Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_16-cv-00144/USCOURTS-caed-2_16-cv-00144-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

HEALTHSMART BENEFIT 

SOLUTIONS, INC.,

Plaintiff,

v.

INTERWEST INSURANCE 

SERVICES, INC. and DOES 1 through 

10,

Defendants.

No. 2:16-cv-00144-MCE-AC

MEMORANDUM AND ORDER

Plaintiff HealthSmart Benefit Solutions, Inc., (“Plaintiff”) alleges that its insurance 

broker, Defendant InterWest Insurance Services, Inc. (“Defendant”), created a coverage 

gap when it purchased replacement liability insurance for Plaintiff. After Plaintiff’s policy 

claims were denied by both of its insurance providers based on the existence of that 

coverage gap, Plaintiff filed suit against them. By way of this action, Plaintiff seeks 

recovery from Defendant for the litigation costs of that dispute and accordingly brings 

claims for negligence, breach of contract and declaratory relief. Jurisdiction is premised 

on diversity of citizenship.1 Currently pending is Defendant’s Motion to Dismiss pursuant 

 1 Plaintiff is an Illinois corporation with its principal place of business in Texas. Defendant is a 

Florida corporation with its principal place of business in California. Defendant’s corporate office is located 

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to Federal Rule of Civil Procedure 12(b)(6).2 ECF No. 6. For the following reasons, the 

Motion is DENIED in its entirety.

BACKGROUND3

Between December 31, 2012, and December 31, 2013, Lloyd’s, London 

(“Lloyd’s”) provided Plaintiff with professional liability insurance coverage. In or around 

December 2013, Plaintiff retained Defendant as its insurance broker. Plaintiff specifically 

wanted Defendant to procure insurance coverage that would allow Plaintiff to seamlessly 

maintain its professional liability coverage once its policy with Lloyd’s expired.

Defendant procured a policy for Plaintiff through Hudson Specialty Insurance 

Company (“Hudson”). Hudson’s policy was in effect from December 31, 2013, to 

December 31, 2014. On December 18, 2013, while Lloyd’s’ policy was still in effect, 

Plaintiff was added as a defendant in a Louisiana lawsuit (hereafter “Opelousas”). 

Plaintiff was not served with the Opelousas “Amended Petition” until January 15, 2014, 

after Lloyd’s’ policy ended. Opelousas was a putative class action lawsuit alleging 

violations of Louisiana’s Preferred Provider Organization Act.

Plaintiff believed that its insurance policies covered any exposure it had to the 

Opelousas lawsuit. Accordingly, it contacted both Lloyd’s and Hudson immediately upon 

service of the “Amended Petition.” Both insurance providers denied coverage on the 

Opelousas claim based on the purported coverage gap at the heart of this lawsuit. 

Specifically, Lloyd’s policy requires written notice of any claims “as soon as 

practicable but in any event the earlier of 30 days after [Plaintiff] first receive[s] notice of 

any Claim made against [Plaintiff] or [Plaintiff] first become[s] aware of any specific act, 

 in Sacramento County. 

2 All further references to “Rule” or “Rules” are to the Federal Rules of Civil Procedure unless 

otherwise indicated. 

3 The following facts are taken from Plaintiff’s Complaint (ECF No. 1) or are undisputed. 

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error or omission which is reasonably expected to give rise to a claim, or the end of the 

Policy Period.” ECF No. 1 at ¶ 15. Because Plaintiff did not submit written notice by “the 

end of the Policy Period,” Lloyd’s denied coverage for the Opelousas claim. 

Hudson’s policy contains an exclusion for claims “based upon ... any prior and/or 

pending civil ... proceeding” that arose before December 31, 2013. Id. at ¶ 19. Hudson 

denied Plaintiff’s “prior and/or pending civil proceeding” claim because Opelousas

initially arose before Hudson’s policy went into effect. 

Plaintiff sued Lloyd’s and Hudson for denying its claims under the policies, 

incurring $900,000 in attorney’s fees and costs. Plaintiff alleges these litigation costs 

were directly and proximately caused by Defendant’s creation of a gap in insurance 

coverage. For its part, Defendant maintains that it had no duty to obtain Plaintiff’s policy 

without a coverage gap and that essential elements of an oral contract have not been 

alleged by Plaintiff. 

STANDARD

On a motion to dismiss for failure to state a claim under Federal Rule of Civil 

Procedure 12(b)(6), all allegations of material fact must be accepted as true and 

construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. 

Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) “requires only ‘a short and plain 

statement of the claim showing that the pleader is entitled to relief’ in order to ‘give the 

defendant fair notice of what the . . . claim is and the grounds upon which it rests.’” Bell 

Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 

47 (1957)). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require 

detailed factual allegations. However, “a plaintiff's obligation to provide the grounds of 

his entitlement to relief requires more than labels and conclusions, and a formulaic 

recitation of the elements of a cause of action will not do.” Id. (internal citations and 

quotations omitted). A court is not required to accept as true a “legal conclusion 

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couched as a factual allegation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting 

Twombly, 550 U.S. at 555). “Factual allegations must be enough to raise a right to relief 

above the speculative level.” Twombly, 550 U.S. at 555 (citing 5 Charles Alan Wright & 

Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed. 2004) (stating that the 

pleading must contain something more than “a statement of facts that merely creates a 

suspicion [of] a legally cognizable right of action”)).

Furthermore, “Rule 8(a)(2) . . . requires a showing, rather than a blanket 

assertion, of entitlement to relief.” Twombly, 550 U.S. at 555 n.3 (internal citations and 

quotations omitted). Thus, “[w]ithout some factual allegation in the complaint, it is hard 

to see how a claimant could satisfy the requirements of providing not only ‘fair notice’ of 

the nature of the claim, but also ‘grounds' on which the claim rests.” Id. (citing Wright & 

Miller, supra, at 94, 95). A pleading must contain “only enough facts to state a claim to 

relief that is plausible on its face.” Id. at 570. If the “plaintiffs . . . have not nudged their 

claims across the line from conceivable to plausible, their complaint must be dismissed.” 

Id. However, “[a] well-pleaded complaint may proceed even if it strikes a savvy judge 

that actual proof of those facts is improbable, and ‘that a recovery is very remote and 

unlikely.’” Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).

ANALYSIS

Defendant’s Motion makes three arguments to support its contention that the 

Court must dismiss the Complaint. First, Defendant contends that Plaintiff’s negligence 

claim must be dismissed because insurance brokers owe no general duty of care to their 

clients to procure replacement insurance without a coverage gap. Second, Defendant 

argues that Plaintiff’s breach of contract claim must be dismissed because it fails to 

allege facts sufficient to establish the formation of an oral contract. Specifically, Plaintiff 

does not identify Defendant’s employees who entered into a contract with Plaintiff, or the 

methods of communication used for the agreement.

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In addition to its substantive claims for negligence and breach of contract, Plaintiff 

requests a judicial declaration as to the duties of fictitious defendants on a belief that 

discovery will uncover their identities. Defendant moves to dismiss the claim for 

declaratory relief on the assumption that the Court will dismiss Plaintiff’s negligence and 

breach of contract claims. For the following reasons, Defendant’s Motion is DENIED in 

its entirety. 

A. Defendant owed Plaintiff a Duty to Procure Insurance without a 

Coverage Gap.

Defendant incorrectly argues that the existence of a “special duty” is required for 

Plaintiff’s professional negligence claim. Although certain factual circumstances can 

form the basis for additional legal obligations, all insurance brokers have a duty to “use 

reasonable care, diligence, and judgment in procuring the insurance requested.” Pacific 

Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc., 138 Cal. Rptr. 3d 

294, 297 (Cal. Ct. App. 2012). This general duty can be breached by the creation of 

even a potential gap in coverage when obtaining replacement insurance. Reserve 

Insurance Co. v. Pisciotta, 640 P.2d 764, 816-17 (Cal. 1982) (stating that a failure to 

advise the insured of the gap also constitutes negligence). Here, Defendant had a duty 

not to create potential coverage gaps for Plaintiff once Lloyd’s’ policy ended, irrespective 

of any “special duty” that may have been formed. See id. at 816-17. 

Without avail, Defendant claims that Reserve’s holding is limited only to coverage 

gaps where the payout of a replacement policy is less than the payout of an original 

policy. Id. at 806-07 (discussing a “gap in coverage between $100,000 and $300,000”). 

Contrary to Defendant’s claim, a coverage gap is simply “the exposure of [the insured] to 

[] liability without insurance[.]” Troost v. Estate of DeBoer, 202 Cal. Rptr. 47, 51-52 (Cal. 

Ct. App. 1984). This can even result from insurance policies with “claims made and 

reported” clauses, such as Lloyd’s’ and Hudson’s policies. See Root v. American Equity 

Specialty Ins. Co., 30 Cal. Rptr. 3d 631, 637 n.4 (Cal. Ct. App. 2005) (“‘A coverage gap 

may occur where the insured obtains successive ‘claims made and reported’ policies. If 

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a claim is made against the insured during policy year one but not reported to the insurer 

until policy year two, there may be no coverage under either policy, even if issued by the 

same insurer!’”) (citing Corskey, Heesman and Johnson, Cal. Practice Guide: Insurance 

Litigation, p. 7K-4 (The Rutter Group 2004)). For these reasons, Defendant’s Motion as 

to the “First Cause of Action” is DENIED.

B. Plaintiff Sufficiently Alleges the Existence of an Oral Contract.

To state a claim for a breach of contract, Plaintiff must sufficiently allege: (1) that 

a contract existed; (2) Plaintiff’s performance or an excuse for nonperformance; (3) 

Defendant’s breach; (4) and the damages that occurred to Plaintiff. Oasis West Realty, 

LLC v. Goldman, 124 Cal. Rptr. 3d 1115, 1121 (Cal. 2011). 

Here, Defendant argues that Plaintiff fails to sufficiently allege the existence of an 

oral contract. Specifically, Defendant claims that Plaintiff does not include the identities 

of Defendant’s employees who entered into the contract with Plaintiff. Defendant also 

argues that Plaintiff fails to state “how the terms were communicated” to form the oral 

contract. However, this Court is unaware of any law that requires the specificity that 

Defendant argues for with respect to a breach of contract claim, and Defendant provides 

no support for its position. See ECF Nos. 6 and 9 (emphasis added). While Federal 

Rule of Civil Procedure 9(b) requires such heightened pleading when a plaintiff pursues 

claims of fraud or mistake, no such claims are set forth here. See Vess v. Ciba-Geigy 

Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003) (“Averments of fraud must be 

accompanied by ‘the who, what, when, where, and how’ of the misconduct charged.”) 

(quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). 

Moreover, Defendant’s reliance on Bissessur v. Indiana University Bd. of 

Trustees, 581 F.3d 599 (7th Cir. 2009) is unpersuasive. In Bissessur, a student filed suit 

against his university for breach of an implied contract. Id. at 600-01. The student’s 

complaint stated only that: “An implied contract existed between Bissessur and IU”; “IU 

breached the implied contract that existed between Bissessur and IU”; and that “IU’s 

actions were arbitrary, capricious, and undertaken in bad faith.” Id. at 602. The 

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Bissessur court affirmed the district court’s decision to dismiss the claim because, 

among other things, there was no mention of the promises made to either party. Id. at 

603-04.

To the contrary here, Plaintiff alleges that “around December 2013,” it entered into 

an oral contract with Defendant “for a fee,” in exchange for which Defendant agreed to 

“[p]rocure professional liability coverage” as requested and “[p]roperly advise Plaintiff of 

any gaps or ambiguities in coverage.” ECF No. 1 at ¶ 35. Unlike the plaintiff in 

Bissessur, Plaintiff’s Complaint here includes the “entitlements” of each party in the 

contract and it does not fall “drastically short” of the pleading standard. See 581 F.3d at 

603. In short, Plaintiff plausibly alleges the existence of an oral contract between itself 

and Defendant. See Twombly, 550 U.S. at 570. Defendant’s Motion as to the “Second 

Cause of Action” is therefore DENIED.

C. Defendant Lacks Standing to Dismiss a Request for a Declaratory 

Judgment Regarding Fictitious Defendants. 

Finally, Plaintiff seeks declaratory relief against unknown defendants that it 

believes will be identified through discovery. A defendant has no standing to seek 

dismissal on the behalf of nonmoving defendants. Mantin v. Broadcast Music, Inc., 

248 F.2d 530, 531 (9th Cir. 1957). Accordingly, because this claim is alleged against 

defendants whose identities are as yet unknown, Defendant lacks standing to dismiss 

Plaintiff’s request for declaratory relief. See id. 

Even if standing were demonstrated, however, dismissal is proper only if “it is 

clear that discovery would not uncover the identities” of the fictitious defendants. See

Wakefield v. Thompson, 177 F.3d 1160, 1163 (9th Cir. 1999) (quoting Gillespie v. 

Civiletti, 629 F.2d 637, 643 (9th Cir. 1980)). Here, there is no “clear” reason why Plaintiff 

will not uncover the identities of unknown defendants. See id. Accordingly, Defendant’s 

Motion as to the “Third Cause of Action” is DENIED. 

///

///

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CONCLUSION

For the reasons stated above, Defendant’s Motion to Dismiss (ECF No. 6) is 

DENIED in its entirety. 

IT IS SO ORDERED. 

Dated: July 29, 2016

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