Dykstra v. Foremost Insurance
MARTIN J. DYKSTRA Et Al., Plaintiffs and Appellants, v. FOREMOST INSURANCE COMPANY, Defendant and Respondent
- Area
- civil
- Panel
- Patricia D. Benke (author)
Analysis
The trial court granted summary judgment in favor of the insurer, ruling that the underlying claims of fraud and negligent misrepresentation did not constitute an 'accident' under the insurance policies and thus no duty to defend existed. The Court of Appeal affirmed the judgment, holding that intentional or negligent misrepresentations are not accidental occurrences and that no extrinsic facts created a potential for a covered claim.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Granting of summary judgment in favor of Foremost Insurance Company, finding no duty to defend Dykstra and Holland Michigan against Feurzeig's claims.“The trial court granted Foremost’s motion and denied Dykstra and Holland Michigan’s motion. A judgment in favor of Foremost was entered and Dykstra and Holland Michigan filed a timely notice of appeal.” | de novo | correct | agree with court The appellate court applied the standard that the duty to defend is broader than the duty to indemnify but is not unlimited; it exists only if there is a potential for the third party to assert a covered claim. The court determined that the underlying claims of fraud and negligent misrepresentation inherently require intent or knowledge, which excludes them from the definition of 'accident' in the policy. Since the pleadings and the record contained no facts suggesting accidental conduct, the trial court correctly concluded there was no duty to defend. |
Authorities
- relied: Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846 — Establishes that 'occurrence' in a CGL policy means 'accidental' and that negligent misrepresentations causing investment loss are considered purposeful rather than accidental because they require intent to induce reliance.
- relied: Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 — Establishes that the duty to defend arises when an insurer has knowledge of facts, whether from the complaint or another source, which reveal the possibility of a claim covered by the policy.
- relied: Devin v. United Services Auto. Assn (1992) 6 Cal.App.4th 1149 — Clarifies that the duty to defend is measured at the outset of litigation based on the potential for a covered claim, not the actual establishment of liability, and is not unlimited where there is no potential for recovery on a covered claim.
- relied: United Pacific Ins. Co. v. McGuire Co. (1991) 229 Cal.App.3d 1560 — Distinguished on the grounds that it involved a special endorsement defining occurrence to include 'events,' whereas the policies at issue here only covered 'accidents,' making the intentional act of termination potentially covered in McGuire but not the misrepresentations here.
- relied: Gagne v. Bertran (1954) 43 Cal.2d 481 — Supports the rationale that negligent misrepresentation is a subspecies of fraud excluded from policy coverage because it requires intent to induce reliance.
The appellate opinion: sound — The opinion is sound because it correctly applies the established legal principle that 'occurrence' in CGL policies is limited to accidental events and distinguishes the present case from United Pacific based on the specific policy language. It thoroughly analyzes the underlying pleadings to demonstrate that the required elements of the claims (intent/knowledge) preclude any potential for a covered claim.
The trial court, on cross-motions for summary judgment submitted on an agreed statement of facts, ruled that Foremost Insurance owed Dykstra and Holland Motor Homes Michigan no duty to defend the underlying Feurzeig action for fraud, negligent misrepresentation, conspiracy to breach fiduciary duty, accounting, and emotional distress, and entered judgment for Foremost. The Court of Appeal affirmed, holding that misrepresentations made to induce reliance are not an "accident" and therefore not an "occurrence" under the CGL and umbrella policies, so there was never any potential for a covered claim and no duty to defend arose.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Summary judgment for Foremost on the ground that the Feurzeig claims, all predicated on fraud or negligent misrepresentation made to induce reliance, did not arise from an 'accident' and therefore involved no 'occurrence' under the policies“Courts have uniformly found that policies which contain the definition of occurrence set forth in the Foremost policies only provide coverage for accidental events.” | de novo | correct | agree with court The opinion does not expressly state a standard of review, but it independently construes undisputed policy language on an agreed record, which is functionally de novo. Its holding that negligent misrepresentation is deliberate rather than accidental because the tort requires intent to induce reliance follows Chatton and is consistent with Gagne v. Bertran's description of the tort; the result is well supported by the uniform line of CGL 'occurrence' cases cited. |
Rejection of appellants' argument that United Pacific Ins. Co. v. McGuire Co. required coverage for intentional conduct producing unintended emotional distress“Here, of course, the Foremost policies do not extend coverage to both “accidents” and “events.”” | de novo | correct | agree with court United Pacific turned on a special endorsement adding the word 'event' to the definition of occurrence, and that court itself said its holding was not inconsistent with the 'accident' precedents. The Foremost policies define occurrence as an 'accident' only, so the distinction drawn is faithful to United Pacific's own reasoning. |
No duty to defend because there was never any potential for a covered claim, including on the later-added negligent and intentional infliction of emotional distress counts and no extrinsic facts suggested coverage“Since Dykstra could only be found liable to Feurzeig for intentional conduct, no occurrence within the meaning of the policies could be established.” | de novo | correct | agree with court The court correctly framed the duty to defend as broader than the duty to indemnify and measured by potential for coverage, including extrinsic facts under Gray v. Zurich, then found no such facts in the agreed record and no pleaded theory that could succeed without proof of intent or knowledge. The emotional distress claims were expressly pleaded as flowing from the same misrepresentation conduct, so the footnote's conclusion is defensible, though the court treated the negligent infliction count summarily without separately analyzing whether any non-misrepresentation negligence could have been within the claim. |
Authorities
- relied: Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846 — 'Occurrence' defined as an accident in a CGL policy means accidental; intentional or fraudulent acts and negligent misrepresentation causing economic loss are purposeful, not accidental, because negligent misrepresentation requires intent to induce reliance.
- relied: St. Paul Fire & Marine Ins. Co. v. Superior Court (1984) 161 Cal.App.3d 1199 — 'Occurrence' in a CGL policy means 'accidental' in its plain, ordinary sense.
- relied: Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41 — Definition of 'accident' for purposes of CGL occurrence coverage.
- relied: Dyer v. Northbrook Property & Casualty Ins. Co. (1989) 210 Cal.App.3d 1540 — CGL occurrence coverage extends only to accidental events.
- relied: Commercial Union Ins. Co. v. Superior Court (1987) 196 Cal.App.3d 1205 — CGL occurrence coverage extends only to accidental events.
- relied: Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532 — CGL occurrence coverage extends only to accidental events.
- relied: Gagne v. Bertran (1954) 43 Cal.2d 481 — Negligent misrepresentation is a form of deceit requiring intent to induce reliance.
- relied: Blankenheim v. E. F. Hutton & Co. (1990) 217 Cal.App.3d 1463 — Negligent misrepresentation is a species of fraud requiring intent to induce reliance.
- relied: United Pacific Ins. Co. v. McGuire Co. (1991) 229 Cal.App.3d 1560 — Distinguished: a special endorsement defining occurrence to include an 'event' extends coverage to intentional acts with unintended injury, but that holding rests on the added word 'event' and does not alter the 'accident' precedents.
- relied: Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149 — Duty to defend is broader than duty to indemnify, is measured at the outset by potential for a covered claim, but does not exist where there is no potential for recovery on a covered claim.
- relied: Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 — Duty to defend arises not only from the complaint but from facts known to the insurer revealing the possibility of a covered claim.
- relied: Wells v. John Hancock Mut. Life Ins. Co. (1978) 85 Cal.App.3d 66 — Duty to disclose further information arises only where the defendant knows its prior statements or conduct induced reliance.
- missed: Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076 — Even where the underlying complaint alleges intentional conduct not covered as a matter of law, the insurer must defend if the pleadings or extrinsic facts show a potential for liability on other, non-intentional conduct within coverage; this Supreme Court duty-to-defend decision issued shortly before this opinion and was not discussed.
The appellate opinion: sound with gaps — The opinion answers the coverage argument with the established line of 'occurrence' cases, properly distinguishes United Pacific on its endorsement language, and correctly applies the potential-for-coverage test including the Gray v. Zurich extrinsic-facts rule to an agreed record. It does not state its standard of review, disposes of the negligent infliction of emotional distress count in a footnote without separate analysis, and does not address the Supreme Court's then-recent Horace Mann decision on the duty to defend where intentional conduct is alleged, though the result is consistent with that case.
Opinion — Benke
Opinion
BENKE, Acting P. J.In this case the liability insurance policies obtained by the plaintiffs provided coverage for “accidents.” Alleged misrepresentations made by the plaintiffs for the purpose of inducing participation in a *364 business venture are not “accidents” within the meaning of those policies. Accordingly the defendant insurer did not owe the plaintiffs any duty to defend them in an action based solely on the alleged misrepresentations.
Factual and Procedural Background
1. Policies
Between 1983 and 1988 plaintiff and appellant Holland Motor Homes Michigan (Holland Michigan) obtained an annual series of “Comprehensive General Liability” (CGL) insurance policies from defendant and respondent Foremost Insurance Company (Foremost). In addition in 1988 Holland Michigan obtained a “Commercial Umbrella Liability Policy.” Plaintiff and appellant Martin J. Dykstra was an additional insured on each of the Foremost policies.
Although the Foremost policies varied in some respects in the coverage they provided Holland Michigan and Dykstra, they all shared the same definition of a covered occurrence: “[A]n accident, including continuous or repeated exposure to conditions, which results in bodily injury, property damage or advertising liability neither expected nor intended from the standpoint of the insured.”
2. Underlying Claim and Tender of Defense
On October 24, 1989, Dykstra was named as a defendant in a complaint filed by Israel Feurzeig. The complaint alleged Dysktra had induced Feurzeig to enter into a partnership with Dykstra’s son Michael and acquire a mobilehome franchise in San Diego.
The franchise, Holland Motor Homes California (Holland California), was not successful. According to his complaint, Feurzeig lost in excess of $2.6 million in the venture. The complaint alleged Dykstra was liable for these losses because Dykstra had misrepresented his son’s experience in mobile-home sales and management of mobilehome dealerships, his son’s financial capabilities and the likely profits that would be generated by the franchise. Feurzeig’s initial complaint alleged Dysktra was liable on alternative theories of fraud and negligent misrepresentation.
On March 15, 1990, Dykstra tendered defense of the Feurzeig action to Foremost. Foremost responded to the tender by advising Dysktra that it did not appear there was coverage under Foremost’s policies but that Foremost would investigate the potential for coverage and reimburse Dykstra for attorney fees he incurred if coverage was found.
*365 On March 23, 1990, Feurzeig filed a first amended complaint. The first amended complaint added Holland Michigan as a named defendant. As against Dykstra the newest pleading added an allegation Dykstra had conspired with his son to induce his son’s corporation to breach its fiduciary duties to Feurzeig and alleged Dykstra was liable for an accounting.
On August 7, 1990, Feurzeig filed a second amended complaint in which he added causes of action for intentional and negligent infliction of emotional distress. Feurzeig alleged the conduct which gave rise to his claims for fraud and negligent misrepresentation supported his emotional distress claims.
On September 18, 1990, Dykstra and Holland Michigan settled Feurzeig’s claim by agreeing to pay Feurzeig $1 million. The settlement agreement stated $800,000 of the settlement was paid as compensation for “personal injury damages to Feurzeig in the form of negligent infliction of emotional distress.”
Following execution of the settlement agreement, Dykstra sent Foremost a demand for reimbursement of his attorney fees and the $800,000 he had paid to Feurzeig as compensation for Feurzeig’s emotional distress.
On January 21, 1991, Foremost rejected Dykstra and Holland Michigan’s demand. Foremost based its rejection on its determination that Feurzeig had not made a claim for property damage or bodily injury within the meaning of the policies and that Dykstra and Holland Michigan had not shown that any occurrence as defined by the policies gave rise to Feurzeig’s claims.
3. These Proceedings
On March 4, 1991, Dykstra and Holland Michigan filed a complaint against Foremost. They alleged that in failing to provide them with a defense to the Feurzeig action, Foremost was guilty of breach of contract and breach of the covenant of good faith and fair dealing.
Foremost answered the complaint and raised a number of affirmative defenses. In particular the company alleged that the Feurzeig action did not involve any occurrence, bodily injury, property damage or personal injury as defined in its policies.
The parties filed cross-motions for summary judgment which were submitted to the trial court on an agreed statement of facts. The trial court granted Foremost’s motion and denied Dykstra and Holland Michigan’s *366 motion. A judgment in favor of Foremost was entered and Dykstra and Holland Michigan filed a timely notice of appeal.
Issues on Appeal
On appeal the parties vigorously dispute whether Feurzeig’s claim involved an occurrence as defined by the Foremost policies. They also dispute whether Feurzeig suffered any property damage, bodily injury or personal injury covered by the policies. Because we find Feurzeig’s claims were not based on an occurrence, we do not reach the parties’ dispute over the type of injury he suffered.
I
Courts have uniformly found that policies which contain the definition of occurrence set forth in the Foremost policies only provide coverage for accidental events. “Under the interpretation of the case law, ‘occurrence’ as defined in a CGL policy means ‘accidental.’ In its plain, ordinary sense, ‘accidental’ means ‘ “arising from extrinsic causes[;] occurring unexpectedly or by chance[; or] happening without intent or through carelessness.” ’ (St. Paul Fire & Marine Ins. Co. v. Superior Court (1984) 161 Cal.App.3d 1199, 1202 [208 Cal.Rptr. 5], fn. omitted, brackets in original; Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41, 48 [261 Cal.Rptr. 273].)” (Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846, 860-861 [13 Cal.Rptr.2d 318] (Chatton); accord Dyer v. Northbrook Property & Casualty Ins. Co. (1989) 210 Cal.App.3d 1540, 1547 [259 Cal.Rptr. 298]; Commercial Union Ins. Co. v. Superior Court (1987) 196 Cal.App.3d 1205, 1208-1209 [242 Cal.Rptr. 454]; Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532, 537 [226 Cal.Rptr. 435].)
“Since insurance is designed to protect against contingent or unknown risks of harm, rather than harm that is certain or expected [citation], it is well settled that intentional or fraudulent acts are deemed purposeful rather than accidental and, therefore, are not covered under a CGL policy [citations].
“Even more to the point ... it is likewise established that negligent misrepresentations causing investment loss or loss of other economic interest are considered purposeful rather than accidental for the purpose of insurance coverage. . . . The underlying rationale of this rule is that negligent misrepresentation requires intent to induce reliance and, therefore, is a subspecies or variety of fraud which is excluded from policy coverage. (Gagne v. Bertran (1954) 43 Cal.2d 481, 487-488 [275 P.2d 15]; Blankenheim v. E. F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1472-1473 [266 Cal.Rptr. 593].)" (Chatton, supra, 10 Cal.App.4th at pp. 860-862, italics added.)
*367 Contrary to Dykstra and Holland Michigan’s argument, the holding in United Pacific Ins. Co. v. McGuire Co. (1991) 229 Cal.App.3d 1560, 1565-1566 [281 Cal.Rptr. 375], has no application here. There the court was dealing with the definition of occurrence provided by a special endorsement to a standard CGL policy. The endorsement defined occurrence as “ ‘an accident, an event [italics added] or a continuous or repeated exposure to conditions which results, during the policy period, in bodily injury or property damage neither expected nor intended by the insured.’ ” (Id. at p. 1563.) Focusing on addition of the word “event” in the special endorsement, the court in United Pacific agreed with the insured that the policy would provide coverage for the intentional act of terminating an employee so long as the results of the termination—the employee’s emotional distress—were not also intended by the insured. (Id. at p. 1566.)
“The insureds’ interpretation comports best with the grammaticial structure of the definition of occurrence and gives substance to the extended coverage in the special endorsement. It is not inconsistent with precedents holding that intentional conduct lies outside the definition of occurrence. As we have noted, these precedents are based on an interpretation of the word ‘accident’; the insureds’ interpretation rests on the additional word ‘event’ inserted in the extended definition. Contrary to the protests of Pacific Insurance, we do not think the insureds’ interpretation would open the insurance industry to ‘unbridled coverage.’ It would extend coverage under the special endorsement to an area of liability for bodily injury that, while lying outside standard coverage, is still circumscribed by the statutory limitations of Insurance Code section 533 and the presumably broader limitations of the phrase excluding coverage for damages that are expected or intended.” (United Pacific Ins. Co. v. McGuire Co., supra, 229 Cal.App.3d at pp. 1566-1567.)
Here, of course, the Foremost policies do not extend coverage to both “accidents” and “events.” Rather, as in Chatton, coverage was provided for accidents only and not for intentional or negligent misrepresentations.
II
Having concluded the Foremost policies provide coverage only for accidents, we turn to the broader question of whether Foremost nonetheless owed Dykstra and Holland Michigan a duty to defend them in the Feurzeig action. “It is axiomatic that an insurer’s duty to defend is separate from and broader than its duty to indemnify. [Citation.] The duty to defend is not measured solely by how the third party denominates its complaint or frames its theories, but is also measured by whether there is any potential for *368 the third party’s complaint to assert a covered claim. [Citation.] Thus, if the insurer learns facts—whether from the complaint, the insured or another source—which create a potential for the third party to assert a covered claim, the insurer owes a duty to defend. [Citation.]
“Additionally, the duty to defend is measured at the outset of the litigation because, unlike the duty to indemnify, which is determinable only after the basis for the insured’s liability is finally established, the duty to defend is based on the potential for the establishment of a covered claim, not the actual establishment of a covered claim. . . .
“. . . [T]he duty to defend is indeed a wide-ranging obligation. However, such duty, while broad, is not unlimited. Where there is no potential for the third party to recover on a covered claim, there is no duty to defend. [Citations.]” (Devin v. United Services Auto. Assn (1992) 6 Cal.App.4th 1149, 1157 [8 Cal.Rptr.2d 263].)
Accordingly, Foremost’s duty to defend turns upon whether there was ever any potential Feurzeig would recover damages based upon accidental conduct committed by Dykstra or Holland Michigan. On this record we find there was never any potential for such a recovery.
First, we examine the face of Feurzeig’s claims against Dykstra and Holland Michigan. We know that to recover on theories of fraud or negligent misrepresentation, Feurzeig would have had to establish statements were made for the purpose of inducing Feurzeig’s reliance and were therefore not accidental. (Chatton, supra, 10 Cal.App.4th at pp. 861-862.) With respect to the claim Dykstra induced his son’s corporation to breach its fiduciary duties, proof of any inducement by Dykstra would also be proof Dykstra was acting intentionally. (Ibid.)
An analogous problem confronts claims by Feurzeig, such as for an accounting or breach of fiduciary duty, which are based on Dykstra’s failure to correct his initial misstatements or provide Feurzeig with further information. Dykstra and Holland Michigan would have a duty to further advise Feurzeig only if Feurzeig could show Dykstra and Holland Michigan knew their affirmative statements or conduct created some reliance by Feurzeig. (See, e.g., Rest.2d Torts, § 551; Wells v. John Hancock Mut. Life Ins. Co. (1978) 85 Cal.App.3d 66, 72 [149 Cal.Rptr. 171].) Like the intent to induce reliance, knowledge by Dykstra or Holland Michigan of the effect of their statements or conduct would make the statements and conduct nonaccidental. (See Chatton, supra, 10 Cal.App.4th at pp. 861-862.)
The duty to defend, however, is not limited to the claims a third party has made. It also arises when an insurer has knowledge of facts which *369 reveal the possibility of a claim covered by the policy. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275-276 [54 Cal.Rptr. 104, 419 P.2d 168].) Here, however, there are no such extrinsic facts in the record. None are disclosed on the face of the pleadings Feurzeig filed and Dykstra and Holland Michigan do not contend their correspondence to Foremost gave the company knowledge of any additional facts which would support the possibility of coverage.
In sum, there was no potential for recovery by Feurzeig on a covered claim because Feurzeig could recover only by establishing Dykstra’s statements were made with either the intent or knowledge they would induce reliance on Feurzeig’s part or conduct by his son’s corporation. 1 Accordingly, Foremost did not owe Dykstra or Holland Michigan any duty to defend them against Feurzeig’s claims.
Judgment affirmed.
Huffman, J., and Froehlich, J., concurred.
The allegation Dykstra’s conduct caused Feurzeig emotional distress does not expand the policies’ coverage. Since Dykstra could only be found liable to Feurzeig for intentional conduct, no occurrence within the meaning of the policies could be established.
Cites, in this corpus
- Chatton v. National Union Fire Insurance A049438 · 1992-10-28
- Devin v. United Services Automobile Ass'n D011407 · 1992-05-22
- United Pacific Ins. Co. v. McGuire Co. A05445 · 1991-05-22
- Blankenheim v. E. F. Hutton & Co. H004920 · 1990-02-15
- Merced Mutual Insurance v. Mendez F010623 · 1989-08-11
- Dyer v. Northbrook Property & Casualty Insurance B034700 · 1989-05-25
- Commercial Union Insurance v. Superior Court A036334 · 1987-12-10
- Royal Globe Insurance v. Whitaker Civ. 24491 · 1986-05-23
- St. Paul Fire & Marine Insurance v. Superior Court Civ. 24132 · 1984-10-30
- Wells v. John Hancock Mutual Life Insurance Civ. 52811 · 1978-09-25
- Gray v. Zurich Insurance Co. L. A. 28897 · 1966-10-25
- Gagne v. Bertran L. A. 23098 · 1954-10-19
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