Travelers Property Casualty Company of America v. Mountain Movers Engineering Company, Inc., 3:16-cv-02127

Background

Mountain Movers (insured) worked on a Carlsbad property for general contractor Pacific Building Group (PBG); Mountain had a Travelers commercial general liability policy and agreed to indemnify PBG.
A September 8, 2012 sewer cleanout was damaged, causing sewage backup; ORGENCO paid most repair costs and Mountain agreed to reimburse PBG’s $10,000 deductible.
Travelers denied coverage citing Pollution and Bacteria/Fungi exclusions and declined to fund repairs or settlement efforts; payments for Mountain’s defense were allegedly late and sporadic.
Defendants (ORGENCO and PBG) sued in state court and obtained a stipulated judgment against Mountain; Mountain assigned its claims against Travelers to ORGENCO and settled with a covenant not to execute.
Defendants filed counterclaims against Travelers in this federal action asserting bad-faith claims (failure to indemnify and failure to settle) and a judgment-creditor claim; Travelers moved to dismiss certain claims and to strike allegedly privileged mediation-related allegations.
The court permitted the bad-faith counterclaims to proceed, struck the prayer for punitive damages, and denied Travelers’ motion to strike mediation-related allegations.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether bad-faith claim for failure to indemnify should be dismissed	Travelers: no duty to indemnify; stipulated judgment with covenant not to execute cannot bind insurer	Defendants: Travelers wrongfully refused to defend/settle; stipulated judgment may bind insurer and trigger indemnity duty	Denied dismissal — facts plausibly show wrongful refusal to defend/settle so indemnity claim survives
Whether bad-faith claim for failure to settle should be dismissed	Travelers: refusal reasonable given coverage defenses	Defendants: Travelers unreasonably refused settlement, threatened Mountain, caused consequential damages beyond excess judgment	Denied dismissal — allegations sufficiently plead unreasonable refusal to settle and consequential harm
Whether punitive damages may be sought by assignee/judgment creditor	Travelers: punitive damages are personal and nonassignable; judgment-creditor claim arises from contract so punitive damages unavailable	Defendants: seek punitive damages based on assigned claims and judgment-creditor theory	Granted in part — punitive damages stricken (cannot be recovered by assignee or on judgment-creditor contract claim absent a separate pleaded tort)
Whether mediation-related statements in counterclaims must be stricken as privileged	Travelers: passages disclose privileged mediation communications and should be struck under Rule 12(f) and Cal. Evid. Code §1119	Defendants: passages are non-communicative allegations (motivation/behavior), and much of the material was already placed in the record by Travelers	Denied — statements are not privileged communications or were already in the record; Rule 12(f) relief inappropriate

Key Cases Cited

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (establishes plausibility standard for pleadings)
Ashcroft v. Iqbal, 556 U.S. 662 (pleading must include factual content permitting reasonable inference of liability)
PPG Indus., Inc. v. Transamerica Ins. Co., 20 Cal.4th 310 (insurer's covenant includes duty to accept reasonable settlement)
Howard v. American Nat. Fire Ins. Co., 187 Cal.App.4th 498 (insurer may be liable for wrongful refusal to indemnify or settle)
Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal.4th 1252 (bad-faith cause of action assignable though some damages are not)
Buss v. Superior Court, 16 Cal.4th 35 (insurer's duty to indemnify relates to claims actually covered)
Murphy v. Allstate Ins. Co., 17 Cal.3d 937 (punitive damages and certain personal tort damages are not assignable)
Zander v. Casualty Ins. Co. of Cal., 259 Cal.App.2d 793 (covenant not to execute in insured's settlement does not prevent insurer liability)