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ASSOCIATED INDUSTRIES INSURANCE COMPANY, INC., Plaintiff, v. MCNICHOLAS & MCNICHOLAS LLP, et al., Defendants.
ORDER RE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT 
This matter is before the Court on the motion for summary judgment (“MSJ”) by Plaintiff Associated Industries Insurance Company, Inc. (“Associated”) on its declaratory relief claims against Defendants McNicholas & McNicholas LLP; attorneys Matthew McNicholas, Juan Victoria, and Douglas Winter (together, “McNicholas”); and Omar Gomez. [Doc. # 52.] Associated also moves for partial summary adjudication on McNicholas's Affirmative Defenses. Id. McNicholas and Gomez each filed separate Oppositions. [Doc. ## 54, 55.] Associated filed a Reply. [Doc. # 56.] The Court held a hearing on the Motion on October 16, 2020. For the reasons set forth below, the Court GRANTS in part and DENIES in part the MSJ.
FACTUAL AND PROCEDURAL BACKGROUND 1
This is an insurance coverage dispute concerning whether Associated owed a duty to defend or indemnify McNicholas in a legal malpractice lawsuit brought against it by Gomez in the Los Angeles County Superior Court, tiled Omar Gomez v. McNicholas & McNicholas, LLP, et al., Case No. 19-ST-CV-18180 (the “Suit”). The facts are largely undisputed.
A. The Suit
McNicholas represented Gomez in a personal injury action that Gomez first brought against Suncor Energy U.SA., Inc. (“Suncor”), Safway Services, LLC (“Safway”), and Total Safety U.S., Inc. (“Total Safety”) on September 24, 2014 in Los Angeles County Superior Court (the “First California Action”). SUF 15-16. Gomez's alleged injury occurred on October 29, 2012, meaning the First California Action was filed just one month prior to the expiration of the statute of limitations. SUF 14. On January 8, 2015, Suncor filed a Motion to Quash for lack of personal jurisdiction, which the California court granted on March 26, 2015. SUF 35-36. On April 16, Total Safety filed a Motion to Dismiss, which Safway later joined, asserting that Suncor was a necessary and indispensable party. SUF 37-38. On May 28, McNicholas refiled the same action on behalf of Gomez in Colorado state court against Suncor, Total Safety, and Safway (the “Colorado Action”). SUF 39. McNicholas then voluntarily dismissed the First California Action on June 11, while Total Safety and Safway's Motion to Dismiss was still pending. SUF 40.
On July 1, 2015, after the First California Action had been voluntarily dismissed, Suncor filed a Motion to Dismiss the Colorado Action on the grounds that the claims were barred by the statute of limitations. SUF 45. On July 11, McNicholas refiled Gomez's claims in California state court against Total Safety and Safway (the “Second California Action”). SUF 50. McNicholas then stipulated on behalf of Gomez to dismiss Suncor from the Colorado Action, with prejudice, which the Colorado court granted on August 5, 2015. SUF 46-47. McNicholas also moved to dismiss Total Safety and Safway without prejudice, which Safway opposed, accusing McNicholas of forum shopping and arguing that the claims were barred by the statute of limitations in both Colorado and California. SUF 48-49.
Safway and Total Safety demurred in the Second California Action based on the statute of limitations. SUF 24. McNicholas opposed on the basis of equitable tolling, arguing that the statute of limitations was suspended while Gomez pursued the First California Action and the Colorado Action. SUF 25. On March 10, 2017, the court granted the demurrers. SUF 26. McNicholas appealed, and on June 27, 2018, the California Court of Appeal affirmed the dismissal of the Second California Action in an unpublished opinion, holding based on existing case law that equitable tolling did not apply where the first action had been voluntarily dismissed in the same court. SUF 52. Despite these rulings, McNicholas believed that their equitable tolling argument had merit. SAF 85. McNicholas filed a Petition for Review with the California Supreme Court on August 6, 2018, seeking review of the Court of Appeal's decision, which was denied on October 10, 2018. SAF 77.
On February 6, 2019, McNicholas received a letter from attorney Thomas Neville, who stated that he represented Gomez and was investigating potential claims against McNicholas stemming from its representation of Gomez in the Colorado and California actions. SAF 83. This was the first time any allegations of wrongdoing had been raised against any of the McNicholas Defendants concerning their representation of Gomez. SAF 84. On May 23, 2019, Gomez filed the Suit, alleging that McNicholas committed malpractice by (1) failing to adequately investigate jurisdictional and immunity issues prior to filing the First California Action; (2) failing to oppose Total Safety and Safway's motion to dismiss for failure to join an indispensable party, and otherwise failing to assess and research the issue; (3) failing to assess the ramifications of voluntarily dismissing the First California Action; (4) failing to consider or seek an agreement from the defendants to waive jurisdiction and statute of limitations defenses in exchange for dismissing the First California Action; and (5) failing to adequately advise Gomez of the risks and benefits of initially filing in California, and of dismissing the First California Action and refiling in Colorado. SAF 86.
B. The Policy
McNicholas first purchased a Lawyers’ Professional Liability Insurance Policy (the “Policy”) from Associated on September 1, 2014. SUF 1. The Policy Period covered one year, and McNicholas renewed the Policy on September 1 of each year from 2015 through 2019. SUF 1-5.
The Policy is a “claims-made” policy, meaning it only provides coverage for claims that are made during the Policy Period. In particular, the Policy states:
The Company shall pay Damages and Claim Expenses ․ that the Insured shall become legally obligated to pay as a result of a Claim made against the Insured for a Wrongful Act, provided that (i) the Claim is first made against the Insured and reported to the Company, in writing, during the Policy Period ․; (ii) the Insured has no knowledge of such Wrongful Act prior to the Inception Date of this Policy ․
[Doc. # 52-4 at 23.]2 The Policy defines “wrongful act” as “any actual or alleged negligent act, error, or omission committed or attempted in the rendering or failing to render Professional Services ․” Id. at 28. The Policy also includes a “Notice of Circumstance/Claims Made Extension” provision, which states:
If during the Policy Period any Insured first becomes aware or has reasonable grounds to suspect that an Insured has committed or may have committed a specific Wrongful Act for which coverage is otherwise provided hereunder, and provided the Insured during the Policy Period gives notice to the Company of:
A. the specific Wrongful Act;
B. the injury or damage which has resulted or may result from such Wrongful Act; and
C. the circumstances by which the Insured first became aware of or suspected such Wrongful Act;
then any Claim that may subsequently be made against any Insured arising out of such Wrongful Act shall be deemed for the purposes of this insurance to have been made during the Policy Period.
Id. at 32. In other words, the Policy does not provide coverage if the insured had “knowledge of such wrongful act” giving rise to the claim prior to the inception of the Policy Period, even if the claim was tendered during the Policy Period (the “Prior Knowledge Provision”). Coverage can extend to claims tendered after the Policy Period, however, if the insured provides notice of the underlying wrongful act to the insurer during the Policy Period.
The Policy also includes the following words, first appearing towards the bottom of the Declarations page (page 5), in capitalized, bolded, size 8.04-point Arial font:
THIS IS A CLAIMS MADE AND REPORTED POLICY, [sic] EXCEPT AS OTHERWISE PROVIDED HEREIN, THIS POLICY COVERS ONLY CLAIMS FIRST MADE AGAINST THE INSURED DURING THE POLICY PERIOD AND REPORTED TO THE COMPANY DURING THE POLICY PERIOD OR EXTENDED REPORTING PERIOD, IF APPLICABLE. PLEASE READ THE POLICY CAREFULLY.
Id. at 17; SUF 8. Similar text, also capitalized and bolded, also appears on page 11 of the Policy, near the top of the page, just beneath the title “Lawyers’ Professional Liability Insurance Policy”:
THIS IS A CLAIMS MADE AND REPORTED POLICY THIS POLICY IS LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING THE POLICY PERIOD AND REPORTED TO THE COMPANY IN ACCORDANCE WITH THE TERMS OF THIS POLICY. CLAIM EXPENSES REDUCE THE LIMIT OF LIABILITY. PLEASE REVIEW THIS POLICY CAREFULLY.
[Doc. # 52-4 at 23.]
C. The Claim on the Policy and the Instant Action
McNicholas reported a claim to Associated on March 4, 2019, after receiving the February 6, 2019 letter from counsel that first raised Gomez's malpractice allegations. SAF 60. This constituted the first notice that Associated received of any circumstance relating to McNicholas's representation of Gomez. SAF 61. Both the February 6 letter and the March 4 notice were delivered during the 2018-19 Policy Period, which began on September 1, 2018 and ran until September 1, 2019. SAF 5.
On August 16, 2019, Associated filed the operative First Amended Complaint in this action, seeking judicial declarations that it owes no duty to defend or indemnify McNicholas for the malpractice Suit under the 2014-15, 2015-16, 2016-17, or 2017-18 Policies because McNicholas did not report a claim or notice of circumstance during the respective Policy Periods, nor under the 2018-19 Policy because McNicholas had knowledge of the underlying wrongful acts prior to the Policy's inception. [Doc. # 13.] McNicholas answered on September 17, 2019, raising nine affirmative defenses, including its Ninth Affirmative Defense, which asserts that the Policy provisions that Associated seeks to enforce are unenforceable because they do not comply with the requirements of the California Insurance Code. [Doc. # 23.]
At least as of the initial pleadings in this action, the Suit has not been resolved and no finding has been made as to McNicholas's liability. See McNicholas's Motion to Stay [Doc. # 34].
Summary judgment should be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); accord Wash. Mut. Inc. v. United States, 636 F.3d 1207, 1216 (9th Cir. 2011). Material facts are those that may affect the outcome of the case. Nat'l Ass'n of Optometrists & Opticians v. Harris, 682 F.3d 1144, 1147 (9th Cir. 2012) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). A dispute is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505.
The moving party bears the initial burden of establishing the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its initial burden, Rule 56(c) requires the nonmoving party to “go beyond the pleadings and by [his or] her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue for trial.’ ” Id. at 324, 106 S.Ct. 2548 (quoting Fed. R. Civ. P. 56(c), (e)); see also Norse v. City of Santa Cruz, 629 F.3d 966, 973 (9th Cir. 2010) (en banc) (“Rule 56 requires the parties to set out facts they will be able to prove at trial.”). “In judging evidence at the summary judgment stage, the court does not make credibility determinations or weigh conflicting evidence.” Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). “Rather, it draws all inferences in the light most favorable to the nonmoving party.” Id.
A. The Prior Knowledge Provision
The crux of this dispute concerns the parties’ dueling interpretations of the Prior Knowledge Provision. Essentially, Associated argues that for the insured to have “knowledge of [a] Wrongful Act,” the insured need know only that the act itself has occurred. See MSJ 13-19. McNicholas, on the other hand, contends that the insured must be aware not only that the act has occurred, but also that the act was wrongful. McNicholas Opp. at 11-17.
1. Insurance Policy Interpretation Principles
Insurance policies “are contracts and, therefore, are governed in the first instance by the rules of construction applicable to contracts.” Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 666, 42 Cal.Rptr.2d 324, 913 P.2d 878 (1995). Accordingly, “the mutual intention of the parties at the time the contract is formed governs its interpretation” and that “intent is to be inferred, if possible, solely from the written provisions of the contract.” Id. In other words, “[i]f the meaning a layperson would ascribe to the language of a contract of insurance is clear and unambiguous, a court will apply that meaning.” Id. at 666-67, 42 Cal.Rptr.2d 324, 913 P.2d 878. On the other hand, “[a] policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable.” Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal. 4th 857, 868, 77 Cal.Rptr.2d 107, 959 P.2d 265 (1998). “If an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist (i.e., the insurer) in order to protect the insured's reasonable expectation of coverage.” Id.
Insurance “coverage is interpreted broadly so as to afford the greatest possible protection to the insured,” while “exclusionary clauses are interpreted narrowly against the insurer.” MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648, 3 Cal.Rptr.3d 228, 73 P.3d 1205 (2003) (internal punctuation excluded). Accordingly, insurers must “phrase exceptions and exclusions in clear and unmistakable language.” Id. Whereas the insured has the burden to establish that the claims fall within the basic scope of coverage, the insurer must demonstrate that the claim is specifically excluded.3 Id.
Under California law, an insurer may have a duty to defend or a duty to indemnify, or both. Buss v. Superior Court, 16 Cal. 4th 35, 45-46, 65 Cal.Rptr.2d 366, 939 P.2d 766 (1997). While the duty to indemnify “runs to claims that are actually covered” by a given policy “in light of facts proved,” the duty to defend “runs to claims that are merely potentially covered, in light of facts alleged or otherwise disclosed.” Id. (duty to indemnify arises “only after liability is established,” but duty to defend “arises as soon as tender is made.”). Thus, while insurers must indemnify insureds only for proven claims, when an insurer has a duty to defend, the broader “potential for coverage” standard applies. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008); Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993) (“[T]he duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded.”).
Insofar as the Court is aware, no liability has been established in the Suit as of yet, and therefore only the duty to defend is implicated in the MSJ.
2. The Subjective vs. Objective Test
Associated argues that under the Prior Knowledge Provision, “[w]hen an insured is aware that a client's claim has been lost due to procedural acts or omissions, there is no question of fact whether the insured knew, prior to the policy period, of the acts or omissions which later were the subject allegations of the claim.” MSJ at 17. Associated obfuscates a bit as to the exact formulation of the legal standard that it believes applies to the Provision, but it relies upon cases that apply the two-part, “subjective-objective” test articulated in Weddington v. United Nat. Ins. Co.:
The first part requires that the insured have knowledge of the relevant suit, act, error, or omission. The second part is satisfied if the suit, act, error, or omission might reasonably be expected to result in a claim or suit. This condition does not require that the insured actually form such an expectation.
No. C 07-1733 SBA, 2008 WL 590512, at *5 (N.D. Cal. Feb. 29, 2008), aff'd, 346 F. App'x 224 (9th Cir. 2009) (citations omitted) (citing Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231, 237 (3d.2006)). The first part of the test is subjective; that is, it only requires that the insured subjectively “be aware of acts that caused a malpractice claim to be filed against” it. Id. The second part is objective, assessing “whether a reasonable professional in the insured's position might expect a claim or suit to result.” Id. At this step, it is irrelevant whether the insured subjectively believed a claim or suit would result. Id. The subjective-objective test is well-established, and has been applied by several Courts of Appeals in interpreting prior knowledge provisions in claims-made policies. See, e.g., Chicago Ins. Co. v. Paulson & Nace, PLLC, 783 F.3d 897, 901 (D.C. Cir. 2015); Koransky, Bouwer & Poracky, P.C. v. Bar Plan Mut. Ins. Co., 712 F.3d 336, 343 (7th Cir. 2013); Selko v. Home Ins. Co., 139 F.3d 146, 152 (3d Cir. 1998).
Associated somewhat glosses over the second step, but the objective component is crucial to this case. McNicholas does not deny that it knew of the acts it took during the Gomez representation, but maintains that it subjectively believed that the acts were not wrongful. McNicholas claims that the Prior Knowledge Provision incorporates a purely subjective test of whether the insured knew that the acts were negligent or alleged to be negligent. McNicholas Opp. at 17. McNicholas argues that the Policy language here is different from that in the cases that have applied the subjective-objective test. Id. at 13-14.
In each of the cases cited above, the prior knowledge provision included language related to reasonableness, foreseeability, or other similar objective term. See Weddington, 2008 WL 590512, at *2 (“knew or could have reasonably foreseen that such wrongful act might be expected to be the basis of a claim”); Colliers, 458 F.3d at 234 (“knowledge of any suit, or any act or error or omission, which might reasonably be expected to result in a claim or suit”); Paulson, 783 F.3d at 900 (“a reasonable basis ‘to believe that the [firm] had breached a professional duty’ prior to the policy's issuance or to otherwise foresee that pre-policy conduct might result in a claim”); Koransky, 712 F.3d at 342 (“knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim”); Selko, 139 F.3d at 150 (“basis to believe that the Insured had breached a professional duty”) (emphases added in each).
In Maxum Indem. Co. v. Drive W. Ins. Servs., Inc., 630 F. App'x 599, 606 (6th Cir. 2015), the Sixth Circuit found that cases such as Weddington that applied the objective test usually involved policies with “language about reasonable foreseeability.” Applying California law, the Sixth Circuit held that a policy without such language—merely excluding coverage for prior acts of which the insured “had knowledge of or information related to ․ and which may result in a ‘claim’ ”—incorporated a purely subjective test. Id. at 605-06. Under this standard, the insured must have been “subjectively aware of the potential for suit arising from [the conduct] prior to coverage.” Id. at 606. In McDowell Bldg., LLC v. Zurich Am. Ins. Co., No. CIV.A. RDB-12-2876, 2015 WL 1656497, at *5 (D. Md. Apr. 13, 2015), the court made a similar observation and reached the same conclusion when faced with similar policy language. Because the policy “lack[ed] the obvious talismans of an objective standard,” the court applied the subjective test. Id.; see also James River Ins. Co. v. Hebert Schenk, P.C., 523 F.3d 915, 921-22 (9th Cir. 2008) (insurance application asking whether any insureds were “aware of any circumstances, allegations ․ or contentions as to any incident which may result in a claim” called for a “subjective determination” of opinion, rather than an objective fact).
Here, the Prior Knowledge Provision in Associated's Policy states only that there is no coverage where the insured had “knowledge of such Wrongful Act prior to the Inception Date of this Policy.” It defines “Wrongful Act” as “any actual or alleged negligent act, error, or omission committed or attempted in the rendering or failing to render Professional Services.” Notably lacking from these clauses are any of “the obvious talismans of an objective standard.” Id. Moreover, a subjective standard is at least a reasonable interpretation given the plain language. Substituting in the definition for Wrongful Act, the Provision would read, “knowledge of any actual or alleged negligent act, error, or omission.” In other words, if no negligent act is “alleged,” then the insured must have knowledge of an “actual negligent act.” To have knowledge of an actual negligent act, a person must be aware that the act is negligent. Associated's position appears to be that only the prepositional phrase “of any act” modifies the noun “knowledge,” as opposed to the whole phrase “of any actual negligent act.” Even assuming the dubious proposition that Associated's interpretation is grammatically correct, the former interpretation is at least as reasonable, and the Court must resolve an ambiguity, if any, in favor of the insured. See Foster-Gardner, 18 Cal. 4th at 868, 77 Cal.Rptr.2d 107, 959 P.2d 265. Therefore, the Court finds that the Prior Knowledge Provision incorporates a subjective standard.
Associated argues that cases like Maxum and McDowell are inapposite because the policy language they dealt with is distinguishable. Reply at 12-14. In Maxum and McDowell, the insured had knowledge of an act “which may result in a claim,” a phrase absent from Associated's Policy. But this difference is immaterial when one considers the distinction between the Policy and all those policies incorporating reasonableness language in the cases that apply the objective test. The phrase “which may result in a claim” does not obviously signal a subjective standard in and of itself, and Maxum and McDowell do not rely exclusively on it in reaching their conclusions to apply a subjective test. To the contrary, they explicitly point to the lack of objective language as central to their analysis. See Maxum, 630 F. App'x at 606; McDowell, 2015 WL 1656497, at *5. Meanwhile, courts applying an objective test expressly rely on the objective language in the policies. See, e.g., Weddington, 2008 WL 590512, at *4 (“Courts considering contract language similar to the one at issue, containing the words ‘reasonably’ and ‘foreseen,’ have held that an objective test is the more appropriate test.”).
Associated cites one case involving the same policy language at issue here that did apply an objective test: Weeks & Irvine LLC v. Associated Indus. Ins. Co., Inc., 433 F. Supp. 3d 791 (D.S.C. 2020). The plaintiff in Weeks had argued that its conduct “was not a ‘wrongful act’ because there was no threat of a claim ripening therefrom before the inception date”—though the Weeks plaintiff did not appear to deny that it had made an actual mistake or been negligent. Id. at 797-98, 800. Agreeing with “the logic and holdings” of courts applying an objective test, the court found that a wrongful act “does not require the threat of a claim.” Id. The Weeks court relied upon Mut. Real Estate Holdings, LLC v. Houston Cas. Co., No. 10-CV-236-LM, 2011 WL 3902774, at *8 (D.N.H. Sept. 6, 2011), which held that an insured had knowledge of an “alleged negligent act” where it received a demand letter, even if it subjectively believed the claim had no merit. Weeks also cited Cement & Concrete Workers Dist. Council Pension Fund v. Ulico Cas. Co., 199 F. App'x 29, 32 (2d Cir. 2006), which rejected the contention that an insured does not have knowledge of a wrongful act “until liability flows from it.” But neither of these holdings support the proposition that an insured's subjective belief as to the actual wrongfulness of its acts—before any allegation or materialized liability—is irrelevant. To the extent that Weeks stands for anything more than the unremarkable notion that prior knowledge does not require an express threat of litigation or actual finding of liability, this Court finds it unpersuasive.
The Court agrees that McNicholas need not have received an allegation or finding of negligence from a third party in order to have knowledge of an actual or alleged negligent act. Given the wording of the Prior Knowledge Provision, however, McNicholas still must have had some subjective awareness that the act, error, or omission was negligent.4 Because Associated has not put forth any facts demonstrating that McNicholas subjectively knew that the conduct alleged in the Gomez Suit was negligent or could give rise to a claim prior to the Policy's inception date, Associated has not met its burden on summary judgment of proving that the Prior Knowledge Provision defeats coverage as a matter of law.5 Therefore, Associated's MSJ on its declaratory relief claim that it owes McNicholas no duty to defend under the 2018-19 Policy is DENIED.6
B. McNicholas's Affirmative Defenses
Associated also moves for partial summary adjudication on McNicholas's nine affirmative defenses, which are (1) failure to state a claim, (2) failure to join necessary parties, (3) statute of limitations, (4) waiver, (5) estoppel, (6) unclean hands, (7) unripe, (8) failure to comply with policy, and (9) unenforceable policy provision.
1. Affirmative Defenses 1-8
Associated asserts that McNicholas's Defenses 1-6 are boilerplate defenses lacking in any factual basis. It argues that Defense 7, that the case is not ripe for adjudication, was already rejected by the Court in its Order denying McNicholas's Motion to Stay. [Doc. # 43.] Defense 8, that Associated failed to comply with its own policy requirements, including by exhausting mediation requirements, purportedly relies on policy provisions that do not exist.
McNicholas does not oppose Associated's request for summary adjudication on Defenses 1-8. See McNicholas Opp. The Court agrees that these Defenses have no factual basis for support, and GRANTS Associated's MSJ on Defenses 1-8.
2. Affirmative Defense 9
In its Ninth Affirmative Defense, McNicholas claims that Associated “is not entitled to the relief requested because the policy provision(s) sought to be enforced do not comply with requirements imposed by the California Insurance Code.” Answer at 9. Although on its face the Defense does not specify what section of the code the Policy violates, the parties’ briefing makes clear that they contest whether the Policy complies with California Insurance Code section 11580.01. Section 11580.01 states that a policy “which generally limits the coverage thereof to liability for only those claims that are first made against the insured while the policy is in force” must “recite prominently and conspicuously at the heading thereof that it is an application or proposal for a claims-made policy.” Section 11580.01 also provides:
Each such policy described in subdivision (a) shall contain on the face page thereof a prominent and conspicuous legend or statement substantially to the following effect:
“Except to such extent as may otherwise be provided herein, the coverage of this policy is limited generally to liability for only those claims that are first made against the insured while the policy is in force. Please review the policy carefully and discuss the coverage thereunder with your insurance agent or broker.”
Cal. Ins. Code § 11580.01(c). McNicholas claims the Policy did not “recite prominently and conspicuously” at its “heading” that it is a claims-made policy, nor did it include the Notice language on its “face page.” Opp. at 22. It argues that because of this non-compliance, the claims-made provisions of the Policy are unenforceable, and therefore the Policy provides coverage for acts that occurred during the Policy Period, regardless of whether a claim was made at the time. Opp. at 29-30. Because the conduct alleged by Gomez occurred during the 2014-15 Policy Period, this Policy would provide coverage. Id.
The Policy includes language “substantially to the [ ] effect” of the statutory language in two places in its first few pages. See Part I.B, supra. First, on the Declarations page (page 5), the Notice appears immediately below the invoice material, and is the first substantial block of text on the page. [Doc. # 52-4 at 17.] Second, similar language appears on the first page laying out the insuring agreement (page 11), at the top of the page just beneath the title of the Policy.
Section 11580.01 does not define the term “face page.” In Mt. Hawley Ins. Co. v. Fed. Sav. & Loan Ins. Corp., 695 F. Supp. 469, 481 (C.D. Cal. 1987), the policy at issue included the phrase, “THIS IS A CLAIMS MADE POLICY. PLEASE READ CAREFULLY,” on the same page that contained the insuring clause, which the court termed “its first page (not counting the declarations and endorsements).” The court found this to be in “substantial compliance” with Section 11580.01.
Similarly, here the notice appears on the first page with actual contractual language, the same page with the insuring agreement, immediately beneath the title of the Policy: “Lawyers’ Professional Liability Insurance Policy.” Although this is not the first page of the whole document—preceding it are the cover page or “jacket,” the declarations, endorsements schedule, signature page, service of process, as well as blank pages—the Court finds that it may reasonably be considered the face page for the purpose of complying with Section 11580.01. The notice appears on the “header” of the page and is prominent and conspicuous. The purpose of the statute is to ensure that the insured is aware that it is purchasing a more restrictive claims-made policy. The Policy's notice language clearly accomplishes that goal. Any person turning to view the basic contractual language binding the policy would see and read the notice. And if the insured only cares about the cost of the insurance, the notice appears immediately beneath the premium listed on the Declarations page as well. See Taub v. First State Ins. Co., 44 Cal. App. 4th 811, 817, 52 Cal.Rptr.2d 1 (1995) (policy with the statutory notice on the Declarations page was compliant with Section 11580.01).
Therefore, the Policy complies with Section 11580.01. Associated's MSJ as to McNicholas's Ninth Affirmative Defense is GRANTED.
For the foregoing reasons, Associated's MSJ is GRANTED in part as to McNicholas's affirmative defenses and to the extent it seeks summary adjudication as to the inapplicability of the ‘14-15, ‘15-16, ‘16-17, and ‘17-18 policies. The MSJ is DENIED in part as to Associated's duty to defend under the ‘18-19 policy.
IT IS SO ORDERED.
2. All page references are to the page numbers inserted by the CM/ECF system.
3. Associated contends that the Prior Knowledge Provision is a condition precedent and not an exclusion. The Court need not address that distinction squarely because the parties did not specifically brief that issue and, under the summary judgment standard, Associated bears the burden of proving that the provision precludes coverage under either scenario.
4. Associated also cites to El Gallo Giro Corp. v. Houston Cas. Co., No. 2:12-CV-05422-ODW, 2012 WL 5829966, at *4 (C.D. Cal. Nov. 15, 2012), for the proposition that the insured need not believe in the merits of an impending complaint to have knowledge of an actual or alleged negligent act. But in El Gallo, the insured was aware of an allegation of a wrongful act, even though it did not believe the allegation was meritorious or would mature into a lawsuit. Id. There is no doubt that under a plain reading of the Policy, an allegation would suffice as prior knowledge, regardless of its merits. But absent an allegation of a negligent act, the insured must be aware of an actual negligent act. See also Mut. Real Estate, 2011 WL 3902774, at *8 (holding under similar policy language that when a negligent act is alleged, the insured's subjective belief as to the merits is irrelevant).
5. Associated argues that McNicholas was on notice of negligent acts when the Court of Appeal affirmed the dismissal on procedural grounds, but provides no authority for the proposition that receiving an adverse ruling alone creates a subjective awareness of negligent acts. Indeed, there is daylight between an attorney becoming aware of an adverse ruling and believing her position was wrong as a matter of law, notwithstanding the court's opinion—and even further daylight between knowing her position was legally incorrect and believing her representation was therefore negligent. Cases like Weddington hold that these beliefs are unreasonable, and therefore immaterial, only when applying the objective test. 2008 WL 590512, at *7.
6. There is no real dispute that the earlier, 2014–2018 policies do not provide coverage. McNicholas did not tender a claim or give notice of a circumstance during these policy periods. Therefore, to the extent Associated moves for summary adjudication on the grounds that the ‘14-15, ‘15-16, ‘16-17, and ‘17-18 policies do not provide coverage, the motion is GRANTED.
DOLLY M. GEE, UNITED STATES DISTRICT JUDGE
Response sent, thank you
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Docket No: Case No. CV 19-6101-DMG (Ex)
Decided: October 19, 2020
Court: United States District Court, C.D. California.
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