Alvarez v. Insurance Co. of North America

• Decision Date: 04 August 1987
• Docket Number: No. C-86-6120-CAL.,C-86-6120-CAL.
• Citation: 667 F. Supp. 689
• Parties: Javier ALVAREZ, d/b/a Nueva Castilla Co., a partnership, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, et al., Defendants.
• Court: U.S. District Court — Northern District of California

667 F. Supp. 689

Javier ALVAREZ, d/b/a Nueva Castilla Co., a partnership, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, et al., Defendants.

No. C-86-6120-CAL.

United States District Court, N.D. California.

August 4, 1987.

Socrates Mamakos, San Francisco, Cal., for plaintiff.

Harry J. Levine, Charles J. Philipps, Adams, Philipps & Alexander, San Francisco, Cal., for defendants.

OPINION AND ORDER

LEGGE, District Judge.

This case involves the issue of whether the Miller Act, 40 U.S.C. § 270a et seq., preempts a state cause of action for unfair insurance practices under the California Insurance Code.¹

I.

Plaintiff Nueva Castilla was a subcontractor to Feinstein Construction, the bonded general contractor, on a federal construction project in California. Defendant Insurance Company of North America ("INA"), a Pennsylvania corporation, issued the Miller Act Bond covering the project.

Nueva Castilla sued Feinstein and INA to recover under the Miller Act bond and for bad faith under the California law. United States ex rel. Nueva Castilla Co. v. Feinstein Construction, et al., No. C-85-7125-CAL. This court dismissed the claim for bad faith, primarily on the ground that such relief was not available under the Miller Act. After an arbitration award, judgment on the Miller Act claim was then entered in favor of Nueva Castilla.

In response to the large number of claims against the Feinstein bond, INA filed an interpleader action in this court, Insurance Company of North America v. Nueva Castilla, No. C-86-0309-CAL, depositing the amount of its bond. Plaintiff and other subcontractors recovered only the pro rata shares of their claims in the interpleader action.

Plaintiff Nueva Castilla then reasserted its bad faith claim in an action in the Superior Court of California. INA properly removed that action to this court on the basis of diversity jurisdiction. Only this removed bad faith action, No. C-86-6120-CAL, is presently before the court.

The present complaint alleges that defendant INA is subject to the regulations of the California Insurance Code. Plaintiff charges that INA violated Cal. Ins. Code § 790.03 by failing to settle the claim in good faith when liability on the bond was clear. Specifically, plaintiff charges that INA failed to achieve a fair and equitable resolution of plaintiff's claim, failed to properly investigate the claim, falsely denied liability on the bond, asserted meritless defenses, and refused to respond, reasonably, promptly or adequately to plaintiff's inquiries and demands. See, Cal. Ins. Code § 790.03.

INA moves for summary judgment on three grounds. First, it argues that this bad faith action is barred by res judicata because of this court's earlier dismissal in C-85-7125-CAL. Next, INA contends that a Miller Act surety is not subject to regulation under the California Insurance Code. And finally, INA argues that plaintiff's cause of action under the state insurance regulations is preempted by the Miller Act. Both parties agree that there are no disputed issues of material fact. The court has reviewed the moving and opposing papers, the arguments of counsel, the record and the applicable authorities.

II.

INA contends that plaintiff's bad faith claim is barred by res judicata. The bad faith claim was previously before this court as a part of plaintiff's Miller Act suit in No. C-85-7125-CAL. INA now argues that Nueva Castilla is precluded here by this court's order dismissing that claim.

However, this court's dismissal was primarily on the ground that the state law relief was not available under the Miller Act. See, United States for the Use of Getz Bros. & Co. v. Markowitz Bros. (Delaware), Inc., 383 F.2d 595, 597-98 (9th Cir.1967) (state law may not be used to enlarge remedies of Miller Act) (discussed further infra). As no federal claim for bad faith could be stated, the court exercised its discretion to dismiss the state claim to the extent that it was also a pendent claim for relief under state law. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). This court did not resolve the merits of plaintiff's state claim.

III.

The issue in this motion is whether a Miller Act surety can be liable for alleged bad faith in its claims settlement practice, in violation of a state insurance code. This is a question of first impression. To resolve the question, the court must first decide whether California Insurance Code Section 790.03 applies to Miller Act surety companies. That question is decided under California law. If the code section applies to such surety companies, the court must then decide whether the Miller Act preempts such state regulation of Miller Act sureties. Preemption is a question of federal law.

IV.

Section 790 provides that the purpose of the "Unfair Practices" Article of the Insurance Code is to "regulate trade practices in the business of insurance". It does not explicitly include bonding or surety companies. But section 790.01 lists the insurance businesses to which the article does apply and concludes with the catchall: "as well as all other persons engaged in the business of insurance." Section 790.03 defines prohibited acts and practices "in the business of insurance." Thus, the statutory language of Sections 790.01 and 790.03 refers only to "the business of insurance." On its face, the statute does not apply to surety companies or surety bonds.

No California case discusses whether Miller Act sureties are in "the business of insurance", but a recent case did apply Section 790.03 to surety companies which issue construction bonds. General Insurance Company of America v. Mammoth Vista Owners Association, Inc., 174 Cal. App.3d 810, 220 Cal.Rptr. 291 (1985). To determine whether the surety was engaged in "the business of insurance" as that term is used by Sections 790.01 and 790.03, the General Insurance court considered the definition of "insurance" in the Insurance Code. See, Cal.Ins.Code §§ 22, 23, 100(5) and 105.² The court concluded

By plain and explicit language, the Legislature made suretyship a "class" of insurance subject to regulation under the code. For the purposes of the Insurance Code, one who issues surety bonds is in "the business of insurance" and subject to the provisions prohibiting unfair and deceptive practices.

Id. at 824, 220 Cal.Rptr. 291.

This court adopts the reasoning and holding of the General Insurance court to the effect that Section 790.03 applies to a surety on a construction bond. There is nothing in the language of the California statute, nor in the reasoning of the General Insurance court, to suggest that the same interpretation would not apply to bring a Miller Act surety within the reach of Section 790.03.

The court concludes that, under California law, surety companies which issue Miller Act bonds are subject to the regulations of California Insurance Code § 790.03.

V.

In determining whether the application of that state statute is preempted by the Miller Act, and thus invalid under the Supremacy Clause of the U.S. Constitution, the crucial inquiry is the intent of Congress. California Federal Savings and Loan Ass'n v. Guerra, ___ U.S. ___, 107 S.Ct. 683, 689, 93 L.Ed.2d 613 (1987); Louisiana Public Service Comm'n v. FCC, 476 U.S. 355, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986); Malone v. White Motor Corp., 435 U.S. 497, 504, 98 S.Ct. 1185, 1190, 55 L.Ed.2d 443 (1978).

Preemption may be found in several ways. First, Congress may preempt state laws by stating its desire to do so in express terms. See, e.g., Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 1309, 51 L.Ed.2d 604 (1977). The parties here do not dispute that Congress has not stated its express intention to preempt state insurance regulations with the Miller Act. Second, in the absence of express intent to preempt, preemption may still be inferred "where the scheme of federal regulation is sufficiently comprehensive to make reasonable the inference that Congress `left no room' for supplementary state regulation." Guerra, 107 S.Ct. at 689 (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947)). Third, even if federal regulation has not completely occupied the field, state law will be preempted "to the extent it actually conflicts with federal law." Guerra, 107 S.Ct. at 689. As the Guerra Court stated, "such a conflict occurs either because `compliance with both federal and state regulations is a physical impossibility,' or because the state law stands `as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" Id. (citations omitted). The intent to preempt state law is not to be inferred lightly. Guerra, 107 S.Ct. at 689; Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 2129, 68 L.Ed.2d 576 (1981).

As stated, congressional intent is the critical question in a preemption inquiry. Determining the intent of Congress properly begins with consideration of the actual statutory language. The first section of the Miller Act requires that a contractor on any public work must furnish two performance bonds — one for the protection of the United States and one for the protection of persons supplying labor or material to the project. 40 U.S.C. § 270a. Section 2 of the Act, 40 U.S.C. § 270b, gives "every person who has furnished labor or material in the prosecution of the work provided for in such contract" the right to sue on the bond required by the previous section.³

As the Supreme Court has recognized, one purpose of the Miller Act is "to provide security for the payment of all persons who provide labor or material on public work" as an alternative to state mechanics' liens.⁴Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 380, 37 S.Ct. 614, 616, 61 L.Ed. 1206 (1917); accord, United States for the Benefit of Sherman v. Carter, 353 U.S. 210, 216, 77 S.Ct. 793, 796, 1 L.Ed.2d 776 (1957). The...