Opinion
Case No. CV 18-6805-DMG (MRWx)
12-09-2019
GLOBAL HAWK INSURANCE COMPANY (RRG), Plaintiff, v. WESCO INSURANCE COMPANY, Defendant.
Jeffrey S. Bolender, Daniel Y. An, Bolender Law Firm PC, Torrance, CA, for Plaintiff. Jordon Edward Harriman, Lane J. Ashley, Lewis Brisbois Bisgaard and Smith LLP, Los Angeles, CA, for Defendant.
Jeffrey S. Bolender, Daniel Y. An, Bolender Law Firm PC, Torrance, CA, for Plaintiff.
Jordon Edward Harriman, Lane J. Ashley, Lewis Brisbois Bisgaard and Smith LLP, Los Angeles, CA, for Defendant.
ORDER RE CROSS-MOTIONS FOR SUMMARY JUDGMENT [60, 62]
DOLLY M. GEE, UNITED STATES DISTRICT JUDGE
This matter is before the Court on the Cross-Motions for Summary Judgment ("MSJs") filed by Plaintiff Global Hawk Insurance Company and Defendant Wesco Insurance Company. [Doc. ## 60 ("Pl.'s MSJ"), 62 ("Def.'s MSJ and Opp").] The MSJs are fully briefed. [Doc. ## 63 ("Pl.'s Opp. and Reply"), 64 ("Def.'s Reply").] For the following reasons, the Court GRANTS Wesco's MSJ and DENIES Global Hawk's MSJ.
I.
FACTUAL AND PROCEDURAL BACKGROUND
The Court set out this action's general factual background in its Order Denying Wesco's Motion for Summary Judgment. [Doc. # 39 ("MSJ 1 Order").] Because the previous round of MSJ briefing dealt primarily with choice of law issues, and the instant MSJs pertain to Global Hawk's claims' merits, it is necessary to repeat some of that background to provide a complete factual timeline.
After Marco Martinez, a truck driver employed by O&G Logistics, was involved in a car crash that killed two people in Texas, the decedents' heirs filed suit in 2014 against Martinez and O&G in Texas (the "Smith Lawsuit"). MSJ 1 Order at 2. Wesco, O&G's insurer, hired Wade Quinn to defend O&G and Martinez shortly before the Smith Lawsuit was filed. Stipulated Fact ("SF") 11 [Doc. # 60-8].
The Court cites to the MSJ 1 Order for certain facts that the parties agreed were undisputed.
The Smith plaintiffs sent a letter to Quinn on May 13, 2015 offering to settle the action and release their claims against O&G and Martinez in exchange for the $1 million policy limits of Wesco's insurance policy with O&G (the "Wesco Policy"). MSJ 1 Order at 2-3. Wesco accepted that offer on behalf of both O&G and Martinez on May 27, 2015. Id. at 3. The Smith Plaintiffs then sent another letter to Quinn on July 9, 2015 demanding the $1 million limits of a liability policy issued by Global Hawk (the "Global Hawk Policy") to K&K Transportation, Inc., the owner of the truck that Martinez was driving, in exchange for a release of their claims against Martinez and K&K. SF 23. On October 12, 2015, the Smith Plaintiffs sent a third letter to Quinn purporting to adjust their May 13 demand such that Wesco's $1 million policy-limits payment would release only O&G, and not Martinez. SF 37-38. The Smith Plaintiffs claimed that they needed to "revise" their initial demand because they had only recently discovered the "previously unknown" Global Hawk Policy. MSJ 1 Order at 3.
The Wesco Policy is defined and described in the MSJ 1 Order. MSJ 1 Order at 2.
Global Hawk retained Quinn to represent K&K in the Smith Lawsuit in June 2015. Wesco's Statement of Uncontroverted Facts ("WUF") 132 [Doc. # 64-1].
Wesco then consulted with Quinn and other counsel to determine whether the Wesco Policy's terms and governing law allowed them (or required them) to settle without obtaining a release of the Smith plaintiffs' claims against Martinez. SF 39-49. Wesco eventually determined that it could enter into such a settlement under Texas law and executed an agreement with the Smith Plaintiffs in December 2015 whereby Wesco gave them $1 million and the Smith Plaintiffs released their claims against O&G, but not against Martinez or K&K Transportation. SF 57.
The parties agree that "Wesco defended O&G and Martinez" in the Smith Lawsuit until the date of that settlement. SF 59. After "paying its policy limits" per the settlement's terms on December 2, 2015, "Wesco withdrew from all further defense of Martinez in the Smith [L]awsuit." SF 60.
On December 22, 2015, counsel for Global Hawk contacted Quinn and represented that Global Hawk's "analysis is that [the Global Hawk Policy] does not apply" to the Smith Plaintiffs' claims, but that, nonetheless, "Global Hawk will pick up the defense of the O&G driver, Mr. Martinez." SF 61-62.
On December 23, 2015, Global Hawk filed a "complaint for rescission and declaratory relief" in Los Angeles County Superior Court against Martinez, K&K, and others (the "Reimbursement Action"). SF 73.
Quinn and his firm continued to represent Martinez and bill Wesco for their services until "late January 2016," WUF 131, at which point Global Hawk, on behalf of Martinez and K&K, reached an agreement with the Smith Plaintiffs whereby it would pay them the Global Hawk Policy's $1 million limits in exchange for a release of their claims against Martinez and K&K. SF 63-64. Global Hawk and the Smith Plaintiffs memorialized that agreement in writing on March 15, 2016, SF 65-66, and Global Hawk issued payment on March 30, 2016. SF 67.
On April 1, 2016, Global Hawk's counsel sent Martinez a letter stating:
Global Hawk reserves the right to seek an allocation and reimbursement of defense costs paid (if any) to defend the subject suit should it be established that the suit never presented a potential for covered liability ... Global Hawk reserves the right to seek reimbursement and/or allocation from any other insurers that have a duty to defend and/or indemnify the insureds.... Global Hawk hereby provides you with notice under Blue Ridge Ins. Co. v. Jacobsen , 25 Cal. 4th 489, 506, 106 Cal.Rptr.2d 535, 22 P.3d 313 [ (2001) ] that (1) it is informing you of its reservation of rights under the policy; (2) it intends to make a potentially non-covered payment in settlement of the Smith action in the amount of $1 million; and (3) it expressly offers you the ability to assume your own defense of the Smith action if you object to this payment. Global Hawk further notifies you that if you accept the settlement, Global Hawk is entitled and intends to seek full reimbursement of the non-covered settlement amounts paid under Blue Ridge.
SF 69-70.
Global Hawk then amended its complaint in the Reimbursement Action to include a cause of action for reimbursement on April 5, 2016. SF 73. Global Hawk served Martinez with the amended complaint on April 17, 2016, but he did not timely answer or otherwise respond. Hobbs Decl. [Doc. # 60-1] at ¶¶ 3-4. Global Hawk requested that the Superior Court enter Martinez's default on August 4, 2016, WUF 112, and the court entered a default judgment against Martinez on October 4, 2016. SF 73. The judgment included a judicial declaration that Global Hawk has no duty under the Global Hawk Policy to defend or indemnify Martinez in the Smith Lawsuit and ordered Martinez to reimburse Global Hawk in the amount of $1,000,933.60. SF 73.
Global Hawk and Martinez then entered into an "Assignment and Covenant Not to Execute" whereby Global Hawk agreed "not to execute its judgment against Martinez" and Martinez assigned "all of his rights, claims, and causes of action against Wesco ... arising out of any applicable insurance policies, the SUBJECT ACCIDENT, the UNDERLYING ACTION, and the DEFAULT JUDGMENT." Assignment and Covenant Not to Execute, Plaintiff's Appendix, Ex. 23 [Doc. # 62-4]; SF 76. The parties finally executed that agreement on October 17, 2016. WUF 16.
Wesco and Global Hawk agree that Martinez did not pay "any portion of the defense fees and costs [that] Wade Quinn's firm generated in defending the Smith [L]awsuit on behalf of Martinez." SF 91. They also agree that Martinez "did not pay any portion of the defense fees and costs [that] Global Hawk incurred in defending Martinez in the Smith [L]awsuit." SF 94. And they agree that Martinez paid no portion of Wesco's settlement on behalf of O&G or Global Hawk's settlement on behalf of K&K and Martinez. SF 91, 94. Indeed, there is no evidence in the record that Martinez has paid any money out of pocket as a result of the car crash in Texas, the Smith Lawsuit, or the resulting insurance disputes.
Global Hawk filed the instant action in Los Angeles County Superior Court on June 29, 2018. [Doc. # 1-2 ("Compl.").] The Complaint seeks to vindicate Martinez's rights against Wesco—it alleges claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on Wesco's conduct with respect to Martinez. Global Hawk does not assert that Wesco violated any of its own rights or pursue any claims based on Wesco's conduct with respect to Global Hawk. See Compl.
Wesco removed the action to this Court on August 8, 2018 [Doc. # 1], and the parties filed no merits motions until Wesco's June 21, 2019 MSJ. That MSJ concerned Wesco's argument that Texas law operated to absolve it of any liability for its decision to deny coverage to Martinez. See MSJ 1 Order. The Court denied that MSJ and determined that California law governs the parties' dispute, but did not decide whether Global Hawk's claims for breach of contract and breach of the implied covenant of good faith and fair dealing can succeed as a matter of California law. See id. at 8-19. The instant MSJs address that question.
II. LEGAL STANDARD
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.
Where the issues before the Court are questions of law, the case is particularly "well suited" for summary judgment. Del Real, LLC v. Harris , 966 F. Supp. 2d 1047, 1051 (E.D. Cal. 2013) ; see also Asuncion v. Dist. Dir. Of U.S. Immigration & Naturalization Serv. , 427 F.2d 523, 524 (9th Cir. 1970) (district court properly resolved motion for summary judgment where issues presented were comprised solely of questions of law).
III.
DISCUSSION
Global Hawk and Wesco argue over a range of issues that have arisen over the course of the parties' dispute about Martinez's insurance coverage. The central question in this case, however, is whether Wesco's alleged breach of the Wesco Policy by denying Martinez coverage caused any cognizable damage to Martinez. The Court therefore discusses Global Hawk's breach of contract claim first and its bad faith claim second.
A. Breach of Contract
The well-established elements for breach of contract are "(1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff." Oasis W. Realty, LLC v. Goldman , 51 Cal. 4th 811, 821, 124 Cal.Rptr.3d 256, 250 P.3d 1115 (2011). Wesco argues that, since Global Hawk stepped in to defend and indemnify Martinez after Wesco withdrew its defense of Martinez, Martinez suffered no injury as a result of the Smith Lawsuit. Def.'s MSJ and Opp. at 9-11. Wesco also argues that it did not proximately cause the only harm that Martinez suffered—Global Hawk's $1,000,933.60 award against Martinez in the Reimbursement Action. Def.'s Reply at 3-6. The Court agrees.
1. Wesco Did Not Waive its Damages and Causation Arguments
Global Hawk first contends that Wesco waived its damages and causation arguments because Wesco did not include them as an affirmative defense in its Answer. This argument has several flaws. First, Global Hawk relies entirely on California law to make it. See Pl.'s MSJ at 4-7. Because pleading standards are a matter of procedure, the Court must apply federal law to determine whether Wesco must have included this defense in its Answer. Ohlendorf v. Am. Home Mortg. Servicing , 279 F.R.D. 575, 580 n.2 (E.D. Cal. 2010) (citing Hanna v. Plumer , 380 U.S. 460, 465, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965) ).
Second, federal law is clear that "[a] defense which demonstrates that plaintiff has not met its burden of proof is not an affirmative defense." Zivkovic v. S. California Edison Co. , 302 F.3d 1080, 1088 (9th Cir. 2002) ; see also Mathew Enter., Inc. v. Chrysler Grp., LLC , 738 F. App'x 569, 570 (9th Cir. 2018). As discussed further below, to succeed on its breach of contract claim, Global Hawk must prove that (1) Martinez suffered damages and (2) Wesco caused them. Wesco's argument that Global Hawk has not done so is therefore not a waivable affirmative defense.
Third, even if California law did control this inquiry, the authorities that Global Hawk cites for the proposition that "superseding cause" is a waivable affirmative defense discuss that defense in connection with negligence claims, not breach of contract claims. See Pl.'s MSJ at 7 (citing Judicial Council of California Civil Jury Instruction 432 ; Maupin v. Widling , 192 Cal. App. 3d 568, 578, 237 Cal.Rptr. 521 (1987) ); see also Ash v. N. Am. Title Co. , 223 Cal. App. 4th 1258, 1275, 168 Cal.Rptr.3d 499 (2014) (reasoning that the defense of "superseding cause" applies in tort cases, but not contract cases). Since Global Hawk's waiver argument is legally deficient, factually distinguishable, and contrary to the appropriate standard, the Court rejects it.
2. Rules Regarding Contract Damages and Causation
A claim for breach of contract "is not actionable without damage." Bramalea California, Inc. v. Reliable Interiors, Inc. , 119 Cal. App. 4th 468, 473, 14 Cal.Rptr.3d 302 (2004). In California, contract damages are "the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom." Cal. Civ. Code § 3300. California courts interpret this provision to codify a difference between "general damages" and "consequential damages." Lewis Jorge Constr. Mgmt., Inc. v. Pomona Unified Sch. Dist. , 34 Cal. 4th 960, 968, 22 Cal.Rptr.3d 340, 102 P.3d 257 (2004). General damages are "those that flow directly and necessarily from a breach of contract, or that are a natural result of a breach." Id.
Consequential damages are "those losses that do not arise directly and inevitably from any similar breach of any similar agreement. Instead, they are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties." Id. Such damages must be "foreseeable and proximately caused by the breach of a contract"—they are recoverable only to the extent they "were either actually foreseen ... or were ‘reasonably foreseeable’ when the contract was formed". Id. at 969, 22 Cal.Rptr.3d 340, 102 P.3d 257 ; Applied Equip. Corp. v. Litton Saudi Arabia Ltd. , 7 Cal. 4th 503, 506, 28 Cal.Rptr.2d 475, 869 P.2d 454 (1994) (damages "beyond the expectations of the parties are not recoverable").
The question of consequential damages' foreseeability can be either a question of law or fact. Sun-Maid Raisin Growers v. Victor Packing Co. , 146 Cal. App. 3d 787, 790, 194 Cal.Rptr. 612 (1983) ("[U]nless it can be ruled on as a matter of law, the question whether the buyer's consequential damages were foreseeable by the seller is one of fact to be determined by the trier of fact."). Here, the Court is asked to apply the legal rules governing foreseeability to materially undisputed facts, creating a "mixed question of law and fact." See Sousa ex rel. Will of Sousa v. Unilab Corp. Class II (Non-Exempt) Members Grp. Benefit Plan , 252 F. Supp. 2d 1046, 1049 (E.D. Cal. 2002), aff'd sub nom. Sousa v. Unilab Corp. Class II (Non-Exempt) Members Grp. Benefit Plan , 83 F. App'x 954 (9th Cir. 2003). The Ninth Circuit has held that "[w]hen a mixed question of fact and law involves undisputed underlying facts, summary judgment is appropriately granted." Han v. Mobil Oil Corp. , 73 F.3d 872, 875 (9th Cir. 1995). The Court therefore need not defer adjudication of this issue until trial.
The reach of the parties' possible expectations for the purposes of consequential damages "is something much more limited in scope than that applied in tort cases where the fiction of foreseeability of the risk is one of many factors" underlying the "proximate cause" analysis. California Shoppers, Inc. v. Royal Globe Ins. Co. , 175 Cal. App. 3d 1, 59, 221 Cal.Rptr. 171 (1985). As one California court has held, "it is foreseeability only by the party in breach that is determinative" and the damage must have been "foreseeable as a probable ... result of the breach." Ash , 223 Cal. App. 4th at 1270, 168 Cal.Rptr.3d 499. If the contract itself does not spell out the foreseeable risks,
the court will determine what risks were foreseen or foreseeable when the contract was made by viewing the matter in the light of common sense; and the courts will consider the nature and purpose of the contract, and the surrounding circumstances known by the parties to exist at that time, as well as what the breaching party may reasonably be supposed to have assumed consciously.
Id. at 1273, 168 Cal.Rptr.3d 499 (citing 24 Williston on Contracts § 64.13, at 136 (4th ed. 2002).
3. Wesco Did Not Cause Martinez to Suffer Any Cognizable Damages
While the parties do not explicitly cabin their arguments in terms of general and consequential damages, the facts require the Court to analyze general and consequential damages separately.
i. General Damages
In this case, the damages that would flow "directly and necessarily" from Wesco's decision to deny coverage to Martinez would be any award or settlement that the Smith plaintiffs obtained from Martinez and the cost of Martinez's defense against the Smith Lawsuit. Wesco relies primarily on Emerald Bay Community Association v. Golden Eagle Insurance Corporation , 130 Cal. App. 4th 1078, 31 Cal.Rptr.3d 43 (2005), to argue that Martinez suffered no such damages as a result of the Smith Lawsuit. In Emerald Bay , an insurer, Golden Eagle, refused to defend or indemnify an insured, and the insured sued Golden Eagle for breach of the insurance contract. Emerald Bay , 130 Cal. App. 4th at 1082-83, 31 Cal.Rptr.3d 43. Despite Golden Eagle's refusal to provide coverage, a second insurer, Federal Insurance Company ("Federal") tendered a complete defense and indemnification. Id. at 1083-84, 31 Cal.Rptr.3d 43.
The Court of Appeal affirmed the trial court's decision that the insured had suffered "no cognizable damages" stemming from Golden Eagle's purported contractual breach because Federal had provided complete coverage and the insured never suffered any financial harm as a result of the underlying lawsuit. See id. at 1087-96, 1090, 31 Cal.Rptr.3d 43 ("where one insurer paid for insured's defense in underlying litigation, second insurer's failure to do so ‘was of no consequence’ to insured") (quoting Ceresino v. Fire Ins. Exchange 215 Cal. App. 3d 814, 823, 264 Cal.Rptr. 30 (1989) ). Put differently, Emerald Bay stands for the proposition that when:
the insured has recovered the full amount of its loss from one or more, but not all, of the insurance carriers, the insured has no further rights against the insurers who have not contributed to its recovery. Similarly, the liability of the remaining insurers to the insured ceases, even if they have done nothing to indemnify or defend the insured.
Id. at 1091.
The facts of this case are similar and undisputed. Global Hawk stepped in to defend and indemnify Martinez as soon as Wesco refused to cover him. The parties agree that, as a result, Martinez paid nothing out of pocket to the Smith plaintiffs and contributed nothing towards his defense against the Smith Lawsuit.
Global Hawk attempts to distinguish Emerald Bay on the ground that Federal in fact owed the insured a duty to defend and indemnify, whereas Global Hawk claims that it never owed Martinez any such duty. But Emerald Bay does not clearly recognize such a distinction as legally significant. In that case, Federal conceded that its policy covered the insured, id. at 1089, 31 Cal.Rptr.3d 43, so the court had no occasion to examine whether its holding would change if, like Global Hawk, Federal provided coverage while denying that it owed the insured any duty. Nor has Global Hawk cited any other authority to support its argument.
Emerald Bay hinges its analysis on the fact that "to support an action at law for breach of contract, the plaintiff must show it has suffered damage." Id. at 1088, 31 Cal.Rptr.3d 43. Because Martinez suffered no injury that flowed "directly and necessarily" from Wesco's refusal to cover him in the Smith Lawsuit, Global Hawk cannot show that Martinez suffered any general damages.
ii. Consequential Damages
The only conceivable injury that Martinez suffered in this case is Global Hawk's default judgment against him for reimbursement of the amount that it paid to the Smith plaintiffs on Martinez's behalf. This purported harm qualifies as a "secondary or derivative loss[ ] arising from circumstances that are particular to the contract or to the parties." Lewis Jorge , 34 Cal. 4th at 968, 22 Cal.Rptr.3d 340, 102 P.3d 257. For two reasons, that injury cannot support Global Hawk's breach of contract cause of action.
First, as a practical matter, Martinez will never have to satisfy the default judgment. The covenant not to execute into which Global Hawk and Martinez entered states that: (1) Global Hawk "agrees not to take any action of any kind against MARTINEZ, including any action to collect the DEFAULT JUDGMENT"; (2) Global Hawk "will attempt to recover and collect the DEFAULT JUDGMENT solely and exclusively from WESCO and/or its agents, brokers, employees, officers and any other WESCO affiliated persons or entities"; and (3) Global Hawk "agrees that all efforts to collect the DEFAULT JUDGMENT will be undertaken solely at its own risk and expense; and that if those efforts are in any way unsuccessful, GHIC shall have no recourse against MARTINEZ or its attorneys." Assignment and Covenant Not to Execute at § 3. In other words, no matter the outcome of this action, Martinez faces no financial exposure to Global Hawk or Wesco.
The result of this arrangement is similar to the one between the insured and Federal in Emerald Bay. There, Federal conditionally assigned to the insured its rights to sue and collect from Golden Eagle. In exchange, the insured agreed that the parties would characterize Federal's settlement and defense payments on the insured's behalf as an "advance" that the insured would have to repay if it was able to collect from Golden Eagle. Emerald Bay , 130 Cal. App. 4th at 1084, 31 Cal.Rptr.3d 43. While the assignment of rights in Emerald Bay flowed from Federal to the insured (as opposed to here, where they flowed from Martinez to Global Hawk), the result of the parties' arrangement was that the insured had no financial exposure to Federal, Golden Eagle, or the injured plaintiff. When the insured argued that its obligation to pursue Golden Eagle for funds to pay back Federal's "advance" entitled it to sue for breach of contract, the court reasoned that the way the parties structured their assignment of rights "d[id] not alter the legal effect of what occurred." Id. at 1091. In this case, the legal effect of what occurred is that, as a result of Global Hawk's coverage and the resulting Assignment and Covenant Not to Execute, Martinez is entirely insulated from financial harm. Accordingly, the only consequential damages that could have arisen as an attenuated result of Wesco's purported breach will never materialize.
The Court is aware that, in different factual settings, California courts have rejected the argument that an injured plaintiff's covenant not to execute a default or stipulated judgment against an insured relieves the non-covering insurer from liability since the covenant eliminates the insured's obligation to pay damages. See, e.g. , Pruyn v. Agric. Ins. Co. , 36 Cal. App. 4th 500, 521-22, 42 Cal.Rptr.2d 295 (1995). The cases that reject that argument, however, involve an injured plaintiff who asserts the insured's right to defense and indemnification against a non-covering insurer. See id. Those cases rely on California's policy that insureds should be able assign their rights against their insurer to injured plaintiffs in exchange for a covenant not to execute "without forfeiting" those rights so that injured plaintiffs may use the amount of the judgment against the insured as a basis for establishing the amount of their recovery from the non-covering insurer. Id. at 522, 42 Cal.Rptr.2d 295. Indeed, the statute that Pruyn cites makes clear that an insured's ability to assign its rights, without forfeiting those rights, to an injured plaintiff in exchange for a covenant not to execute applies only "in an action based upon bodily injury, death, or property damage." Cal. Ins. Code § 11580(b)(2). Here, since the Smith plaintiffs settled their claims against Martinez (and their claims against O&G), California's policy of protecting injured plaintiffs has been vindicated. And since this injury arose from Global Hawk's case against Martinez—an action for declaratory relief and reimbursement of insurance proceeds, not damages for bodily injury, death, or harm to property—section 11580(b)(2)'s language does preserve Martinez's damages.
Second, even assuming that the default judgment against Martinez constitutes cognizable harm despite the fact that he will never have to pay it, Wesco could not have foreseen that harm at the time it entered into the Wesco Policy with O&G in November 2013. [Doc. # 26-6.] One California court reasoned persuasively that a certain loss that would have required the contracting party to anticipate a series of unpredictable events was unforeseeable and therefore unrecoverable as consequential contract damages. See California Shoppers , 175 Cal. App. 3d at 60, 221 Cal.Rptr. 171. In California Shoppers , a plaintiff sued a magazine distributer for unfair business practices and the distributer tendered its defense to its insurer, who declined coverage. The plaintiff ultimately obtained a damages award against the distributor. In the subsequent coverage dispute, the distributor received a large award of consequential damages from the insurer to compensate the distributor for having to prematurely sell its business as a result of the insurer's decision to deny coverage. Id. at 15-29, 221 Cal.Rptr. 171.
The appellate court overturned the award of consequential damages because upholding the award would have required the court to hold that:
the parties contemplated, at the time the insurance was purchased , that:
(1) [the distributor] would violate the Unfair Practices Act; (2) a competitor would sue [the distributor] because of such violations; (3) [the insurer] would decline coverage and the tender of this defense; (4) because of $39,000 in attorney's fees incurred to defend the action, [the distributor] would be forced to sell the publishing enterprise ...; and (5) [the insurer] was aware of the [distributor's] long-range plan to sell the business at a later date after it had greatly appreciated in value.
Id. at 60 (some emphasis removed).
While California Shoppers ' facts differ from this case, the link between the coverage denials and the resulting losses in both cases are similarly attenuated. Here, Wesco would have had to foresee, at the time it executed the Wesco Policy, that (1) Martinez would cause fatal injuries during the course of his employment; (2) the decedents' heirs would sue and offer to settle without releasing Martinez; (3) Wesco would decline coverage of Martinez based on the incorrect belief that Texas law compelled it to do so; (4) a third-party insurance company would assume Martinez's defense and settle with the plaintiffs on Martinez's behalf despite disclaiming any coverage duty; (5) that insurance company would coordinate with Martinez to obtain a default judgment requiring Martinez to reimburse the insurance company's costs and settlement payment; (6) Martinez would assign his rights against Wesco to the insurance company in exchange for the insurance company's covenant not to execute the judgment against Martinez; and (7) the insurance company would assert Martinez's rights against Wesco using the default judgment as a basis for damages.
Given that courts may view foreseeability "in the light of common sense," Ash , 223 Cal. App. 4th at 1270, 168 Cal.Rptr.3d 499, it appears clear that the "mere recital of the requisite combination of items [that Wesco] would have had to have in mind to justify this award of damages demonstrates that" Martinez's loss cannot be "awarded as consequential damages." California Shoppers , 175 Cal. App. 3d at 60, 221 Cal.Rptr. 171. Moreover, Global Hawk has presented no evidence or substantive argument that Wesco could or should have foreseen Martinez's loss resulting from the default judgment at the time of contracting. Celotex , 477 U.S. at 323, 106 S.Ct. 2548 (party opposing summary judgment must "designate specific facts showing that there is a genuine issue for trial"). In the absence of such evidence, the Court concludes that Wesco could not have foreseen Martinez's loss when it entered into the Wesco Policy with O&G.
Wesco argues that the loss resulting from the default judgment is made more unforeseeable by potential defects in the judgment itself. Defs.' MSJ and Opp. at 12. It argues that, as a prerequisite for seeking reimbursement from an insured for an indemnity payment, insurers must make: "(1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer's intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement." Id. (citing Blue Ridge Ins. Co. v. Jacobsen , 25 Cal. 4th 489, 502, 106 Cal.Rptr.2d 535, 22 P.3d 313 (2001) ). Wesco argues that the Los Angeles Superior Court erred in entering a judgment requiring reimbursement against Martinez because it is undisputed that Global Hawk filed the Reimbursement Action and settled with the Smith plaintiffs before sending Martinez the April 1, 2016 letter that informed him of his Blue Ridge rights. It also argues that the court erred in entering the judgment because Global Hawk waived its right to seek reimbursement from Martinez by failing to reserve its right to do so until after it filed the Reimbursement Action and settled with the Smith plaintiffs. Defs.' MSJ and Opp. at 11 (citing Miller v. Elite Ins. Co. , 100 Cal. App. 3d 739, 754, 161 Cal.Rptr. 322 (1980).
Global Hawk does not contest the facts underlying Wesco's Blue Ridge and Miller arguments, and does not dispute its failure to satisfy Blue Ridge 's requirements before seeking reimbursement. It instead accuses of Wesco of improperly collaterally attacking the default judgment. Pl.'s Opp. and Reply at 14-15. But that is an imprecise understanding of Wesco's position. The Court does not read Wesco's argument to be that the Court should reverse or reject the Superior Court's decision. It is blackletter law that the Court cannot do so. See Noel v. Hall , 341 F.3d 1148, 1154 (9th Cir. 2003) (federal district courts cannot hear appeals from state court rulings). Wesco's position is that the Superior Court's issuance of the judgment in the Reimbursement Action despite Global Hawk's failure to perfect its right to reimbursement adds an additional layer of unforeseeability to the loss that Martinez suffered and reduces the extent to which Wesco proximately caused that loss. See Def.'s Reply at 14. The Court agrees that, under California Shoppers , these undisputed flaws in the default judgment likely constitute another "item" that Wesco would have had to "keep in mind" when foreseeing potential damages at the time of contracting. But, even without accounting for these Blue Ridge flaws, the events leading to Martinez's loss are too attenuated to give rise to consequential damages. The Court therefore need not rely on the asserted Blue Ridge flaws in reaching its ruling.
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In sum, because Global Hawk has not carried its summary judgment burden to show a genuine dispute of material fact as to whether Wesco caused Martinez to suffer any cognizable damages, it cannot establish the necessary elements of breach of contract.
B. Breach of the Covenant of Good Faith and Fair Dealing
Global Hawk contends that Wesco's decision to settle the Smith Lawsuit without obtaining a release of claims against Martinez violated the implied covenant of good faith and fair dealing. Pl.'s MSJ at 17-18. In opposition, Wesco first argues that Global Hawk's bad faith claim must fail as a matter of law because Global Hawk cannot maintain a breach of contract cause of action. Def.'s MSJ and Opp. at 16. But the cases it relies upon hold that a bad faith claim cannot succeed when the underlying breach of contract claim fails because the insurance policy at issue does not give rise to a potential for coverage. Waller v. Truck Ins. Exch., Inc. , 11 Cal. 4th 1, 36, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995) ; Love v. Fire Ins. Exch. , 221 Cal. App. 3d 1136, 1153, 271 Cal.Rptr. 246 (1990) ("a bad faith claim cannot be maintained unless policy benefits are due"). That is not the case here—Wesco acknowledges that the Martinez was covered under the Wesco Policy. See Def.'s Reply at 15 (Wesco did not accept the Stowers demand based on an erroneous belief in noncoverage. The Smith lawsuit was covered under the policy, and Wesco paid its limits.... None of Wesco's actions involved any decision based on noncoverage."). Wesco instead contends that it denied coverage regardless based on its understanding of Texas law.
That genuine belief that Texas law compelled it to deny Martinez coverage is enough to defeat Global Hawk's bad faith claim. In California, an insurer that wrongfully denies coverage to an insured is not liable for bad faith if its coverage decision was "due to the existence of a genuine dispute" as to whether it had an obligation to provide coverage. Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co. , 90 Cal. App. 4th 335, 347, 108 Cal.Rptr.2d 776 (2001). To be liable for breaching the covenant of good faith and fair dealing, the insurer's conduct must go beyond incorrectly denying coverage—"bad faith implies unfair dealing rather than mistaken judgment." Congleton v. Nat'l Union Fire Ins. Co. , 189 Cal. App. 3d 51, 59, 234 Cal.Rptr. 218 (1987). Plaintiffs alleging bad faith liability must show that the insurer's "reason for withholding benefits must have been unreasonable or without proper cause." Love , 221 Cal. App. 3d at 1151, 271 Cal.Rptr. 246. Without more, "mere negligence is not enough to constitute unreasonable behavior for the purpose of establishing a breach of the implied covenant of good faith and fair dealing in an insurance case." Aceves v. Allstate Ins. Co. , 68 F.3d 1160, 1166 (9th Cir. 1995) (citing National Life & Accident Ins. Co. v. Edwards , 119 Cal. App. 3d 326, 339, 174 Cal.Rptr. 31 (1981) ).
As the Court concluded in the MSJ 1 Order, the majority view in Texas is that insurers have the right and the duty to accept settlement offers that exhaust their policy limits without releasing all insureds. MSJ 1 Order at 10. The undisputed facts of this case demonstrate that Wesco decided to settle with the Smith plaintiffs without obtaining a release of claims against Martinez because it genuinely believed that Texas law governed the Wesco Policy. The car crash and aftermath that gave rise to the Smith Lawsuit took place in Texas and the Smith plaintiffs' counsel styled their settlement offers as demands under a Texas court decision: G.A. Stowers Furniture Co. v. Am. Indem. Co. , 15 S.W.2d 544 (Tex. Comm'n App. 1929). SF 15. The record shows that Wesco discussed internally whether a Stowers demand required it to settle without obtaining a release of Martinez's claims. SF 16, 30, 39-44, 48-49. It determined after consulting with counsel that the Smith plaintiffs' original settlement offer was unenforceable under Texas law, WUF 127, and that Texas law allowed it to settle without obtaining a release of Martinez's claims. See SF 49; See Ayala v. Infinity Ins. Co. , 713 F. Supp. 2d 984, 988 (C.D. Cal. 2010) ("an insurer acts in good faith where it is acting upon the opinion of a reasonably qualified legal advisor"). Global Hawk also does not dispute that Wesco "made several attempts to protect Martinez from any exposure even though he was not a released party" under the settlement. WUF 128.
While Wesco's assumption that Texas law controlled the insurance relationship between it and Martinez was ultimately incorrect, there is no indication in the record that its decision arose out of bad faith or as the result of unfair dealing. If anything, it appears that Wesco was "merely negligent" in failing to consider that California law controlled and precluded it from settling around Martinez.
Global Hawk's two main arguments to the contrary are unavailing. It first argues that the Court already decided that Wesco denied Martinez coverage in bad faith because it ruled in its MSJ 1 Order, in determining which state's law in fact controlled, that "it would not have been reasonable for the parties to have assumed that Texas law would govern." Pl.'s Opp. and Reply at 16 (citing MSJ 1 Order at 15). In the MSJ I Order, the Court was analyzing whether, for purposes of the comparative impairment prong of the governmental interest test, it would have been reasonable for Wesco and O&G to assume that Texas law governed their insurance contract. The Court's conclusion does not amount to a finding that, under the test for breach of the implied covenant of good faith and fair dealing, Wesco's actions constituted bad faith. Indeed, without more, "[n]either mistaken judgment nor unreasonable judgment is the equivalent of bad faith" in the insurance context. Merritt v. Reserve Ins. Co. , 34 Cal. App. 3d 858, 876, 110 Cal.Rptr. 511 (1973).
Global Hawk next argues that California recognizes a scenario in which "a liability insurance company might be tagged for ‘tort’ damages when it was reasonable, but incorrect" in its coverage assessment. Pl.'s Opp. and Reply at 19 (citing Griffin Dewatering Corp. v. N. Ins. Co. of New York , 176 Cal. App. 4th 172, 206 n.38, 97 Cal.Rptr.3d 568 (2009) ). That situation is when:
the insurance company had the chance to settle a case within policy limits, but passed up the opportunity because it incorrectly determined that there was not even any potential coverage. In that particular situation, even though the coverage decision may have been reasonable, but incorrect, the insurance company still might have to pay the excess of any ensuing judgment over the policy limits as bad faith damages.
Griffin , 176 Cal. App. 4th at 206 n.38, 97 Cal.Rptr.3d 568. As discussed above, however, Wesco did not deny coverage because it incorrectly determined that there was no potential for coverage—it did so under the belief that Texas law required it to do so despite the potential for coverage. The scenario that Global Hawk invokes therefore does not apply here.
In sum, the undisputed facts indicate that, while Wesco's decision to deny Martinez coverage was likely unlawful in California, it did not amount to a breach of the implied covenant of good faith and fair dealing.
IV.
CONCLUSION
In light of the foregoing, Global Hawk cannot sustain a claim for breach of contract because Martinez did not suffer any cognizable harm caused by Wesco. Nor can Global Hawk establish a claim for breach of the implied covenant of good faith and fair dealing because Wesco's decision to deny Martinez coverage was due to a genuine dispute as to whether Texas law required it to accept the Smith plaintiffs' revised settlement offer. Global Hawk's MSJ is therefore DENIED and Wesco's MSJ is GRANTED .