State Nat'l Ins. Co. v. Khatri, C 13-00433 LB

STATE NATIONAL INSURANCE COMPANY, Plaintiff, v. PRADEEP KANTILAL KHATRI, et al., Defendants.

No. C 13-00433 LB

UNITED STATES DISTRICT COURT Northern District of California San Francisco Division

Dated: September 13, 2013

ORDER GRANTING IN PART AND

DENYING IN PART DEFENDANTS'

MOTION TO DISMISS PLAINTIFF'S

FIRST AMENDED COMPLAINT

[Re: ECF No. 19]

INTRODUCTION

Plaintiff State National Insurance Company ("State National") filed this action against Pradeep Kantilal Khatri and VNS Hotels, Inc. ("VNS") (collectively, "Defendants") seeking reimbursement of defense fees and costs incurred and indemnity of payments made in relation to a state court action in which State National defended Defendants and ultimately settled with the state court plaintiffs. See generally Complaint, ECF No. 1.¹ Defendants move to dismiss State National's First Amended Complaint. Motion to Dismiss FAC, ECF Nos. 19 & 19-1. Pursuant to Civil Local Rule 7-1(b), the court finds these matters suitable for determination without oral arguments and vacates the September 19, 2013 hearing. Upon consideration of the applicable authority, the parties' arguments, and the record in this case, the court GRANTS IN PART and DENIES IN PART Defendants'motion.

STATEMENT

State National provided coverage to Defendants under a Commercial General Liability Policy (the "Policy") for the period August 19, 2009 to August 19, 2010 (the "Coverage Period"). FAC, ECF No. 17 ¶ 12, Exh. A (Policy). The Policy names VNS as the "First Insured" and Mr. Khatri is an "Additional Insured," Policy, ECF No. 17 at 17; id., ECF No. 17-1 at 30, and it contains liability coverage for "Advertising Injury," "Bodily Injury," "Personal Injury," and "Property Damage," id., ECF No. 17-1 at 25-29. "Advertising Injury" includes "injury arising out of . . . [o]ral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services." Id., ECF No. 17-1 at 33. "Bodily Injury" "means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time." Id., ECF No. 17-1 at 33. "Personal Injury" includes "injury, other than 'bodily injury, arising out of . . . [o]ral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services." Id., ECF No. 17-1 at 35. And "Property Damage" means "[p]hysical injury to tangible property, including resulting loss of use of that property," as well as "[l]oss of use of tangible property that is not physically injured." Id., ECF No. 17-1 at 36. The Policy also states that it "applies to 'bodily injury' and 'property damage' only if: (1) [t]he 'bodily damage' or 'property damage' is caused by an 'occurrence' . . . ." Id., ECF No. 17-1 at 25. An "occurrence," in turn, is defined as "an accident including continuous or repeated exposure to substantially the same general harmful conditions." Id., ECF No. 17-1 at 35. The Policy also includes an "Employment-Related Practices Exclusion" that excludes from coverage an employee's "'personal injury' arising out of . . . coercion . . . [or] defamation." Id., ECF No. 17-2 at 3.

With the Policy's relevant terms stated, the court now turns to the alleged events. On June 23, 2011, Veena and Arjun Mackrani (collectively, the "Mackranis") filed a complaint against Defendants in San Mateo County Superior Court arising out of conduct that allegedly occurred in part within the Coverage Period (the "Mackrani Action"). Id., ECF No. 17 ¶ 13, Exh. B (the "Mackrani Complaint"). They alleged claims for: (1) Non-payment of Wages, (2) Waiting TimePenalties, (3) Interference with Employment by Misrepresentation, (4) Defamation by Slander Per Se, (5) Unfair Business Practices, (6) Assault, (7) Battery, (8) False Imprisonment, (9) Intentional Infliction of Emotional Distress, and (10) Negligent Infliction of Emotional Distress. Mackrani Complaint, ECF No. 17-2 ¶¶ 4-69. On July 19, 2011, Defendants' counsel tendered the defense and indemnification of the Mackrani Action to State National and demanded that their personally-retained counsel represent them pursuant to California Civil Code § 2860. FAC, ECF No. 17 ¶ 14. On August 24, 2011, State National agreed to defend the Mackrani Action under a reservation of rights to seek reimbursement of attorney's fees, costs, and expenses and to seek indemnification "of claims that are not potentially covered under the policy." Id., ECF No. 17 ¶ 15. State National also agreed to Defendants' designation of counsel under Civil Code § 2860. Id. Pursuant to Civil Code § 1860, State National asked Defendants and their counsel to provide reports to it "advising it of information learned during discovery and investigation in the Mackrani [Action], which is necessary to permit State National to evaluate [Defendants'] liability and damages exposure . . . ." Id., ECF No. 17 ¶ 16.

In August 2012, Defendants notified State National of an upcoming mediation—it was scheduled to take place in September 2012—in the Mackrani Action. Id., ECF No. 17 ¶ 17. State National participated in the mediation. Id. At the mediation, Defendants "demanded that [State National] fully indemnify in full and final settlement of the [Mackrani Action]." Id. The mediation resulted in a two-pronged Mediator's Proposal, "which required the parties to (1) agree to a full and final settlement of the [Mackrani Action] for $125,000; and (2) for [D]efendants to mutually release all claims that may have against the Mackranis." Id. "The proposed mutual release," State National alleges, "was an agreement separate from the proposed settlement of the [Mackrani Action], but was material to the Mackranis' acceptance of the settlement of their complaint against [D]efendants." Id., ECF No. 17 ¶ 18.

Defendants "agreed [that] the Mediator's Proposal was a reasonable settlement of the [Mackrani Action]," and they also agreed "to mutually release the Mackranis' from any and all future claims [they] may have against the Mackranis." Id., ECF No. 17 ¶ 19. Defendants also demanded that StateNational "fund the entire Mediator's Proposal in settlement of the [Mackrani Action] for $125,000," and "threatened to sue State National for tortious breach of [the Policy] if [it] did not fund the entire settlement of the claims [D]efendants admitted were not covered by [the Policy]." Id. State National alleges that Mackranis and Defendants both accepted the Mediator's Proposal, but Defendants "refused to contribute to settle claims [D]efendants admitted were not covered under the [P]olicy." Id., ECF No. 17 ¶ 20.

On September 28, 2012, "hours before the Mediator's Proposal was to expire, and in the face of [D]efendants' acceptance of both prongs of the Mediator's Proposal," State National "agreed to fund the entire $125,000 in settlement of the [Mackrani Action] under a strict reservation of rights to seek reimbursement from [D]efendants for moneys it paid to defend a claim not potentially covered under the [P]olicy and to indemnify claims not actually covered under the [P]olicy." Id., ECF No. 17 ¶ 21. State National agreed to do so even though Defendants continued to refuse to contribute to the settlement amount. Id.

Thereafter, the Mackranis' counsel and Defendants' counsel mutually drafted a written settlement agreement (which included Defendants' release of all claims they may have against the Mackranis), but only the Mackranis signed it. Id., ECF No. 17 ¶ 22. Nevertheless, State National alleges that Defendants "performed the settlement agreement b demanding that State National forward the $125,000 settlement payment to the Mackranis." Id., ECF No. 17 ¶ 23. Defendants also filed a Notice of Settlement of the Mackrani Action in the Superior Court. Id.

On October 22, 2012, State National "complied with [D]efendants' demand and transmitted the $125,000 [in] settlement funds to the Mackranis' attorney in full and final settlement of the [Mackrani Action] under the reservation of rights to seek reimbursement." Id., ECF No. 17 ¶ 24. By November 27, 2012, "the Mackranis had not received the settlement agreement with [D]efendants' signatures and notified State National and [D]efendants that they would void the settlement" if they did not receive a fully executed copy with Defendants' signatures on it by December 4, 2012. Id., ECF No. 17 ¶ 25. On November 30, 2012, Defendants "notified State National that they would not sign their agreement to mutually release the Mackranis because State National was reserving its right to seek reimbursement." Id., ECF No. 17 ¶ 25. On December 3,2012, State National "notified [D]efendants that they should assume their own defense if they did not want State National to settle the [Mackrani Action] under [its] express right to reimbursement." Id., ECF No. 17 ¶ 27. Defendants did not assume their own defense and instead "repudiated" their "separate agreement to release the Mackranis from all claims." Id. Following this repudiation, the Mackranis nevertheless "agreed to accept $125,000 to settle all claims in [the Mackrani Action] against [D]efendants." Id. And on December 6, 2012, State National "consented to the Mackranis' execution of its $125,000 payment in full and final settlement of the [Mackrani Action] under a strict reservation of rights to seek reimbursement from [D]efendants." Id., ECF No. 17 ¶ 28. The Mackranis "allocated" the $125,000 as follows: $60,000 for attorney's fees; $20,000 for compensation for unpaid wages; $39,000 for emotional distress damages for assault and loss of consortium; and $6,000 for civil penalties. Id., ECF No. 17 ¶ 29.

Thereafter, State National alleges that the Mackranis said they would sue Defendants for their breach of their release of all claims they may have against the Mackranis. Id., ECF No. 17 ¶ 31. "[T]o settle their inchoate claim," the Mackranis demanded $50,000. Id. So, on December 11, 2012...