ORDER GRANTING IN PART AND DENYING IN PART AAIC’S MOTION FOR SUMMARY JUDGMENT ON HUDSON’S COUNTERCLAIMS
Before the Court is a Motion for Summary Judgment or, in the alternative, Partial Summary Judgment on Hudson’s Counterclaims filed by Plaintiff and Counter-Defendant American Alternative Insurance Corporation.
After considering all papers submitted in support of and in opposition to the motions, as well as the arguments advanced by counsel at the April 1, 2013 hearing, the Court GRANTS IN PART AND DENIES IN PART American Alternative’s Motion for Summary Judgment.
I. BACKGROUND
A. Procedural Background
On March 26, 2012, Plaintiff American Alternative Insurance Company (“AAIC”) filed its Amended Complaint against Hudson Insurance Company (“Hudson”) in the California Superior Court for the County of Riverside, alleging three claims for declaratory relief. {See Not. of Removal (“Not.”), Ex. A, Compl., Doc. No. 1.) Hudson removed the action to this Court on April 24, 2012. (Not.) On May 15, 2012, Hudson answered and asserted three counterclaims for declaratory relief, equitable indemnity, and equitable subrogation. (“Counterclaim,” Doc. No. 15.) AAIC answered the Counterclaim on June 8,2012. (Doc. No. 16.)
AAIC filed its Motion for Summary Judgment or Partial Summary Judgment as to Hudson’s counterclaims on January 14, 2013. (“MSJ,” Doc. No. 32.) AAIC included the following documents in support of its MSJ: Statement of Uncontroverted Facts and Conclusions of Law (“SUF,” Doc. No. 32-1); Request for Judicial Notice (“RJN,” Doc. No. 32-3)
On January 22, 2013, Hudson filed its Opposition (“Opp’n,” Doc. No. 34), along with its Statement of Genuine Issues of Material Fact and Additional Material Facts (“SGI,” Doc. No. 34-3), a Declaration of Gary Hamblet (Doc. No. 34-1) attaching eight exhibits (Exhs. 8-14, 19), and a Declaration of Greg Edwards (Doc. No. 34-2) attaching seven exhibits (Exh. 15-18, 20-22). On March 11, 2013, Hudson supplemented its opposition with a Declaration of Edward J. McKinnon attaching his Rule 26 Expert Report. (Doc. No. 38.) AAIC filed its Reply on January 18, 2013 (“Reply,” Doc. No. 39), along with its Response to Hudson’s Statement of Additional Facts (“Reply SUF,” Doc. No. 39-1), Objections to the' McKinnon Declaration (“Obj.,” Doc. No. 39-2), and a Reply Declaration of Jennifer Kokes (Doc. No. 39-3) attaching several exhibits (Exhs. 23-25).
B. AAIC’s Complaint
AAIC’s Complaint arises from an underlying personal injury judgment against Minuteman. (Compl., ¶ 1.) Hudson insured Minuteman under a primary policy and AAIC covered Minuteman under an excess policy. (Compl., ¶ 1.) AAIC alleges that Hudson is obligated to pay the entire judgment against Minuteman as well as prejudgment interest and costs because Hudson (1) breached its duty to timely communicate pretrial settlement offers to AAIC (Compl., ¶¶ 56-59) and (2) unreasonably failed to settle the underlying action for an amount less than AAIC’s policy limits in violation of Hudson’s implied covenant of good faith and fair dealing (Compl., ¶¶ 50-55).
C. Hudson’s Counterclaim
Hudson counterclaims that AAIC unreasonably failed to settle the underlying action when it was presented with pretrial settlement offers' that were within its coverage limits. (Counterclaim, ¶ 13.) Due to this breach, Hudson claims that AAIC is responsible for (1) the defense costs Hudson incurred after AAIC failed to settle and (2) $219,289.18 in judgment costs and interest Hudson paid as part of the final judgment. (Counterclaim, ¶ 13.) Hudson brings three claims for declaratory relief, equitable indemnity, and equitable subrogation. (Counterclaim, ¶¶ 11-20.)
II. LEGAL STANDARD
A motion for partial summary adjudication is governed by the same standard as a motion for summary judgment. Green v. Sun Life Assur. Co. of Canada,
Generally, the burden is on the moving party to demonstrate that it is entitled to
Where the non-moving party has the burden at trial, however, the moving party need not produce evidence negating or disproving every essential element of the non-moving party’s case. Celotex,
The burden then shifts to the non-moving party to show that there is a genuine issue of material fact that must be resolved at trial. Fed.R.Civ.P. 56(c); Celotex,
In ruling on a motion for summary judgment, a court construes the evidence in the light most favorable to the non-moving party. Scott v. Harris,
III. DISCUSSION
A. Undisputed Facts
The following material facts are sufficiently supported by admissible evidence and are uncontroverted. They are “admitted to exist without controversy” for purposes of the MSJ. L.R. 56-3 (facts not “controverted by declaration or other written evidence” are assumed to exist without controversy); Fed.R.Civ.P. 56(e)(2) (stating that where a party fails to address another party’s assertion of fact properly, the court may “consider the fact undisputed for purposes of the motion”).
1. Accident
Minuteman provided valet parking services for the Fantasy Springs Casino in Riverside County, California. (SUF ¶ 1; SGI ¶ 1.) On October 31, 2008, a vehicle operated by a Minuteman employee struck Tory Fretz (“Fretz”) in the Casino’s parking area. (SUF ¶ 2; SGI ¶ 2.) Fretz was treated at a local emergency room and
2. Primary and Excess Insurance Policies
At the time of the accident, Hudson insured Minuteman under a primary insurance policy which provided liability coverage up to $1 million. (Hudson Primary Policy; SUF ¶¶ 3-4; SGI ¶¶3-4.) The Primary Policy states that Hudson “will pay those sums that the Insured becomes legally obligated to pay as damages because of ‘bodily injury’____” (SUF ¶ 6; SGI ¶ 6.) Hudson also “will have the right and duty to defend the Insured against any ‘suit’ seeking those damages” and that “right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements ...(SUF ¶ 6; SGI ¶ 6.) Under Supplementary Payments, the Hudson Primary Policy states that Hudson will pay “[a]ll costs taxed against the insured in the ‘suit’ ” and “[pjrejudgment interest awarded against the insured on that part of the judgment we pay” or “prejudgment interest based on that period of time after the offer” to pay the applicable limit of insurance. (SUF ¶ 7; SGI ¶ 7.)
AAIC insured Minuteman under an excess insurance policy with coverage of $4 million available after exhaustion of the $1 million provided by the Hudson Primary Policy. (AAIC Excess Policy; SUF ¶¶ 8-9, 12; SGI ¶¶ 8-9, 12.) The AAIC Excess Policy provides that:
“[w]e will pay, on behalf of the Insured, sums in excess of the amount payable under the terms of the [Hudson Primary Policy], that the Insured becomes legally obligated to pay as damages because of injury or damage to which this insurance applies.... In no event will this insurance apply unless the [Hudson Primary Policy] applies or would apply but for the exhaustion of its applicable Limit of Liability.”
(SUF ¶ 11; SGI ¶ 11.) The AAIC Excess Policy also provided that AAIC would “assume charge of the settlement or defense of any claim or suit against the insured when the aggregate Limit of Liability of the [Hudson Primary Policy] has been exhausted by payment of claims,” otherwise, AAIC would not be obligated to pay defense expenses. (SUF ¶ 13; SGI ¶ 13.)
3. Fretz Litigation & Settlement Offers
On October 22, 2009, Fretz sued Minuteman in Riverside Superior Court seeking damages sustained in the accident. (“Fretz Action,” SUF ¶ 14; SGI ¶14.) Pursuant to the Primary Policy, Hudson retained Lois Brisbois Bisgaard. & Smith LLP to defend Minuteman in the Fretz Action. (SUF ¶ 15; SGI ¶ 15.) The parties proceeded with early mediation. (SGI ¶ 41; Reply SUF ¶ 41.) On June 28, 2010, defense counsel prepared and sent to Hudson an evaluation report which examined Fretz’s .bodily injuries, loss of earnings, and economic damages and gave a recommended settlement range of.$500,000 to $700,000. (June 28, 2010 Report.) The report reviewed Fretz’s medical records and noted that Fretz sustained “significant injuries limited to her head and neck,” including nine facial/skull fractures, small, bilateral, frontal hematomas, and a small, left .front brain hemorrhagic contusion. (June 28, 2010 Report at 210-11.) The report also noted that at Loma Linda Hospital “no neurological deficits were noted.” (Id. at 212.) Throughout Fretz’s followup care, the Report noted that Fretz complained of headaches, blurred vision, forgetfulness, and osteoarthritis. (Id. at 212-
On or about July 21, 2010, Fretz mailed Hudson a Statutory Offer to Compromise pursuant to Cal.Code Civ. P. § 998 and Cal. Civ.Code § 3291 offering to settle the Fretz Action for $1 million. (“July § 998 Offer,” SUF ¶ 16; SGI ¶ 16; Kokes Deck, Exh. 5 at 171-72; Rsp. to RFA No. 22.) Hudson rejected the July § 998 Offer on August 20, 2010. (SUF ¶ 17; SGI ¶ 17; Hamblet Deck, Exh. 18, Deposition of Gary Edwards at 251.) On the same day, Hudson notified AAIC of Fretz’s claim and her July § 998 Offer. (SGI ¶44; Reply SUF ¶ 44.)
On April 8, 2011, defense counsel reported to Hudson and AAIC that he consulted with a neuro-radiologist who opined that Fretz sustained permanent brain damage which could “impair emotional functions and personality.” (“April 8, 2011 Letter,” Edwards Deck, Exh. 10, 223; SGI ¶45; SUF Reply ¶ 45.) The radiologist also noted that Fretz’s medical records from Loma Linda Hospital immediately following the accident “did not suggest a significant brain injury.” (April - 8, Letter at 233.)
On May 5, 2011, defense counsel reported to Hudson and AAIC that Fretz’s neuropsychologist testified that Fretz was psychologically impaired resulting in “profound behavioral ' changes observed by family and friends.” (SGI ¶ 47; Reply SUF ¶ 47; Edwards Deck, Exh. 11.) Defense counsel also reported that Fretz’s lifetime medical care could total $904,876. (SGI ¶ 48; Reply SUF ¶ 48.)
On May 9, 2011, Fretz offered to settle the Action for $3 million. (Rsp. to RFA No. 34.) On May 13, 2011, defense counsel prepared a pretrial report for Hudson and AAIC which estimated a net verdict against Minuteman in the range of $3,100,000 to $3,250,000. (“Pretrial Report,” Edwards Deck, Exh. 11, 234; SGI ¶ 49; Reply SUF ¶ 49.) Defense counsel reported to Hudson and AAIC on May 16, 2011 that Fretz renewed her offered to settle for $3 million. (SGI ¶ 50; Reply SUF ¶ 50.) On May 16 or 17, 2011, Hudson first made its $1 million policy limits available to settle the Fretz Action. (SUF ¶ 18; SGI ¶ 18.) On May 17, 2011, AAIC and Hudson countered, offering Fretz a $1.25 million settlement, which was rejected. (Edwards Deck, Exh. 14.) Fretz increased her settlement demand from $3 million and by May 21, 2011 requested a $5 million settlement. (Edwards Deck, Exh. 19.)
AAIC set aside a $3 million reserve for the Fretz Action on May 24, 2011, but it was not offered to Fretz prior to the jury verdict. (SGI ¶ 59; Reply SUF ¶ 59.) On June 1, 2011, Fretz informed defense counsel that she would “likely settle” for $3 million and this information was communicated to AAIC. (SGI ¶¶ 53-54; Reply SUF ¶¶ 53-54.)
During the Fretz trial on June 5, 2011, the President of Minuteman emailed AAIC demanding that it “take any steps necessary to settle this case right away” and “stressing] the importance to us that you settle this under our policy limits immediately.” (Hamblet Deck, Exh. 22; SGI ¶ 55; Reply SUF ¶ 55.) During the trial, AAIC authorized up to $5 million to settle the case, but it was not offered to Fretz before the verdict. (SGÍ ¶ 56; Reply SUF ¶ 56.)
A jury found in favor of Fretz and against Minuteman in the Fretz Action. (SUF ¶ 20; SGI ¶20.) On June 21, 2011, judgment was entered in the amount of $6,520,790.50, plus $681,313,39 in costs, totaling $7,202,104 (“Judgment”). (SUF ¶¶ 21-22, 24; SGI ¶¶ 21-22, 24.) Of the costs, $580,350.31 represented prejudgment interest from July 21, 2010, the date
4. The Settlement
On July 22, 2011, the Fretz Action was settled for the amount of the Judgment. (SUF ¶ 24; SGI ¶ 24.) Hudson contributed $1 million plus $219,289, which Hudson contends constituted costs and interest. (SUF ¶ 25; SGI ¶ 25.) AAIC funded the remainder of the Judgment. (SUF ¶ 26; SGI ¶ 26.) Hudson paid all of the defense costs incurred to defend Minuteman through trial. (SGI ¶ 57; Reply SUF ¶ 57.)
B. Genuine Issues of Material Fact
. The Court finds that neither AAIC nor Hudson has submitted evidence to establish that any material fact in this matter is disputed. Hudson does not dispute any of the facts presented in AAIC’s SUF. All of the purportedly disputed facts in AAIC’s Reply SUF are contentions about relevance, materiality, or conclusions of law regarding Hudson’s breach of its duty of good faith and fair dealing. Thus, as there is no genuine issue as to any material fact, the Court considers whether the moving party, under Rule 56(a) is entitled to judgment as a matter of law.
C. Judgment as a Matter of Law
AAIC requests summary judgment on Hudson’s three counterclaims which contend that AAIC is responsible for defense costs and costs taxed on the Fretz verdict due to AAIC’s breach of its duty to settle. AAIC argues that Hudson is contractually obligated to pay these costs therefore it is entitled to judgment as a matter , of law. It argues that a primary insurer has no legal claim for breach of a duty to settle against an excess insurer. Hudson, on the other hand, argues that AAIC breached its implied good faith obligation to reasonably settle the Fretz action, resulting in increased costs to Hudson.
1. Hudson’s second and third counterclaims state claims on which relief may be granted
Hudson brings its second counterclaim under a theory of equitable indemnity and its third counterclaim under equitable subrogation. AAIC argues that these causes of action do not provide Hudson with claims for relief. As to the theory of equitable subrogation, AAIC argues that Hudson, as a primary insurer, lacks standing to bring this claim. AAIC also argues that insurers cannot be held hable under a theory of equitable indemnity,
a. Under a theory of equitable subrogation, an excess insurer has a good faith obligation to a primary insurer to reasonably settle a case
In each policy of liability insurance, California law implies a covenant of good faith and fair dealing. PPG Indus., Inc. v. Transamerica Ins. Co.,
Traditionally, the covenant of good faith and fair dealing arises from the agreement between the insured and the insurer. See Fireman’s Fund Ins. Co. v. Maryland Cas. Co.,
The California courts have not limited equitable subrogation recovery to excess insurers; primary insurers may also bring a claim under this theory of liability. In Diamond Heights, the court found that the primary insurer could proceed on an equitable subrogation theory against the excess insurer where the excess insurer arbitrarily vetoed a reasonable settlement and forced the primary insurer to proceed to trial and bear the full costs of defense. Diamond Heights,
The Court finds that fairness and equity require that Hudson, a primary insurer, be permitted to assert a counterclaim for equitable subrogation against AAIC, an excess insurer, for its alleged failure to reasonably settle the Fretz Action, thereby exposing Hudson to “unwarranted liability” for defense costs and costs and interest on the Judgment. Diamond Heights,
AAIC argues that Hudson should not be permitted to proceed with its equitable subrogation claims since it only seeks to recover “costs,” and not a portion of the Judgment. (Reply at 2-3.) California case law directly contradicts AAIC’s argument. The Diamond Heights court held that when an excess insurer evaluates a settlement offer, it must consider the “costs of defense and burdens imposed upon all parties if the litigation continues.” Diamond Heights,
AAIC has not cited a single case, and the Court has found none, supporting its argument that California law bars a primary insurer from bringing a claim for equitable subrogation against an excess insurer to recoupe defense costs and costs and interest paid as part of a settlement. The Court therefore holds that Hudson has stated a counterclaim for equitable subrogation against AAIC for its alleged unreasonable failure to settle the Fretz Action within its policy limits,
b. Hudson cannot maintain a claim for equitable indemnity against AAIC
However, Hudson’s second counterclaim for equitable indemnity cannot stand. In Fireman’s Fund Ins. Co. v. Commerce & Indus. Ins. Co., C-981060VRW,
Based on this controlling case law, the Court finds that Hudson cannot state a counterclaim for equitable indemnity against AAIC, Hudson’s second counterclaim fails as-a matter of law.
2. A triable issue of fact exists as to AAIC’s good faith duty to reasonably settle the Fretz Action
Hudson’s first claim for declaratory relief and third claim for equitable subrogation rest on the theory that AAIC unreasonably refused to settle the Fretz Action within its policy limits.
AAIC insists that it cannot be liable under these two claims because there is no coverage under AAIC’s Excess Policy for the defense costs and costs taxed against Minuteman. (Reply at 6.) This argument fails to appreciate the purpose of an equitable subrogation claim. As the court in Fortman v. Safeco Ins. Co. described:
“The reciprocal rights and duties of several insurers who have covered the same event ... flow from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden. As these principles do not stem from agreement between the insurers their application is not controlled by the language of their contracts with the respective policy holders.”
There is a triable issue of fact as to whether AAIC failed to reasonably settle the Fretz Action prior to trial and within its $4 million policy limit. See Johansen v. California State Auto. Assn.,
It is undisputed that Fretz made several settlement offers prior to trial that were within AAIC’s policy limits. Therefore, the sole issue is whether AAIC reasonably refused these settlement offers. Based on the evidence AAIC had before it when it considered the numerous settlement demands prior to trial, the Court cannot find as a matter of law that AAIC reasonably refused Fretz’s settlement offers under $4 million. For example, defense counsel’s June 28, 2010 Report raises significant issues as to whether it was reasonable to conclude that Fretz suffered permanent brain damage in the accident, and thereby exposed AAIC to substantial liability. Moreover, triable issues of fact remain as to AAIC’s ability to reasonably rely on defense counsel’s calculation of Fretz’s
IV. CONCLUSION
For the foregoing reasons, the Court GRANTS summary judgment on Hudson’s second counterclaim for equitable indemnity and DENIES summary judgment on Hudson’s first and third counterclaims for declaratory relief and equitable subrogation.
Notes
. AAIC requests judicial notice of the Complaint filed in Tory Fretz v. Minuteman Parking Company, Riverside Superior Court, No. 090666 and several documents filed in the instant action, including AAIC’s Amended Complaint and Hudson's Answer and Counterclaim. The Court grants AAIC’s RJN, as the submitted documents are court filings and thus appropriate for judicial notice. See Reyn’s Pasta Bella, LLC v. Visa USA, Inc.,
. Unless otherwise noted, all references to “Rule'’ refer to the Federal Rules of Civil Procedure.
. Hudson did not move for summary judgment on the issue of AAIC’s alleged bad faith refusal to settle, and argues only that a material dispute precludes summary judgment for AAIC on Hudson's counterclaims.