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FEINBERG v. CANADIAN INSURANCE COMPANY OF CALIFORNIA

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Court of Appeal, Second District, Division 7, California.

J. Jay FEINBERG, Plaintiff and Appellant, v. CANADIAN INSURANCE COMPANY OF CALIFORNIA, Defendant and Respondent.

No. B067027.

Decided: January 25, 1993

Guy Sanders, Avalon, for plaintiff and appellant. Fisher & Hurst, Geoffrey A. Beaty and Kevin J. Chechak, San Francisco, for defendant and respondent.

This appeal is from a summary judgment in favor of an insurer (respondent, The Canadian Insurance Company of California) who refused to defend its insured (Island Industries, Inc.) against a third party lawsuit.   We conclude there was a triable issue of fact concerning whether or not the third party lawsuit “potentially [sought] damages within the coverage of the policy” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168) and reverse the summary judgment.

FACTUAL AND PROCEDURAL BACKGROUND

J. Jay Feinberg (appellant) was president of Island Industries, a potato chip maker, which marketed its product under the name “Rusty's Island Chips.”

Another potato chip maker, Aloha Pacific, Inc., also marketed its product under the name “Rusty's Island Chips.”

On October 19, 1989, counsel for Aloha Pacific, Inc. wrote a “cease and desist” letter to Island Industries, Inc.   About a month later, on November 16, 1989, Aloha Pacific, Inc. filed suit against Island Industries, Inc. in federal court for trademark infringement and unfair competition (the third party lawsuit).   Upon being served, appellant tendered defense to its insurer, The Canadian Insurance Company of California (respondent).

Respondent rejected the tendered defense.   Its senior litigation specialist, in a December 1, 1989, letter to appellant, stated:  “We have reviewed the complaint for insurance coverage ․ [and] have noted the complaint seeks no monetary damages.   Since our advertising injury coverage only pays for liability for ‘damages' it does not appear to us that this suit would come within the protection of the policy.”

On February 20, 1990, the federal court granted Aloha Pacific, Inc. a preliminary injunction against Island Industries.   Aloha Pacific, Inc. promptly informed Island Industries it intended to amend its complaint to seek damages.   Island Industries informed respondent and then furnished to respondent a copy of the amended complaint which named appellant (J. Jay Feinberg) as an additional defendant and added a prayer for monetary damages.   Thereafter, on May 23, 1990, respondent informed appellant's counsel it would defend the third party suit.

On February 27, 1991, appellant filed the instant “failure to defend” action.   On March 3, 1992, the trial court granted respondent's summary judgment motion, determining respondent “had no duty to defend Island Industries, Inc. or J. Jay Feinberg against the original complaint.”   This appeal followed.

DISCUSSION

1. Summary judgment:  standard of review

A motion for summary judgment “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”  (Code Civ.Proc., § 437c, subd. (c).)  “The purpose of summary judgment is to penetrate evasive language and adept pleading and to ascertain, by means of affidavits, the presence or absence of triable issues of fact.  [Citation.]   Accordingly, the function of the trial court in ruling on a motion for summary judgment is merely to determine whether such issues of fact exist, and not to decide the merits of the issues themselves.”  (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107, 252 Cal.Rptr. 122, 762 P.2d 46.)

“A defendant is entitled to summary judgment if the record establishes as a matter of law that none of the plaintiff's asserted causes of action can prevail.  [Citation.]   To succeed, the defendant must conclusively negate a necessary element of [or establish a complete defense to each cause of action of] the plaintiff's case, and demonstrate that under no hypothesis is there a material issue of fact that requires the process of a trial.”  (Ibid.)

 Since “[s]ummary judgment is a drastic measure that deprives the losing party of a trial on the merits ․ [i]t should therefore be used with caution, so that it does not become a substitute for trial.  [Citation.]   The affidavits of the moving party should be strictly construed, and those of the opponent liberally construed.  [Citations.]   Any doubts as to the propriety of granting the motion should be resolved in favor of the party opposing the motion.”  (Ibid.)

2. Duty to defend:  legal standard

 An insurer's duty to defend its insured against claims which create a potential for indemnity have been accurately characterized as “wide-ranging.”   (Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149, 1157, 8 Cal.Rptr.2d 263.)

 “It is axiomatic that an insurer's duty to defend is separate from and broader than its duty to indemnify.  [Citation.]   The duty to defend is not measured solely by how the third party denominates its complaint or frames its theories, but is also measured by whether there is any potential for the third party's complaint to assert a covered claim.   Thus, if the insurer learns facts—whether from the complaint, the insured or another source—which create a potential for the third party to assert a covered claim, the insurer owes a duty to defend.  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275–277, 54 Cal.Rptr. 104, 419 P.2d 168.)

 “Additionally, the duty to defend is measured at the outset of the litigation because, unlike the duty to indemnify, which is determinable only after the basis for the insured's liability is finally established, the duty to defend is based on the potential for the establishment of a covered claim, not the actual establishment of a covered claim.”  (6 Cal.App.4th 1157, 8 Cal.Rptr.2d 263.)  (Original emphasis.)   Only by “tak[ing] up the defense of its insured ․ as soon as possible” may the interests of the insured be fully protected.  (CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 605, 222 Cal.Rptr. 276.)

As the seminal Gray v. Zurich Insurance Co. case made clear, the language in a third party's pleading cannot insulate an insurer from its duty to defend its insured.  Gray stated:  “[An insurer] cannot construct a formal fortress of the third party's pleadings and retreat behind its walls.   The pleadings are malleable, changeable and amendable.”  (Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 276, 54 Cal.Rptr. 104, 419 P.2d 168.)

3. Duty to defend:  application of legal standard to the facts

Respondent argued to the trial court that it had no initial duty to defend appellant because the third party's complaint sought an injunction not damages and was therefore outside the coverage of the policy.   The trial court agreed and accordingly granted summary judgment in respondent's favor.

The argument and the ruling were violative of Gray and in error:  “To restrict the defense obligation of the insurer to the precise language of the pleading would not only ignore the thrust of the cases but would create an anomaly for the insured.”  (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276, 54 Cal.Rptr. 104, 419 P.2d 168.)

 For the following reasons, there was a triable issue of fact concerning whether or not the third party lawsuit “potentially [sought] damages within the coverage of the policy” (id., at p. 275, 54 Cal.Rptr. 104, 419 P.2d 168):  (1) the third party, in its October 19, 1989, “cease and desist” letter indicated its intent to seek both “monetary and injunctive relief.”   It made clear that unless appellant immediately desisted from using the subject trademark—which appellant continued to use—it would seek “profits, ․ damages, ․ costs,” etc. (2) the third party complaint stated facts providing grounds for money damages (3) the third party complaint, although initially seeking only equitable relief to which no jury trial right attached, stated:  “Plaintiffs hereby demand a jury trial on all claims to which such right attaches.”  (4) according to the declaration of third party's counsel, on December 1, 1989, he told respondent's senior litigation specialist “that my clients were not presently seeking damages and would not do so provided that Island Industries immediately discontinued its use of my clients' trademarks and associated trade dress.   I certainly would not have said anything to suggest to Ms. Benson that my clients would not be seeking damages in the event that Island Industries continued to use the trademarks and trade dress.”  (5) appellant's counsel informed respondent's senior litigation specialist that on December 7, 1989, third party's counsel “represented ․ that they can always amend the Complaint to allege damages, and that they may do just that.”   and (6) the third party made a document production request for a copy of appellant's insurance policy, irrelevant if only equitable relief was sought.

The trial court erred in granting respondent's summary judgment motion.1

DISPOSITION

The judgment is reversed.   Costs on appeal are awarded to appellant.

FOOTNOTES

1.   Although the third party suit initially named only Island Industries, Inc., not J. Jay Feinberg (appellant), there was a triable issue of fact concerning whether or not appellant had been assigned Island Industries' cause of action against respondent.   This issue was not decided by the trial court adversely to appellant.   Additionally, just as the third party lawsuit potentially sought damages, it also potentially sought damages against appellant.   Respondent's reliance upon Lofberg v. Aetna Cas. & Sur. Co. (1968) 264 Cal.App.2d 306, 70 Cal.Rptr. 269 is misplaced.   It is inapposite.

FRED WOODS, Associate Justice.

LILLIE, P.J., and JOHNSON, J., concur.

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