Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-02742/USCOURTS-casd-3_12-cv-02742-2/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

SOUTHERN DISTRICT OF CALIFORNIA

MILLENNIUM LABORATORIES, 

INC.,

Plaintiff,

Case No. 12-cv-2742 BAS (KSC)

ORDER:

(1)CLARIFYING 

EVIDENTIARY ISSUES;

(2)ORDERING 

SUPPLEMENTAL 

BRIEFING; AND 

(3)DENYING DARWIN’S 

MOTION TO TERMINATE 

THE DUTY TO DEFEND

(ECF 195)

v.

DARWIN SELECT INSURANCE 

COMPANY,

Defendant.

On December 3, 2014, the Court heard argument from the parties in this 

matter on several outstanding issues. This Order clarifies some of the outstanding 

issues, orders supplemental briefing to be filed simultaneously by both parties, and 

DENIES Darwin’s Motion to Terminate its Duty to Defend. ECF 195.

I. Reasonableness of Brandt Fees

Under Brandt v. Superior Court, “When an insurer's tortious conduct 

reasonably compels the insured to retain an attorney to obtain the benefits due 

under a policy, it follows that the insurer should be liable in a tort action for that 

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expense. The attorney's fees are an economic loss—damages—proximately caused 

by the tort.” Brandt v. Superior Court, 37 Cal. 3d 813, 817 (1985). The fees “are 

recoverable as damages resulting from a tort in the same way that medical fees 

would be part of the damages in a personal injury action.” Id.

At oral argument, Millennium suggested that the reasonableness of such fees 

would not be in question at trial, citing to the Brandt court’s comparison between 

medical fee recovery and Brandt fees. Darwin argued that it could challenge the 

reasonableness of fees. Darwin is correct.

Under California law, as well as the Restatement of Torts, “a personal injury 

plaintiff may recover the lesser of (a) the amount paid or incurred for medical 

services, and (b) the reasonable value of the services.” Howell v. Hamilton Meats

& Provisions, Inc., 52 Cal. 4th 541, 555–56 (2011); but see Katiuzhinsky v. Perry, 

152 Cal. App. 4th 1288, 1296, 62 Cal. Rptr. 3d 309, 314 (2007) (holding a 

tortfeasor liable for the full billed expense instead of the discounted debt purchased 

by a bill collector). In the medical context, quoted prices do not generally represent 

the real value of services, and as such are not “necessarily representative of either 

the cost of providing those services or their market value.” Howell, 52 Cal.4th at 

564. Evidence of the amount actually paid is certainly admissible at trial. Howell, 

52 Cal.4th at 562.

However, in the medical context, the California Supreme Court was reticent 

to suggest alternate methods for calculating market value, other than the rate paid 

for the services. See Corenbaum, Corenbaum v. Lampkin, 215 Cal. App. 4th 1308, 

1326–27 (2013), as modified (May 13, 2013) (analyzing Howell). The California 

Court of Appeal has persuasively stated that expert testimony on the 

reasonableness of fees from both parties would be admissible on this point. See 

Dodd v. Cruz, 223 Cal.App.4th 933, 167 Cal. Rptr. 3d 601, 608 (2014)

(unpublished). As such, the reasonableness of rates and the amount of damages is 

appropriately determined by the factfinder, and it is appropriately the lesser 

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between the amount actually paid and the reasonable rate.

In the context of Brandt, plaintiffs are charged with proving “(1) the amount 

to which the insured was entitled to recover under the policy, (2) that the insurer 

withheld payment unreasonably or without proper cause; (3) the amount that the 

insured paid or incurred in legal fees and expenses in establishing the insured's 

right to contract benefits and (4) the reasonableness of the fees and expenses so 

incurred.” Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062, 1079 (2007), as 

modified on denial of reh'g (Apr. 20, 2007). Under this rubric, plaintiffs must prove 

the reasonableness of the fees claimed to recover. As with medical expenses, this 

includes the reasonableness of the rate charged. Thus, the Court finds that

California court decisions and basic tort principles require Millennium to prove the 

reasonableness of the rates it claims as damages. Clearly then, Darwin may rebut 

Millennium’s evidence.

Accordingly, insofar as Millennium orally moved to limit challenges to the 

reasonableness of the rates its counsel charged in this case, Millennium’s oral 

motion is DENIED. 

II. Darwin’s Duty to Investigate

At the final pretrial conference on December 3, 2014, the Court addressed 

Millennium’s proposed jury instruction on Darwin’s duty to investigate, a modified 

version of CACI § 2332. Darwin argues this instruction applies only to “firstparty” insurance cases, and that there is no duty to investigate in a third-party 

claim. 

In fact, California law imputes a duty to investigate in third-party claims. 

“[A]n insurer's obligation of equitable contribution for defense costs arises where, 

after notice of litigation, a diligent inquiry by the insurer would reveal the potential 

exposure to a claim for equitable contribution, thus providing the insurer the 

opportunity for investigation and participation in the defense in the underlying 

litigation.” St. Paul Mercury Ins. Co. v. Mountain W. Farm Bureau Mut. Ins. Co., 

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210 Cal. App. 4th 645, 663 (2012), quoting OneBeacon America Ins. Co. v. 

Fireman's Fund Ins. Co., 175 Cal.App.4th 183, 203 (2009) (italics added). At 

times, this diligent inquiry may be satisfied “by comparing the allegations of the 

complaint with the terms of the policy,” Horace Mann Ins. Co. v. Barbara B., 4 

Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993), and considering “the 

extrinsic facts [. . .] known by the insurer at the inception of the third party 

lawsuit,” Gunderson v. Fire Ins. Exch., 37 Cal.App.4th 1106, 44 Cal.Rptr.2d 272, 

277 (Ct.App.1995) (emphasis in original). Bock v. Travelers Prop. Cas. Ins. Co., 

465 F. App'x 623, 625 (9th Cir. 2012).

The Ninth Circuit has suggested that there may be a further duty to 

investigate in some cases. See Bock, 465 F. App’x at 625. This may be triggered if 

the insurer is aware of any extrinsic facts at the time of tender that suggest further 

investigation is required. In Bock, the insurer specifically told the insured that if 

they knew of “any other facts or theories which . . . are relevant to the duty to 

defend . . . we welcome your thoughts and will give serious consideration to any 

information that you may provide.” Id. However, because the insured provided no 

further facts, the insured was warranted in believing no further investigation was 

necessary. It is a question of fact, therefore, as to whether the extrinsic facts known 

to Darwin at the time of tender triggered a duty to conduct a further investigation.

As a result, the parties may argue whether the extrinsic facts known to 

Darwin at the time should have reasonably resulted in Darwin’s further 

investigation of the tendered claim. Such a factual inquiry does not require any 

further instruction beyond the general duty of good faith and fair dealing. 

Therefore the Court will not include an instruction on the duty to investigate when 

instructing the jury.

III. Travelers’ Letter Tendering Claims

a. Time of Tender

On August 31, 2012, Travelers Property Casualty Company of America sent 

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a letter, through its counsel, to Darwin Select Insurance Company. In that letter, 

Travelers intended “to formally tender Darwin the two actions” underlying the 

present lawsuit. This letters’ existence is undisputed, and the duty to defend begins 

with the time of tender.

Darwin argues that because this letter was sent from a coinsurer, not from 

Millennium directly, it is not proper tender. Under California law, contract 

interpretations are the province of the court, as they are a legal issue. Travelers 

Cas. & Sur. Co. v. Am. Int'l Surplus Lines Ins. Co., 465 F. Supp. 2d 1005, 1012 

(S.D. Cal. 2006). Because the contents and receipt of Travelers’ letter is 

undisputed, the Court determines as a matter of law that the letter was valid tender.

The duty to defend arises as soon as an insured tenders a third party lawsuit. 

Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 58 (1997). California 

case law recognizes two types of valid tender: formal and constructive. Truck Ins. 

Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 979 (2000) (“Unigard”).

Therefore the duty to defend may arise when the insurer receives “constructive 

notice” of its contractual duty. California Shoppers, Inc. v. Royal Globe Ins. Co., 

175 Cal. App. 3d 1, 37 (1985). In California Shoppers, a letter sent by an insured 

to an insurer containing only a complaint naming the insured as a defendant in a 

suit and a copy of the summons was considered valid constructive notice of tender 

of the defense, notwithstanding that the letter’s envelope had the return name and 

address of another unrelated entity also insured by that insurer. As the court 

summarized, “given the appropriate circumstances, the law will charge a party with 

notice of all those facts which he might have ascertained had he diligently pursued 

the requisite inquiry.” Id.

More on point is the Unigard case, an action for equitable contribution 

between coinsurers. In that case, the defendant Unigard did not defend its insured 

in the underlying lawsuit, claiming it was never tendered by its insured. The 

plaintiff-coinsurer Truck did not notify Unigard of its potential liability in the 

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underlying lawsuit until after it was resolved. In finding for Unigard, the court 

concluded, “The notice should have been made promptly after Truck agreed to 

provide a defense. That is not to say that Truck had to tender the defense to 

Unigard. A simple notice regarding the possibility of contribution would have been 

sufficient.” Unigard, 79 Cal.App.4th at 982.

In summary, “an insured’s lack of tender or compliance with a policy 

provision is not fatal [...]; rather, adequate notice of the potential for contribution 

and the opportunity for investigation and participation in the defense in the 

underlying litigation will suffice.” OneBeacon America Ins. Co. v. Fireman’s Fund 

Ins. Co., 175 Cal.App.4th 183, 201 (2009) (emphasis in original). Moreover, all 

state supreme courts confronted with this issue have ruled “that notice of suit is 

sufficient to tender a defense.” Home Ins. Co. v. Nat'l Union Fire Ins. of 

Pittsburgh, 658 N.W.2d 522, 532 (Minn. 2003), as modified on denial of reh'g 

(Apr. 3, 2003) (citing Illinois, New Hampshire, and Wisconsin Supreme Court 

precedent).

Darwin’s insistent ignorance of the long-established doctrine of constructive 

tender is surprising and hopefully not an attempt to intentionally mislead the Court. 

Based on clear precedent and the undisputed facts in this case, Travelers’ letter is 

valid tender of the underlying lawsuit. In its letter Travelers states it is intended as 

a tender letter and includes all necessary information required to provide notice. As 

a result, the date of tender for purposes of the duty to defend the underlying 

lawsuits is August 31, 2012.

b. Admissibility of Travelers’ Letter

As the Court has previously ruled, permitting evidence of Travelers’ belief 

that Darwin had a duty to defend the underlying lawsuits is unnecessarily 

prejudicial. However, this letter is probative in this case. As discussed regarding 

the duty to defend, Darwin’s knowledge of extrinsic facts at the time of the denial 

of coverage is extremely relevant when determining whether Darwin breached its 

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duty of good faith and fair dealing, and as such this letter should be properly before 

the jury as evidence of the scope of Darwin’s knowledge.

The Court is sensitive to Darwin’s concerns over the possible prejudice of 

the letter. As such, the Court requires further redactions to mitigate this prejudice. 

On the second page, third paragraph, the language “and it highlights the responses 

which implicate Darwin’s coverage” should be redacted. Only the following 

language in the first paragraph on page 3 is more relevant than prejudicial:

“Travelers hereby demands that Darwin [REDACTED] participate in 

Millennium’s defense in the Calloway matter[.]” The rest of the paragraph should 

be redacted. The second paragraph on page 3, only “In light of the upcoming 

September 14, 2012 mediation in the coverage matter, we ask for your reply no 

later than September 10th.” is not overly prejudicial. The remainder of the 

paragraph should be redacted. Insofar as this modifies the Court’s prior ruling on 

Darwin’s third motion in limine, the Court DENIES IN PART that motion. 

Millennium is reminded that this letter goes to Darwin’s adjusters’ states of mind

only, and it cannot be admitted for its truth.

IV. Millennium’s Financial State

The Court ORDERS the parties to submit authority regarding the relevance 

of Millennium’s financial condition to the determination of liability for breach of 

the duty of good faith and fair dealing. This may include no more than four cases 

from each party, to be attached as an appendix to their supplementary briefing due 

on December 18, 2014. The authority citations must not include any explanatory 

paragraphs.

V. Darwin’s Motion to Terminate the Duty to Defend

Darwin has a duty to defend Millennium in the underlying Ameritox

litigation, so long as there is a potential for coverage. See Montrose Chemical 

Corp. v. Superior Court, 6 Cal. 4th 287, 295 (1993). This Court takes judicial 

notice that in the underlying case, Millennium has appealed the district court’s 

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denial of its new trial motion. Because such a new trial would implicate the same 

duty as the first trial, Darwin’s motion is DENIED. ECF 195.

CONCLUSION

For the foregoing reasons, the Court DENIES Darwin’s motion to terminate 

the duty to defend. The parties are ordered to submit “Supplemental Briefing” on 

whether Brandt fees should be bifurcated from the other damages. This briefing 

may not exceed five pages from each party. If the parties stipulate on this issue, 

they do not need to file Supplemental Briefing, but should file the stipulation with 

the Court. Supplemental Briefing or a stipulation must be submitted on or before 

December 18, 2014. The parties may attach a Notice of Authorities on the 

relevance of Millennium’s financial condition at trial to the Supplemental Briefing. 

This Notice must include no more than four citations and must be presented 

without commentary.

IT IS SO ORDERED.

Dated: December 9, 2014

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