Opinion
NOT TO BE PUBLISHED
Humboldt County Super. Ct. No. DR080861
SEPULVEDA, J.
Dairy farmers sued their liability insurer for breach of contract and bad faith after their insurer refused to defend them against a third party’s lawsuit. The insurer filed a motion for summary adjudication. The trial court denied summary adjudication of the breach of contract cause of action, finding potential coverage and thus a duty to defend. The trial court granted summary adjudication of the bad faith cause of action, finding that the insurer reasonably relied upon the advice of counsel in denying a defense.
Insureds and insurer both appeal. The insurer argues that the trial court erred in finding a duty to defend, and the insureds argue that the court erred in finding no bad faith. There was no error. The factual allegations in the underlying lawsuit showed a potential claim for trade libel, and thus triggered the insurer’s duty to defend. But the insurer reasonably relied upon the advice of counsel in mistakenly refusing a defense and thus there was no bad faith, only a breach of contract. We affirm the judgment.
I. FACTS
The insureds are plaintiffs Timothy Miranda, Dorice Miranda, and Robert Miranda (collectively, the Mirandas). Timothy and Robert are brothers. Dorice is Timothy’s wife. Together, the insureds operate Miranda Dairy in Humboldt County. They are insured under a farm liability policy issued by defendant California Capital Insurance Company.
The policy has various coverage provisions. Relevant here is coverage for personal injury liability, specifically product disparagement or trade libel. The insurer promised to “pay those sums that the ‘insured’ becomes legally obligated to pay as damages because of ‘personal injury’... to which this insurance applies. [Insurer] will have the right and duty to defend the ‘insured’ against any ‘suit’ seeking those damages.” The policy definition of “ ‘personal injury’ ” includes “injury, other than ‘bodily injury, ’ arising out of one or more of the following offenses: [¶... ¶] “Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services....’ ”
In 2008, Raymond Christie sued the Mirandas. Christie is the owner of Christie Livestock, a Humboldt County business. Christie asserted multiple causes of action, none denominated trade libel. Relevant here are the first amended complaint causes of action, and facts alleged in those causes of action relating to the maintenance and sale of milk cows. The Christie complaint alleged that the Mirandas took possession of 537 Christie milk cows in May 2004 with the verbal agreement that the Mirandas would feed and maintain the cows at their expense in exchange for which the Mirandas milked the cows and sold the milk for the Mirandas’ profit. Christie retained title to the cows and the right to sell them, subject to the Mirandas’ right of first refusal to purchase the Christie cows prior to a sale to a third-party purchaser.
The Christie complaint further alleged that a third-party purchaser, Blake Alexandre, offered to purchase 100 cows out of Christie’s herd in the Mirandas’ possession in July 2005, and the Mirandas did not exercise their right of first refusal. The Mirandas delivered cows to Alexandre but the cows were not from Christie’s herd. The Christie complaint alleges that the Mirandas “substituted their own substandard cows, i.e.[, ] cull and/or low producing dairy cows, for [Christie’s] cows” and misrepresented to Alexandre “that the cows were the property of” Christie and from Christie’s herd. The Mirandas allegedly made the same substitution of their “substandard” cows and the same misrepresentation in May 2006, when Alexandre contracted with Christie to purchase an additional 112 cows. Christie alleged that the Mirandas knew of his actual and prospective business relationships with ranchers and third-party purchasers “and intentionally transferred [the Mirandas’] inferior cows to Mr. Alexandre and misrepresented to both Mr. Alexandre and [Christie] that the cows were from [Christie’s] herd, to disrupt these relationships.” Among his claimed damages, Christie asserted lost profits resulting from a loss of business reputation. The complaint stated causes of action for breach of contract, intentional and negligent misrepresentation, intentional and negligent interference with business advantage, and conversion.
The Mirandas, through counsel, tendered the defense of the Christie action to their insurer in May 2008. The Mirandas asserted that the complaint contained allegations that they disparaged Christie’s cows by misrepresenting low producing dairy cows as Christie’s cows, resulting in a claimed loss of Christie’s business reputation. The insurer conducted a coverage analysis. In July 2008, a law firm provided the insurer with a coverage opinion. Counsel advised the insurer that it owed no duty to defend or indemnify the Christie action. Counsel reasoned that the alleged misrepresentation of low producing milk cows as Christie’s cows was not trade libel: “This alleged statement does not rise to the level of an unambiguous allegation of an untrue statement that would induce others not to deal with [Christie] and cause special damages.” A claims adjuster for the insurer declares that he relied upon counsel’s opinion in determining that the insurer had no duty to defend the Mirandas. The claims adjuster directed counsel to send the coverage opinion to the Mirandas, and counsel did so in late July 2008.
The Mirandas’ attorney disputed the law firm’s coverage opinion, but the insurer’s law firm maintained its position in an exchange of correspondence during August 2008. The insurer’s counsel maintained that “[t]he underlying case involves no false publication of fact that damages [Christie’s] reputation, but instead involves substitution of [the Mirandas’] cows for [Christie’s] cows as the damage-causing event.”
In September 2008, the Mirandas sued their insurer for breach of contract and bad faith. The insurer moved for summary judgment or adjudication in March 2009. The trial court denied summary adjudication of the breach of contract cause of action, finding a potential for coverage under the trade libel policy provision and thus a duty to defend. The trial court granted summary adjudication of the bad faith cause of action, finding that the insurer reasonably relied upon the advice of counsel in denying a defense. The parties stipulated to entry of judgment while retaining their right to appeal. Under the terms of the stipulation, the insurer agreed to assume defense of the Christie action and to pay prior defense costs, subject to reimbursement if it prevailed on appeal. Judgment was entered on the stipulation in September 2009. The insurer appealed the adjudication of a duty to defend, and the insureds appealed the adjudication finding no bad faith. The insurer’s duty to defend, and its claimed bad faith in refusing a defense, are the only issues in the case.
No question of indemnity arises. The Christie action was voluntarily dismissed while these appeals were pending, as the insureds inform us in their brief on appeal.
II. DISCUSSION
A. General principles concerning the duty to defend
“An insurer must defend its insured against claims that create a potential for indemnity under the policy. [Citations.] The duty to defend is broader than the duty to indemnify, and it may apply even in an action where no damages are ultimately awarded. [Citation.] [¶] Determination of the duty to defend depends, in the first instance, on a comparison between the allegations of the complaint and the terms of the policy. [Citation.] But the duty also exists where extrinsic facts known to the insurer suggest that the claim may be covered. [Citation.] Moreover, that the precise causes of action pled by the third-party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.” (Scottsdale Ins. Co v. MV Transportation (2005) 36 Cal.4th 643, 654 (Scottsdale).)
“On the other hand, ‘in an action wherein none of the claims is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. [Citation.] “This freedom is implied in the policy’s language. It rests on the fact that the insurer has not been paid premiums by the insured for [such] a defense.... [T]he duty to defend is contractual. ‘The insurer has not contracted to pay defense costs’ for claims that are not even potentially covered.” ’ ” (Scottsdale, supra, 36 Cal.4th at p. 655.)
“From these premises, the following may be stated: If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance.” (Scottsdale, supra, 36 Cal.4th at p. 655.)
B. The insurer had a duty to defend
The insurer here promised to defend and indemnify claims arising from various offenses, including “[o]ral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.... ” Insuring clauses like the one found here insuring libel, slander, and product disparagement “are construed in their tort sense so that only claims for actionable torts are covered under the policy.” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 1995) ¶ 7:1097, p. 7C-42.) “But the complaint need not specifically allege a claim for ‘libel, ’ ‘slander, ’ etc. Factual allegations in other claims may show a potential claim for defamation” or product disparagement. (Ibid.) “[T]he duty to defend arises when the facts alleged in the underlying complaint give rise to a potentially covered claim regardless of the technical legal cause of action pleaded by the third party.” (Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 510.)
Disparagement of the quality of goods is commonly called trade libel, and is a form of injurious falsehood. (Rest. 2d Torts, § 626, com.. a, pp. 345-346.) The Restatement of Torts sets out the general principle governing liability for an injurious falsehood: “One who publishes a false statement harmful to the interests of another is subject to liability for pecuniary loss resulting to the other if [¶] (a) he intends for publication of the statement to result in harm to interests of the other having a pecuniary value, or either recognizes or should recognize that it is likely to do so, and [¶] (b) he knows that the statement is false or acts in reckless disregard of its truth or falsity.” (Rest. 2d Torts, § 623A.) Disparagement of quality, while commonly called trade libel, does not require a writing as personal libel does—an oral statement disparaging the quality of goods is actionable. (Rest. 2d Torts, § 626, com. a, pp. 345-346.) “A statement is disparaging if it is understood to cast doubt upon the quality of another’s land, chattels or intangible things... and [¶] (a) the publisher intends the statement to cast the doubt, or [¶] (b) the recipient’s understanding of it as casting the doubt was reasonable.” (Rest. 2d Torts, § 629.)
As appellant insurer acknowledges, California follows the Restatement of Torts definition of trade libel. (See Erlich v. Etner (1964) 224 Cal.App.2d 69, 73 [quoting Restatement]; see also Nichols v. Great American Ins. Companies (1985) 169 Cal.App.3d 766, 773 (Nichols) [quoting Restatement].)
The question here is whether “any facts stated or fairly inferable in the complaint... suggest a claim potentially covered by the policy” insuring trade libel. (Scottsdale, supra, 36 Cal.4th at p. 655.) The answer is yes. The Christie complaint states that the insureds knowingly transferred the insureds’ “inferior cows” to a dairy rancher, falsely told the rancher that the cows were from Christie’s herd, and made the transfer and false statement with the intention of disrupting Christie’s business relationships with dairy ranchers. Christie further alleged that the insured’s conduct resulted in Christie suffering lost profits from a loss of business reputation.
Had the insureds falsely told the rancher “Christie’s cows are inferior, ” trade libel would be apparent. The existence of trade libel is less clear here, where it is claimed that the insureds falsely told the rancher “these are Christie cows” and presented inferior cows. The insurer argues that this is nothing more than “ ‘palming off’ ” an inferior product for another product, which may be unfair competition but is not trade libel. (See Aetna Casualty & Surety Company, Inc. v. Centennial Insurance Company (1988) 838 F.2d 346, 351-352 [palming off another’s product as one’s own is not trade libel].) The argument has merit but does not account for additional allegations in the complaint stating facts beyond simple substitution of goods. The complaint alleges that the insureds not only presented inferior cows as Christie cows but also did so with the intention of disrupting Christie’s business relationships with ranchers. This is different from the usual “palming off” case, where one trades upon the good reputation of an established product to substitute another product. (See 4 McCarthy, Trademarks and Unfair Competition (4th ed. 2003) § 25:3.) Here, the allegations of the Christie complaint suggest that the insureds’ intention was not simply to palm off their inferior cows for Christie cows (hoping the substitution would go undetected) but also to disrupt Christie’s livestock business by creating the false impression that Christie’s cows are substandard and thereby impairing future sales.
Although the insureds did not say Christie’s cows were substandard, they allegedly did say that certain substandard cows were Christie’s and made the statement to damage Christie’s livestock business. The implication of the insureds’ statement was that Christie’s cows were substandard. This fits the broad definition of an injurious falsehood. Christie alleged that the insureds made a knowingly false statement and intended “publication of the statement to result in harm to interests of [Christie] having a pecuniary value.” (Rest. 2d Torts, § 623A.) Although the statement (these are Christie’s cows) did not, standing alone, disparage the quality of the cows, “[a] statement is disparaging if it is understood to cast doubt upon the quality of another’s land, chattels or intangible things... and [¶] (a) the publisher intends the statement to cast the doubt, or [¶] (b) the recipient’s understanding of it as casting the doubt was reasonable.” (Rest. 2d Torts, § 629.) Here, the Christie complaint alleges that the statement (these are Christie’s cows) was understood to cast doubt upon the quality of Christie’s cows, and the insureds intended the statement to cast doubt. Product disparagement generally includes “statements about a competitor’s goods that are untrue or misleading and are made to influence potential purchasers not to buy.” (Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017, 1035.)
It will be recalled that a duty to defend arises “[i]f any facts stated or fairly inferable in the complaint... suggest a claim potentially covered by the policy.” (Scottsdale, supra, 36 Cal.4th at p. 655, italics added.) “[A] bare ‘potential’ or ‘possibility’ of coverage [is] the trigger of a defense duty.” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 300.) The Christie complaint did not denominate any cause of action as trade libel, but a potential claim for trade libel is fairly inferable from the facts alleged. (Scottsdale, at p. 654.) The insurer thus had a duty to defend.
Nichols, supra, 169 Cal.App.3d 766, cited by the insurer, is not to the contrary. In Nichols, the court found no duty to defend a seller of cable television interception devices against a cable company’s lawsuit seeking to enjoin sale of the devices and alleging loss of business opportunities, reputation, and good will. (Id. at p. 770.) The seller insured sought coverage under a personal injury insurance clause different from the one here. (Id. at p. 772.) There, the insurer covered “publication or utterance of a libel or slander or of other defamatory or disparaging material.” (Ibid.) The insured claimed that the thrust of the cable company’s action against it was that, by selling devices to intercept cable television signals, the insured had disparaged the cable company’s exclusive license to distribute that signal. (Ibid.) The court found that there was no actionable disparagement, or trade libel, because there was no defamatory publication or utterance. (Id. at p. 775.) The court concluded that the complaint “did not allege any statement or conduct by [the insureds] which directly cast aspersions on [the cable company’s] equipment or license.” (Id. at p. 774.) Statements made in advertising the devices were not covered because advertising was excluded under the policy, and statements to customers that there was “ ‘nothing wrong’ ” in intercepting the television signals were not defamatory because they were “either ambiguous or susceptible of an innocent meaning.” (Ibid.) The court noted that, with ambiguous statements, “it is incumbent upon the plaintiff to plead by innuendo the facts showing the defamatory meaning of the statements.” (Ibid.) The complaint in Nichols, “contains no suggestion of the defamatory meaning that [the insureds] seek to infer, ” and thus did not trigger a duty to defend. (Ibid.)
Unlike Nichols, supra, 169 Cal.App.3d 766, the complaint here did allege the defamatory meaning of the insureds facially innocent statement that the cows were Christie cows. The complaint alleged that the insureds made the statement knowing that the cows were not Christie cows, knowing that the cows were “substandard” and “inferior cows, ” intending to disrupt Christie’s sales to ranchers, and succeeding in reducing Christie’s profits by damaging Christie’s business reputation. The implication of the insureds’ alleged statement (these are Christie cows) was not facially defamatory but was potentially defamatory, sufficient to trigger a duty to defend, in the context of the insured’s other statements and conduct. One accused of libel is responsible “for what is insinuated, as well as for what is stated explicitly.” (Bates v. Campbell (1931) 213 Cal. 438, 442.)
C. The insurer did not act in bad faith in denying a defense
“ ‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.’ [Citation.] ‘The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement. [Citations.]’... Breach of the covenant of good faith and fair dealing exposes an insurer to breach of contract and tort damages.” (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 528, mod. 188 Cal.App.4th 327a.) Punitive damages may be awarded for tortious bad faith if the insurer was also guilty of oppression, fraud, or malice. (Civ. Code, § 3294; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922-923.) “But ‘a breach of an insurance contract does not automatically subject an insurer to tort damages for bad faith....’ [Citation.] An insurer’s tortious ‘breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself.’ [Citation.] In simple terms, an insurer’s tortious bad faith conduct is conduct that is unreasonable.” (Howard, supra, at pp. 528-529.) “A breach of the duty to defend in itself constitutes only a breach of contract [citation], but it may also violate the covenant of good faith and fair dealing where it involves unreasonable conduct or an action taken without proper cause. [Citations.] On the other hand, ‘[i]f the insurer’s refusal to defend is reasonable, no liability will result.’ ” (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 881.)
“An insurer may defend itself against allegations of bad faith and malice in claims handling with evidence the insurer relied on the advice of competent counsel. [Citations.] The defense of advice of counsel is offered to show the insurer had ‘proper cause’ for its actions even if the advice it received is ultimately unsound or erroneous.” (State Farm Mut. Auto. Ins. Co. v. Superior Court (1991) 228 Cal.App.3d 721, 725.) Proof that an insurer acted in good faith reliance on advice of competent counsel negates both allegations that it acted in bad faith and allegations that it acted with oppression, fraud, or malice warranting punitive damages. (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 12:1248, p. 12D-23.)
The insurer here presented evidence establishing the defense of good faith reliance on the advice of competent counsel. The insurer’s claims adjuster, Craig Hoertling, submitted a declaration stating that he asked Lance Orloff of Grant, Genovese & Baratta to provide a coverage opinion as to whether the insurer was obligated to provide a defense to the insureds in the Christie action. The competency of Attorney Orloff to render a coverage opinion is undisputed.
Attorney Orloff sent a coverage opinion letter to Hoertling concluding that the insurer owed no duty to defend. The letter is seven pages long. Counsel’s letter summarizes the facts as they were presented in Christie’s complaint, an insured’s statement, and the tender letter prepared by the insured’s attorney. The letter includes a detailed legal analysis discussing cases and various coverage provisions, ultimately concluding that “[t]he facts alleged in [Christie’s] complaint do not give rise to trade libel.” Counsel reasoned that the alleged misrepresentation of low producing milk cows as Christie’s cows was not trade libel: “This alleged statement does not rise to the level of an unambiguous allegation of an untrue statement that would induce others not to deal with [Christie] and cause special damages.” Attorney Orloff maintained his non-coverage opinion in a supplemental coverage letter written after he reviewed Christie’s amended complaint, concluding that the “elements necessary to assert defamation or trade libel, most prominently a publication of disparaging fact, are not alleged in the First Amended Complaint.”
The claims adjuster, Hoertling, declared that he reviewed Attorney Orloff’s coverage opinion, “relied on this opinion in determining that California Capital had no duty to defend or indemnify, ” and directed Attorney Orloff to send his coverage opinion to the insureds’ attorney. Attorney Orloff sent the coverage opinion letter to the insureds’ attorney. The insureds’ attorney replied directly to Attorney Orloff, contesting his conclusion and maintaining that “[t]he amended complaint clearly alleges all of the elements of a trade libel.” Attorney Orloff responded with a letter that disagreed with the legal analysis of the insureds’ attorney. Attorney Orloff wrote that “the damage-causing event was your clients’ alleged substitution of one of their cows for [Christie’s], which allegedly damaged [Christie’s] business reputation, ” not “a factual publication that itself damage[d] [Christie’s] reputation.”
In opposing the insurer’s motion for summary adjudication, the insureds presented no evidence refuting claims adjuster Hoertling’s declaration that he relied upon Attorney Orloff’s coverage opinion in denying a duty to defend. The insureds did question the sufficiency of that declaration, arguing that the only proof of reliance on advice of counsel was Hoertling’s declaration, and that the trial court should exercise its discretion to deny the motion so that Hoertling could be cross-examined on the point at trial. (Code Civ. Proc., § 437c, subd. (e).) The argument is repeated on appeal. It is not well taken. Hoertling’s declaration was not the only proof that the insurer relied upon advice of counsel in refusing a duty to defend. The course of events, documented in multiple letters, clearly shows such reliance. The documents show that the insurer asked Attorney Orloff to provide a coverage opinion and, once the opinion was prepared, directed Attorney Orloff to send the coverage opinion to the insureds, which he did. The plain inference is that the insurer relied upon Attorney Orloff’s advice and adopted his coverage opinion. The insureds did not produce any evidence to the contrary.
The documents presented by the insurer on the motion for summary adjudication also established a prima facie case that the insurer’s reliance upon advice of counsel was reasonable. Reliance is reasonable if the insurer “acted in reliance on the opinion and advice of its lawyer”; “[t]he lawyer’s advice was based on full disclosure by [the insurer] of all relevant facts that it knew, or could have discovered with reasonable effort”; the insurer “reasonably believed the advice of the lawyer was correct”; the insurer “gave at least as much consideration to [its insureds’] interest as it gave its own interest” in relying on its lawyer’s advice; and the insurer “was willing to reconsider and act accordingly [if and] when it determined that the lawyer’s advice was incorrect.” (CACI No. 2335.)
The correspondence between the insurer and its counsel shows a full disclosure of the relevant facts. The insurer’s counsel was given the policy, the Christie complaint, the amended complaint, an insured’s recorded statement, and the insureds’ tender letter setting out their arguments for coverage. The correspondence also shows that the insurer reasonably believed its lawyer’s advice, which was founded on a detailed legal analysis of the facts and pertinent legal authority. Although we have concluded that the facts alleged in the underlying Christie action can be inferred to state a covered claim for trade libel, Attorney Orloff’s contrary conclusion was plausible and reasonably relied upon by the insurer.
On appeal, the insureds argue that the trial court applied the wrong standard in granting summary adjudication of their bad faith claim. The insureds note that the court’s initial order focused on the lack of evidence supporting punitive damages for bad faith, rather than the state of the evidence when judged under the lesser culpability standard applicable to bad faith itself. We do not accept the insureds’ claim that the court applied the wrong standard. The court filed a later order making clear that it found no triable issue of fact as to either bad faith or punitive damages. Also, the transcript of the hearing on the summary adjudication motion indicates that the court understood that bad faith was at issue. In any event, we review an order granting summary adjudication de novo. (Atlantic Mutual Ins. Co. v. J. Lamb, Inc., supra, 100 Cal.App.4th at p. 1031.) The question is not whether the trial court reasoned correctly in granting the insurer summary adjudication but whether, evaluating the evidence independently, the insurer was entitled to summary adjudication. We conclude that it was entitled to summary adjudication because the insurer presented sufficient evidence that it relied, in good faith, upon the advice of competent counsel in denying a duty to defend, and the insureds failed to present contrary evidence raising a triable issue of material fact on that issue.
III. DISPOSITION
The judgment is affirmed. The parties shall bear their own costs incurred on the appeal and cross-appeal.
We concur: Ruvolo, P. J., Rivera, J.