Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-02499/USCOURTS-cand-5_05-cv-02499-0/pdf.json

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

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 This disposition is not designated for publication and may not be cited.

Case No. C-05-02499-JF

ORDER

(JFLC1)

**E-Filed 9/22/05**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

SYSTEMS AMERICA, INC.,

 Plaintiff,

 v.

THE ST. PAUL TRAVELERS COMPANY, INC.,

ET AL.,

 Defendants.

Case Number C 05-02499-JF

ORDER DENYING DEFENDANTS’

MOTION TO DISMISS1

[Docket No. 12]

I. BACKGROUND

Systems America, Inc. (“Systems America”) purchased property insurance from The St.

Paul Travelers Company, Inc. and St. Paul Mercury Insurance Company (collectively, “St.

Paul”), effective from September 21, 2000 to October 10, 2002. A clause in the property

insurance policy contractually limits the time within which a lawsuit may be brought: “Any

lawsuit to recover on a property claim must begin within 2 years after the date on which the

direct physical loss or damage occurred.”

Case 5:05-cv-02499-JF Document 22 Filed 09/22/05 Page 1 of 7
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Case No. C-05-02499-JF

ORDER

(JFLC1)

In March, 2004, Systems America discovered losses attributable to two thefts, referred to

as “payroll theft” and “employee theft.” The employee theft was discovered when Systems

America learned that four employees had stolen InterfaceONE Computer Software (a software

product that then was in development), three laptop computers, and a computer server when they

left the company to start their own company in February and/or March 2002. Systems America

asserts that the replacement cost of the lost InterfaceONE software is $9,100,000, the cost of the

three laptops is $7,500, and the cost of the computer server is $24,500, totaling $9,132,000 in

losses. The payroll theft was discovered when an internal audit revealed overpayments by the

payroll department made between 1998 and 2001 resulting in losses of $6,786,711. Systems

America’s investigation concluded that a single employee was most likely responsible for this

theft. 

On October 27, 2004, Systems America submitted claims for the employee thefts under 

both its general liability policy and its property policy. St. Paul responded at that time by

assigning claim numbers to the two claims. On January 29, 2005, St. Paul sent a letter denying

the general liability claim and noting that it was still investigating the property policy claim. On

December 17, 2004, Systems America submitted a claim for the payroll theft under its property

policy. St. Paul sent a letter on December 21, 2004, assigning a claim number and a claims

handler.

On February 18, 2005 and March 22, 2005, Systems America sent follow-up letters

requesting coverage determinations for each claim. It received no response. Systems America

sent additional follow-up letters on June 7, 2005 regarding both claims, which prompted

response letters sent June 13, 2005. However, St. Paul did not provide the requested coverage

determinations, noting that it “expect[ed] to be able to conclude [its] coverage review within the

next 30 days.” Systems America then commenced the instant action.

After filing an original complaint on June 20, 2005, Systems America filed an amended

complaint on July 11, 2005, asserting claims for breach of contract and breach of the implied

covenant of good faith and fair dealing. Systems America also seeks a judicial declaration of the

parties’ past, present and future contractual rights, duties, and obligations under the property

Case 5:05-cv-02499-JF Document 22 Filed 09/22/05 Page 2 of 7
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Case No. C-05-02499-JF

ORDER

(JFLC1)

insurance policy. St. Paul now moves to dismiss all claims for failure to state a claim upon

which relief may be granted. Systems America opposes the motion to dismiss.

II. LEGAL STANDARD

A complaint may be dismissed for failure to state a claim upon which relief can be

granted for one of two reasons: (1) lack of a cognizable legal theory or (2) insufficient facts under

a cognizable legal theory. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Robertson v. Dean

Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). For purposes of a motion to

dismiss, all allegations of material fact in the complaint are taken as true and construed in the

light most favorable to the nonmoving party. Clegg v. Cult Awareness Network, 18 F.3d 752,

754 (9th Cir. 1994). A complaint should not be dismissed "unless it appears beyond doubt the

plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Id.

However, the Court “is not required to accept legal conclusions cast in the form of factual

allegations if those conclusions cannot reasonably be drawn from the facts alleged.” Id. at

754-55. Motions to dismiss generally are viewed with disfavor under this liberal standard and

are granted rarely. See Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997).

Although the Court generally may not consider any material beyond the pleadings when

ruling on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), Cooper v.

Pickett, 137 F.3d 616, 622 (9th Cir. 1997), it may consider documents that are attached to and

part of the complaint, Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987). The

Court also may consider “documents whose contents are alleged in a complaint and whose

authenticity no party questions, but which are not physically attached to the pleading.” Branch v.

Tunnell, 14 F.3d 449, 454 (9th Cir. 1994).

III. DISCUSSION

St. Paul moves for dismissal based on its contention that Systems America’s insurance

claims are either (1) barred by the two-year suit limitation period, or (2) not covered by the

property insurance policy. St. Paul contends that California law provides two definitions of

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Case No. C-05-02499-JF

ORDER

(JFLC1)

when a property loss “occurs.” The first is that the loss occurs at the time the discernable

physical loss or damage to property happens. The second is that the loss occurs at the time it is

“manifested,” which has been defined as “that point in time when appreciable damage occurs and

is or should be known to the insured, such that a reasonable insured would be aware that his

notification duty under the policy has been triggered.” Prudential-LMI Ins. Co. v. Superior

Court, 51 Cal. 3d 674, 699 (1991). St. Paul argues that under the first definition, although the

loss would have occurred during the coverage period, the lawsuit is time-barred by the suit

limitation period. Alternatively, under the second definition, the loss would have occurred at the

time of discovery in March 2004, after the coverage period had ended.

Systems America opposes the motion to dismiss, arguing that St. Paul’s contention relies

on an inappropriate conflation of the “manifestation” rule with the entirely distinct “delayed

discovery” rule also recognized under California law. Systems America argues correctly that

these are two separate rules. The manifestation rule allocates progressive losses to the insurance

policy that is in effect when the loss is manifested. It applies “in first party progressive property

loss cases, when . . . the loss occurs over several policy periods and is not discovered until

several years after it commences.” Prudential-LMI Ins. Co., 51 Cal. 3d at 699. The delayed

discovery rule, on the other hand, tolls the beginning of the suit limitation period until losses are

discovered if they were not “reasonably discernable” when they occurred. Id. at 686-87.

When the delayed discovery rule applies, there actually may be two dates of loss. The

first is the date (or dates) of the physical loss itself. The second is the date when the loss is

reasonably discovered, triggering the beginning of the suit limitation period. In Prudential-LMI,

the California Supreme Court held that the suit limitation clause of a property insurance policy,

derived from the standard fire insurance policy form in California Insurance Code § 2071,

necessarily included a delayed discovery rule. That clause reads:

No suit or action on this policy for the recovery of any claim shall be sustainable

in any court of law or equity unless all the requirements of this policy shall have

been complied with, and unless commenced within 12 months next after inception

of the loss.

Cal. Ins. Code § 2071. The Court “consider[ed] how to define the inception of a loss for

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Case No. C-05-02499-JF

ORDER

(JFLC1)

purposes of triggering section 2071 when the loss occurs some time before any damage is

discovered by the insured.” Id. at 684. It is evident from this language that the Court treated the

date of the “inception of a loss” as distinct from the date of the occurrence of the loss for the

purposes of the suit limitation clause. 

As the Court stated,

California law supports the application of the following delayed discovery rule for

purposes of the accrual of a cause of action under section 2071: The insured's suit

on the policy will be deemed timely if it is filed within one year after ‘inception of

the loss,’ defined as that point in time when appreciable damage occurs and is or

should be known to the insured, such that a reasonable insured would be aware

that his notification duty under the policy has been triggered. 

51 Cal. 3d at 686-87 (emphasis added). The Court’s definition of “inception of the loss” applies

only to the suit limitation clause and does nothing to affect when a loss itself is determined to

have occurred. St. Paul argues that because the manifestation rule and the delayed discovery

rule share a similar definition, they are the same rule. However, while the Court did apply the

definition of “inception of the loss” to “manifestation of the loss,” id. at 699, it did not hold that

the two are identical for purposes of the delayed discovery rule. 

The delayed discovery rule, not the manifestation rule, is applicable to Systems

America’s claims. Systems America asserts that its “payroll theft” losses occurred between 1998

and 2001 and that its “employee theft” losses occurred in February and/or March 2002, but that it

did not discover either loss until March, 2004. These allegations are sufficient to survive a

motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).

St. Paul asserts that there is no specific clause, such as a “discovery clause,” in Systems

America’s property insurance policy that would allow delayed discovery to delay the beginning

of a suit limitation period. However, such an express clause is not necessary. The effect of the

California Supreme Court’s decision in Prudential-LMI is that a delayed discovery rule is

implicitly incorporated into the suit limitation clause in any insurance policy. Counsel for St.

Paul conceded at the hearing on September 9, 2005 that there is no essential difference between

the suit limitation clause in Systems America’s property insurance policy and the language in §

2071 construed by the Court in Prudential-LMI.

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Case No. C-05-02499-JF

ORDER

(JFLC1)

Thus, the lawsuit limitation period for Systems America’s property insurance does not

begin “until that point in time when appreciable damage occurs and is or should be known to the

insured, such that a reasonable insured would be aware that his notification duty under the policy

has been triggered.” 51 Cal. 3d at 687. It is therefore possible both that Systems America’s

property insurance claims are covered under its policy with St. Paul and that it brought its lawsuit

within the required time period.

Accordingly, the motion to dismiss will be denied.

IV. ORDER

Good cause therefore appearing, IT IS HEREBY ORDERED that St. Paul’s motion to

dismiss is DENIED. 

DATED: September 22, 2005

/s/ electronic signature authorized

 

JEREMY FOGEL

United States District Judge

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Case No. C-05-02499-JF

ORDER

(JFLC1)

This Order has been served upon the following persons:

Case 5:05-cv-02499-JF Document 22 Filed 09/22/05 Page 7 of 7