JOHN A. MENDEZ, District Judge.
Plaintiff San Joaquin County Employees Retirement Association ("SJCERA") filed a motion for partial summary judgment on October 25, 2019 on the issue of whether Travelers Casualty and Surety Company of America ("Travelers") had a duty to defend SJCERA in an underlying lawsuit entitled Allum v. San Joaquin County Employees' Retirement Association
On December 10, 2019, the Court held oral argument on the above-referenced cross-motions of SJCERA and Travelers. Present for San Joaquin was its counsel James H. Vorhis and Ashley K. Dunning of Nossaman LLP and present for Travelers was its counsel Nicholas J. Boos of Maynard Cooper & Gale, LLP.
After considering all of the moving, opposition, and reply papers in connection with the above-referenced cross-motions, the documents, exhibits, and evidence filed and lodged in connection with those motions, and oral argument of counsel at the hearing:
IT IS HEREBY ORDERED that, for the reasons set forth in this Court's December 10, 2019 oral decision, a copy of which is attached to this order as Exhibit 1, Travelers' motion for summary judgment is GRANTED in its entirety and SJCERA's motion for partial summary judgment is DENIED.
IT IS SO ORDERED.
(In open court.)
THE CLERK: Calling civil 18-2042, San Joaquin County Employees' Retirement Association v. Travelers Casualty and Surety Company of America.
MS. VORHIS: Good afternoon, Your Honor; Jim Vorhis and Ashley Dunning on behalf of the plaintiffs, San Joaquin County Employees Retirement Association, which we'll call SJCERA throughout for the sake of ease.
THE COURT: And I'll call you San Joaquin.
MS. VORHIS: Or we'll call it San Joaquin.
We also have in the audience Johanna Shick from SJCERA and Jason Morrish from the County of San Joaquin.
THE COURT: Okay.
MR. BOOS: Good afternoon, Your Honor; Nicholas Boos on behalf of defendant Travelers.
THE COURT: Okay. This is on before the Court on cross-motions. The plaintiff brought a motion for partial summary judgment just on the duty-to-defend issue.
The defendants have challenged all claims, including the duty-to-defend issue, declaratory relief, the implied covenant of good faith and fair dealing and punitive damages.
This involves a claim by the County arguing that Travelers was required to or had a duty to defend the county. They failed to do that in what is referred to throughout the papers as the underlying action. That was an action filed in 2017. I just want to get the date right. It's also referred to as the Allum, A-L-L-U-M, litigation. We'll probably refer to it throughout as the underlying litigation.
In terms of the history of this case, back in 2006 at San Joaquin County the retirement association purchased fiduciary liability insurance from Travelers. The policy was meant to provide defense an indemnity protection to the county for claims alleging breach of fiduciary duty or negligence, error or omission. It was purchased to cover the period from August 2016 to August 2017.
Travelers does not dispute that the policy included a clause requiring them — not requiring — it to defend covered claims.
Central to this dispute, just focusing on the duty to defend the breach of contract claim, central to this is whether there are exclusions to that policy that permitted Travelers not to honor its duty to defend; two, in particular, referred to by the parties as a prior or pending litigation exclusion and then what's referred to in the papers as an inadequate funding exclusion.
Again, the underlying action, the Allum litigation, was filed against the County in 2017. The lawsuit, the 2017 — the underlying lawsuit stems from a settlement agreement that was entered into back in 2001. It resolved a lawsuit that had been filed in 1998 by a class of San Joaquin County employees against the retirement association. In that 1998 litigation, the plaintiffs sought to recover enhanced retirement benefits that they believed were owed as a result of incorrect calculations.
In order to resolve the 1998 litigation, a settlement agreement was entered into, and it's that settlement agreement that's at the heart of this issue before this Court.
In that 2001 settlement agreement, which resolved the 1998 litigation, the retirement association was required to agree to give supplemental benefits to the members that had sued them that had retired between April 1st, 1982 and 2001, also referred to throughout the briefs as the post-'82 retirees. And so the retirement association, the County, was required to create and fund a settlement reserve account in order to fund the supplemental benefits.
So now we fast forward to 2017 and these post-'82 retirees file another lawsuit against the County Retirement Association alleging breach of fiduciary duty by failing to pay them the supplemental benefits that were promised and required under the 2001 settlement agreement.
There are also allegations that the settlement reserve was misapplied, the funds weren't properly applied. There's that issue of whether the allegations really are that there was underfunding or not, I'll get into that, but there are allegations included in the underlying litigation concerning the misuse or the improper allocation of funds.
Travelers — the defense was tendered when the retirement association was sued. Defense was tendered to Travelers, Travelers declined coverage and contended that the prior or pending exclusion applied. Travelers also alleged that the inadequate funding exclusion applied as well.
There was a request for judicial notice, oral request for judicial notice. The Court has granted those requests. Obviously I had to take a look at the pertinent documents in this case, including the '98 lawsuit, the settlement agreement and the underlying litigation; although, for purposes of the request for judicial notice, the Court would not take it as true and wouldn't consider the allegations themselves, but I needed to look at these documents. And the parties obviously needed to make reference to them to see what exactly was alleged in these documents and what was included in the settlement agreement.
This is a classic case ripe for summary judgment. It really doesn't involve material issues of fact. It's really presented to the Court and the parties are asking the Court to interpret the insurance policy at issue. It's well established under California law that whenever a suit against an insured alleges a claim that could subject the insurer to liability for covered damages, an insurer must defend unless and until the insurer can demonstrate by reference to undisputed facts that the claim cannot be covered.
The insurer can, therefore, establish the absence of a duty to defend when it shows that the underlying claim could not come within the policy coverage by virtue of the scope of the insuring clause or the breadth of an exclusion.
While clauses identifying coverage are interpreted broadly in favor of the insured, exclusionary clauses are interpreted narrowly against the insurer.
The burden rests upon the insurer to phrase exclusions in clear and unmistakable language. The exclusionary clause must, therefore, be conspicuous, plain and clear. This requirement is especially forceful when the coverage portion of the insurance policy would lead an insurer to reasonably expect coverage for the claim purportedly excluded.
The burden is on the insured to establish that the claim is within the basic coverage and on the insurer to establish that the claim is specifically excluded.
In order to ascertain the scope of an exclusion, the Court is required to first consider the coverage language of the policy. The relevant coverage provisions in this policy stated that Travelers will pay on behalf of the insured loss for any claim first made during the policy period or if exercised during the extended reporting period or runoff extended reporting period for a wrongful act.
The term "loss" is defined, the term "wrongful act" is defined in the policy.
The language in the policy itself establishes a reasonable expectation that the insured, in this case the retirement association, will have coverage for any litigation defense expenses associated with a breach of contractual duty, and coverage will be found unless in this case the Court finds that the inadequate funding exclusion or the prior opinion exclusion conspicuously, plainly and clearly deprives the insured of certain litigation defense expenses, such as not adequately funding the settlement mandated reserve, will not be covered.
So you turn to the language of taking up first the prior impending litigation exclusion, and that exclusion states as follows, quote, "The company," meaning Travelers in this case, "will not be liable for loss for any claim based upon or arising out of any fact, circumstance, situation, event or wrongful act underlying or alleged in any prior or pending civil proceeding against any insured as of a certain date. In this case the parties agree that date is August 31st, 2005.
Travelers has argued in its motion that the plain language of this exclusion and controlling authorities make clear that it applies to bar coverage for the underlying litigation, the 2017 litigation.
The County has argued that this exclusion cannot bar coverage because the underlying action, the 2017 lawsuit, is not based upon or arising out of any fact, circumstance, situation, event or wrongful act alleged in the 1998 litigation.
Central to this dispute before this Court today is the interpretation of the phrase "arising out of." That's usually typical in most of these insurance policy interpretation cases. The County has argued that this phrase "arising out of" should be construed narrowly when included within an exclusion. The County cites Charles E. Thomas Company versus Travelers America Insurance Group in support of that argument.
Travelers argues, on the other hand, that the broad interpretation of the "arising out of" term applies to both coverage provisions and exclusions.
Travelers cites a string of cases including, in particular, Trenches, Inc. v. Hanover Insurance Company, a Ninth Circuit case which states that in California "arising out of" is construed broadly even if in an exclusion.
In looking at these cases and applying the cases to this situation, this Court has found the cases cite by Travelers to be more instructive and the Court has interpreted the phrase "arising out of" a little more broadly and to mean originating from, flowing from, incident to or having a connection with.
Our next area of disagreement is how extensively the relevant facts must overlap for an underlying action to, quote, arise out of, closed quote, the 1998 litigation.
Again, the County Retirement Association argues that both the 1998 complaint and the 2017 complaint must substantially overlap with each other with regard to the relevant facts for the exclusion to apply.
Travelers argues that the case relied on by their retirement association is, in part, based on a First Circuit case, which carries no weight or applicability in this court.
And they also argue that the California courts only require a slight connection or incidental relationship between the two lawsuits relying on a case Southgate Recreation Park District v. California Association Park and Recreation Insurance.
Again, the Court finds Travelers' argument to be more persuasive and has analyzed the arguments in light of the broader definition, which leads to ultimately the Court's view that as Travelers has argued primarily in its reply that it's undeniable that the underlying action, the 2017 lawsuit, grew out of and has at least a slight connection with the allegations in the 1998 action.
It seems clear to me it doesn't in any way that's not ambiguous, it's not difficult to read that exclusion and recognize that under the undisputed facts of this case there was a lawsuit filed in 1998. That lawsuit is settled only because there's a settlement agreement that was completed in 2001, and the underlying litigation in 2017 arises directly out of that 2001 settlement agreement. The 2001 settlement agreement doesn't exist unless there's a 1998 lawsuit and it just flows. These three documents just flow.
And I'm going to use Travelers arguments here because I adopt them and found them to be — I just agreed with the arguments completely. Again, quoting from Travelers reply brief, the Court adopts these arguments. "There can be no question that the underlying action where the plaintiffs allege that SJCERA wrongfully stopped paying them benefits agreed to in the 2001 settlement agreement that resolved the 1998 action has at least a slight connection to or incidental relationship with the allegation of the 1998 action.
SJCERA makes a series of futile arguments trying to remove the '98 action from the scope of the prior opinion exclusion that attempts to distance the action by characterizing it as involving allegations that SJCERA breached its fiduciary duty and violated contractual obligations by making certain decisions relating to its allocation of money to SJCERA reserves that plaintiffs thought were dictated to occur in a different manner under the 2001 settlement agreement, which led to a suspension of the benefit agreed to in the 2001 settlement agreement.
That characterization does not change the reality that the plaintiffs in the underlying action sued SJCERA for not paying the supplemental benefit agreed to in order to resolve the allegations in the 1998 action.
Though the County argues that the supplemental benefit established under the 2001 settlement agreement was a new benefit, that is irrelevant as Travelers has argued. The prior or pending exclusion includes coverage for any claim, quote, based upon or arising out of any fact, circumstance, situation, event, or wrongful act underlying or alleged in any prior or pending civil proceeding against any insured as of or prior to August 31st, 2001.
And "arising out" of requires only a slight connection or incidental relationship. There is no requirement that the parties and the harm be the same in the two actions.
Application of the exclusion does not depend on whether the supplemental benefit should be characterized as new. The supplemental benefit was established in the 2001 settlement agreement that resolved the 1998 action which alleged that SJCERA incorrectly determined compensation for San Joaquin County employees.
The County has argued that the prior or pending exclusion should not apply because some prior policies issued by Travelers included a prior or pending exclusion as well as an exclusion for a specific type of benefit created by the 2001 settlement agreement. That argument the Court — as Travelers argues goes nowhere because aside from the fact that it's not based on the language of the policy at issue in this litigation, overlapping exclusions do not render either exclusion ambiguous or unenforceable.
And as Travelers points out, the County did not attempt to respond to Traveler's discussion of Garamendi for that point.
The County has complained that the prior or pending exclusion is broad but the breath of the exclusion does not render it unenforceable.
The California Supreme Court has recognized that a word with a broad meaning or multiple meanings may be used in an insurance policy for that very reason, its breath to achieve a broad purpose.
And there's also no merit to the County's argument that applying the prior or pending exclusion would render the policy illusory.
As explained in Traveler's opening brief, an agreement is illusory and there is no valid contract when one of the parties assumes no obligation.
Applying the prior or pending exclusion does not render the policy illusory because it only removes coverage for one type of claim. The exclusion does not apply to litigation that was not pending prior to August 31st, 2005, or to claims that should not fall within the scope of the exclusion.
There is, the Court finds without question, more than a slight connection or incidental relationship between the 1998 plaintiffs' allegations that the County Retirement Association incorrectly determined their compensation earnable and the allegations in the underlying action that the County Retirement Association wrongfully stopped paying the supplemental benefit established to resolve the 1998 action. The allegations of the 1998 action led to the settlement that created the post-'82 group, the supplemental benefit, and the directives as to how to fund it, which are directly at issue in the underlying action due to the County Retirement Association suspension of payments of the benefit.
The bottom line is just I don't see any basis for not finding that these lawsuits are related, such that the exclusion applies. And I do find that Travelers didn't have a duty to defend — did not have a duty to defend under that exclusion.
Although I am not required to address the other argument, the inadequate funding exclusion, I do want to indicate to the parties that for purposes of completeness, I did not find and do not find that that exclusion actually was applicable. So I would not grant summary judgment on the basis that the duty to defend was also excluded under the inadequate funding exclusion.
In part, it's due to the allegations in the underlying litigation, the 2017 litigation, that as the County Retirement Association has argued it's not so much an allegation that there was inadequate funding. It's really allegations, if you read through that 2017 complaint, allegations that the money was mismanaged. In fact, there are allegations in the complaint itself that there was sufficient funding. Paragraph 22, the allegation is, in fact, there were funds available or there would have been funds available had defendants not illicitly redirected retirement funds or failed to allocate funds according to the requirements of law in the defendant's contract with class members.
Defendant goes on in the same paragraph defendants had simply mismanaged and misallocated money the defendants owed to the plaintiff class. Paragraph 23. In fact, there were funds available or there would have been funds available had defendants not illicitly redirected retirement funds. And there are other allegations throughout, so I would not find that this exclusion plainly and clearly precluded coverage for inadequate funding, given these allegations in the underlying litigation.
So for those reasons, again, I would grant defendant's motion for summary judgment on the breach of contract or the duty to defend claim and deny plaintiff's motion for summary judgment on that claim.
I'll get to the other claims, but I want to give the parties an opportunity just to comment and complete the record, make a record on the Court's decision with respect to that first claim.
Mr. Vorhis, anything you want to add?
MS. VORHIS: Yes. Absolutely, Your Honor. Thank you.
I wanted to clarify one point about the 1998 litigation that you mentioned about the recovery of enhanced retirement benefits and that being the subject matter of that 1998 litigation, and that's not accurate. The 1998 litigation was simply about asking the Court to determine what pay types should be included in the statutory benefit formula. It was not about the recovery of an enhanced benefit.
And I think this is important because when you actually get to the 2001 settlement agreement, recognize that it covers all retirees, past, present, future, and that there are provisions within that settlement agreement that apply both to this post-'82 group but also to active members of the County of San Joaquin and future members.
And that's important because we've been focused on paragraph 20 of that settlement agreement, and Travelers has made some implied decisions about exactly what that applies to in the context of the 1998 complaint. But right above it in paragraph 19 they go on to provide a formula for benefits that will be paid to active and future members.
Now, what's really problematic about the scope of potentially denying this decision on the prior impending litigation exclusion is that it then would also implicate any benefits-related litigation addressing active members, future members. So as of 2001, if someone were to join the retired — were to join the County of San Joaquin in 2004 and retire in 2008 and then had a problem with their benefits, under Travelers' interpretation of this prior impending litigation exclusion, that would be barred, and that is why we've made the argument about the illusory coverage but also the importance of the overlapping exclusions.
Obviously this supplemental sick bank exclusion that was included in the first seven years of Travelers coverage for SJCERA was expressly called out and he — Mr. Boos and Travelers cited to Garamendi.
The important point, from our perspective, is the reasonable expectation of San Joaquin where they have one benefit created by a 2001 settlement agreement that is expressly excluded and another that's not listed at all where the application of this exclusion then bars essentially all benefits related to litigation because the 1998 litigation was to calculate pay types that are to be included in the retirement formula for all members. It's not just this one subgroup.
I would also point out that the 2001 settlement agreement in paragraph 20, it does mention that it was to resolve the matter, but it doesn't tie that out to anything in particular from the 1998 litigation. It doesn't say: This is because of retroactive benefits to be paid for a particular subgroup of retirees. And that's important because there are retirees that are members of the post-'82 group that were not entitled to any benefits in 1998. They had no cause of action in 1998 whatsoever. A supplemental benefit was created in 2001 anew. So can claims raised by someone who had no actual claim in 1998 be barred? And I understand Your Honor's point about the phrase "arising out of" being broad. We cited to Charles Thomas, which was not in the context of a prior impending litigation exclusion.
I would point to a different case that was cited by Travelers, and that's the Medill case, Medill. And there's some language there that I think is really important and that says — if I can find it — the provision will shift between clarity and ambiguity with changes in the event at hand. Under the circumstances here we do not find the breach of the contract exclusionary language to be ambiguous.
The important point is that the clarity or ambiguity of a particular term will depend on precisely what type of exclusion it's in. "Arising out of" may be a very broad statement, but if you actually look at the cases that both parties cited, which would include ML Direct and Bensalem and Catlin Specialty and Juszkiewicz, all of them actually required that there be overlapping underlying wrongful conduct, which is clearly not the case here.
The 1998 litigation was brought because there was a California Supreme Court decision and a group of members of SJCERA wanted to determine what pay types are going to be included in other statutory benefit formula.
The Allum litigation or the underlying litigation that we've been talking about today is about how SJCERA accounts for its or how it allocates its reserves within the system.
Obviously this is not something they would have contemplated when purchasing the insurance, that if they had a statutory benefit piece of litigation that addressed every member of its system that it would be sued 15 years — 15 years later regarding its methodology for allocating reserves and that it would somehow bar coverage because earlier — and, of course, that litigation relates to something that's not part of the statutory benefit formula, but how that would then be barred by something from 20 years prior.
THE COURT: Mr. Boos, do you want to respond?
MR. BOOS: I'll be brief, Your Honor. Thank you.
I don't want to rehash all the briefing. I think most of Mr. Vorhis' arguments have been addressed in the briefing already, you know, I obviously agree with the Court's conclusion with respect to the prior impending exclusion. I will just say, as I did in the briefing and as Your Honor did, that it is undeniable that the exclusion applies here based on any plain reading of the relevant documents. It's impossible to describe the underlying action without concluding that it falls within the exclusion. It just does.
With respect to the inadequate funding exclusion, you know, obviously we disagree with that. We respect the Court's decision, but unless Your Honor has any specific questions for me ...
THE COURT: Okay. No, I don't. I just wanted to give each party an opportunity to make whatever comments you want to make for purposes of the record.
In terms of the other claims, let me go through those quickly, given the Court's decision on the duty to defend issue.
There is a declaratory relief claim. Travelers is seeking summary judgment on that claim. The claim requests a judicial determination of the retirement association's rights and duties and a declaration that Travelers is obligated to defend the retirement association under the policy for past costs incurred and future costs that will be incurred related to the underlying litigation.
The claim fails, as Travelers has argued, fails as a matter of law because the Court has found that the retirement association was not entitled to a defense, the Court's determination that the prior impending exclusion precludes a duty to defend and because of that determination, the declaratory relief claim fails as a matter of law and summary judgment is granted for Travelers on that claim.
On the breach of implied covenant of good faith and fair dealing, the retirement association has alleged that Travelers breached this obligation by failing to defend them in the underlying litigation. Travelers has sought summary judgment on this claim.
And when there is no duty to defend under the terms of a policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based upon the contractual relationship between the insured and the insurer. That's the Waller v. Truck Insurance Exchange, Inc., case.
Accordingly, because this Court has found that there was no duty to defend, the San Joaquin County Retirement Association's claim for breach of implied covenant of good faith and fair dealing also fails as a matter of law.
Even if the Court had determined that Travelers owed a duty to defend, the Court would still find that this claim fails and that summary judgment would be appropriate because it must be demonstrated or shown that Travelers acted unreasonably and without proper cause in its denial of coverage. An insurer must engage in a conscious and deliberate act which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the insured. The mistaken withholding of benefits without more is merely a breach of contract, not a breach of the implied covenant of good faith and fair dealing.
There is absent from the undisputed facts in this case any facts that would support a claim that Travelers consciously and deliberately acted to unreasonable deny coverage in this case, and for that reason also, the claim would have failed and does fail even if the Court had found that Travelers had a duty to defend.
And then finally, there's a punitive damage claim in this case which, given the Court's rulings on the other claims, fails as a matter of law. And again, the Court also finds that there was insufficient evidence of malice, suppression or fraud or that Travelers unreasonably ignored its obligations under the policy in this case.
Taking the evidence in light most favorable to the plaintiff, there still would be no legal basis for a jury to award punitive damages under the undisputed facts of this case. So for that reason, summary judgment is granted. On that claim as well, the Court, therefore, grants Travelers' motion for summary judgment in its entirety.
Any pretrial dates or trial dates are vacated.
Mr. Boos, if you want, I'm not going to prepare a written opinion. The Court's ruling here in court will stand as the Court's order. If, for some reason, you want to have an order on file, feel free to prepare one and get approval of the plaintiff as to the form. But, again, the Court's order here in court stands as the final order.
MR. BOOS: Thank you, Your Honor.
THE COURT: Okay. Thank you all.
MS. VORHIS: Thank you, Your Honor.
(Concluded at 2:32 p.m.)
I certify that the foregoing is a true and correct transcript of the record of proceedings in the above-entitled matter.
