Case Name: The Restoration Cleanup Company, Inc. v. Michael Rantz, et al.
Case No.: 2011-1-CV-212971

Demurrer to the Sixth Amended Cross-Complaint by Cross-Defendant North American Capacity Insurance Company

Factual and Procedural Background

This is an insurance coverage action. Defendants and cross-complainants Michael Rantz and Paula Rantz (collectively, “the Rantzes”) are the owners of real property located at 330 Santa Rita Avenue in Palo Alto, California (“Property”). (Sixth Amended Cross-Complaint [“6ACC”] at ¶ 1.) Cross-Defendant North American Capacity Insurance Company (“NAC”) is an insurance provider issuing policies to insureds residing in or doing business in California. (Id. at ¶ 2.) NAC issued a commercial general liability insurance policy to defendant Northwall Builders, Inc. (“Northwall”), the general contractor hired by the Rantzes to construct their home on the Property. (Id. at ¶ 3.)

On March 25, 2011, the Rantzes’ home sustained serious water damage from a leak of over 75,000 gallons of water from a sprinkler system. (6ACC at ¶ 4.) The damage was caused by the failure of subcontractor and defendant Adanac Fire Protection, Inc. (“Adanac”) to glue a sprinkler pipe fitting during construction of the home, and Northwall’s actions in turning on the water to the home thereafter. (Ibid.) To address the substantial flooding and resulting damage caused by its own negligence, Adanac hired plaintiff the Restoration Cleanup Company (“RCC”) to remediate the damage. (Id. at ¶ 5.)

On November 10, 2011, RCC filed a Complaint (“RCC Action”) against Adanac, Northwall, and the Rantzes (collectively, “Defendants”) setting forth causes of action for: (1) breach of written contract [against Adanac]; (2) breach of written contract [against Northwall]; (3) breach of implied-in-fact contract [against Northwall and Adanac]; (4) quantum meruit [against Defendants]; (5) breach of implied-in-law contract – unjust enrichment [against the Rantzes]; (6) common count for money had and received [against the Rantzes]; (7) common count for goods and services rendered [against Adanac and Northwall]; and (8) common count for open book account and account stated [against Adanac and Northwall]. The Complaint alleges that Defendants breached the written contracts and failed to compensate RCC for labor and services performed on the Property.

The Rantzes timely notified NAC of the RCC Action seeking a defense and indemnification under the terms of the policy for the claims set forth in the RCC Action. (6ACC at ¶ 27.) NAC has repeatedly denied and refused to assume its contractual responsibility to defend or indemnify the Rantzes against the claims in the RCC Action under the terms of the policy. (Ibid.)

On January 25, 2017, the Rantzes filed a Fifth Amended Cross-Complaint (“5ACC”) against NAC alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing. NAC filed a demurrer to the 5ACC on the ground that it failed to state a cause of action. The Court sustained the demurrer with twenty days leave to amend to give the Rantzes one last opportunity to state a cause of action.

On May, 11, 2017, the Rantzes filed the operative 6ACC setting forth the same causes of action as the prior pleading.

Currently before the Court is NAC’s demurrer to the 6ACC on the ground that it fails to state a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Both sides submitted requests for judicial notice in conjunction with the motion. The Rantzes filed written opposition. NAC filed reply papers.

Demurrer to the 6ACC

NAC’s Request for Judicial Notice

In support of the motion, NAC requests judicial notice of the following: (1) the Complaint filed in the RCC Action (Exhibit A); (2) the Rantzes’ Fourth Amended Cross-Complaint (Exhibit B); and (3) the Court’s Order Re: NAC’s Demurrer to the 5ACC (Exhibit C). “Judicial notice is the recognition and acceptance by the court, for use by the trier of fact or by the court, of the existence of a matter of law or fact that is relevant to an issue in the action without requiring formal proof of the matter.” (Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117.) The Court may take judicial notice of these documents as records of the superior court under Evidence Code section 452, subdivision (d). (See Stepan v. Garcia (1974) 43 Cal.App.3d 497, 500 (Stepan) [the court may take judicial notice of its own file].)

Therefore, the request for judicial notice is GRANTED.

The Rantzes’ Request for Judicial Notice

In opposition, the Rantzes request judicial notice of the operative 6ACC in this action (Exhibit A). The pleading constitutes a record of the superior court subject to judicial notice under Evidence Code section 452, subdivision (d). (See Stepan, supra, 43 Cal.App.3d at p. 500 [the court may take judicial notice of its own file].) Therefore, the request for judicial notice is GRANTED.

The Rantzes’ Evidentiary Objection

In opposition, the Rantzes filed an evidentiary objection to portions of the demurrer. However, there is no authority for the proposition that a court must rule on evidentiary objections made in connection with a motion other than a motion for summary judgment or an anti-SLAPP motion. Therefore, the Court declines to rule on the evidentiary objection.

Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 (Blank).) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

First Cause of Action: Breach of Contract

The first cause of action is a claim for breach of contract. “A statement of a cause of action for breach of contract requires a pleading of (1) the contract, (2) plaintiff’s performance or excuse for non-performance, (3) defendant’s breach, and (4) damage to plaintiff therefrom.” (Acoustics, Inc. v. Trepte Construction Co. (1971) 14 Cal.App.3d 887, 913.)

The sole argument raised on this motion, as the prior demurrer, is whether NAC owes a duty to defend the Rantzes against claims alleged in the RCC Action.

“A liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. [Citation.] The determination whether the insurer owes a duty to defend is usually made in the first instance by comparing the allegations of the complaint with the terms of the policy. [Citation.] Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. [Citation.] The obligation to defend, however, is not without limits. Rather, such a duty is limited by the nature and kind of risk covered by the policy. [Citation.] The insurer does not need to defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. [Citation.]” (Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093, 1106.)

“[I]n order to prevail on the issue of the duty to defend, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.” (George F. Hillenbrand, Inc. v. Insurance Co. of North America (2002) 104 Cal.App.4th 784, 801 [internal quotation marks omitted].) “Any doubts as to whether the insurer has a duty to defend must be resolved in the insured’s favor.” (Id. at pp. 800-801.)

“In the context of a demurrer, the absence of a duty to defend may be established when the allegations in the third party complaint disclose no basis for policy coverage, and the insured’s complaint alleges no extrinsic facts that raise a possibility for coverage.” (Total Call Intern., Inc. v. Peerless Ins. Co. (2010) 181 Cal.App.4th 161, 167 (Total Call Intern., Inc.).)

Here, the Court previously sustained the demurrer to the 5ACC on the ground that the subject policy did not cover claims for property damage. (See NAC’s Request for Judicial Notice at Exhibit C.) Instead, the Court concluded that RCC was seeking purely economic damages from the Rantzes which do not constitute property damages and thus are not covered under the policy. (Ibid.; see Waller v. Truck Insurance Exchange (1995) 11 Cal.4th 1, 17 [“The focus of coverage for property damage is therefore the property itself, and does not include intangible economic losses, violation of antitrust laws or nonperformance of contractual obligations.”].) Since the Rantzes were given leave to amend, the Court now addresses the 6ACC to determine if a cause of action for breach of contract has been stated.

In doing so, the Court examines the amended allegations set forth in paragraph 33, subdivision (l) of the 6ACC which provide in relevant part as follows:

“Despite refusing coverage and a defense to Cross-Complainants, Cross-Defendants defended and indemnified the named insured, Northwall, for the RCC Action under the same Policy that insured the Rantzes. NAC agreed to provide a defense and indemnity to Northwall under the Policy for the same allegations asserted against the Rantzes in the RCC Action. By agreeing to provide a defense and indemnity to Northwall, NAC interpreted the Policy term ‘Property Damage’ to include the allegations in the RCC Action. However, despite agreeing that the RCC Action constituted a claim for ‘Property Damage’ under the Policy as to Northwall, NAC took the opposite position that the RCC Action did not constitute a claim for ‘Property Damage’ as to the Rantzes. By agreeing to defend Northwall in the RCC Action, NAC admitted that it was one for ‘Property Damage’ as that term is defined by the Policy. NAC breached the contract by denying coverage to the Rantzes for the RCC Action when it provided a defense and coverage to Northwall.”

(6ACC at ¶ 33, subd. (l).)

According to these allegations, NAC provided coverage to Northwall because it concluded that the RCC Action constituted a claim for property damages under the policy. (See 6ACC at ¶ 33, subd. (l).) In addition, both Northwall and the Rantzes were subject to the same allegations in the RCC Action. (Ibid.) Thus, the RCC Action would also constitute a claim for property damages against the Rantzes just as it did for Northwall. As a consequence, NAC would arguably have a duty to defend the Rantzes under the same policy. In any case, as this is a demurrer, all that matters is whether there exists at least the possibility for coverage. (See Total Call Intern., Inc., supra, 181 Cal.App.4th at p. 167.) Based on these allegations, which must be accepted as true on demurrer, the Court concludes that NAC owed a duty to defend the Rantzes against claims alleged in the RCC Action.

NAC disputes these allegations and points to the California Supreme Court decision in Foster-Gardner, Inc. v. National Union Fire Insurance Company (1998) 18 Cal.4th 857 (“Foster-Gardner”). NAC cites this decision for the proposition that the decision of an insurer to provide a defense is a judgment call left solely to the insurer. (Id. at p. 883.) This argument is misplaced. As a threshold matter, Foster-Gardner is distinguishable as it addressed a motion for summary judgment where the court can consider whether a party has evidence to support allegations of the complaint. As this is demurrer, the Court must accept the pleaded facts as true. More importantly, the Supreme Court in that case held, based on the policy language, that the insurer’s duty to defend the insured in a “suit” was limited to a civil action prosecuted in a court; it did not extend to an order issued by an administrative agency under an environmental statute. (Id. at pp. 878-888.) This holding is immaterial in resolving issues raised by this demurrer. To the extent that NAC disagrees with the allegations, it may renew its argument on a motion for summary judgment or at trial once the parties have exhausted their efforts through the process of civil discovery. As pled, the Court finds that the Rantzes have stated a cause of action for breach of contract.

Therefore, the demurrer to the first cause of action on the ground that it fails to state a claim is OVERRULED.

Second Cause of Action: Breach of the Covenant of Good Faith and Fair Dealing

The second cause of action is a claim for breach of the covenant of good faith and fair dealing. The covenant of good faith and fair dealing is implied in law to assure that a contracting party refrains from doing anything to injure the right of others to receive the benefits of the agreement. (McMillin Scripps North Partnership v. Royal Ins. Co. (1993) 19 Cal.App.4th 1215, 1222.) “In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.” (Ibid.)

“It is clear that if there is no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and insurer.” (Waller, supra, 11 Cal.4th at p. 36.) Since the Rantzes have stated a claim for breach of contract, the Court also finds a cause of action stated for breach of the covenant of good faith and fair dealing.

Consequently, the demurrer to the second cause of action on the ground that it fails to state a claim is OVERRULED.

The Court will prepare the Order.