Swanbom v. Travelers Commercial Ins. Co.

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JOEL SWANBOM, et al., Plaintiffs, v. TRAVELERS COMMERCIAL INSURANCE COMPANY, Defendant.

No. 1:24 -cv-00171-KES-SAB

United States District Court, E.D. California

June 6, 2024

AMENDED FINDINGS AND RECOMMENDATIONS RECOMMENDING GRANTING DEFENDANT TRAVELERS COMMERCIAL INSURANCE COMPANY'S MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM WITH LEAVE TO AMEND

(ECF NOS. 11, 14, 15)

OBJECTIONS DUE WITHIN FOURTEEN (14) DAYS

Currently before the Court is Travelers Commercial Insurance Company's (“hereafter Defendant”) motion to dismiss Joel Swanbom and Katie Swanbom's (hereafter “Plaintiffs”) complaint with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). The matter was referred to the undersigned pursuant to 28 U.S.C. § 636(b)(1)(B) and Local Rule 302. (ECF No. 12.)

The Court heard oral argument on May 22, 2024. (ECF No. 16.) Counsel Christian Garris appeared by video for Plaintiffs and counsel Kathleen Delaney appeared by video for Defendant. (Id.) Based on the moving, opposition, and reply papers, the information presented by counsel at the hearing held on May 22, 2024, and the Court's record, the Court recommends Defendant's motion to dismiss be granted.^[1]

I. FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs purchased a homeowner's policy from Defendant from around April 27, 2010, through March 15, 2018, on property they owned located at 7158 North Maine Avenue, Clovis, California (“the Maine policy”). (Compl. ¶ 1, ECF No. 1.) Around January 27, 2018, Plaintiffs sold the Maine property to The Servants and Handmaids of the Sacred Heart of Jesus, Mary and Joseph (hereafter “the Buyer”). Escrow closed on or about February 16, 2018. (Compl. ¶ 10.) Thereafter, Plaintiffs purchased property at 5421 East Butler Avenue, Fresno, California, and from February 22, 2018, Plaintiffs purchased a homeowner's policy from Defendant on that property (“the Butler policy”). (Compl. ¶¶ 1, 11.)

After the purchase, the Buyer notified Plaintiffs of damages they had suffered at the Maine property. Plaintiffs promptly tendered the claim to Defendant. (Compl. ¶ 14.) Around October 23, 2018, Defendant acknowledged receipt of the tendered claim. (Compl. ¶ 15.) On or about July 16, 2020, the Buyer filed a complaint against Plaintiffs in Fresno County Superior Court, case no. 20CECG02061 (“the underlying action”) alleging negligence and five additional causes of action. The Buyer alleged in part that they suffered ongoing physical harm to the Maine property including damage and loss of use during the Maine policy and Butler policy periods of coverage. (Compl. ¶ 16.)

About July 31, 2020, Defendant notified Plaintiffs that it was continuing to investigate the claim. (Compl. ¶ 17.) On August 28, 2020, the Buyer filed an amended complaint alleging that they paid $1.275 million for the Maine property and there were no disclosures from Plaintiffs regarding any draining or flood issues on the property, Plaintiffs had failed to disclose that a well on the property did not produce adequate amounts of water, physical damage to the property had occurred, and the Buyer had suffered a loss of use of a portion of the property. (Compl. ¶ 18.) The Buyer alleged that Plaintiffs had failed to properly maintain the Maine property and the failure to maintain the property led to destruction of the pool filter and resulting damage on May 5, 2018. (Compl. ¶ 19.)

Around September 2, 2020, Defendant denied Plaintiffs' claim, refusing to defend or indemnify Plaintiffs in the underlying action. (Compl. ¶ 20.) On or about May 25, 2021, Plaintiffs' retained counsel updated Defendant regarding the claim and requested reconsideration of the denial. (Compl. ¶ 21.) About June 15, 2021, Defendant denied the claim for reconsideration. (Compl. ¶ 22.)

Around May 2, 2023, the state court action was resolved when Plaintiffs settled the underlying action for $45,000 and the case was dismissed with prejudice on June 7, 2023. (Compl. ¶ 23.) Around July 5, 2023, Defendant notified Plaintiffs that it would not reimburse Plaintiffs for their defense costs or the money spent to settle the action. (Compl. ¶ 24.) Plaintiffs spent in excess of $271,380. in attorney fees and costs in defending the underlying action. (Compl. ¶ 25.)

Plaintiffs filed this action against Defendant on February 24, 2024, alleging breach of contract and breach of the covenant of good faith and fair dealing.^[2] On April 3, 2023, Defendant filed a motion to dismiss for failure to state a claim. (ECF No. 11.) On April 17, 2024, Plaintiffs filed an opposition to the motion to dismiss. (ECF No. 14.) On April 29, 2024, Defendants filed a reply. (ECF No. 15.)

II. LEGAL STANDARDS

A. Motion to Dismiss

Under Federal Rule of Civil Procedure (“Rule”) 12(b)(6), a party may file a motion to dismiss on the grounds that a complaint “fail[s] to state a claim upon which relief can be granted.” A motion to dismiss pursuant to Rule 12(b)(6) tests the legal sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In deciding a motion to dismiss, “[a]ll allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.” Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). The pleading standard under Rule 8 does not require “‘detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In assessing the sufficiency of a complaint, all well-pleaded factual allegations must be accepted as true. Iqbal, 556 U.S. at 678-79. However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 678. To avoid a dismissal under Rule 12(b)(6), a complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. In ruling on a motion to dismiss the court considers the allegations in the complaint, any attached exhibits, and matters properly subject to judicial notice pursuant to Federal Rule of Evidence 201. Akhtar v. Mesa, 698 F.3d 1202, 1212 (9th Cir. 2012); Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988); Granite Outlet, Inc. v. Hartford Cas. Ins. Co., 190 F.Supp.3d 976, 981 (E.D. Cal. 2016).

In deciding whether a complaint states a claim, the Ninth Circuit has found that two principles apply. First, to be entitled to the presumption of truth, the allegations in the complaint “may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). Second, so that it is not unfair to require the defendant to be subjected to the expenses associated with discovery and continued litigation, the factual allegations of the complaint, which are taken as true, must plausibly suggest an entitlement to relief. Id. “Dismissal is proper only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory.” Navarro, 250 F.3d at 732 (citing Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988)).

B. Relevant Insurance Law Principals

In this diversity action, the court must apply California law when interpreting the insurance policies. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Under California law, “interpretation of an insurance policy is a question of law that follows the general rules of contract interpretation.” TRB Invs., Inc. v. Fireman's Fund Ins. Co., 40 Cal.4th 19, 27 (2006); Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 1115 (1999); Dua v. Stillwater Ins. Co., 91 Cal.App.5th 127, 135-36 (2023), review denied (July 12, 2023). “While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.” Bank of the West v. Superior Ct., 2 Cal.4th 1254, 1264 (1992). The fundamental rules of contract interpretation are based on the premise that giving effect to the mutual intention of the parties at the time the contract was formed guides the interpretation of a contract. TRB Invs., Inc., 40 Cal.4th at 27 (citing Cal. Civ. Code § 1636); Bank of the West, 2 Cal.4th at 1264.

The California Civil Code provides that interpretation of the contract is to be governed by the language of the contract. Cal. Civ. Code § 1638. If possible, the intent of the parties is to be inferred solely from the written provisions of the contract. Id., § 1639. Judicial interpretation is controlled by the “clear and explicit” meaning of the provisions, id., § 1638, interpreted in their “ordinary and popular sense,” unless “used by the parties in a technical sense or a special meaning is given to them by usage,” id., § 1644.

The terms of the policy must be interpreted in context, giving effect “to every part” of the policy with “each clause helping to interpret the other,” with regard to the intended function of the policy. Bank of the West, 2 Cal.4th at 1264; Palmer, 21 Cal.4th at 1115. Further, insurance coverage is “interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] exclusionary clauses are interpreted narrowly against the insurer.” TRB Invs., Inc., 40 Cal.4th at 27 (quoting MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 647-648 (2003)). To ensure that the end result (coverage or noncoverage) conforms with the insured's objectively reasonable expectations, a broad construction is used to aid the insured in meeting his burden of proof. TRB Invs., Inc., 40 Cal.4th at...