Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_13-cv-02311/USCOURTS-caed-2_13-cv-02311-0/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

JAMES LENNANE, an Individual, 

and JC PRODUCE, LLC, a 

California limited liability 

company,

Plaintiffs,

v.

AMERICAN ZURICH INSURANCE 

COMPANY, an Illinois 

corporation; and Does 1 

through 30, inclusive,

Defendants.

No. 2:13-cv-02311 JAM AC

ORDER GRANTING DEFENDANT’S 

MOTION TO DISMISS

This matter is before the Court on Defendant American Zurich 

Insurance Company’s (“Defendant”) Motion to Dismiss (Doc. #7) 

Plaintiffs James Lennane (“Plaintiff Lennane”) and JC Produce, 

LLC’s (“Plaintiff JCP”) (collectively “Plaintiffs”)third, fourth 

and sixth causes of action in the Complaint (Doc. #1) pursuant to 

Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”) 

for failure to state a claim upon which relief may be granted. 

Plaintiffs oppose the motion (“Opposition”) (Doc. #11). 

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Defendant filed a reply (Doc. #13). For the following reasons, 

Defendant’s motion is GRANTED.1

I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

Plaintiff Lennane is a resident of Florida. Compl. ¶ 1. 

Plaintiff JCP is a California limited liability company. Compl. 

¶ 2. Defendant American Zurich Insurance Company is an Illinois 

corporation. Compl. ¶ 3.

On April 1, 2006, Plaintiff JCP purchased a workers’ 

compensation insurance policy (“the Policy”) from Defendant. 

Compl. ¶ 7. Under the Policy, Defendant agreed to pay the 

benefits required of Plaintiff JCP by the California workers’ 

compensation laws. Compl. ¶ 8. The Policy required Plaintiff 

JCP to reimburse Defendant for each claim, up to the deductible 

amount of $250,000. Compl. ¶ 11. Plaintiff JCP collateralized 

its deductible by providing Defendant with a $25,000 “loss fund” 

and two standby letters of credit, in the aggregate amount of 

$780,000 (the “Standby Letters”). Compl. ¶ 12. Bank of the West 

(the “Bank”) issued the required Standby Letters to Defendant. 

Compl. ¶ 12. The Bank required Plaintiff Lennane to personally 

guarantee repayment of the Standby Letters, in the event that 

Plaintiff JCP failed to repay the Bank. Compl. ¶ 12.

At some point in 2006, the Bank declined to renew the 

Standby Letters, which were set to expire. Compl. ¶ 13. In 

approximately December 2006, Defendant “exercised its rights 

 

1 This motion was determined to be suitable for decision without 

oral argument. E.D. Cal. L.R. 230(g). The hearing was 

scheduled for January 22, 2014.

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under the . . . Policy to present to Bank the [Standby Letters] 

for payment, and monetized the amount of $780,000.” Compl. ¶ 13. 

Consequently, Defendant had possession of $805,000, which it 

allegedly held “in trust” for Plaintiffs’ benefit. Compl. ¶ 13. 

Plaintiff Lennane subsequently reimbursed the Bank for its 

funding of the Standby Letters. Compl. ¶ 14. In October 2008, 

Plaintiff JCP’s business failed. Compl. ¶ 15.

Previously, in October 2006, Hugo Arreola (“Arreola”) filed 

a claim under the California workers’ compensation laws against 

Plaintiff JCP. Compl. ¶ 18. This claim was subject to the 

Policy, as Arreola claimed to have suffered an injury while

working for Plaintiff JCP. Compl. ¶ 18. Defendant paid 

“significant sums of money” to Arreola and his health care 

providers, under the Policy, until August 2010. Compl. ¶ 20. 

Between October 2006 and December 2006, Defendant billed 

Plaintiff JCP under the deductible provision of the Policy for 

Arreola’s claim. Compl. ¶ 20. After Defendant monetized the 

Standby Letters in December 2006, Defendant continued to make 

payments to Arreola from the $805,000 fund held by Defendant. 

Compl. ¶¶ 13, 20.

In June 2010, Plaintiff Lennane obtained records that 

suggested Arreola had concealed a prior injury which would have 

impacted his workers’ compensation claim. Compl. ¶ 21. 

Plaintiff Lennane shared the information with Defendant, which 

then proceeded to investigate Arreola’s claim. Compl. ¶ 21. 

Defendant had allegedly failed to conduct a proper investigation 

at the time of Arreola’s original claim. Compl. ¶ 21. On 

September 20, 2010, Defendant “shared with Plaintiffs, for the 

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first time, that they had obtained sufficient information to 

believe Arreola was a fraudster.” Compl. ¶ 21.

On September 18, 2013, Plaintiffs filed the Complaint (Doc. 

#1) in California Superior Court, Sacramento County. The 

Complaint includes the following causes of action: (1) breach of 

contract; (2) tortious breach of the implied covenant of good 

faith and fair dealing; (3) unfair insurance business practices 

in violation of California Insurance Code section 790.03; 

(4) breach of fiduciary duty; (5) unfair business practices in 

violation of California Business and Professions Code section 

17200; (6) negligence; and (7) conversion. On November 6, 2013, 

Defendant removed the action to this Court and on November 13, 

2013 filed its motion herein to dismiss the third, fourth and 

sixth causes of action. The Court has original jurisdiction 

over this action pursuant to 28 U.S.C. 

§ 1332.

II. OPINION

A. Legal Standard

A party may move to dismiss an action for failure to state a 

claim upon which relief can be granted pursuant to Federal Rule 

of Civil Procedure 12(b)(6). To survive a motion to dismiss a 

plaintiff must plead “enough facts to state a claim to relief 

that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 

556 U.S. 662, 570 (2007). In considering a motion to dismiss, a 

district court must accept all the allegations in the complaint 

as true and draw all reasonable inferences in favor of the 

plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), 

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overruled on other grounds by Davis v. Scherer, 468 U.S. 183 

(1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). “First, to be 

entitled to the presumption of truth, allegations in a complaint 

or counterclaim may not simply recite the elements of a cause of 

action, but must sufficiently allege underlying facts to give 

fair notice and enable the opposing party to defend itself 

effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 

2011), cert. denied, 132 S. Ct. 2101, 182 L. Ed. 2d 882 (U.S. 

2012). “Second, the factual allegations that are taken as true 

must plausibly suggest an entitlement to relief, such that it is 

not unfair to require the opposing party to be subjected to the 

expense of discovery and continued litigation.” Id. Assertions 

that are mere “legal conclusions” are therefore not entitled to 

the presumption of truth. Ashcroft v. Iqbal, 556 U.S. 662, 678 

(2009) (citing Twombly, 550 U.S. at 555). Dismissal is 

appropriate when a plaintiff fails to state a claim supportable 

by a cognizable legal theory. Balistreri v. Pacifica Police 

Department, 901 F.2d 696, 699 (9th Cir. 1990).

Upon granting a motion to dismiss for failure to state a 

claim, a court has discretion to allow leave to amend the 

complaint pursuant to Federal Rule of Civil Procedure 15(a). 

“Dismissal with prejudice and without leave to amend is not 

appropriate unless it is clear . . . that the complaint could not 

be saved by amendment.” Eminence Capital, L.L.C. v. Aspeon, 

Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).

B. Discussion

1. Third Cause of Action—Unfair Business Practices

Defendant argues that Plaintiffs’ third cause of action, 

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which alleges unfair business practices in violation of 

California Insurance Code section 790.03(h) – also referred to as 

the Unfair Insurance Practices Act (“UIPA”) – must be dismissed

because “[t]he California Supreme Court has repeatedly held that 

insureds have no private right of action for alleged violations 

of section 790.03(h).” Mot. at 4. Plaintiffs “concede that [the 

UIPA] does not lead to a private cause of action.” Opp. at 3. 

Therefore, Defendant’s motion to dismiss Plaintiffs’ third cause 

of action is GRANTED.

Plaintiffs argue that they “may plead violation of the UIPA 

as the basis for [their] UCL claim” and seek leave “to amend the 

complaint relating thereto.” Opp. at 3. Plaintiffs appear to be 

requesting leave to amend their fifth cause of action – an Unfair 

Competition Law (“UCL”) claim – with an additional allegation 

that Defendant violated the UIPA. This is expressly prohibited.

Zhang v. Superior Court, 57 Cal.4th 364, 384 (2013) (noting that 

“a litigant may not rely on the proscriptions of section 790.03 

as the basis for a UCL claim” because “[p]rivate UIPA actions are 

absolutely barred”). Plaintiffs can draw no support from the 

holding of Zhang, which is merely that “the UIPA does not 

immunize insurers from UCL liability for conduct that violates 

other laws in addition to the UIPA.” Zhang, 57 Cal.4th at 384 

(emphasis added). Zhang is clear that “a plaintiff may not use 

the UCL to ‘plead around’ an absolute bar to relief[.]” Zhang, 

57 Cal.4th at 369 (emphasis in original). Permitting Plaintiffs 

to “plead violation of the UIPA as the basis for [the] UCL claim” 

would be in direct contravention of Zhang. Opp. at 3.

Therefore, Defendant’s motion to dismiss Plaintiffs’ third cause 

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of action is GRANTED WITHOUT LEAVE TO AMEND.

2. Fourth Cause of Action—Breach of Fiduciary Duty

Defendant argues that Plaintiffs’ fourth cause of action for 

breach of fiduciary duty must be dismissed because, under 

California law, a fiduciary relationship does not exist between 

an insurer and an insured. Mot. at 5. Plaintiffs argue that 

California law does not rule out the existence of a fiduciary 

relationship between an insurer and an insured, citing 

Frommoethelydo v. Fire Ins. Exch., 42 Cal.3d 208 (1986) and Tran 

v. Farmers Grp., Inc., 104 Cal.App.4th 1202 (2002). Opp. at 3. 

Plaintiffs additionally argue that Defendant acted as an 

“attorney-in-fact” by “handling $805,000 in Plaintiffs’ funds 

Plaintiffs entrusted to [Defendant],” and therefore owed a 

fiduciary duty to Plaintiffs. Opp. at 4.

Under California law, “an insurer is not a fiduciary for its 

insured in the traditional sense and cannot be held liable for 

breach of fiduciary duties.” Casey v. Metro. Life Ins. Co., 688 

F.Supp.2d 1086, 1100 (E.D. Cal. 2010). Although “special and 

heightened duties” are owed by insurers to insureds, the 

“insurer-insured relationship is not a true ‘fiduciary 

relationship.’” Casey, 688 F.Supp.2d at 1100. Accordingly, an 

insured may not normally bring a cause of action against his 

insurer for breach of fiduciary duty. See Solomon v. North 

American Life & Cas. Ins. Co., 151 F.3d 1132, 1138 (9th Cir.

1998) (holding that an insurer “owed no fiduciary duty to [the 

insured] as a result of their insurer-insured relationship”); 

Casey, 688 F.Supp.2d at 1101 (holding that “a separate claim does 

not exist for breach of fiduciary duty”).

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///

Plaintiffs’ reliance on Frommoethelydo v. Fire Ins. Exch., 

42 Cal.3d 208 (1986) is misplaced. To the extent that 

Frommoethelydo suggests that an insured may bring a claim for 

breach of fiduciary duty against an insurer, the California 

Supreme Court has since rejected this approach. Vu v. Prudential 

Prop. & Cas. Ins. Co., 26 Cal.4th 1142, 1150–1151 (2001) (noting 

that “the insurer-insured relationship . . . is not a true 

‘fiduciary relationship’ in the same sense as the relationship 

between a trustee and a beneficiary, or attorney and client”). 

Likewise, Plaintiffs’ reliance on Tran v. Farmers Grp., Inc., 104 

Cal.App.4th 1202 (2002) is misplaced. The Tran court notes its 

agreement with “the authorities suggesting that an insurer’s 

breach of its ‘fiduciary-like duties’ is adequately redressed by 

a claim for breach of the covenant of good faith and fair dealing 

implied in the insurance contract.” Tran, 104 Cal.App.4th at 

1212. Accordingly, Plaintiffs’ claim for breach of fiduciary 

duty cannot be based solely on the existence of the insurerinsured relationship. 

Plaintiffs concede as much, acknowledging that Defendant 

“was not acting as a ‘fiduciary’ when carrying out the terms of 

its insurance policy.” Opp. at 4. However, Plaintiffs argue 

that Defendant “undertook to do more” and acted as a fiduciary 

“in handling the $805,000 in Plaintiffs’ funds Plaintiffs 

entrusted to [Defendant].” Opp. at 4. This argument falls short

given Plaintiffs’ own allegation that Defendant “exercised its 

rights under the . . . Policy” when it monetized the $780,000 

from the Bank. Compl. ¶ 13 (emphasis added). Thus, Plaintiffs 

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themselves acknowledge that Defendant did not “undert[ake] to do 

more” by monetizing the Standby Letters and holding the $805,000 

as a collateralized deductible: rather, Defendant was merely 

carrying out the terms of the Policy. Compl. ¶ 13.

Finally, Plaintiffs’ contention that, “in handling these 

funds, [Defendant] acted as an attorney-in-fact, owing to 

Plaintiffs a fiduciary duty” finds no support in the Complaint. 

Opp. at 4. An attorney-in-fact must be duly appointed through a 

written agreement. See Delos v. Farmers Grp., Inc., 93 

Cal.App.3d 642, 652 (1979) (noting that attorneys-in-fact, in the 

insurance context, are empowered in written underwriters 

agreements). Plaintiffs fail to allege the existence of a 

written agreement, separate from the Policy, that grants

Defendant authority with regard to Plaintiffs’ funds. 

Accordingly, Defendant’s motion to dismiss Plaintiffs’ fourth 

cause of action is GRANTED WITHOUT LEAVE TO AMEND.

3. Sixth Cause of Action--Negligence

Defendant argues that Plaintiffs’ sixth cause of action, a 

negligence claim, must be dismissed because “California courts 

have made clear that the only tort remedy available for the 

breach of an insurance contract is ‘bad faith,’ a claim that 

requires more than a showing of ‘mere negligence.’” Mot. at 8. 

Plaintiffs respond that Defendant owed Plaintiffs a duty to 

investigate the testimony of workers’ compensation claims made 

under the Policy and a duty to not pay fraudulent claims. Opp. 

at 5-6. Plaintiffs also cite Erlich v. Menezes, 21 Cal.4th 543

(1999) for the rule that “where a social policy exists, or where 

a traditional common law tort accompanies the breach [of a 

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contract], such as fraud or conversion, the courts allow” a tort 

claim. Opp. at 6.

In California, “negligence is not among the theories of 

recoveries generally available against insurers.” Tento Int'l, 

Inc. v. State Farm Fire & Cas. Co., 222 F.3d 660, 664 (9th Cir. 

2000). When “an insured seeks to recover in tort for an 

insurer’s mishandling of a claim, it must allege more than mere 

negligence.” Adelman v. Associated Int'l Ins. Co., 90 

Cal.App.4th 352, 369 (2001) (emphasis in original). Rather, in 

the context of an insurance contract, California courts “rel[y] 

on the covenant of good faith and fair dealing, implied in every 

contract, to justify tort liability.” Erlich, 21 Cal.4th at 552.

To the extent Plaintiffs rely on Erlich, their agrument 

fails . The Erlich court unequivocally asks and answers the very 

question posed in the present case: “[I]s the mere negligent 

breach of a contract sufficient [to impose tort liability]? The 

answer is no.” Erlich, 21 Cal.4th at 552. Erlich goes on to 

describe “the familiar paradigm of tortious breach of [an 

insurance] contract,” in which courts “rel[y] on the covenant of 

good faith and fair dealing . . . to justify tort liability.” 

Id. at 552. The remainder of Erlich’s language, quoted by 

Plaintiffs, is specifically limited to circumstances “outside the 

insurance context” and is inapplicable to the present case. Id.

at 553-54. 

Furthermore, Plaintiffs’ apparent contention that its 

negligence claim is viable because Defendant committed the 

“traditional common law tort” of conversion simply does not 

follow. Opp. at 6-7. If anything, the allegation of conversion 

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supports a tort claim for conversion, not negligence.

Accordingly, Defendant’s motion to dismiss Plaintiffs’ sixth 

cause of action is GRANTED WITHOUT LEAVE TO AMEND.

III. ORDER

For the reasons set forth above, the Court GRANTS 

Defendant’s Motion to Dismiss. Plaintiff’s third, fourth, and 

sixth causes of action are DISMISSED WITHOUT LEAVE TO AMEND.

IT IS SO ORDERED.

Dated: February 7, 2014

 

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