Quan v. Truck Ins. Exchange, B110711

• Decision Date: 29 October 1998
• Docket Number: No. B110711,B110711
• Citation: 79 Cal.Rptr.2d 134,67 Cal.App.4th 583
• Parties: , 98 Daily Journal D.A.R. 11,227 James W. QUAN et al., Plaintiffs and Appellants, v. TRUCK INSURANCE EXCHANGE, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

Page 134

79 Cal.Rptr.2d 134

67 Cal.App.4th 583, 98 Daily Journal D.A.R. 11,227

James W. QUAN et al., Plaintiffs and Appellants, v. TRUCK INSURANCE EXCHANGE, Defendant and Respondent.

No. B110711.

Court of Appeal, Second District, Division 2, California.

Oct. 29, 1998.

Certified for Partial Publication. ^*

Rehearing Denied Nov. 20, 1998.

Review Denied Feb. 17, 1999.

Law Offices of Jacob N. Segura and Jacob N. Segura, Beverly Hills, for Plaintiffs and Appellants.

Cooper, Kardaras & Scharf, Edward C. Wilde, Greines, Martin, Stein & Richland, Irving H. Greines and Marc J. Poster, Beverly Hills, for Defendant and Respondent.

ZEBROWSKI, Associate Justice.

The trial court in this case sustained, without leave to amend, a demurrer by defendant and respondent Truck Insurance Exchange ("insurer") to a second amended complaint ("SAC") for declaratory relief, breach of insurance contract, and breach of the implied covenant of good faith and fair dealing ¹ brought by plaintiffs and appellants James W. Quan and Lucita L. Quan ("insureds.") ²

Because the second amended complaint reveals no potential that the insurer could be liable to indemnify its insureds for any of the claims presented in the underlying action, we affirm. In the published portion of this opinion, we explain that the underlying action did not raise any potential for coverage under the insurance policy's "bodily injury" coverage. In the unpublished portion, we explain that we need not consider the potential for coverage under the insurance policy's "personal injury" coverage in view of the procedural posture of this case, that (in view of the lack of any potential for either "bodily injury" or "personal injury" coverage) we need not determine the application of the "wilful act" exclusion created by Insurance Code section 533, and that unpled claims against Lucita Quan do not create a potential for coverage.

I. PROCEDURAL BACKGROUND

A. The Underlying Action

In 1989, Darlene Bradford ("claimant") filed a civil action (the "underlying action" or "underlying complaint") against insured James Quan. ³ The underlying complaint by the claimant asserts four brief causes of action, for "assault and battery," "intentional infliction of emotional distress," "negligence," and "negligent infliction of emotion [sic] distress."

The underlying complaint was not served on the insured until March of 1992, when the insured promptly tendered his defense to the insurer. That same month, the insurer assigned the defense of the insured to defense counsel chosen by the insurer, under a "reservation of rights" pending results of the insurer's coverage investigation. ⁴

The insurer defended the action through its selected defense counsel for a period of nine months while it assertedly conducted a coverage investigation. On December 18, 1992, the insurer withdrew from the defense and denied any indemnity obligation. ⁵

Although the record does not indicate the manner in which the underlying action was sent to judicial arbitration, the SAC in this action includes as an exhibit a July 1993 letter from the insureds' subsequently retained defense counsel enclosing a document entitled "Amended Findings and Award of Arbitrator." Whatever their origin, the findings and award were apparently rendered a nullity by a request for trial de novo, inasmuch as the matter proceeded to two mistrials before the underlying action was finally tried to a judgment in favor of the claimant in May 1995. The insured appealed the underlying judgment, which was reversed by this court on December 3, 1997. ⁶ The record does not further disclose the immediate status of the underlying case.

B. The Coverage Action

The allegations of the insureds' second amended complaint span more than 100 pages, with nearly two hundred pages of exhibits. Of necessity, the factual allegations may only be summarized. They fall into two broad categories.

First, the insureds allege that the insurer's refusal to agree to defend and indemnify was not only erroneous, but unreasonable so as to constitute a breach of the implied covenant, in light of: (1) the allegations of the underlying complaint; (2) information the insurer had gathered or learned from other sources by the time it withdrew from the defense after nine months; and (3) information it learned after withdrawing from the defense.

Second, the insureds allege that the insurer not only conducted itself improperly in withdrawing from the defense, but also in the manner in which it investigated the coverage issues, and in the way it defended the insured for the nine month period in which it was conducting a coverage investigation. The insureds allege that from the very nature of the allegations of the underlying complaint the insurer knew there was a coverage issue of the type that should give rise to a right to independent counsel under Civil Code section 2860, but deprived the insured of that right for nine months while trying to build the case for a coverage denial, and then cast the insured adrift. In the interim, the insured's defense was allegedly compromised, and settlement opportunities within policy limits were either not communicated to the insured, or improperly allowed to lapse. ⁷

The insurer demurred to each cause of action on the ground that it failed to state a cause of action. The trial court sustained the demurrers and ordered the action dismissed under Code of Civil Procedure section 581, subdivision (f)(1). The insureds appeal from the order of dismissal. (Code Civ. Proc. § 581d.)

On appeal, the insureds contend only that their complaint "was and is legally sufficient to state causes of action against [insurer] for breach of contract and breach of the implied covenant of good faith and fair dealing arising from [insurer's] unjustified failure and refusal to defend [insureds] against [claimant's] action." Thus, only three of the insureds' causes of action are potentially pertinent: the first cause of action, for "declaratory relief," the second cause of action (erroneously titled as an "implied covenant" claim) which alleges that the insurer's refusal to defend and indemnify is a breach of the insurance contract, and the portion of the third cause of action which alleges that the insurer's refusal to defend and indemnify further constituted a breach of the covenant of good faith and fair dealing.

II. STANDARD OF REVIEW

The complaint must be liberally construed with a view to substantial justice between the parties. (Code of Civ. Proc. § 452.) A demurrer is treated as admitting all material facts properly pleaded, but not " 'contentions, deductions or conclusions of fact or law.' " (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58). Under Blank, the complaint must be given a reasonable interpretation, reading it as a whole and its parts in their context. When a demurrer is sustained, the court determines whether the complaint states facts sufficient to constitute a cause of action. And when it is sustained without leave to amend, the court decides 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 the reviewing court will reverse; if not, there has been no abuse of discretion. (Ibid.) The burden of proving the "reasonable possibility" of cure by amendment is on the plaintiff, but the showing need not be made in the trial court so long as it is made to the reviewing court. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1381, 272 Cal.Rptr. 387.)

Here, the insureds make no showing of how the SAC could be amended if it is determined not to state a cause of action. The record reflects three ever-lengthening complaints and sets of exhibits comprising hundreds of pages. There is no indication that every fact allegedly known to the insurer at any time with regard to the underlying action is not either expressly alleged and/or substantiated with exhibits to the SAC. Accordingly, there is no reason to consider whether the trial court abused its discretion in light of the possibility of further amendment. ⁸ (See Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093, 1105, fn. 4, 58 Cal.Rptr.2d 133.)

The interpretation of an insurance policy as applied to undisputed facts (here, the facts alleged by the insureds) is a question of law for the court, which is not bound by the trial court's construction. (Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 802, 26 Cal.Rptr.2d 391.)

III. DISCUSSION

A. Nature of The Duty to Defend

The parties agree the dispositive issue is whether the insurer had a duty to defend. The principles governing determination of the existence of that duty are oft-stated: "[A] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (Gray ).) As we said in Gray, 'the carrier must defend a suit which potentially seeks damages within the coverage of the policy.' (Id. at p. 275, 54 Cal.Rptr. 104, 419 P.2d 168, italics in original.) Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded. [Citations.]" (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792.) "The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal the possibility that the claim may be covered by the policy. (Gray, supra, 65 Cal.2d at p. 276, 54 Cal.Rptr. 104, 419 P.2d 168.)" (Ibid.)

Thus the Supreme Court in Montrose Chemical Corp. v. Superior Court (1993) 6...