Otay Land Co. v. Royal Indemnity Co.

• Decision Date: 25 November 2008
• Docket Number: No. D052057.,D052057.
• Citation: 86 Cal. Rptr. 3d 408,169 Cal.App.4th 556
• Court: California Court of Appeals Court of Appeals
• Parties: OTAY LAND COMPANY et al., Plaintiffs and Appellants, v. ROYAL INDEMNITY COMPANY, Defendant and Respondent.

169 Cal.App.4th 556

86 Cal. Rptr. 3d 408

OTAY LAND COMPANY et al., Plaintiffs and Appellants, v. ROYAL INDEMNITY COMPANY, Defendant and Respondent.

No. D052057.

Court of Appeals of California, Fourth District, Division One.

November 25, 2008.

Shoecraft Burton, Robert D. Shoecraft and Michelle L. Burton for Plaintiffs and Appellants.

Musick, Peeler & Garrett, Susan J. Field and Stephen M. Green for Defendant and Respondent.

OPINION

HUFFMAN, J.

This appeal from a judgment of dismissal in favor of defendant and respondent Royal Indemnity Company (Royal), following an order sustaining its demurrer without leave to amend, was brought by plaintiffs and appellants Flat Rock Land Company and its predecessor, Otay Land Company (collectively Flat Rock or plaintiff). The complaint filed by Flat Rock sought declaratory relief regarding Royal's anticipated insurance coverage of one of Royal's former insureds, nonparty United Enterprises et al. (United), with respect to contamination problems at the property now owned by Flat Rock and formerly owned by United. (Code Civ. Proc., § 1060.) Flat Rock contends the trial court erroneously failed to recognize that declaratory relief could be properly ordered regarding any insurance coverage for the former insured, United, such that Flat Rock could then take advantage of that declared coverage in related environmental litigation against United.

(1) This appeal follows Flat Rock's unsuccessful appeal of an order denying it the right to intervene in an earlier similar declaratory relief action that Royal brought against its insured, United (which is still pending). (Code Civ. Proc., § 387; Royal Indemnity Co. v. United Enterprises, Inc. (2008) 162 Cal.App.4th 194 (Royal or our prior opinion).) According to Flat Rock, since the procedural contexts of its respective efforts to obtain declaratory relief are different, the reasoning of our prior opinion regarding intervention does not apply to its current complaint or the demurrer to it. We disagree, finding the legal conclusions we previously reached also apply here for the purpose of analyzing the demurrer on essentially identical issues. Flat Rock has not pled sufficient facts to establish it has standing to sue the insurer in order to determine the applicability of an alleged tortfeasor's insurance. We affirm the judgment of dismissal.

FACTUAL AND PROCEDURAL BACKGROUND

A. Related Actions; Prior Opinion

United purchased a 1960's-era liability policy from Royal for its business that was operated on certain real property that United formerly owned (the subject property). United owned a trap and skeet shooting range on the subject property, and environmental contaminants remain there. After Flat Rock bought the property, related pending cases were filed in state and federal courts. Flat Rock brought a federal complaint against United and others, for recovery of environmental response costs, damages, and other relief. In the federal action, Flat Rock has appealed an unfavorable summary judgment to the Ninth Circuit Court of Appeals, and that appeal remains pending.¹

In the related state action, Flat Rock sued United and several other parties to seek recovery of environmental cleanup costs at the subject property, as well as other relief under the Carpenter-Presley-Tanner Hazardous Substance Account Act. (Health & Saf. Code, § 25300 et seq.) Unfair business practices allegations were also brought. (Bus. & Prof. Code, § 17200.) The related state action by Flat Rock against United has been stayed pending the outcome of the federal appeal.

In the separate insurance coverage action that gave rise to our prior opinion, Royal sued United for declaratory relief to establish that Royal should not be obligated to provide liability insurance coverage under the 1960's-era policy, which does not contain a pollution exclusion. (Royal, supra, 162 Cal.App.4th 194, 199-200.) Those parties are engaged in extensive preliminary disputes in the environmental litigation about any duty to defend and pay defense costs, as well as the indemnity issues. Flat Rock sought leave to intervene in that action, on the ground that it should be able to assist United in litigating the coverage issues, since Flat Rock is a potential claimant under the policy, and since United is allegedly not defending vigorously enough. (Code Civ. Proc., § 387.) This court affirmed the denial of leave to intervene in our prior opinion. We reasoned that Flat Rock had not shown that it met the applicable statutory criteria for intervention, and its reliance upon cases such as Thompson v. Mercury Casualty Co. (2000) 84 Cal.App.4th 90 (Thompson) and Haynes v. Farmers Ins. Exchange (2004) 32 Cal.4th 1198 [13 Cal.Rptr.3d 68, 89 P.3d 381] (Haynes) was inapposite. (Royal, supra, at pp. 209-213.)

B. Current Action; Demurrer; Ruling

Flat Rock filed the current complaint against Royal, seeking declaratory relief on coverage issues on the theory that it has a legitimate interest in making coverage arguments that may affect its possibilities of recovering damages and environmental cleanup costs from United.

In response, Royal demurred to the complaint for failure to state a cause of action, contending that no actual controversy is presented, and Flat Rock does not have standing to sue Royal, since it does not fit within any of the applicable exceptions to the "no direct action" rule. (Ins. Code, § 11580, subd. (b)(2); all further statutory references are to this code unless noted.)²

In opposition, Flat Rock acknowledged that an injured third party is generally prohibited from suing a tortfeasor's insurer for failing to defend or indemnify the tortfeasor against the claim. (Shaolian v. Safeco Ins. Co. (1999) 71 Cal.App.4th 268, 271 .) However, Flat Rock argued its complaint should fall under a new exception to this rule, said to be allowed in Thompson, supra, 84 Cal.App.4th 90 and Haynes, supra, 32 Cal.4th 1198.

The trial court sustained the demurrer without leave to amend, identifying the issue presented as whether Flat Rock has standing to request declaratory relief as to Royal's "duty to defend and indemnify [United] from and against all claims by Plaintiffs." The court relied on Royal Surplus Lines Ins. Co. v. Ranger Ins. Co. (2002) 100 Cal.App.4th 193, 200 for the proposition that California law generally prohibits third parties from suing an insurer when they are not in contractual privity, and noted that these parties are not in such privity. Also, Flat Rock was not claiming to fall within three well-accepted exceptions to that rule (i.e., where the third party plaintiff has a judgment against the insured, § 11580, subd. (b)(2); where the insurer has sued the third party in its own declaratory relief action; or where the insured has assigned its rights under the policy to the third party). Moreover, the court found distinguishable the two cases relied on by Flat Rock (Thompson, supra, 84 Cal.App.4th 90 & Haynes, supra, 32 Cal.4th 1198) to create a purported further exception that would allow a third party to sue the insured's liability insurer for declaratory relief on coverage issues.

Accordingly, the trial court dismissed the complaint, finding that Flat Rock had failed to establish standing to sue for declaratory relief about any obligations owed by the insurer to the policyholder, and there was not yet any existing "actual controversy." (§ 11580, subd. (b)(2).)

Flat Rock appeals the judgment of dismissal after demurrer. It has sought judicial notice of the record it prepared in the appeal resulting in our prior opinion, and Royal has likewise sought judicial notice of the portion of the record that it prepared in that matter. Both requests were deferred to the merits panel, and are now granted. Previously, we denied Royal's motion to strike Flat Rock's reply brief, in which Royal unmeritoriously argued that the reply brief raised new issues on declaratory relief that were not subsumed in the issues covered in the opening brief.

DISCUSSION

I APPLICABLE STANDARDS

For purposes of analyzing the ruling on demurrer, we give the pleading a reasonable interpretation, reading it as a whole, its parts in their context, to determine whether sufficient facts are stated to constitute a cause of action or a right to the relief requested. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58].) If a demurrer was sustained without leave to amend, but the defect was curable by amendment, we would find an abuse of discretion in that ruling. However, if the order is correct as a matter of law we would not reverse it. (Ibid.) We examine the legal sufficiency of the judgment, not necessarily the reasoning of the trial court. (D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 19 [112 Cal.Rptr. 786, 520 P.2d 10].)

(2) "`The fundamental basis of declaratory relief is the existence of an actual, present controversy over a proper subject.'" (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 79 [124 Cal.Rptr.2d 519, 52 P.3d 695], italics omitted; see Caffory v. Fremlin (1961) 198 Cal.App.2d 176, 183 ; Zetterberg v. State Dept. of Public Health (1974) 43 Cal.App.3d 657, 662 (Zetterberg); Laguna Pub. Co. v. Employers Reinsurance Corp. (D.C.Cal. 1985) 617 F.Supp. 271, 273 (Laguna Pub. Co.).) The language of Code of Civil Procedure section 1060 appears to allow for an extremely broad scope of an action for declaratory relief: "Any person interested under a written instrument ... or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property ... may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or...