516 INC v. RICHMOND NATIONAL INSURANCE COMPANY (2025)

PROCEEDINGS (IN CHAMBERS): ORDER GRANTING DEFENDANT'S MOTION TO DISMISS [10]

Before the Court is Defendant's Richmond National Insurance Company (“Defendant” or “RNIC”) Motion to Dismiss (“Motion” or “Mot.”) (Dkt. 10) Plaintiff's 516, Inc. (“Plaintiff”) Complaint (“Compl.”) (Dkt. 1-2). For the following reasons, the Court hereby GRANTS Defendant's Motion.

I. Background

A. Facts

The following facts are taken from Plaintiff's Complaint. Plaintiff is a commercial plumbing company with its corporate office in Orange County, California. Compl. ¶ 1. Defendant is a surplus lines insurer registered to do business in the State of California. Id. ¶¶ 2-3. On or about February 1, 2024, Defendant issued a Commercial General Liability policy (“CGL Policy”) to Plaintiff with a policy period of February 1, 2024, to February 1, 2025. Id. ¶¶ 4-5. Pursuant to the policy, Plaintiff paid an insurance premium of $16,800. Id. ¶ 15.

The CGL Policy's terms are outlined in the Commercial General Liability Coverage Form and contains multiple provisions. Compl., Ex. A, Commercial General Liability Coverage Form (“CGL Policy”) (Dkt. 1-2). Section I pertaining to the Bodily Injury and Property Damage Liability, subsection 1 (a) states that Defendant “will pay those sums that an insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. [Defendant] will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, [Defendant] will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.” Id. at 1. Section V outlines the Definitions and subsection 18 defines a “suit” as “a civil proceeding in which damages because of ‘bodily injury’, ‘property damage,’ or ‘personal and advertising injury’ to which this insurance applies are alleged.” Id. at 16. Section IV which is titled “Commercial General Liability Conditions,” subsection 2(d) includes a “no voluntary payments provision” stating that “[n]o insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” Id. at 11.

On June 10, 2024, Plaintiff alleges to have installed a plumbing fixture on the third floor of a commercial remodeling project that leaked overnight and caused substantial damage to the building. Id. ¶ 9. This damage was alleged to affect all three floors of the building and the basement. Id. The total cost of remediation and repair exceeded $100,000, and Plaintiff alleges to have become “legally obligated for these costs.” Id. ¶ 12. Plaintiff does not allege that any suit was filed against Plaintiff for the remediation expenses. See generally Compl. According to Plaintiff, Plaintiff reported the loss to George L. Brown Insurance Agency, an agent for Defendant, on or around June 10, 2024, and it was decided that further investigation of the leak was warranted. Id. ¶ 10. On or about July 11, 2024, George L. Brown Insurance Agency reported the loss to Defendant. Id. ¶ 11. Plaintiff claims to have fully cooperated with Defendant's investigation of the claim. Id. ¶ 12. On September 13, 2024, Defendant denied coverage for the claim. Id. ¶ 13. Plaintiff retained counsel and asked Defendant to reconsider, but Defendant maintained its denial of coverage. Id.

B. Procedural History

On April 11, 2025, Plaintiff filed suit in Orange County Superior Court for breach of contract and breach of implied covenant of good faith and fair dealing. See generally Complaint (“Compl.”) (Dkt. 1-2). On June 4, 2025, Defendant removed the action to this Court, asserting diversity jurisdiction (Dkt. 1). Defendant filed this instant Motion on June 11, 2025. Plaintiff filed its Opposition (“Opp'n”) (Dkt. 18) on June 23, 2025. Defendant filed a Reply (“Reply”) (Dkt. 20) on June 30, 2025.

II. Legal Standard

A. Rule 12(b)(6)

Under Federal Rule of Civil Procedure 12(b)(6), a complaint must be dismissed when a plaintiff's allegations fail to set forth a set of facts that, if true, would entitle the complainant to relief. Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (holding that a claim must be facially plausible in order to survive a motion to dismiss). The pleadings must raise the right to relief beyond the speculative level; a plaintiff must provide “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)). On a motion to dismiss, a court accepts as true a plaintiff's well-pleaded factual allegations and construes all factual inferences in the light most favorable to the plaintiff. See Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). A court is not required to accept as true legal conclusions couched as factual allegations. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.

In evaluating a Rule 12(b)(6) motion, review is ordinarily limited to the contents of the complaint and material properly submitted with the complaint. Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002); Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555, n.19 (9th Cir. 1990). Under the incorporation by reference doctrine, the court may also consider documents “whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading.” Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119, 1121 (9th Cir. 2002). The court may treat such a document as “part of the complaint, and thus may assume that its contents are true for purposes of a motion to dismiss under Rule 12(b)(6).” United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

When a motion to dismiss is granted, the court must decide whether to grant leave to amend. The Ninth Circuit has a liberal policy favoring amendments, and thus leave to amend should be freely granted. See, e.g., DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992). However, a court need not grant leave to amend when permitting a plaintiff to amend would be an exercise in futility. See, e.g., Rutman Wine Co. v. E. & J. Gallo Winery, 829 F.2d 729, 738 (9th Cir. 1987) (“Denial of leave to amend is not an abuse of discretion where the pleadings before the court demonstrate that further amendment would be futile.”).

III. Discussion

A. Breach of Contract

Plaintiff's first cause of action alleges that Defendant breached its contract with Plaintiff by refusing to indemnify Plaintiff for the loss Plaintiff suffered because of the damage by water of Plaintiff's commercial remodeling project. Compl. ¶¶ 9, 12. Defendant counters that Plaintiff's breach of contract claim fails because the loss Plaintiff suffered did not occur as a result of a “suit,” and because Plaintiff's conduct violated the policy's “no voluntary payments” provision. Mot. at 1.

To establish a breach of contract, Plaintiff must demonstrate (1) the existence of a valid contract, (2) Plaintiff's performance or excuse for nonperformance, (3) Defendant's breach of the contract, and (4) resulting damages to Plaintiff because of the breach. Pyramid Techs., Inc. v. Hartford Cas. Ins. Co., 752 F. 3d 807, 818 (9th Cir. 2014) (citing Abdelhamid v. Fire Ins. Exch., 182 Cal.App.4th 990, 106 Cal. Rptr. 3d 26, 33 (2010)).

Moreover, when an insurer is moving to dismiss a plaintiff's complaint based on the language of the insurance policy, it must establish conclusively that this language “unambiguously negates beyond reasonable controversy the construction alleged in the body of the complaint.” Palacin v. Allstate Ins. Co., 119 Cal. App. 4th 855, 862, 14 Cal.Rptr.3d 731 (2004) (citing Columbia Cas. Co. v. Nw Nat'l. Ins. Co., 231 Cal. App. 3d 457, 468, 282 Cal.Rptr. 389 (1991)). To meet this burden, Defendant must show that the language in the policy supporting their position is “so clear that parole evidence would be inadmissible to refute it.” Id. (citing 231 Cal. App. 3d at 469, 282 Cal.Rptr. 389). Absent this showing, the court must deny the motion to dismiss. Id.

In dispute here is whether Defendant breached the contract by denying Plaintiff coverage for the costs suffered from remedying the water damage and failing to properly investigate the claim. Defendant argues there was no breach because Plaintiff's claim was not covered by the CGL Policy. Mot. at 6. Defendant contends that Plaintiff's losses were not from any “damages” as defined in the policy and Plaintiff violated the “no voluntary payments” provision. Mot. at 7, 11.

i. Do Plaintiff's Losses Constitute “Damages” Under the CGL Policy?

Defendant argues it has met its burden of showing it was not required to provide coverage to Plaintiff as a matter of law because indemnity coverage under its written policy is triggered only when Plaintiff is “legally obligated to pay damages” because of a “suit.” Mot. at 1. Defendant further argues that under California law, this limits the damages Defendant is responsible for to only those “pursuant to a court order.” Id. Defendant has the burden of proving as a matter of law that the word “damages” encompasses only those created because of a court order. See George v. Auto. Club of S. Cal., 201 Cal. App. 4th 1112, 1127, 135 Cal.Rptr.3d 480 (2011) (citing Palacin, 119 Cal. App. 4th at 862, 14 Cal.Rptr.3d 731).

California courts read the words of a contract in their “ordinary and popular sense, rather than according to their strict legal meaning.” Cal. Civ Code § 1644; see also Certain Underwriters at Lloyd's of London v. Superior Ct., 24 Cal. 4th 945, 969, 103 Cal.Rptr.2d 672, 16 P.3d 94 (2001). As was first articulated in the California Supreme Court case Lloyd's, and further developed in subsequent cases, the “ordinary and popular” reading of “damages” is that they “exist traditionally inside of court.” Lloyd's, 24 Cal. 4th at 969, 103 Cal.Rptr.2d 672, 16 P.3d 94; see also Brookfield Prop. Grp., LLC v. Liberty Mut. Fire Ins. Co., 679 F. Supp. 3d 971, 982 (C.D. Cal. 2023). In Lloyd's, the California Supreme Court interpreted the insuring agreement of a commercial general liability policy almost identical to the policy in this case. Lloyd's, 24 Cal. 4th at 955, 103 Cal.Rptr.2d 672, 16 P.3d 94. The dispute concerned whether expenses an administrative agency ordered the insured to pay were such that they constituted “sums that the insured becomes legally obligated to pay as damages.” Id. at 955, 966, 103 Cal.Rptr.2d 672, 16 P.3d 94. The California Supreme Court ruled that these expenses were not covered by the insurance policy because the expenses ordered by the administrative agency “[did] not constitute money ordered by a court,” and therefore did not fall within the “ordinary and popular sense” of the word damages. Id. at 966, 969, 103 Cal.Rptr.2d 672, 16 P.3d 94.

The California Supreme Court further found that the “ordinary and popular” interpretation of “damages” was strengthened when reading the policy in its full context, because the policy in question linked damages to the word “suit.” Id. at 969, 103 Cal.Rptr.2d 672, 16 P.3d 94. The ordinary and popular reading of “suit” is “a dispute in the form of a civil action prosecuted in a court.” Id. at 957-58, 103 Cal.Rptr.2d 672, 16 P.3d 94 (citing Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal. 4th 857, 878, 77 Cal.Rptr.2d 107, 959 P.2d 265 (1998)). The policy therefore impliedly links “damages” to a “suit” because it is through a suit that the cost of damages is determined. See Lloyd's, 24 Cal. 4th at 969, 103 Cal.Rptr.2d 672, 16 P.3d 94.

Here, the policy at hand defined “suit” as “a civil proceeding in which damages because of ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged.” CGL Policy at 16. No civil action has been filed by any party regarding the water damage incident on June 10, 2024. Mot. at 7. And therefore, no court could have ordered that Plaintiff pay damages to a third party. Plaintiff argues Defendant's claim that it has no obligations to defend or indemnify Plaintiff because there was no suit is “completely erroneous.” Opp'n at 19. Plaintiff, however, does not provide an adequate basis in the law to support this position, and never alleges a suit occurred. See generally Compl; see also Opp'n. Based on the allegations in the Complaint and the text of the CGL Policy, Plaintiff cannot establish that Defendant has a duty to indemnify plaintiff for the cost of rectifying the water damage from the incident. See Zox LLC v. W. Am. Ins. Co., No. 23-55125, 2024 WL 512561, at *2 (9th Cir. Feb. 9, 2024) (“Where there is no duty to defend, there cannot be a duty to indemnify.”).

California courts have said that a court “can never determine that the meaning of a document is clear and unambiguous without provisionally considering any extrinsic evidence offered by the parties.” George, 201 Cal. App. 4th at 1128, 135 Cal.Rptr.3d 480 (citing generally Fremont Indem. Co. v. Fremont Gen. Corp., 148 Cal. App. 4th 97, 55 Cal.Rptr.3d 621 (2007)). Plaintiff, however, does not provide any extrinsic evidence for the Court to consider that would call into question the plain meaning of the terms of the agreement. Plaintiff therefore has failed to provide extrinsic evidence necessary for the Court to conclude the contract is “reasonably susceptible to Plaintiff's alleged interpretation.” Id.

ii. “No Voluntary Payments” Provision

Defendant separately argues that the “no voluntary payments” provision of the CGL Policy bars coverage for Plaintiff's claim. Mot. at 11. The provision states that “[n]o insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” CGL Policy at 11. Defendant contends that Plaintiff incurred the remediation expenses without Defendant's consent and before Defendant denied coverage. Mot. at 11-12. Defendant also contends that Plaintiff's payment was wholly “voluntary” and no exceptional circumstances like duress apply. Reply at 6. Therefore, Defendant argues that Plaintiff's claims are barred and the remediation expenses must be incurred “at that insured's own cost.” Mot. at 13.

Plaintiff puts forth multiple arguments to refute the “no voluntary payments” provision's effect. Plaintiff argues that (1) it had “no choice” but to pay for the remediation expenses immediately; (2) Defendant should be estopped from disclaiming responsibility for the expenses because Defendant unjustly denied Plaintiff's claim; (3) Defendant was obligated to affirmatively advise Plaintiff about the “no voluntary payments” provision; and (4) the provision is unenforceable because it is vague, ambiguous, and overly broad. See generally Opp'n.

Because there was no “suit” and Plaintiff was not legally obligated to pay any “damages,” it has already been proven that Plaintiff's claim fell outside of the CGL Policy's indemnity coverage and Defendant did not breach by denying coverage. Therefore, the Court need not address the merits of Defendant's “no voluntary payments” provision argument.

iii. Duty to Investigate

Plaintiff provides conflicting information on whether Defendant investigated Plaintiff's claim before denying coverage. In its Opposition, Plaintiff argues that Defendant declined Plaintiff's coverage “without any investigation whatsoever.” Opp'n. at 4-5. However, Plaintiff did not plead in its Complaint that Defendant did not investigate. In fact, Plaintiff pleaded that it “fully cooperated with RNIC's investigation.” Compl. ¶ 12.

Plaintiff's Opposition contends that Defendant had a duty to investigate Plaintiff's claim, and Defendant's denial of coverage without investigation constitutes a breach of contract and breach of good faith. Opp'n. at 5. Plaintiff does not point out any provision of the CGL Policy that imposes a duty to investigate a pre-suit claim. Rather, Plaintiff argues that Defendant's lack of investigation does not comport with industry standards and case law imposes the duty to investigate. Opp'n. at 5-7. Defendant contends that RNIC has discretion to investigate pre-suit claims but is not obligated to do so under the contract because the CGL Policy's indemnity coverage is only triggered when there are damages from a suit. Reply at 5, 12-14.

Even if Defendant did not investigate Plaintiff's claim or did not do so thoroughly, Defendant had no duty to investigate and therefore did not breach. Under California law, a CGL insurer has discretion, but no legal duty, to investigate a pre-suit claim against its insured. Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal. 4th 857, 878, 77 Cal.Rptr.2d 107, 959 P.2d 265 (1998), as modified (Sept. 23, 1998); Kinsale Ins. Co. v. R.P. Ruiz Corp., 764 F. Supp. 3d 935, 939 (C.D. Cal. 2025). The CGL Policy's explicit language also supports this general rule. The CGL Policy states that RNIC “may, at [its] discretion, investigate any ‘occurrence.’ ” CGL Policy at 1. Here, no third party filed a suit or claim against Plaintiff and Plaintiff's claim for the loss it incurred fell wholly outside of the CGL Policy coverage. Therefore, Defendant did not breach the contract if it failed to investigate.

Accordingly, the Court GRANTS Defendant's Motion as to Plaintiff's breach of contract claim WITHOUT PREJUDICE.

B. Breach of Implied Covenant of Good Faith and Fair Dealing

Plaintiff's second cause of action alleges that Defendant RNIC breached its obligation of good faith and fair dealing with Plaintiff by “unreasonable denying to fully and promptly pay for Plaintiff's covered loss.” Compl. ¶ 22. Defendant responds that it did not breach their contract with Plaintiff, and because Plaintiff is not entitled to coverage under the policy for the insurance claim, the claim for breach of the implied covenant fails. Mot. at 13-14.

To establish a claim for a breach of the implied covenant of good faith and fair dealing, Plaintiff must demonstrate (1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause. Wilshire Manor Apartments, LLC v. State Farm Gen. Ins. Co., 732 Fed. Appx. 613, 614 (9th Cir. 2018) (citing Love v. Fire Ins. Exch., 221 Cal.App.3d 1136, 271 Cal. Rptr. 246, 255 (1990)). California courts have held that when there is no breach of contract, there necessarily is no breach of the implied covenant of good faith and fair dealing. Razuki v. AmGUARD Ins. Co., No. 24-2352, 2025 WL 1604592, at *1 (9th Cir. June 6, 2025) (citing Love, 221 Cal.App.3d at 1153, 271 Cal. Rptr. 246). This makes sense here because there are no benefits due under the policy as analyzed above in the breach of contract claim. Because the complaint does not establish that Defendant had a duty to defend or indemnify Plaintiff under the CGL Policy for the reasons discussed above, Plaintiff cannot state a claim for breach of the implied covenant of good faith and fair dealing. See Nat'l Mech. Servs., Inc. v. Kinsale Ins. Co., 620 F. Supp. 3d 1096, 1104 (S.D. Cal. 2022).

Thus, the Court GRANTS Defendant's Motion to Dismiss as to Plaintiff's second claim WITHOUT PREJUDICE.

IV. Disposition

For the reasons set forth above, the Court GRANTS Defendant's Motion, DISMISSES all of Plaintiff's claims, and GRANTS Plaintiff Leave to Amend. Amended Complaint to be filed within thirty days.

Accordingly, the motion hearing and scheduling conference set for July 14, 2025 is hereby VACATED.

DAVID O. CARTER, JUDGE