DEMONET INDUSTRIES v. TRANSAMERICA INSURANCE COMPANY (1991)

Demonet Industries, Demonet Industries, Inc., Homeland International Centre San Jose Partners, Ltd., Joaquin de Monet, Ricardo de Monet, Charles Schonfeld, and Helga Schonfeld appeal from a judgment entered upon the trial court's sustaining of a demurrer without leave to amend.   The case arises out of the denial by respondents Transamerica Insurance Company, Transamerica Insurance Services, and Transamerica Insurance Group of appellants' request for a defense in a third-party lawsuit brought against appellants in connection with a contract dispute involving the sale and management of a commercial office building in San Jose.   Because we conclude that the trial court erred in sustaining the demurrer without leave to amend, we reverse.

I

 A demurrer admits all material facts properly pleaded in a complaint;  the factual allegations of a complaint are therefore deemed admitted for purposes of the review of a judgment of dismissal following the sustaining a demurrer to the complaint.  (White v. Davis (1975) 13 Cal.3d 757, 765, 120 Cal.Rptr. 94, 533 P.2d 222;  Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713, 63 Cal.Rptr. 724, 433 P.2d 732.)   According to the factual allegations of appellants' complaint and the documents attached to it and incorporated therein, on or about June 27, 1986, appellants entered into contractual agreements with August/Century, Ltd. (“August”) to sell August certain commercial property in San Jose of which appellants were then the owner (the “Property”).   As part of the sale, appellants agreed to operate, manage and maintain the property, and guaranteed the payment of a minimum monthly net income to August from the property for five years.   Approximately one year later, in June 1987, appellants terminated their management agreements with August with respect to the Property.   Thereafter, disputes arose between August and appellants regarding the way in which appellants had managed the Property, and the manner in which they had terminated their agreements with August.

Commencing in 1986, and at all relevant times herein, appellants were insured by two successive “Blanket General Liability” policies (the “Policies”) issued by respondents, together with a “Blanket Additional Coverage Endorsement” (the “Endorsement”).   The basic blanket liability Policies provided coverage to appellants for “all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence,” and gave respondents “the right and duty to defend” any suit against appellants seeking such damages.¹  The term “occurrence” was defined in the Policies as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured․”

This insurance coverage provided by the basic bodily injury and property damage Policies was extended by the Endorsement to cover damages that appellants were legally obligated to pay arising out of “personal injury or advertising injury to which this insurance applies, sustained by any person or organization and arising out of the conduct of the named insured's business․”  Once again, respondents had “the right and duty to defend any suit against the insured seeking damages on account of such injury, even if any of the allegations of the suit are groundless, false or fraudulent․” ²

Unlike the basic Policies, coverage under the Endorsement did not depend on the existence of an “occurrence,” “bodily injury” or “property damage.”   “Advertising injury” was defined as “injury arising out of an offense committed during the policy period occurring in the course of the named insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan.”

In May 1988, August filed a complaint against appellants (the “August Lawsuit”), alleging inter alia that “in or about May, 1987,” appellants had breached their contractual and fiduciary obligations under the contracts of sale and management agreement, committed fraud, and “interfered with August's prospective economic advantage.”   Specifically, August's complaint alleged that appellants “advised agents for potential tenants of the Property that [appellants] would soon be terminating their contracts with August and refused to provide information concerning rental space available at the property to such agents”;  and that as a consequence of this interference with August's “prospective economic advantage,” August had sustained damages including but not limited to loss of rents and “damage to its reputation and goodwill.”   The complaint further alleged that these acts were done in bad faith and with intent to injure August, and therefore prayed for exemplary damages in an amount of at least $10 million.

Appellants tendered the defense of the August Lawsuit to respondents in June 1988 under the Policies and the Endorsement.   Respondents denied coverage to appellants and refused to provide a defense.   Ultimately, the August Lawsuit went into arbitration, and appellants prevailed.   Thereafter, appellants filed the complaint against respondents in this action, alleging that in refusing to provide a defense in the August Lawsuit, respondents had committed a breach of contract and of the implied covenant of good faith and fair dealing.   Respondent demurred to the complaint, and the trial court sustained the demurrer without leave to amend and entered judgment in favor of respondents.

II

 Appellants contend that respondents had an obligation to defend the August Lawsuit pursuant to the provisions in the Endorsement, and that the trial court erred in sustaining respondents' demurrer without leave to amend.   In our view, appellants' contentions are meritorious.   The language in the insurance policy Endorsement issued by respondents to appellants was broad enough to cover liabilities potentially imposed under the allegations of the August Lawsuit.

 We start with the well-established principle that an insurer's duty to defend is separate from and broader than its duty to indemnify, and that the duty to defend is measured by the reasonable expectations of the insured.  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276–277, 54 Cal.Rptr. 104, 419 P.2d 168;  Ohio Casualty Ins. Co. v. Hubbard (1984) 162 Cal.App.3d 939, 943–944, 208 Cal.Rptr. 806.)   An insurer must defend a lawsuit as soon as it learns facts that create a potential for coverage under its insurance policy.  (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 217, 169 Cal.Rptr. 278;  State Farm Mut. Auto. Ins. Co. v. Flynt (1971) 17 Cal.App.3d 538, 548, 95 Cal.Rptr. 296.)   Where there is doubt as to whether the duty to defend exists, the doubt must be resolved in favor of the insured and against the insurer.  (Eichler Homes, Inc. v. Underwriters (1965) 238 Cal.App.2d 532, 538, 47 Cal.Rptr. 843.)   The fact that an insurer may not ultimately be liable as the indemnifier of the insured does not establish that it has no duty to defend.   (Ohio Casualty Ins. Co. v. Hubbard, supra, 162 Cal.App.3d at p. 944, 208 Cal.Rptr. 806.)

This court has had occasion to address this principle in the recent past.   In CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 222 Cal.Rptr. 276, we stated:  “The duty to defend is much broader than the duty to indemnify.   An insurer's duty to defend must be analyzed and determined 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.   If the insurer is obliged to take up the defense of its insured, it must do so as soon as possible, both to protect the interests of the insured, and to limit its own exposure to loss.   Unlike the duty to indemnify, which is only determined after liability is finally established, the duty to defend must be assessed at the outset of the case.   [Citations.]  Thus, we are not dealing with the question of whether the insurers were actually liable to indemnify [the insured] for the wrongs alleged in the ․ lawsuit, but rather with their duty to defend [the insured] against [the claims at issue] as of the time that lawsuit was filed.   This distinction is critical.

“The insurer's obligation to defend is not dependent on the facts contained in the complaint alone;  the insurer must furnish a defense when it learns of facts from any source that create the potential of liability under its policy.  [Citations.]  Indeed, the duty to defend is so broad that as long as the complaint contains language creating the potential of liability under an insurance policy, the insurer must defend an action against its insured even though it has independent knowledge of facts not in the pleadings that establish that the claim is not covered.”  (CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at pp. 605–606, 222 Cal.Rptr. 276;  fn. omitted.)

 Thus, we must examine the potential for liability created by the August Lawsuit under the subject insurance Policies and Endorsement, not the formal wording of the pleadings and the technical legal causes of action set forth therein.  (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 275–277, 54 Cal.Rptr. 104, 419 P.2d 168;  CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at pp. 606–607, 222 Cal.Rptr. 276.)   Moreover, any ambiguity or uncertainty in the Policies and the Endorsement must be resolved against the insurer, because it is the insurer drafts and therefore controls the language of the policy.   If semantically permissible, the contract must be construed in such a way as to reasonably and fairly achieve the objective of providing the greatest possible coverage for the insured, and to protect reasonable expectations of the insured.   (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 912, 226 Cal.Rptr. 558, 718 P.2d 920;  Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807–808, 180 Cal.Rptr. 628, 640 P.2d 764;  Aerojet–General Corp. v. Superior Court (1989) 211 Cal.App.3d 216, 225–232, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684;  California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 32, 35, 221 Cal.Rptr. 171;  1 Witkin, Summary of Cal.Law (9th ed. 1987) Contracts, § 699, pp. 632–634.)

Applying the above principles to the facts of this case, it is apparent to us that respondents' duty to defend appellants was in fact triggered by language in the August Lawsuit that raised at least the potential for coverage under the provision in the Endorsement relating to advertising injury;  specifically, that covering “injury arising out of ․ unfair competition․”

Under California law, “unfair competition” is defined by statute.  Business and Professions Code section 17200 broadly defines “unfair competition” to “mean and include unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertising.”   The Supreme Court in this state has consistently and repeatedly given the broadest possible definition to this term.

In Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 101 Cal.Rptr. 745, 496 P.2d 817, the Supreme Court rejected a narrow “common law” interpretation of “unfair competition” that would confine its usage to practices involving competitive injury, that is, injury resulting from the unfair practices of a competitor.  “Although in a common law context, competitive injury originally composed an essential element of the tort of ‘unfair competition,’ the Legislature [has] broadened the scope of legal protection against wrongful business practices generally, and in so doing extended to the entire consuming public the protection once afforded only to business competitors.   Thus, [former Civil Code] section 3369[, the predecessor of present Business and Professions Code section 17200,] indicates that ‘unfair competition’ as used in the section cannot be equated with the common law definition of ‘unfair competition,’ but instead specifies that, for the purposes of its provisions, unfair competition ‘shall mean and include unlawful, unfair or fraudulent business practice․’ ” (Barquis v. Merchants Collection Assn., supra, at p. 109, 101 Cal.Rptr. 745, 496 P.2d 817, emphasis in original.)

Similarly, in People v. McKale (1979) 25 Cal.3d 626, 159 Cal.Rptr. 811, 602 P.2d 731, Justice Clark, writing for a unanimous court, stated:  “Unfair competition is defined to include ‘unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertising.’  (Bus. & Prof.Code, § 17200.)   California courts have consistently interpreted such language broadly.   An ‘unlawful business activity’ includes ‘ “anything that can properly be called a business practice and that at the same time is forbidden by law.” ’  [Citation.]”  (People v. McKale, supra, at pp. 631–632, 159 Cal.Rptr. 811, 602 P.2d 731;  see also Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 209–210, 197 Cal.Rptr. 783, 673 P.2d 660;  Consumers Union of United States, Inc. v. Fisher Development, Inc. (1989) 208 Cal.App.3d 1433, 1437–1439, 257 Cal.Rptr. 151.)

Recently, Division Four of the First Appellate District ruled on the specific issue of whether the phrase “unfair competition,” as used in standard form comprehensive general liability insurance policies such as those before us in this case, is limited to the common law tort of passing off the goods of a business rival as one's own, or whether it also encompasses the broad statutory definition set forth in Business and Professions Code section 17200, “so as to embrace all unlawful, unfair or fraudulent business practices.”   The court concluded that the phrase must be given as broad a meaning in the context of its use in liability insurance policies as it has been in the statutory context.  (Bank of the West v. Superior Court (1991) 226 Cal.App.3d 835, 277 Cal.Rptr. 219 (hereafter Bank of the West ).)

In examining this issue, the court in Bank of the West rejected the insurer's narrow reading of “unfair competition,” which would limit the phrase's applicability in the insurance context to the common law definition of the tort as arising solely in strictly competitive business situations.   Citing and relying on Barquis v. Merchants Collection Assn., supra, 7 Cal.3d 94, 101 Cal.Rptr. 745, 496 P.2d 817, and quoting from Prosser and Keeton on Torts (5th ed. 1984) § 130, pp. 1013, 1015, the court gave the following description:  “ ‘Unfair competition is now a generic name for a number of related torts involving improper interference with business prospects․  [¶]  Unfair competition thus does not describe a single course of conduct or a tort with a specific number of elements;  it instead describes a general category into which a number of new torts may be placed when recognized by the courts.   The category is open-ended, and nameless forms of unfair competition may be recognized at any time for the protection of commercial values.’   [Citation.]”  (Bank of the West, supra, 226 Cal.App.3d at 845, 277 Cal.Rptr. 219.)

The court in Bank of the West held that the phrase as used in the form insurance policy was susceptible to a variety of interpretations;  that any ambiguity must be resolved against the insurer and in favor of providing coverage for the insured;  and that the phrase “unfair competition” as used in insurance policies extends at least as broadly as the phrase defined in Business and Professions Code section 17200.   We find the reasoning in Bank of the West persuasive and applicable to the facts of this case.   Thus, we reject respondents' contention that there could be no potential “unfair competition” liability under the August Lawsuit because appellants and August were not competitors.³

The allegations in the August Lawsuit concerning appellants' conduct in managing and marketing the Property and in communicating about it with prospective tenants clearly raise at least the potential of liability for “unfair competition.”   The August Lawsuit alleged that in or about May 1987, “agents for potential tenants of the Property contacted the [appellants] regarding the possibility of leasing available, unleased space in the Property”;  and that appellants informed those agents that they “would soon be terminating their contracts with August and refused to provide such agents information about rental space available in the Property.”   This allegation was repeated in the cause of action in the August Lawsuit “For Interference With Prospective Economic Advantage.”   Indeed, it constituted the principle factual allegation on which that particular cause of action was based, which alleged damages for loss of rents and “damage to [August's] reputation and goodwill.”   Similar allegations were again repeated in August's demand for arbitration.   As a matter of law with regard to determining potential liability for purposes of an insurer's duty to defend, the cause of action in the August Lawsuit for interference with prospective economic advantage was substantially identical to a cause of action for unfair competition.

Respondents' duty to defend in this case was not limited by the fact that, under the terms of the Endorsement, coverage for unfair competition is provided only if the tortious acts occurred in the course of the insured's “advertising activities.”   As stated by the court of appeal in Bank of the West:  “Under standard dictionary definition ‘advertising’ includes any activities designed to bring a seller's goods or services to the attention of potential buyers or to induce them to buy.   The term is not limited to paid announcements in print and broadcast media.   To advertise is ‘[t]o advise, announce, apprise, command, give notice of, inform, make known, publish’ or to ‘call to the public attention by any means whatsoever.’  (Black's Law Dict. (5th ed. 1979) p. 50, emphasis added.)   California courts similarly interpret advertising broadly:  even one-on-one oral representations are advertising under the California case law [citations].”  (Bank of the West, supra, 226 Cal.App.3d at p. 845, 277 Cal.Rptr. 219.)

The record here shows that the August Lawsuit specifically alleged that in the course of their activities as manager of the Property, appellants made statements to “agents of potential tenants of the Property,” including but not limited to refusals to provide information concerning rental space, which resulted in loss of rents to August and damage to its reputation and goodwill.   These statements obviously qualify as “one-on-one representations” to potential purchasers.   Despite the fact that they were negative inducements to purchase rather than positive ones, they certainly qualify as “advertising activities” under the applicable standards for the interpretation of coverage provisions of insurance policies, particularly since they were alleged to have taken place in the course of appellants' marketing duties as property manager.

Appellants' complaint against respondents simply alleges that they were served with the August Lawsuit, that they tendered the defense and indemnification of the August Lawsuit to respondents, that respondents had the duty to defend appellants under the terms of the Policies and Endorsement, and that respondents had failed and refused to defend appellants.   On the basis of these skeletal allegations, appellants seek damages for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty.

We agree with the trial court that this complaint, as currently presented, fails to set forth appellants' causes of action with sufficient specificity.   There are, for example, no allegations that the Policies and Endorsement cover liability for damages arising from allegations of unfair competition in the context of advertising activities, and that the August Lawsuit contained allegations of fact which gave rise to potential liability for such damages.

However, these were flaws which may have been corrected by giving the appellants an opportunity to amend their complaint to overcome the lack of specificity and certainty therein.   Here, the trial court sustained respondents' demurrer to appellants' complaint without leave to amend.  “ ‘An order sustaining a demurrer without leave to amend “ordinarily constitutes an abuse of discretion, if there is a reasonable possibility that the defect can be cured by amendment.”  [Citation.]  Liberality in permitting amendment is the rule, not only where a complaint is defective as to form but also where it is deficient in substance, if a fair prior opportunity to correct the substantive defect has not been given.  [Citations.]’ ”  (Cordonier v. Central Shopping Plaza Associates (1978) 82 Cal.App.3d 991, 999, 147 Cal.Rptr. 558.)

 We conclude that although the complaint in this case was drafted somewhat sketchily, it discloses the basis of valid causes of action against respondents for violation of the terms of their insurance Policies and Endorsement.   The trial court therefore abused its discretion in not giving appellants the opportunity to amend their complaint to state their allegations with greater certainty and specificity.

The judgment is reversed.   The trial court shall grant appellants leave to amend their complaint.   Appellants are awarded costs on appeal.

FOOTNOTES

1.   The coverage provision of both of the successive blanket general liability policies provided as follows:  “The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence.   The company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient.”

2.   The endorsement provided in pertinent part as follows:  “The company [respondents] will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or advertising injury to which this insurance applies, sustained by any person or organization and arising out of the conduct of the named insured's business, within the policy territory, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient․”

3.   Appellants dispute respondents' contention that they were not in a competitive economic relationship with August, and sought to amend their complaint to allege that August and appellants were, in fact, competitors.   An insurer's duty to defend does not depend on the allegations of the underlying complaint alone, but may arise from facts gleaned from any source that indicate the potential of liability under the policy.  (CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at pp. 605–606, 222 Cal.Rptr. 276.)   Appellants should therefore at the very least have been permitted to amend their complaint herein to allege the competitive relationship with August.   On this ground alone, we would be obliged to reverse the trial court judgment sustaining the demurrer without leave to amend.   As it is, because we hold that an actual competitive relationship is not a necessary element in a claim of unfair competition, appellants would not need to amend their complaint in this specific way.

MERRILL, Associate Justice.

WHITE, P.J., and CHIN, J., concur.