Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_04-cv-03518/USCOURTS-cand-4_04-cv-03518-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

AMERICAN COLOR GRAPHICS, INC., 

 Plaintiff, 

 vs. 

THE ST. PAUL TRAVELERS COMPANIES, 

INC., et al., 

 Defendant 

Case No.: C 04-3518-SBA 

ORDER RE: DEFENDANT’S MOTION 

FOR SUMMARY JUDGMENT

Defendant Travelers Property Casualty Company of America’s (“Travelers”) Motion 

for Summary Judgment came on regularly for hearing at 1:00 on December 13, 2005 before 

the Honorable Saundra Brown Armstrong in Courtroom 3 of the above-entitled court. 

This matter having been fully briefed and all evidence considered, IT IS HEREBY 

ORDERED that Defendant’s Motion be denied in its entirety. The Court finds that Plaintiff 

American Color Graphics, Inc. (“American”) established with admissible evidence that there 

are genuine issues of material fact, and Travelers’ motion must be denied as a matter of law. 

A. Background 

This matter involves a claim by American that Travelers breached the workers’ 

compensation insurance contract between the parties, and the implied duty of good faith and 

fair dealing, by various activity in connection with the workers’ compensation claim of Aiza 

Custodio (the “claim”). Among other things, American contends that Travelers assigned 

personnel to the claim who were untrained, failed to supervise those individuals, failed to 

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contact relevant witnesses, failed to abide by its own internal procedures for the handling of 

workers’ compensation claims, failed to act upon the many red flags that were indicative of 

fraud, misrepresented the reports of medical doctors in an electronic system made available to 

the insured, and misrepresented various facts to American both before the claim was accepted, 

and thereafter. As a result, American seeks compensatory and punitive damages. In response 

to these allegations, Travelers has filed a motion for summary judgment in which it contends, 

in essence, that the insurance contract between the parties allowed it the discretion to act in 

any way it pleases with respect to a workers’ compensation claim, so long as it tendered a 

defense to the claim, and that it cannot be liable for the allegations made by American in this 

action. Indeed, counsel for Travelers several times at oral argument that the parties agreed, by 

virtue of the Agreement, that Travelers could do just what it is alleged to have done in this 

case. The Court disagrees. 

Travelers admits, for purposes of this motion, that it did not conduct an adequate 

investigation with respect to the claim. The parties agree as to the relevant provisions of the 

insurance policy. These provisions state: 

 We will pay promptly when due the benefits required of you by the 

 workers’ compensation law. 

 We have the right and duty to defend at our expense any claim, 

 proceeding or suit against you for benefits payable by this insurance. 

 We have the right to investigate and settle these claims, proceedings 

 and suits. 

 ... 

 In consideration of a reduced premium, you have agreed to reimburse 

us up to the deductible amounts stated in the Schedule at the end of this 

endorsement for all payments legally required . . . which arises [sic] 

out of any claim or suit we defend. 

 

We will remain responsible for the full payment of all claims under 

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this policy without regard to your ability or intention to reimburse us 

for the deductible amount, provided that this does not release you from 

your obligation to us. 

Declaration of Howard E. Fitts [“Fitts Decl.”], ¶ ¶ 4-6 & Ex. A, “Workers Compensation and 

Employers Liability Policy; A Custom Insurance Policy Prepared for: American Color 

Graphics, Inc.”, AC 327 & TRAV 776. 

B. Legal Standard 

The Federal Rules of Civil Procedure provide for summary adjudication when “the 

pleadings, depositions, answers to interrogatories, and admissions on file, together with 

affidavits, if any, show that there is no genuine issue as to any material fact and that the 

moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). 

In considering a motion for summary judgment, the court must examine all of the 

evidence in the light most favorable to the non-moving party. United States v. Diebold, Inc., 

369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). If the moving party does not bear the 

burden of proof at trial, he or she may discharge his burden of showing that no genuine issue 

of material fact remains by demonstrating that “there is an absence of evidence to support the 

non-moving party's case.” Celotex Corporation v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 

91 L.Ed.2d 265 (1986). Once the moving party meets the requirements of Rule 56 by 

showing there is an absence of evidence to support the non-moving party's case, the burden 

shifts to the party resisting the motion, who “must set forth specific facts showing that there is 

a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 

2505, 91 L.Ed.2d 202 (1986). 

C. Analysis 

Plaintiff has made a showing sufficient to establish the existence of an element 

essential to its case, namely whether the investigation into the claim conducted by Defendant 

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was reasonable and conducted in good faith. This issue is essential to Plaintiff’s claims of 

breach of contract, and breach of the implied covenant of good faith and fair dealing. 

The duty to conduct a reasonable investigation is inherent in the duty to defend. See 

Mariscal v. Old Repulic Life Ins. Co., 42 Cal.App.4th 1617, 1623-34 (1996) (insurer breached 

covenant of good faith and fair dealing when it did not fulfill its duty to thoroughly 

investigate the claim before denying coverage). The insurance contract between the parties 

conferred upon the defendant the right to pay benefits on behalf of American when benefits 

are legally required of Plaintiff under the workers’ compensation law. Such a determination 

obliges Defendant under the contract to conduct a reasonable investigation and in good faith. 

While there is no true fiduciary relationship between an insurer and insured, it is 

“fiduciary-like” and “similar” because this relationship is often characterized by unequal 

bargaining power in which the insured must depend on the good faith and performance of the 

insurer. See Tran v. Farmers Group, Inc., 104 Cal.App.4th 1202, 1212 (2002); Old Republic 

Ins. Co. v. FSR Brokerage, Inc., 80 Cal.App.4th 666, 683 (2000). The exercise of an insurer’s 

discretion in the claims handling process is restricted by the implied covenant of good faith 

and fair dealing where such exercise may impair the insured’s interest under the policy. See 

Security Officers Service, Inc. v. State Compensation Ins. Fund, 17 Cal.App.4th 887, 895-96 

(1993). “'Every contract imposes on each party a duty of good faith and fair dealing in each 

performance and in its enforcement. Simply stated, the burden imposed is that neither party 

will do anything which will injure the right of the other to receive the benefits of the 

agreement. Or, to put it another way, the implied covenant imposes upon each party the 

obligation to do everything that the contract presupposes they will do to accomplish its 

purposes.” Old Republic Ins. Co. v. FSR Brokerage, Inc., 80 Cal.App.4th 666, 683-84 (2000). 

Based upon the authority cited by American, and the evidence it presented in its 

opposition papers, as well as the evidence it presented during oral argument, the Court finds 

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that American has established that there are several genuine issues of material fact. For 

example: (1) whether Travelers performed a reasonable investigation of the claim; (2) 

whether Travelers’ handling of the claim violated its internal standards for defending an 

investigating claims; (3) whether the claim should have been reviewed by a claims supervisor 

before Travelers accepted it for compensation; (4) whether Travelers failed to adequately train 

and/or supervise its employees; (5) whether Travelers acted in bad faith in connection with 

this matter, including by attempting to mislead its insured before and after accepting the 

claim; (6) whether Travelers violated the implied covenant of good faith and fair dealing 

and/or the express terms of the contract by the conduct described above, and other conduct 

alleged in this action; and (7) whether American is entitled to the damages it seeks, and the 

amount of such damages. 

In light of the discussion above, the Motion for Summary Judgment of Travelers must 

be DENIED as a matter of law. 

D. Defendant’s Objections to Plaintiff’s December 20, 2005 Proposed Order

At the close of the summary judgment motion hearing held on December 13, 2005, the 

Court requested Plaintiff prepare an order for the Court’s signature denying Defendant’s 

motion. The next day, Plaintiff submitted a one page order that did not include any findings 

or rulings the Court made during the hearing, other than that Defendant’s motion for summary 

judgment was denied. Consequently, the Court requested Plaintiff to submit a more 

substantive proposed order for the Court’s signature that memorialized in brief the Court’s 

findings and the legal bases for the Court’s conclusions. Plaintiff submitted a revised 

proposed order on December 20, 2005. The next day, Defendant filed a Notice of Objection 

to Plaintiff’s December 20, 2005 Proposed Order and requested the Court strike the December 

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20, 2005 Proposed Order. As the December 20, 2005 Order was submitted at the request of 

the Court the objection is OVERRULED. 

 IT IS SO ORDERED. 

Dated: 1/27/06 __________________________________ 

 SAUNDRA BROWN ARMSTRONG 

United States District Court Judge 

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