Opinion
No. CIV. S-01-2030 WBS/JFM
January 23, 2002
MEMORANDUM AND ORDER
Defendants move to dismiss plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.
I. Background
This lawsuit arises out of defendants' alleged failure to defend and indemnify plaintiff under a commercial property insurance policy. According to plaintiff's First Amended Complaint, plaintiff operated a commercial turkey ranch, which plaintiff leased from Turkeyland, L.P. (First Am. Compl. ¶ 12). On May 31, 1998, plaintiff vacated the property. (Id.) On November 14, 2000, plaintiff was served with notice that Turkeyland had filed suit against plaintiff for breach of contract. (Id. ¶ 13, and Ex. B thereto.) Turkeyland alleged among other things that plaintiff failed to maintain the property as required by the lease agreement, that it would cost $190,000 to clean and repair the leased property, and that tools and equipment valued at $132,000 had been destroyed or removed by plaintiff. (Id. Ex. B at B-9.) On July 31, 2001, Turkeyland filed an amended complaint, adding a cause of action for negligence. (Id. Ex. C). Plaintiff alleges that defendants breached their obligation under the contract of insurance to defend and indemnify plaintiff against Turkeyland. (Id. ¶ 18-24.)
Defendants argue that plaintiff has failed to state a claim upon which relief can be granted because (1) the insurance contract does not require defendants to defend any legal action against plaintiff or indemnify plaintiff for any damages awarded against it in such an action; (2) plaintiff fails to allege that it satisfied the conditions precedent to filing suit under the insurance contract; and (3) plaintiff forfeited its rights under the policy by failing to make a claim within the time allowed by the contract for filing a legal action.
II. Discussion
On a motion to dismiss, the allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322 (1972). In general, the complaint is construed favorably to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Thus, the court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. Retail Clerks International Ass'n v. Schermerhorn, 373 U.S. 746, 753 n. 6 (1963). The court may not dismiss for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him or her to relief. Hishon v. King Spalding, 467 U.S. 69, 73 (1984). Dismissal is appropriate if plaintiff fails to put forth either (1) a cognizable legal theory, or (2) sufficient allegations of fact under a cognizable theory. Robertson v. Dean Witter Reynolds, Inc, 749 F.2d 530, 533-34 (9th Cir. 1984).
A. Scope of Coverage Under the Policy
The policy at issue insures against loss or damage to "Personal Property of Others . . . that is . . . [i]n your care, custody or control and for which you are legally liable." (First Am. Compl. Ex. A, at A-50.) The contract is clear and unambiguous. It covers only damage or loss to the underlying property, and does not obligate defendants to provide a defense or to indemnify plaintiff in the Turkeyland lawsuit.
Interpretation of a written instrument is "solely a judicial function unless the determination turns upon the credibility of extrinsic evidence." Powers v. Dickson, Carlson Campillo, 54 Cal.App.4th 1102, 1111 (1997). Parol evidence may be admitted to explain the meaning of a writing when the meaning is reasonably susceptible to different interpretations or the contract is ambiguous, but where the written instrument is unambiguous, parol evidence to show intent cannot be admitted. Id. "Applying these rules, courts have granted motions to dismiss on contract claims where it is clear from the unambiguous terms of the contract that the alleged conduct of the defendant does not constitute a breach of contract." Mieuli v. DeBartolo, No. C-00-3225, 2001 WL 777447, *5 (N.D.Cal. Jan. 16, 2001) (citations omitted). In Winters v. State Farm Fire and Casualty Co., 73 F.3d 224, 228 (9th Cir. 1995) the insured was a lawyer who had possession of his client's saws for use in a trial. The saws were stolen from his office, and the lawyer sued his insurance company to recover the value of the saws themselves, as well as an amount equal to the potential legal liability to his client as the bailee of the saws (which the lawyer claimed was equal to the value of the client's case had the saws not been stolen). The policy there, like the one here, insured the property of others held by the insured up to an amount "for which the insured is legally liable."
The Ninth Circuit in Winters found that the lawyer could recover the value of the saws themselves, but not the amount his client could potentially recover against him in a lawsuit. Id. In so ruling, the court followed the weight of authority, which holds that insurance against damage or loss of property of others for which the insured is "legally liable" "affords coverage only to the extent of the bailed property, and does not cover liability to third parties in tort or contract." Id. at 227; see United States v. Globe Rutgers Fires Insurance Co., 104 F. Supp. 632 (N.D.Tex. 1952), aff'd 202 F.2d 696 (5th Cir. 1953); Folger Coffee Co. v. Great American Insurance Co., 333 F. Supp. 1272 (W.D. Miss. 1971); C.S. Rouse v. Albany Ins. Co., 257 N.C. 267 (1962); Penn v. Commercial Union Fire Insurance Co., 233 Miss. 178 (1958); Home Insurance Co. v. Peoria P.U.RY Co., 78 Ill. 64 (1899).
As explained in 11 Couch on Insurance § 154:34 (3d ed. 2000), "the term `liable,' as used in the policy, was not intended to describe a particular fixed legal liability which would require a showing that the insured was responsible by contract or in tort for the . . . loss, but, instead, referred to his liability or `responsibility' as a bailee." Id. Thus, policy provisions covering property for which the insured is "legally liable" are "intended to insure against loss of the property and not to indemnify the insured against his legal responsibility in tort or contract to the owners of the property." Id.
The policy at issue in this case cannot be distinguished from other policies containing similar language. The language of the policy "consistently points to insurance on property, not on the insured's liability for a . . . loss on such property." Globe Rutgers, 104 F. Supp. at 634. The policy insures against "`All Risk' of direct physical loss or damage to property described. . . ." (First Am. Compl. Ex. A, at A-14) (emphasis added). It states that defendants "will pay for loss of or damage to Covered Property." (Id., at A-49) (emphasis added). The policy insures "Personal Property of Others . . . that is . . . [i]n your care, custody or control and for which you are legally liable." (Id. at A-50) (emphasis added). Moreover, the policy values the property at actual cash value at the time of the loss, not at the amount of damages assessed against the insured in a lawsuit. (Id. at A-61).
The policy also provides that, in the event of loss involving property of others in the custody or care of the insured, defendants "have the right but not the duty to" adjust the loss with the owner of the property or provide a defense to the insured. (Id. at A-62). This provision does not in any way suggest that defendants are obligated to defend or indemnify plaintiff. It simply affords the insurer a practical way to control how much the insured will claim under the policy by allowing the insurer to adjust the loss directly with the owner or defend the insured in a lawsuit by the owner. More importantly, the plain language of the policy makes the provision of a defense strictly optional. The policy unambiguously covers only damage or loss to the bailed property itself; it does not obligate defendants to defend or indemnify plaintiff. Insofar as plaintiff's complaint seeks damages for failure to defend and indemnify, it must therefore be dismissed.
However, to the extent that the complaint alleges that defendants failed to pay for the loss or damage to Turkeyland's property, it alleges a loss covered by the policy. As defendants acknowledge, they "would be obligated to pay the value of the lost or damaged property, if the loss or damage resulted from a Covered Cause of Loss." (Def's Mot. Dismiss at 4). Although the complaint overwhelmingly focuses on defendants' failure to defend and indemnify, it does allege that defendants have failed to perform "pursuant to the terms of the contract." (First Am. Compl. ¶¶ 22.) Given the liberal pleading standards, plaintiff has adequately pled that defendants breached the contract.
B. Conditions Precedent to Bringing a Claim
Defendants argue that even if the contract contemplates covering plaintiff's loss, plaintiff has not sufficiently alleged that it complied with contractual conditions requiring the insured to describe what, where, when, how, and how much property was lost or damaged before the insured can recover under the policy. Satisfaction of conditions precedent is a necessary element of any breach of contract claim. See Hickman v. London Assurance Corp., 184 Cal. 524, 529-30 (1920); 4 Witkin Cal. Procedure § 464 (3d ed.). Failure to allege that such conditions are satisfied amounts to failure to state a claim for relief.
The First Amended Complaint alleges that "[a]t all times herein mentioned, plaintiff paid all premiums on the policy as they became due and payable, and has otherwise performed all the required terms and conditions of the policy." (First Am. Compl. ¶ 11) (emphasis added). Under the liberal pleading standards, plaintiff has alleged that it fulfilled the conditions precedent to bringing a claim under the policy.
C. Time Limitation for Bringing a Claim
Finally, defendants argue that plaintiff's action is time-barred. The policy in question requires any legal action against the insurer to be brought within two years "after you first have knowledge of the loss." (Id. Ex. A at A-62.) While plaintiff alleges that it had no knowledge Turkeyland's claims until November of 2000, nowhere in the complaint does plaintiff say when it first became aware of the damage to the property. Because it is damage to property, not potential liability in a lawsuit, that is the "loss" covered by the policy, plaintiff must allege that it first learned of the property damage within two years of bringing its claim under the policy. Plaintiff has failed to do so.
The First Amended Complaint alleges that "Plaintiff has complied with its duties under said contract of insurance by promptly notifying Defendants of said underlying claim after receiving notice of such claim." (Id. ¶ 20) (emphasis added). Plaintiff also alleges that "Plaintiff had no knowledge of any claims by Turkeyland LP, including claims for property damage or negligence before service upon it of the complaint and amended complaint in the underlying action." (Id. ¶ 21) (emphasis added)
IT IS THEREFORE ORDERED that defendants' motion to dismiss be, and the same hereby is, GRANTED. Plaintiff is given twenty (20) days from the date of this Order to file an Amended Complaint consistent with this Order.