2019-00248786-CU-IC

Mark Giannini vs. Allstate Insurance Company

Nature of Proceeding: Hearing on Demurrer

Filed By: Williams, Erica L.

Effective September 23, 2019, official court reporters will not be available in Departments 53 and 54, with exceptions listed in the Court’s Policy Regarding Availability and Unavailability of Official Court Reporters. Additional information regarding this policy can be found on the Court’s website at www.saccourt.ca.gov .

Defendant Allstate Insurance Co.’s demurrer to Plaintiffs Mark Giannini and Linda Giannini’s (collectively “Plaintiffs”) second cause of action in their first amended complaint is SUSTAINED with leave to amend.

Overview

Plaintiffs own 8 properties. Allstate provided insurance to Plaintiffs as well as a $2 million umbrella policy. Allstate inspected the property at issue in September 2014 to look for hazards and other conditions that posed risks to the building or were dangers to others. Plaintiffs allege that at the time of the inspection, Allstate’s inspector saw scaffolding, but Allstate never indicated that the scaffolding was a hazard or risk of injury. Plaintiffs allege that in October 2014, Allstate knew that in cases involving scaffolding, the claims can produce very serious injury and damages in excess of Plaintiffs’ policy limits, but failed to advise Plaintiffs of such risks. In December 2014, two individuals (“Injured Parties”) climbed on the top of the scaffolding when the board on which they were standing broke. Both fell to the ground, one sustained a broken leg and other injuries. The other was totally paralyzed below the waist with some paralysis above the waist. In 2015, the Injured Parties sued Plaintiffs. They demanded was $62 million.

Plaintiffs allege that “Allstate delayed in offering the policy limits for months even though it knew that the demand was reasonable and well outside the policy limits.” (FAC, ¶ 12.) Allstate eventually offered the policy limits and the $2 million umbrella policy. The Injured Parties rejected the offer and demanded a “significant portion” of Plaintiffs’ assets. (FAC, ¶ 12.) Plaintiffs further allege that “Allstate did not acknowledge the significant risk to plaintiffs nor the need for Cumis counsel to balance the conflicting interests of Allstate and the plaintiffs. Allstate’s counsel refused to pursue arguments that would establish the comparative fault” of the two individuals. ( Id.) Plaintiffs were forced to hire outside counsel. The case settled two years later. Plaintiffs allege that “during this time, Allstate knew that plaintiffs were incurring expenses because of its unreasonable refusal to pursue settlement and refusal to pursue arguments that would reduce the plaintiffs’ liability, including but not limited to arguments that Ms. Ott and Ms. Grover contributed to or caused their fall by their own negligence. Plaintiffs had to contribute $1.1 million to the settlement, and incurred

other expenses to resolve the case, as well.” (Id.)

The second cause of action in Plaintiffs’ complaint is for breach of implied covenant of good faith and fair dealing. Plaintiffs allege that Allstate breached the implied covenant by:

acting unreasonably in the handling of the claims against plaintiffs; unreasonably refusing to offer the policy limits within a reasonable time; or otherwise provide benefits under the agreements alleged above or to correct mistakes made with regard to these agreements by funding the full amount of the settlement; failing to pursue arguments and evidence, including of comparative fault of the [sic] Ms. Ott and Ms. Grover, forcing the plaintiffs to hire outside counsel to protect their interests instead of providing Cumis counsel; and it failing to take other steps to protect the insureds; failing to properly investigate; failing to properly follow the standards imposed by custom and/or law, the Department of Insurance Regulations, and/or the Insurance Code; unreasonably withholding benefits; failing to settle the Lawsuit without making plaintiffs pay; looking for ways to deny coverage rather than look for ways to find coverage; and in other respects.

(FAC, ¶ 27.)

Allstate demurs to the second cause of action on the grounds that it is uncertain and fails to state sufficient facts.

The Court previously sustained Allstate’s demurrer to the initial complaint. Relying on Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, Allstate argued that Plaintiffs could not state a claim because did not allege that Allstate unreasonably withheld a policy benefit owed on their policies. In opposition, Plaintiffs maintained that a bad faith action does not require an allegation of failure to pay a policy benefit, but may also be based on a failure to investigate, failure to settle appropriately, denial of benefits due, paying less than due, and/or unreasonably delaying payments due. The Court agreed with Plaintiffs that a bad faith action did not require an allegation of failure to pay the policy benefits, however, Plaintiffs failed to allege any facts to support their bad faith cause of action. There were no factual allegations as to how Allstate failed to investigate their claim, failed to settle appropriately, or unreasonably delayed payments. (7/3/2019 Order.)

Allstate now demurs on the ground that Plaintiffs new allegations that: (1) Allstate failed to voluntarily offer its policy limits for months; (2) Allstate failed to provide Cumis counsel, and (3) Allstate’s defense counsel made strategic errors are insufficient to state a bad faith claim.

Delay in Offering Policy Limits

Allstate first contends that “absent an opportunity to settle within policy limits, an insurer’s failure to tender its limits is not ‘bad faith’ as a matter of law.” (Demurrer, 5:20-21.) “For bad faith liability to attach to an insurer’s failure to pursue settlement discussions, in a case where the insured is exposed to a judgment beyond policy limits, there must be, at a minimum, [1] some evidence either that the injured party has communicated to the insurer an interest in settlement, or [2] some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated.” (Reid v. Mercury Ins. Co. (2013) 220 Cal.App.4th 262, 272 [no bad faith action for failure to settle where plaintiff was willing to settle within policy limits, but insurer made no offer to settle, and there was no evidence to infer that the insurer knew or should have known that plaintiff was interested in settlement within policy limits.]; see also Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414, 427.) Here, there are no allegations that the Injured Parties were interested in settling within the policy limits. Indeed, the two individuals demanded $62 million – far exceeding the policy limits and the umbrella policy.

To the extent Plaintiffs allege that Allstate should have initiated settlement discussions, such a claim does not exist.

An insured’s claim for “wrongful refusal to settle” cannot be based on his or her insurer’s failure to initiate settlement overtures with the injured third party (Reid v. Mercury Ins. Co. (2013) 220 Cal.App.4th 262, 277 [162 Cal. Rptr. 3d 894] [“nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear”]), but instead requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. (Merritt, supra, 34 Cal.App.3d at p. 877.)

(Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414, 427 [italics in original].)

Plaintiffs oppose, arguing “Plaintiffs have alleged that the defendant was unreasonable in waiting months to offer the policy limits and waiting years to get the case settled, even though it had full control of the case. The California Supreme Court has stated that the only permissible consideration in evaluating ‘reasonableness’ of a settlement demand is ‘whether, in light of the victim’s injuries and probable liability of the insured, the ultimate judgment is likely to exceed the settlement offer.’ Johansen v. California State Auto. Ass’n Inter-Ins. Bureau (1975) 15 Cal.3d, 16; Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 498.” (Opposition, 3:15-22.)

Johansen is inapposite since the insurer refused to accept a settlement offer within the policy limits because it believed that the accident did not fall within the policy’s

coverage. Here, there are no allegations that Allstate believed the accident was outside the policy’s coverage. Indeed, Allstate provided a defense, without a reservation of rights, and paid the full policy limits. Further, Johansen was not a bad faith case.

Blue Ridge Ins. is also distinguishable. In Blue Ridge, the insurer defended the action but reserved its right to dispute coverage for any settlement contribution it made. A reasonable settlement offer was made, and the insurer accepted the settlement. The insureds objected to the insurer settling if the insureds would be liable for reimbursing the insurer for any noncovered claims. They also refused to either assume their own defense, or agree the settlement offer was unreasonable. The insurer then sued for reimbursement of the settlement amount. The California Supreme Court held that under such circumstances, the insurer may be reimbursed for a reasonable settlement amount made over the objection of its insureds. (Id. at 493.) Again, Allstate did not reserve its right to dispute coverage, nor is Allstate suing for reimbursement of the settlement. Lastly, Blue Ridge Ins. was not a bad faith case.

Failure to Offer Cumis Counsel

Civ. Code §2860(a) provides [i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision which sets forth the method of selecting that counsel consistent with this section.”

Civ. Code §2860(b) states, in part, “[f]or purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist.”

Allstate insists that its failure to offer Cumis counsel, absent a reservation of rights, cannot support a bad faith claim.

The Third District Court of Appeal has recognized the purpose of independent counsel (i.e. Cumis counsel). “Since it is almost unavoidable that, in the course of investigating and preparing the insured’s defense to the third party’s action, the insured’s attorney will come across information relevant to coverage or similar issues, it is quite difficult for an attorney beholden to the insurer to represent the insured where the insurer is reserving its rights regarding coverage.” (Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 87.) “The need for Cumis counsel arises only when there is a conflict

or potential conflict of interest between the insured and the insurer. Ethical dilemmas and temptations preclude joint representation at this juncture (unless the insured waives its right to control counsel.” (Id. at 90 (emphasis in original).) “Independent counsel is required where there is a reservation of rights ‘and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.’” (James 3 Corp. v. Truck Insurance Exchange (2001) 91 Cal.App.4th 1093, 1102.) “For independent counsel to be required, the conflict of interest must be ‘significant, not merely theoretical, actual, not merely potential.” ( Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal. App. 4th 999, 1007.)

Here, there are no allegations that Allstate reserved its rights regarding coverage. Plaintiffs advance that their allegations that the Allstate sought to provide a full defense by failing to pursue comparative fault claims and by failing to pursue arguments that would mitigate the exposure of the Plaintiffs is sufficient. Plaintiffs’ reliance on Spindle v. Chubb/Pacific Indem. Group (1979) 89 Cal.App.3d 706 is misplaced. Spindle did not involve Cumis counsel. Indeed, Civ. Code §2860 had not yet been enacted. Spindle involved a conflict of interest between two insureds that were defendants in the same action, and the insurer’s retention of counsel to represent both insureds.

Citing to Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, Plaintiffs argue that “Defendant’s conduct in failing to settle the case in a reasonable and timely fashion also exposes it to bad faith liability for failing to pursue arguments that would mitigate exposure of the plaintiffs.” (Opposition, 4:11-14.) In Golden Eagle, the insurer provided a defense without a reservation of rights. Despite providing a defense without a reservation of rights, on the “eve of trial”, the insurer informed its insured that it was disputing coverage and it was not until trial was underway that the insurer informed the insureds of its intent to settle for an amount in excess of its policy limits. The insureds thereafter obtained independent counsel, and then sued their insurer for reimbursement of attorney’s fees for their own independent counsel. The Second District Court of Appeal explained that since a defense was offered without a reservation of rights, the insurer would normally not be required to provide Cumis counsel. The court, however, found a conflict because the insurer’s defense counsel, over the insureds’ objections, attempted to negotiate a settlement in excess of policy limits, and that settlement would have exposed the insureds to claims by tenants who were not plaintiffs in the underlying action. Defense counsel pursued a settlement in excess of policy limits rendered his representation of the insureds “less effective” and, consequently, the insureds were entitled to advice from independent counsel regarding settlement. (Id.)

Golden Eagle does not assist Plaintiffs. Notably, Golden Eagle was not a bad faith case. Instead, the court found that the insureds were entitled to reimbursement for their independent counsel because the insurer should have provided them Cumis counsel. Moreover, Plaintiffs’ factual and conflict allegations against Allstate do not rise to the level of the insured’s acts in Golden Eagle.

Allstate’s Defense Counsel’s Errors

Plaintiffs do not oppose Allstate’s argument that an insurer is not liable for the conduct of defense counsel. The Court construes Plaintiffs’ failure to oppose the argument as a concession on the merits.

Disposition

The demurrer to second cause of action is SUSTAINED with leave to amend. The Court grants leave to amend since it has only ruled on one prior challenge to the complaint.

Plaintiffs may file and serve a second amended complaint (“SAC”) by no later than October 15, 2019, Response to be filed and served within 30 days thereafter, 35 days if the SAC is served by mail. (Although not required by any statute or rule of court, Plaintiffs are requested to attach a copy of the instant minute order to the SAC to facilitate the filing of the pleading.)

The minute order is effective immediately. No formal order pursuant to CRC Rule 3.1312 or further notice is required.