HAYES, District Judge:
The matter before the Court is the Motion for Summary Judgment or, Alternatively, Partial Summary Judgment ("Motion for Summary Judgment"), filed by Defendant National Union Fire Insurance Company of Pittsburgh, PA ("National Union"). (ECF No. 24).
On June 10, 2011, Plaintiff LMA North America, Inc. ("LMA") initiated this action by filing a Complaint in this Court against National Union. (ECF No. 1). In connection with National Union's refusal pay $3.75 million toward the settlement of an underlying litigation pursuant to an umbrella insurance policy, LMA asserts two claims for relief: (1) breach of contract, and (2) breach of the implied covenant of good faith and fair dealing ("bad faith claim"). Plaintiff seeks punitive damages as to the bad faith claim, and has demanded a jury trial.
On September 12, 2012, National Union filed the Motion for Summary Judgment, accompanied by evidence. (ECF No. 24). National Union moves the Court for summary judgment as to the entire Complaint or, alternatively, partial summary judgment as to LMA's bad faith claim and request for punitive damages.
On October 1, 2012, LMA filed an opposition to the motion, accompanied by evidence. (ECF No. 26). On October 5, 2012, National Union filed a reply. (ECF No. 27). On February 8, 2012, the Court conducted oral argument on the Motion for Summary Judgment. (ECF No. 36).
Plaintiff LMA and LMA's main competitor, Ambu A/S ("Ambu"), distribute competing laryngeal mask airway products.
On October 15, 2007, LMA brought a patent infringement suit against Ambu related
On August 25, 2008, Ambu filed five product disparagement counterclaims against LMA in the Ambu Litigation. (Def. Ex. 4 at 16, ECF No. 24-3 at 17). These counterclaims were premised on allegedly false and disparaging statements in LMA advertising regarding Ambu's laryngeal mask airway products. Specifically, Ambu alleged that from 2004 to 2009, LMA made certain claims in its advertising and marketing that implied Ambu's products were unsafe or inferior to LMA's products, and Ambu thereby claimed entitlement to resulting monetary damages (the "Counterclaims").
On September 25, 2009, the district court in the Ambu Litigation granted summary judgment in favor of Ambu for invalidity of the LMA patent, effectively dismissing all of LMA's affirmative claims for patent infringement. (Def. Ex. 7 at 53-57, ECF No. 24-3 at 54-58). On September 25, 2009, the district court denied LMA's motion for summary judgment as to Ambu's Counterclaims and denied LMA's motion to exclude Ambu's damages expert pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). (Pl. Ex. 1 at 1-2, ECF No. 26-1 at 4-5). On October 6, 2009, the district court stayed all further proceedings pending LMA's appeal of the summary judgment order as to LMA's patent infringement claim. (Pl. Ex. 2 at 1-4, ECF No. 26-1 at 6-10).
On September 21, 2010, the Court of Appeals for the Federal Circuit reversed the dismissal of the LMA patent claims. (Def. Ex. 8 at 63, ECF No. 24-3 at 64). The action was remanded to the district court for adjudication of LMA's patent infringement claims in conjunction with Ambu's Counterclaims. Id.
Defendant National Union issued Policy No. BE 3205963 (the "Policy") to LMA, with per occurrence excess limits of $14 million.
Prior to exhaustion of CNA's primary coverage, National Union has "the right and shall be given the opportunity to participate in the defense and trial of any claims, suits or proceedings relative to any Occurrence which, in [its] opinion, may create liability on [its] part...." (Def. Ex. 9 at 82, ECF No. 24-3 at 83). Following exhaustion of the CNA policy, National Union has "the right and duty to defend any claim or suit seeking damages covered by the terms and conditions of this policy when ... [t]he applicable Limits of Insurance
The Policy contains the following "no voluntary payments" provision: "No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [National Union's] consent." Id. at 93, ECF No. 24-3 at 94. The Policy also contains the following "no action" clause: "There will be no right of action against us under this insurance unless:... 2. The amount you owe has been determined with our consent or by actual trial and final judgment." Id.
On March 13, 2009, LMA notified National Union of Ambu's Counterclaims. (Manger Decl. ¶ 6, ECF No. 24-4 at 3).
On July 14, 2009, CNA agreed to defend LMA under the primary policy in the Ambu Litigation with respect to the Counterclaims. Id. ¶ 10, ECF No. 24-4 at 3.
On September 14, 2009, LMA forwarded to National Union a September 11, 2009 letter from Ambu, whereby Ambu's counsel stated that "LMA's potential exposure [as to Ambu's Counterclaims] is ... well in excess of $30 million." (Manger Dep. 61-62, 65, ECF No. 26-3 at 73-74; Pl. Ex. D, ECF No. 26-3 at 121).
On September 30, 2009, National Union sent a coverage letter to LMA, whereby National Union stated "there is potential coverage under the National Union Polic[y], subject to a reservation of rights." (Manger Decl. ¶ 11, ECF No. 24-4 at 4; Def. Ex. 16 at 114, ECF No. 24-4 at 115).
On October 9, 2009, LMA defense counsel informed a National Union claims handler that the Ambu Litigation would most likely be stayed pending LMA's appeal to the Federal Circuit. (Def. Ex. 11 at 60, ECF No. 24-4 at 61). LMA gave National Union access to a "database of the docket sheet and all entries on the docket" of the Ambu Litigation. (Pl. Ex. D at 119, ECF No. 26-3 at 124). National Union "typically follows PACER [a database allowing access to all public filings in a federal court case] to keep track of filings in [a] case" such as the Ambu Litigation. (Manger Dep. at 74-75, ECF No. 26-3 at 77).
On August 30, 2010, LMA's counsel, Stephen Marzen, forwarded to National Union's claims handler, Louis Manger, a detailed case report concerning the Ambu Litigation. (Pl. Ex. D at 119, ECF No. 26-3 at 124).
On November 15, 2010, LMA's counsel Marzen spoke with claims handler Manger. The claim notes written by Manger state:
(Def. Ex. 11 at 45, ECF No. 24-4 at 46).
In his April 27, 2012 deposition in this case, Marzen stated: "[W]e characterized [the Ambu Counterclaims as] a bargaining chip. At the same time, it plainly was not merely a bargaining chip, because the claim, having survived summary judgment motions, was more than a chip at that point [because it was going to go to trial]." (Marzen Dep. at 53-54, ECF No. 26-3 at 19-20). Marzen stated:
Id. at 38-39, ECF No. 26-3 at 16.
On November 16, 2010, National Union claims adjuster Manger reported in his claim notes that he was called by "the underlying CNA adjuster." (Def. Ex. 11 at 45, ECF No. 24-4 at 46). Manger states: "While [the CNA adjuster] is still reviewing deposition transcripts, preliminarily, [CNA] does not intend to pay[] on the claim at this point and do[es] not think they will attend the mediation [in the Ambu Litigation]. Nevertheless, it was agreed that [CNA] would provide us with the mediation date when it is scheduled." Id.
On November 17, 2010, Marzen emailed Manger with information about the upcoming mediation, including proposed dates, and asked, "Are you available to attend...?" (Pl. Ex. F at 167, ECF No. 26-3 at 172).
On November 29, 2010, Manger responded that "National Union did not plan on attending the upcoming mediation unless the primary carrier (CNA) planned on contributing its $1,000,000 primary limits to settle Ambu's counterclaim." (Manger Decl. ¶ 13, ECF No. 24-4 at 4). Marzen "voiced no objection to National Union's position regarding the upcoming mediation." Id.
On December 2, 2010, Manger spoke to the CNA claims adjuster. In his claim notes, Manger stated as follows: "[CNA has] not been given a demand and [CNA was] not considering, at this time, ... put[ing] up [its] policy limits. Accordingly, I informed [the CNA claims adjuster] that [National Union] will not be attending the upcoming mediation. It was agreed that CNA would keep us up to date on the happenings at the mediation." (Def. Ex. 11 at 41, ECF No. 24-4 at 42).
On December 16, 2010, LMA forwarded to National Union a copy of Ambu's December 10, 2010 pre-mediation settlement demand for its Counterclaims, which was then $28 million, including 14 pages of factual and legal analysis and voluminous attachments. (Manger Dep at 105-110, ECF No. 26-3 at 84-85; Pl. Exs. G & H, ECF Nos. 26-3 at 197-205, 26-4 at 1-78). Ambu's December 10, 2010 pre-mediation letter states that Ambu's expert economist "estimates that Ambu has sustained actual damages of at least $9,862,847, and alternatively at least $12,376,090 under an unjust enrichment theory." (Pl. Ex. G at 196, ECF No. 26-3 at 201). The letter states that "Ambu will establish additional facts at trial" that "will expose LMA to enhanced damages (up to three times the amount of actual damages)." Id.
On January 5, 2011, Manger stated in his claim notes:
(Def. Ex. 11 at 40, ECF No. 24-4 at 41).
On January 10-11, 2011, the mediation proceeded without National Union present. (Marzen Dep. at 174-75, ECF No. 26-3 at 50).
On the afternoon of January 10, 2011, Manger sent Marzen an email asking if there were "[a]ny significant developments." (Pl. Ex. R at 345, ECF No. 26-5 at 50). Marzen responded on January 10, 2011 with an email stating that "[t]he parties have not yet exchanged demands and offers." Id. Marzen continued: "As you know, CNA is represented here by its coverage counsel. If CNA is willing to tender its policy limits, is [National Union] willing to participate?" Id.
Later in the afternoon of January 10, 2011, the CNA claims adjuster sent Manger an email relaying a report she had received from CNA's coverage counsel at the mediation. CNA's claims adjuster stated:
(Pl. Ex. P at 341, ECF No. 26-5 at 46).
On the morning of January 11, 2010, Marzen called Manger with a detailed update of the first day of the mediation. (Marzen Dep. at 60-61, ECF No. 26-3 at 21). During the call, Marzen told Manger that "further exchange of numbers on the second day of the mediation ... would necessarily be in the excess insurer's layer." Id. at 62, ECF No. 26-3 at 22. Manger "accurately played back to [Marzen] all of the arguments in [LMA's] summary judgment motions." Id. Marzen responded that, "as good as we ... thought our argument was, the judge without a written opinion has denied our summary judgment motion. So those arguments ... aren't going to stop this product disparagement counterclaim from getting to a jury." Id. at 63, ECF No. 26-3 at 22. At the end of the call, Manger told Marzen that LMA did not have authority to settle from National Union. See id. Marzen also did not have authority to settle from CNA. See id.
During the second day of the mediation, "offers and counter-offers went back and forth throughout the course of the ... day," and, "at midnight, there was a tentative term sheet" agreed to by the parties. Id. at 64, ECF No. 26-3 at 22.
On January 13, 2011, Manger stated in the claim notes:
On February 1, 2011, LMA's coverage counsel sent an e-mail to Manger. According to Manger:
(Manger Decl. ¶ 17, ECF No. 24-4 at 5). LMA's coverage counsel asked Manger to review the attached "Agreement in Principle" and then contact LMA's coverage counsel. (Def. Ex. 17 at 134, ECF No. 24-4 at 135).
The "Agreement in Principle" signed by LMA and Ambu on January 11, 2011, stated that the settlement payments (payment by Ambu to LMA of $8.75 million, and payment by LMA to Ambu of $4.75 million) were expressly conditioned on LMA's ability to obtain "a written unconditional commitment ... by LMA['s] primary and umbrella insurance carriers ... to reimburse LMA [] for the amount paid to Ambu.... If LMA does not certify the fulfillment of the Condition by February 18, 2011 ... or otherwise waive the Condition... then this Agreement in Principle becomes null and void." (Def. Ex. 17 at 136, ECF No. 24-4 at 137).
On February 2, 2011, LMA sent Manger LMA's and Ambu's mediation presentations. (Manger Dep at 134-135, ECF No. 26-3 at 92). On February 3, 2011, LMA sent Manger "a memo and [budget] estimate that [LMA] sent to the trial team to organize [LMA's] preparation for trial." (Pl. Ex. K at 287, ECF No. 26-4 at 87). The budget from LMA estimated that the defense fees and costs through the end of trial would be a total of $2,759,968.75 (including $2,008,025 in fees related to Ambu's Counterclaims). (Manger Dep. at 124-25, 214-15, ECF No. 26-3 at 89, 107; Pl. Ex. I at 285, ECF No. 26-4 at 85). On February 3, 2011, CNA sent Manger "the last case analysis and subsequent e-mail with regards to the [Federal Circuit] appellate ruling." (Pl. Ex. L at 290, ECF No. 26-4 at 90).
On February 14, 2011, Manger responded to the February 1, 2011 e-mail from LMA's coverage counsel. Manger stated:
(Def. Ex. 19 at 174, ECF No. 24-4 at 175).
On February 17, 2011, LMA's counsel sent an e-mail to Manger which stated:
(Def. Ex. 20 at 177, ECF No. 24-4 at 178).
On February 18, 2011, Manger sent LMA's counsel an e-mail which stated:
(Def. Ex. 21 at 181, ECF No. 24-4 at 182).
LMA and Ambu agreed to extend the February 18, 2011, deadline in the LMA-Ambu contingent settlement in order to allow more time for CNA and National Union to consider the settlement. (Marzen Dep. at 120-21, ECF No. 26-3 at 36-37).
On February 18, 2011, Manger sent an e-mail to Marzen, which stated: "[National Union] has retained its own counsel to examine and evaluate the settlement proposal. I would like them to be able to access all confidential discovery." (Pl. Ex. M at 334, ECF No. 26-5 at 38). Marzen responded on the same day allowing National Union's counsel access to the LMA defense database. Id. at 333, ECF No. 26-5 at 37.
On March 17, 2011, LMA's counsel sent an e-mail to Manger stating that CNA had "agreed to pay its policy limits of $1 million, conditioned only on a release by Ambu re its product disparagement claims." (Def. Ex. 23 at 186, ECF No. 240-4 at 187). Attached to the e-mail was a memorandum dated March 7, 2011 from
Id.
On March 23, 2011, LMA's counsel sent Manger an e-mail stating that he "want[s] to make sure that this is being considered by [National Union] with all due attention." (Pl. Ex. N at 336, ECF No. 26-5 at 40).
On March 24, 2011, Manger responded with an e-mail which stated: "We are evaluating your response [of March 17, 2011] and will get back to you shortly." Id. Manger directed further inquiries to National Union's coverage counsel. See id.
On March 25, 2011, LMA's counsel sent National Union's counsel a letter setting forth the chronology and stating:
(Def. Ex. 26 at 11, ECF No. 24-5 at 12).
On March 25, 2011, National Union's counsel e-mailed a letter to LMA's counsel, which stated: "[W]e are in the process of reviewing and evaluating the Memorandum [dated March 7, 2011]. However, during the course of the review, a number of questions have arisen regarding [LMA counsel]'s analysis of the claims, liability, and proposed settlement of the LMA Action, which require clarification." (Def. Ex. 25 at 6, ECF No. 24-5 at 7). National Union's counsel listed six questions regarding the Ambu Litigation and the contingent settlement. See id. at 6-7, ECF No. 24-5 at 8.
On March 29, 2011, LMA's counsel sent Manger a nine-page reply to the six questions posed by National Union's counsel. (Def. Ex. 28 at 16, ECF No. 24-5 at 17). LMA's counsel also sent Manger a scheduling notice from the trial court in the Ambu Litigation regarding "an appeal mandate hearing next Friday, April 8." Id. LMA's counsel stated: "We are likely to discuss the schedule for clean-up document discovery, depositions, the pretrial conference, and trial of the patent and product-disparagement claims at the [April 8, 2011] hearing." Id.
On March 29, 2011, LMA's counsel sent an e-mail to National Union's counsel asking National Union to communicate a reply regarding the contingent settlement by April 1, 2011, and stating that "LMA is in a position of duress," and "after [April 1, 2011], the prejudice [to LMA] would be at a point where the underlying litigation must resume." (Def. Ex. 29 at 27, ECF No. 24-5 at 28). LMA's counsel stated: "[T]he primary insurer accepts the opinion of defense counsel and has tendered [policy] limits. If [National Union] scuttles the settlement, one or the other [i.e., CNA or
On March 30, 2011, National Union's counsel sent an e-mail to LMA's counsel which stated that "National Union will make every effort to provide you with a response by Friday [April 1, 2011] regarding the proposed settlement." (Def. Ex. 30 at 30, ECF No. 24-5 at 31).
On April 1, 2011, National Union's counsel sent an e-mail to LMA's counsel which stated:
(Pl. Ex. O at 340, ECF No. 26-5 at 45).
On April 7, 2011, Manger e-mailed LMA a letter stating that "National Union cannot consent to the settlement." (Def. Ex. 24 at 198, ECF No. 24-4 at 199). Manger stated:
Id. at 199-200, ECF No. 24-4 at 200-01.
At his deposition, Manger stated that "it's always a consideration [for National Union to take over the defense] because it's something that we can opt to do." (Manger Dep. at 197, ECF No. 26-3 at 107).
On April 11, 2011, LMA's counsel called National Union's counsel and "advised [National Union's counsel] that LMA intended to settle the Ambu Litigation, notwithstanding National Union's decision not to consent to the proposed settlement." (Wagner Decl. ¶ 12, ECF No. 24-5 at 3). LMA's counsel stated that he "believed there was legal authority for his position that National Union was required to: (a) consent to the proposed settlement; (b) step in and defend the Ambu Litigation in place of the primary carrier; or (c) face litigation from LMA." Id. During that telephone conversation, LMA's counsel mentioned the case, Diamond Heights Homeowners Association v. National American Insurance Co., 227 Cal.App.3d 563, 277 Cal.Rptr. 906
On April 12, 2011, National Union's counsel e-mailed LMA's counsel and stated: "I have relayed the substance of our discussion to National Union. I will let you know as soon as I have any information to report." (Def. Ex. 33 at 42, ECF No. 24-5 at 43).
On April 13, 2011, LMA's counsel e-mailed National Union's counsel and stated:
(Def. Ex. 33 at 41, ECF No. 24-5 at 42). Manger testified that, at the time, he "kn[e]w what [National Union's] options were." (Manger Dep. at 202, ECF No. 26-3 at 109).
On April 13, 2011, National Union's counsel e-mailed LMA's counsel and stated:
(Def. Ex. 34 at 44, ECF No. 24-5 at 45).
On April 14, 2011, LMA's counsel e-mailed a four-page letter to National Union's counsel, reiterating the "three options" and addressing issues raised in National Union's April 7, 2011 letter. (Def. Ex. 35 at 48-51, ECF No. 24-5 at 49-52). The letter stated that "LMA can no longer extend to National Union an indefinite amount of time to consider the matter," and "the $4.75 million settlement ... will likely be executed tomorrow or early next week." Id. at 49, 51, ECF No. 24-5 at 50, 52. The letter concluded: "LMA has reached out to National Union and its counsel at every stage of this matter, and, continues to do so.... Please [feel] free to call me...." Id. at 51, ECF No. 24-5 at 52.
On April 19, 2011, LMA's counsel e-mailed National Union's counsel and stated:
(Def. Ex. 36 at 52, ECF No. 24-5 at 53).
On April 21, 2011, National Union's counsel e-mailed an eight-page letter to LMA's counsel which responded in detail to LMA's April 14, 2011 letter and April 19, 2011 e-mail, and concluded:
(Def. Ex. 37 at 62, ECF No. 24-5 at 63).
On April 21, 2011, LMA's counsel e-mailed National Union's counsel and stated:
(Def. Ex. 38 at 63, ECF No. 24-5 at 64).
"A party may move for summary judgment, identifying each claim or defense — or the part of each claim or defense — on which summary judgment is sought. The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A material fact is one that is relevant to an element of a claim or defense and whose existence might affect the outcome of the suit. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The materiality of a fact is determined by the substantive law governing the claim or defense. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
The moving party has the initial burden of demonstrating that summary judgment
National Union contends:
(ECF No. 24-1 at 7-9). National Union contends that "facts of the present case are also clearly distinguishable from Diamond Heights." Id. at 25.
LMA contends:
(ECF No. 26 at 6-7).
California law governs in this diversity action. See Hyundai Motor Am. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 600 F.3d 1092, 1097 (9th Cir.2010); see also Erie Ry. Co. v. Tompkins, 304 U.S. 64, 71-80, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).
Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir.2001) (quotation omitted).
In Diamond Heights Homeowners Association v. National American Insurance Co., 227 Cal.App.3d 563, 277 Cal.Rptr. 906 (1991) ("Diamond Heights"), a primary insurer sued an excess insurer, seeking contribution toward a stipulated judgment. In the settled action, an insured developer had been sued for construction defects. Its primary insurer provided the defense and notified the excess insurer, Central, that settlement demands exceeded primary coverage and that it was likely the primary policy limits would be exhausted. Defense counsel also notified Central that both its assessment of the repair work and the plaintiffs' settlement demand exceeded primary policy limits, and sought information on Central's position. Though Central offered to contribute a nominal sum toward settlement, the matter settled on the first day of trial, without Central's contribution and with its objection to the settlement on the record. See id. at 575, 277 Cal.Rptr. 906.
In Diamond Heights, Central moved for summary judgment on the ground that the settlement entered without its consent violated the "no action" clause of the policy. See id. at 576, 277 Cal.Rptr. 906. Central contended that, "absent a demonstration of bad faith, a liability insurer acts within its contract rights whenever it refuses to voluntarily settle a claim and insists on adjudication of the matter on the merits." Id. (citation omitted). "Central cited the rule that where maximum potential loss does not exceed liability policy limits, the insurer has the absolute right to control the litigation and settlement, because the insured
Id. at 580, 277 Cal.Rptr. 906.
The Diamond Heights court concluded that, subject to certain conditions, "a primary insurer may negotiate a good faith settlement of a claim in an amount which invades excess coverage, and ... the primary insurer may enter into such settlement binding upon the excess insurer without the excess insurer's consent, notwithstanding the `no action' clause." Id. The appellate court stated: "Although such holding is in apparent conflict with the `no action' clause ..., we conclude the excess insurer may waive its rights under that clause if it rejects a reasonable settlement and at the same time fails to offer to undertake the defense." Id. at 581, 277 Cal.Rptr. 906. The appellate court stated:
Id. at 580-81, 277 Cal.Rptr. 906 (quotation omitted).
The appellate court stated that "[t]he excess insurer is not without a means of avoiding a proposed settlement or challenging a final settlement." Id. at 582, 277 Cal.Rptr. 906. For instance, the excess insurer "may voluntarily waive policy provisions such as condition H [providing that the excess insurer shall not be required to assume charge of the defense or settlement of any claim against the insured] and agree to undertake the defense (once the primary insurer tenders its full policy limits) and either conduct its own settlement negotiations or take the action to trial." Id. The excess insurer "may also challenge the settlement on the ground of unreasonableness or that it is a product of collusion between primary insurer and insured." Id. The appellate court reversed the grant of summary judgment in favor of Central because: "Central did not establish as a matter of law that the primary insurers were required to tender a formal demand that Central undertake the defense before entering into the settlement," and "[t]he record further shows Central's papers filed in support of summary judgment did not dispose of the material factual issue of whether Central waived its rights under [the `no action' clause], including the issue of whether Central was afforded a reasonable opportunity to undertake the defense prior to the settlement." Id. at 583, 277 Cal.Rptr. 906.
National Union contends that "the unique factual circumstances surrounding the settlement on the first day of trial in Diamond Heights ... distinguish it from the present situation where the settlement was consummated before a trial date was even set." (ECF No. 27 at 10). However, there is nothing stated in the court's analysis
National Union contends that "waiver of the `no action' clause described in Diamond Heights is inconsistent with [California] Supreme Court authority," specifically, Waller v. Truck Insurance Exchange, 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995). (ECF No. 24-1 at 23). In Waller, in a different factual context than this case,
Id. at 31, 44 Cal.Rptr.2d 370, 900 P.2d 619 (quoting City of Ukiah v. Fones, 64 Cal.2d 104, 107-08, 48 Cal.Rptr. 865, 410 P.2d 369 (1966)); see also id. at 33-34, 44 Cal.Rptr.2d 370, 900 P.2d 619 ("California courts will find waiver when a party intentionally relinquishes a right or when that party's acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.") (quotation omitted).
Waller reiterated waiver principles that existed before Diamond Heights. See Waller, 11 Cal.4th at 31, 44 Cal.Rptr.2d 370, 900 P.2d 619. Waller makes no mention of Diamond Heights or the rule stated therein. A post-Waller California Court of Appeal case has applied the Diamond Heights holding in a context similar to this case. In Fuller-Austin Insulation Co. v. Highlands Ins. Co., 135 Cal.App.4th 958, 38 Cal.Rptr.3d 716 (2006), the appellate court concluded that a reorganization plan approved by a bankruptcy court was a settlement which was enforceable against excess insurers without their consent, despite the presence of a policy provision "prohibiting [the insured] from voluntarily settling any claim without the insurer's prior written consent." Id. at 982 n. 7, 38 Cal.Rptr.3d 716. The appellate court examined Diamond Heights and stated: "The rationale of Diamond Heights applies
Id. at 990-91, 38 Cal.Rptr.3d 716 (citing Diamond Heights, 227 Cal.App.3d at 581, 277 Cal.Rptr. 906). After examining Diamond Heights, Waller, Fuller-Austin, and the other cases cited by the parties, the Court does not find that National Union has provided "convincing evidence that the state supreme court would decide differently" than Diamond Heights in this context. Vestar Dev. II, 249 F.3d at 960.
National Union contends that Diamond Heights has been "roundly criticized by other California appellate courts." (ECF No. 24-1 at 23 (citing Pacific Estates, Inc. v. Superior Court, 13 Cal.App.4th 1561, 1572, 17 Cal.Rptr.2d 434 (1993); Pruyn v. Agricultural Ins. Co., 36 Cal.App.4th 500, 524-25, 42 Cal.Rptr.2d 295 (1995); Hartford Accident & Indem. Co. v. Landmark Ins. Co., 29 Cal.App.4th 435, 440, n. 4, 34 Cal.Rptr.2d 520 (1994))). The criticism of Diamond Heights relates to issues not relevant in this case. See Fuller-Austin, 135 Cal.App.4th at 987 n. 11, 38 Cal.Rptr.3d 716 ("We acknowledge that Diamond Heights has been criticized, but this criticism revolves around its further conclusion that Central was bound by the good faith settlement determination as a `co-obligor.' Subsequent cases have clarified that an excess insurer is not conclusively bound by a good faith settlement determination in which it did not participate.") (citing Hartford Accident & Indem. Co. and Pacific Estates, Inc.).
National Union contends that Diamond Heights "makes no mention [of] the `no voluntary payments' provision." (ECF No. 27 at 11). However, as conceded by National Union, the underlying purpose of both the "no action" clause and the "no voluntary payments" provision are the same. See ECF No. 24-1 at 21 ("Like the `no voluntary payments' provision, `the purpose of a `no action clause' is to prevent abuse, collusion and/or fraud against the insurer in the settlement of claims against an insured.'") (quoting Continental Cas. Co. v. St. Paul Surplus Lines Ins. Co., 803 F.Supp.2d 1113, 1123 (E.D.Cal.2011)). National Union has presented no reasoned basis to apply the Diamond Heights holding differently to a "no voluntary payments" provision than to a "no action" clause. Indeed, in Fuller-Austin, the California Court of Appeal applied the Diamond Heights holding to an excess policy with a "no voluntary payments" provision. See Fuller-Austin, 135 Cal.App.4th at 982 n. 7, 38 Cal.Rptr.3d 716.
The Court finds, based upon the summary judgment standard of review and solely for the purposes of deciding the Motion for Summary Judgment, that the holding of Diamond Heights applies to
National Union contends:
(ECF No. 24-1 at 9)
LMA contends:
(ECF No. 26 at 27).
Under California law, "[t]he covenant of good faith and fair dealing has particular application to insurers because they are invested with a discretionary power affecting the rights of another, and the insurance business is affected with a public interest and offers services of a quasi-public nature." Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir.2002) (applying California law) (citing, inter alia, Egan v. Mut. of Omaha Ins. Co., 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141 (1979)). "Reflecting the importance of insurers' good faith obligations, bad faith by an insurer is subject to tort remedies, including punitive damages." Id. (citation omitted). "The key to a bad faith claim is whether or not the insurer's denial of coverage was reasonable." Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir.2001) (applying California law); see also Jordan v. Allstate Ins. Co., 148 Cal.App.4th 1062, 1073, 56 Cal.Rptr.3d 312 (2007) ("[I]f the insurer denies benefits unreasonably (i.e., without any reasonable basis for such denial), it may be exposed to the full array of tort remedies, including possible punitive damages.")
National Union relies upon CalFarm Ins. Co. v. Krusiewicz, 131 Cal.App.4th 273, 31 Cal.Rptr.3d 619 (2005), in contending that "LMA's ... bad faith [claim] ... cannot be based on a purported waiver of a policy provision." (ECF No. 24-1 at 9). In CalFarm, the court held that because an insured's claim for promissory estoppel was not based on the terms of the insurance contract, the insured was not entitled to punitive damages. See CalFarm, 131 Cal.App.4th at 285-86, 31 Cal.Rptr.3d 619 ("Here, promissory estoppel arises to enforce [a representative of the insurer]'s promise at the settlement conference that [the insurer] would pay the full amount of the arbitrator's award, not to enforce the Policy terms. Since promissory estoppel here was based on a promise independent of the Policy's implied covenant of good faith and fair dealing, estoppel cannot support punitive damages."). In this case, LMA has asserted that National Union's failure to pay LMA's claim constitutes a breach of contract, which distinguishes this case from CalFarm. Cf. id. at 277, 31 Cal.Rptr.3d 619 ("The pertinent issue in assessing bad faith is whether [the insurer]'s assessment of coverage under the contract of insurance was objectively reasonable. In contrast, the [insureds]' claim of promissory estoppel was based upon representations made by [the insurer] at a settlement conference regarding an agreement to arbitrate, not the terms of an insurance contract."). In light of the principles announced in Diamond Heights and Fuller-Austin, as discussed above, a reasonable jury could find that National Union's failure to pay LMA's claim constituted a breach of the insurance contract.
Viewing the evidence in the light most favorable to LMA, a reasonable jury could conclude that National Union acted unreasonably in delaying its response to LMA's request that National Union fund the contingent settlement or take over defense of the Counterclaims. The Motion for Summary Judgment is denied as to LMA's claim for breach of the covenant of good faith and fair dealing.
National Union contends that "LMA simply cannot prove, with clear and convincing evidence, that National Union engaged in fraudulent, oppressive, or malicious conduct." (ECF No. 24-1 at 9). National Union contends that Louis Manger was not a "managing agent" of National Union and LMA cannot prove that any "improper conduct [by Manger] was authorized or ratified by [National Union] management." Id.
LMA contends:
(ECF No. 26 at 28). LMA contends that "[b]ecause Mr. Manger exercised substantial discretion over the decision not to pay the claim, a jury could find his actions should be imputed to National Union." Id. at 28-29.
"Punitive damages are available if in addition to proving a breach of the implied covenant of good faith and fair dealing proximately causing actual damages, the insured proves by clear and convincing evidence that the insurance company itself engaged in conduct that is oppressive, fraudulent, or malicious." Amadeo, 290 F.3d at 1164 (citing, inter alia, Cal. Civ.Code § 3294(a)). "`Malice' means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others." Cal. Civ.Code § 3294(c)(1). "`Oppression' means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights." Id. § 3294(c)(2). "An employer shall not be liable for [punitive] damages ..., based upon acts of an employee of the employer, unless the employer... authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation." Id. § 3294(b). "[T]he relationship of insurer and insured is inherently unbalanced; the adhesive nature of insurance contracts places the insurer in a superior bargaining position. The availability of punitive damages is thus compatible with recognition of insurers' underlying public obligations and reflects an attempt to restore balance in the contractual relationship." Egan, 24 Cal.3d at 820, 169 Cal.Rptr. 691, 620 P.2d 141 (citations omitted). "`Determinations related to assessment of punitive damages have traditionally been left to the discretion of the jury.'" Amadeo, 290 F.3d at 1165 (quoting Egan, 24 Cal.3d at 821, 169 Cal.Rptr. 691, 620 P.2d 141).
Viewing the evidence in the light most favorable to LMA, a reasonable jury could find that National Union's actions and inaction, including its delays in responding to LMA's request that National Union fund the contingent settlement or take over defense of the Counterclaims, were motivated by an improper purpose that constituted malice or oppression. Viewing the evidence in the light most favorable to LMA, a reasonable jury could find that Manger, who was the only National Union agent "proactively involved" in "assess[ing]" the claim and "read[ing] any of the underlying documentation" (Manger Dep. at 175-77, ECF No. 26-3 at 102), was a "managing agent" of National Union pursuant to California Civil Code § 3294(b). See Egan, 24 Cal.3d at 822-23, 169 Cal.Rptr. 691, 620 P.2d 141 ("The determination whether employees act in a managerial capacity ... does not necessarily hinge on their `level' in the corporate hierarchy. Rather, the critical inquiry is the degree of discretion the employees possess in making decisions that will ultimately determine corporate policy. When employees dispose of insureds' claims with little if any supervision, they possess sufficient discretion for the law to impute their actions concerning those claims to the corporation."). The Motion for Summary
IT IS HEREBY ORDERED that the Motion for Summary Judgment is DENIED. (ECF No. 24).
IT IS FURTHER ORDERED that all remaining dates in the Case Management Conference Order (ECF No. 32) are reset as follows.
The parties shall fully comply with the Pretrial Disclosure requirements of Federal Rule of Civil Procedure 26(a)(3) on or before
Counsel shall meet together and take the action required by Local Rule 16.1(f)(4) on or before
The proposed final pretrial conference order, including objections to the opposing parties' Federal Rule of Civil Procedure 26(a)(3) Pretrial Disclosures shall be filed with the Clerk of the Court, and e-mailed to efile_hayes@casd.uscourts.gov in WordPerfect or Word format, on or before
The final pretrial conference shall be held on
