Total Call Internat., Inc. v. Peerless Ins. Co.

• Decision Date: 21 January 2010
• Docket Number: No. B212923.,B212923.
• Citation: 104 Cal.Rptr.3d 319,181 Cal.App.4th 161
• Court: California Court of Appeals Court of Appeals
• Parties: TOTAL CALL INTERNATIONAL, INC., Plaintiff and Appellant, v. PEERLESS INSURANCE COMPANY, Defendant and Respondent.

181 Cal.App.4th 161

104 Cal.Rptr.3d 319

TOTAL CALL INTERNATIONAL, INC., Plaintiff and Appellant, v. PEERLESS INSURANCE COMPANY, Defendant and Respondent.

No. B212923.

Court of Appeals of California, Second District, Division Four.

January 21, 2010.

The Cronin Law Group and Timothy C. Cronin for Plaintiff and Appellant.

Lindahl Beck, Kelley K. Beck and Andrew Sperry for Defendant and Respondent.

OPINION

MANELLA, J.

In the underlying action for breach of insurance contract and bad faith, appellant Total Call International, Inc. (TCI), asserted that respondent Peerless Insurance Company (Peerless) had improperly declined to defend TCI in litigation arising out of its advertising activities. The trial court sustained Peerless's demurrer to TCI's complaint without leave to amend. We affirm.

RELEVANT FACTUAL AND PROCEDURAL BACKGROUND

TCI's complaint against Peerless, filed August 12, 2008, alleges the following facts: TCI provides telecommunication services and products including prepaid domestic and international phone cards. The cards enable people, many of whom are immigrants, to make calls to their home countries. The prepaid phone card industry is competitive, and providers such as TCI operate on thin profit margins. Most providers rely on "point of sale" advertising, that is, billboards and posters at gas stations and other places where cards are sold that state the price of the provider's card and amount of paid minutes. Because cost is the determinative factor for most consumers, they typically buy the least expensive card advertised on the billboards and posters.

TCI's complaint further alleges that Peerless issued a commercial general liability policy to TCI, effective from July 13, 2006, to July 13, 2007. The policy's coverage provisions stated: "We will pay those sums that the insured becomes legally obligated to pay as damages because of `personal and advertising injury' to which this insurance applies. We will have the right and duty to defend the insured against any `suit' seeking those damages." The policy defined "[p]ersonal and advertising injury" to mean "injury . . . arising out of" several enumerated "offenses," including the "[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services." Under an exclusion entitled "Quality [o]r Performance of Goods — Failure to Conform [t]o Statements" (nonconformity exclusion), the policy precluded coverage for "`[p]ersonal and advertising injury' arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured's] `advertisement.'"

TCI's complaint further alleges that in March 2007, two competitors of TCI — namely, IDT Telecom, Inc., and Union Telecard Alliance, LLC (collectively IDT) — sued TCI, alleging that they had suffered damages as the result of TCI's advertising activities. Peerless declined to provide TCI a defense in the IDT action on the ground that IDT had alleged only that TCI's advertising misrepresented TCI's own phone cards. In view of these allegations, Peerless asserted that IDT's claims fell outside the policy's coverage for advertising injury and were otherwise barred from coverage by the nonconformity exclusion. In November 2007, TCI entered into a settlement with IDT.

TCI's complaint asserts claims for breach of insurance contract, bad faith, unfair business practices (Bus. & Prof. Code, § 17200 et seq.), and declaratory relief against Peerless. Peerless demurred to TCI's complaint, contending that Peerless had properly declined to defend TCI in the IDT action. On November 4, 2008, the trial court sustained the demurrer without leave to amend. In ruling, the trial court concluded that although IDT's claims potentially constituted advertising injury under the policy, they were barred from coverage by the nonconformity exclusion. An order of dismissal was entered in Peerless's favor on November 17, 2008. This appeal followed.

DISCUSSION

TCI contends the trial court erred in sustaining the demurrer without leave to amend. As explained below, TCI is mistaken.

A. Standards of Review

"Because a demurrer both tests the legal sufficiency of the complaint and involves the trial court's discretion, an appellate court employs two separate standards of review on appeal. [Citation.] . . . Appellate courts first review the complaint de novo to determine whether or not the . . . complaint alleges facts sufficient to state a cause of action under any legal theory, [citation], or in other words, to determine whether or not the trial court erroneously sustained the demurrer as a matter of law. [Citation.]" (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879 , fn. omitted.) "Second, if a trial court sustains a demurrer without leave to amend, appellate courts determine whether or not the plaintiff could amend the complaint to state a cause of action. [Citation.]" (Id. at p. 879, fn. 9.)

Under the first standard of review, "we examine the complaint's factual allegations to determine whether they state a cause of action on any available legal theory. [Citation.] We treat the demurrer as admitting all material facts which were properly pleaded. [Citation.] However, we will not assume the truth of contentions, deductions, or conclusions of fact or law [citation], and we may disregard any allegations that are contrary to the law or to a fact of which judicial notice may be taken. [Citation.]" (Ellenberger v. Espinosa (1994) 30 Cal.App.4th 943, 947 .) Moreover, because the policy and the competitors' complaint constitute the "foundation" of TCI's claims and are incorporated into TCI's complaint, we may properly rely on these documents in assessing whether TCI's claims are legally tenable. (4 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 430, p. 564.)

Under the second standard of review, the burden falls upon the plaintiff to show what facts he or she could plead to cure the existing defects in the complaint. (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 890.) "To meet this burden, a plaintiff must submit a proposed amended complaint or, on appeal, enumerate the facts and demonstrate how those facts establish a cause of action." (Ibid.)

B. Duty to Defend

(1) The key issues presented on appeal concern an insurer's duty to defend.¹ "[I]t is firmly established [that] the duty to defend is broader than the obligation to indemnify. The former arises whenever an insurer ascertains facts that give rise to the possibility or the potential of liability to indemnify. Unlike the duty to indemnify which arises only when the insured's underlying liability is established, the duty to defend must be assessed at the very outset of a case. . . . [¶] Equally established is that `when a suit against an insured alleges a claim that potentially or even possibly could subject the insured to liability for covered damages, an insurer must defend unless and until the insurer can demonstrate, by reference to undisputed facts, that the claim cannot be covered.'" (Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340, 1350-1351 , italics omitted, quoting Borg v. Transamerica Ins. Co. (1996) 47 Cal.App.4th 448, 455 .) The absence of a duty to defend is established when the insurer shows that "the underlying claim [could not] come within the policy coverage by virtue of the scope of the insuring clause or the breadth of an exclusion." (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301 [24 Cal.Rptr.2d 467, 861 P.2d 1153].)

(2) To determine whether Peerless properly declined to provide a defense to TCI, we identify the facts available to it at the time of its denial. "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." (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081 [17 Cal.Rptr.2d 210, 846 P.2d 792].) Facts extrinsic to the complaint also trigger the duty to defend when they reveal a possibility that the claim may be covered by the policy. (Id. at p. 1081.) In the context of a demurrer, the absence of a duty to defend may be established when the allegations in the third party complaint disclose no basis for policy coverage, and the insured's complaint alleges no extrinsic facts that raise a possibility of coverage. (Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093, 1107-1108 .)

C. Facts Known to Peerless

As TCI's complaint against Peerless does not allege extrinsic facts pertinent to the duty to defend, our inquiry is confined to IDT's complaint, which is incorporated into TCI's complaint. IDT filed its action in federal district court in New Jersey against TCI and several other phone card providers. IDT's complaint asserts claims for deceptive business practices and false advertising under the Lanham Act (15 U.S.C. § 1051 et seq.) and the laws of several states, including California's unfair competition law (Bus. & Prof. Code, § 17200 et seq.) and false advertising law (Bus. & Prof. Code, § 17500 et seq.).

IDT's complaint alleged that the prepaid phone card industry generates over $2 billion in annual retail sales revenue. According to the complaint, IDT constituted the leading card provider, with annual sales exceeding $1 billion; TCI and the other defendants collectively made approximately $1 billion in sales. Although consumers of phone cards exhibit a high degree of "brand loyalty" and frequently buy the same brand of card, they are also sensitive to price rates. Consumers receive information about phone cards from advertising and "voice prompts," that is, an automated computer voice that tells a card user the amount of calling time remaining on the card.

IDT's complaint further alleged that because IDT had offered "high quality and low priced services"...