Zurich Ins. Co. v. Smart & Final Inc., CV 97-6100-RC.

Decision Date05 March 1998
Docket NumberNo. CV 97-6100-RC.,CV 97-6100-RC.
Citation996 F.Supp. 979
CourtU.S. District Court — Central District of California
PartiesZURICH INSURANCE COMPANY, a Swiss corporation, Plaintiff, v. SMART & FINAL INC., a Delaware corporation; Smart & Final Stores Corporation, a California corporation; Darryl Dinson, an individual; Frank Said, an individual; Richard L. Michener, an individual; and Lexington Insurance Company, a Delaware corporation, Defendants. SMART & FINAL INC. and Smart Final Stores Corporation, Counterclaimants, v. ZURICH INSURANCE COMPANY, Counterdefendant.

Craig Douglas Aronson, Stephen R. Barry, Hagenbaugh & Murphy, Glendale, CA, for Plaintiff.

Dennett F. Kouri, Becky J. Belke, Meserve Mumper & Hughes, Los Angeles, CA, for Defendants.

MEMORANDUM DECISION AND ORDER

CHAPMAN, United States Magistrate Judge.

This matter was heard before Magistrate Judge Rosalyn M. Chapman on March 4, 1998. The plaintiff/counterdefendant Zurich Insurance Company was represented by Craig D. Aronson, attorney-at-law. Defendants/counter-claimants Smart & Final, et. al., were represented by Dennett F. Kouri and Becky J. Belke, attorneys-at-law.

BACKGROUND
I

On October 31, 1997, plaintiff/counterdefendant Zurich Insurance Company filed a motion to dismiss defendant Smart & Final, Inc.'s and Smart & Final Stores Corporation's (collectively "Smart & Final") counterclaim for failure to state a claim upon which relief can be granted under Fed.R.Civ.P. 12(b)(6). Essentially, Zurich argues that the counterclaim fails to state a claim upon which relief can be granted since there is no coverage or potential for coverage under the policy issued by it to Smart & Final applicable to an underlying state court legal action filed against Smart & Final by defendant Richard L. Michener ("Michener action"). Counterclaimant Smart & Final filed an opposition to the motion to dismiss the counterclaim on November 10, 1997. On November 17, 1997, Zurich filed a reply memorandum in which it acknowledges that since it has already filed an answer to the counterclaim, the motion to dismiss under Fed.R.Civ.P. 12(b)(6) may be "technically untimely" and instead should be treated as a motion for a judgment on the pleadings under Fed.R.Civ.P. 12(c). Reply, at 18:7-19-15.

On November 17, 1997, defendant Smart & Final filed a motion for summary adjudication of its breach of contract claim based on Zurich's breach of the duty to defend, with supporting memorandum of points and authorities and declaration of Susan Miller. On November 24, 1997, plaintiff Zurich filed its opposition to the motion for summary adjudication, with supporting exhibits, and a statement of genuine issues in opposition. On December 1, 1997, Smart & Final filed its reply to the opposition to the motion for summary adjudication.

On January 9, 1998, the parties consented to Magistrate Judge Rosalyn M. Chapman conducting all further proceedings in this action.

II

On August 15, 1997, Zurich Insurance Company, a Swiss corporation, filed a complaint for declaratory relief against defendants Smart & Final Stores Corporation, a California corporation, and Smart & Final Inc., a Delaware corporation, Darryl Dinson, an individual, Frank Said, an individual, Richard L. Michener, an individual, and Lexington Insurance Company, a Delaware corporation.1 Diversity jurisdiction under 28 U.S.C. § 1332 and an amount in controversy in excess of $50,000.00 are alleged. Complaint ¶¶ 1-8. Zurich seeks a declaratory judgment against defendants declaring the respective rights and duties of Zurich and defendants under insurance policy no. GLO 8212709-00 and any and all policies issued by Lexington with respect to an underlying state court legal action filed by defendant Michener ("Michener action"). Complaint at 9:18-25. Zurich also seeks costs and expenses. Complaint at 9:26-27.

Generally, Zurich alleges the following facts: that Smart & Final are named insureds under commercial general liability ("CGL") insurance policy no. GLO 8212709-00 issued by Zurich for the period October 1, 1995, through October 1, 1996. Complaint ¶ 9. Smart & Final gave notice and tendered a claim to Zurich pertaining to the Michener action. Complaint ¶¶ 10-11, 14-15. In the Michener action, Michener alleged that he was employed by Smart & Final from January 22, 1988, through May 29, 1996; that on May 22, 1996, he was confronted by Dinson and Said, both employees of Smart & Final, and driven without his consent to a motel room where he was interrogated regarding inventory shortages and any mistakes he may have committed during his employment with Smart & Final; that during the interrogation he described his consumption several years earlier of items marked for disposal; that Michener felt coerced and intimidated; that Dinson and Said told him that Smart & Final would take no retaliatory action if he told the truth; however, this was a false statement, and Michener's employment with Smart & Final was terminated on May 22, 1996, without good cause and in retaliation against him for voicing objections to his treatment. Complaint ¶ 13. Zurich denied the claim, determining that there is no potential for coverage and denying both defense of the Michener action and indemnification. Complaint ¶¶ 16-17. Specifically, Zurich contends that the Michener action arises from acts or omissions related to Michener's employment, or its termination, and there is no insurance coverage for bodily injury, property damage or personal injury arising out of "false imprisonment, wrongful termination, harassment, or coercion related to employment, or arising out of any other act or omission related to employment." Complaint ¶ 20(1). Further, Zurich alleges that defendant Lexington issued insurance policies that were in effect at all pertinent times providing defense and indemnity coverage for the claims made in the Michener action. Complaint ¶¶ 12, 20(3)-(4).

On October 10, 1997, Smart & Final, Dinson and Said answered the complaint and Smart & Final filed a counterclaim against Zurich.2 Smart & Final repeats the factual allegations set forth in the complaint regarding the Michener action, the insurance policy, Smart & Final's giving notice and submission of the claim to Zurich, and the like. Counterclaim ¶¶ 32-33, 35-36. In their counterclaim, Smart & Final set forth three causes of action: (1) declaratory relief, (2) breach of insurance contract, and (3) breach of the implied covenant of good faith and fair dealing. In their first cause of action, Smart & Final seek a declaration that the policy is in full force and effect and provides a duty to defend and coverage or indemnification for the false imprisonment claim and other claims set forth in the Michener action, and a declaration that Zurich is responsible for all damages, expenses, costs and attorneys fees attributable to the defense of the Michener action and its settlement.3 Counterclaim ¶¶ 42-43. In their second cause of action, Smart & Final claim that Zurich breached the insurance contract by refusing without just cause to defend and indemnify Smart & Final. Counterclaim ¶¶ 44-48. In their third cause of action, Smart & Final claim that Zurich acted unreasonably and in bad faith by failing to defend and indemnify them in the Michener action, forcing them to expend monies out of pocket; unreasonably misrepresenting facts and insurance policy provisions relating to coverage of the Michener action; failing to conduct a reasonable, prompt and unbiased investigation; failing to contribute reasonable sums to settlement of the Michener action despite a duty to do so; commencing this action at a time when the Michener action had already been settled and fees and settlement contributions had already been contributed by Smart & Final; and including within the instant litigation individual employees of Smart & Final, Dinson and Said, as well as Michener, the plaintiff in the underlying action. Counterclaim ¶¶ 49-57. Smart & Final seek a declaration that Zurich was obligated to provide and pay for a defense and to pay reasonable sums to effect a settlement of the Michener action, and refusal to do so was without justification or excuse and was a breach of the insurance contract. Counterclaim 19:1-11. Smart & Final also seek all costs and monies paid to settle the Michener action, plus interest, including prejudgment interest, reasonable attorney fees in defending the Michener action, reasonable attorneys fees in the instant litigation, and punitive or exemplary damages. Counterclaim 19:12-24.

On October 31, 1997, Zurich filed an answer to the counterclaim and raised twelve affirmative defenses.

III

The documents attached to the counterclaim and the summary judgment documents establish the following facts: Zurich issued CGL insurance policy no. GLO 8212709-00 to Smart & Final for the period of October 1, 1995, to October 1, 1996. See Counterclaim, Exh. A at 21-57; Declaration of Susan Miller, Exh. A at 23-59. The policy provided a $2 million general aggregate limit, a $1 million personal injury and advertising injury limit, a $1 million each occurrence limit, and a $10,000.00 per person medical expense limit. See Counterclaim, Exh. A at 35; Miller Decl., Exh. A at 37. The premium on the policy was $374,400.00, plus a surcharge of $2,321.00, payable in installments. See Counterclaim, Exh. A at 21, 23; Miller Decl., Exh. A at 23, 25.

On October 17, 1996, Richard L. Michener filed a lawsuit, Michener v. Smart & Final, Inc., et al., in the Superior Court for the County of Ventura, case no. CIV 168005. Counterclaim, Exh. B at 58-73; Miller Decl., Exh. B at 60-75. In his first amended complaint, Michener sets forth seven causes of action against defendant Smart Final: false imprisonment, intentional misrepresentation, breach of implied contract of employment, breach of implied covenant of good faith and fair dealing, wrongful termination in violation of public policy, and intentional infliction of emotional distress....

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