City of San Bernardino Municipal Water Dept. v. American Alternative Ins. Corp. CA4/1 ( 2015 )

Filed 11/25/15 City of San Bernardino Municipal Water Dept. v. American Alternative Ins. Corp. CA4/1
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
CITY OF SAN BERNARDINO D068482
MUNICIPAL WATER DEPARTMENT,
Plaintiff and Appellant,
(Super. Ct. No. RIC1202114)
v.
AMERICAN ALTERNATIVE INSURANCE
CORPORATION,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Riverside County, Richard J.
Oberholzer and Edward D. Webster, Judges. Judgment affirmed. Appeal from denial of
summary adjudication dismissed.
Radcliff & Saiki and Eric H. Saiki for Plaintiff and Appellant.
Wood, Smith, Henning & Berman, Kevin D. Smith, Stacey F. Blank, Nicholas M.
Gedo and Keith E. Smith for Defendant and Respondent.
In 2004 the City of San Bernardino Municipal Water Department (City) purchased
a blended insurance policy and investment product through an insurance broker, Alliant
Insurance Services (Alliant). The insurance was designed to insure against City's
liability, and also pay for environmental remediation caused by chemical pollution
introduced into a local aquifer by a United States military base during World War II.
When the state assessed a $1.64 million tax on this insurance, a dispute arose
between the City and Alliant over who was responsible to pay the tax. Ultimately,
Alliant paid about $1.4 million of the tax. City sued Alliant for professional negligence,
among other things, and Alliant cross-complained against City seeking reimbursement
for the tax it paid.
City tendered defense of the cross-complaint to American Alternative Insurance
Corporation (AAIC), which had issued City a liability policy. After AAIC denied
coverage, City filed a motion for summary adjudication on the issue of duty to defend.
About a month later, AAIC filed a motion for summary judgment, asserting there was no
coverage as a matter of law. The trial court denied City's motion and granted AAIC's
motion.
City contends the judgment should be reversed because: (1) having determined
triable issues of fact precluded summary adjudication in favor of City, the trial court was
required to deny AAIC's motion for summary judgment on the same grounds; (2) the trial
court failed to determine whether AAIC owed a duty to defend in 2007, when Alliant
filed its cross-complaint; (3) Alliant's cross-complaint alleged tort theories; which along
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with "extrinsic evidence" established a potential for coverage and a duty to defend; (4)
the alleged wrongful conduct "clearly occurred within the pertinent time period"; and (5)
the "undisputed evidence" is City "had no reason to know at policy inception that Alliant
would make a formal claim."
We affirm. The trial court correctly determined there was no potential coverage
because Alliant's claims against City were exclusively for breach of contract, which
AAIC's policy excludes. Because there was no possibility of coverage, and therefore no
duty to defend on this ground, the trial court correctly entered judgment in favor of
AAIC.
FACTUAL AND PROCEDURAL BACKGROUND
A. The AIG Blended Policy
City owns property that had ground water contamination as a result of its use by
the United States military during World War II. In ensuing litigation, City and the United
States entered into a consent decree that contemplated City managing a 50-year
remediation program using federal funds.
To fund the remediation program using the settlement proceeds, City consulted
with Kennen Staley, an insurance broker who was employed by Alliant. Staley
negotiated with American International Group, Inc. (AIG) for an insurance product
consisting of (1) liability coverage for pollution causing bodily injury or property
damage, and (2) an investment designed to generate sufficient returns to pay remediation
costs for the first 30 years of City's remediation obligations.
3
The premium for the AIG policy was over $51 million. Of this amount,
approximately $42.5 million was the premium for the investment or annuity portion, and
approximately $8.9 million was the premium for the liability portion.
B. Surplus Lines Tax Dispute
California law imposes a 3 percent surplus lines premium tax plus other fees on
policies issued by nonadmitted insurers, such as AIG. (Ins. Code, § 1775.5.) The $51
million premium did not include any such tax. A letter from AIG to Staley states "[i]t is
the [b]roker's responsibility to access, collect, and remit these charges."
In 2004 Staley discussed this tax with the California Department of Insurance.
From those informal and nonbinding discussions, Staley believed the state would assess
tax on only the liability premium portion of the policy, resulting in a tax of approximately
$225,000.
Several months later, however, Staley reported the Department of Insurance was
inclined to change its position and tax the entire $51 million premium. The total tax due
would be $1,660,589. In March or April 2005, with the tax issue still unsettled, City paid
the $51 million premium.
In April 2005 the City's then-lawyer, Russell Randle write to Staley, telling him
the City "[did] not have the cash to pay a $1,660,000 tax . . . . Randle told Staley the City
wanted AIG to "meet us halfway on this problem."
AIG offered City a $600,000 reduction in premium, which City accepted. Stacey
Aldstadt, the City's general manager, testified AIG reduced the City's premium by
$600,000 because "AIG recognized that there was a problem and that we had been caught
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unaware of that problem and that we were in a very difficult position." Thomas
Jacobson, an attorney representing City at the time wrote, "AIG paid the Water
Department $600,000 to be used to resolve the tax issue."1
With an enormous tax potentially looming, City looked for a political solution,
first through the California Department of Justice and then with its state Assembly
member. Meanwhile, in November 2005 Staley informed City the Department of
Insurance had decided to imposes taxes and fees on the entire $51 million premium.
The next month, Jacobson wrote to Alliant's lawyer, Cheryl Orr, stating City paid
$275,000, the tax on the premium attributable to the liability portion of policy. Jacobson
said City would not pay any additional taxes and asserted Alliant was legally responsible
for the remaining taxes and fees.
In January 2006 Alliant sent a $1,370,875.62 invoice to City for the "remaining
tax obligation." Alliant's cover letter stated, "As you are aware it is the obligation of the
insurance broker to assess, collect and remit these taxes to the State of California." Two
weeks later, Alliant sent a $1,706,756.98 invoice to City, representing the tax, interest,
and penalties the Department of Insurance assessed.
In February 2006 Jacobson wrote to the Department of Insurance, stating,
"Though the tax . . . is imposed on the broker, we are requesting an opportunity to
participate in discussions concerning this matter because Driver is claiming they may
1 In its reply brief, City states, "the contention [that City received a premium
reduction to offset any tax liability] is a blatant misrepresentation," even though that is
exactly what Jacobson wrote at the time.
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have the right to seek indemnity or contribution from us if the tax is imposed in amounts
in addition to those already paid."2
In June 2006 Orr wrote to Jacobson, stating Alliant was obligated to pay the tax or
else face possible suspension or revocation of its broker's license. Orr's letter included a
demand City pay the tax, now $1,538,577.51 plus interest at $419.25 per day. Orr's letter
reminded City, "AIG agreed to refund $600,000 in premium to the Water Department for
the purpose of applying those funds to any surplus lines tax liability that might eventually
be assessed . . . ."
After settlement attempts failed, in October 2006 Orr wrote to Jacobson, stating
Alliant "will be paying the tax and accrued interest" and would "undertake to protest the
tax determination . . . and seek a refund." Orr threatened to sue City "to seek full
recovery of the tax . . . ."
C. Alliant's Government Claim
In December 2006 Orr sent a "Notice of Claim Against Public Entity" addressed to
the City of San Bernardino Water Department.3 The notice of claim asserted in
2 The parties refer to Alliant as Alliant, Driver-Alliant Insurance Services, or
Driver. The parties do not advise us of any relevant distinction among these names for
purposes of this case. For clarity, we use Alliant throughout this opinion.
3 On June 21, 2007, Orr sent another notice of claim, this one addressed to the City
of San Bernardino (instead of "Water Department"), repeating the substance of the
December 2006 notice. The parties do not discuss the legal significance, if any, of two
such notices.
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October 2006 Alliant paid $1,377,251.77 "for tax liabilities incurred by the Water District
but that the Water District failed and refused to pay."
D. City's Tender of Defense
City's AAIC policy provides AAIC "shall have the right and duty to defend the
Insured against any 'suit'" seeking specified damages. Although no suit had yet been
filed, in January 2007 Jacobson wrote to AAIC, forwarding a copy of Alliant's notice of
claim, explaining the background of the AIG insurance and tax dispute, and "tendering"
the claim "pursuant to the terms of the policy covering acts and omissions."
E. AAIC Denies Defense
In February 2007 Glatfelter Claims Management, Inc. (Glatfelter), acting on
AAIC's behalf, denied defense on the grounds the claim arose (1) from City's refusal to
pay a tax, representing a "financial gain to which the City was not legally entitled," and
therefore not a covered "wrongful act"; and (2) from the purchase of an insurance
contract that allegedly created a contractual obligation upon the City to pay the tax, and
there is a policy exclusion for failing to perform or breach of contract.
F. City Sues Alliant
In June 2007 City sued Alliant and Staley for alleged breach of fiduciary duty,
breach of contract, professional negligence, negligent misrepresentation, and declaratory
relief. City alleged as damages "fees it has been forced to pay, and continues to pay, to
lobbyists, consultants, and attorneys in efforts to mitigate the putative additional costs
that the City may owe on the investment contract portion of the AIG Agreement."
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G. Coverage Dispute Continues
By July 2007 Jacobson no longer represented City in dealing with AAIC, City
having retained new counsel, Radcliff & Saiki, LLP.
Jules Radcliff, Jr., sent a letter to Glatfelter to "alert[] you to the fact that
additional information has been developed and will soon be provided to you." Radcliff
asserted he met with Alliant's attorneys and "have engaged in a more informed discussion
of said counsel's theories of recovery and understanding of the facts supporting those
theories." He added, "your insured, by its conduct . . . caused, or substantially
contributed to, a series of events that resulted in significant miscommunication with
various state governmental agencies, including the California Department of Insurance
[and] . . . through a further series of errors [led] . . . to the improper leveling of a
premium tax . . . ." Radcliff ended the letter by promising, "In the coming days we will
provide you with additional information and details, together with supporting
documentation wherever available." (Italics added.)
Despite promising to provide additional information "in the coming days," in fact
Radcliff did not again communicate with Glatfelter until seven months later. In February
2008 Radcliff wrote to Glatfelter, complaining "[w]e have heard nothing further from
AAIC but silence." He asserted, "For over one year this factually-complex claim has
been ignored by you, no investigation at all has been conducted, and the interests of your
insured have been abandoned." Counsel stated Glatfelter's denial of coverage and
defense was "squarely at odds with the facts underlying this claim."
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Radcliff's February 8, 2008 letter contained no new factual information. But there
had been a significant event. In November 2007 Alliant filed a cross-complaint against
City. The proof of service shows Alliant served Radcliff & Saiki, LLP, with the cross-
complaint on November 2, 2007.
H. Alliant's Cross-Complaint
Alliant's cross-complaint alleged four theories of liability against City: (1)
account stated; (2) open book account; (3) equitable indemnity; and (4) unjust
enrichment. Alliant's cross-complaint alleged "[i]t is the custom and standard practice in
the insurance brokerage industry for the surplus lines broker . . . to bill the insured for the
premium and all applicable taxes and fees . . . ." Alliant also alleged AIG discounted the
premium by $600,000 "to provide the City with additional funds" for paying the surplus
lines tax. Alliant alleged City agreed to pay the tax, Alliant sent City invoices for taxes
due, and City refused to pay.
I. Continuing Dispute About Coverage
In February 2008, still unaware that Alliant had filed a cross-complaint against
City, Glatfelter responded to Radcliff's letter of February 8. Glatfelter reminded counsel
that in July 2007 he had promised to provide additional information "in the near future";
however, "[t]o date, I have not received the information discussed in the July 9, 2007
letter."
On March 17, 2008—more than four months since being served with Alliant's
cross-complaint—Radcliff again wrote to Glatfelter stating, "[W]e have no idea what
information you may actually need and find most relevant." Radcliff stated there had
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been "numerous developments that, presumably, would be of interest to you and to
AAIC"—but he said nothing about Alliant's cross-complaint. Instead, Radcliff stated
City was "shocked and dismayed by AAIC's initial denial of coverage" and "will hold
AAIC and its agents responsible for this continuing abandonment in the face of a clearly
covered claim." Radcliff added that he had spoken to Alliant's lawyer, who stated he
intended to pursue a negligence claim against City. However, Radcliff did not enclose a
copy of Alliant's cross-complaint, which contains no negligence allegations.4
On April 2, 2008, Radcliff wrote another letter to Glatfelter. The letter begins, "I
wanted to give you a heads-up that after a period of relative inactivity the litigation part
of this matter is about to heat up considerably . . . ." But still, Radcliff did not enclose
Alliant's cross-complaint.
The next day, Glatfelter wrote Radcliff, requesting a copy of Alliant's cross-
complaint, stating, "Your recent correspondence states a lawsuit has been filed against
the Water Department. The Common Policy Conditions of the Special Districts
Insurance Program Policy require an insured to immediately forward a copy of a suit for
our review. To date, we have not received a copy . . . ."
On April 9, 2008—five months after Alliant served its cross-complaint—Radcliff
sent Glatfelter the cross-complaint.
4 City's brief asserts, "Throughout the entire dispute between [City] and
Alliant . . . [City's] counsel continually provided AAIC with facts and information
concerning developments in the [u]nderlying [a]ction." The facts stated in the text do not
support this assertion.
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On May 5, 2008, Glatfelter denied coverage and defense on the grounds: (1) the
conduct Alliant alleges is not a "wrongful act" as defined in the policy because the
lawsuit sought restitution of financial gain to which the City was not legally entitled; (2)
the policy excludes coverage for (i) failure to perform or breach of contract; and (ii)
liability arising from Superfund obligations.
Radcliff replied to Glatfelter the next day, stating Alliant's attorneys "have
informed me that they will try the case as a negligence action against your insured rather
than simply as a tax reimbursement claim." The letter ended by stating, "Your handling
of this claim is just unfathomable."
J. Legislative Solution
In early June 2008, Radcliff wrote to Glatfelter, stating, "We may soon have a
determination that the financing component of the blended finite risk product that was
utilized in this matter is not subject to taxation." He stated this was the basis of Alliant's
"negligence" claim against the City. He ended by stating, "AAIC has acted in egregious
bad faith in its handling of this claim to date."
In September 2008 the Legislature amended Insurance Code section 1775.5,
subdivision (a) to exclude from taxation any portions of premiums for the investment
portion of a blended finite risk product used in financing Superfund environmental
settlements. As a result, the state refunded $1,377,251.77 tax Alliant had paid, plus
interest. Alliant dismissed its cross-complaint against City.
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K. City's Complaint Against Alliant Goes to Trial
Even with Alliant's cross-complaint dismissed, City continued to litigate its
complaint against Alliant to recover its lobbying costs. Despite Radcliff's repeated
assertions that Alliant intended to present a negligence case against City, Alliant never
asserted City's purported negligence in any pleading in that litigation until literally the
11th hour—when Alliant filed a motion to amend its answer to assert a comparative fault
affirmative defense a week before the case went to the jury, nearly two years after Alliant
had dismissed its cross-complaint.
In July 2011 a jury returned a special verdict in City's favor against Alliant for
professional negligence and negligent misrepresentation in the amount of $650,820.68.
The jury found City was 25 percent negligent.5
After judgment, City and Alliant apparently settled the case. In connection with
the settlement, they stipulated to vacate the judgment. On April 27, 2012, the trial court
obliged and entered an order vacating the judgment.
L. City Sues AAIC for Breach of Contract and Bad Faith
In August 2012 City sued AAIC for breach of the insurance contract and bad faith.
The complaint alleges AAIC "refused to provide the City with a defense" to Alliant's
government claim and cross-complaint. City alleges AAIC breached the implied
covenant of good faith and fair dealing by "denying the City a defense without proper
5 The parties do not inform us why City's cause of action against Alliant for breach
of contract is not in the verdict form.
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cause and without regard to the provisions of the policy, relevant case law, and the
undisputed facts underlying the [government] claim and cross-complaint."
M. City's Motion for Summary Adjudication
City filed a motion for summary adjudication of the issue of AAIC's duty to
defend. Stating, "Alliant sought from the outset" to assert "tort theories," City asserted
there was a potential for coverage, triggering AAIC's duty to defend.
In its motion, City acknowledged that to obtain coverage (and defense), the AAIC
policy requires the alleged "'wrongful act'" to have occurred either during the policy
period, or before the policy so long as the insured "'neither knew nor could have
reasonably foreseen that such 'wrongful act' might have been the basis of a claim or
'suit.'" City asserted there was "undisputed evidence" City "had no reason to know at
policy inception that Alliant would make a formal claim." The cited "undisputed
evidence" was a declaration by Stacey R. Aldstadt, City's general manager, a lawyer, who
stated:
"At the time of the policy's inception on June 30, 2006, I had no
knowledge whatsoever that CSB [City] . . . had committed any act
or omission that could become the basis of a claim or lawsuit against
CSB. In particular, I had no knowledge that anyone at CSB,
including its employees, attorneys, etc., had done or failed to do
anything that would be the basis of a claim by Staley, Alliant . . . ."
N. Alliant's Opposition to City's Motion for Summary Adjudication
After City filed its motion, but before opposition was due, Alliant deposed
Aldstadt. In deposition testimony, Aldstadt admitted that before the June 30, 2006 policy
inception date, she knew Alliant was claiming City was responsible for paying the tax:
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"Q: . . . Were you aware in February 2006 that Alliant was making
the assertion that they would seek contribution from [City] for the
surplus lines tax on the policy?
"A: . . . So yes . . . I would have been aware at that point that that
may have been what Driver Alliant was alleging or claiming."
Aldstadt also admitted Alliant sent City invoices for the tax before the policy's
inception date:
"Q: Isn't it true that prior to June 30th, 2006, you had received
invoices from Alliant requesting that [City] pay the surplus lines
tax?
"A: I think that's a true statement."
"Q: Isn't it true that as of June 30th, 2006, you were aware of the
fact that Alliant was asserting [City] owed a surplus lines tax above
and beyond that had already been paid? [¶] . . .
"A: . . . I am aware that Cheryl Orr had written a letter in early June
2006 asserting that [City] was responsible for paying. However, I
did not believe that was to be—that was a true statement."
AAIC also deposed Jacobson. On June 14, 2006—two weeks before the AAIC
policy inception—Jacobson wrote a letter to Orr, suggesting the parties and attorneys
meet in an attempt to avoid litigation Jacobson testified:
"Q: As of June 14, 2006, when you wrote this letter . . . did you
believe there was a potential for litigation between [City] and Alliant
over the surplus lines tax?
"A: . . . I saw, given Miss Orr's conduct at that point in time, that if
it was up to her, she would litigate first and discuss later.
"Q: And by this letter you wanted to meet to avoid potential
litigation?
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"A: My client did. Mr. Staley did. Everybody wanted to besides
Miss Orr."6
Opposing City's motion for summary adjudication, AAIC argued "[t]he heart of
the dispute between [City] and Alliant . . . arose out of [City's] failure to perform" its
contractual obligation to pay the surplus lines tax. Because the policy excludes coverage
for "failure to perform or breach of contract," AAIC asserted there was no duty to defend.
AAIC also argued there was no coverage because the undisputed evidence established
City knew of the potential claim before policy inception, and failed to disclose the
potential claim on the insurance application.
O. City's Reply on Its Motion for Summary Adjudication
Given the deposition testimony showing City well knew of the potential claim
before policy inception, City's reply argued AAIC's duty to defend cannot be decided
"with the benefit of 20/20 hindsight" and instead must be based on what facts AAIC
knew "as of February 21, 2007, when it disclaimed coverage . . . ." City asserted, "Thus,
whether today, in 2013, it can establish a lack of coverage does not negate the fact that a
duty to defend existed in 2007 and thereafter . . . ."
P. The Court Denies Summary Adjudication
The trial court (Judge Oberholzer) denied City's motion for summary adjudication
on the grounds that "triable issues of material fact" existed, namely: (1) "[w]hen the duty
to defend arose"; (2) "[w]hether the exclusion for failure to perform a breach of contract
6 Ignoring this deposition testimony, City's brief asserts there was "undisputed
evidence that . . . [City] had no reason to know at policy inception that Alliant would
make a formal claim against [City]."
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applies"; (3) "[w]hether the City was obtaining improper financial gain"; and (4)
"]w]hether wrongful acts occurred or took place during the policy period."
Q. AAIC's Motion for Summary Judgment
Meanwhile, in October 2013, AAIC filed a motion for summary judgment.
AAIC's motion, and City's opposition, mostly repeated the same arguments made in the
context of City's motion for summary adjudication. For example, AAIC argued there was
no duty to defend because: (1) no "wrongful act" occurred within the policy period; (2)
there is no coverage for a tax obligation; and (3) no coverage for breach of contract.
City opposed the motion, asserting: (a) the duty to defend is determined by
information the carrier possessed when it refused to defend, and the carrier cannot justify
a refusal to defend by hindsight; (b) AAIC's duty to defend was triggered by Alliant's
government claim; (c) Alliant pursued tort theories; (d) the policy exclusion for breach of
contract did not apply; and (e) the trial court's previous ruling denying City's motion for
summary adjudication already established there were triable issues of fact precluding
summary judgment.
R. The Trial Court Grants Summary Judgment
The trial court (Hon. Edward D. Webster) granted summary judgment. The court
stated the "first and strongest argument" is City knew of Alliant's claim and failed to
disclose it before purchasing the AAIC policy:
"There were discussions going back, letters going back. There was a
dispute already raging as to who's going to be responsible for the
tax. In fact, at some point . . . the City got a $600,000 refund on the
underlying policy. [¶] But again, clearly, the act and knowledge of
the act occurred before June 30th, 2006. So, on the very terms of the
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policy, any claims for coverage by the City for the attorney's fees in
that litigation is not covered. To me, that is clear as can be."
The trial court also granted summary judgment because AAIC's policy excludes
coverage for breach of contract claims. The court stated:
"I agree that the policy exclusion providing 'liability for damages
arising out of failure to perform or breach of contractual obligation'
applies. [¶] To my mind, the issue of who's going to pay the tax is
not a tort. It involves a dispute, either express or implied contract,
who's going to be responsible for it. I mean, there's even an
agreement by [AIG] that they were going to give a $600,000 refund
to the City, which it got, on a reduction of the premium, arguably to
cover the tax. So this is all related to agreements or understandings
between the parties. This is not a tort situation."
The trial court rejected City's argument that "extrinsic" evidence outside the cross-
complaint's allegations created a duty to defend. Addressing City's lawyer, the court
stated:
"Even your very best argument for coverage, it seems to me,
depends upon a remarkably slender thread of logic, and that is,
because Alliant said in the letter it may have a claim for negligence
where no one had a clue what they were talking about, and which
was not reflected in the cross-complaint, that somehow that
ephemeral statement in the letter is enough to give right to duty to
defend. That's your argument at best, what I heard, for whatever it's
worth. [¶] So I will grant the motion on the grounds stated."
City timely filed a notice of appeal from the judgment. City's notice of appeal also
purports to appeal from "The Order Denying Plaintiff's Motion for Summary
Adjudication of Issues entered on February 28, 2014."
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DISCUSSION
I. THE STANDARD OF REVIEW
"We review the trial court's grant of summary judgment under a de novo standard
of review." (Gonzalez v. Fire Ins. Exchange (2015) 234 Cal.App.4th 1220, 1229.) "In
reviewing a grant of summary judgment in favor of the defendant, as in this situation, we
must review the entire record de novo and determine whether the defendant
'"conclusively negated a necessary element of the plaintiff's case or demonstrated that
under no hypothesis is there is a material issue of fact that requires the process of trial."'"
(Ibid.) "'[T]he trial court's stated reasons for its rulings do not bind us. We review the
ruling, not its rationale.'" (Monticello Ins. Co. v. Essex Ins. Co. (2008) 162 Cal.App.4th
1376, 1385.)
II. CITY'S APPEAL FROM THE ORDER DENYING
SUMMARY ADJUDICATION IS DISMISSED
The trial court denied City's motion for summary adjudication on the grounds
"triable issues" existed. City contends this ruling necessarily requires AAIC's motion for
summary judgment to also be denied. We disagree because City's argument ignores the
applicable standard of review. As noted, we review the summary adjudication and
summary judgment orders de novo. Moreover, we review the trial court's ruling, not the
court's rationale. (Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, 878.) Because
in our de novo review we determine summary judgment for AAIC should be affirmed,
then necessarily the order denying City's motion for summary adjudication was also
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correct, regardless of whether the reasons (i.e., the existence of triable issues) given for
that ruling were right or wrong.
Additionally, City's purported appeal from the order denying summary
adjudication must be dismissed. An order denying summary adjudication is not
separately appealable, but it may be reviewed on appeal from summary judgment. (Cale
v. Transamerica Title Insurance (1990) 225 Cal.App.3d 422, 428, fn. 2.) However,
because we affirm the summary judgment for AAIC, we have no occasion to consider the
denial of City's motion for summary adjudication. The purported appeal from the
nonappealable order denying summary adjudication must therefore dismissed.7 (Ibid.)
III. THE DUTY TO DEFEND
"A liability insurer owes its insured a broad duty to defend against claims creating
a potential for indemnity. [Citations.] The duty to defend is broader than the duty to
indemnify, and may exist even if there is doubt about coverage. [Citation.]
When determining whether a duty to defend exists, the court looks to all of the facts
available to the insurer at the time the insured tenders its claim for a defense. [Citation.]
Initially, the court compares the allegations of the complaint with the terms of the policy.
[Citation.] The proper focus is on the facts alleged in the complaint, rather than the
7 Cale also involved a denial of summary adjudication followed by a grant of
summary judgment. The Cale court dismissed the purported appeal from the order
denying summary adjudication, stating, "Since we affirm the summary judgment for
Transamerica, we have no occasion to consider the denial of Cale's motion for summary
adjudication. The purported appeal therefrom is dismissed." (Cale v. Transamerica Title
Insurance, supra, 225 Cal.App.3d at p. 428, fn. 2.)
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alleged theories for recovery. Nevertheless, the insured '"'may not speculate about unpled
third party claims to manufacture coverage,'" . . . , and the insurer has no duty to defend
where the potential for liability is "tenuous and farfetched." . . . The ultimate question is
whether the facts alleged "fairly apprise" the insurer that the suit is upon a covered claim.'
[Citation.] Facts extrinsic to the complaint may also be examined and may either
establish or preclude the duty to defend. [Citation.] Any doubt as to whether the facts
give rise to a duty to defend is resolved in favor of the insured." (Albert v. Mid-Century
Ins. Co. (2015) 236 Cal.App.4th 1281, 1289-1290.) "'Since pleadings are easily
amended, the proper focus is on the facts alleged, rather than the theories for recovery.'"
(Gonzalez v. Fire Ins. Exchange, supra, 234 Cal.App.4th at p. 1230.)
The duty to defend is determined by facts known to the insurer at the time of the
tender of defense. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287,
300.) "The crucial question is whether [the insurer] was in possession of factual
information which gave rise to potential liability under its policy when the company
denied [the insured] a defense in [the underlying] action." (Mullen v. Glen Falls Ins. Co.
(1977) 73 Cal.App.3d 163, 170.)
Thus, where the insurer moves for summary judgment based on the lack of a duty
to defend, the insurer must present undisputed facts establishing "the absence of any such
potential" for coverage. (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at
p. 300, italics omitted.) In so doing, if coverage depends on an unresolved dispute over a
factual question, the very existence of that dispute would not only result in the denial of
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the motion, but also establish a possibility of coverage and thus a duty to defend.
(Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1085.)
"On the other hand, 'in an action wherein none of the claims is even potentially
covered because it does not even possibly embrace any triggering harm of the specified
sort within the policy period caused by an included occurrence, the insurer does not have
a duty to defend. [Citation.] "This freedom is implied in the policy's language. It rests
on the fact that the insurer has not been paid premiums by the insured for [such] a
defense. . . . [T]he duty to defend is contractual. 'The insurer has not contracted to pay
defense costs" for claims that are not even potentially covered." ' " (Scottsdale Ins. Co. v.
MV Transportation (2005) 36 Cal.4th 643, 655.) "This includes claims falling outside
the scope of the insuring clause, or within an express exclusion from coverage." (Alterra
Excess & Surplus Ins. Co. v. Snyder (2015) 234 Cal.App.4th 1390, 1401.)
IV. THE AAIC POLICY
Effective June 30, 2006, AAIC issued liability insurance coverage to City, Policy
No. SDISSK 9100525-3. The policy period is June 30, 2006 to June 30, 2007. Section I,
"Insuring Agreement," part A provides in part:
"We shall pay on behalf of the Insured those sums that the Insured
becomes legally obligated to pay as damages because
of . . . 'wrongful acts' . . . to which this Coverage Part applies. We
shall have the right and duty to defend the Insured against any 'suit'
seeking those damages, even if the allegations are groundless, false
or fraudulent. However, we will have no duty to defend the Insured
against any 'suit' seeking those damages to which this insurance does
not apply."
21
Section I, part F, entitled "Wrongful Acts" provides in part:
"This Coverage Part applies to 'wrongful acts' which take place
during the policy period. Coverage is extended to include damages
or injuries caused by 'wrongful acts' committed prior to the policy
period . . . provided that: [¶] (1) At the inception of the policy
period, the Insured against whom the claim is made neither knew nor
could have reasonably foreseen that such 'wrongful act' might have
been the basis of a claim or 'suit'; and [¶] (2) No other valid or
collectible insurance applies to the 'wrongful act.'"
Section V, entitled "Exclusions," part M entitled "Failure to Perform or Breach of
Contract" provides in part:
"This Coverage Part does not apply to: [¶] . . . [¶] Liability for
damages arising out of failure to perform or breach of a contractual
obligation."
V. THE TRIAL COURT PROPERLY GRANTED SUMMARY JUDGMENT
BECAUSE COVERAGE IS EXCLUDED FOR BREACH OF CONTRACT
A. Any Duty To Defend Was Triggered by Alliant's Cross-Complaint, Not Its
Government Claim
At the outset, the parties dispute whether AAIC's duty to defend was potentially
triggered by Alliant's government claim or instead Alliant's cross-complaint. The
insuring agreement provides the duty to defend is triggered by "suit." Section VI,
"Definitions," defines "suit" as follows:
"'Suit' means a civil proceeding in which damages are alleged
because of . . . wrongful acts . . . to which this insurance applies."
A government claim is a statutory prerequisite to certain suits, but it is not a suit.
"The primary attribute of a 'suit,' as that term is commonly understood, is that parties to an
action are involved in actual court proceedings initiated by the filing of a complaint."
(Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 878.)
22
"'While a claim may ultimately ripen into a suit, "claim" and "suit" are not synonymous.'"
(Id. at p. 879.) "Thus, a reasonable construction of the word "suit" is a lawsuit." (Ibid.)
The policy also defines "suit" to include:
"An arbitration proceeding . . . . or [¶] [a]ny other alternative dispute
resolution proceeding in which such damages are claimed and to
which an Insured submits with our consent."
City contends its government claim is a "suit" under this alternative definition
because the purpose of the claims filing requirement is to afford the government an
opportunity to settle claims early, and thus constitutes an "alternative dispute resolution
proceeding in which such damages are claimed." City's argument fails for two reasons.
A government claim is not an "alternative dispute resolution proceeding." It is not an
"alternative" to anything. Moreover, City's argument ignores the second clause of the
definition. The "alternative dispute resolution proceeding" must be one "to which an
insured submits with our consent." The government claims process did not involve City
submitting to a proceeding, nor was the claim filed with AAIC's consent.
B. Alliant's Cross-Complaint Solely Alleges Contractual Theories of Liability
"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., supra, 4 Cal.4th at p. 1081.) As
explained next, the allegations in Alliant's cross-complaint sound exclusively in contract,
not tort.
23
1. Common allegations
Alliant's cross-complaint alleges the following "allegations common to all causes
of action":
"16. It is the custom and standard practice in the insurance
brokerage industry for the surplus lines broker . . . to bill the insured
for the premium and all applicable taxes and fees, including any
surplus lines taxes . . . ."
"17. The parties negotiating the AIG Policy, fully contemplated that
a surplus lines tax might be imposed . . . ."
"19. . . . [R]epresentatives of the City, including its Water
Department, Alliant, and AIG met in New York in 2004 to discuss
the premium payment for the AIG Policy and the surplus lines tax
problem. At that meeting, AIG agreed to discount the premium on
the AIG Policy by $600,000. The intent of the discount was to
provide the City with additional funds in the event that the DOI
[Department of Insurance] did not agree that the [policy's investment
portion] was not subject to the surplus lines tax."
"32. In December, 2005, Alliant sent the City a second invoice,
invoicing the surplus lines tax . . . . [¶] 33. The City failed and
refused to pay the invoice within thirty days."
"35. . . . Alliant sent another invoice to the City for the outstanding
tax . . . . The City did not pay the January 27, 2006 invoice."
"37. On or about February 7, 2006, Alliant sent a letter to the City
requesting payment of the outstanding surplus lines tax fees and
interest. The City, again, refused to make the payment."
"41. On or about June 6, 2006, Alliant requested the City to forward
$1,442,935.02, the amount due . . . as of May 30, 2006 . . . . [¶] 42.
The City refused to and failed to remit payment . . . ."
Based on these allegations, Alliant alleged four causes of action: (1) account
stated, (2) open book account, (3) equitable indemnity, and (4) unjust enrichment.
24
2. Account stated is a contractual theory of liability
The first cause of action for account stated alleges, "On or about April 25,
2005 . . . an account was stated between Alliant and the City. . . . [¶] . . . At the time of
the statement of the account, the City agreed to pay the amount of the surplus lines
tax . . . ."
Account stated is a contractual theory of liability. "An account stated is an
agreement, based on prior transactions between the parties, that the items of an account
are true and that the balance struck is due and owing. [Citation.] To be an account
stated, 'it must appear that at the time of the statement an indebtedness from one party to
the other existed, that a balance was then struck and agreed to be the correct sum owing
from the debtor to the creditor, and that the debtor expressly or impliedly promised to pay
to the creditor the amount thus determined to be owing.' [Citation.] The agreement
necessary to establish an account stated need not be express and is frequently implied
from the circumstances. When a statement is rendered to a debtor and no reply is made
in a reasonable time, the law implies an agreement that the account is correct as
rendered." (Maggio, Inc. v. Neal (1987) 196 Cal.App.3d 745, 752-753.)
3. Open book account is a contractual theory of liability
"The term 'book account' means a detailed statement which constitutes the
principal record of one or more transactions between a debtor and a creditor arising out of
a contract or some fiduciary relation, and shows the debits and credits in connection
therewith, and against whom and in favor of whom entries are made, is entered in the
regular course of business as conducted by such creditor or fiduciary, and is kept in a
25
reasonably permanent form and manner and is (1) in a bound book, or (2) on a sheet or
sheets fastened in a book or to backing but detachable therefrom, or (3) on a card or cards
of a permanent character, or is kept in any other reasonably permanent form and
manner." (Code Civ. Proc., § 337a.)
Here, Alliant's cross-complaint alleges City "agreed to pay the amount of the
surplus lines tax" The alleged liability is one between debtor and creditor and is
contractual.
4. Alliant's cause of action for equitable indemnity is for implied contractual
indemnity
Alliant's third cause of action, entitled equitable indemnity, alleges Alliant paid
taxes and fees "due to the refusal of the City to pay those amounts, which in equity and
good conscience and under the law, are amounts payable by the City, not its insurance
broker, Alliant."
City contends equitable indemnity is necessarily "tort-based" and therefore this
cause of action precluded the trial court from entering summary judgment based on the
breach of contract exclusion.
To begin with, "coverage turns not on 'the technical legal cause of action pleaded
by the third party' but on the 'facts alleged in the underlying complaint' or otherwise
known to the insurer." (Gonzalez v. Fire Ins. Exchange, supra, 234 Cal.App.4th at p.
1235, italics omitted.) Therefore, even if equitable indemnity did always involve tort
liability, the label "equitable indemnity" is not controlling. The facts alleged are
controlling.
26
Moreover, equitable indemnity is not exclusively a tort-based theory of liability.
To the contrary, the theory includes implied contractual indemnity.
In general, indemnity refers to "the obligation resting on one party to make good a
loss or damage another party has incurred." (Rossmoor Sanitation, Inc. v. Pylon, Inc.
(1975) 13 Cal.3d 622, 628.) "Historically, the obligation of indemnity took three forms:
(1) indemnity expressly provided for by contract (express indemnity); (2) indemnity
implied from a contract not specifically mentioning indemnity (implied contractual
indemnity); and (3) indemnity arising from the equities of particular circumstances
(traditional equitable indemnity). (Prince v. Pacific Gas & Electric Co. (2009) 45
Cal.4th 1151, 1157 (Prince).)
"Although the foregoing categories of indemnity were once regarded as distinct,
we now recognize there are only two basic types of indemnity: express indemnity and
equitable indemnity." (Prince, supra, 45 Cal.4th at p. 1157.) "[I]implied contractual
indemnity is but a form of equitable indemnity." (Id. at p. 1157, fn. 2, italics added.)
"'The right to implied contractual indemnity is predicated [on] the indemnitor's
breach of contract.'" (Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi
Corp. (2003) 111 Cal.App.4th 1328, 1350.) "'Implied contractual indemnity is applied to
contract parties and is designed to apportion loss among contract parties based on the
concept that one who enters a contract agrees to perform the work carefully and to
discharge foreseeable damages resulting from that breach.'" (Ibid.) "An implied
contractual indemnity action does not amount to a claim for contribution from a joint
tortfeasor because it is founded neither in tort nor on any duty that the indemnitor owes to
27
the injured party. Rather, it is predicated on the indemnitor's breach of duty owing to the
indemnitee to properly perform its contractual responsibilities." (Id. at p. 1351.)
In this case, the allegations in Alliant's third cause of action for "equitable
indemnity" invoke principles of implied contractual indemnity. For example, paragraph
16 alleges the "custom and standard practice" to bill the insured for the tax. Paragraph 19
alleges City's acceptance of a $600,000 premium discount to offset the tax. Paragraph 65
alleges the City's legal obligation to pay the tax, and paragraph 67 alleges Alliant paid the
tax "to avoid further interest and penalties." Paragraph 68 alleges Alliant seeks
"equitable indemnity" for amounts "which in equity and good conscience and under the
law, are amounts payable by the City . . . ."
5. Unjust enrichment
Alliant's fourth cause of action, entitled "unjust enrichment," sought restitution of
the $600,000 premium reduction. Alliant alleged it was entitled to restitution because the
money was intended to be used for paying the surplus lines tax on the investment portion
of the policy, but instead, City retained the money. However, "'[t]here is no cause of
action in California for unjust enrichment.' [Citations.] Unjust enrichment is
synonymous with restitution." (Durell v. Sharp Healthcare (2010) 183 Cal.App.4th
1350, 1370.) The facts alleged, as already discussed, sound in contract.
C. The Trial Court Correctly Determined There Was No Duty To Defend
The trial court granted summary judgment on several alternative grounds, one of
which is "[t]here is no coverage or duty to defend under the subject insurance policy for
the failure to perform or breach of contract."
28
The trial court correctly determined AAIC owed no duty to defend from the first
tender of suit. The AAIC policy specifically excludes coverage for "Liability for
damages arising out of failure to perform or breach of a contractual obligation."
Glatfelter consistently cited this exclusion as a basis for denying coverage and defense
from tender (of the government claim) through conclusion.8 As explained ante, Alliant's
cross-complaint alleged City's liability on exclusively contractual grounds. Based on the
allegations of the cross-complaint, there was simply no potential for coverage for City's
alleged breach of an agreement to pay the taxes. "'The insurer's duty to defend does not
extend to claims for which there is no potential for liability coverage. This includes
claims . . . within an express exclusion from coverage.'" (Alterra Excess & Surplus Ins.
Co. v. Snyder, supra, 234 Cal.App.4th at p. 1401, italics omitted.)
In its reply brief, City contends AAIC is relying on the breach of contract
exclusion "for the first time on appeal" and should not be allowed to change theories.
City misreads the record. AAIC relied on the breach of contract exclusion in
opposing City's motion for summary adjudication and argued the issue in its
memorandum of points and authorities. AAIC also relied on the same exclusion in its
motion for summary judgment.
8 City contends the trial court decided there was no duty to defend based on facts
existing in 2014, but failed to decide the duty to defend issue based on facts existing at
the time of tender. City's argument fails because Glatfelter's initial denial of coverage in
February 2007 cited the policy exclusion for breach of contract and the trial court relied
on the same policy exclusion in granting summary judgment.
29
City also contends the exclusion for claims arising from breach of contract cannot
apply because Insurance Code section 1775.5 imposes a duty only on the surplus lines
broker to pay the tax, not the policyholder. However, City's argument misunderstands
the relevant standard, which involves initially a comparison between the allegations in
the complaint and the terms of the insurance policy. (Albert v. Mid-Century Ins. Co.,
supra, 236 Cal.App.4th at pp. 1289-1290.) Alliant's cross-complaint alleged City agreed
to pay the tax and breached that agreement. Paragraph 16 alleged an implied agreement
in accordance with the "custom and standard practice in the insurance brokerage
industry." Paragraph 19 alleged an oral agreement in consideration of a $600,000
premium reduction. Paragraph 54 alleged "City agreed to pay the amount of the surplus
lines tax." The alleged conduct falls squarely within the policy exclusion for breach of
contract.
Next, City contends there is additional evidence, outside the four corners of
Alliant's cross-complaint, that was available to AAIC and creates a potential of coverage.
City argues "the trial court erred in granting AAIC summary judgment when it never
decided the key issue in the case, i.e., the duty to defend on the basis of any potential
liability arising from facts available to the insurer from the complaint or other sources
available to it at the time of the tender of defense."
The extrinsic evidence City relies on mostly consists of its attorney's letters to
AAIC. Radcliff repeatedly told AAIC that based on conversations with Alliant's
attorneys, Alliant would present a negligence theory against the City. For example, on
May 6, 2008, Radcliff wrote that Alliant's attorneys "have informed me that they will try
30
the case as a negligence action against your insured rather than simply as a tax
reimbursement claim." In another letter, Radcliff wrote "it is the claimant's assertion that
it was through the negligence and errors of your insured" that the state assessed tax on the
investment portion of the AIG policy.
In addition to these letters, City notes in July 2011 the jury in City's case against
Alliant assessed City with 25 percent comparative fault—demonstrating Radcliff was
right: Alliant was intending to, and would, successful make negligence claims against
the City.
We reject City's argument about the comparative fault finding for two reasons.
First, the time span is too attenuated to draw any relevant conclusions. Alliant did not
even amend its answer to assert comparative fault until just eight days before the jury
returned its verdict in that case, and nearly four years after Alliant filed its cross-
complaint against City. Second, the comparative fault finding does not even actually
exist anymore. Based on City's stipulation, the trial court vacated the City's judgment
against Alliant.
More importantly, City's argument about the information contained in Radcliff's
letters to Glatfelter is based on a misunderstanding of law. In Gunderson v. Fire Ins.
Exchange (1995) 37 Cal.App.4th 1106, the court held "[a]n insured may not trigger the
duty to defend by speculating about extraneous 'facts' regarding potential liability or ways
in which the third party claimant might amend its complaint at some future date." (Id. at
p. 1114.)
31
Similarly, in Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992)
10 Cal.App.4th 533, where the insured's counsel sent several letters to the insurer setting
forth counsel's belief as to how the underlying action could potentially assert covered
claims, the court rejected the argument that these "self-serving letters" to the insurer
"bridged the coverage gap." (Id. at p. 540.) As the court explained, "[T]he insured may
not speculate about unpled third party claims to manufacture coverage." (Id. at p. 538;
see Baroco West, Inc. v. Scottsdale Ins. Co. (2003) 110 Cal.App.4th 96, 104 [finding that
even if insured's assertions in its tender letter of various factual situations that could
create a potential for coverage were "within the realm of possibility," the insured's
argument was still "nothing more than speculation" and did not trigger the duty to
defend].) "[W]hile the universe of facts bearing on whether a claim is potentially covered
includes extrinsic facts known to the insurer at the inception of the suit as well as the
facts in the complaint, it does not include made up facts, just because those facts might
naturally be supposed to exist along with the known facts. An insured is not entitled to a
defense just because one can imagine some additional facts which would create the
potential for coverage. . . . [¶] . . . [¶] . . . You don't prove an insurer has a duty to
defend merely by making a good argument for potential coverage, you show it by
demonstrating a potential for coverage under the terms of the actual policy." (Friedman
Prof. Management Co., Inc. v. Norcal Mutual Ins. Co. (2004) 120 Cal.App.4th 17, 34-
36.)
32
City asserts Radcliff was not speculating about amendments to Alliant's cross-
complaint and was not making anything up; rather, he was providing "facts and
information" by "concerning developments in the underlying action."
The record shows otherwise. Radcliff merely characterized Alliant's claims as
involving unspecified "actions and inactions" by City that "caused . . . a series of
events . . . [and] a further series of errors and miscommunications, leading to the
improper leveling of a premium tax." Counsel stated, "[I]t is the claimant's assertion that
it was through the negligence and errors of your insured" that the tax was assessed—
although Radcliff promised to provide "additional information and details"— he never
did.
There were neither evidence nor facts to support Radcliff's assertions about City
negligence. City never provided AAIC with facts that, if true, would establish a potential
for coverage; rather, City provided their counsel's uncorroborated analysis of the third
party's claims. An insured's counsel's self-serving legal opinion about potentially covered
claims "hardly constitutes a 'fact' known to [the insurer] which . . . gives rise to a . . . duty
to defend." (National Union Fire Ins. Co. v. Siliconix, Inc. (N.D.Cal. 1989) 726 F.Supp.
264, 272.)
There is nothing in City's tender of the suit that even hinted at a potentially
covered claim. And nothing AAIC received later altered that initial view. Having
determined the trial court properly granted summary judgment on this ground, we need
not consider any of the remaining grounds asserted by AAIC or City's responses.
33
DISPOSITION
The judgment is affirmed. The appeal from the denial of summary adjudication is
dismissed. AAIC shall recover its costs on appeal.
NARES, J.
WE CONCUR:
HUFFMAN, Acting P. J.
McDONALD, J.
34