Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_07-cv-01003/USCOURTS-casd-3_07-cv-01003-1/pdf.json

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

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The Court uses the term “Dallo Family” to refer to all the Dallos (mother, father, son, and the

Dallo’s company, Dallo & Co., Inc.) while the term “Counterclaimants” refers to the Dallo Family

minus Jonathan Dallo.

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

PROGRESSIVE WEST INSURANCE

COMPANY,

Plaintiff/Counterdefendant,

CASE NO. 07CV1003 IEG (BLM)

ORDER GRANTING PLAINTIFF’S

MOTION TO DISMISS 

(Doc. No. 17, 18, 23, 26)

vs.

JONATHAN DALLO; MICHAEL DALLO;

MONA DALLO; DALLO & CO., INC., and

DOES 1 through 10, inclusive,

Defendants/Counterclaimants.

Presently before the Court is Plaintiff’s motion to dismiss Defendants’ counterclaims. For the

reasons set forth below, the Court GRANTS Plaintiff’s motion.

BACKGROUND

A. Factual Background

On June 28, 2006, Jonathan Dallo, adult son of Mona and Michael Dallo, while driving a

BMW vehicle, was involved in a motor vehicle accident in which Jodi Burnett was killed.

(Counterclaimants’ Counterclaims Complaint (“Counter-Complaint”) ¶ 11.) Burnett’s husband and

family pursued compensation, filing a lawsuit in San Diego Superior Court (“Burnett Lawsuit”) which

asserted claims against Jonathan Dallo, Michael Dallo, Mona Dallo, and Dallo & Co., Inc.,

(collectively “Dallo Family”).1

 (See Counter-Complaint ¶ 12.) 

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At the time of the accident, Michael Dallo had in force with Plaintiff Progressive West

Insurance Co. (“Progressive”) a policy of automobile insurance (“the Policy”). The Policy provided

$500,000 in personal injury liability coverage. (See Counter-Complaint ¶ 10.) The CounterComplaint makes no specific reference to the Policy’s provisions nor does it make any allegation that

the BMW driven by Jonathan Dallo on the night of the accident is covered by the express terms of the

policy. 

 Michael Dallo, Mona Dallo, and Dallo & Co., Inc.’s (“Counterclaimants’”) Counter-Complaint

alleges that after tendering claims related to the Burnett Lawsuit to Progressive—a claim “clearly

covered by the policy”—Progressive initially denied coverage. (Counter-Complaint ¶ ¶ 13, 40.) The

Counter-Complaint goes on to allege Progressive eventually agreed to defend the Dallo Family after

the Dallo Family retained counsel to represent them and counsel re-tendered the claims to Progressive

with additional information. (Counter-Complaint ¶ 14.) The Counter-Complaint further alleges that

while agreeing to undertake defense obligations, Progressive reserved its rights to recoup its defense

costs and any indemnity payment based on its position that Jonathan Dallo’s use of the BMW vehicle

was not covered by the Policy and despite numerous requests by Counterclaimants that Progressive

tender its policy limits without a reservation. (Counter-Complaint ¶¶ 14, 21.) 

The Counter-Complaint alleges that despite Progressive’s agreement to provide a defense for

Jonathan Dallo and Counterclaimants and its retention of a lawyer for the Dallo Family, Progressive

never actually undertook Counterclaimants’ defense since a conflict of interest between Jonathan

Dallo and Counterclaimants precluded joint representation. The Counter-Complaint acknowledges

separate counsel was eventually secured for Jonathan Dallo on the one hand and Counterclaimants on

the other. However, and without specifically identifying the counsel to which it is referring, the

Counter-Complaint alleges “counsel never took over the defense in a substantive way.” (CounterComplaint ¶ 23.) Further, again without specifying the counsel being referenced, the CounterComplaint alleges counsel provided by Progressive was not independent, as required by the

circumstances. (See Counter-Complaint ¶ 23.) 

The Counter-Complaint goes on to allege Progressive offered its policy limits to the Burnett

Lawsuit plaintiffs pursuant to its reservation of rights without first conferring with Counterclaimants

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Counterclaimants claimed the FAC alleges a payment only on behalf of Jonathan Dallo.

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about the best way to approach the defense of the case or waiting for a policy limits demand.

(Counter-Complaint ¶ 16.) 

After a second mediation between the Dallo Family, the Burnett Lawsuit plaintiffs and the

Dallo Family’s insurers, the Burnett Lawsuit settled. The Counter-Complaint alleges

Counterclaimants explicitly abandoned all coverage under the Progressive policy and used their own

funds along with funds from another insurer to settle all claims asserted against them in the Burnett

Lawsuit. (Counter-Complaint ¶ 25.) The Counter-Complaint further asserts Progressive was informed

of Counterclaimants’ abandonment of coverage and that, thereafter, plaintiffs in the Burnett Lawsuit

made a policy limits offer to Progressive to settle their claims against Jonathan Dallo only, which

Progressive accepted. (Counter-Complaint ¶ 26.) Pursuant to the settlement agreement, Progressive

paid its $500,000 policy limits on behalf of Jonathan Dallo only, while Counterclaimants paid

$250,000 of their own funds on their own behalf. (Counter-Complaint ¶ 33-34).

B. Procedural Background

On July 16, 2007, Progressive filed its First Amended Complaint (“FAC”), asking for (1) a

declaration that the Policy does not cover claims arising out of the accident in the Burnett Lawsuit;

(2) a judgment for reimbursement from the Dallo Family of defense costs incurred during

Progressive’s defense of the Burnett Lawsuit; and (3) a judgment for reimbursement of the $500,000

paid to the Burnetts Lawsuit plaintiffs as part of the settlement agreement. (Doc. No. 6.) On August

8, 2007, Counterclaimants filed a motion to dismiss, arguing Progressive’s FAC fails to state a claim

because it fails to allege Progressive paid policy benefits on behalf of Counterclaimants2

 and that

Progressive fails to allege it fulfilled the prerequisites for obtaining reimbursement outlined by the

California Supreme Court in Blue Ridge Ins. Co. v. Jacobson, 25 Cal. App. 4th 489 (2001). In an

October 30, 2007 Order, this Court rejected Counterclaimants’ argument and denied the motion.

(Doc. No. 14.)

On November 9, 2007, Counterclaimants filed counterclaims against Progressive, asking for

a declaration regarding the rights and duties under the Policy and asserting causes of action for (1)

breach of contract, (2) bad faith, and (3) intentional infliction of emotional distress. (Doc. No. 17.).

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Rule 8(a)(2) requires only that the complaint include “a short and plain statement of the claim

showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).

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On November 29, 2007, Progressive filed a motion to dismiss, alleging Counterclaimants could not

state a claim for these various actions because Progressive paid all benefits due under the Policy.

(Doc. No. 18.) Counterclaimants filed an opposition on January 8, 2008. (Doc. No. 23). Progressive

replied on January 14, 2008. (Doc. 26.)

The Court finds the matter fully briefed and amenable for disposition without oral argument

pursuant to Local Rule 7.1(d)(1). 

LEGAL STANDARD

A motion to dismiss pursuant to Fed. R. Civ. Pro. 12(b)(6) tests the legal sufficiency of the

claims asserted in the complaint. Fed. R. Civ. Proc. 12(b)(6); Navarro v. Block, 250 F.3d 729, 731

(9th Cir. 2001). To survive a Rule 12(b)(6) motion, a complaint generally must satisfy only the

minimal notice pleading requirements of Fed. R. Civ. Pro. 8(a)(2).3

 Porter v. Jones, 319 F.3d 483, 494

(9th Cir. 2003). A court may dismiss a complaint for failure to state a claim when “it appears beyond

doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to

relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Navarro, 250 F.3d at 732 (citing Conley); see

also Haddock v. Board of Dental Examiners, 777 F.2d 462, 464 (9th Cir.1985) (a court should not

dismiss a complaint if it states a claim under any legal theory, even if plaintiff erroneously relies on

a different theory). In other words, a Rule 12(b)(6) dismissal is proper only where there is either a

“lack of a cognizable legal theory” or “the absence of sufficient facts alleged under a cognizable legal

theory.” Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988).

In deciding a motion to dismiss for failure to state a claim, the court's review is limited to the

contents of the complaint. Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996); Allarcom

Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). The court must

accept all factual allegations pled in the complaint as true, and must construe them and draw all

reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co.,

80 F.3d 336, 337-38 (9th Cir.1996); Mier v. Owens, 57 F.3d 747, 750 (9th Cir.1995) (citing Usher v.

City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). In spite of the deference the court is bound

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to pay to the plaintiff's allegations, it is not proper for the court to assume that “the [plaintiff] can

prove facts which [he or she] has not alleged.” Associated General Contractors of California, Inc. v.

California State Council of Carpenters, 459 U.S. 519, 526 (1983). Furthermore, a court is not required

to credit conclusory legal allegations cast in the form of factual allegations, unwarranted deductions

of fact, or unreasonable inferences. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.

2001); Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981).

A court may dismiss a complaint without granting leave to amend only if it appears with

certainty that the plaintiff cannot state a claim and any amendment would be futile. See Fed. R. Civ.

P. 15(a) (leave to amend “shall be freely given when justice so requires”); DeSoto v. Yellow Freight

Systems, Inc., 957 F.2d 655, 658 (9th Cir.1992); Albrecht v. Lund, 845 F.2d 193, 195 (9th Cir. 1988);

Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986) (“leave to

amend should be granted unless the court determines that the allegation of other facts consistent with

the challenged pleading could not possibly cure the deficiency”).

DISCUSSION

I. Contract Claim

The elements of a cause of action for breach of contract are: “(1) The contract; (2) Plaintiff’s

performance; (3) Defendant’s breach; (4) Damage to plaintiff.” McDonald v. John P. Scripps

Newspaper, 210 Cal. App. 3d 100, 104 (1989). The parties’ dispute centers on whether CounterClaimant’s allegations regarding Progressive’s claims handling sufficiently alleges breach of the

insurance contract either directly or by way of a violation of the covenant of good faith and fair

dealing. 

The Counter-Complaint asserts Progressive directly breached the Policy in the following ways:

(1) Progressive failed to acknowledge coverage owed under the policy; (2) Progressive failed to

diligently investigate the claims and coverage facts arising from the accident, (3) Progressive failed

to pay a covered claim without a reservation of rights, and (4) Progressive failed to provide defense

counsel. (Counter-Complaint ¶ 40.) Progressive counters, pointing out there is no dispute Progressive

picked up the defense of the Burnett Lawsuit under a reservation of rights, hired counsel to defend the

Dallo Family, and paid the full limits of coverage under the Policy to settle the claim. Under the

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circumstances, argues Progressive, there has been no withholding of policy benefits, unreasonable or

otherwise, that would give rise to a cause of action for breach of contract, bad faith, or intentional

infliction of emotional distress. Progressive cites Progressive West Ins. Co. v. Superior Court

(“Preciado”), 135 Cal. App. 4th 263, 277-79 (2005) in support of the proposition that no contract or

tort liability may arise from an insurer’s pursuit of reimbursement for defense and indemnity benefits

it claims were never due. 

The Court concludes the Counter-Complaints’ allegations fail to state a claim for breach of

contract either because they are not precise enough to allege violations of specific contractual

provisions or because they are directly contradicted by other parts of the Counter-Complaint. 

With respect to the first allegation, in which the Counter-Complaint says Progressive failed

to acknowledge coverage owed under the Policy, the Counter-Complaint concedes Progressive

provided a defense under a reservation of rights—thereby acknowledging the insurance relationship

and the potential for coverage under the Policy. There is no allegation that such a qualified defense

was foreclosed by the terms of the Policy. Similarly, with respect to the third allegation, which states

Progressive refused to pay a claim covered by the policy without a reservation of rights, the CounterComplaint obviously concedes a qualified payment (under a reservation of rights) was made and

makes no allegation that such a qualified payment of settlement violates any terms of the parties’

agreement. Such action on the part of an insurer is sanctioned under California law. See Blue Ridge

Ins. Co. v. Jacobsen, 25 Cal. 4th 489 (2001). With respect to the fourth allegation, Progressive’s

failure to provide defense counsel, the Counter-Complaint acknowledges defense counsel was in fact

secured. 

To the extent Counterclaimants base their claim on a lack of diligence on the part of

Progressive in investigating the coverage issue associated with the claim and/or retaining separate

counsel for the Counterclaimants, the Court finds insufficient support for these legal conclusions. The

Counter-Complaint implies Progressive promptly acknowledged potential coverage and offered a

qualified defense upon being provided with “additional information” by Counterclaimants’ retained

counsel. (Counter-Complaint ¶ 14.) The Counter-Complaint does not allege Progressive’s initial

position (i.e. before it received the “additional information” from the Dallo Family’s counsel) was

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Counterclaimants also allege Progressive resisted providing “independent” counsel for

months, however, Counterclaimants make no specific allegations demonstrating “independent”

counsel was required under the Policy or by law.

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unreasonable. Further, while Counterclaimants allege they were initially forced to accept joint

representation, they concede separate counsel was provided shortly before the second mediation and

there is no allegation that this time frame was unreasonable. (Counter-Complaint ¶ 23.)4

 Finally,

Counterclaimants fail to plead any provision of the contract which sets forth a timetable or otherwise

describes the mechanism for coverage decisions which supports an inference that Progressive’s

handling of the claim lacked diligence. 

Under the circumstances, Counterclaimants have failed to state a claim for breach of contract

and, accordingly, the Court GRANTS Progressive’s motion to dismiss Counterclaimants’ breach of

contract claim.

2. Bad Faith

There are at least two separate requirements to establish breach of the implied covenant of

good faith and fair dealing (or more simply bad faith): (1) benefits due under an insurance policy must

have been withheld; and (2) the reason for withholding benefits must have been unreasonable or

without proper cause. Preciado, 135 CalApp.4th at 446-47. 

With respect to the bad faith claim, the Counter-Complaint alleges Progressive (1) put its own

interests ahead of its insureds’; (2) failed to properly engage its insureds in a dialogue about coverage;

(3) acknowledged Counterclaimants disavowal of coverage while secretly harboring the intent to seek

payment from Counterclaimants; (4) failed to distinguish between the differing situations of its

differently situated insureds; (5) denied coverage when it was reasonably clear under the policy

language; (6) offered policy limits under reservation of rights without first considering the interests

of its insureds. (Counter-Complaint ¶ 46-47.) 

The first four allegations do not amount to a contention that insurance policy benefits were

unreasonably withheld. With respect to the final two allegations, just as Progressive’s reservation of

rights does not constitute a breach of contract, the Court rejects Counterclaimants’ implied assertion

that Progressive’s failure to pay without a reservation of rights supports a bad faith claim.

Accordingly, the Counter-Complaint fails to allege Progressive withheld benefits due under the policy.

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Again, to the extent Counterclaimants claim is based on Progressive’s failure to diligently

acknowledge and take on defense and indemnity obligations, the Court finds the Counter-Complaint’s

allegations insufficient. Beyond the mere characterization of Progressive’s conduct as lacking

diligence, Counterclaimants make no specific allegations demonstrating Progressive’s performance

was unreasonable or otherwise without proper cause. Instead, the Counter-Complaint indicates the

challenged claim was subject to a good faith dispute regarding coverage. See Counter-Complaint ¶

15 (explaining Progressive’s position that Jonathan Dallo’s use of the BMW vehicle resulted in no

coverage because the BMW was not covered by the policy). As discussed above, the CounterComplaint makes clear Progressive acknowledged potential coverage and offered a qualified defense

after Counterclaimants re-tendered their claims to Progressive through counsel with additional

information. There is no allegation Progressive did not, at that point, provide a timely qualified

defense. Indeed, Counterclaimants’ sixth allegation, concerning a premature offer of policy limits,

belies any suggestion that Progressive unduly delayed offering a defense and indemnification to

Counterclaimants. Further, there is no allegation that Progressive’s position regarding coverage prior

to receiving this “additional information” was unreasonable. While Counterclaimants assert coverage

was “reasonably clear,” this conclusory statement is unsupported by any specific allegations or any

reference to the specific provisions of the Policy which impact the coverage determination.

Because the Counter-Complaint fails to allege Progressive withheld a specific benefit under

the Policy based on an unreasonable or improper cause, the Court GRANTS Plaintiff’s motion to

dismiss Counterclaimants’ bad faith claim.

3. Intentional Infliction of Emotional Distress

The elements of a prima facie case for the tort of intentional infliction of emotional distress

are: (1) outrageous conduct by the defendant; (2) the defendant's intention of causing or reckless

disregard of the probability of causing emotional distress; (3) the plaintiff's suffering severe or

extreme emotional distress; and (4) actual and proximate causation of the emotional distress by the

defendant's outrageous conduct. Ross v. Creel Printing & Publishing Co., 100 Cal. App. 4th 736,

744-45 (2002). To support a claim for intentional infliction of emotional distress against an insurer,

the plaintiff must allege conduct exceeding all bounds usually tolerated by a decent society especially

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calculated to cause mental distress of a very serious kind. Christensen v. Superior Court, 54 Cal. 3d

868, 904-05 (1991). Mere “delay or denial of insurance claims is not sufficiently outrageous to state

a cause of action for intentional infliction of emotional distress.” Coleman v. Republic Indem. Ins.

Co., 132 Cal. App. 4th 403, 417 (2005). Behavior may be considered outrageous if a defendant: (1)

abuses a relation or position which gives him power to damage the plaintiff's interest; (2) knows the

plaintiff is susceptible to injuries through mental distress; or (3) acts intentionally or unreasonably

with the recognition that the acts are likely to result in illness through mental distress. Hailey v.

California Physicians’ Service, 158 Cal. App. 4th 452, 474 (2007).

Michael and Mona Dallo premise their claim on allegations Progressive (1) failed to properly

analyze coverage; (2) refused to address the differences in equities between Counterclaimants and

Jonathan Dallo; (3) failed to advise Counterclaimants of their right to withdraw from coverage; (4)

failed to provide defense counsel; (5) withheld defense counsel in hopes of tricking Counterclaimants

into making statements which Progressive could use against them in subsequent coverage litigation;

(6) leveraged and used Michael and Mona Dallo’s love for their son; (7) acknowledged

Counterclaimants had abandoned coverage and remained silent until Counterclaimants had paid

$250,000 and ratified the settlement before announcing Progressive’s position that Counterclaimants’

owed Progressive a refund of $500,000. Counterclaimants allege “severe emotional distress” as a

result of this Conduct. (Counter-Complaint at ¶ 53.) 

In light of the Court’s finding that Counterclaimants have not stated a case for breach of

contract or bad faith, the Court concludes Michael and Mona Dallo cannot meet the outrageousness

prong required to state a claim for intentional infliction of emotional distress. As discussed further

above, the allegations of the Counter-Complaint, including those cited in support of the intentional

infliction of emotional distress claim, at most indicate that coverage benefits were delayed and/or

delivered conditionally. The Counterclaimants have cited no authority demonstrating such conduct

qualifies as sufficiently outrageous to support their claim. Accordingly, the Plaintiff’s motion to

dismiss Michael and Mona Dallo’s intentional infliction of emotional distress claim is GRANTED.

//

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CONCLUSION

Based on the foregoing, the Court GRANTS Plaintiff’s motion to dismiss Counterclaimants’

causes of action for breach of contract, bad faith, and intentional infliction of emotional distress. 

Because the Court concludes allegations of other facts consistent with the Counter-Complaint

could possibly cure the deficiencies, the Court GRANTS Counterclaimants leave to amend their

Counter-Complaint. Counterclaimants may file an amended complaint addressing the deficiencies

set forth above, no later than 14 days from the date this order is filed.

IT IS SO ORDERED.

DATED: February 14, 2008

IRMA E. GONZALEZ, Chief Judge

United States District Court

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