2009).
There are certain presumptions that California law applies in cases involving
insurance contracts—and, more specifically, those involving the duty to defend. “[W]hen
the policy is ambiguous and the insured would reasonably expect coverage based on the
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nature and kind of risk covered by the policy,” or when “the underlying suit potentially
seeks damages within the coverage of the policy,” the California courts have held that an
insurer has a duty to defend its insured against third-party lawsuits. Conestoga Servs.
Corp. v. Executive Risk Indem., Inc., 312 F.3d 976, 981-82 (9th Cir. 2002) citing
Stanford Ranch, 89 F.3d at 624 (quoting La Jolla Beach & Tennis Club, 9 Cal.4th at 38,
36 Cal.Rptr.2d 100, 884 P.2d 1048) (Citations and internal quotations omitted).
Here, Essex was given notice of the complaint, the mediation, and the possibility of the
existence of a potential for coverage. Thus, Essex was aware of, and the third party lawsuit plead
facts giving rise to the potential for coverage under the insuring agreement.
A. Duty To Defend
Essex argues that it had no duty to defend the Rothmans’ operation of CMM for a
number of reasons:
1) Maintaining a trust account is not a “professional service;”
2) Stealing from a trust account is not a “professional service” rendered
“for others”;
3) Claims that arise from CMM’s inability to make payments from the
depleted trust account are excluded by the policy’s exclusion for
“failure or refusal to collect, pay, or return any policy premium, return
premium, commission..;”
4) Stealing from a trust account is excluded by the policy’s exclusion for
claims that arise out of dishonesty;
5) The Trustee’s claim is for uninsurable restitution;
6) The Trustee’s claim is uninsurable under Cal. Ins. Code § 533; and
7) The Trustee’s claim is barred by the Policy’s “insured vs. insured”
exclusion.
The Trustee contends that Essex owed a duty because the FAC alleged that the Rothmans
committed errors and omissions in the course of their Professional Services as to their
management and control of the CMM Insurance Trust Account, (the “Trust Account”), which
CMM was required to maintain in accordance with California Insurance Code §1733 et seq. See
RJN 2, Ex. 1 Third Claim for Relief, ¶¶ 75-83; see also RJN 8. Specifically, the Trustee alleged
that the failure of the Rothmans, as the officers and directors of CMM, to supervise the business
affairs and management of CMM through its Trust Account was a Wrongful Act done in the
performance of their Professional Services that consisted of the control, maintenance and
operation of the Trust Account for the benefit of its clients and the insurance companies it
represented. After the Rothmans tendered the Trustee’s claims to Essex for defense and for
coverage, Essex denied coverage, without a reservation of rights.
I. WRITTEN TERMS OF THE POLICY
A starting point must be the pertinent policy provisions of the Essex issued Policy to
CMM, Inc. for the June 1, 2011 through June 1, 2012 Policy Period.
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With respect to “Professional Services,” the Policy’s Insuring Agreement
provides that Essex:
shall pay on behalf of the Insured all sums in excess of the Deductible
… which the Insured shall become legally obligated to pay as Damages
as a result of a Claim first made against the Insured and reported to the
Company during the Policy Period, Automatic Extended Reporting
Period, or Optional Extended Reporting Period, if exercised, by reason
of a Wrongful Act or Personal Injury in the performance of
Professional Services rendered or that should have been rendered by the
Insured or by any other person or organization for whose Wrongful Act
or Personal Injury the Insured is legally responsible…
[Essex’s Separate Statement of Undisputed Facts (“SSUF”) 51 (Policy Insuring Agreement A.)]
(Emphasis Added)
“Wrongful Act” is defined to mean “any act, error or omission in Professional Services.”
[SSUF 51 (Policy Definitions N.)]
Policy Definitions K then describes “Professional Services” in pertinent part to mean “the
following services rendered for others:
1. Insurance Wholesaler;
2. Insurance Managing General Agent;
3. Insurance General Agent;
4. Insurance Underwriting Manager;
5. Insurance Program Administrator;
6. Insurance Agent;
7. Insurance Broker;
8. Insurance Surplus Lines Broker;
9. Insurance Consultant;….”
[SSUF 51 (Policy Definitions K.)
a. Administration of an Insurance Trust Account is a Professional Service
i. “Professional Service”
The threshold issue is whether the administration of the CMM Trust Account is a
Professional Service for others. The Ninth Circuit has defined “professional service” in a
different context as follows:
The act or service must be such as exacts the use or application of special learning
or attainments of some kind. The term ‘professional’ in the context used in the
policy provision means something more than mere proficiency in the performance
of a task and implies intellectual skill as contrasted with that used in an
occupation for production or sale of commodities.... In determining whether a
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particular act is of a professional nature or a ‘professional service’ we must look
not to the title or character of the party performing the act, but to the act itself.
Bank of California, N.A. v. Opie, 663 F.2d 977, 981 (9th Cir.1981) (quoting Marx v. Hartford
Accident and Indem. Co., 183 Neb. 12, 157 N.W.2d 870, 871-72 (1968)).
In Opie, a bank provided lines of credit for Opie to draw upon to finance construction
projects. Pursuant to the loan agreement, Opie was required to use the loan proceeds to discharge
construction liens and other encumbrances on properties. In violation of the agreement, Opie
used the funds for another purpose and failed to discharge the construction liens. This resulted in
the bank's security being impaired. Eventually, the bank obtained a judgment against Opie and
filed a writ of garnishment against Opie's professional liability insurer. The insurer claimed that
the actions of Opie were not “professional services.” The Ninth Circuit held that Opie's activities
were professional services. In doing so, the court recognized that managing the loan proceeds
was part of Opie's day-to-day operations and a necessary part of its business. See Id. at 982.
Further, the court reasoned that “[t]o conclude otherwise would ignore the nature of the
[business], the plain meaning of the policy, and the reasonable expectations of the insured.” Id.
In Utica Mut. Ins. Co. v. Miller, the Court of Appeals in Maryland determined that
[a]ccounting for premiums is generally a duty that an insurance agent owes to an insurance
company, and is part of the agent's business. The insurance company may choose the agent, in
part, because of his ability to maintain accurate records of the premiums for policies sold on
behalf of the company. 130 Md. App. 373, 389, 746 A.2d 935, 944 (2000). The Court held that
an agent's acts of monitoring his business operations, maintaining records, and accounting to the
insurance company for premiums were “professional services.” It came to this conclusion based
on its interpretation of Ninth Circuit law. Thus, although the decision in Utica is not binding on
this Court, it is persuasive as it applied Ninth Circuit law to an insurance agent’s handling of
policy premiums.
Essex argues that the administration of an insurance trust account is similar to that of an
attorney’s or a medical service provider’s trust account. It relies on cases discussing such
accounts in arguing that these California cases should control rather than Opie and Utica. One
case relied on by Essex, Horizon W. Inc. v. St. Paul Fire And Marine Ins. Co., involved health
care providers who sued their professional liability insurer for failing to defend them in a suit
alleging that they violated the False Claims Act (FCA) by submitting Medicare and Medicaid
claims for services that were not provided. 214 F. Supp. 2d 1074 (E.D. Cal.) aff'd sub nom.
Horizon W., Inc. v. St. Paul Fire & Marine Ins. Co., 45 F. App'x 752 (9th Cir. 2002). The Court
held that under California law, health care providers' submission of Medicare and Medicaid
claims did not constitute a “professional service,” absent a showing that individuals submitting
claims needed specialized knowledge. Thus, the insurer had no duty to defend the health care
providers based on claims for services that were not provided but only charged for.
In Inglewood Radiology Med. Grp., Inc. v. Hosp. Shared Servs., Inc., the other case
relied on, the court held that the decision to terminate employment was a business or
administrative decision, and the applicable policy only required the insurer to indemnify the
corporation for sums the corporation became obligated to pay because of injuries arising out of
the rendering of professional services, i.e., medical services. 217 Cal. App. 3d 1366, 266 Cal.
Rptr. 501 (Ct. App. 1989).
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Horizon addressed a situation where the Court concluded that no specialized knowledge
was involved. Here, the undisputed evidence is that a broker needs specialized knowledge to
administer an insurance trust account. Inglewood Radiology addressed the booking services of a
medical practice. The professional services were not directly related to the activities of their
profession – providing medical care.
Looking specifically at the act of maintaining an Insurance Trust Account, based on
California law, the maintenance of Trust Account is not simply an administrative act.
Maintaining a trust account is a statutorily required professional service for an insurance agent
and broker. California Insurance Code §1733 et seq. reads in pertinent part: “[a]ll funds received
by any person acting as a licensee … as premium or return premium on or under any policy of
insurance or undertaking of bail, are received and held by that person in his or her fiduciary
capacity. Thus, California Insurance Code §1733 imposes a fiduciary obligation creating a
special risk inherent in the practice of the profession. See Opie, at 981.
Insurance brokers are entrusted with funds to be paid out. California Insurance Code
1734(b) requires the insurance broker to:
(a) Remit premiums, less commissions, and return premiums receive or held by
him to the insurer or the person entitled thereto, or
(b) Maintain such fiduciary funds on California business at all times in a trustee
bank account or depository in California separate from any other account or
depository, in an amount at least equal to the premiums and return premiums, net
of commissions, received by him and unpaid to the persons entitled thereto or, at
their direction or pursuant to written contract, for the account of such persons.
(c) Maintain such fiduciary funds pursuant to Section 1734.5.
Based on the requirements listed above, the maintenance of an insurance trust account
requires more than just depositing and remitting funds. The Trustee has submitted the
Declaration of Sanford Michelson, 1 an expert in the administration of an Insurance Trust
Account under California law, in which he explains the complexity of managing an Insurance
Trust Account pursuant to California law. See RJN 11. No opposing expert or other facts were
submitted to dispute the Michaelson opinion. See Plaintiff’s Reply to Defendant’s Response to
Plaintiff’s Statement of Facts, Dkt. no. 50. The accounting of this trust account is not
administrative or ancillary to the practice of insurance agents or brokers but requires specialized
knowledge of the duties and obligations of insurance brokers in the ordinary course of their
business.
ii. “For Others”
Essex also argues that even if the maintenance of a trust account were considered a
professional service, that service was not performed “for others.” Essex claims that because the
Trustee alleged the Rothmans were withdrawing funds to pay themselves, they were not
providing a professional service “to others.” Essex relies on Transamerica Ins. Co. v. Sayble,
where a California appellate court considered a lawyer’s malpractice policy that applied to the
1 The Declaration was submitted previously in support of Debtor’s Opposition to Motion for Appointment of
Chapter 11 Trustee in the Debtor’s Bankruptcy. Dkt no. 47 entered on 1/19/12.
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provision of professional services “for others.” 193 Cal. App. 3d 1562, 1565 (1987) (“Sayble”).
The Sayble court rejected the argument that the policy could extend coverage to a dispute
between partners at the law firm because the dispute involved a lawyer acting in his capacity as a
partner at the firm, which did not involve providing services “for others.” Id. Essex maintains
that because, here, the Trustee is not a customer of CMM, at best he can allege that the
Rothmans “mismanaged” the account by failing to prevent themselves from stealing from it.
Essex argues that the mismanagement of a trust account is an internal dispute because failing to
prevent your own theft is not a “professional service.”
The Court of Appeal in Sayble held that insurers were not required under its professional
liability policy issued to an attorney to defend lawsuits based on business conflicts between
members of the law firm in the absence of an allegation of professional malpractice. In contrast,
the Trustee argues that his complaint alleged professional malpractice against the Rothmans for
the mismanagement of the trust account. Further, the Trustee was not suing on behalf of CMM
against the Rothmans, but he was suing on behalf of the debtor’s bankruptcy estate. See Section
II c. Policy Exclusion E- Insured v. Insured discussion below.
Here, the Insurance Trust Account is used to collect and pay premiums -- services that
directly relate to the insurance broker’s profession, in that premiums that are paid and collected
are used to purchase or maintain the insurance policies, which are the core of the broker’s
business -- the selling and maintenance of insurance policies. The broker’s trust account requires
a working knowledge of the insurance business, knowledge of how commissions work and are to
be deducted from the payments received, and how refunds of policy premiums are to be allocated
and paid, among many other payments and collections that are made from the Trust Account as
required by state law. Conversely, an attorney’s trust account is simply a conduit for the receipt
of monies, which can be administered without the knowledge of the attorney’s professional
activities. One of the primary duties of an insurance broker is the administration of a trust
account. The maintenance is also a required service performed for the benefit of others, such as
for clients and other brokers, not just for CMM.
Finally, Essex’s argument that theft is not a professional service does not address whether
the administration of a trust account is a professional service based on the policy’s language.
Essex conflates the Trustee’s allegations with the definition of professional services in its policy.
Essex denied coverage because it determined that the administration of the trust account is just
accounting and not a professional service. As discussed above, however, based on the language
of the policy, the administration of a trust account is an identified professional service for others
and conforms to the nature of the business, the plain meaning of the policy, and the reasonable
expectations of the insured.
b. The Duty to Defend was Triggered
Because the maintenance of an insurance trust account is a professional service as
defined in the policy, the next issue is whether the duty to defend was triggered by the Trustee’s
allegations in the complaint. In pertinent part, the Trustee alleged, “as of January 25, 2012, the
Debtor’s books and records disclose that the Debtor had a ‘net payable’ to various insurance
companies in the amount of $1,085,659.14. As of January 25, 2012, the Debtor’s General Ledger
sets forth that the Trust Account had an account balance of $11,783.20. Based thereon, due to the
acts and conduct and mismanagement of Defendants Herbert Rothman, Eric Rothman and
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Rebecca Rothman, the Debtor was out of trust in an amount believed to be in excess of $ 1
million…[caused by the ] breach of their fiduciary obligations owed to the Debtor in failing to
maintain the Trust Account as required by California Law…” See RJN 2, Ex. 1 Third Claim for
Relief, ¶¶ 47-48. Although, the Complaint alleged intentional looting, it also could fairly be read
to encompass mismanagement or other issues with handling the trust account.
A liability insurer has a duty to defend its insured if facts alleged in the complaint, or
other facts known to the insurer, potentially could give rise to coverage under the policy.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 654–655, 31 Cal.Rptr.3d 147, 115
P.3d 460 (2005); Gray v. Zurich Insurance Co. 65 Cal.2d 263, 275–277, 54 Cal.Rptr. 104, 419
P.2d 168 (1966). The facts need only “raise the possibility” that the insured will be held liable
for covered damages. Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 304, 24
Cal.Rptr.2d 467, 861 P.2d 1153 (1993). An insurer has a duty to defend even if the claims
against the insured are “ ‘groundless, false, or fraudulent.’ ” Horace Mann Ins. Co. v. Barbara B.
4 Cal.4th 1076, 1086, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993). “Any doubt as to whether the
facts establish the existence of the defense duty must be resolved in the insured's favor.”
Montrose, supra, at pp. 299–300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.
Essex argues that it is not a professional service to withdraw and use funds for the
Rothmans own benefit. Indeed, stealing is not a professional service, but an insurer must look at
all the allegations in the complaint. The Trustee’s complaint alleged mismanagement as well as
stealing. In Gray v Zurich Insurance Co. 65 Cal.2d 263, the insurer refused to defend on the
grounds that the complaint against the insured sought damages for an intentional tort, and the
policy contained an exclusion for damages caused intentionally by the insured. The court,
recognizing that one must look not only to the pleaded word, but to the "potential liability"
created by the suit, held in favor of the insured. Although the complaint alleged an intentional
tort, it could have been amended, in light of the facts alleged, to seek damages for negligence.
Necessarily, therefore, the action presented the potential of a judgment based on unintentional
conduct. See also § 4:2.Resolution of doubts and ambiguities, 1 Insurance Claims and Disputes §
4:2 (6th ed.). Gray made clear that facts known to the insurer and extrinsic to the third party
complaint can generate a duty to defend, even though the face of the complaint may not reflect a
potential for liability under the policy. (Gray, supra, 65 Cal.2d at p. 276.). Montrose Chem. Corp.
v. Superior Court, 6 Cal. 4th 287, 296, 24 Cal. Rptr. 2d 467, 472, 861 P.2d 1153, 1158 (1993).
Essex erroneously relied on the Trustee’s allegations of intentional looting and fraud and
ignored other allegations and possible explanations for the trust account problems. California law
is clear that an insurer needs to compare the allegations in the complaint with the terms of the
policy. Based on the language of the policy, Essex should have defended the Rothmans for the
alleged mismanagement of the Trust Account that was potentially covered. Essex denied
coverage based on the Trustee’s allegations of intentional wrongdoing in the FAC instead of first
defending and then denying indemnity based on the policy if intentional wrongdoing were
proven. None of these allegations were ever adjudicated or proven and were vehemently denied
by the Rothmans. The Rothmans’ alleged looting of the trust account merely placed in dispute
whether the insured's actions would eventually be determined not to constitute an occurrence or
fall within one or more of the exclusions contained in the policies. It did not, however, establish
that the underlying claim could not come within the policy coverage. The duty to defend arises
when the underlying claim may fall within policy coverage and arises out of the existence of a
potential for coverage. Although the Trustee alleged intentional mismanagement in his
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complaint, it did not foreclose the possibility that the alleged mismanagement of the Trust
Account could be found to be “of the nature and kind covered by the policy” and would qualify
as an error in professional services that the Policy specifically covers. Gray, supra, 65 Cal.2d at
p. 274. Because there are claims arising out of the insured’s activities in rendering ‘professional
services for others’ in their ‘capacity as insurance brokers,’ the Trustee’s allegation of
mismanagement of the trust account falls within Essex’s scope of coverage and a duty to defend
was triggered.
II. EXCLUSIONS
In a declaratory relief action to determine the insurer's obligations under the policy, the
burden is on the insured initially to prove an event is a claim within the scope of the basic
coverage. The burden then shifts to the insurer to prove the claim falls within an exclusion.
Merced Mut. Ins. Co. v. Mendez, 213 Cal. App. 3d 41, 44, 261 Cal. Rptr. 273, 275 (1989). Thus,
the burden is on Essex to prove the claim falls within an exclusion. Essex claims that it denied
coverage based on non-professional services and alleged fraudulent acts by the Rothmans. Essex
argues that based on its policy exclusions, there was no duty to defend the Rothmans because the
policy excludes coverage for claims arising out of dishonest or fraudulent conduct and the failure
to collect, pay or return any policy premiums or commissions.
[A]n exclusion from coverage otherwise within the scope of an insuring clause must be
clear and unmistakable to be given effect. GGIS Ins. Services, Inc. v. Superior Court, 168 Cal.
App. 4th 1493, 1507, 86 Cal. Rptr. 3d 515, 527 (2008) (“GGIS Ins.”) citing MacKinnon v. Truck
Ins. Exchange 31 Cal.4th 635, 648, 3 Cal.Rptr.3d 228, 73 P.3d 1205 (2003); AIU Ins. Co. v.
Superior Court 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253 (1990). “The exclusionary
clause ‘must be conspicuous, plain and clear.’ ” Id. The interpretation of a contract, including the
resolution of any ambiguity, is solely a judicial function, unless the interpretation turns on the
credibility of extrinsic evidence. Id. citing Parsons v. Bristol Development Co. 62 Cal.2d 861,
865, 44 Cal. Rptr. 767, 402 P.2d 839 (1965).
a. Policy Exclusion A
The Policy does not apply to any Claim:
based upon or arising out of any actual dishonest, fraudulent, criminal or malicious act,
error or omission by an Insured; provided, however, this exclusion shall not apply to any
Insured who:
1. did not personally commit, participate in, or acquiesce in the act, error or omission;
2. did not remain silent or passive after having personal knowledge of the act, error,
or omission; and
3. notified the Company immediately upon becoming aware of the act, error, or
omission;
[SSUF 51 (Policy Exclusions A.)
This exclusion does not apply in this case because as discussed above, in addition to the
Trustee’s allegations of actual dishonest and fraudulent acts, the possibility of negligent
mismanagement of the trust account still remained. In addition, Essex denied coverage before
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conducting an investigation as to whether the Rothmans collectively or individually committed
the alleged acts. In the Trustee’s adversary proceeding, the Rothmans denied any wrongdoing, so
it is possible that one or more of the Rothmans was not involved in the alleged fraudulent acts
and was not excluded by this provision. As stated earlier, Essex erroneously relied on the
Trustee’s allegations to deny coverage. The duty to defend is broad and includes any allegations
that could potentially be covered by the policy. Essex’s assumption of dishonesty based upon
some of the allegations of the complaint cannot be a basis for denying coverage. Finally, because
the Trustee already resolved the litigation, Essex cannot now challenge the factual underpinnings
of the settlement simply by repeating allegations that dishonesty, rather than negligent
mismanagement was involved. See Section 2(b)II. Settlement discussion below.
b. Policy Exclusion M
The Policy does not apply to any Claim:
. . . based upon or arising out of allegations of intentional failure or refusal to
collect, pay, or return any policy premium, return premium, commission, tax, or
policy fee of any kind. Notwithstanding this provision, this exclusion shall not
apply to allegations of negligent bookkeeping errors or oversights.
[SSUF 51 (Policy Exclusions M.)]
Essex argues it had no duty to defend based on the failure to pay exclusion because there
were no allegations in the complaint that the withdrawals from the trust account were not made
properly but by mistake due to a book keeping error. As discussed above, this is not the standard
that gives rise to the duty to defend. A liability insurer has a duty to defend its insured if facts
alleged in the complaint, or other facts known to the insurer, potentially could give rise to
coverage under the policy. The facts need only raise the possibility that the insured will be held
liable for covered damages. GGIS Ins., 168 Cal. App. 4th 1493, 1494, 86 Cal. Rptr. 3d 515, 519
(2008). Exclusion M does not apply because the Trustee’s allegations could include negligent
bookkeeping. The Trustee generally, alleged that the Rothmans failed to 1. monitor CMM’s
business operations; 2. maintain records; 3. account for premiums; and 4. properly audit the
Trust Account activities. The Trustee argues that those failures could be based on negligence, not
intentional misconduct as Essex claims.
Although, Policy M’s exclusion specifically excepts negligent bookkeeping errors or
oversights, which the Trustee alleged in its FAC, Essex argues that the carve-out provision in the
exclusion is for the improper payments to another person made intentionally but made to an
improper party. Essex contends there were no allegations of erroneous payments that created the
out of trust situation. Essex maintains this case is similar to GGIS Ins. supra. Essex is correct that
the policy language in both cases is similar. GGIS Ins., however, is a failure to pay commission
case and not applicable here. In GGIS Ins., the Pennsylvania Insurance Commissioner clearly
alleged a failure to pay cause of action in its complaint. Here, there were no allegations of a
failure to pay premiums that were owed to a third party. The Trustee alleged that funds were
missing because the trust account balance did not reflect sufficient funds to cover Debtor’s
liabilities. A failure to pay claim is different from a negligent mismanagement claim. An out of
trust situation based on mismanagement of a trust account tends to occur prior to the failure to
pay. An out of trust account could occur based on just bad record keeping or intentional acts. The
Trustee argues his claim against the Rothmans can fairly be characterized that the overall
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management of the Debtor was negligent because the Rothmans failed to properly monitor the
trust account. In this case, it is possible that the out of trust situation was due to unintentional or
negligent mismanagement of the trust account and does not necessarily mean that there was a
failure to pay. In addition, the exception has to do with third party claims and there were no third
party claims for Debtor’s failure to pay premiums.
c. Policy Exclusion E
Essex also argues that the policy excludes coverage for claims filed by another insured
and the Trustee is considered an insured under paragraph 7 of the definition in the Policy. Essex
argues the Trustee is the legal representative in bankruptcy of the insured, CMM.
Exclusion E – the “Insured vs. Insured Exclusion” – states that “The policy does not
apply to any Claim:… by or on behalf of another Insured.” [SSUF 51 (Policy Exclusions E.)]
“Insured” is defined, in pertinent part, to include the following:
1. the Named Insured herein defined as the person(s) or organization(s) stated
in Item 1. of the Declarations;…
3. any past or current principal, partner, officer, director, trustee, shareholder
or employee of the Named Insured or its Predecessor Organization solely
while acting on behalf of the Named Insured or its Predecessor Organization
and within the scope of their duties as such;…
7. the heirs, executors, administrators, assigns and legal representatives of
each Insured above in the event of death, incapacity, or bankruptcy of such
Insured but only for such Insured’s liability as otherwise covered herein.
[SSUF 51 (Policy Definitions F.)] (Emphasis added).
Although the Trustee is the representative of Debtor CMM’s bankruptcy estate, he is not
the Trustee or the representative of the Rothmans and is suing Essex through the Rothmans’
assignment of rights, not the Debtor’s. The Trustee was and is prosecuting his claims on behalf
of the estate and for the benefit of those having valid claims against it, among whom the Debtor
stands last in priority. In Rigby v. Underwriters at Lloyd's, London, 907 So. 2d 1187, 1188-89
(Fla. Dist. Ct. App. 2005), the Court held the insured versus insured exclusion did not apply
because the trustee had filed suit on behalf of the debtor’s creditors, based upon his statutory
duty as trustee under the Code and did not bring the adversary action acting as an officer or
director. 2 Similarly, here the Trustee is not bringing its action against the Rothmans acting as an
officer or director.
The Trustee is a legal entity separate and distinct from the Debtor, prosecuting claims
that are not the Debtor's, therefore, the “insured vs. insured exclusion” in the Policy does not
apply. See In re Cnty. Seat Stores, Inc., 280 B.R. 319 (Bankr. S.D.N.Y. 2002) (Trustee, who was
2 The clause provides: "[Lloyd's] shall not be liable to make any payment in connection with any Claim:. . . .
F. by, on behalf of, or at the direction of any of the Assureds, except and to the extent such Claim is brought
derivatively by a security holder of the Company who, when such Claim is first made, is acting independently of all
of the Assureds." Under the definition provisions of the policy "Assureds means the Company and the Directors and
Officers." "The Directors and Officers" as originally defined are: "Directors and Officers means all persons who
were, now are, or shall be directors or officers of the Company including their estates, heirs, legal representatives
or assigns in the event of their death or bankruptcy."
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charged with statutory duty to act in best interest of general creditors in collecting and preserving
estate assets and, in particular, in pursuing breach of fiduciary duty claims against corporate
debtor's former officers and directors, was independent and disinterested entity, separate and
distinct from corporate Chapter 11 debtor or prepetition corporation, and did not assume debtor's
identity for purpose of the policy's “insured vs. insured” exclusion) and see also In re Buckeye
Countrymark, Inc., 251 B.R. 835, 840 (Bankr.S.D.Ohio 2000) (bankruptcy trustee is not the
debtor's alter ego but a separate legal entity that neither represents the Debtor nor owes the
Debtor a fiduciary obligation and whose responsibility is to the bankruptcy estate). The Trustee’s
duty is to protect the interests of the creditors and to administer property of the estate. He or she
cannot be the legal representative of the debtor because the trustee does not stand in the shoes of
the debtor. See TIG Specialty Insurance Company v. Koken, 855 A.2d 900, 909
(Pa.Commw.Ct.2004) (finding that the plain language of the definitions and the exclusion do not
include the bankruptcy trustee for claims brought by the Trustee). As discussed herein, the
bankruptcy trustee did not assert the claims “by, on the behalf of, or in the right of the Insured
Entity” but has instituted the claims on behalf of the estate and for the benefit of its creditors.
The Trustee is not a trustee of CMM, the corporate entity, but the trustee of the bankruptcy estate
of CMM. See Unified W. Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106, 1117 (9th Cir.
2006) citing In re Swift Aire Lines, Inc., 30 B.R. 490, 495 (9th Cir. B.A.P. 1983) ("The
bankruptcy estate of Swift is, represented by the trustee, a new legal entity distinct from the
debtor Swift Aire Lines, Inc." (citing 11 U.S.C. §§ 323, 363, 541, 704, and 721)).
In addition, exclusions are to be read narrowly. In this case, the exclusion does not
expressly and plainly provide that bankruptcy trustee’s are excluded under the Policy. It must
also be noted that in contrast to the Policy in this case, there are liability policies that explicitly
exclude coverage when suits are brought by bankruptcy trustees or debtors in possession. If the
policy wanted to exclude a bankruptcy trustee’s claims, then the policy should have explicitly
stated that bankruptcy trustees are excluded. See In re Buckeye, supra. (the intent behind an
"insured vs. insured" exclusion is to protect insurance companies against collusive suits. When
the plaintiff is a bankruptcy trustee acting as a genuinely adverse party to the defendant officers
and directors, there is no threat of collusion. Under such circumstances, an “insured vs. insured"
exclusion does not excuse the insurance companies from coverage). Because the insurer writes
the policy, it is held “responsible” for ambiguous policy language, which is therefore construed
in favor of coverage. AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822, 799 P.2d 1253, 1264-
65 (1990). Having failed to meet its burden “to phrase exceptions and exclusions in clear and
unmistakable language,” Essex cannot now benefit from the ambiguity. State Farm Mut. Auto.
Ins. Co. v. Jacober, 10 Cal.3d 193, 201–02, 110 Cal.Rptr. 1, 514 P.2d 953 (1973).
Thus, the Trustee is not the legal representative of the insured and is not barred by the
“insured v. insured” exclusion.
d. California Section 533 Exclusion
Section 533 of the Insurance Code provides: “[a]n insurer is not liable for a loss caused
by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of
the insured's agents or others.” Cal. Ins. Code § 533 does not bar coverage for conduct which
may be wrongful, but which is not intentional or willful from the standpoint of the insured.
Preclusion under § 533 requires more than negligence, recklessness or even the intentional doing
of an act constituting ordinary negligence or the violation of a statute. The statutory exclusion is
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intended to preclude indemnification for conduct that is clearly wrongful and necessarily
harmful. Unified W. Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106, 1109 (9th Cir.
2006).
There is no dispute that for much of this case, the Trustee alleged intentional looting and
other tortious acts by the Rothmans. The Trustee alleged a variety of claims against the
Rothmans, however, some of which asserted negligence and others of which required
willfulness. The alleged breach of a fiduciary duty in the complaint may be satisfied by proof of
negligent conduct without any evidence of or logical correlation to a willful scheme to defraud.
No finding was ever made that the Trustee’s allegations of willful looting were true. This
exclusion is not applicable at this point because the Trustee has already settled his claims against
the Rothmans and there have been no findings that the Rothmans caused a loss by any willful
acts. The failure to participate in the action against the Rothmans precludes revisiting that
question.
In this case, the Policy language is clear. Nevertheless, if there is still any question
regarding coverage, it is resolved in favor of the insured. Cooper Co. v. Transcontinental Ins.
Co., 31 Cal.App.4th 1094, 1101(1995). As discussed above, the maintenance of an insurance
trust account is a professional service and the Trustee has shown that one of the claims in the
FAC potentially falls within policy coverage. Based on the language of the policy, none of the
exceptions in the Policy apply to the Rothmans and therefore, Essex had a duty to defend the
Rothmans against the Trustee.
In conclusion, there are no genuine issues of material fact as to whether Essex had a duty
to defend the Rothmans under the Policy. It did.
2. BREACH OF CONTRACT
The Trustee argues that Essex breached its obligations under the terms and conditions of
the Policy by (1) failing to provide a defense to the Rothman Parties, and (2) failing to provide
coverage and pay the claims of the Trustee as presented in the FAC, notwithstanding its
obligation to do so.
The insurer must prove that the claim cannot fall within policy coverage. Montrose
Chemical Corp., 6 Cal. 4th at 300. Where an insurer does not investigate the claim, the insurer
will not be able to establish that the claim cannot fall within policy coverage, thus results in a
breach of the duty to defend. See Bogard v. Employers Casualty Co., 164 Cal. App. 3d 602, 615,
210 Cal. Rptr. 578 (1985). Wrongful failure to provide coverage or defend a claim is a breach of
contract. Isaacson v. Cal. Ins. Guarantee Assn., 44 Cal. 3d 775, 791, 244 Cal. Rptr. 655, 666, 750
P.2d 297, 308 (1988).
As the Rothmans dispute includes matters which are covered by the policy, Essex’s
reliance on cases such as Ceresino v. Fire Ins. Exch., 215 Cal. App. 3d 814, 822 (Ct. App. 1989)
is misplaced. Essex did not defend where at least some allegations and ultimate liability came
under the scope of the policy. Thus, once Essex failed to defend the Rothmans, it breached the
terms of the Policy. Accordingly, the Motion is granted for Essex’s breach of contract for
erroneously denying a defense for the Rothmans.
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As Essex had a duty to defend the Rothmans against the Trustee’s claims based on the
terms of the Policy, the question then is whether, after a settlement has been entered, can an
insurer who breached its duty to defend be precluded from contesting its duty to indemnify? If
Essex has a duty to indemnify, what portion of the settlement is covered by the Policy? The
question of damages is more complex.
B. Damages
I. ATTORNEY FEES
When an insurer breaches its duty to defend, the insured may recover as contract
damages the funds it expended defending itself, and also any damages that proximately resulted
from the insurer's breach of the insurance contract. Amato v. Mercury Cas. Co., 53 Cal.App.4th
825, 61 Cal.Rptr.2d 909, 912-13 (1997). Under California law, where an insurer wrongfully
refuses to defend an action against its insured, the insurer is liable for the total amount of the fees
unless the insurer produces undeniable evidence that it is not liable for all of the attorney's fees.
Hogan v. Midland Nat'l Ins. Co., 3 Cal.3d 553, 91 Cal.Rptr. 153, 476 P.2d 825, 831 (1970). An
insured suing on the policy for alleged failure of the insurer to defend an action against the
insured as agreed is not entitled to recover an attorney fee for prosecution of this action against
Essex. Ritchie v. Anchor Cas. Co., 135 Cal. App. 2d 245, 248, 286 P.2d 1000, 1002 (1955).
Here, Essex has not produced any evidence that it is not liable for the attorney fees or the
damages that resulted from its refusal to defend the Rothmans against the Trustee’s claims.
Essex argues that Scottsdale insurance covered the attorney fees incurred defending the
Rothmans, so Scottsdale insurance should be entitled to recover any attorney fees, not the
Trustee because he cannot double dip. No undisputed evidence was presented on this issue.
Thus, there is an issue of material fact as to whether the Trustee is entitled to attorney fees based
on the assignment of the Policy or whether those fees were already covered and owed to
Scottsdale Insurance. This issue requires further factual and legal development.
II. THE SETTLEMENT
The Trustee argues that Essex is barred from disputing the amount of the settlement
because it was approved by the Court, was not collusive, and was not objected to by Essex.
Essex argues that it is not precluded from contesting the reasonableness of the settlement
amount.
Where an insured was sued for liability covered under the policy but the insurer refused
to defend, the insured has the right to make any reasonable and bona fide compromise of the
action against them and is generally entitled to recover from the insurer, in addition to the
amount paid for the reasonable compromise, any reasonable attorney's fees incurred in defense of
the action. Ritchie v. Anchor Cas. Co., 135 Cal. App. 2d 245, 286 P.2d 1000 (1955) see also
Isaacson v. California Ins. Guarantee Assn., 44 Cal. 3d 775, 792, 750 P.2d 297, 308 (1988). If an
insurer wrongfully fails to provide coverage or a defense, and the insured then settles the claim,
the insured is given the benefit of an evidentiary presumption. In a later action against the insurer
for reimbursement based on a breach of its contractual duty to defend the action, a reasonable
settlement made by the insured to terminate the underlying claim against him may be used as
presumptive evidence of the insured's liability on the underlying claim and the amount of such
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liability. Isaacson v. Cal. Ins. Guarantee Assn., 44 Cal. 3d 775, 791, 244 Cal. Rptr. 655, 666, 750
P.2d 297, 308 (1988); see also Everett Associates, Inc. v. Transcon. Ins. Co., 159 F. Supp. 2d
1196, 1209 (N.D. Cal. 2001) aff'd, 35 F. App'x 450 (9th Cir. 2002) (It is a general rule that when
an insurer “improperly refused to defend an insured, the insured is entitled to make a reasonable
settlement of the claim in good faith, and then maintain an action against the insurer to recover
the amount of the settlement.”).
Here, the settlement between the Rothmans and the Trustee is presumptive evidence of
the Rothmans liability and the amount of such liability. Essex took the risk and waived its right
to explore the claims when it denied coverage. Essex was given the opportunity to object and
participate in the negotiations but it declined to do so. Essex cannot now dispute the
reasonableness of the settlement amount. There is no indication that the settlement was not
entered into in good faith. In fact, the Court made a finding as part of its approval of the
settlement that it was reasonable and in good faith. See RJN Ex. 6 - Order Granting Motion
authorizing Trustee to enter into and consummate good faith settlement determination with
Rothman parties, Dkt. no 228.
Whether the settlement was reasonable and whether Essex has a duty to indemnify the
entire settlement amount are two different issues. An insurer must indemnify the insured against
judgments based on claims covered by the insurance policy. Buss v. Superior Court, 16 Cal.4th
35, 65 Cal.Rptr.2d 366, 939 P.2d 766, 773 (1997). In a mixed cause of action, where it is unclear
whether a judgment was based on covered or uncovered claims, the insurer can be liable for the
entire judgment. Gray, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168. Similarly, when an
insurer breaches its duty to defend and the insured proves that at least one claim in a mixed cause
of action is covered, the insured does not have to allocate between claims. The insurer, however,
“can still present any defenses not inconsistent with the judgment against the insured.” Hogan v.
Midland Nat'l Ins. Co., 91 Cal.Rptr. 153, 476 P.2d at 832 (emphasis added). 3 The burden rests
on the insured initially to show that at least a portion of the settlement involved compensation for
damages attributable to claims that were covered by the insurance policy. Once the insured has
satisfied that burden, the burden of proof shifts to the insurer to show what portion of the
settlement is attributable to covered claims. 4 Peterson Tractor Co. v. Travelers Indem. Co., 156
F. App'x 21, 24 (9th Cir. 2005) (Unpublished). Following the insurer's refusal to defend, the
insurer may litigate in a subsequent action against it by the insured whether the policy covered
the liability underlying the settlement in the subsequent action, and damages paid pursuant to a
settlement are recoverable if the insurance policy covered such damages. Everett Associates, Inc.
v. Transcon. Ins. Co., 159 F. Supp. 2d 1196 (N.D. Cal. 2001) aff'd, 35 F. App'x 450 (9th Cir.
2002). (Gray does not preclude the insurer from establishing that the damages were not covered
under the policy in the first place).
The Trustee has met his burden showing that at least a portion of the settlement is
covered by the Policy. Essex now bears the burden to prove the amount that is covered in the
settlement. Essex asserts that it can only be held responsible for claims within the scope of
3 The Ninth Circuit has held in an unpublished opinion that California would apply the logic of Gray and Hogan to
insurance settlements, and not confine it to judgments. Peterson Tractor Co. v. Travelers Indem. Co., 156 F. App'x
21, 23 (9th Cir. 2005).
4 Hogan noted that it would “cast an impossible burden” on the insured to be required “to show the extent of the loss
caused by the insurer's breach.” Hogan, 91 Cal.Rptr. 153, 476 P.2d at 833. On the other hand, Hogan also noted that
an insurer was entitled to assert a defense that some or all of the judgment might not be covered by the policy. Id. at
832.
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coverage and the only claim of consequence under professional services is the out of trust
allegation due to the misadministration of the trust account. The other claims do not fall under
the Policy coverage. Essex also argues that even if the Trustee’s arguments were correct, the
damages cannot exceed the amount of the out of trust allegation.
The Trustee agues that Essex cannot challenge the allocation of the settlement amount
based on the coverage afforded by the Policy. The Trustee relies on Diamond Heights
Homeowners Assn. v. National American Ins. Co., where an excess insurer had refused a request
to assume the defense of the insured, and had exercised the opportunity to participate in the
section 877.6 hearing into the good faith and reasonableness of a proposed settlement. 227 Cal.
App. 3d 563, 277 Cal.Rptr. 906 (1991). The excess insurer objected to the good faith claims
made by its insured, but after the trial court had made its determination, it failed to seek relief by
a petition for a writ of mandamus as provided in section 877.6, subdivision (e). The court held
that this failure to seek appellate review of the good faith determination barred the insurer's
subsequent bad faith and collusion claims. Id. at 583. Diamond Heights supports the Trustee’s
assertion that Essex cannot re-litigate the good faith and reasonableness of the settlement as it
cannot reach back without violating due process, but it does not support the Trustee’s theory that
Essex must indemnify the entire amount of the settlement.
The Trustee also relies on Hamilton v. Md. Cas. Co., 27 Cal. 4th 718, 721, 117 Cal. Rptr.
2d 318, 320, 41 P.3d 128, 130 (2002). There a liability insurer agreed to defend its insured
against a personal injury lawsuit. After the insurer refused a settlement demand within the policy
limits, the claimant and the insured, without the insurer's participation, agreed on a settlement.
The Court held a defending insurer cannot be bound by a settlement made without its
participation and without any actual commitment on its insured's part to pay the judgment, even
where the settlement has been found to be in good faith for purposes of Cal. Civ. Proc. Code §
877.6. Hamilton does not address the situation at hand because the insurer had agreed to defend
the insured.
There is a duty to indemnify if the judgment or settlement was covered by the policy.
Where the kind of claim asserted is not covered by the insurance contract (and not simply the
amount of the claim), an insurer has no obligation to pay money in a settlement of a non-covered
claim. DeWitt v. Monterey Ins. Co., 204 Cal. App. 4th 233, 234, 138 Cal. Rptr. 3d 705, 707
(2012) citing Risely v. Interinsurance Exchange of the Automobile Club 183 Cal.App.4th 196,
207–208, 107 Cal. Rptr. 3d 343 (2010).
Essex cannot dispute the good faith and reasonableness of the settlement, but this
conclusion does not address what portion of the settlement is covered by the insurance policy.
The Trustee enjoys a presumption that the entire settlement is included, but Essex may still be
heard on how much of the settlement is covered by the policy since not all claims in the FAC are
covered under the policy.
The Settlement covers eight causes of action. The settlement distinctly covered breach of
fiduciary duty and mismanagement with the trust account but it also included potentially
uncovered causes of action. For example, the settlement includes both the failure to properly
manage CMM’s premium “Trust Account” as well as having CMM pay for the purchase of a
residence in Newport Beach, California. Although Essex cannot challenge the amount or
reasonableness of the damages in the stipulation, Essex is possibly not liable for the full amount
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of the settlement agreement. Thus, given the range of claims covered by the settlement, there are
issues of fact regarding the amount of the settlement covered by the Policy. Further information
is necessary to resolve the delineation of damages to be paid. Further briefing and perhaps a trial
are needed to determine the full damages amount covered under the Policy.
3. BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
This Court has already determined that Defendants breached their duty to defend, but
whether Essex has breached the implied covenant of good faith and fair dealing is a separate
cause of action. An insurer may breach the covenant of good faith and fair dealing when it fails
to properly investigate its insured's claim. Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 814,
169 Cal. Rptr. 691, 693, 620 P.2d 141, 143 (1979). The issue is whether Essex’s failure to
investigate was done in bad faith to breach the implied covenant of good faith and fair dealing.
The key to a bad faith claim is whether or not the insurer's denial of coverage was
“reasonable.” Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 quoting Guebara v.
Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir.2001). “[T]he reasonableness of an insurer's claims-
handling conduct is ordinarily a question of fact.” Chateau Chamberay Homeowners Ass'n v.
Associated Intern., 90 Cal.App. 4th 335, 346 (2001); accord Dalrymple v. United Servs. Auto.
Ass'n, 40 Cal.App. 4th 497, 511 (1995). “The genuine issue rule in the context of bad faith
claims allows a district court to grant summary judgment when it is undisputed or indisputable
that the basis for the insurer's denial of benefits was reasonable—for example, where even under
the plaintiff's version of the facts there is a genuine issue as to the insurer's liability under
California law.” Amadeo, 290 F.3d at 1161 citing Safeco Ins. Co. of Am. v. Guyton, 692 F.2d
551, 557 (9th Cir.1982). An insurer is not entitled to judgment as a matter of law, however,
where viewing the facts in the light most favorable to [the non-moving party], a jury could
conclude that the insurer acted unreasonably. Id. at 1162 (citing Neal v. Farmers Ins. Exch., 21
Cal.3d 910, 920 (1978)).
As to the Trustee’s third claim, at this stage, the Court cannot grant the Motion because
all material inferences are to be made in favor of the non-moving party. Whether the denial of
coverage was reasonable is an issue of material fact and the Court needs to weigh the evidence
and determine competing inferences.
Accordingly, the Motion for Summary Judgment is denied for the third cause of action.
Evidentiary Objections
The Court has reviewed Defendant’s evidentiary objections which concerned statements
in Mr. Sharp’s declaration. The Court did not rely on any of the objectionable evidence in
reaching its ruling as outlined above. When determining whether a particular policy provides a
potential for coverage, courts are guided by the principle that interpretation of an insurance
policy is a question of law. Powerine Oil Co. v. Superior Court, 37 Cal. 4th 377, 118 P.3d 589
(2005). The bulk of the Plaintiff’s statement of facts was undisputed. The issues disputed go
mainly to the question of the scope of the indemnification and damages owed to the Trustee.
Those objections are preserved for a later hearing consistent with this ruling.
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Request for Judicial Notice
Plaintiff asks the Court to take Judicial Notice of Exhibits 1-16 in its Request for Judicial
Notice filed concurrently with the Motion for Summary Judgment. See Dkt no. 15. Defendant
also submitted an appendix of Exhibits A-F in support of its Opposition to the Motion. The Court
takes judicial notice pursuant to Federal Rule of Evidence 2015 of Plaintiff’s Exhibits 1-16 and
Defendant’s Exhibits A-F because the exhibits are either court documents or generally accessible
to the public and the accuracy of the documents have not been questioned.
Conclusion
Based on the above Findings of Facts and Conclusion of Law, the Motion for Summary
Judgment is GRANTED in part and DENIED in part. The Motion is granted as to the Trustee’s
first claim of Declaratory Relief that Essex had a duty to defend the Rothmans and his second
claim for Breach of Contract. The Motion is denied without prejudice as to the attorney fees,
whether Essex has the duty to indemnify the full settlement amount and for the third claim for
Breach of the Implied Covenant of Good Faith and Fair Dealing. Further briefing or a trial on
these issues will be discussed at the next status conference on May 13, 2015 at 11:00 a.m.
Plaintiff should submit a judgment and order in accordance with this ruling.
###
5 Federal Rule of Evidence 201 provides that “A judicially noticed fact must be one not subject to reasonable dispute
in that it is either (1) generally known within the territorial jurisdiction of the trial court, or (2) capable of accurate
and ready determination by resort to sources whose accuracy cannot reasonably be questioned.”
Date: March 20, 2015
Case 1:14-ap-01042-MT Doc 57 Filed 03/20/15 Entered 03/20/15 09:42:31 Desc
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