Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_99-cv-05583/USCOURTS-caed-1_99-cv-05583-3/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

UNITED STATES FIDELITY &

GUARANTY COMPANY,

Plaintiff,

v.

LEE INVESTMENTS LLC, d.b.a.

THE ISLAND, and DIANA CONLEY. 

Defendants.

1:99-CV-5583 OWW SMS

ORDER RE: MULTIPLE MOTIONS

(DOCS. 220, 221, 223 & 229)

AND SETTING SCHEDULING

CONFERENCE

LEE INVESTMENTS LLC,

Plaintiff,

v.

AMERICAN SPECIALTY INSURANCE

SERVICES INC, AMERICAN

SPECIALTY RISK MANAGEMENT

SERVICES, LLC, UNITED STATES

FIDELITY & GUARANTY COMPANY, 

Counter-Defendants.

I. INTRODUCTION

This is a workers compensation insurance coverage dispute. 

Defendant Lee Investments LLC (“Lee”) owns and operates a water

park called “The Island” in Fresno. Lee, through its insurance

broker AON Risk Services of Central California, Inc. (“Aon”),

purchased a workers compensation insurance policy (the “Policy”)

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from U.S. Fidelity & Guaranty Co. (“USF&G”) for the relevant

period of time. USF&G operated through its agent American

Specialty Insurance Company (“American Specialty”). This case

has evolved into a three-way dispute between (1) USF&G and

American Specialty, (2) Lee, and (3) Aon. 

Before the court for decision are the following motions:

(1) USF&G’s motion to supplement and/or amend the complaint

to add alter ego allegations; and to amend the

scheduling order to allow limited discovery on these

new allegations. (Doc. 220.)

(2) Lee’s motion to file a second amended and supplemental

counterclaim against USF&G for negligence, fraud,

negligent misrepresentation, indemnity conspiracy to

defraud, declaratory relief, breach of contract,

tortious breach of the implied covenant of good faith

and fair dealing and abuse of process. (Doc. 223.) 

(3) Aon’s motion to amend its answer to Lee’s third-party

complaint to assert counterclaims for negligence,

negligent misrepresentation and fraud. (Doc. 229.)

(4) Aon’s motion to amend its answer to USF&G’s and

American’s third-party complaint to assert

counterclaims for comparative equitable indemnity and

contribution. (Doc. 229.)

(5) USF&G’s motion to re-set dispositive motion deadline to

allow the filing of a second round of summary judgment

motions. (Doc. 221.) 

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II. FACTUAL BACKGROUND

In late 1997 or early 1998, Lee contracted with Rexford

Development Company for the development of The Island. Rexford

subcontracted Whitewater West Industries (“Whitewater”) to

construct certain water slides at The Island. 

Lee and Rexford are alleged to be alter egos of one another

under the mutual control of Richard Ehrlich. During depositions

conducted in 2001, Lisa Erlich-Chupak testified that her father,

Richard Erlich, owned most of Lee, as well as Rexford Development

Corporation and Rexford Properties, two entities involved in

development of The Island. 

In early 1998, Aon sought workers compensation insurance for

The Island through American Specialty, an agent with experience

in the water park industry. Initially, Lee selected a workers’

compensation policy underwritten by Industrial Indemnity

(“Industrial”). Industrial issued its policy in April 1998. 

Soon thereafter, Industrial conducted an audit of The Island,

which revealed that Lee had casual laborers as well as

subcontractors performing construction-related tasks at The

Island. On July 13, 1998, Industrial sent Lee a notice

cancelling its policy, citing a “change in your business or

opertaion that materially increases the hazard or frequency or

severity of loss.” American Specialty assured Aon that it would

find replacement coverage for the Island. 

Soon thereafter, American Specialty located a workers’

compensation policy (the “Policy”) from USF&G, for which American

Specialty acted as a managing general agent. On August 11, 1998,

just prior to the issuance of the Policy, American Specialty sent

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a letter to Aon, as Lee’s agent, that stated in pertinent part: 

Please help me prove to our underwriter the following:

1. Island employees will not be performing tasks

outside of their designated classifications as water

park employees. 2. Construction has ceased at The

Island and all construction laborers working for

Rexford Development Corporation have moved to a

different job site. Therefore, workers’ compensation

claims arising from construction will not be reported

under Lee Investments’ workers compensation policy.

(Doc. 229, Aon’s motion, Ex. 1.) 

Aon communicated these concerns to Lisa Ehrlich, Lee’s

General Counsel, who confirmed that Lee would no longer use its

employees to perform construction tasks at The Island. Ms.

Ehrlich asked Aon to draft a letter that was later placed on Lee

letterhead and sent to American Specialty. This letter, dated

August 12, 1998, states:

This is to confirm that The Island is operating as a

water park. Our opening date was August 6, 1998. Our

operation will no longer employ construction laborers. 

Any construction work will be performed by independent

contractors. We will obtain and forward certificates

of insurance on any contractors hired. The Island will

provide appropriate training for the water park

employees. Their duties will be restricted to park

activities. 

(Doc 229, Ex. 1-B.) The letter was signed and mailed by Christy

Plat of Lee. Ms. Platt testified that she orally reviewed the

contents of the letter with Ms. Ehrlich and “read it to her to

make sure that it included what Lisa wanted” before signing it

ans sending it to American Specialty. 

On the same day, August 12, 1998, Ms. Ehrlich sent a letter

to Whitewater complaining of the costs of “maintaining a labor

force to erect [Whitewater’s] materials” and indicating that Lee

would “rent the appropriate equipment and provide ample labor for

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USF&G later stipulated to the dismissal of Conley as a 1

defendant after she agreed to be bound by any orders, judgments,

or settlements resulting from this litigation.

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a two week period,” once the remaining materials arrived at the

site. (Doc. 229, Ex. 1-C.) 

On August 26, 1998, Aon sent a letter to Ms. Platt of Lee,

enclosing the USF&G binder for workers’ compensation benefits. 

The letter noted that the “coverage with [USF&G] has been issued

on the premise that there will be no construction laborers

employed by Lee Investments LLC.” (Doc. 229, Ex. 1-D.) 

In January 1999, Lee undertook to complete construction of

the Red Wave water slide, utilizing its own employees, without

Whitewater supervision. (See Doc. 194, Order on Cross Mots. for

Sum. J., at 49.) The construction was supervised by a Lee

employee. To assist with the construction work, Lee hired two

employees who had previously performed construction work for Lee

and also used current employee Diana Conley. On February 22,

1999, Diana Conley was helping to guide slide sections into place

as they were lifted by slingstraps. During the process, a bar

fell and hit Ms. Conley, who sustained serious injuries. 

In March 1999, Conley filed a claim for benefits under the

Policy. As required, USF&G reported the injury to California’s

Worker Compensation Insurance Rating Bureau (WCIRB). 

On April 26, 1999, USF&G filed this lawsuit against Lee and

Conley, seeking rescission of the Policy and reimbursement for 1

sums paid under the Policy. By that time, USF&G had advanced

more than $600,000 in benefits to Conley. 

Lee filed a counterclaim and then a first amended

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counterclaim against USF&G, American Specialty, American

Specialty Risk Management Services LLC (“ASRM”). Lee also filed

a third-party complaint against Aon raising similar allegations. 

In August 2000, Lee dismissed Aon without prejudice after Lee and

Aon entered into a tolling agreement. However, in May 2001,

USF&G filed a third-party complaint against Aon seeking indemnity

and contribution. In September 2001, Lee filed a third-party

complaint against Aon. 

A. Summary of Prior Order on Cross-Motions for Summary

Judgment.

Cross motions for summary judgment were filed on May 24,

2002. District court Judge Robert E. Coyle heard oral arguments

in August 2002. No decision was issued until July 2004, at which

time the district court denied Lee’s motion for summary judgment

and denied in part and granted in part USF&G, American Specialty

& ASRM’s cross-motion. (Doc. 194.) The key findings of the

decision are as follows.

With respect to USF&G and American Specialty’s motion for

summary judgment:

(1) Summary adjudication was granted to USF&G on all but one of

the elements of its rescission claim. Specifically, there

was a triable issue of fact as to whether the

representations by Lee concerning construction activity by

its personnel were misrepresentations. (Doc. 194, 66-74) 

Summary adjudication was granted to USF&G on several other

issues relevant to rescission: the representations made by

Lee are material (Id. at 74-79); USF&G is entitled to

restitution from Lee if it prevails on its claim for

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rescission; and, at the time of the motion, USF&G had

advanced $623,320.26 on behalf of Conley (Id. 79-81). 

(2) American Specialty moved for summary judgment on Lee’s

counterclaim for negligence. American Specialty argued that

it owed no duty to Lee because it was not Lee’s agent, but

Lee maintained that American Specialty held itself out as an

expert in this form of insurance. Summary judgment was

denied because it could not be determined a matter of law

that American Speciality owed no duty to Lee. (Id. at 81-

87.) 

(3) USF&G/American Specialty moved for summary judgment on Lee’s

counterclaims for Fraud and Negligent Misrepresentation on

the ground that Lee had not established that any

misrepresentations were made by American Specialty. The

motion was denied because the facts underlying the alleged

misrepresentations are disputed. (Id. at 87-88.)

(4) USF&G/American Specialty moved for judgment on Lee’s

counterclaim for conspiracy to defraud on the ground that

such a cause of action does not exist under California Law. 

This assertion was rejected and the motion denied. (Id. at

88-89.)

(5) USF&G/American moved for judgment on Lee’s counterclaim for

equitable indemnity on the ground that this claim would be

moot if USF&G prevails on its rescission claim. The

district court declined to eliminate the claim on this

ground at the summary judgment stage. (Id. at 89-90)

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(6) Finally USF&G moved for judgment on Lee’s counterclaim for

breach of oral contract. While acknowledging that Lee’s

evidence in support of such a claim was weak, the motion was

denied because there were disputed questions of fact. (Id.

at 90.)

With respect to Lee’s cross-motion:

(1) Lee’s contention that USF&G unlawfully failed to limit or

restrict the Policy by use of an approved endorsement (i.e.,

one that would have excluded coverage for construction work)

was rejected. Specifically, this argument was deemed “not

relevant” because, assuming the truth of USF&G’s claim that

“Lee represented to [USF&G] in applying for the policy that

its business was a water park and that its operation no

longer employed construction workers,...there would be no

basis or reason for [USF&G] to issue the []

endorsement....because [USF&G] would not have expected

construction workers to be employed by Lee.” (Doc. 194 at

54.)

(2) Lee’s contention that USF&G had waived its right to rescind

because it failed to investigate under California Insurance

Code § 336 was also rejected. Section 336 provides: “the

right to information of material facts may be waived...by

neglect to make inquiries as to such facts, where they are

distinctly implied in other facts of which information is

communicated.” The record before the court was “disputed

and raises genuine issues of material fact concerning the

notice received by [USF&G] that would have triggered a duty

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to conduct further investigation before issuing the workers’

compensation policy or would have triggered a basis for

Fidelity to terminate the policy prior to Conley’s injury.” 

(Id. at 63.)

(3) Finally, Lee’s motion for judgment that USF&G intentionally

waived its right to rescind by virtue of accepting premium

payments was also rejected. (Id. at 65-66.) 

B. Recent Activity in this Case. 

After the initial summary judgment decision issued, a trial

on the remaining issues was reset for June 1, 2005. To

accommodate counsel’s schedules and allow for the completion of

expert discovery, the trial was again continued until February

28, 2006. 

In late November 2005, Lee informed counsel for USF&G that

it would be filing for bankruptcy within two weeks. In December,

Lee asserted that its largest unpaid obligation was under a lease

of the water park held by Rexford properties. Based on Lee’s

assertion that it might file for bankruptcy, the trial was again

continued to March 28, 2006. After several telephone

conferences, Lee determined that it would not be filing for

bankruptcy. 

On December 19, 2005, the case was transferred from Judge

Coyle to the undersigned district judge. In mid-January, the

parties again attempted to reach a settlement, but the deadline

set by the magistrate judge for settlement passed. A status

conference was held on February 10, 2006, at which time the

parties expressed interest in amending the pleadings. A schedule

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for the filing of motions to amend was set at that hearing.

In the period since the decision on the cross motions for

summary judgment, the amount advanced by USF&G on behalf of

Conley has risen to over $850,000. 

III. STANDARD APPLICABLE TO MOTIONS TO AMEND/SUPPLEMENT

Motions to amend or supplement pleadings are governed by

Federal Rule of Civil Procedure 15 (a) or (d), respectively: 

(a) Amendments. A party may amend the party's pleading

once as a matter of course at any time before a

responsive pleading is served or, if the pleading is

one to which no responsive pleading is permitted and

the action has not been placed upon the trial calendar,

the party may so amend it at any time within 20 days

after it is served. Otherwise a party may amend the

party's pleading only by leave of court or by written

consent of the adverse party; and leave shall be freely

given when justice so requires. A party shall plead in

response to an amended pleading within the time

remaining for response to the original pleading or

within 10 days after service of the amended pleading,

whichever period may be the longer, unless the court

otherwise orders.

***

(d) Supplemental Pleadings. Upon motion of a party the

court may, upon reasonable notice and upon such terms

as are just, permit the party to serve a supplemental

pleading setting forth transactions or occurrences or

events which have happened since the date of the

pleading sought to be supplemented. Permission may be

granted even though the original pleading is defective

in its statement of a claim for relief or defense. If

the court deems it advisable that the adverse party

plead to the supplemental pleading, it shall so order,

specifying the time therefor.

Leave to amend should be “freely given,” “[i]n the absence

of any apparent or declared reason - such as undue delay, bad

faith or dilatory motive on the part of the movant, repeated

failure to cure deficiencies by amendments previously allowed,

undue prejudice to the opposing party by virtue of allowance of

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the amendment, futility of amendment, etc.” Foman v. Davis, 371

U.S. 178, 182 (1962)(emphasis added).

Similarly, the Ninth Circuit has entrusted application Rule

15(d) to the district court’s broad discretion. 

Rule 15(d) is intended to give district courts broad

discretion in allowing supplemental pleadings. The rule

is a tool of judicial economy and convenience. Its use

is therefore favored. As Judge Haynsworth observed more

than two decades ago: 

Rule 15(d) of the Federal Rules of Civil Procedure

provides for...supplemental pleading. It is a

useful device, enabling a court to award complete

relief, or more nearly complete relief, in one

action, and to avoid the cost, delay and waste of

separate actions which must be separately tried

and prosecuted. So useful they are and of such

service in the efficient administration of justice

that they ought to be allowed as of course, unless

some particular reason for disallowing them

appears, though the court has the unquestioned

right to impose terms upon their allowance when

fairness appears to require them.

....The clear weight of authority, however, in both the

cases and the commentary, permits the bringing of new

claims in a supplemental complaint to promote the

economical and speedy disposition of the

controversy....

Keith v. Volpe, 858 F.2d 467, 473 (9th Cir. 1988)(internal

citations omitted). 

Accordingly, if amendment/ supplementation serves the

interests of judicial economy, it should be freely given unless,

(a) the moving party exhibits undue delay, bad faith or dilatory

motive, the opposing party would suffer undue prejudice, or (c)

amendment would be futile. 

//

//

//

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IV. DISCUSSION

A. USF&G’s motion to supplement and/or amend the complaint

to add alter ego allegations; and to amend the

scheduling order to allow limited discovery on these

new allegations. 

In November 2005, USF&G learned that Lee was considering

filing for bankruptcy. Soon thereafter, in December 2005, USF&G

learned that Lee’s alleged insolvency and undercapitalization was

due, at least in, part to a purported multi-million dollar unpaid

lease obligation to one of the Rexford entities. 

USF&G allege that both Lee and the Rexford entitles are

owned and controlled by Richard Erlich. Based upon this

information, USF&G now moves to amend the complaint to add alter

ego allegations. USF&G also seeks to reopen discovery to obtain

documentation to support its alter ego claim. Specifically,

USF&G seeks documents concerning the financial status of Lee,

Rexford Properties and Rexford Development Corporation. USF&G

asserts that this discovery can be quickly conducted and

completed. (Doc. 220 at 8.) 

If amendment/ supplementation serves the interests of

judicial economy, it should be freely given unless, (a) the

moving party exhibits undue delay, bad faith or dilatory motive,

(b) the opposing party would suffer undue prejudice, or (c)

amendment would be futile. 

1. Futility.

To establish an alter ego claim, plaintiff must establish

that “(1) there is such a unity of interest and ownership between

the corporation and the individual or organization controlling it

that their separate personalities no longer exist, and (2)

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failure to disregard the corporate entity would sanction a fraud

or promote injustice.” Robbins v. Blecher, 52 Cal. App. 4th 886,

892 (1997).

Here, Lisa Erlich-Chupack testified that Richard Erlich

owned all or a majority of Lee, Rexford Development Corporation,

and Rexford Properties. (See Smyth Decl., Ex. 3.) Richard

Miller, the accountant for the various entities, testified that

Lee did not have its own bank account at the time the Policy was

purchased and that Rexford Development paid all of the premiums

for the policy. (Id. at Ex. 4.) In light of these and other

facts, Lee’s recent threat of bankruptcy based in part on its

indebtedness to one of the Rexford entities suggests that Lee is

manipulating its assets and liabilities to render itself judgment

proof. USF&G’s alter ego claim does not appear to be futile. 

2. Prejudice.

USF&G asserts that there would be no actual prejudice to Lee

because USF&G could always seek to bind the alter egos after

judgment. The Ninth Circuit has held that Federal Rule of Civil

Procedure 69(a) empowers federal courts to rely on state law to

add judgment debtors. See Cigna Property and Cas. Ins. Co. v.

Polaris Pictures Corp., 159 F.3d 412, 421 (9th Cir. 1998). 

California Code of Civil Procedure § 187 gives a court the

authority to use “all the means necessary” to carry its

jurisdiction into effect. This includes the power to amend a

judgment to add judgment debtors if (1) “the new party [is] the

alter ego of the old party;” and (2) “the new party [] controlled

the litigation, thereby having had the opportunity to litigate,

in order to satisfy due process concerns.” In Re Levander, 180

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F.3d, 1114, 1121 (9th Cir. 1999), citing Tripplet v. Farmers

Ins., Exch., 24 Cal. App. 4th 1415, 1421 (1994). 

Lee responds that the proposed amendment would demand

“significantly more discovery” which would impose an “unfair

burden on Lee.” (Doc. 240, at 2.) Lee cites a number of cases

to support its assertion that “it is well established that

putting Lee through the time and expense of continued litigation

on a new theory, with the possibility of new evidence,” would

cause undue prejudice. See Ascon Properties, Inc. v. Mobile Oil

Co, 866 F.2d 1149, 1161 (9th Cir. 1989), MV Am. Queen v. San

Diego Marine Construction Corp, 708 F.2d 1483, 1492 (9th Cir.

1983). USF&G correctly rejoins that in Ascon and MV American

Queen, the Ninth Circuit relied on multiple factors to reach the

conclusion that prejudice would result, mentioning the burden of

further discovery as only part of the totality of the

circumstances. A supplemental alter ego allegation would require

a modest amount of additional discovery. Although it is not a

dispositive factor, the delay and expense of such discovery does

weigh against trying the alter ego allegation alongside the

existing claims. 

3. Delay.

Lee objects that USF&G has unreasonably delayed filing this

claim because it was “on notice” of the relationship between Lee,

Ehrlich, and the Rexford entities. It is undisputed that USF&G

knew of the interconnections since the depositions of Lisa

Ehrlich, Richard Ehrlich, and Richard Miller (the accountant) in

2001. In addition, Lee points out that USF&G was on notice since

the initiation of this lawsuit that Conley suffered a serious

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injury that would expose the insured and/or USF&G to significant

liability. Lee asserts that USF&G should have known, therefore,

that a judgment of such size against Lee would endanger Lee’s

financial stability. 

Lee’s objections are misplaced. Although USF&G may have

known of the ties between Lee and the Rexford entities, USF&G had

no reason to consider filing of an alter ego claim until it

became apparent that Lee might be shifting its assets to the

Rexford entities to protect itself against a potential adverse

judgment in this case. 

4. Bad faith.

Lee asserts that this motion to supplement “reeks of bad

faith” in light of USF&G’s recent withdrawal of Lee’s defense. 

But, apart from Lee’s conclusory allegation that USF&G’s is only

filing this alter ego motion to “squeeze the new parties for

settlement while it has a chance and before judgment is entered,” 

the record does not support a finding of bad faith here. USF&G’s

alter ego claim appears to be well-founded and may be a necessary

step in any effort by USF&G to collect on a potential judgment in

this case.

5. Judicial Economy.

USF&G asserts that the interests of judicial economy will be

served by resolving this alter ego claim alongside the other

claims in one proceeding. But, examining in detail the business

relationship between Lee and the Rexford entities would

significantly complicate a trial on the rescission issue that

would otherwise focus on a discrete set of interactions between

Lee, its insurers, and the insurance brokers. Adding the alter 

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ego claims would not serve the interests of judicial economy,

particularly given the fact that California law would permit

USF&G to amend any judgment in its favor to add alter ego

judgment debtors.

USF&G’s motion to amend to add alter ego claims is GRANTED,

but these claims will be severed and tried separately, along with

the bad faith and equitable indemnity claims, after jury trial on

the rescission issue. A schedule for further discovery on this

issue will be set after resolution of the rescission issue. 

B. Lee’s motion to file a second amended and supplemental

counterclaim against USF&G for negligence, fraud,

negligent misrepresentation, indemnity conspiracy to

defraud, declaratory relief, breach of contract,

tortious breach of the implied covenant of good faith

and fair dealing and abuse of process. (Doc. 223.) 

1. Additional Relevant Facts.

In March 1999, Conley filed a claim before the California

Workers’ Compensation Appeals Board (WCAB), naming Lee, and GAB

Robins (the third party administrator of the Policy) as

defendants. In April 1999, USF&G filed its action in this

court, seeking a declaration that the Policy is void and that

USF&G is entitled to rescind the policy (“the Rescission

action”). On June 29, 1999, Conley filed a declaration of

readiness to proceed with the WCAB action. On the same day,

USF&G filed an objection to the jurisdiction of the WCAB over the

rescission question. The WCAB denied USF&G’s objection and

apparently continues to assert jurisdiction over the claim for

rescission. 

On July 7, 1999, Conley filed a motion to dismiss in this

court, asserting that jurisdiction belonged in the WCAB and that

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dismissal was appropriate on various abstention grounds. Even

though Lee had already answered the federal court complaint, it

joined Conley’s motion to dismiss on July 14, 1999. Judge Coyle

denied the motion to dismiss, reasoning that the WCAB did not

have exclusive jurisdiction over the rescission issue and that

abstention was not required or appropriate. (Doc. 21, filed Oct.

28, 1999.) 

On November 16, 1999, Conley requested reconsideration from

the district court. Lee did not join this motion for

reconsideration and instead sought leave to file a counterclaim. 

Conley’s motion for reconsideration was denied. (Doc. 57, filed

Aug. 17, 2000.) The order denying the motion for reconsideration

noted that Lee’s counterclaims for breach of fiduciary duty,

fraud, conspiracy to defraud, and negligent misrepresentation

against USF&G, American Specialty, and AON, arise out of the same

facts as the rescission claim and would therefore bring those

facts before the district court. While any decision by the WCAB

on the recession issue would bind the parties to the WCAB dispute

(USF&G, Lee, and Conley), it would not bind the other

counterdefendants in the federal action (i.e., American Specialty

and AON) which are not parties to the WCAB action. This provided

an independent basis for allowing the rescission claim and the

related counterclaims to proceed in federal court. (Id. at 19.)

On April 18, 2000, Lee made a demand for the appointment of

independent defense counsel in the WCAB proceeding. USF&G agreed

to do so in a letter dated April 26, 2000. That letter stated

that nothing contained therein constituted a waiver of any

claims, rights, causes of action, rights of action, defenses,

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positions and/or remedies possessed by USF&G, all of which were

expressly reserved. (Doc. 245, Ex. 5.) Lee selected Dowling,

Aaron & Keeler (“DAK”) as its counsel. The parties dispute

whether bills from DAK, which were forwarded directly to American

Specialty, referenced only the WCAB case (as USF&G’s contends) or

both the WCAB case and the federal case (as Lee contends). 

USF&G concedes that it paid invoices from DAK for time spent

in connection with the WCAB and with depositions which were

simultaneously noticed in both the WCAB and the federal court

matter. 

USF&G heard nothing further from Lee until April 29, 2005,

when Lee sent a letter to Mr. Lowell Gratigny of American

Specialty, requesting payment of bills referencing “The Island”

and “Lee Investments.” Critically, Mr. Gratigny has

responsibility over the federal court litigation and has no

involvement with the workers’ compensation case. Mr. Gratigny

responded to Lee that he had no record in his file that a “cumis”

counsel had been requested by Lee. 

On January 10, 2006, Lee sent a letter to USF&G specifically

requesting payment of attorneys fees incurred in this case. By

letter dated January 26, 2006, USF&G denied any duty to defend

Lee in this action. 

Lee now seeks to amend its complaint to assert two new

claims against USF&G. Lee’s proposed amendment alleges that

USF&G committed the tort of abuse of process by improperly

bringing this declaratory relief action for rescission in federal

court for various improper purposes. Lee also proposes to add a

new claim that alleges various forms of insurance bad faith

against USF&G, including bad faith failure to defend.

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2. Lee’s Proposed Abuse of Process Claim is Futile.

Lee alleges that USF&G has filed and maintained this

Rescission action in “patent violation of California law that

prohibits an insurer from seeking declaratory relief that will

prejudice Lee in its defense of the WCAB proceeding.” (Doc. 222

at ¶77.) Specifically Lee asserts, among other things, that:

(1) USF&G has used the Rescission Action as a means to

deny Lee a defense of the rescission issue on which lee

is entitled; (2) USF&G has used orders and will use

evidence, findings and orders in the Rescission Action

against Lee in the WCAB proceedings; (3) USF&G has

threatened Lee with and intends through the Rescission

Action to subject Lee to penalties as an uninsured

employer and to a civil action by Conley; and (4) USF&G

has and intends to use the Rescission Action to

threaten Lee with those potential penalties and

Conley’s potential civil action in an effort to effect

a settlement in an unfavorable manner. 

(Id.)

 The elements of an abuse of process claim are: (1) “an

ulterior motive;” and (2) “a willful act in the use of process

not proper in the regular conduct of the proceedings.” Drum v.

Bleau, Fox & Assoc., 107 Cal. App. 4th 1009, 1020 (2003).

The ulterior motive element can be inferred from proof of a

willful improper act, so the critical question is whether

Plaintiffs have established a “willful act in the use of process

not proper in the regular conduct of the proceedings.” Id. Put

another way, to abuse process, a defendant must use court process

for a purpose not intended, such as to obtain a collateral

advantage. 

At the heart of Lee’s proposed abuse of process claim is the

allegation that USF&G has filed and maintained this rescission

action in “patent violation of California law that prohibits an

insurer from seeking declaratory relief that will prejudice Lee

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in its defense of the WCAB proceeding.” (Doc. 222 at ¶77.) This

is an overstatement of the reach of California law on this

subject. 

A federal district court hearing a declaratory relief action

for rescission has the discretion to either stay or dismiss the

declaratory relief claim if proceeding might prejudice the

insured in the underlying compensation action. See Brillhart v.

Excess Ins. Co, 316 U.S. 491 (1942). A district court should

exercise its discretion to either stay or dismiss in order to

“avoid needless determination of state law issues...discourage

litigants from filing declaratory actions as a means of forum

shopping...[and] avoid duplicative litigation.” Gov’t Employees

Ins. Co. V. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998). Among

other circumstances to be considered in the exercise of this

discretion, the Ninth Circuit suggests weighing the following

factors: 

whether the declaratory action will settle all aspects

of the controversy; whether the declaratory action will

serve a useful purpose in clarifying the legal

relations at issue; whether the declaratory action is

being sought merely for the purposes of procedural

fencing or to obtain a ‘res judicata’ advantage; or

whether the use of a declaratory action will result in

entanglement between the federal and state court

systems. In addition, the district court might also

consider the convenience of the parties, and the

availability and relative convenience of other

remedies. 

Id. at 1225 n.5. 

The Ninth Circuit’s concern over whether the party bringing

the declaratory relief action might obtain a “res judicata

advantage” is similar to concerns raised by the California

Supreme Court in Montrose Chemical Corp. v. Superior Court, 6

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Cal. 4th 287, 301 (1993)(Montrose I). In Montrose I, in which an

insurer sought a declaration that it had no duty to defend, the

court cautioned against “the risk of inconsistent factual

determinations that could prejudice the insured,” and advised

that “a stay of the declaratory relief action pending resolution

of the third party suit is appropriate when the coverage question

turns on facts to be litigated in the underlying action.” Id. at

303. In particular, Montrose I emphasized the importance of

avoiding prejudice to the insured in the underlying litigation.

For example, when the third party seeks damages on

account of the insured's negligence, and the insurer

seeks to avoid providing a defense by arguing that its

insured harmed the third party by intentional conduct,

the potential that the insurer's proof will prejudice

its insured in the underlying litigation is obvious.

This is the classic situation in which the declaratory

relief action should be stayed. By contrast, when the

coverage question is logically unrelated to the issues

of consequence in the underlying case, the declaratory

relief action may properly proceed to judgment. 

Id. (emphasis added). But, the kind of prejudice that merits a

stay only arises under certain circumstances. 

When the courts talk about prejudice to the insured

from concurrent litigation of the declaratory relief

and third party actions, they are saying, in effect,

that the insurer must not be permitted to join forces

with the plaintiffs in the underlying actions as a

means to defeat coverage. Another sort of prejudice

occurs when the insured is compelled to fight a

two-front war, doing battle with the plaintiffs in the

third party litigation while at the same time devoting

its money and its human resources to litigating

coverage issues with its carriers. And, of course,

there is the collateral estoppel issue. If the

declaratory relief action is tried before the

underlying litigation is concluded, the insured may be

collaterally estopped from relitigating any adverse

factual findings in the third party action,

notwithstanding that any fact found in the insured's

favor could not be used to its advantage. 

Montrose Chem. Corp v. Superior Court, 25 Cal. App. 4th 902, 910

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(Montrose II) (1994)(emphasis added). 

A cursory review of the facts in this case shows that Lee is

being asked to fight a “two-front war,” however, the record does

not indicate that the WCAB proceeding is currently placing

demands upon Lee or Lee’s counsel, particularly given the fact

that USF&G continues to cover Lee’s defense costs associated with

Conley’s compensation claims before the WCAB. Moreover, language

from Montrose II suggests that the two-front war factor is not

dispositive, as a court is also instructed to give consideration

“to the burden on insurance carriers that must continue to pay

defense costs and fees until the underlying actions are

resolved.” Montrose II, 25 Cal. App. 4th at 910. 

Critically, even if there was a potential for “two-front

war” prejudice here, a court is vested with discretion to either

stay or dismiss a declaratory relief action where prejudice may

result. See Scottsdale v. MV Transp., 36 Cal. 4th 643, 662 (Cal.

2005). The very fact that a court may choose to stay rather than

dismiss a declaratory judgment action even in the face of

prejudice, suggests that the mere filing by USF&G of a separate

declaratory relief action does not constitute abuse of process,

which requires the “use [of] court process for a purpose not

intended....” Drum, 107 Cal. App. 4th at 1020.

Lee responds that its abuse of process claim is not based

merely on the filing or maintenance of this lawsuit. 

Specifically, the complaint alleges that USF&G unlawfully abused

the court process by: 

//

//

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(1) the taking of multiple depositions, many of

exceeding length; (2) opposing dismissal of the

Rescission Action after the WCAB had already ruled it

had jurisdiction; (3) inducing and forcing Conley not

to pursue coverage in the WCAB proceedings; (4) forcing

Lee to defend the rescission issue in federal court so

that it could try to deny Lee a defense; (5) using the

counterclaim Lee was compelled to file to protect its

rights as alleged evidence that the rescission issue

was allegedly properly before the federal court; and

(6) using the federal action as additional leverage to

try to extort from Lee a settlement. 

Lee is correct that the term “process” as used in an abuse of

process claim “has been interpreted broadly to encompass the

entire range of procedures incident to litigation.” Barquis v.

Merchants Collection Assn., 7 Cal. 3d 94, 104 n.4 (1972).

However, many of the alleged “abuses” are closely tied to Lee’s

allegation that the filing of the rescission action in federal

court was an unlawful abuse of process. As discussed, USF&G’s

prosecution of its rescission action in federal court cannot form

the basis of an abuse of process claim as it is a proper use of a

judicial forum to obtain a decision on whether an insurance

contract was procured by fraud. Accordingly, for the purpose of

abuse of process, it not improper for USF&G to “oppose[]

dismissal of the Rescission Action after the WCAB had already

ruled it had jurisdiction,” to “force Lee to defend the

rescission issue in federal court,” to use “the counterclaim Lee

was compelled to file...as alleged evidence that the rescission

issue was ...properly before the federal court,” or to use “the

federal action as additional leverage to try to extort from Lee a

settlement.” 

Lee also alleges that USF&G used the discovery process

unlawfully. However, as the Barquis court notes, even abusive

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use of a court process does not necessarily support an abuse of

process claim if there is an adequate legal remedy. 7 Cal. 3d at

106 (noting that there was no adequate legal remedy for abusive

and intentional filing of actions in an inconvenient forum where

doing so required low income adverse parties to engage counsel to

advise them of their venue rights). The taking of multiple

depositions, “many of exceeding length,” might constitute a

discovery violation, but there are ample means under the federal

and California discovery rules by which Lee could have objected

to and perhaps have prevented any abusive discovery from taking

place. Moreover, there is no indication that Lee was at all

harmed by any discovery misconduct. Rather, the record indicates

that USF&G covered Lee’s defense costs associated with

depositions that were simultaneously noticed in both the WCAB and

the federal court matter. 

Finally, it is not clear what is meant by Lee’s final abuse

of process allegation –- that USF&G “induc[ed] and forc[ed]

Conley not to pursue coverage in the WCAB proceedings. Nor is it

clear how this would have harmed Lee. 

The motion to amend to add an abuse of process claim is

DENIED.

//

//

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//

//

//

//

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3. Lee’s Bad Faith Claim.

a. Summary of the Claim.

Lee’s proposed Ninth Claim alleges that USF&G breached the

covenant of good faith and fair dealing and acted in bad faith

by: 

(1) refusing to defend Lee on the rescission issue

before the WCAB; 

(2) intentionally manipulating court and

administrative processes so that Lee and Conley

would be forced to litigate the rescission issue

in the federal court forum rather than before the

WCAB; 

(3) intentionally manipulating court and

administrative processes against the interest of

Lee so that USF&G could contend that it did not

owe a duty to defend the issue of rescission; 

(4) failing to defend Lee at all before the WCAB or in

the Rescission Action until Lee demanded a

defense; 

(5) deliberately withdrawing the defense of Lee in the

Rescission Action at a time when Lee faced

extraordinary defense expenses for expert

discovery and trial; 

(6) failing to conduct Lee’s defense of the WCAB

proceedings so as to protect Lee from Conley’s

potential claims for penalties and from Conley’s

potential contention that Conley can bring a civil

action against Lee for greater damages than Conley

would receive from the WCAB; 

(7) failing timely and fully to communicate with Lee

and retaining Giesler in the WCAB proceedings who

purported to represent Lee in those proceedings,

but who in fact has not communicated at all with

Lee and has not represented Lee at all in those

proceedings; 

(8) attempting to undermine and render Lee defenseless

against USF&G’s claimed right of rescission in

both the WCAB and federal court proceedings; 

(9) forcing Lee to the brink of bankruptcy; 

(10) failing to investigate on behalf of Lee the

potential exposure of third parties who may have

contributed to Conley’s accident; and 

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(11) on information and belief, failing to notify the

Uninsured Employer’s Benefit Trust Fund of the

rescission issue in the WCAB proceedings so that

the Fund could intervene to protect its and Lee’s

interests.

(Doc. 222, at ¶73.) Notably, all of the above-mentioned

allegedly unlawful conduct concerns events that occurred after

Ms. Conley was injured.

4. Judicial Economy/Prejudice Issues.

As was the case with USF&G’s proposed alter ego claim,

expanding the scope of the litigation to include the laundry list

of allegations related to USF&G’s litigation-related conduct

would significantly complicate a trial on the rescission-coverage

issue. For the most part, where appropriate, these claims can

most effectively be addressed after the rescission issue is

resolved without prejudicing Lee. Lee argues that it will be

severely prejudiced if it is forced to incur the expense of

litigating the rescission issue in federal court. USF&G suggests

that the bad faith failure to defend claim can be resolved on the

ground of futility. 

5. Futility of the Bad Faith Failure to Defend Claim.

“An insurer must defend its insured against claims that

create a potential for indemnity under the policy....The duty to

defend is broader than the duty to indemnify, and it may apply

even in an action where no damages are ultimately awarded.” 

Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 65 (2005).

The Scottsdale court described in detail the scope of the duty to

defend: 

//

//

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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. But the

duty also exists where extrinsic facts known to the

insurer suggest that the claim may be covered. 

Moreover, that the precise causes of action pled by the

third-party complaint may fall outside policy coverage

does not excuse the duty to defend where, under the

facts alleged, reasonably inferable, or otherwise

known, the complaint could fairly be amended to state a

covered liability. 

The defense duty arises upon tender of a potentially

covered claim and lasts until the underlying lawsuit is

concluded, or until it has been shown that there is no

potential for coverage. When the duty, having arisen,

is extinguished by a showing that no claim can in fact

be covered, it is extinguished only prospectively and

not retroactively.

On the other hand, in an action wherein none of the

claims is even potentially covered because it does not

even possibly embrace any triggering harm of the

specified sort within the policy period caused by an

included occurrence, the insurer does not have a duty

to defend. This freedom is implied in the policy's

language. It rests on the fact that the insurer has

not been paid premiums by the insured for such a

defense. The duty to defend is contractual. The

insurer has not contracted to pay defense costs for

claims that are not even potentially covered.

From these premises, the following may be stated: If

any facts stated or fairly inferable in the complaint,

or otherwise known or discovered by the insurer,

suggest a claim potentially covered by the policy, the

insurer's duty to defend arises and is not extinguished

until the insurer negates all facts suggesting

potential coverage. On the other hand, if, as a matter

of law, neither the complaint nor the known extrinsic

facts indicate any basis for potential coverage, the

duty to defend does not arise in the first instance.

Id. at 466. 

Procedurally, if an insurer believes that a complaint does

not present a potential for indemnity, the insurer may either (1)

deny defense at the outset and risk being sued later for bad

faith denial of insurance benefits, or may (2) assume the defense

under a reservation of the right to seek recovery of the defense

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costs if it is later determined that there is no potential for

any coverage. Id. at 660. 

USF&G maintains that Lee’s proposed claim for bad faith

breach of the duty to defend is futile because Lee has no right

to a defense in the federal case. The operative Policy

provisions are undisputed. The Policy covers “bodily injury by

accident or bodily injury by disease.” (Policy at 1, Part 1 ¶A.) 

It is also undisputed that the Policy was issued “on the premise

that there will be no construction laborers employed by Lee....”

(Doc. 229, Ex. 1-D). Under the Policy, USF&G retains “the right

and duty to defend at our expense, any claim, proceeding or suit

against you for benefits payable by this insurance,” but

disclaims that it has “no duty to defend a claim, proceeding, or

suit that is not covered by this insurance.” (Policy at 1, Part

1, ¶C.) USF&G maintains that the rescission action does is not a

“claim, proceeding or suit against you for benefits payable by

this insurance.” 

In support of its futility argument, USF&G cites, among

other cases, Horsemen’s Benevolent & Protective Assn v. Insurance

Co. of North Am., 222 Cal. App. 3d 816, 820-22 (1990). In that

case, Horsemen’s (an association providing services to horse

owners) purchased an insurance policy on behalf of its members

that contained an explicit exclusion for “bodily injury to any

person [sustained] while exercising or training any horse.” 

Three of Horsemen’s members were later named as defendants in a

personal injury lawsuit arising out of a racing accident. The

three members then filed cross-claims against Horsemen’s,

alleging fraud and misrepresentation as to the nature of the

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policy coverage. Horsemen’s tendered the expense of its own

defense to the insurer. The Horsemen’s court held that no

defense was owed to Horsemen’s because the evidence “conclusively

demonstrate[d] the [] liability policy for personal injury or

property damage did not provide coverage for the defense or

indemnity of the cross-complaints against Horsemen’s:

The three cross-complaints against Horsemen's were

premised on allegations of fraud or intentional and

negligent misrepresentation concerning the racing and

training exclusion in the Bellefonte policy. The

cross-complainants did not allege liability on the part

of Horsemen's for any personal injury or property

damage suffered by them. 

Id. at 820. 

Here, USF&G alleges that to induce issuance of the policy,

Lee misrepresented the nature of the activities in which its

employees would be engaged. As in Horsemen’s, the federal court

claims do not concern liability on the part of the insured for

covered occurrences of “bodily injury by accident or bodily

injury by disease.” Rather, the claims here concern the

applicability of the policy’s construction activities exclusion. 

Horsemen’s suggests that there is no duty to defend under these

circumstances.

In response, Lee first suggests that USF&G failed to follow

proper procedure before denying Lee a defense in the federal

case. Specifically, Lee asserts that USF&G agreed to provide Lee

with independent counsel regarding “all issues before the Workers

Compensation Appeals Board,” but that “despite recognizing its

obligation to provide Lee with independent counsel, USF&G now

refuses to provide Lee with such counsel for the defense of the

rescission action” in federal court. (Doc. 252 at 2.) But, Lee

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The cases cited by Lee are not on point. For example, 2

in Diamond Woodworks, Inc. v. Argonaut Insurance Co., 109 Cal.

App. 4th 1020 (2003), an insurance company was found to have

acted “reprehensibly” when, despite the existence of caselaw

suggesting the insured was entitled to a defense, the insurer

continued to deny provision of a defense to the insured. Here,

Lee has been unable to point to a single case that clearly

imposes a duty upon an insurer to provide a defense to the

insured in a rescission action. 

30

confuses the duty to provide the insured independent counsel in

the underlying compensation dispute with a “duty” to provide

counsel in a coverage action to rescind the insurance policy

based upon a misrepresentation allegedly made by the insured. 

Lee cites no authority which supports the existence of this

latter duty under the facts and circumstances of this case.2

Lee also repeatedly argues that by bringing this declaratory

relief action USF&G tortiously breached the covenant of good

faith and fair dealing. This argument is misplaced for the same

reason that the abuse of process claim is futile. The law sets

up a system under which the declaratory judgment/rescission court

may examine the potential for causing prejudice to the insured in

the underlying workers compensation action. Lee points to cases

in which bad faith claims were allowed to proceed under somewhat

related circumstances, but these cases are distinguishable. For

example, in Dalrymple v. United Services Automobile Association,

40 Cal. App. 4th 497, 515 (1995), the court found it to be

at least arguable that pursuing a declaratory relief

action regarding coverage could be done for reasons

indicating bad faith...(e.g., if there were no proper

cause to dispute coverage, and if more than erroneous

interpretation of a policy (e.g., a willfully misguided

one) were concerned.

(emphasis in the original). It cannot be argued here that there

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As a separate ground for its bad faith breach claim, 3

Lee also argues that USF&G failed to provide Lee a proper defense

in the WCAB proceeding. There is no pressing need to resolve

these allegations at this time. They too may be raised after the

rescission claims are resolved. 

31

was “no proper cause to dispute coverage,” nor is it alleged that

USF&G made “a willfully misguided” interpretation of the policy

in concluding that the misrepresentation claim was not covered by

the policy’s defense provisions.

Lee’s bad faith failure to defend claim appears to be futile

as currently pled. Absent any stronger showing of merit on this

issue, it is not appropriate to try that claim prior to or

alongside the rescission-coverage issue. However, as

appropriate, Lee may pursue its bad faith failure to defend claim

and may seek reimbursement of its defense costs after resolution

of the rescission claims. 

3

Accordingly, Lee’s motion to amend to assert claims for bad

faith and/or breach of the covenant of good faith and fair

dealing is GRANTED, but these claims will be severed and tried

separately, along with the alter ego and equitable indemnity

claims, after jury trial on the rescission issue is completed. 

C. Aon’s motion to amend its answer to Lee’s third-party

complaint to assert counterclaims for negligence,

negligent misrepresentation and fraud. (Doc. 229.)

Aon now seeks leave to amend its answer to Lee’s third party

Complaint to assert claims for negligence, negligent

misrepresentation, and fraud. Specifically, Aon seeks to recover

a portion of its attorneys’ fees and costs incurred in this

matter under the “tort of another” doctrine. USF&G filed a

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statement of non-opposition to this motion. (Doc 243.) Lee

objects to amendment on the ground that the proposed counterclaim

would be futile. The question is whether the complaint, read in

the light most favorable to the plaintiff states a valid claim. 

See Miller v. Rykoff-Sexton Inc., 845 F.2d 209 (9th Cir. 1988). 

Under the tort of another doctrine:

A person who through the tort of another has been

required to act in the protection of his interests by

bringing or defending an action against a third person

is entitled to recover compensation for the reasonably

necessary loss of time, attorney's fees, and other

expenditures thereby suffered or incurred.

Prentice v. N. Am. Title Guaranty Corp., 59 Cal. 2d 618 (1963). 

Both parties rely upon a recent case out of the Northern

District, Burger v. Kuimelis, 325 F. Supp. 2d 1026 (N.D. Cal.

2004). In Burger, a broker alleged that the insured’s wrongful

conduct caused the broker to become “an unwitting tool in [the

insured’s] criminal scheme to defraud,” and that the insureds

“knew they were placing [the broker] at risk of an

[administrative] investigation.” Id. at 1036. The broker sought

to recover the expenses he incurred defending himself against the

administrative investigation, even though the broker pled guilty

to a related charge. Id. at 1037. The district court in Burger

found that the broker’s allegations were sufficient to state a

fraud action under the tort of another doctrine. 

The allegations here are similar to those in Burger. Here,

Aon asserts that Lee defrauded Aon by falsely representing that

it would no longer use its employees to perform construction

work. Aon further contends that it was “entirely foreseeable

that Aon would become embroiled in any dispute over the accuracy

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of the representations in that letter.” (Doc. 229 at 8.) 

Lee unpersuasively cites Umet Trust v. Santa Monica Medical

Investment Co., 140 Cal. App. 3d 864, 869-870 (1983) for the

proposition that a party can only recover attorneys fees under

exceptional circumstances. Umet does not support Lee’s case. 

The Umet court specifically held that such exceptional

circumstances exist when “a person who through the ‘tort of

another’ has been required to act in the protection of his

interests.” Id. at 869. 

Lee also maintains that Aon’s negligence claim is futile

because Lee owed no duty to Aon. But, “the duty not to mislead

is a duty that runs from [a client] to [its broker.]” Burger,

325 F. Supp. 2d at 1044. 

Lee next argues that Aon’s fraud claim must fail on several

grounds. First, Lee incorrectly argues that Aon must allege (a)

that Lee made a representation to Aon with the intent to induce

Aon to rely on the truth of the representation (b) that Aon’s

reliance was justified, and (c) that Aon suffered damages. In

support of this objection, Lee cites California Civil Jury

Instructions 1900 (Intentional misrepresentation) and 1903

(negligent misrepresentation). Even if these jury instructions

were binding authority, which they are not, they address the

ultimate burden of proof at trial, not the pleading standard

applicable in the context of a futility objection. 

Second, Lee argues that Aon cannot possibly prove reliance

because the alleged misrepresentations were made in a letter that

was sent by Lee to American/USF&G and was not intended for Aon. 

However, Aon’s proposed amendment specifically alleges that Lee

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made representations directly to Aon and that Aon relied on these

representations. 

Finally, Lee argues that Aon cannot state a claim under the

tort of another doctrine because Aon at least partially caused

its own involvement in the litigation through fraudulent acts of

its own that Lee plans to prove at trial. Lee argues that, under

such circumstances, the tort of another doctrine is legally

unavailable. But, the fact that Lee has alleged wrongdoing on

the part of Aon does not render Aon’s claim invalid at the

pleading stage. For example, in Burger, the broker incurred some

attorneys fees as a result of his own misconduct. However, even

though “it might be difficult to determine what damages are

attributable to [the client’s] alleged misconduct...such is a

matter better considered later.” 325 F. Supp. at 1037. 

Aon’s proposed “tort of another” claims are not futile. No

party offers any further objection to Aon’s amendment. 

Permitting the addition of Aon’s proposed claims would not

require additional discovery, nor would it demand the

presentation of additional witnesses or evidence at trial. Aon’s

motion to amend to assert claims of negligence, negligent

misrepresentation, and fraud under the “tort of another” doctrine

is GRANTED. It may be appropriate to try this claim with the

rescission-coverage issue. This timing issue will be addressed

at the up-coming scheduling conference. 

//

//

//

//

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D. Aon’s motion to amend its answer to USF&G’s and

American’s third-party complaint to assert

counterclaims for comparative equitable indemnity and

contribution. (Doc. 229.)

USF&G has asserted claims of indemnity and contribution

against Aon in a third party complaint. Aon now seeks leave to

amend its answer to USF&G’s third party complaint to assert

claims for comparative equitable indemnity, contribution and

declaratory relief. Aon argues that amendment should be

permitted because its proposed claims are essentially the same as

the claims already asserted by USF&G. 

USF&G filed a conditional non-opposition to Aon’s motion. 

USF&G and American Specialty assert that they “do not oppose

Aon’s motion to assert a counterclaim against them if the Court

grants the motion of USF&G to amend its complaint to add

allegations of alter ego.” (Doc. 244.) However, USF&G and

American Specialty “would oppose the motion of Aon if the Court

were to deny USF&G’s motion....” (Id.) USF&G offers no legal or

factual argument in its conditional opposition. 

Again, because these proposed claims will not require

additional discovery, witnesses or evidence at trial, the

interests of judicial economy would not be hindered by permitting

amendment. Aon’s motion to amend to assert counterclaims for

comparative equitable indemnity and contribution is GRANTED. 

However, as the availability of equitable indemnity and

contribution will turn on the outcome of the rescission-coverage

issue, these claims will be severed and tried separately after

the rescission-coverage trial is completed.

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Lee complains that the latest scheduling order only 4

permits the parties to bring motions to extend the existing

pleadings and does not permit the filing of new dispositive

motions. This is a non-sequitur, as USF&G is now moving to

amend the schedule.

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E. USF&G’s motion to re-set dispositive motion deadline to

allow the filing of a second round of summary judgment

motions. (Doc. 221.) 

USF&G also moves to amend the scheduling order to allow the

filing of a second round of summary judgment motions. USF&G 4

argues that consideration of a renewed motion is appropriate here

because it has new facts which may eliminate some of the issues

in dispute. See Advanced Semiconductor Materials America Inc.,

v. Applied Materials Inc., 922 F. Supp. 1439 (N.D. Cal. 1996);

Courtaulds Aerospace Inc. v. Huffman, 826 F. Supp. 345 (E.D. Cal.

1993). USF&G also asserts that newly decided cases have

clarified the applicable law. Specifically, Mitchell v. United

National Ins. Co, 127 Cal. App. 4th 457 (2005) held that an

unintentional failure to disclose material facts in an

application provided a basis for rescission even though there

were other facts giving rise to a duty on the part of the insurer

to investigate other alleged misrepresentations. 

USF&G also asserts that the July 30, 2004 order on cross

motions for summary judgment disposed of all but one element of

USF&G’s rescission claim (whether Lee’s representations to Aon

constituted misrepresentations) and all but part of one of Lee’s

affirmative defenses (whether USF&G waived its right to

rescission under California Insurance Code § 336 by failing to

make inquiries as to material facts where distinctly implied by

other facts). Lee objects to USF&G’s characterization of the

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remaining issues in the case, asserting that Judge Coyle merely

denied Lee’s motion for summary judgment on the issue of whether

USF&G waived its right to rescission under California Insurance

Code § 336. Lee objects that USF&G is trying to “bootstrap a

denial of Lee’s motion for summary judgment into a ruling

granting summary judgment to USF&G.” In addition, Lee suggests

that it will advance other waiver theories at trial. 

Summary judgment is one mechanism for resolving such

disputes, but under the circumstances, where a trial on the

merits has been delayed for many years, it is more efficient to

take up these issues as motions in limine. The motion to amend

the scheduling order to permit the filing of new dispositive

motions is DENIED. A schedule for the future progress of the

case will be set during the next scheduling conference. 

V. CONCLUSION

For the reasons set forth above, 

(1) USF&G’s motion to supplement and/or amend the complaint

to add alter ego allegations; and to amend the

scheduling order to allow limited discovery on these

new allegations, (Doc. 220), is GRANTED, but these

claims will be severed. Any discovery and/or trial on

these claims will proceed after the trial on the

coverage (rescission) claims.

(2) Lee’s motion to file a second amended and supplemental

counterclaim against USF&G (Doc. 223) is DENIED with

respect to the abuse of process allegation as futile. 

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(3) Lee’s motion to file a second amended and supplemental

counterclaim against USF&G (Doc. 223), is GRANTED with

respect to the bad faith allegations, but all bad faith

claims will be severed and tried separately after trial

on the rescission issue.

(3) Aon’s motion to amend its answer to Lee’s third-party

complaint to assert counterclaims for negligence,

negligent misrepresentation and fraud under the tort of

another doctrine, (Doc. 229), is GRANTED.

(4) Aon’s motion to amend its answer to USF&G’s and

American’s third-party complaint to assert

counterclaims for comparative equitable indemnity and

contribution, (Doc. 229), is GRANTED but these claims

will be severed and tried separately after trial on the

rescission issue.

(5) USF&G’s motion to re-set the dispositive motion

deadline to allow the filing of a second round of

summary judgment motions, (Doc. 221), is DENIED. 

A scheduling conference will be held on September 1, 2006,

at 8:45 a.m., to:

(a) Set a schedule for further proceedings, including

motions in limine, and a trial date; and 

(b) determine whether Aon’s tort of another allegations

will proceed to trial with the rescission-coverage

issues. 

SO ORDERED 

Dated: July 18, 2006 /s/ OLIVER W. WANGER

______________________________

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

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