Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_12-cv-00971/USCOURTS-caed-2_12-cv-00971-0/pdf.json

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

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

AQUARIUS WELL DRILLING INC., NO. 2:12-cv-00971-MCE-CMK

et al.,

 

Plaintiffs,

 MEMORANDUM AND ORDER

v.

AMERICAN STATES INSURANCE CO.,

GENERAL INSURANCE CO.

OF AMERICA,

 

Defendants.

----oo0oo----

Before the Court is Defendants American States Insurance

Company (“ASIC”) and General Insurance Company of America’s

(“General”) Motion to Dismiss Plaintiffs Aquarius Well Drilling

and Ray and Sharon Williamson’s Complaint (ECF No. 6) (“MTD”).1

///

 Because oral argument would not be of material assistance, 1

the Court ordered this matter submitted on the briefing. E.D.

Cal. R. 230(g).

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For the reasons that follow, Defendants’ Motion to Dismiss is

GRANTED with leave to amend. 

BACKGROUND2

Aquarius is a California Corporation engaged in the well

drilling and well testing business. (Complaint (“Compl.), ECF

No. 1 ¶ 1). The Williamsons are husband and wife and are the

sole officers, directors and shareholders of Aquarius. (Id.) 

The Defendants are both insurers. (Id.) 3

Plaintiffs contend that, at all relevant times, they were

insured by Defendants by means of a commercial general liability

policy, No. 01-CG-326500 (“the Policy”). (Id. ¶ 3.) 4

 Except as otherwise noted, the following facts are taken 2

from Plaintiffs’ Complaint (ECF No. 1) (“Compl.”) All page

references to filed documents will be to the Court’s ECF

pagination. For the purposes of this Motion, the Court accepts

Plaintiff’s facts as true and makes all inferences in the light

most favorable to Plaintiff.

 The Court notes, but does not reach because it is granting 3

the Motion to Dismiss with leave to amend, two issues:

(1) whether the Williamsons have standing to bring claims as

individuals; and (2) whether General is a proper defendant to

this action. As to the Williamsons’ standing, the Court notes

that they do not appear to be either named insureds under the

Policy or named defendants in the underlying action by the

Manleys. If Plaintiffs choose to amend their Complaint, the

basis for the Williamsons’ standing should be clarified. 

Similarly, General does not appear on the Policy, only ASIC, so

the basis for Plaintiffs’ claims against General is unclear. The

Court does note that General is listed on the Notice of

Nonrenewal (ECF No. 1, Ex. 3), however, whether that is

sufficient to establish a basis to name General as a defendant is

not clear at this time. So, in the event that Plaintiffs amend

their Complaint, this issue should also be clarified.

 Attached to Plaintiffs’ Complaint are (1) Defendants’ 4

January 16, 2012, declination letter (ECF No. 1, Ex. 2);

(continued...)

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In the policy, Defendants allegedly promised to pay those sums

Aquarius becomes legally obligated to pay, including damages and

attorneys’ fees because of property damage or loss of use of

tangible property that is not injured caused by an “occurrence,”

defined as an “accident.” (Id. ¶ 7.) 

On November 16, 2011, non-parties to this action, Laurie and

Robert Manley, filed a complaint against Aquarius. (Id. ¶ 9.) 

In this underlying lawsuit, Aquarius contends that the Manleys

charged Aquarius with negligence in testing a well on certain

real property, that thereafter the Manleys purchased the

property, and that in September 2009, the well suddenly and

unexpectedly ceased producing water while the Manleys depended on

it as a source of water. (Id.)

(...continued) 4

Defendants’ Notice of Non-Renewal (Ex. 3); (3) Plaintiffs’

January 23, 2012 request for reconsideration (Ex. 4); and

(5) Defendants’ February 15, 2012 final declination letter

(Ex. 5). Although Plaintiffs do not include a copy of the

Policy, Defendants request judicial notice of several documents,

including the Policy. Pursuant to Federal Rules of Evidence

201(b) (authorizing judicial notice of adjudicative facts

“capable of accurate and ready determination by resort to sources

whose accuracy cannot be reasonably questioned”), Defendants

request the Court take judicial notice of several documents. 

(Request for Judicial Notice (“RJN”) (ECF No. 6, Ex. 1 and

attached exhibits 1-4.) Specifically, Defendants ask the Court

to take judicial notice of: (1) the November 16, 2011, state

court complaint against Aquarius brought by Laura and Robert

Manley (Ex. 1); (2) the Complaint in this action (as well as the

attachments listed above) (Ex. 2; see also ECF No. 1); (3) the

Policy (Ex. 3 (the Policy is attached as an exhibit in three

parts, (ECF Exs. 4-6); and (4) Excerpts from the Policy (Ex.4;

ECF Ex. No. 7). Defendants’ requests are unopposed and are the

proper subject of judicial notice. See, e.g., Champlaie v. BAC

Home Loans Servicing, LP, 706 F. Supp. 2d 1029, 1040 (E.D. Cal.

2009); Lee v. County of Los Angeles, 250 F.3d 668, 688 (9th Cir.

2001) (court may take judicial notice of matters of public

record). Accordingly, Defendants’ Request for Judicial Notice,

(ECF No. 23), is granted. 

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Aquarius alleges that it promptly notified Defendants of the

Manleys’ lawsuit and tendered defense. (Id. ¶ 10.) However, on

January 16, 2012, Defendants sent Aquarius a letter in which they

declined to defend, claiming that the policy did not cover the

matters alleged in the lawsuit. (Id. ¶ 11.) On January 19,

Defendants then sent a Notice of Nonrenewal to Aquarius stating

the Policy would expire on March 26. (Id. ¶ 12.) Then, on

January 23, Aquarius asked Defendants to reconsider their denial,

which, on February 15, Defendants also denied. (Id. ¶¶ 13.) 

On April 12, 2012, Plaintiffs filed their Complaint in this

Court on the basis of diversity jurisdiction. (ECF No. 1). In

their Complaint, Plaintiffs generally allege that Defendants were

obligated to defend the Manleys’ lawsuit because the lawsuit

alleged that Aquarius had negligently tested the well, and that

the well thereafter unexpectedly ceased producing water,

interfering with the Manleys’ use of the property. (Id. ¶ 9.) 

In Plaintiffs’ view, these claims sufficiently stated an

“occurrence” to trigger Defendants’ duty to defend. (Id.

¶¶ 9-10,19-24.) Plaintiffs bring claims for (1) breach of

contract; (2) breach of the covenant of good faith and fair

dealing; (3) estoppel; and (4) intentional infliction of

emotional distress. (Id. at pages 4-9.) They seek various

damages, as well as attorney fees and costs and a determination

that Defendants are estopped from denying coverage. (Id. at

pages 9-10.)

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Defendants move to dismiss pursuant to Federal Rule of Civil

Procedure 12(b)(6). (Motion to Dismiss (“MTD”), ECF No. 6.) 5

Defendants’ primary contention is that the Policy covered

property damage only if caused by an “occurrence,” which is

defined as an “accident,” and that “the Manleys’ lawsuit merely

alleged that Aquarius gave bad professional advice as to the

well’s water supply.” (Id. at 7.) Defendants contend that,

“[u]nder California law, an insured’s bad professional advice or

opinion does not amount to an accident or ‘occurrence’ triggering

the insurer’s duty to defend.” (Id.)

STANDARD FOR RULE 12(b)(6) MOTION TO DISMISS

On a motion to dismiss for failure to state a claim under

Rule 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, 554-55 (2007) (internal

citations and quotations omitted). 

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 All further references to “Rule” or “Rules” shall be to 5

the Federal Rules of Civil Procedure unless otherwise noted.

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Though “a complaint attacked by a Rule 12(b)(6) motion to dismiss

does not need detailed factual allegations, 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. at 555 (internal citations and quotations omitted). 

A plaintiff’s factual allegations must be enough to raise a right

to relief above the speculative level. Id. (citing 5 C. Wright &

A. Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d

ed. 2004) (“The pleading must contain something more. . . than

. . . a statement of facts that merely creates a suspicion [of] a

legally cognizable right of action”)).

Moreover, “Rule 8(a)(2) . . . requires a ‘showing,’ rather

than a blanket assertion of entitlement to relief. Without 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.” Twombly, 550 U.S. at 555, n.3 (internal

citations omitted). A pleading must contain “only enough facts

to state a claim to relief that is plausible on its face.” Id.

at 570; see also Ashcroft v. Iqbal, 556 U.S. 662, 677-679 (2009). 

If the “plaintiffs . . . have not nudged their claims across the

line from conceivable to plausible, their complaint must be

dismissed.” Twombly, 550 U.S. at 570; Iqbal, 556 U.S. at 680. 

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A court granting a motion to dismiss a complaint must then

decide whether to grant leave to amend. Rule 15(a) empowers the

court to freely grant leave to amend when there is no “undue

delay, bad faith[,] dilatory motive on the part of the movant,

. . . undue prejudice to the opposing party by virtue of . . .

the amendment, [or] futility of the amendment. . . .” Foman v.

Davis, 371 U.S. 178, 182 (1962). Leave to amend is generally

denied when it is clear the deficiencies of the complaint cannot

be cured by amendment. DeSoto v. Yellow Freight Sys., Inc.,

957 F.2d 655, 658 (9th Cir. 1992); Balistieri v. Pacifica Police

Dept., 901 F.2d 696, 699 (9th Cir. 1990) (“A complaint should not

be dismissed under Rule 12(b)(6) 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.”) (internal citations

omitted).

ANALYSIS

A. Parties’ Contentions

Defendants contend the Policy requires that, to trigger

their duty to defend, plaintiffs in an underlying lawsuit must

allege property damage due to an “occurrence” or accident caused

by their insured that results in property damage. (MTD at 7-18.) 

Defendants note the Policy states, in relevant part:

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COVERAGE A BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

We will pay those sums that the insured becomes legally

obligated to pay as damages because of “bodily injury”

or “property damage” to which this insurance applies.

We will have the right and duty to defend the insured

against any “suit” seeking those damages. However, we

will have no duty to defend the insured against any

“suit” seeking damages for “bodily injury” or “property

damage” to which this insurance does not apply. We

may, at our discretion, investigate any “occurrence”

and settle any claim or “suit” that may result. . . . .

b. This insurance applies to “bodily injury” and

“property damage” only if: 

(1) The “bodily injury” or “property damage” is

caused by an “occurrence” that takes place in

the “coverage territory”;

(2) The “bodily injury” or “property damage”

occurs during the policy period;

(See MTD at 8-9; see also RJN, ECF No. 6, Ex. 4 (The Policy) at

4.) In particular, the Policy defines “Occurrence” to mean “an

accident, including continuous or repeated exposure to

substantially the same harmful conditions.” (The Policy at 18.) 

Defendants assert that their duty to defend was not

triggered because the Manleys’ complaint in the underlying action

alleges deliberate and purposeful conduct on Plaintiffs’ part –

the giving of bad professional advice – not an occurrence or

accident. (Id. at 9-10.) Specifically, Defendants contend that

the Manleys’ complaint alleges that Aquarius falsely represented

the productivity of the well, and fraudulently concealed the

actual condition of the well from them. (Id.) 

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According to Defendants, “California courts routinely hold ‘that

the insurer has no duty to defend where the underlying lawsuit is

based on purposeful conduct and the policy confines coverage to

injuries (e.g., property damage) caused by an accident.’” (Id.

at 12, 12-15.) Because they had no duty to defend, Defendants

allege that all of Plaintiffs’ claims fail. (Id. at 15-18.) 

Plaintiffs argue that the underlying Manley complaint does,

in the ninth cause of action, sufficiently raise negligence

claims against them, based on inadequate well testing resulting

in the Manleys’ loss of use of the well, to constitute an

“occurrence,” triggering Defendants’ duty to defend. (Opposition

(“Opp’n”), ECF No. 8 at 9-10.) In addition, Plaintiffs contend

that the Manleys’ eighth cause of action, for negligent

misrepresentation, is also sufficient to raise the possibility

for there to have been an “occurrence,” therefore, again, the

insurers had a duty to defend. (Id. at 12-14).

B. California Insurance: Duty to Defend Standard6

An insurer is required to defend its insured if the

underlying claim against the insured is potentially covered by

the policy. George F. Hillenbrand, Inc. v. Ins. Co. of N. Am.,

104 Cal. App. 4th 784, 800 (Cal Ct. App. 2002). Though broad,

the duty to defend is not unlimited; rather, “it is measured by

the nature and kinds of risks covered by the policy.” 

 California law governs this insurance policy dispute 6

brought in a diversity action. Hyundai Motor America v. National

Union Fire Ins. Co., 600 F.3d 1092, 1097 (9th Cir. 2010). 

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Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 19 (Cal. 1995). 

Where there is no possibility of coverage, there is no duty to

defend. Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287,

300 (Cal. 1993).

“Determination of the duty to defend depends, in the first

instance, on a comparison between the allegations of the

complaint and the terms of the policy.” Scottsdale Ins. Co. v.

MV Transp., 36 Cal. 4th 643, 654 (Cal. 2005). “To prevail, the

insured must prove the existence of a potential for coverage,

while the insurer must establish the absence of any such

potential. In other words, the insured need only show that the

underlying claim may fall within policy coverage; the insurer

must prove it cannot.” Montrose Chem, 6 Cal. 4th at 300. Thus,

the insurer’s duty to defend turns on the facts alleged in the

underlying complaint or otherwise known at the time of tender,

rather than “the technical legal cause[s] of action” pled in the

suit. Swain v. Cal. Cas. Ins. Co., 99 Cal. App. 4th 1, 8 (Cal

Ct. App. 2002). When an insurer denies defense without

appropriate investigation, it takes the risk that “the insured

may later be able to prove that a reasonable investigation would

have uncovered evidence to establish . . . a potential for

coverage. In that case, the insurer will be liable for the costs

of defense already incurred by the insured and could also be

exposed to tort liability.” Eigner v. Worthington,

57 Cal. App. 4th 188, 195 (Cal. Ct. App. 1997) (quoting Am. Int’l

Bank v. Fid. & Deposit Co., 49 Cal.App.4th 1558, 1571 (Cal

Ct. App. 1996)).

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C. Analysis

California courts have held that for there to be an accident

or “occurrence,” the cause, as well as the result, must be

unexpected, unusual, and unforeseen. Merced Mut. Ins. Co. v.

Mendez, 213 Cal. App. 3d 41 (Cal Ct. App. 1989). “Accident” is

given a commonsense interpretation that it is an unintentional,

unexpected, chance occurrence. Fire Ins. Exch. v. Sup. Ct.,

181 Cal. App. 4th 388, 393 (Cal. Ct. App. 2010). 

Intentional acts causing unintentional damage are not

accidents for the purposes of insurance coverage. See, e.g.,

Ray v. Valley Forge Ins. Co., 77 Cal. App. 4th 1039, 1045–46 (Cal

Ct. App. 1999). “An accident is never present when the insured

performs a deliberate act unless some additional, unexpected,

independent, and unforeseen happening occurs that produces the

damage.” Merced Mut., 213 Cal. App. 3d at 43. Stated

conversely, where damage is the direct and immediate result of an

intended or expected event, there is no accident. See, e.g., 

Ray, 77 Cal. App. 4th at 1045–46; Merced Mut., 213 Cal. App. 3d

at 48 (noting that the argument that the requisite intent applies

not to one’s actions, but to their consequences, “has been

repeatedly rejected by the appellate courts”); Swain,

99 Cal. App. 4th at 10(the insured landlord’s act of evicting

tenants was not an “occurrence” triggering the insurer’s duty to

defend landlord in tenant's underlying wrongful eviction suit) 

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Here, the Manleys’ complaint alleges that the seller of the

real property at issue misrepresented to the Manleys that there

was a working water well that had, three years earlier, produced

twelve gallons per minute (“gpm”). (Manley Compl., ECF 6, Ex. 3

at ¶ 13.) The Manleys contend this was untrue: there was no

well, just an eighteen foot deep hole dug with an excavator,

which tapped into seeping ground water. (Id. at ¶ 14.) 

Regarding Aquarius, the Manleys allege that:

Aquarius purportedly conducted several tests on the

“well,” including a “pump test” and “water analysis,”

among other things, but did not conduct a test

regarding the depth or casing of the well, among other

things. Furthermore, [] Aquarius reported on a written

report that it conducted a 2 hour “well” pump test and

it produced “12+ gpm.” This representation was untrue

as the “well” pump test was actually conducted over a

few minutes with the results extrapolated out to a 2

hour time period.

(Id. at ¶ 15.) Based on the representations of the seller and 7

Aquarius, the Manleys bought the property in June 2007, but, in

September 2009, the water source ceased, leaving them without a

reliable water source and causing them to incur various costs to

install a water source. (Id. at ¶ 16.) 

The Manleys thereafter sued both the seller and Aquarius. 

In their complaint, the Manleys brought four causes of action

against Aquarius, seeking relief either because of fraud (their

sixth and seventh causes of action), or because of negligence

(their eighth and ninth causes of action). (Id. at ¶¶ 53-78.) 

///

 The Manleys’ complaint does not specifically state who 7

hired Aquarius to perform the challenged well tests, but they

allege that Aquarius breached a duty owed to them, so presumably

they hired Aquarius 

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The fraud claims generally allege that Aquarius knew, or should

have known, its representations regarding the well were false and

that Aquarius concealed the true nature of the well from the

Manleys. (Id. at ¶¶ 53-60.) 

The Manleys’ Eighth Cause of Action, for negligent

misrepresentation, alleges that while Aquarius’s representations

regarding the well were false, Aquarius may have honestly

believed they were true and it intended for the Manleys to rely

on its representations. (Id. at ¶¶ 60-73.) The Ninth Cause of

action, a negligence claim, alleges that Aquarius had a duty to

perform a thorough test of the well, but failed to do so and

failed to disclose the actual condition of the well to the

Manleys. (Id. at ¶¶ 74-78.) 

Even drawing all possible inferences in favor of Aquarius,

none of the Manleys’ causes of action appear to allege an

accident or occurrence under the Policy. The fraud claims allege

Aquarius took deliberate actions to defraud and conceal the true

nature of the property from the Manleys. Those acts do not

constitute an accident or occurrence because they are deliberate

and the Manleys’ reliance was foreseeable. Merced Mut.,

213 Cal. App. 3d at 43 (“An accident is never present when the

insured performs a deliberate act unless some additional,

unexpected, independent, and unforeseen happening occurs that

produces the damage.”) 

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Similarly, the negligence claims allege that Aquarius’s act

of testing the well and reporting that it was producing twelve

gallons per minute were deliberate and wilful acts, but, for the

purposes of those claims, the Manleys assume Aquarius made honest

mistakes. However, even if Plaintiffs’ alleged errors were the

result of simple negligence, the acts of testing and reporting

the results of those tests were still deliberate and wilful acts

and the Manleys’ reliance was foreseeable: there was no

“accident” or otherwise unexpected, unusual, and unforeseen

result that accrued as the result of Aquarius’s tests and report.

In Ray, the California Court of Appeal held there was no

occurrence under a commercial general liability policy, therefore

no duty for an insurer to defend, where the insured provided

professional advice to the plaintiff in the underlying lawsuit

that turned out to be bad advice. Ray, 77 Cal. App. 4th at

1045–46. Aquarius states that facts here are different from

those in Ray because, in Ray, Ray intended to give the advice;

gave it in the intended manner, and the advice was followed as he

intended. (Opp’n, ECF No. 8 at 11.) Aquarius contends the

situation is different in the instant case because Aquarius did

not intend to be negligent. (Id.) 

This, however, is an unpersuasive argument. In Ray, the

allegation was that Ray provided bad advice about suitable

roofing materials to the underlying plaintiff. Ray,

77 Cal. App. 4th at 1043. It was not alleged that Ray intended

to give bad advice, just that he did so. 

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The same holds true here: Aquarius was hired to provide a report

on the suitability of the well and intended the Manleys to rely

on that information, which they did. In the negligence causes of

action it is not alleged that Aquarius intended to be negligent

in their testing and reporting, just that they were negligent. 

Here, the Manleys allege that Aquarius was acting in its

professional capacity by performing a well test and preparing a

report that indicated the well produced twelve gallons of water

per minute. As alleged, Aquarius intended that the Manleys rely

on this information, even if it turned out later (as it

apparently did) that the professional advice that Aquarius

provided was in error. Because Aquarius’s acts were deliberate,

there was no accident, and therefore no duty to defend.

Because the Court finds Aquarius’s complaint does not state

any potential accident or occurrence within the meaning of the

Policy, there was no duty to defend and therefore Aquarius’s

derivative claims for estoppel, breach of the implied covenant of

good faith and fair dealing, as well as the emotional distress

claims, all fail. 

For the reasons set forth above, the Court does not find a

basis in the Policy for Plaintiffs’ action. However, the Court

will grant Defendants’ Motion to Dismiss with leave to amend. 

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CONCLUSION

As a matter of law, and for the reasons set forth above,

Defendants’ Motion to Dismiss (ECF No. 6) is GRANTED with leave

to amend. Plaintiffs shall file any amended complaint within

twenty (20) days of electronic filing of this Order.

IT IS SO ORDERED.

Dated: July 13, 2012

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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Case 2:12-cv-00971-MCE-CMK Document 13 Filed 07/16/12 Page 16 of 16