Jacobs v. Liberty Surplus Ins. Corp.

SCOTT CROCKER JACOBS, Plaintiff, v. LIBERTY SURPLUS INSURANCE CORPORATION, Defendant.

No. 3:21-cv-01687-WHO

United States District Court, N.D. California

September 17, 2021

ORDER ON MOTION TO DISMISS RE: DKT. NO. 28

Willi am H. Orrick, United States District Judge

Plaintiff Scott Jacobs was the trustee for, and a beneficiary of, a trust. He purchased a professional liability insurance policy from defendant Liberty Surplus Insurance Corporation (“Liberty”). Other beneficiaries sued Jacobs in state court; they alleged that he abused his position as trustee and sought, among other things, penalties and his removal. Jacobs eventually paid a settlement and attorney's fees. He alleges that Liberty was obligated to defend him against suit and pay the costs; its failure to do so, he claims, breached the contract and violated the covenant of good faith and fair dealing. Liberty moves to dismiss because, it argues, the policy did not obligate it to do either. The motion is denied. Liberty's arguments for why the Policy does not, on its face, cover the suit are mostly unpersuasive. One argument, about whether any exclusions apply, may persuade later, but the dispute is not sufficiently developed to resolve on the pleadings and briefing to date. Dismissal is not warranted on that basis now.

BACKGROUND

Jacobs a citizen of California, is and was the trustee of a trust for Justin Jacobs, Jr. (the “Trust”). Complaint (“Compl.”) [Dkt. No. 1] ¶ 1. Liberty is alleged to maintain its principal place of business in Massachusetts or New Hampshire. Id. ¶ 2. It issued a professional liability insurance policy to Jacobs (through a now-dismissed defendant, see Dkt. No. 35) that covered December 27, 2017, to December 27, 2018. Compl ¶ 9; see also Dkt. No. 28-2 at 58-76 (“Policy”).^[1]

As a general matter, the Policy provided,

The Company will pay on behalf of the Insured all sums in excess of the Deductible amount stated in the Declarations which the Insured shall become legally obligated to pay as Damages and Claims Expenses resulting from Claims first made against the Insured during the Policy Period, or Extended Reporting Period, if applicable, as a result of a Wrongful Act by the Insured or any Entity for whom the Insured is legally liable, provided that:

(1) such Wrongful Act was committed on or after the Retroactive Date and before the end of the Policy Period; and

(2) prior to the Knowledge Date stated in the Declarations of this Policy, the Insured did not know or could not have reasonably expected that such Wrongful Act might give rise to a Claim.

Policy at 61. It also provided that Liberty “has the sole right to appoint defense counsel and the right and duty to defend any Claim made against the Insured.” Id. It said that “[t]he Insured shall not admit or assume liability for any Wrongful Act, or settle any Claim, or incur any expenses including Claims Expenses, without the written consent of the Company.” Id.

It defined a “Claim” to mean “receipt of a civil action, suit, proceeding, written monetary demand or written demand naming the Insured seeking Damages and / or Professional Services and/or nonmonetary relief including an injunction arising out of a Wrongful Act by the Insured or any Entity for whom the Insured is legally liable.” Id. at 63. “Claims expenses” was defined to include “[r]easonable and necessary fees charged by an attorney(s) designated by the Company, or designated by the Insured with the Company's written consent, to defend a Claim.” Id. “Damages” was defined as “a compensatory monetary amount for which the Insured may be held legally liable, including judgments (inclusive of any pre- or post-judgment interest), awards, or settlements negotiated with the approval of the Company.” Id. A “Wrongful Act” was defined as “any actual or alleged act, error, omission, misstatement, misleading statement, neglect, or breach of duty, or Personal Injury in the rendering of or failure to render Professional Services.” Id. at 66. “Professional Services, ” in turn were “those services specified in Item 7 of the Declarations which are provided by the Insured to a third party for a monetary fee; or as otherwise defined by endorsement to this Policy.” Id. at 65. Finally, the Policy had various exclusions; those that Liberty argues are relevant are discussed below.

On October 31, 2018, a beneficiary of the Trust, Garret Winston Jacobs, filed a petition to remove Jacobs as trustee, compel an accounting, appoint a successor trustee, and for attorney's fees in Santa Clara Superior Court (the “Petition”). Compl. ¶ 12; see also Dkt. No. 28-2 at 2-57 (“Pet.”).^[2] It was captioned “In the Matter of Justin Jacobs, Jr., Trust Dated June 7, 2013.” Pet. at 2. As a general matter, it sought removal of Jacobs as a trustee for alleged breaches of his fiduciary duties. See Id. at 3, 5-11. It also sought for Jacobs to be “personally liable” or liable “in his individual capacity” for beneficiary costs and attorney's fees associated with the petition. Id. at 13, 14.

Jacobs alleges that he timely tendered the Petition to Liberty, which acknowledged receipt and opened a file. Compl. ¶ 14. But Liberty did not defend him against the Petition. He paid for his own defense. Id. ¶ 15. He claims that he kept Liberty informed of developments in the litigation and that Liberty requested updates. Id. According to him, it “never objected to any of the work defense counsel performed” or to “defense counsel's rates or any fees or costs plaintiff incurred defending against the Petition.” Id. The litigation settled in January 2020. Id. Jacobs alleges that “$400, 000 was paid to Garrett Winston Jacobs, to his attorneys, and to attorneys representing [another beneficiary].” Id. Jacobs claims that the fees and costs “exceeded $300, 000.” Id. He demanded that Liberty reimburse him for attorney's fees and settlement expenditures; Liberty denied the coverage in May 2020. Id. ¶ 16.

Jacobs filed suit in this court in March 2021, alleging breach of contract; violation of the covenant of good faith and fair dealing; negligence; and violation of California's Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200. After the parties stipulated to extending the time to respond, Liberty moved to dismiss in July 2021. See Motion to Dismiss (“Mot.”) [Dkt. No. 28].

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when the plaintiff pleads facts that “allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. While courts do not require “heightened fact pleading of specifics, ” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” See Twombly, 550 U.S. at 555, 570.

In deciding whether the plaintiff has stated a claim upon which relief can be granted, the Court accepts the plaintiff's allegations as true and draws all reasonable inferences in favor of the plaintiff. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” See In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

If the court dismisses the complaint, it “should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” See Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). In making this determination, the court should consider factors such as “the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment.” See Moore v. Kayport Package Express, 885 F.2d 531, 538 (9th Cir. 1989).

DISCUSSION

Liberty moves to dismiss all claims because, it argues, the Policy did not require it to defend Jacobs against the Petition. See generally Mot.^[3]

I.BREACH OF CONTRACT

The first claim alleges that Liberty breached its contractual commitments under the Policy by failing to defend against the Petition and indemnify Jacobs. See Compl. ¶¶ 17-33.

“Interpretation of a contract is a matter of law.” Beck Park Apartments v. U.S. Dep't of Hous. & Urban Dev. 695 F.2d 366, 369 (9th Cir. 1982). The correct interpretation is the one that gives effect to the “mutual intention” of the parties. Waller v. Truck Ins Exch., Inc., 11 Cal.4th 1, 18 (1995), as modified on denial of reh'g (Oct. 26, 1995) (citing Cal. Civ. Code § 1636). The starting point for this analysis is always the language of contract itself. Id. “A written contract must be read as a whole and every part interpreted with reference to the whole, with preference given to reasonable interpretations.” Pauma Band of Luiseno Mission Indians of Pauma & Yuima Reservation v. California, 813 F.3d 1155, 1170 (9th Cir. 2015). “An interpretation which gives effect to all provisions of the contract is preferred to one which renders part of the writing superfluous, useless or inexplicable.” Id. at 1171 (internal quotation marks omitted).“Interpretation of a contract must be fair and reasonable, not leading to absurd conclusions.” ...