Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-00736/USCOURTS-caed-1_05-cv-00736-8/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 )

CO., and Does 1 through 100, ) 

inclusive, )

 )

Defendants. )

)

) 

No. CV-F-05-0736 REC LJO

ORDER GRANTING SFPUD’S

MOTION FOR PARTIAL SUMMARY

JUDGMENT AND DENYING

CLARENDON’S MOTION FOR

SUMMARY JUDGMENT. 

(Docs. 30 & 41) 

On Monday, May 8, 2006, the Court heard Sierra Foothills

Public Utility District’s (“SFPUD”) Motion for Partial Summary

Judgment as to the Issue of Clarendon’s Duty to Defend and

Clarendon America Insurance Company’s (“Clarendon”) Motion for

Summary Judgment. Upon due consideration of the written and oral

arguments of the parties and the record, the Court GRANTS SFPUD’s

motion and DENIES Clarendon’s motion, as set forth herein.

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I. Factual Background

A. The Underlying Lawsuit

On April 17, 2003, David E. Englert filed a lawsuit against

SFPUD in Madera County Superior Court, Case No. MCV 020596. The

complaint in that action (the “Underlying Complaint”) contained

two causes of action: for Breach of Contract and for Wrongful

Termination in Violation of Public Policy. The allegations in

the Underlying Complaint are as follows.

SFPUD employed Mr. Englert as its General Manager, for which

Mr. Englert received salary and benefits. SFPUD led Mr. Englert

to believe that he would not be terminated except for good cause. 

On or about October 17, 2002, SFPUD terminated Mr. Englert

without good cause and ceased paying his wages and benefits.

Mr. Englert further alleged that over the two years prior to

his termination, SFPUD had paid money to Steve Varner and Dennes

Coombs. Mr. Varner and Mr. Coombs did not perform any services

or provide SFPUD any benefits in exchange for those payments. 

Mr. Englert determined that the payments jeopardized the

financial stability of SFPUD. Consequently, he refused to sign

any more checks payable to Mr. Varner or Mr. Coombs. He also

withheld support for Mr. Varner’s and Mr. Coombs’s attempts to

control the disbursement of SFPUD funds to its board and to

control personnel decisions affecting the operation of Riverbend

Golf Course, which SFPUD operated.

Riverbend Operations, Inc. (“ROI”), of which Mr. Englert was

president, managed SFPUD’s facilities. Mr. Varner was an

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authorized signatory on a checking account ROI maintained at

United Security Bank. After Mr. Englert refused to authorize the

payments, Mr. Varner directed SFPUD or ROI staff to fill out

checks payable to himself, which he proceeded to cash.

Mr. Varner and Mr. Coombs sought to punish Mr. Englert for

his attempts to stop the payments. SFPUD, by and through its

Chairman, Terry Holmes, initiated a campaign of harassment and

unwarranted criticism against Mr. Englert.

In October of 2002, Mr. Englert provided written notice to

United Security Bank indicating that Mr. Varner was not

authorized to withdraw funds or sign ROI checks. Immediately

thereafter, SFPUD terminated Mr. Englert.

Mr. Englert alleges several instances of misconduct by SFPUD

after his termination. SFPUD falsely accused Mr. Englert of

financial improprieties with public funds, publicly disclosed

privileged employment matters, refused to return Mr. Englert’s

personal property, attempted to have Mr. Englert arrested, and

circulated false rumors that Mr. Englert would soon be arrested

and that he was dishonest. 

On or about March 19, 2004, Mr. Englert won a judgment of

$1,765,943 in the underlying action. SFPUD appealed the

judgment. At the time of these motions, the appeal was still

pending.

B. The Policy

SFPUD is the named insured under Public Officials Liability

Coverage Policy Number HX00001199 (the “Policy”) issued by

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Terms that the Policy defines in Section VII appear in 1

boldface throughout the Policy. The Court, in all quotations from

the Policy, has attempted to reproduce the original emphasis.

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Clarendon. The Policy was effective from December 28, 2001, to

December 28, 2003. Section I.1 of the Policy provides coverage,

in relevant part, as follows:

We Agree:

. . .

B. With the “Governmental Entity” that if,

during the “policy period,” any “claim” or

“claims” are first made against the

“Insured,” individually or collectively for a

“wrongful act,” we will pay in accordance

with the terms of this policy, and on behalf

of the “Governmental Entity,” all “loss”

which the “Governmental Entity” shall become

legally obligated to pay or for which the

“Governmental Entity” may be required by law

to indemnify the “Insured”; . . . .

Sommer Decl. Ex. A (emphasis in original ). 1

The Policy, in Section VII.5, defines “Insureds” as 

those persons acting within the scope of

their official duties who were, now are or

shall be lawfully elected or lawfully

appointed officials or members or employees

or volunteers of the “Governmental Entity” or

members of commissions, boards, or other

unites operated by and under the jurisdiction

of such “Governmental Entity” and within

apportionment of the total operating budget

indicated in the application form, . . . .

Id. 

The Policy, at Section VII.10, defines “wrongful act” as 

any actual or alleged error or misstatement

or act or omission or neglect or breach of

duty including misfeasance, malfeasance, and

nonfeasance by the “Insured” in the discharge

of their “official duties” with the

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“Governmental Entity,” individually or

collectively, or any matter claimed against

them solely by reason of their being or

having been duly elected or appointed

officials.

Id. 

The Policy, in Section I.2, also excludes from coverage “ANY

‘CLAIM’ OR ‘CLAIMS’ BASED UPON OR ATTRIBUTABLE TO:”

B. . . .

(3) wrongful entry or eviction or

other invasion of the right of

privacy;

. . .

O. any ‘wrongful act’ . . . which shall be

deemed uninsurable under the law pursuant to

which this policy shall be construed;

. . . 

V. . . . claims by any ‘Insured’ against

the ‘Government Entity.

Id. 

C. The Tender

On or about June 3, 2003, SFPUD tendered the underlying

action to Clarendon for defense and indemnification. The

materials SFPUD tendered on that date include the Underlying

Complaint; the Management Agreement between SFPUD and ROI;

minutes from a Special Board Meeting of SFPUD on October 11,

2002; notice to Mr. Englert that SFPUD was terminating ROI’s

management services, dated October 11, 2002; minutes from SFPUD’s

Special Board Meeting held October 17, 2002; and SFPUD Board of

Directors Resolution 2002-02. See Enns Decl. Ex. 1. Clarendon

declined defense of SFPUD by letter of June 11, 2003. See Enns

Decl. Ex. 2.

On April 5, 2004, after the judgment had been entered in the

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underlying action, SFPUD again tendered the defense, which

Clarendon denied in a letter of April 12, 2004. On May 12, 2004,

October 11, 2004, and January 31, 2005, SFPUD sent Clarendon

further communications arguing that it had a duty to defend the

underlying action. Clarendon at no point accepted defense of the

action.

II. Procedural History

On May 5, 2005, SFPUD filed a Complaint in the Fresno County

Superior Court for Breach of Contract, Breach of the Covenant of

Good Faith and Fair Dealing, Fraud, and Declaratory Relief. On

June 7, 2005, Clarendon removed the case to this Court.

On March 17, 2006, Clarendon filed its Motion for Summary

Judgment. Clarendon contends that it did not have a duty to

defend the underlying action. Consequently, Clarendon argues,

SFPUD’s claims for Breach of Contract, Bad Faith, and Fraud also

fail as a matter of law. On March 27, 2006, SFPUD filed is

Motion for Partial Summary Judgment as to the Issue of

Clarendon’s Duty to Defend. 

III. Legal Standard

Summary judgment is proper when it is shown that there

exists “no genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of law.” Fed.

R. Civ. P. 56. A fact is “material” if it is relevant to an

element of a claim or a defense, the existence of which may

affect the outcome of the suit. T.W. Elec. Serv., Inc. v. Pac.

Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987)

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(citing Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp.,

475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986)). 

Materiality is determined by the substantive law governing a

claim or a defense. Id. The evidence and all inferences drawn

from it must be construed in the light most favorable to the

nonmoving party. Id. 

The initial burden in a motion for summary judgment is on

the moving party. The moving party satisfies this initial burden

by identifying the parts of the materials on file it believes

demonstrate an “absence of evidence to support the nonmoving

party’s case.” Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106

S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The burden then shifts to

the nonmoving party to defeat summary judgment. T.W. Elec., 809

F.2d at 630. Where a court decides cross motions for summary

judgment, neither party is entitled to summary judgment if a

genuine issue exists as to any material fact. United States v.

Fred A. Arnold, Inc., 573 F.2d 605, 606 (9th Cir. 1978) (citing

Fed. R. Civ. P. 56(c)).

The nonmoving party “may not rely on the mere allegations in

the pleadings in order to preclude summary judgment,” but must

set forth by affidavit or other appropriate evidence “specific

facts showing there is a genuine issue for trial.” Id. (citing

Fed. R. Civ. P. 56(e)). The nonmoving party may not simply state

that it will discredit the moving party’s evidence at trial; it

must produce at least some “significant probative evidence

tending to support the complaint.” Id. (citing First Nat’l Bank

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v. Cities Serv. Co., 391 U.S. 253, 290, 88 S. Ct. 1575, 20 L. Ed.

2d 569 (1968)).

IV. SFPUD’s Motion for Summary Judgment

A. An Insurer’s Duty to Defend

A liability insurer has a broad duty to defend the insured

against claims that create a potential for indemnity. Montrose

Chem. Corp. v. Super. Ct., 6 Cal. 4th 287, 295 (1993). This

means that “the carrier must defend a suit which potentially

seeks damages within the coverage of the policy.” Id. (quoting

Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081

(1993)). Hence, the duty to defend is broader than the duty to

indemnify, sometimes requiring that an insurer defend the insured

even in an action in which no damages are awarded. Id. (citing

Horace Mann, 4 Cal. 4th at 1081).

The first step to determine whether the insurer has a duty

to defend is to compare the allegations of the complaint with the

terms of the policy. Id. (citing Horace Mann, 4 Cal. 4th at

1081). Facts outside the complaint may also be relevant where

they reveal that a possibility exists that the claim may be

covered by the policy. Id. (citing Horace Mann, 4 Cal. 4th at

1081). These facts outside the complaint can trigger a duty to

defend “even though the face of the complaint does not reflect a

potential for liability under the policy.” Id. at 296 (citing

Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 276 (1966)). This is

because, in light of pleading rules allowing liberal amendment,

the third party plaintiff should not be the arbiter of coverage. 

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Id. (citing Gray, 65 Cal. 2d at 276). “The scope of the duty [to

defend] does not depend on the labels given to the causes of

action in the third party complaint; instead it rests on whether

the alleged facts or known extrinsic facts reveal a possibility

that the claim may be covered by the policy.” Cunningham v.

Universal Underwriters, 98 Cal. App. 4th 1141, 1148 (2002). The

insured is entitled to a defense if facts in the complaint and in

other materials tendered to the insurer indicate that “the

complaint might be amended to give rise to a liability that would

be covered under the policy.” Montrose, 6 Cal. 4th at 299

(citing Gray, 65 Cal. 2d at 275-76).

California courts resolve in the insured’s favor any doubts

as to whether the facts establish the insurer’s duty to defend. 

Id. at 299-300. “[T]he insurer need not defend if the third

party complaint can by no conceivable theory raise a single issue

which could bring it within the policy coverage.” Id. at 300

(quoting Gray, 65 Cal.2d at 276 n. 15) (Montrose’s emphasis). 

This means that, to prevail, “the insured need only show that the

underlying claim may fall within policy coverage; the insurer

must prove it cannot.” Id. (Montrose’s emphasis) Facts that

merely tend to show that the claim is not covered, or is unlikely

to be covered, do not eliminate the possibility that the action

will fall within a policy’s coverage and “therefore add no weight

to the scales.” Id. On the other hand, the duty to defend “may

exist even where coverage is in doubt and ultimately does not

develop.” Id. at 295.

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To prevail in demonstrating that it does not have a duty to

defend, Clarendon must present “evidence that the underlying

claim cannot come within the policy coverage by virtue of the

scope of the insuring clause or the breadth of an exclusion.” 

Id. at 301. The duty to defend also extends to claims that are

not covered, so long as any claim discloses the potential for

liability under the policy. Rosen v. Nations Title Ins. Co., 56

Cal. App. 4th 1489, 1496-97 (1997). 

B. Interpreting Insurance Contracts

California courts construe insurance contracts, like

contracts generally, to give effect to the mutual intentions of

the parties. Boghos v. Certain Underwriters at Lloyds of London,

36 Cal. 4th 495, 501 (2005). Contractual language governs where

it is “clear and explicit.” Id. (quoting Bank of the W. v.

Super. Ct., 2 Cal. 4th 1254, 1264 (1992)). Ambiguous terms are

interpreted to protect the “‘objectively reasonable expectations

of the insured.’” Bank of the W., 2 Cal. 4th at 1265 (quoting

AIU Ins. Co. v. Super. Ct., 51 Cal. 3d 807, 822 (1990)). 

Insurance policies are written in two parts:

“an insuring agreement which defines the type of risks being

covered, and exclusions, which remove coverage for certain risks

which are initially within the insuring clause.” Rosen, 56 Cal.

App. 4th at 1497. A court first construes coverage provision to

determine whether they extend to the claim at issue. Id. If a

claim falls within the coverage provisions but also within an

exclusion, the policy does not cover the claim. Id.

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C. Potential Coverage Based on Conversion

SFPUD claims that the Underlying Complaint and the materials

it tendered on June 3, 2003, contain facts that present potential

for covered liability for conversion:

Conversion is the wrongful exercise of

dominion over the property of another. The

elements of a conversion are the plaintiff’s

ownership or right to possession of the

property at the time of the conversion; the

defendant’s conversion by a wrongful act or

disposition of property rights; and damages. 

It is not necessary that there be a manual

taking of the property; it is only necessary

to show an assumption of control or ownership

over the property, or that the alleged

converter has applied the property to his own

use.

 

Farmers Ins. Exch. v. Zerin, 53 Cal. App. 4th 445, 451-52 (1997). 

A person who refuses to return the property of another or who

prevents another from retrieving his property can be liable for

conversion. Gruber v. Pac. States Sav. & Loan Co., 13 Cal. 2d

144, 147 (1939) (holding that landlord was liable for conversion

where it refused to allow tenant access to his personal

property); see also Price v. Hovsepian, 114 Cal. App. 2d 385, 388

(1952) (defendant who locked plaintiffs out of an apartment

containing their property could be liable for conversion).

The Underlying Complaint alleges that “[f]ollowing [Mr.

Englert]’s termination, SFPUD . . . refused to return Plaintiff’s

personal property, . . . .” Clarendon’s Request for Judicial

Notice (“RJN”) Ex. 1 at 5. This allegation appears under the

heading “Second Cause of Action for Wrongful Termination in

Violation of Public Policy.” Clarendon’s RJN Ex. 1 at 4-5. The

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language appears to state a claim for conversion under California

law. It indicates that the property in question belonged to Mr.

Englert and that SFPUD denied him access to it in retaliation for

the manner in which he performed his duties as General Manager. 

1. Coverage of Claims Where SFPUD is Sole Defendant 

Clarendon contends that Mr. Englert’s claims against SFPUD

are not potentially covered by the Policy because they are not

claims against an “Insured.” Section I.1 of the Policy provides

coverage for “any ‘claim’ or ‘claims’ are first made against the

‘Insured,’ individually or collectively for a ‘wrongful act.’”

Sommer Decl. Ex. A. In such a case, Clarendon promises to “pay

in accordance with the terms of this policy, and on behalf of the

‘Governmental Entity,’ all ‘loss’ which the ‘Governmental Entity’

shall become legally obligated to pay or for which the

‘Governmental Entity’ may be required by law to indemnify the

‘Insured.’” Id. Under Section VII.5, “Insureds” are “those

persons acting within the scope of their official duties who

were, now are or shall be lawfully elected or lawfully appointed

officials or members or employees or volunteers of the

‘Governmental Entity’ . . . .” Id.

Clarendon argues that the Underlying Complaint cannot

trigger coverage under the Policy because only SFPUD was named a

defendant, but not any of its officials, members, employees, or

volunteers (collectively “Insureds”). In support, Clarendon

cites Olympic Club v. Those Interested Underwriters at Lloyd’s

London (Olympic Club), 991 F.2d 497, 502-04 (9th Cir. 1993). 

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That case involved interpretation of a Director’s and Officer’s

Liability Policy that required the insurer to pay all “loss”

arising from claims based on the policyholder entity’s directors’

and officers’ “wrongful acts.” Id. at 499. The court held that

coverage would turn on “whether the underlying lawsuits are

against the [entity] for the [entity]’s own policies, or are

against the [entity] because of ‘wrongful acts’ of its directors

and employees that are ‘imputed to [the entity] as their

principal.’” Id. at 500. The court determined that the

underlying claims sought relief solely based on longstanding

policies of the entity. Id. The underlying claims did not

allege that the directors and employees themselves had committed

any “wrongful acts.” Id.

Even if the Policy here functions similarly to that in

Olympic Club, coverage does not properly turn on whether any

Insured is named as a defendant in the Underlying Complaint, as

Clarendon contends. The Olympic Club court looked past the

absence of a named officer defendant to determine whether the

underlying lawsuits alleged the requisite “wrongful act” under

the Policy. Id. Similarly here, an analysis of the wrongful

acts and the actors alleged to have committed them is necessary.

Clarendon’s reading of the Policy appears to interpret the

phrase “any ‘claim’ or ‘claims’ are first made against the

‘Insured’” to refer only to causes of action naming an Insured as

defendant. See Sommer Decl. Ex. A. This reading, however, is

doubtful in light of the Policy’s definition of “claim”: 

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“‘Claim’ means a demand for ‘damages’ received by the

‘Governmental Entity’ or the ‘Insured’ including the service of

‘suit’ or institution of arbitration proceedings against the

‘Governmental Entity’ or the ‘Insured.’” Id. (italics added). 

Inserting the relevant portions of this definition of “claim”

into the coverage language reads as follows: “any [demand for

‘damages’ received by the ‘Governmental Entity’ or the ‘Insured’

including the service of ‘suit’ is] first made against the

‘Insured.’” The clause concerning the “demand for ‘damages’

received by the ‘Governmental Entity’” has no meaning if the

“first made against the ‘Insured’” restricts coverage to lawsuits

naming an Insured as defendant.

Clarendon’s reading also causes the Court to wonder what

effect remains for the language in Section I.1 indicating that

Clarendon will pay according to the terms of the Policy “all

‘loss’ which the ‘Governmental Entity’ shall become legally

obligated to pay.” Id. Furthermore, as defined in Section VII.6

of the Policy, “loss” includes “any amount which the

‘Governmental Entity’ or the ‘Insured’ is legally obligated to

pay as ‘damages,’ . . . .” Sommer Decl. Ex. A. It does not

appear that SFPUD could have a legal obligation to pay “damages,”

a term defined in Section VII.3 as “compensatory money damages

only,” on a claim brought against one of its Insureds. See id.

Moreover, Exclusion V contains language that specifically

excludes coverage for “claims by any ‘Insured’ against the

‘Government Entity.’” Id. Such an exclusion would be

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At oral argument, Clarendon contended that these provisions 2

referring to SFPUD’s own liability have meaning because they refer

to coverage of SFPUD for suits by Insureds against SFPUD seeking

indemnity. Clarendon contended that, for instance, the definition

of “loss” included the language “any amount which the ‘Governmental

Entity’ . . . is legally obligated to pay as ‘damages’” to indicate

that indemnity actions against SFPUD are covered. The passage,

however, refers to amounts that SFPUD is “legally obligated to pay”

separately from amounts it must pay to indemnify Insureds: “‘Loss’

shall mean any amount which the ‘Governmental Entity’ or the

‘Insured’ is legally obligated to pay as ‘damages,’ or for which

the ‘Governmental Entity’ is required to indemnify the ‘Insured,’

. . . .” Sommer Decl. Ex. A (italics added). If both clauses are

to retain meaning, the Policy must be read cover amounts that SFPUD

is legally obligated to pay other than amounts it is required to

pay to indemnify an Insured. See Cal. Civ. Code § 1641 (“The whole

of a contract is to be taken together, so as to give effect to

every part, if reasonably practicable, each clause helping to

interpret the other.”).

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unnecessary if only claims naming Insured as defendant fall

within the definition of coverage and those brought against the

“Government Entity” fall outside.2

A more plausible reading of Section I.1 requires an inquiry,

similar the analysis in the Olympic Club case Clarendon cites,

into whether the underlying action seeks to recover based on a

“wrongful act” of one of SFPUD’s Insureds. Clarendon does not

explain why a claim cannot be “against” someone for his wrongful

act unless he is a defendant in the lawsuit that arises

therefrom. Rather, it seems logically possible to classify a

lawsuit naming a public entity as a defendant and alleging

misconduct by an officer of that entity to be a claim against the

officer. Given the dissonance between Clarendon’s reading and

the other language of the Policy, accepting the latter

explanation is better than foreclosing it. Under such a reading,

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defining whether a claim is “first made against the ‘Insured’

. . . for a ‘wrongful act’” turns on whom plaintiff alleges to

have committed the wrongful act, rather than on which name

appears in the caption or the heading of the cause of action.

In Toledo-Lucas County Port Authority v. Axa Marine &

Aviation Insurance (UK), Ltd., 368 F.3d 524 (6th Cir. 2004), the

court interpreted a Public Officials Liability policy that

covered claims for certain types of misconduct “by an officer

and/or commissioner and/or employee and/or committee member in

the discharge of his/her duties as such and claimed against

him/her solely by reason of his/her capacity as such with a port

or harbor commission named herein.” Id. at 527 (emphasis added). 

The court read that language to require the insurer to defend and

indemnify claims against the insured public entity based on its

employees’ acts. Id. at 533. The court described the general

nature of public officials liability policies, like the one at

issue in this case: “Public Officials Liability coverage,

accordingly, does not necessarily require a claim or demand to be

made against an individual employee; a claim or demand against

the [entity] for damages on account of an individual employee’s

wrongdoing solely in his or her capacity as [the entity’s]

employee will suffice.” Id.; see also City of Flint v. Lexington

Ins. Co., 293 F.3d 956, 958 (6th Cir. 2002) (“Public Officials

and Employees Liability Insurance Policy” covered suit against

insured entity only).

Had the parties intended to restrict coverage to suits in

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which officials, members, employees, or volunteers were

defendants, they could have done so with direct explicit language

to that effect. Toledo-Lucas, 368 F.3d at 531. Instead, they

included language that explicitly contemplated coverage for

claims made in lawsuits filed against SFPUD. The Court finds

that the phrase limiting coverage to “any ‘claim’ or ‘claims’ are

first made against the ‘Insured’” does not preclude coverage of

causes of action in which only SFPUD is a defendant. 

2. Wrongful Act of an Insured

Coverage under the Policy turns, not on whom the Underlying

Complaint names as defendant, but instead on whether the conduct

alleged constitutes a wrongful act by an Insured – an officer,

member, employee, or volunteer of SFPUD. See Olympic Club, 991

F.2d at 500. Under Section VII.10 of the Policy, a “wrongful

act” is 

any actual or alleged error or misstatement

or act or omission or neglect or breach of

duty including misfeasance, malfeasance, and

nonfeasance by the “Insured” in the discharge

of their “official duties” with the

“Governmental Entity,” individually or

collectively, or any matter claimed against

them solely by reason of their being or

having been duly elected or appointed

officials.

Sommer Decl. Ex. A. 

Clarendon does not address whether any of SFPUD’s Insureds

engaged in the conduct giving rise to the allegations of

conversion in the Underlying Complaint. The Underlying Complaint

states that “SFPUD, by and through its Chairman Terry Holmes,

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initiated a campaign of harassment and unwarranted criticism

against Plaintiff in the performance of his duties as General

Manager.” Clarendon’s RJN Ex. 1 at 4. The next paragraph

contains the facts supporting a claim for conversion: 

“[f]ollowing [Mr. Englert]’s termination, SFPUD . . . refused to

return Plaintiff’s personal property, . . . .” Clarendon’s RJN

Ex. 1 at 4. The actor in that paragraph is simply “SFPUD.” The

language does not explicitly state that this action was performed

“by and through” any Insured. 

Nevertheless, this language shows that there is potential

that SFPUD will face covered liability in the underlying action. 

The language stating that Chairman Terry Holmes, an officer of

SFPUD, had initiated the harassment campaign indicates that Mr.

Englert is likely contending that SFPUD was acting through Mr.

Holmes when it refused to return the property. Even if the

allegation is not that Mr. Holmes refused to return the property,

the allegation, if true, tends to show, and may even logically

necessitate, that an Insured committed a wrongful act. In any

event, Clarendon must prove that, based on the information

tendered, conduct on which the Underlying Complaint is based

cannot possibly give rise to covered liability. The Underlying

Complaint raises the possibility that an Insured, and not simply

SFPUD, committed a wrongful act giving rise to the tort of

conversion. 

3. Failure to “Advise” or Request Reconsideration

Clarendon further contends that SFPUD “never advised”

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Clarendon that a claim for conversion triggered its duty to

defend and did not “seek reconsideration” of Clarendon’s denial

on this basis. Clarendon’s Opp’n 35:12-18. SFPUD’s role in

determining whether a potential coverage triggers a duty to

defend ends when it submits materials demonstrating a potential

for coverage. See Montrose, 6 Cal. 4th at 295-96. Any failure

of SFPUD to guide Clarendon in Clarendon’s interpretation of

those materials does not impair SFPUD’s right to a defense in the

case that the tendered materials demonstrate a potential for

covered liability.

The insurer determines at the inception of the third party

lawsuit whether the duty to defend exists “by reference to the

policy, the complaint and all facts known to the insurer from any

source.” Safeco Ins. Co. of Am. v. Parks (Parks), 122 Cal. App.

4th 779, 791 (2004) (quoting Gray, 65 Cal. 2d at 300) (emphasis

in original). “The risk that an insurer takes when it denies

coverage without investigation is that the insured may later be

able to prove that a reasonable investigation would have

uncovered evidence to establish coverage or a potential for

coverage.” Am. Int’l. Bank v. Fid. & Deposit Co., 49 Cal. App.

4th 1558, 1571 (1996). The only duty that California courts

place on the insured is to tender to the insurer the complaint

and any extrinsic facts that show a potential for coverage. 

Montrose, 6 Cal. 4th at 295. Doing so triggers the duty to

defend until “it has been shown that there is no potential for

coverage.” Id. (emphasis in original).

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Forcing the insurer, rather than the insured, to perform the

legwork of thoroughly examining the tendered evidence, underlying

complaint, and policy comports with the relative expertise of the

parties and with the policy behind the duty to defend. The

insurer is likely more familiar with the law concerning coverage

and is undoubtedly more familiar with the terms of the policy. 

This puts the insurer in a better position than the insured to

determine how the underlying complaint or tendered materials may

trigger the potential for coverage. Moreover, requiring the

insured to correctly interpret the manner in which the complaint

and extrinsic evidence might trigger coverage under the policy

practically necessitates that the insured retain legal counsel

for this purpose. This necessity undermines the insured’s

“significant” motive for purchasing insurance: “the right to

call upon the insurer’s superior resources” to ameliorate

potential legal expenses. See Montrose, 6 Cal. 4th at 295-96.

Accordingly, SFPUD’s failure to advise Clarendon that Mr.

Englert made a claim for conversion or to request reconsideration

of Clarendon’s denial on that basis does not affect Clarendon’s

duty to defend. 

4. Duty to Defend Unpled Claims

Clarendon argues that the absence of a claim for conversion

in the Underlying Complaint militates against a finding that

SFPUD potentially faced covered liability for such a claim. 

Clarendon asserts that it is not required to speculate about

claims that Mr. Englert did not plead. In support, Clarendon

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cites Gunderson v. Fire Insurance Exchange (Gunderson), 37 Cal.

App. 4th 1106, 1114 (1995).

At issue in Gunderson was whether the insured had

established a potential for covered liability under a policy

covering “property damage,” defined as “physical injury to or

destruction of tangible property, including loss of its use.” 

Id. at 1115. The complaint featured no claims for property

damage but merely sought injunctive and declaratory relief

regarding an easement. Id. The insured contended that certain

extrinsic evidence, including a series of letters to insured from

counsel for the underlying plaintiff and discovery requests in

the underlying case, demonstrated a potential coverage. Id. 

None of the extrinsic evidence was ever tendered to the insurer. 

Id. at 1117. The court rejected the insured’s argument that the

underlying plaintiff might have amended her complaint to state a

claim for property damage. Id. 

It does not appear that the court in Gunderson intended its

holding to contradict or question the well-established rule that

the insurer may be required to defend in circumstances where “the

complaint might be amended to give rise to a liability that would

be covered under the policy.” Montrose, 6 Cal. 4th at 299

(citing Gray, 65 Cal. 2d at 275-76). The court in Gunderson held

that “[a]n insured may not trigger the duty to defend by

speculating about extraneous ‘facts’ regarding potential

liability or ways in which the third party claimant might amend

its complaint at some future date.” Gunderson, 37 Cal. App. 4th

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at 1114 (emphasis added). This admonition is consistent with the

Supreme Court of California’s directive in Montrose that the

insurer need only consider the facts in the complaint and in any

other materials the insured tenders. 6 Cal. 4th at 295-96. 

Nothing in Gunderson relieves the insurer of its duty to defend a

lawsuit alleging facts that demonstrate a potential for liability

simply based on the causes of action the complaint contains. 

Here, as discussed above, the Underlying Complaint contains facts

that support a claim for conversion. The absence of a cause of

action labeled “conversion” does not affect Clarendon’s duty to

defend.

5. Insured-Versus-Government-Entity Exception

Clarendon contends that no potential for coverage existed

because Mr. Englert was an employee of SFPUD and, as such, his

claims were excluded under Policy Section I.2.V’s Insured-versusGovernment-Entity exclusion (“Exclusion V”).

SFPUD contends that the materials it tendered to Clarendon

in the letter of June 3, 2003, establish that Mr. Englert’s

claims triggered a duty to defend under the Policy based on his

potential status as an independent contractor.

The parties do not dispute that the Underlying Complaint

indicates that Mr. Englert was “employed” by SFPUD. SFPUD’s

Opp’n 21:4-6; see Clarendon’s RJN Ex. 1 at 3-4. Neither party

contends that this language is dispositive as to whether Mr.

Englert is an Insured, triggering Exclusion V. The terminology

in an agreement between a worker and the party for whom the work

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is performed “is not conclusive” as to the nature of their

relationship. See Kowalski v. Shell Oil Co., 23 Cal. 3d 168, 176

(1979). It follows that Mr. Englert’s unilateral

characterization of the relationship in the Underlying Complaint

is not determinative of his employment status. 

The parties vigorously dispute whether the materials

tendered along with the Underlying Complaint on June 3, 2003,

demonstrate that Exclusion V applies. SFPUD contends that the

tendered materials demonstrate that a possibility exists that Mr.

Englert was an independent contractor and therefore not an

Insured under Exclusion V. Clarendon does not argue that

Exclusion V would still apply in the case that Mr. Englert was an

independent contractor under California law.

The Supreme Court of California enumerated factors to

consider in determining whether an individual performing a

service is an employee or an independent contractor in S. G.

Borello & Sons, Inc. v. Department of Industrial Relations, 48

Cal. 3d 341 (1989). The most significant factor concerns whether

that individual has the right to control the details of his work. 

Id. at 350. The right of the party for whom the service is

performed to discharge the worker at will without cause is also

strong evidence of an employment relationship. Id. Additional

factors to consider include the following:

(a) whether the one performing services is

engaged in a distinct occupation or business;

(b) the kind of occupation, with reference to

whether, in the locality, the work is usually

done under the direction of the principal or

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by a specialist without supervision; (c) the

skill required in the particular occupation;

(d) whether the principal or the worker

supplies the instrumentalities, tools, and

the place of work for the person doing the

work; (e) the length of time for which the

services are to be performed; (f) the method

of payment, whether by the time or by the

job; (g) whether or not the work is a part of

the regular business of the principal; and

(h) whether or not the parties believe they

are creating the relationship of

employer-employee.

Id. at 351.

Under the Management Agreement (the “Agreement”), a copy of

which SFPUD tendered to Clarendon, ROI agreed with SFPUD to

manage the Riverbend Golf Club. Enns Decl. Ex. 1. The

Agreement, on page 45, is signed by Mr. Englert as “President” of

ROI. Id. The Agreement provides, on page 7, that ROI, as

Operator, with the approval of SFPUD “shall have the authority

and responsibility to . . . hire, train, and supervise the

general manager . . . .” Id. The Agreement also provides, on

pages 10 and 11, that ROI will submit for SFPUD’s approval an

“Annual Plan” including a budget that details employee

compensation. Id. The “Annual Plan” also included “[a]n

operating business plan for the Facility setting forth a

marketing and promotions plan, a schedule of proposed golf

charges, an operating schedule . . . and a maintenance plan.” 

Id.

The facts do not foreclose the possibility that Mr. Englert

was not an Insured under the Policy, but was instead an

independent contractor. The Agreement indicates that ROI, of

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which Mr. Englert was president, has a central role in

supervising the General Manager position that Mr. Englert held. 

ROI, not SFPUD, had primary responsibility for drafting the

Annual Plan governing compensation and business operations. 

These details signal a significant degree of autonomy from SFPUD

in the manner in which ROI and Mr. Englert carried out management

duties. 

The other materials that SFPUD originally tendered are not

as descriptive as the Agreement, but do tend to show that the

relationship between Mr. Englert and SFPUD paralleled the

relationship of ROI and SFPUD. The minutes of the SFPUD Special

Board Meeting on October 11, 2002, list as a single

“Consideration/action,” SFPUD’s “Termination of Riverbend

Operations, Inc., and David E. Englert as Interim General Manager

of the Sierra Foothills Public Utility District (‘SFPUD’).” Enns

Decl. Ex. 1. The notice to Mr. Englert that SFPUD was

terminating ROI’s services, dated October 11, 2002, and the

minutes from SFPUD’s Special Board Meeting held October 17, 2002,

also indicate that SFPUD viewed its relationship to Mr. Englert

as closely linked to its relationship to ROI. Enns Decl. Ex. 1. 

Since SFPUD prevails if it can merely “show that the

underlying claim may fall within policy coverage,” Clarendon

faces a difficult task at this stage. See Montrose, 6 Cal. 4th

at 300. Clarendon does not argue that the Underlying Complaint

and the other materials initially tendered foreclose the

possibility that Mr. Englert was an independent contractor. The

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strongest statement Clarendon makes about the materials initially

tendered is that “the totality of the circumstances was that

Englert was suing in his individual capacity as a former employee

of SFPUD.” Clarendon’s Opp’n 20:17-18. Such facts that merely

tend to show that SFPUD’s claim is not covered, without

foreclosing the possibility of coverage, have no weight in a

determination of duty to defend. See Montrose, 6 Cal. 4th at

300. 

Clarendon appears to place the burden on SFPUD to explicitly

enunciate the reason that the claims were potentially covered. 

Clarendon points out that SFPUD never told Clarendon that failing

to provide a defense “was improper because Englert was not an

employee of SFPUD.” Clarendon’s Opp’n 20:28-21:2. Clarendon

continues, “After the denial letter was sent, moreover, SFPUD

never requested reconsideration by CLARENDON informing CLARENDON

that the documents it provided in any way demonstrated Englert

was not its former employee as General Manager.” Clarendon’s

Opp’n 21:2-5. 

It appears that Clarendon would have the Court deny SFPUD

its defense, despite tendering facts that demonstrate the

possibility that Mr. Englert’s claims fell outside Exclusion V.

Clarendon does not cite, nor is the Court aware of, any authority

that requires an insured to assist the insurer in applying the

extrinsic evidence to the policy to determine whether coverage is

possible. Such a burden on the insured would be inconsistent

with the duty of an insurer to compare the claims in the

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complaint and any other facts before it with the terms of the

policy to determine whether coverage is appropriate. See Gray,

65 Cal. 2d at 276; Montrose, 6 Cal. 4th at 300. The Court

therefore finds it irrelevant that SFPUD did not assert that Mr.

Englert was an independent contractor rather than an employee at

the time of the initial tender or following Clarendon’s denial of

the defense. 

Clarendon argues that this case is analogous to Parks, where

a California Court of Appeal found that the evidence tendered to

the insurer did not trigger a duty to defend. 122 Cal. App. 4th

at 791. In that case, potential coverage, and consequently the

duty to defend, turned on whether the underlying defendant was an

insured by virtue of being a member of the policyholder’s

household. Id. at 784. No evidence was available to the insurer

indicating that the underlying defendant was a member of the

household. Id. at 793-94. 

Instead, the policyholder, the underlying defendant, and

another resident represented to the insurer and to law

enforcement that the underlying defendant was not a member of the

household. Id. at 792. The policyholder, the other resident,

and the underlying defendant did not disclose evidence tending to

show a familial relationship, such as evidence that the

policyholder disciplined the underlying defendant or provided her

with financial support. Id. at 793. The underlying defendant

listed the policyholder’s residence on her vehicle registration

and some tax documents, but no one informed the insurer of those

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facts. Id. at 792. Because the residents and the underlying

defendant presented a “united front” to the insurer in denying

her status a member of the household, the undisputed facts

established that the underlying defendant was not insured under

the policy. Id. at 793-94. Consequently, the insurer did not

have a duty to defend. Id. at 794. 

The initial tender in this case is distinguishable from that

in Parks. In Parks, all of the evidence tendered indicated that

the claims were undisputedly not covered by the policy. Id. at

794. In addition, the insured herself affirmatively asserted,

both to the insurer and to law enforcement, that no facts that

might trigger coverage existed. Id. at 792. Here, SFPUD merely

tendered to Clarendon evidence that described Mr. Englert’s

claims and his relationship to SFPUD. See Enns Decl. Ex. 1. At

the time of tender, SFPUD did not attempt to characterize Mr.

Englert as an employee or as an independent contractor. It

merely left that determination, and the determination of

potential coverage, up to Clarendon. 

In this case, the evidence of coverage was not one-sided as

it was in Parks. Here, the determination of whether Mr. Englert

was an employee and hence was an Insured appears to require a

complex analysis of a variety of facts. See S. G. Borello, 48

Cal. 3d at 351. Evidence that SFPUD tendered indicated that

primary responsibility for supervising Mr. Englert and

determining the manner in which he carried out his duties may

have fallen to ROI, a company of which Mr. Englert was president,

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SFPUD asserts that Clarendon’s investigation of the claim was 3

inadequate because it failed to obtain and consider in its denial

certain correspondence mentioned in the Underlying Complaint or

consider Mr. Englert’s Internal Revenue Service Form 1099. SFPUD

also contended that communications it sent after June 3, 2003,

indicate that Clarendon had a duty to defend. Additionally, SFPUD

claims that it potentially faced covered liability for claims based

on wrongful termination and invasion of privacy. Because the Court

29

rather than to SFPUD. These facts indicated that the most

significant factor in determining independent contractor status,

that is, whether an individual has the right to control the

details of his work, might weigh against a decision that Mr.

Englert was an employee. Id. at 350. Nevertheless, Clarendon

denied SFPUD a defense on the basis that Mr. Englert was an

employee. In effect, this denial amounted to Clarendon’s

assertion that, based on the evidence before it, Mr. Englert

could not possibly be an independent contractor. The evidence

SFPUD initially tendered at least signaled a possibility that Mr.

Englert was an independent contractor and, as such, not subject

to Exclusion V. The Court finds that, as a matter of law,

Clarendon’s decision that the materials tendered did not indicate

a possibility that Mr. Englert was an independent contractor was

incorrect. Accordingly, a claim of conversion by Mr. Englert can

trigger Clarendon’s duty to defend notwithstanding Exclusion V.

Because the Underlying Complaint and the other materials

tendered establish that SFPUD potentially faced covered liability

for conversion based on Mr. Englert’s claims, the Court finds, as

a matter of law, that Clarendon had a duty to defend SFPUD as of

the tender of June 3, 2003.3

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finds that the materials SFPUD tendered on June 3, 2003, establish

a potential for coverage of a claim for conversion as a matter of

law, it need not consider other arguments in favor of the potential

for coverage. Furthermore, because none of the evidence to which

Clarendon objects bears on the Court’s findings, the Court need not

decide the merits of the objections.

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V. Clarendon’s Motion for Summary Judgment 

Clarendon seeks summary adjudication that Clarendon did not

have a duty to defend SFPUD against Mr. Englert’s claim as of

June 3, 2003. Clarendon also sought summary judgment on SFPUD’s

breach of contract, bad faith, and fraud claims, based on the

absence of its duty to defend. SFPUD has shown that Clarendon

had a duty to defend as a matter of law. Accordingly,

Clarendon’s motion for summary judgment is denied. 

ACCORDINGLY:

1. SFPUD’s Motion for Partial Summary Judgment as to the Issue

of Clarendon’s Duty to Defend is GRANTED.

2. Clarendon’s Motion for Summary Judgment is DENIED.

IT IS SO ORDERED.

Dated: May 16, 2006 /s/ Robert E. Coyle 

810ha4 UNITED STATES DISTRICT JUDGE

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