Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-00198/USCOURTS-cand-5_05-cv-00198-6/pdf.json

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

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

Santana Row Hotel Partners, L.P.,

Plaintiff,

 v.

Zurich America Insurance Company,

Gallagher-Pipino, Inc., and Arthur J.

Gallagher & Co., Inc.,

Defendants.

 

NO. C 05-00198 JW 

ORDER DENYING ZURICH'S MOTION

TO DISMISS

I. INTRODUCTION

Plaintiff Santana Row Hotel Partners, L.P. ("Plaintiff") brings this suit against Defendants

Zurich American Insurance Company ("Zurich"), Gallagher-Pipino, Inc. ("Gallagher"), and Arthur J.

Gallagher & Co. (collectively "Defendants") alleging breach of contract and fraud. Plaintiff alleges

that Zurich failed to pay losses resulting from a fire which were covered by an insurance policy. 

Zurich has filed a Motion to Dismiss the First Amended Complaint, which contains six claims for

relief. The Motion is noticed for hearing on February 27, 2006. The Court finds it appropriate to

take the motion under submission for decision without oral argument pursuant to Civil Local Rule

7-1(b). Based on the papers submitted by the parties, the Court DENIES Zurich's Motion to Dismiss. 

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II. BACKGROUND

A. Factual Background

In May 2000 Zurich issued a builders risk insurance policy ("Policy") to Federal Realty

Investment Trust ("FRIT"), covering certain losses associated with FRIT's construction and

development of a retail and residential community in San Jose known as Santana Row. (Zurich's

Notice of Motion and Motion to Dismiss ("Mot."), Docket Item No. 69, at 1:4-7.) At the time

Zurich issued the Policy, Plaintiff was leasing from FRIT the upper floors of a Santana Row

building to build and operate a hotel. Zurich subsequently added Plaintiff as an Additional Insured

under the Policy, although the date on which this occurred is in dispute. On August 19, 2002 there

was a fire at the Santana Row development which caused massive damage and significant delays in

the hotel's scheduled opening. (First Amended Complaint ("FAC"), Docket Item No. 58, ¶ 11.) 

On August 29, 2002, ten days after the fire, and January 8, 2003 Defendants issued two

Certificates of Insurance ("Certificates") which Plaintiff alleges are evidence that it was insured at the

time of the fire. (FAC ¶ 10.) The Certificates, entitled "Evidence of Property Insurance," state at the

top: "THIS IS EVIDENCE THAT INSURANCE AS IDENTIFIED BELOW HAS BEEN ISSUED,

IS IN FORCE, AND CONVEYS ALL THE RIGHTS AND PRIVILEGES AFFORDED UNDER

THE POLICY." (FAC, Exhibits A & B.) The effective date of the Policy on the Certificates is May

15, 2000, preceding the fire by two years. Both forms list Gallagher-Pipino as the producer of the

document and Zurich as the insurance company. The Certificates identify FRIT as the insured and

show that the Hotel Valencia at Santana Row is covered by the Policy under the "Property

Information" section. The Certificates further specify the amount of insurance for each type of

coverage, as well as the deductibles required by the Policy, and state under the section for special

conditions that the Policy does cover, to some degree, delay in completion damages. Both

Certificates list Plaintiff as an Additional Insured, but the second Certificate specifically indicates

that Plaintiff was added as an additional interest on July 15, 2001. (FAC, Exhibit B.) 

In addition, the Certificates contain language near the bottom of the forms which require that

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upon termination of the Policy, Zurich would give 90 days written notice to the Additional Interest

identified in the Certificate and send notification of any changes to the Policy that would affect that

interest. (FAC, Exhibits A & B.) When Plaintiff claimed its losses under the Policy after the fire, the

parties negotiated for approximately two years before Zurich made a partial payment of $713,839 in

September 2004. (FAC ¶ 13.) Approximately three months after this partial payment, Zurich

formally denied Plaintiff's claims under the Policy. (FAC ¶ 15.) 

Plaintiff alleges its losses are covered by the Policy since Zurich added Plaintiff as an insured

on July 15, 2001. (Plaintiff's Memorandum of Points and Authorities in Opposition to Defendant's

Motion to Dismiss (Opp'n"), Docket Item No. 80, at 7:26-28; see FAC ¶ 9 (although the FAC does

not specify the date on which Defendant allegedly insured Plaintiff, Plaintiff clearly states that this

occurred before the fire).) Plaintiff's losses include without limitation property damage, rental

income loss, extended general conditions, and soft costs in excess of $10 million. (FAC ¶ 11.) 

B. Procedural Background

Plaintiff filed the original Complaint on January 12, 2005. The first and second claims for

relief allege breach of contract against Zurich. In the first claim, Plaintiff alleges that Zurich's failure

to pay covered losses proximately caused Plaintiff's damages in excess of $10 million. (Complaint

for Damages ("Compl."), Docket Item No. 1, ¶¶ 18-19.) Plaintiff's second claim for tortious and bad

faith breach of contract is based on allegations that Zurich unreasonably delayed payment, failed to

effectuate prompt and equitable payment of Plaintiff's claims, and denied its obligation to pay despite

representations to Plaintiff that its losses were covered by the Policy. (Compl. ¶ 21.) In addition to

actual damages (Compl. ¶ 22), Plaintiff seeks punitive damages because of Zurich's allegedly

conscious disregard of Plaintiff's rights and fraud committed with regard to the Policy (Compl. ¶ 24). 

The third claim in the original Complaint for breach of third party beneficiary contract alleges

that, in March 2001, FRIT and Defendants entered into a written contract by which Gallagher would

procure an insurance policy from Zurich for Plaintiff. (Compl. ¶ 27.) Plaintiff alleges the contract

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was expressly made for its benefit, to provide insurance coverage for a variety of hazards associated

with construction and also against delay in completion damages. (Compl. ¶ 28.) Defendants

allegedly breached the contract in failing to obtain Plaintiff insurance and Plaintiff suffered damage

as a result. (Compl. ¶¶ 30-31.) 

The fourth claim in the original Complaint alleges fraud with regard to the Certificates issued

by Defendants. Following the fire, Defendants issued the Certificates on August 29, 2002 and

January 8, 2003 to confirm to Plaintiff that the Policy covered its losses. (Compl. ¶¶ 34 & 37.) 

Plaintiff alleges Defendants issued both Certificates, purporting to show that the Policy covered

Plaintiff, with an intent to conceal Plaintiff's lack of coverage and to deceive Plaintiff into believing it

was insured for losses resulting from the fire. (Compl. ¶¶ 34-35 & 37-38.) 

Zurich moved to dismiss the entire original Complaint. In an Order dated May 25, 2005, the

Court summarily denied Zurich's Motion to Dismiss without prejudice, explaining that the Court

preferred to have the parties proceed with cross-motions for partial summary judgment on the issue of

insurance coverage. (Order Denying Zurich's Motion to Dismiss and Scheduling Hearing Date

Regarding Motions for Partial Summary Judgment on the Issue of Insurance Coverage ("Dismissal

Order"), Docket Item No. 31, at 1:20-22) Although the Dismissal Order did not explicitly so

indicate, the Court directed parties to file motions for partial summary judgment because it

recognized that the issue of insurance coverage was factually complex. On November 16, 2005,

Plaintiff sought and obtained leave to file the FAC. The FAC reasserts all four claims in the original

Complaint and added two new claims for relief. For the most part, the reasserted claims are identical

to the original Complaint. The Court recognizes some minor variations in the allegations of the

reasserted claims (see FAC ¶¶ 43 & 51-52), but finds that these variations do not substantively alter

the claims set forth in the original Complaint. 

Plaintiff's third claim in the FAC, alleging promissory estoppel, is new to the FAC. Plaintiff

alleges that the Certificates issued after the fire constitute promises by Zurich to cover Plaintiff’s

losses, including the delay in completion coverage. (FAC ¶ 27.) Defendant allegedly induced

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reliance on the Certificates in negotiating payment of Plaintiff's claims as if coverage had existed. 

(FAC ¶ 30.) Plaintiff alleges that Zurich should be estopped from denying coverage under the Policy

(FAC ¶ 34) because Zurich permitted a significant amount of time to lapse before definitively

representing to Plaintiff that no coverage existed (FAC ¶ 31). Plaintiff alleges it changed its position

and relied on the promises in the Certificates in finishing construction of the hotel following the fire. 

(FAC ¶¶ 28 & 33.) 

Plaintiff adds the fourth claim to the FAC, alleging breach of a contract entered into by Zurich

and Gallagher, under which Zurich agreed to adjust the claim involving damages to the hotel property

and make Plaintiff an intended beneficiary under the Policy. (FAC ¶¶ 36-40.) Plaintiff alleges that it

does not know whether the contract was oral, written, or partly oral and partly written, but alleges the

existence and material terms of the contract are disclosed in a document served by Zurich in the

course of discovery. (FAC ¶ 36.) Zurich allegedly breached its contract with Gallagher by failing to

adjust the claim as if there were coverage under the Policy and Plaintiff has suffered damage as the

intended beneficiary of the contract. (FAC ¶¶ 39-40.) 

Zurich now moves to dismiss all six claims in the FAC. With regard to the first and second

breach of contract claims, Zurich argues that Plaintiff was not insured under the policy at the time of

the fire, and that Plaintiff was only added after the fire occurred, on October 9, 2002, through

endorsement as an additional insured. (Mot. at 1:13-17.) Even if the Policy covered Plaintiff at the

time of the fire, Zurich argues that the Policy expressly excluded the delay in completion damages

Plaintiff seeks. (Mot. at 2:21-24.) With regard to the promissory estoppel claim based on the

Certificates, Zurich asserts that the Certificates do not constitute promises of insurance coverage and

that Plaintiff fails to allege how it reasonably relied on these promises to its detriment. (Mot. at

13:18-21 & 15:5-11.) As to the fourth and fifth claims for breach of third party beneficiary contract,

Zurich contends it has no legal obligation under any contract to provide Plaintiff with insurance and

that the alleged breaches did not cause Plaintiff's damages. (Mot. at 16:27-17:6.) In addressing the

fraud claim, Zurich contends Plaintiff's allegations do not comply with the pleading requirements of

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FED. R. CIV. P. 9(b) with regard to the element of detrimental reliance. (Mot. at 3:17-25 & 15:5-11.) 

III. STANDARDS

FED. R. CIV. P. 12(b)(6) permits dismissal of a complaint for failure to state a claim upon

which relief can be granted. A claim may be dismissed as a matter of law for: “(1) lack of a

cognizable legal theory or (2) insufficient facts under a cognizable legal claim.” Robertson v. Dean

Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984). “[A] complaint should not be dismissed for

failure to state a claim unless 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). The court “must presume all factual allegations of the complaint to be true and draw all

reasonable inferences in favor of the nonmoving party.” Usher v. City of Los Angeles, 828 F.2d 556,

561 (9th Cir. 1987) (citing Western Reserve Oil & Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir.

1985)).

IV. DISCUSSION

A. Effect of the Dismissal Order on the Current Motion to Dismiss 

Zurich's Motion to Dismiss the FAC is largely based on arguments that were already raised

and summarily rejected in the context of Zurich's Motion to Dismiss the original Complaint. Indeed,

Zurich acknowledges as much and explains that it is reasserting its arguments simply to preserve

these arguments on appeal. See Mot. at 7:n1. Having reviewed Zurich's arguments for a second

time, the Court remains firmly convinced that the insurance coverage issues are factually intense and

are therefore better resolved by way of summary judgment motions. Accordingly, the Court, once

again, summarily denies Zurich's Motion to Dismiss the claims for breach of contract, tortious and

bad faith breach of contract, breach of third party beneficiary contract in failing to procure a policy

for Plaintiff, and fraud. The Court will address the remaining two claims in turn. 

B. Promissory Estoppel (Third Claim for Relief)

In the third claim for relief, Plaintiff alleges that Zurich should be estopped from denying

coverage of Plaintiff's losses because the Certificates constituted promises by Zurich. (FAC ¶ 27.) 

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Plaintiff alleges that not only did it rely on these promises, but Zurich further induced reliance on the

Certificates in negotiating payment of Plaintiff's claims as if coverage had existed. (FAC ¶ 30.) 

Zurich allegedly waited to officially deny coverage until after Plaintiff finished construction and

Zurich had made a partial payment. (FAC ¶ 31.) Zurich moves to dismiss the promissory estoppel

claim on the ground that the Certificates cannot constitute promises because Zurich did not issue the

Certificates to Plaintiff. (Mot. at 13:8-21.) Even assuming these promises existed, Zurich moves for

dismissal because the terms of the promises are not clear and unambiguous (Mot. at 14:3-5), and

Plaintiff has failed to sufficiently allege reasonable reliance (Mot. at 15:5-11) and injury resulting

from breach of the promises (Mot. at 15:27-16:9). 

To maintain a claim of promissory estoppel in California, a plaintiff must allege four

elements: (1) a promise clear and unambiguous in its terms, (2) reliance by the party to whom the

promise is made, (3) the reliance must be both reasonable and foreseeable, and (4) the party asserting

estoppel must be injured by his reliance. Nahas v. City of Mountain View, 2005 WL 2739303, at *5

(N.D. Cal. 2005) (citing Laks v. Coast Fed. Sav. & Loan Assn., 60 Cal. App. 3d 885, 890 (Cal. Ct.

App. 1976). 

1. Issuance of the Certificates

Zurich asserts that in order for a promise to be enforceable, the promisor must have directly

made the promise to the promisee. (Mot. at 13:3-7.) Under this argument, the Certificates cannot be

"promises" upon which Plaintiff relied because Gallagher sent the Certificates to FRIT. Zurich

asserts that the Certificates state on their face that they were prepared and sent by Gallagher, and

further, that Zurich played no role in the issuance of the Certificates. (Mot. at 13:9-17.) 

Taking Plaintiff's allegations as true, the Court finds there are sufficient allegations to

overcome Zurich's argument that it did not make a promise to Plaintiff. First, Plaintiff alleges that at

all relevant times, Gallagher acted as an agent of Zurich for the "purpose of binding, contracting for

and documenting policies of insurance." (FAC ¶ 3.) Thus, the fact that Zurich did not actually issue

and deliver the Certificates to Plaintiff is of no legal consequence. Second, Plaintiff alleges that

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Zurich was aware that the Certificates were being provided to Plaintiff and that Plaintiff would rely

on them in its efforts to complete construction of the hotel. (FAC ¶ 29.) As such, Plaintiff has

sufficiently alleged that Gallagher made the promises contained in the Certificates on Zurich’s behalf.

2. Clear and Unambiguous Promise.

Zurich next contends that the terms of the promise are vague and undeterminable because the

Certificates do not clearly state what promise is being made. (Mot. at 14:12-15.) Zurich asserts that

"on the face of either Certificate[,] it is impossible to determine what, if any, promise is being made." 

(Mot. at 14:14-15.) Specifically, Zurich's interpretation of "clear and unambiguous" requires the

Certificates to specify whether the promises "retroactively convey coverage to [Plaintiff] for a loss

that had already occurred" or whether "the alleged coverage is prospective from the date of issue." 

(Mot. at 14:15-18.) In response to Zurich's argument, Plaintiff points to specific portions of the

Certificates as evidence of the clear promises. Plaintiff further states in its Opposition that "[t]here is

nothing in California law that makes a clear promise unclear simply based on when the promise

occurs." (Opp'n at 12:21-22.) 

The Court is persuaded that the Certificates contain language that can reasonably be construed

as setting forth a promise with clear and unambiguous terms. The Certificate attached as Exhibit B

states that Plaintiff is insured under the Policy as of July 15, 2001 (FAC, Exhibit B); both Certificates

identify specified amounts of coverage, deductibles, and types of coverage. (FAC, Exhibits A & B.) 

That the Certificates were issued after the fire does not necessarily render the Certificates so unclear

and ambiguous as to warrant dismissal of the promissory estoppel claim at the pleading stage. 

3. Reasonable Reliance (Second and Third Elements of Promissory Estoppel)

Zurich argues that Plaintiff has failed to adequately allege reasonable reliance. (Mot. at 14:24-

26 & 15:9-10.) More specifically, Zurich contends that Plaintiff has failed to allege how it acted

differently in relying on Zurich’s promises. In response, Plaintiff points to the following allegations

in the FAC: that it relied on the promises in constructing the hotel following the fire (FAC ¶ 28); that

Zurich knew Plaintiff would rely on the promises in completing construction (FAC ¶ 29); and that

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Zurich further induced reliance on the Certificates by negotiating payments as if coverage existed

(FAC ¶ 30). 

The Court finds Plaintiff’s allegations are sufficient to satisfy the Rule 8 notice pleading

standard. Plaintiff is not required to provide any factual detail at this stage in the proceeding. 4.

Injury Resulting from Reliance

Zurich argues that its alleged breach of promises in the Certificates could not have caused

Plaintiff's injury because the fire caused Plaintiff's damages. (Mot. at 15:27-16:2.) Zurich contends

that Plaintiff cannot use the Certificates, dated after the fire, to prove that Zurich's breach served as a

"substantial factor in bringing about that loss or damage." U.S. Ecology, Inc. v. State of California,

129 Cal. App. 4th 887, 909 (Cal. Ct. App. 2005). Plaintiff responds by pointing out that Zurich has

refused to pay Plaintiff for its losses despite the promises contained in the Certificates. (Opp'n at

14:2-3.) 

Zurich's argument overlooks Plaintiff's allegations entirely. Plaintiff alleges that its injury

consists of reimbursement for losses to which Plaintiff is entitled and injuries caused by Plaintiff's

reliance on Zurich's false promise of insurance coverage. (Opp'n at 14:2-5.) As the precipitating

event, the fire undisputably caused the physical damage which Plaintiff claims Zurich promised to

cover. Plaintiff alleges it has suffered injury from Zurich's failure to pay Plaintiff what it was legally

entitled. As such, Plaintiff has sufficiently alleged that it has been injured by its reliance on Zurich's

promises of payment. For the above reasons, the Court DENIES Zurich's Motion with respect to the

promissory estoppel claim.

C. Breach of Third Party Beneficiary Contract (Fourth Claim for Relief) 

In the fourth claim for relief, Plaintiff alleges breach of a contract entered into by Zurich and

Gallagher under which Zurich agreed to adjust the Policy to make Plaintiff an intended beneficiary. 

(FAC ¶¶ 36-40.) Zurich contends that this claim must be dismissed because Plaintiff does not

describe any consideration that existed for entering into the contract (Mot. at 16:25-26) and Plaintiff

fails to show a causal relationship between breach of the alleged contract and Plaintiff's damages

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(Mot. at 17:5-6). 

Under California law, a breach of contract claim requires the plaintiff to prove the following

elements: "(1) existence of the contract, (2) performance by the plaintiff or excuse for

nonperformance, (3) breach by the defendant, and (4) damages." Tom Trading, Inc. v. Better Blue,

Inc., 26 F.App'x 733, 735 (9th Cir. 2002) (citing First Commercial Mortgage Co. v. Reece, 89 Cal.

App. 4th 731, 745 (Cal. Ct. App. 2001). 

1. Consideration for the Contract

Zurich asserts that the claim must fail because consideration, an essential element of a

contract, is not sufficiently pled in the FAC. (Mot. at 16:21-26.) The Court agrees with Plaintiff's

statement that it need not allege consideration in pleading breach of contract. Zurich has not cited

any case law supporting its contention that consideration must be alleged. In any event, in alleging

the existence of a contract, Plaintiff has implicitly alleged that consideration also existed for entering

into the contract. Moreover, Zurich itself has pointed out that on a Rule 12(b)(6) motion, the Court

must assume Plaintiff's characterization of the material terms of the contract are correct. (Mot. at

16:27-17:1.) 

2. Causal Relationship Between Breach and Damages

Zurich propounds the same "substantial factor" theory to support dismissal of this claim as it

did for the promissory estoppel claim. Zurich claims that the contract to adjust the Policy came into

existence as late as February 2004, long after the fire occurred, yet Plaintiff alleges that breach of this

contract caused the damages from the fire, which occurred in August 2002. (Mot. at 17:11-14.) 

Plaintiff asserts that taken to its logical conclusion, Zurich's argument would mean that an insurer

should never be liable for breach of an insurance contract because the failure to pay damages cannot

be the actual or physical event creating the loss. (See Opp'n at 15:10-13.) 

Again, the Court is unpersuaded by Zurich’s argument that the fire was the only substantial

factor in the damage. The fact that the Defendants did not allegedly enter into this contract until well

after the fire does not change the fact that Plaintiff suffered damages as a result of breaching the

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contract, regardless of when the fire occurred. As characterized in Plaintiff's Opposition, the FAC

alleges that Zurich's failure to adjust the claim as promised deprived Plaintiff of compensation to

which it was entitled. (Opp'n at 15:9-10.) Plaintiff has sufficiently alleged the element of damages

and the Court DENIES Zurich's Motion with respect to the Fourth Claim. 

V. CONCLUSION

For the reasons set forth above, the Court DENIES Zurich's Motion to Dismiss the First

Amended Complaint. 

Dated: February 22, 2006

05cv198dismiss

 /s/James Ware 

JAMES WARE

United States District Judge

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THIS IS TO CERTIFY THAT COPIES OF THIS ORDER HAVE BEEN DELIVERED TO:

Alan Michael Jones ajones@jonesturner.com

Allen Ruby aruby@rubyschofield.com

Gary R. Selvin gselvin@selvinwraith.com

Glen W. Schofield gschofield@rubyschofield.com

Steven A. Ellenberg sellenberg@rubyschofield.com

Steven Donald Turner sturner@jonesturner.com

Dated: February 22, 2006 Richard W. Wieking, Clerk

By:__/s/JW Chambers______

Melissa Peralta

Courtroom Deputy

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