State Farm Fire and Cas. Co. v. Geary, C-86-5107 MHP.

• Decision Date: 15 September 1987
• Docket Number: No. C-86-5107 MHP.,C-86-5107 MHP.
• Citation: 699 F. Supp. 756
• Parties: STATE FARM FIRE AND CASUALTY CO., Plaintiff, v. Ruth GEARY, et al., Defendants.
• Court: U.S. District Court — Northern District of California

699 F. Supp. 756

STATE FARM FIRE AND CASUALTY CO., Plaintiff, v. Ruth GEARY, et al., Defendants.

No. C-86-5107 MHP.

United States District Court, N.D. California.

September 15, 1987.

James M. Harris, York, Buresh & Kaplan, Berkeley, Cal., for plaintiff.

C. Scott Bridges, Law Offices of Eric P. Schnurmacher, Oakland, Cal., for defendants.

ORDER

PATEL, District Judge.

Plaintiff State Farm filed this action in March 1986 seeking a declaratory judgment that it has no obligation to indemnify or to defend the defendant Geary in an underlying state court action and to recover the value of the defense so far provided under a reservation of rights. This case is now before the court on cross-motions for summary judgment and defendant's motion to amend her counterclaim to add two parties. For the reasons set forth below, partial summary judgment is granted to the plaintiff and denied to the defendant. In addition, defendant's motion to amend the complaint is denied.

Facts

A. The Underlying Claims

Defendant's father, Bert Geary, with Wolfgang Morandell ("Morandell"), formed Wolfgang Morandell Company, Inc. ("WMC" or "the company"), where defendant was employed from 1981-1984. After her father died in 1982, defendant purchased from his estate a 49.99 percent interest in the stock of WMC, which represented her father's entire interest in the company. Thereafter, at Morandell's request, defendant in 1983 signed a personal guarantee on a $650,000 line of credit from Pacific Bank, N.A. ("Pacific") for WMC. In late 1984, defendant became dissatisfied with the information she was receiving regarding the financial conduct of the company and so cancelled the guarantee to Pacific and began acrimonious and unsuccessful negotiations to sell her interest in WMC to Morandell. During this period the defendant was fired from her position as a WMC employee and voted out of office as company secretary. On December 28, 1984, Pacific froze WMC's line of credit.

On June 7, 1985, defendant sent her attorney, C. Scott Bridges ("Bridges"), accompanied by a video and recording crew to the WMC offices. Bridges arrived after the completion of a shareholders' meeting and, on defendant's authorization, demanded access to corporate records, books and financial records as well as to inventory for the purpose of inspection. Morandell denied access to Bridges and called the police to have him removed from the premises.

On June 13, 1985, WMC filed a complaint in San Mateo Superior Court against defendant and her attorneys, among others, to enjoin their further trespass on WMC premises and for damages caused by interference with prospective business relationships, all arising from the June 7 incident. Defendant cross-claimed against Morandell and his wife (who together hold a controlling interest in the company), and the Morandells in turn cross-claimed against defendant and her attorneys alleging breach of contract, interference with advantageous economic relations and intentional infliction of emotional distress, all arising out of defendant's cancellation of her personal guarantee on the Pacific line of credit.

This suit between defendant and the Morandells, as well as two other related suits not involving the defendant, are pending in a coordinated action ("the underlying litigation") before a California superior court. With respect to that action, defendant has demanded indemnification and defense from the plaintiff, under several different insurance policies.

B. Insurance and Coverage Claims

Defendant owns several different State Farm policies which include insurance for her home, her car, her Los Angeles condominium, a standard homeowner's policy and a personal liability umbrella policy. Defendant also claims that State Farm policies purchased by WMC insure her in her capacity as an officer and director of that company. Only plaintiff's liability under the homeowner's and personal liability insurance policies is at issue on these cross-motions for partial summary judgment.¹

By letter of August 12, 1985, Eric P. Schnurmacher, a partner in the firm in which Bridges is an associate, tendered the complaint in the underlying suit to State Farm and requested that plaintiff retain another attorney, Richard LemMon, to represent the defendant. Plaintiff, believing that coverage was problematic, repeatedly requested a statement from the defendant. No statement was forthcoming, but in December, LemMon wrote to inform plaintiff that no statement would be forthcoming because coverage was clear. Without further correspondence, by letter of December 18, 1985, plaintiff agreed to undertake the defense of the underlying action under an express reservation of the right later to deny coverage.

The letter agreeing to undertake the defense stated that plaintiff had referred the case to the law firm of Kincaid, Gianunzio, Caudle and Hubert, which would represent the defendant's interests exclusively. However, the letter also acknowledged that the reservation of rights created a conflict of interest between the plaintiff and defendant and informed defendant of her option to retain an attorney of her choice at plaintiff's expense, rather than accept the representation of Kincaid Gianunzio. Defendant chose to retain both LemMon and Schnurmacher and promptly so notified the plaintiff.

The reservation of rights, as outlined in the December 18 letter, was based in part on specific exclusions for business-related suits and injuries, which were unrelated to the determination in the underlying litigation and in part on exclusion for damages that are "the intended or expected results" of actions taken by the insured, an issue that would be central in the determination of the underlying litigation.

By letter of March 19, 1986, plaintiff withdrew its reservation of rights as to the issue of intentional or expected damages and simultaneously asserted the absence of conflict under the rule of San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal.App.3d 358, 208 Cal.Rptr. 494 (1984). Plaintiff refused to pay further for fees of defendant's chosen counsel. The letter asserted that plaintiff's representation of the defendant would continue, but by counsel of plaintiff's rather than defendant's choice.

This court has jurisdiction over these state law claims based on diversity of citizenship. Plaintiff filed this action for declaratory relief in August 1986. Defendant answered and asserted related counterclaims. This order will address the rights and liabilities of the parties with respect to coverage under the homeowner's and personal liability policies. All other coverage issues are preserved.

C. Representations of Plaintiff's Agents as to Coverage

In addition, this order will address plaintiff's motion to amend the counterclaim to join two parties to this action. Defendant moves to join Curt Cooper and Kathy Strah as third party defendants, charging them with negligence and/or misrepresentation. Cooper was defendant's State Farm agent and Strah is his assistant. Defendant alleges that Cooper and Strah advised her that she was covered for precisely the type of suit involved in the underlying litigation and failed to call her attention to any limitations on coverage. Defendant allegedly relied on these representations and thus failed to purchase additional coverage to protect her against the losses represented by the underlying suit. In the event that plaintiff disclaims responsibility for the acts of its agents, defendant prays for personal recovery against Cooper and Strah. See Proposed First Amended Answer to Complaint at fourth counterclaim.

Discussion

I. Cross-Motions for Summary Judgment

Summary judgment is appropriate only if the court is satisfied that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Partial summary judgment that falls short of a final determination, even of a single claim, is authorized by Rule 56 in order to limit the issues to be tried. See Lies v. Farrell Lines, Inc., 641 F.2d 765, 769 n. 3 (9th Cir.1981); DiSandro v. Makahuena Corp., 588 F.Supp. 889, 892 (D.Haw.1984). This order will dispose of the issue of liability under the homeowner's and personal liability policies.

There is no dispute as to the material facts as outlined above, nor is there any dispute as to the existence of the exclusions to coverage included in the homeowner's and personal liability policies.

A. Liability of State Farm Under the Homeowner's Policy

Defendant does not seriously contest plaintiff's argument that the business pursuits exclusion in the homeowner's policy precludes any obligation to defend or indemnify defendant in the underlying litigation. That exclusion provides:

Coverage L liability and Coverage M medical payments do not apply to bodily injury or property damage arising out of business pursuits of an insured or the rental or holding for rental of any part of any premises by an insured. This exclusion does not apply to activities which are ordinarily incident to non-business pursuits.

Such an exclusion is standard in homeowners policies and has consistently been upheld as clear and unambiguous by the California courts. E.g., Crane v. State Farm Fire and Casualty Co., 5 Cal.3d 112, 115-16, 95 Cal.Rptr. 513, 485 P.2d 1129 (1971); Fire Ins. Exch. v. Jiminez, 184 Cal.App.3d 437, 440-43, 229 Cal.Rptr. 83 (1986); State Farm Fire and Casualty v. Drasin, 152 Cal.App.3d 864, 869-70, 199 Cal.Rptr. 749 (1984).

The applicability of the business pursuits exclusion is clear in this case. A business pursuit has been defined as a regular activity motivated by profit or gain, including part-time or supplemental income projects. Drasin, 152 Cal.App.3d at 870, 199 Cal.Rptr. 749. Defendant was undoubtedly motivated by the prospect of profit — or more accurately, by the...