Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-00736/USCOURTS-caed-1_05-cv-00736-1/pdf.json

Parties Involved:
Clarendon America Insurance Company
Defendant
Sierra Foothills Public Utility District
Plaintiff

Document Text:

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

SIERRA FOOTHILLS PUBLIC )

UTILITY DISTRICT, )

)

)

)

Plaintiff, )

)

vs. )

)

)

CLARENDON AMERICA INSURANCE )

COMPANY, et al., )

)

)

Defendant. )

)

)

No. CV-F-05-736 REC/LJO

ORDER DENYING DEFENDANT'S

MOTION TO DISMISS OR FOR

MORE DEFINITE STATEMENT

On August 15, 2005, the court heard defendant Clarendon

America Insurance Company's motion to dismiss or for more

definite statement.

Upon due consideration of the arguments of the parties and

the record, the court denies Clarendon's motion for the reasons

set forth herein.

Sierra Foothills Public Utility District (hereinafter

referred to as Sierra) filed a Complaint for Breach of Contract,

Breach of the Covenant of Good Faith and Fair Dealing, Fraud and

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Declaratory Relief against Clarendon America Insurance Company

(hereinafter Clarendon) and Does 1-100 in the Fresno County

Superior Court. Clarendon removed the action to this court.

The Complaint alleges Clarendon insured Sierra under a

Public Official's Liability Policy for the period December 28,

2001 to December 28, 2002; that, under Coverage "B", the policy

provides coverage for claims made against the insured

"governmental entity" for "wrongful acts"; that, under this

coverage, Clarendon agreed that if a "claim" was first made

during the policy period and the "wrongful act" occurs during the

policy period of after the retroactive date of December 28, 1999

shown in the Declarations, Clarendon will defend any "suit"

seeking to recover for any such "loss" on account of such

"wrongful act" as well as to pay on behalf of the insured all

"loss" which the insured becomes legally obligated to pay. The

Complaint describes the exclusions set forth in the policy. The

Complaint alleges that David B. Englert, an employee of Riverbend

Operations, Inc., the general manager of Sierra, filed a

Complaint for Breach of Contract against Sierra on April 17,

2003. Englert alleged that he was employed as general manager of

Sierra; that, on October 17, 2002, Sierra breached his employment

contract by terminating him without good cause and in violation

of public policy; that, after terminating Englert, Sierra falsely

accused Englert of financial improprieties with public funds,

publicly disclosed privileged matters involving Englert's

employment, refused to return personal property to Englert,

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attempted to have Englert arrested, and circulated false rumors

that Englert's arrest was imminent and that Englert was

dishonest. Sierra's Complaint against Clarendon further alleges:

8. The defense and indemnity of the Englert

action was promptly and timely tendered to

Clarendon under the Policy. By letter dated

June 13, 2003 from Nelia Winkler, a Claims

Adjuster for First Mercury Insurance Company,

Clarendon's Claims Administrator, Clarendon

wrongfully denied coverage for the

allegations in the Englert action based on

Exclusions 'L,' 'K' and 'V' without

conducting any investigation. On April 5,

2004, Sierra Foothills again tendered the

defense of the Englert action to Clarendon

America. Again, without any investigation,

Nelia Winkler by letter dated April 12, 2004,

reiterated Clarendon's denial of coverage.

9. As a direct and immediate consequence of

Clarendon's wrongful denial, Sierra Foothills

attempted to defend itself by retaining

counsel. However, Sierra Foothills did not

at the time have sufficient funds to fully

defend itself by retaining counsel

experienced in employment matters or to

otherwise vigorously respond to Englert's

assertions. 

10. As a result, the Englert action went to

trial and resulted in a Judgment of

$1,765,943 on March 19, 2004, which Judgment

is now on appeal with the Fifth District

Court of Appeal in Fresno.

11. Subsequent to the entry of judgment,

Sierra Foothills again tendered the defense

of the Englert action to Clarendon. In its

re-tender, Sierra Foothills pointed out that

the Englert Complaint alleged claims for

conversion and invasion of privacy occurring

after Englert's termination. Sierra

Foothills noted that the exclusions 'I', 'K'

and 'V,' cited in Clarendon's initial denial

of coverage letter, were inapplicable. 

Clarendon again denied coverage, this time

citing, for the first time, exclusions 'V'

[sic] and, for the first time, exclusion 'Z'

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and Insurance Code § 533. Sierra Foothills

responded pointing out the inapplicability of

these exclusions and of Insurance Code § 533. 

In reply, Clarendon again denied coverage,

this time citing exclusions 'B' and 'O.' 

Sierra Foothills again responded, pointing

out the inapplicability of these exclusions,

but Clarendon has continued to refuse to

defend or indemnify Sierra Foothills. 

12. Clarendon's denial of coverage is

wrongful, unreasonable and in bad faith. 

Specifically, Clarendon has:

a. Failed to conduct any 

investigation.

b. Improperly interpreted the 

policy in a restrictive manner so as to

wrongfully withhold benefits for which the

insured paid a premium.

c. Improperly relied on 

titles of causes of action set forth in the

Englert Complaint rather than the facts

alleged.

d. Improperly relied on the 

facts as established when an issue of fact

clearly existed.

e. Improperly relied on 

unproven allegations to deny coverage.

f. Improperly employed 

hindsight in wrongfully concluding that no

duty to defend existed.

g. Improperly relied on 

evidence from the trial that it did not have

when it denied coverage.

h. Improperly asserted that 

the allegations of conversion and invasion of

privacy were not separate and distinct from

the stated causes of action for wrongful

termination and termination in violation of

public policy.

I. Improperly relied on 

Insurance Code § 533 to deny a defense.

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j. Improperly asserted that 

Englert was an employee even after the

alleged termination.

k. Ignored additional 

information provided by Sierra Foothills

clearly establishing Clarendon's duty to

defend.

l. Refused to respond to many

of the points made by Sierra Foothills in its

multiple re-tenders.

The Complaint alleges as a First Cause of Action breach of

contract, alleging that Clarendon has breached the contract with

Sierra by "(1) failing to properly investigate the claim, (2)

wrongfully denying coverage for both defense costs and

indemnity." The Third Cause of Action is for fraud, incorporates

the preceding allegations and further alleges:

22. On ... February 28, 2001, Clarendon, by

way of the provisions of [the] Policy,

represented that it would provide a defense

to Sierra Foothills with respect to claim

which were potentially covered under said

policy and that it would indemnify Sierra

Foothills for losses covered under the policy

and not otherwise excluded. Said

representations were false in that Clarendon

America never had any intention of providing

such a defense or indemnification. Said

representations were knowingly false and were

made with the intent to defraud, or in the

alternative, were made without any reasonable

basis for believing them to be true. Sierra

Foothills reasonably and justifiably relied

on these representation [sic] in expending

sums to procure the policy, in tendering its

defense, and in incurring other costs and

attorneys fees.

The Fourth Cause of Action is for declaratory relief,

incorporates all preceding allegations, and further alleges in

pertinent part:

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25. An actual controversy has arisen and now

exists between Sierra Foothills and Clarendon

over whether Clarendon's policy provides

coverage for the allegations in the Englert

action.

26. In view of the controversy herein

referred to above, Sierra Foothills seeks a

declaration that Clarendon's policy does

provide coverage for defense and indemnity

for the allegations in the Englert action.

A. Motion to Dismiss.

Clarendon moves the court to dismiss the Third Cause of

Action for fraud and promissory estoppel and the Fourth Cause of

Action for declaratory judgment.

1. Third Cause of Action for Fraud.

Clarendon moves to dismiss this cause of action that a claim

for fraud cannot be solely on allegations that Clarendon failed

to comply with the terms of the insurance policy.

In so moving, Clarendon notes that Rule 9(b), Federal Rules

of Civil Procedure, requires fraud to be pleaded with

specificity. As explained in In re Glenfed, Inc. Securities

Litigation, 42 F.3d 1541, 1547-1548 (9 Cir. 1994): th

... Rule 9(b) requires particularized

allegations of the circumstances constituting

fraud. The time, place, and content of an

alleged misrepresentation may identify the

statement or the omission complained of, but

these circumstances do not ‘constitute’

fraud. The statement in question must be

false to be fraudulent ... To allege fraud

with particularity, a plaintiff must set

forth more than the neutral facts necessary

to identify the transaction. The plaintiff

must set forth what is false or misleading

about a statement, and why it is false. In

other words, the plaintiff must set forth an

explanation as to why the statement or

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omission complained of was false or

misleading. A plaintiff might do less and

still identify the statement complained of;

indeed, the plaintiff might do less and still

set forth some of the circumstances of the

fraud. But the plaintiff cannot do anything

less and still comply with Rule 9(b)’s

mandate to set forth with particularity those

circumstances which constitute the fraud.

Clarendon also refers the court to Smith v. Allstate Insurance

Company, 160 F.Supp.2d 1150 (S.D.Cal. 2001). In Smith, the

insureds sued their homeowners insurer for fraud. In concluding

that the complaint did not allege fraud with the specificity

required by Rule 9(b), the district court, relying on In re

Glenfed Securities, held in pertinent part:

... The Ninth Circuit has identified two

aspects of this particularity requirement ...

First, the plaintiff’s allegations must

identify the time, place and content of the

alleged misrepresentation so that the

defendant can identify the statement ...

Second, the plaintiff must plead facts

explaining why the statement was false when

it was made ... A plaintiff can satisfy this

requirement in a number of ways: by pointing

to inconsistent contemporaneous statements or

information which was made by or available to

the defendant ...; later statements made ‘by

the defendant along the lines of “I knew it

all along.”’ ....

As a consequence of this second requirement,

the plaintiff is precluded from simply

pointing to a defendant’s statement, noting

that the content of the statement conflicts

with the current state of affairs, and then

concluding that the statement in question was

false when made ....

160 F.Supp.2d at 1152-1153. The district court noted that the

fraud cause of action alleged that Allstate, through its written

sales presentations and homeowner’s insurance policy, agreed to

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idemnify plaintiffs’ home against fire damage, that the insurance

policy stated that plaintiffs would be in “good hands” with

Allstate, that Allstate made these representations to induce

plaintiffs to enter into the homeowner’s insurance policy, that

Allstate never intended to honor these representations, and that

Allstate has yet to pay any of plaintiffs’ dwelling losses. The

plaintiffs relied on these allegations in claiming that Allstate

never intended to honor its contractual promises or promises to

treat plaintiffs with “good hands.” In holding that these

allegations did not satisfy Rule 9(b), the district court held:

First, with respect to the contractual

promises claim, Plaintiff’s pleading merely

specify the time, place, and manner of

Allstate’s representations. These pleadings

fail to specify facts from which the Court

can infer that the alleged misrepresentations

were false at the time they were made. 

Plaintiffs dispute this conclusion, arguing

that

Allstate promised in writing to

indemnify [P]laintiffs if they

suffered a loss to their home, that

a loss occurred on May 6, 2000, and

that Allstate has since that day

and every day thereafter to the

present date refused to honor its

promise of indemnification and has

refused to provide [Plaintiffs]

with any explanation as to why

payment has not been made. This

evidence, standing alone, supports

a factual inference that Allstate

never intended to honor the

promises it made to [Plaintiffs

when the coverage was sold].

...

This argument is specious. It assumes that

the alleged breach of contract can be used as

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evidence that Allstate never intended to

honor the contract, thereby committing fraud. 

Such an assumption is unwarranted because it

contradicts the heightened pleading

requirements of Rule 9(b) and would allow

‘every breach on contract [to] support a

claim of fraud so long as the plaintiff adds

to his complaint a general allegation that

the defendant never intended to keep her

promise.’ ....

Plaintiffs’ Second Cause of Action contains

no facts (besides the alleged breach of

contract) suggesting that Allstate’s

representations were false at the time they

were made. Accordingly, this basis for the

Second Cause of Action is dismissed for

failing to comply with Rule 9(b). 

160 F.Supp.2d at 1153-1154.

Clarendon argues that the allegations supporting the Third

Cause of Action are equally deficient and are based solely on the

claims that Clarendon breached the contract by failing to provide

coverage and a defense. Clarendon asserts, there are no

allegations from which it may be inferred that Clarendon made any

misrepresentations to Sierra at the time the policy was issued

which it may be inferred that Clarendon never intended to honor

the contract. 

Sierra responds that the allegations in the Complaint before

the court are distinguishable from those involved in Smith and

support a conclusion that the Third Cause of Action alleges fraud

within the requirements of Rule 9(b):

[I]t is Clarendon’s explanations through its

various declination letters, including new

explanations with each letter, and its

multiple failures to investigation [sic] the

claim to learn the clear inapplicability of

the explanations, that supports the

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allegation Clarendon never intended to

discharge its contractual obligations to

begin with. From one re-tender to the next,

Sierra Foothills explained to Clarendon why

the exclusions it relied on were not

applicable, but Clarendon would simply

respond with yet another declination letter

cited [sic] entirely new exclusions. 

Compounding matters for Clarendon and thus

supporting Sierra Foothills claim, is that

Clarendon not only failed to conduct an

investigation into the facts of the claim, it

relied on unproven allegations to deny the

claim, lumped disparate allegations into

excluded categories, claimed Mr. Englert was

an employee even after the alleged

termination that spawned the underlying

action, ignored information provided by

Sierra Foothills and simply refused to

respond to many of the points raised by

Sierra Foothills in its multiple re-tenders

... These allegations clearly establish that

Clarendon never had any intent of honoring

its promises, but instead it proceeding with

the goal of avoiding its promises by failing

to investigate and by relying on any

exclusions it could conjure up, while

attempting to act in good faith while forcing

Sierra Foothills into litigation.

Clarendon replies that Sierra is merely incorporating the

allegations supporting the First Cause of Action for breach of

contract and the Second Cause of Action for breach of the implied

covenant of good faith and fair dealing into the Third Cause of

Action for fraud without any particularity regarding the time,

place or content of the alleged misrepresentations. Clarendon

contends that if all the actions allegedly constituting a breach

of the implied covenant of good faith and fair dealing also

satisfy a claim for fraud, there would be no reason to have the

Second and Third Causes of Action in the Complaint. Clarendon

argues:

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Here, there is no way that Clarendon can

respond to the allegations in the Third Cause

of Action other than to deny that they have

done anything wrong. The allegations are

simply conclusory statements that because

coverage was denied that it allegedly had no

intention of providing a defense or

indemnification. The Complaint fails to

allege who allegedly made the statements and

how they were reasonably relied upon by

Sierra Foothills. Clarendon is precluded

from providing the requisite admissions and

denials in any answer based on the vagueness

of the allegations asserted in the Third

Cause of Action. Accordingly, the Third

Cause of Action should be dismissed for

failure to meet the pleading requirements

under Rule 9(b) or, at minimum, leave to

amend should be provided to Sierra Foothills

to allege the specific time, place and

content of the alleged misrepresentations to

allow Clarendon to adequately defend the

claim.

The court does not agree with Clarendon that the Complaint

does not adequately set forth the time, place and content of the

alleged misrepresentations upon which Sierra relies in support of

its claim of fraud or the identity of the person making the

alleged misrepresentations. The court also concludes that the

allegations of the Complaint suffice to allege a claim for fraud.

Unlike the allegations in In re Glenfed Securities and Smith, the

Complaint alleges more than a claim of fraud based solely on the

fact that the insurance policy was allegedly breached. Here, the

Complaint alleges that the insurance policy promised coverage and

a defense, a misrepresentation evidenced by the varying theories

of denying coverage and a defense. Consequently, the court

concludes that the Complaint satisfies Rule 9(b) and precludes

the conclusion that the that plaintiff can prove no set of facts

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The court concludes that there is no need for a more definite 1

statement. Clarendon is able to file an answer to the Complaint as

pleaded.

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in support of the fraud cause of action.1

2. Fourth Cause of Action for Declaratory Relief.

Clarendon moves to dismiss the Fourth Cause of Action for

declaratory relief on the ground that it is duplicative of the

First Cause of Action for breach of contract and, if Sierra

prevails on the First Cause of Action, the cause of action for

declaratory relief serves no useful purpose.

In considering whether to hear a claim for declaratory

relief, courts consider two criteria: (1) if the judgment “will

serve a useful purpose in clarifying and settling the legal

relations in issue,” and (2) if “it will terminate and afford

relief from the uncertainty, insecurity, and controversy giving

rise to the proceeding.” McGraw-Edison Co. V. Preformed Line

Products Co., 362 F.2d 339, 342 (9 Cir. 1966). When the issues th

raised by the prayer for declaratory relief will be completely

disposed of in other litigation, it may be appropriate to decline

to hear the action because it will serve no useful purpose. Id.

at 343. Similarly, if a claim for declaratory relief presents

merely factual questions that will not terminate the dispute

between the parties, it may be appropriate to decline the action. 

Celador International Ltd. v. The Walt Disney Co., 347 F.Supp.2d

846, 857 (C.D.Cal. 2004), citing Newton v. State Farm Fire &

Casualty Co., 138 F.R.D. 76, 79 (E.D.Va. 1991). 

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The First Cause of Action for breach of contract alleges

that Clarendon wrongfully denied coverage for both defense costs

and indemnity. The Fourth Cause of Action seeks a declaration

that Clarendon's policy does provide coverage for defense and

indemnity for the allegations in the Englert action.

Clarendon argues that the declaration sought by the Fourth

Cause of Action serves no useful purpose in this litigation

because the question of whether the policy obligated Clarendon to

defend and/or indemnify Sierra in the Englert litigation will be

fully resolved by the First Cause of Action. 

Sierra argues that the Fourth Cause of Action serves a

useful purpose in the litigation before the court because 

Englert is a third party case that involved

and continues to involve not only the duty to

defend but, depending on the results of the

pending appeal, an immediate duty to

indemnify or the potential of such duty in

the future. It is the continuing obligation

of Clarendon to perform that underlies Sierra

Foothills’ declaratory claim, as that claim

is the vehicle through which Sierra Foothills

seeks certainty and security with regard to

Clarendon’s duties. Furthermore, as Englert

is on appeal, the declaratory claim takes on

an important exigency ....

Because of the potentially continuing duty to defend on the

appeal or thereafter if a re-trial is ordered, the court does not 

view the Fourth Cause of Action as serving no useful purpose. 

The court is not faced with a situation in which the underlying

litigation is final and the insured is merely seeking damages

from the insurer because of the refusal to defend and indemnify. 

Consequently, the court concludes that the Fourth Cause of Action

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will not be dismissed as duplicative.

ACCORDINGLY:

1. Defendant Clarendon America Insurance Company’s Motion

to Dismiss or For More Definite Statement is denied.

IT IS SO ORDERED.

Dated: August 29, 2005 /s/ Robert E. Coyle 

668554 UNITED STATES DISTRICT JUDGE

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