Cal. Capital Ins. Co. v. Maiden Reinsurance N. Am., Inc.

472 F.Supp.3d 754

CALIFORNIA CAPITAL INSURANCE COMPANY, et al., Plaintiffs,

v.MAIDEN REINSURANCE NORTH AMERICA, INC., et al., Defendants.

Case No. 2:20-cv-01264-ODW (JPRx)

United States District Court, C.D. California.

Signed July 16, 2020

Jeffrey G. Huron, Cory Lynn Webster, Scott S. Pressman, Dykema Gossett LLP, Los Angeles, CA, for Plaintiffs.

Michael A. Barnes, Andrea Meghan Hall, Dentons US LLP, San Francisco, CA, for Defendants.

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS AND GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO STRIKE [11]

OTIS D. WRIGHT, II, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Defendant Maiden Reinsurance North America, Inc. ("MRNA") moves to dismiss Plaintiffs California Capital Insurance Company, Eagle West Insurance Company, Monterey Insurance Company, and Nevada Capital Insurance Company's (collectively, "CIG") second cause of action for breach of the covenant of good faith and fair dealing. Alternatively, MRNA moves to strike CIG's second cause of action including the request for attorneys’ fees and statutory penalties. For the reasons that follow, the Court GRANTS MRNA's Motion to Dismiss and GRANTS in part and DENIES in part MRNA's Motion to Strike.¹

II. BACKGROUND

From 2006 through 2016, MRNA reinsured CIG, and in 2012, the insurance companies formalized their agreement by signing a Multiple Line Excess of Loss Reinsurance Agreement, which delineates the terms of the reinsurance. (Notice of Removal Ex. A ("Compl.") ¶ 11, ECF No. 1-3.) In 2018, Enstar Insurance Company ("Enstar"), which purchases failing insurance companies, purchased MRNA. (Compl. ¶ 12.)

After Enstar acquired MRNA, CIG alleges MRNA began fabricating reinsurance coverage disputes as to livery, trucking, and habitability claims. (Compl. ¶¶ 5, 12–23.) For example, MRNA allegedly refused to pay valid claims it had previously agreed to pay under the livery program, failed to reimburse CIG for livery losses covered under the reinsurance contract, altered its treatment of habitability claims minimizing its reinsurance obligation, and demanded return of reinsurance payments MRNA had previously made for livery claims, trucking losses, and habitability claims. (Compl. ¶¶ 14–23.)

As a result of these changes, CIG filing suit against MRNA for breach of contract and breach of the implied covenant of good faith and fair dealing. (Compl. ¶¶ 24–40.) As for the second cause of action, CIG alleges MRNA failed to reimburse CIG according to the reinsurance contract, unreasonably rejected CIG and MRNA's original intent and mutual understanding of the terms of the reinsurance contract, failed to conduct appropriate investigations, and wrongfully and unreasonably delayed payment of valid claims. (Compl. ¶ 34.) CIG alleges it has sustained damages as a direct and proximate cause of MRNA's breach and seeks interest at the legal rate, attorneys’ fees, and statutory penalties according to applicable state law. (Compl. ¶ 36.)

On December 23, 2019, CIG filed a Complaint in Los Angeles County Superior Court, which MRNA removed under diversity jurisdiction on February 7, 2020. (See Compl.; Notice of Removal, ECF No. 1.) On March 2, 2020, MRNA moved to dismiss CIG's second cause of action for breach of the covenant of good faith and fair dealing, or alternatively, strike CIG's second cause of action. (See Mot. to Dismiss and Strike ("Mot."), ECF No. 11.)

III. MOTION TO DISMISS

A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable legal theory or insufficient facts pleaded to support an otherwise cognizable legal theory. Balistreri v. Pacifica Police Dep't , 901 F.2d 696, 699 (9th Cir. 1988). "To survive a motion to dismiss ... under Rule 12(b)(6), a complaint generally must satisfy only the minimal notice pleading requirements of Rule 8(a)(2)"—a short and plain statement of the claim. Porter v. Jones , 319 F.3d 483, 494 (9th Cir. 2003) ; see also Fed. R. Civ. P. 8(a)(2). The "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The "complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted). "A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’ " Id. (citing Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ).

Whether a complaint satisfies the plausibility standard is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679, 129 S.Ct. 1937. A court is generally limited to the pleadings and must construe all "factual allegations set forth in the complaint ... as true and ... in the light most favorable" to the plaintiff. Lee v. City of Los Angeles , 250 F.3d 668, 679 (9th Cir. 2001). But a court need not blindly accept conclusory allegations, unwarranted deductions of fact, and unreasonable inferences. Sprewell v. Golden State Warriors , 266 F.3d 979, 988 (9th Cir. 2001). A court may not "supply essential elements of the claim that were not initially pled." Pena v. Gardner , 976 F.2d 469, 471 (9th Cir. 1992).

A. Discussion

MRNA contends that CIG's second cause of action should be dismissed because reinsureds may not recover tort damages in California for breach of the covenant of good faith and fair dealing. (Mot. 1.) CIG argues that because reinsurance is a form of insurance, tort remedies should be available in the reinsurance context. (Opp'n to Mot. ("Opp'n") 6–7, ECF No. 14.) MRNA counters that the relationship between a reinsurer-reinsured is fundamentally different from that of an insurer-insured, and thus should not be subject to liability in tort. (See Mot. 3–8)

The Supreme Court of California has yet to address this issue, and there is no controlling California Court of Appeal authority on point. In the absence of precedent, the Court must predict and apply the rule it believes the California Supreme Court would adopt under the circumstances. Wyler Summit P'ship v. Turner Broad. Sys., Inc. , 135 F.3d 658, 663 n.10 (9th Cir. 1998). Consequently, the Court will consider the circumstances in which the California Supreme Court has imposed tort liability in contractual relationships and the policy reasons for extending tort liability to insurance contracts.

1. California Supreme Court Treatment

To determine whether California's high court would impose tort liability in a reinsurance contract, the Court considers the circumstances in which California courts have imposed, or declined to impose, such liability in the past. Although the California Supreme Court has yet to decide this issue, it has consistently limited tort recovery for breach of the covenant of good faith and fair dealing and cautioned courts from extending the recovery of tort damages to other contract contexts. Cates Constr., Inc. v. Talbot Partners , 21 Cal. 4th 28, 44, 86 Cal.Rptr.2d 855, 980 P.2d 407 (1999) ; see, e.g. , Erlich v. Menezes , 21 Cal. 4th 543, 548, 87 Cal.Rptr.2d 886, 981 P.2d 978 (1999) (denying recovery of tort damages in negligent breach of a contract to build a house); Foley v. Interactive Data Corp. , 47 Cal. 3d 654, 654, 254 Cal.Rptr. 211, 765 P.2d 373 (1988) (holding that tort damages are not available for breach of an employment contract). "Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate social policy." Foley , 47 Cal. 3d at 683, 254 Cal.Rptr. 211, 765 P.2d 373 (internal quotation marks omitted).

The covenant of good faith and fair dealing is a contract term that "has almost always been limited to contract rather than tort remedies," except in cases that involve insurance contracts. Id. at 684, 254 Cal.Rptr. 211, 765 P.2d 373. Although this exception was "a major departure from traditional principles of contract law," California's high court has permitted tort recovery for breach of the implied covenant in the insurance context for various policy reasons. Id. at 684–90, 254 Cal.Rptr. 211, 765 P.2d 373. Specifically, it has considered how insurance policies are unique when compared to contracts for goods or services because they are quasi-public and "characterized by elements of adhesion, public interest and fiduciary responsibility." Cates , 21 Cal. 4th at 44, 86 Cal.Rptr.2d 855, 980 P.2d 407.

CIG argues that because reinsurance is a type of insurance, tort damages are automatically available for a breach of the implied covenant. (Opp'n 6.) The Court is not persuaded. Although reinsurance is a type of insurance, CIG fails to consider the significant differences between the two relationships. In Cates , the California Supreme Court rejected the very argument that tort damages were available where there was a breach of the implied covenant in every insurance context. 21 Cal. 4th at 52, 86 Cal.Rptr.2d 855, 980 P.2d 407. It held that tort damages could not be recovered for a breach of the implied covenant in a surety bond, even though a surety bond is a type of insurance mentioned in the California Insurance Code. Id. at 52, 60, 86 Cal.Rptr.2d 855, 980 P.2d 407. To reach this conclusion, the California Supreme Court considered the relationship between the parties in surety arrangements and determined that those parties "have certain rights and defenses that ... typical insurance relationships" simply do not share. Id. at 48, 86 Cal.Rptr.2d 855, 980 P.2d 407. The court looked at the relationship between the parties to "evaluate whether the policy considerations recognized in the common law support the availability of tort remedies in the context of a performance bond." Id. at 52–56, 86 Cal.Rptr.2d 855, 980 P.2d 407.

Because the California Supreme Court has consistently limited tort recovery for...