Trident Society, Inc. v. SCI Direct, Inc.

[7] 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA [10] 11 TRIDENT SOCIETY, INC., a California Case No.: 19cv1608 DMS (BLM) corporation; et al., [12] ORDER DENYING DEFENDANT’S Plaintiffs, 13 MOTION TO DISMISS v. [14] ILLINOIS NATIONAL INSURANCE [15] COMPANY, an Illinois corporation [16] Defendants. [18] 19 This case comes before the Court on Defendant’s motion to dismiss. Plaintiffs filed 20 an opposition to the motion, and Defendant filed a reply. For the reasons discussed below, 21 the motion is denied. 22 I. 23 BACKGROUND 24 Defendant Illinois National Insurance Company issued two employment practices 25 insurance policies to Plaintiffs corporate parent Service Corporation International, 26 numbered 01-357-02-54 (effective May 1, 2016, to May 1, 2017) and 01-415-77-80 27 (effective May 1, 2017, to May 1, 2018). (First Am. Compl. (“FAC”) ¶14.) The present 28 motion involves the “Notice and Reporting” Clause in the 2016-2017 Policy, and two 1 modifications to the Clause through Endorsements 3 and 17 to the Policy. The notice 2 requirements of the Policy are set out in Clause 6(a). Pursuant to Endorsement 3 to the 3 Policy, Clause 6(a) “is deleted in its entirety and replaced by the following:” 4 [6](a) Reporting a Claim or Crisis [5] (1) The Organization or the Insureds shall, as a condition precedent 6 to the obligations of the Insurer under this policy, give written notice to the Insurer of a Claim or a Crisis as soon as practicable after the [7] Claim or Crisis is reported to or first becomes known by the Named 8 Entity’s Human Resources Department or Office of General Counsel …; or [9] 10 (2) Notwithstanding the foregoing, all Claims … shall be reported no later than: [11] 12 (i) anytime during the Policy Period or during the Discovery Period (if applicable); or [13] 14 (ii) within 45 days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim was [15] made during the Policy Period. [16] (FAC, Ex. 2, ECF No. 1-3 at 36.) Clause 6(a) is further modified by Endorsement 17, [17] entitled “Reporting a Claim or Crises Amended (Prejudice Threshold),“ which [18] provides that “Clause 6(a), Reporting a Claim or Crises is amended by adding the [19] following paragraph to the end thereof: “Notwithstanding the foregoing, a failure to [20] provide notice as soon as practicable shall not preclude coverage under the policy [21] unless the Insurer has been prejudiced by such failure.” (Id. at 55.) [22] Plaintiffs allege that on November 8, 2016, Felicia Horton filed a Complaint for [23] Damages against them asserting claims for discrimination and sexual harassment. (FAC [24] ¶9.) Specifically, Ms. Horton alleged that Guy Allen, who was then an employee of [25] Neptune Management, “had engaged in various acts of sexual harassment and [26] discrimination towards her.” (Id. ¶10.) Ms. Horton filed a Second Amended Complaint [27] adding SCI Direct as a defendant in that case on November 1, 2017. (Id. ¶13.) [28] 1 February 5, 2018. (Id. ¶20.) They further allege that on April 13, 2018, Defendant, 2 through its claims administrator AIG Claims, Inc., denied coverage for the Horton 3 Litigation on the ground that Plaintiffs had not complied with the claim reporting 4 requirements. (Id. ¶23.) As a result of that denial, Plaintiffs “have been forced to incur 5 or pay over $1.6 million dollars ($1,600,000) of Defense Costs out of their own pockets 6 without reimbursement from Defendant Illinois National.” (Id. ¶24.) They were also 7 forced to pay a judgment in the case in the amount of $2,290,729.44. (Id. ¶26.) 8 As a result of these events, Plaintiffs filed the present case alleging claims for 9 breach of contract - failure to advance defense costs, breach of contract - failure to 10 indemnify, and bad faith. It appears the parties attempted to resolve the case through 11 mediation, but those attempts were unsuccessful. Plaintiffs thereafter filed a First 12 Amended Complaint, and Defendant filed the present motion to dismiss. 13 II. 14 DISCUSSION 15 Defendant moves to dismiss the FAC in its entirety. It argues Plaintiffs are not 16 entitled to coverage because they failed to comply with the claim reporting requirement, 17 therefore their breach of contract claims fail. In the absence of a breach of contract claim, 18 Defendant argues the bad faith claim must also be dismissed. Defendant also asserts the 19 bad faith claim is subject to dismissal pursuant to the genuine dispute doctrine. 20 A. Legal Standard 21 In Ashcroft v. Iqbal, 556 U.S. 662 , 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. 22 Twombly, 550 U.S. 544 (2007), the Supreme Court established a more stringent standard 23 of review for 12(b)(6) motions. To survive a motion to dismiss under this standard, “a 24 complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief 25 that is plausible on its face.’” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 570 ). 26 “A claim has facial plausibility when the plaintiff pleads factual content that allows the 27 court to draw the reasonable inference that the defendant is liable for the misconduct 28 alleged.” Id. (citing Twombly, 550 U.S. at 556 ). 1 “Determining whether a complaint states a plausible claim for relief will ... be a 2 context-specific task that requires the reviewing court to draw on its judicial experience 3 and common sense.” Id. at 679 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)). 4 In Iqbal, the Court began this task “by identifying the allegations in the complaint that are 5 not entitled to the assumption of truth.” Id. at 680. It then considered “the factual 6 allegations in respondent’s complaint to determine if they plausibly suggest an entitlement 7 to relief.” Id. at 681. 8 B. Breach of Contract 9 Defendant’s motion to dismiss Plaintiffs’ breach of contract claims raises an issue 10 of contract interpretation. “’Resolution of contractual claims on a motion to dismiss is 11 proper if the terms of the contract are unambiguous.’” Monaco v. Bear Stearns Residential 12 Mortg. Corp., 554 F.Supp.2d 1034, 1040 (C.D. Cal. 2008) (quoting Bedrosian v. Tenet 13 Healthcare Corp., 208 F.3d 220 (9th Cir. 2000)). “A contract provision will be considered 14 ambiguous when it is capable of two or more reasonable interpretations.” Id. (citing Bay 15 Cities Paving & Grading, Inc. v. Lawyers' Mut. Ins. Co., 5 Cal. 4th 854, 867 (1993)). 16 “Language in a contract must be interpreted as a whole and in the circumstances of the 17 case.” Id. (citing Bank of W. v. Superior Court, 2 Cal. 4th 1254, 1265 (1992)). “Where the 18 language ‘leaves doubt as to the parties' intent,’ Consul Ltd. v. Solide Enters., Inc., 802 19 F.2d 1143 , 1149 (9th Cir. 1986), the motion to dismiss must be denied.” Id. 20 Here, Defendant argues the “as soon as practicable” reporting requirement and the 21 45-day reporting requirement are “two distinct conditions precedent to coverage.” (Reply 22 at 7.) Under this interpretation of the Policy, Defendant suggests it could deny a claim that 23 was filed within forty-five days of the end of the Policy Period but not “as soon as 24 practicable” after the Claim was reported. (See Mot. at 14.) According to Defendant, only 25 the denial of a claim for failure to report the claim “as soon as practicable,” triggers the 26 “Prejudice Threshold” Endorsement; and denying a claim due to the Insured’s failure to 27 report a claim within forty-five days of the end of the Policy Period, which is what 28 happened in this case, does not allow the Insured to invoke the “Prejudice Threshold” 1 Endorsement. Plaintiffs disagree with this interpretation of the Policy, arguing that the 2 “Prejudice Threshold” Endorsement applies to both the “as soon as practicable” reporting 3 requirement and the 45-day reporting requirement. 4 The Court agrees with Plaintiffs’ interpretation of the claim reporting requirements 5 of the Policy. The Policy uses the conjunction “or” to connect Clause 6(a)(1), which 6 contains the “as soon as practicable” reporting requirement, and Clause 6(a)(2), which 7 contains the 45-day reporting requirement. (FAC, Ex. 2, ECF No. 1-3 at 36.) The use of 8 “or” indicates that the Insured can comply with the Policy’s reporting requirements by 9 either reporting a claim “as soon as practicable” or within forty-five days of the end of the 10 Policy Period, not that the Insured must do both. This interpretation is bolstered by the 11 language of Clause 6(a)(2), which states, “Notwithstanding the foregoing, all Claims … 12 shall be reported no later than” forty-five days after the end of the Policy Period. (Id.) 13 (emphasis added). 14 Nevertheless, Defendant argues that because the Prejudice Threshold Endorsement 15 includes “as soon as practicable” language, it applies only to that reporting requirement. 16 But the Prejudice Threshold Endorsement expressly comes at “the end” of Clause 6(a), not 17 Clause 6(a)(1), which is where the “as soon as practicable” reporting requirement is found. 18 This placement, and the Endorsement’s explicit statement that “Notwithstanding the 19 foregoing” provisions of Clause 6(a), make clear the Endorsement applies to the entirety 20 of the claim reporting clause, not just the “as soon as practicable” requirement of Clause 21 6(a)(1). 22 In light of this interpretation, Plaintiffs argue that the effect of the Prejudice 23 Threshold Endorsement on their claim reporting requirements under the Policy is: 24 if the Insureds fail to report a claim as soon as practicable after it becomes known by the Insureds’ Human Resources Department or Office of General [25] Counsel – or if the Insureds otherwise fail to report the Claim prior to 45 days 26 after the end of the Policy Period or the Discovery Period – then the Policies shall not provide coverage for such Claim UNLESS Illinois National has not [27] been prejudiced by such failure to provide timely notice. [28] 1 (See Opp’n at 13). The Court is inclined to agree. At a minimum, the parties’ arguments 2 reflect an ambiguity in Clause 6(a) and the Prejudice Threshold Endorsement, which 3 warrants denial of Defendant’s motion to dismiss Plaintiffs’ breach of contract claims. 4 C. Bad Faith 5 Turning to Plaintiffs’ bad faith claim, Defendant argues it should be dismissed 6 because Plaintiffs have failed to plead a valid breach of contract claim, Plaintiffs have 7 failed to set forth sufficient facts to support a bad faith claim, and there is a genuine dispute 8 as to coverage. In light of the discussion above, the Court rejects Defendant’s first 9 argument. The Court also rejects the other two arguments, as explained below. 10 First, contrary to Defendant’s argument, the FAC clearly sets out sufficient facts to 11 support Plaintiffs’ claim. (See FAC ¶¶20-24, 35.) Plaintiffs allege, among other things, 12 that Defendant wrongfully denied Plaintiffs’ claims, failed to adopt and implement 13 reasonable standards for investigating and handling Plaintiffs’ claim, and grossly 14 misrepresented the provisions of and coverage provided by the Policy. (See id. ¶35.) 15 Second, a motion to dismiss is not the proper vehicle in which to raise the genuine 16 dispute doctrine. See Cherewick v. State Farm Fire & Cas., No. 320CV00693BENMSB, [17] 2020 WL 3971515 , at *8 (S.D. Cal. July 14, 2020) (declining to address genuine dispute 18 doctrine on motion to dismiss). This is particularly so when, as here, an action involves 19 not only a duty to indemnify but also a duty to defend. Mt. Hawley Ins. Co. v. Lopez, 215 20 Cal. App. 4th 1385, 1424 (2013) (stating “[i]t is doubtful that the so-called ‘genuine dispute 21 doctrine’ apples in third party duty to defend cases like this one.”) Rather, the genuine 22 dispute doctrine is more appropriately addressed on summary judgment. See City of 23 Fresno v. Tokio Marine Specialty Ins. Co., No. 118CV00504LJOSAB, 2018 WL 3691407 , 24 at *4 (E.D. Cal. Aug. 1, 2018) (stating genuine dispute doctrine applies to summary 25 judgment motions); Ovitz v. Chartis Prop. Cas. Co., No. CV153916PSGPLAX, 2015 WL 26 12746209, at *3 (C.D. Cal. Sept. 14, 2015) (noting the genuine dispute doctrine “is 27 generally applied at summary judgment.”). Accordingly, the genuine dispute doctrine does 28 not warrant dismissal of Plaintiffs’ bad faith claim. 1 Il. 2 CONCLUSION AND ORDER 3 For the reasons set out above, Defendant’s motion to dismiss is denied. 4 IT IS SO ORDERED. 5 || Dated: November 9, 2020 6 ns my. L4\ Hon. Dana M. Sabraw 7 United States District Judge