Century Sur. Co. v. Crosby Ins., Inc.

• Decision Date: 17 November 2004
• Docket Number: No. E033550.,E033550.
• Citation: 21 Cal.Rptr.3d 115,124 Cal.App.4th 116
• Court: California Court of Appeals Court of Appeals
• Parties: CENTURY SURETY COMPANY, Cross-complainant and Appellant, v. CROSBY INSURANCE, INC. et al., Cross-defendants and Respondents.

21 Cal.Rptr.3d 115

124 Cal.App.4th 116

CENTURY SURETY COMPANY, Cross-complainant and Appellant, v. CROSBY INSURANCE, INC. et al., Cross-defendants and Respondents.

No. E033550.

Court of Appeal, Fourth District, Division 2.

November 17, 2004.

Murchison & Cumming and Edmund G. Farrell II, Los Angeles, for Cross-complainant and Appellant.

Newmeyer & Dillion, Mark S. Himmelstein, Newport Beach, Steven S. Wang, Saratoga, and Craig S. Robson, Newport Beach, for Cross-defendants and Respondents.

OPINION

HOLLENHORST, Acting P.J.

Appellant Century Surety Company (Century) appeals from the trial court's sustaining of a demurrer without leave to amend as to Century's second amended cross-complaint against Crosby Insurance, Inc., and Brent Jetton (hereafter, collectively referred to as Crosby) for fraud, negligence, and negligent misrepresentation. We conclude that the second amended cross-complaint states a cause of action for fraud and negligence, and the trial court therefore abused its discretion in sustaining the demurrer without leave to amend as to those causes of action. The second amended cross-complaint, however, omits an essential element of a cause of action for negligent misrepresentation, and Century has not shown that it could amend its complaint to remedy the deficiency. We therefore affirm the judgment with respect to that cause of action.

FACTS AND PROCEDURAL BACKGROUND

In the underlying action (the Charlebois action), Baroco West, Inc., Ralph Roach, Rick Bausher, and Highpoint Development and Construction (hereafter referred to collectively as Baroco) were named as defendants in a complaint filed on July 1, 1998, seeking damages for construction defects against Baroco as the general contractor of a single-family residence. Baroco tendered its defense to Century, and Century, as Baroco's liability insurer, initially undertook the defense of the Charlebois action under a reservation of rights.

After Century determined that information in Baroco's insurance application concerning its loss history was false, Century withdrew its defense, and Baroco sued Century and others not parties to this appeal. Baroco's complaint alleged claims of breach of written contract and of the implied covenant of good faith and fair dealing and included a request for declaratory relief against Century. The complaint also alleged claims of negligence by an insurance agent and breach of fiduciary duty against Crosby.

Century filed its answer to Baroco's complaint and also filed a cross-complaint for declaratory relief, reimbursement of defense costs, and rescission against Baroco. Crosby filed a motion for summary judgment as to Baroco's complaint. The motion was unopposed; it was granted on June 6, 2002, and judgment was thereafter entered.

Century filed a cross-complaint against Crosby. Century's first amended cross-complaint against Crosby alleged that: (1) Crosby was an insurance broker; (2) Brent Jetton was Crosby's agent and was the retail insurance broker for the policy that Century sold to Baroco; (3) although Crosby knew that Baroco was doing work as a general contractor, Crosby submitted an application for insurance to Century stating that Baroco worked only as a drywall contractor; (4) in reliance on this representation, Century underwrote, issued, and priced a policy; and (5) Century had expended funds in connection with the investigation and defense of the Charlebois action, and Baroco was demanding that Century provide it with a defense and indemnity in that action.

Crosby filed a demurrer to the first amended cross-complaint, arguing that the claims for broker negligence and/or misrepresentation and equitable indemnity were barred by res judicata; the claims for fraud were barred by collateral estoppel; the causes of action for equitable contribution and declaratory relief were defective; and the fraud claim was inadequately pleaded. The trial court sustained the demurrer with leave to amend.

On November 13, 2002, Century filed its second amended cross-complaint (hereafter, referred to as the cross-complaint), adding new facts to supports its causes of action. The following material allegations appear in Century's cross-complaint:

In 1995, Crosby, an insurance broker, had prepared and submitted to Century an application for liability insurance for Baroco. The application for insurance classified Baroco as a drywall contractor with potential subcontractor work limited to drywall contracting. Based upon that application, Century issued a policy insuring Baroco. Baroco tendered its defense in the Charlebois action to Century, and Century provided Baroco a defense under reservation of rights. After investigating the claim and determining that there was no potential for coverage under the policy for the claims asserted, Century withdrew its defense of Baroco in the Charlebois action.

Century attached to the cross-complaint the application for insurance that Crosby submitted to Century on behalf of Baroco. The application states that Baroco was previously insured by Farmers Insurance. Century also attached to the cross-complaint a letter purporting to be from "DAN PLESETZ, AGENT" for "THE FARMERS INSURANCE GROUP OF COMPANIES" that refers to the insurance policy number identified in the application and states that "there have been no known losses for the two year period we have had the above referenced policy insured." Century alleged that it had determined through its investigation that Plesetz denied having written or prepared the letter or having any knowledge of the referenced policy number. Century further alleged that Brent Jetton, who was an acquaintance of Plesetz, had had access to Plesetz's office with no other person present, had obtained unauthorized samples of Plesetz's letterhead, and had used that letterhead to forge the letter purporting to be from Plesetz.

Crosby filed a demurrer to the cross-complaint, arguing that it did not owe Century a duty in negligence, and that Century could not maintain an action in fraud against Crosby, but that Century's exclusive remedy was against its insureds. The trial court sustained the demurrer without leave to amend, and judgment of dismissal of the cross-complaint was entered.

DISCUSSION

I. Standard of Review

When we review a judgment of dismissal following the trial court's sustaining of a demurrer, "`[w]e treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

II. Cause of Action for Fraud and Deceit

A. Century Has Adequately Pleaded a Cause of Action for Fraud and Deceit

The following elements must be pleaded to state a cause of action for fraud: (1) a misrepresentation of a material fact; (2) knowledge of falsity; (3) intent to deceive and induce reliance; (4) justifiable reliance on the misrepresentation; and (5) resulting damages. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 481, 80 Cal.Rptr.2d 329.) Here, Century's second amended cross-complaint alleged that the plaintiffs' actual insurance application was attached to the cross-complaint; the application included a false written statement regarding the plaintiffs' loss history; and Crosby had made the false written statement. Thus, the cross-complaint alleged a misrepresentation of a material fact.

The cross-complaint alleged that Crosby made the false written statement intentionally and with knowledge of its falsity. Thus, the cross-complaint alleged the element of scienter.

The cross-complaint alleged that Crosby made the false written statement with the intent to cause Century to issue a policy of insurance to the plaintiffs. Thus, the cross-complaint alleged the element of intent to deceive and to induce reliance.

The cross-complaint alleged that Century had no reason to suspect the falsity of the statement, did not know the statement was false, and relied on the statement in issuing a policy of insurance to the plaintiffs. The cross-complaint further alleged that the plaintiffs' prior loss history was a material element in Century's decision to issue the policy. Thus, the cross-complaint alleged the element of reasonable reliance.

Finally, the cross-complaint alleged that as a result of the misrepresentation, it incurred costs of investigation and defense of the Charlebois action as well as the loss of a higher premium that it would otherwise have charged. Thus, the cross-complaint alleged the element of damages. The cross-complaint therefore alleged all of the requisite elements of a cause of action for fraud.

B. California Case Law Does Not Preclude an Insurer's Cause of Action Against a Broker for Fraud and Deceit Arising out of an Application for Insurance

Crosby contends, however, that as a matter of law an insurance company may not maintain an action against a broker based on fraud and deceit arising out of an application for insurance. Rather, Crosby argues, only the insured is responsible for any misrepresentation in the application made by the broker.

Crosby relies on a line of cases in which California courts held that an insured was responsible for the acts of the...