Hanover Insurance Company v. Paul M. Zagaris, Inc.

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS MAR 2 2018
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
HANOVER INSURANCE COMPANY, No. 17-15477
Plaintiff-Appellant, D.C. No. 3:16-cv-01099-WHA
v.
MEMORANDUM*
PAUL M. ZAGARIS, INC., a California
corporation; et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
William Alsup, District Judge, Presiding
Argued and Submitted February 13, 2018
San Francisco, California
Before: SCHROEDER and WATFORD, Circuit Judges, and SESSIONS,**
District Judge.
Plaintiff Hanover Insurance Company (“Hanover”) appeals the district
court’s ruling denying its motion for summary judgment and granting the
Defendants’ (the “Insureds”) motion for summary judgment.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable William K. Sessions III, United States District Judge
for the District of Vermont, sitting by designation.
1. In this insurance coverage dispute, Hanover contends that the
Miscellaneous Professional Liability Policy (the “Policy”) it issued to the Insureds
does not require Hanover to defend the Insureds in a third-party lawsuit filed
against them. The lawsuit, a putative class action filed in the Superior Court of the
State of California, County of Contra Costa (the “Spracher Lawsuit”), alleged that
Defendant Paul M. Zagaris, Inc., a real estate brokerage company, received
undisclosed kickbacks from the sale of natural-hazard disclosure reports (“NHD
reports”) to its clients. See Spracher v. Zagaris, No. CIVMSC15-02030 (Cal.
Super. Ct. filed Nov. 5, 2015). The Spracher Lawsuit alleged claims for breach of
fiduciary duties, aiding and abetting such breaches, violations of Section 1710(3)
of the California Civil Code (prohibiting “deceit” by omission when obligated to
disclose), violations of Section 17200 of the California Business and Professions
Code, constructive fraud, unjust enrichment, civil conspiracy, and accounting.
Hanover agreed to defend the Insureds in the Spracher Lawsuit subject to a
reservation of rights.
Hanover’s first reservation of rights letter cited certain provisions of the
Policy and mistakenly cited a version of Exclusion 1 that had been superseded by
the version in the Real Estate Professionals Endorsement appended to the Policy.
Hanover’s second reservation of rights letter focused on Exclusion 11, stating that
“[b]ased on Policy 11, Hanover is defending under a reservation of rights those
2 17-15477
counts for violations of California’s deceptive practices act [sic] and business code
prohibiting unfair, unlawful or fraudulent and unfair competition.”
Hanover filed the instant action seeking, inter alia, declaratory relief that it
has no duty to defend or indemnify the Insureds in the Spracher Lawsuit based on
Exclusion 11 of the Policy. Exclusion 11 exempts Hanover’s duty to defend
claims “arising out of false advertising, misrepresentation in advertising, antitrust,
unfair competition, restraint of trade, unfair or deceptive business practices,
including but not limited to, violations of any local, state or federal consumer
protection laws.” The district court explained that
Hanover contends the Spracher action is entirely excluded from
coverage by Exclusion 11 because each cause of action therein arises
out of “deceptive business practices.” Our insureds respond that the
Spracher action is a “mixed action” because there remains a potential
for coverage for some causes of action – for breach of fiduciary duty
and constructive fraud – which will not rely on a finding of deceptive
business practices. Thus, they argue, Hanover has a duty to defend all
claims.
Both parties moved for summary judgment, and the district court denied Hanover’s
motion and granted the Insureds’ motion.
2. California law dictates that “any limitation on the coverage provided by a
liability insurance policy must be express and consistent with the reasonable
expectations of the insured.” Am. Safety Indem. Co. v. Admiral Ins. Co., 220 Cal.
App. 4th 1, 4 (2013). “Doubts concerning the potential for coverage and the
existence of [a] duty to defend are resolved in favor of the insured.” Reg’l Steel
3 17-15477
Corp. v. Liberty Surplus Ins. Corp., 226 Cal. App. 4th 1377, 1389 (2014) (citation
omitted). In an action seeking declaratory relief on the issue of the duty to defend,
“the insured must prove the existence of a potential for coverage, while the insurer
must establish the absence of any such potential. In other words, the insured need
only show that the underlying claim may fall within policy coverage; the insurer
must prove it cannot.” Montrose Chem. Corp. v. Super. Ct., 6 Cal. 4th 287, 300
(1993). In an action with potentially-covered claims and excluded claims, the
insurer has a “duty to defend the entire ‘mixed’ action prophylactically, as an
obligation imposed by law in support of the policy.” Buss v. Super. Ct., 16 Cal.
4th 35, 48–49 (1997).
3. The district court correctly reasoned that the Spracher causes of action
for breach of fiduciary duty and constructive fraud do not necessarily “arise out of
. . . deceptive business practices” such that Exclusion 11 certainly excludes
coverage for them. These causes of action rely on the Insureds’ omissions—
whether or not fraudulent or deceptive. As the district court explained, it remains
possible that the Insureds could be found not to have engaged in deceptive business
practices even if they are found to have breached their fiduciary duties by failing to
disclose their interest in the sales of the NHD reports, or engaged in constructive
fraud via the same omission. Hanover has not met its burden to demonstrate that
4 17-15477
there is no possible scenario in which the claims in the Spracher Lawsuit fall
within the Policy.
Thus, Hanover has a duty to defend the Spracher Lawsuit, and the district
court’s decision is AFFIRMED.
5 17-15477