Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 1 of 20 Page ID #:4474

O 1

2 3 4 5 6 7

8 United States District Court 9 Central District of California

10

11 L.A. TERMINALS, INC. and SOCO Case № 8:19-cv-00286-ODW (PVCx)

WEST, INC.,

12 Plaintiffs, ORDER GRANTING IN PART 13 PLAINTIFFS’ MOTION FOR v. 14 SUMMARY JUDGMENT [79]

UNITED NATIONAL INSURANCE

15 COMPANY, Defendant. 16 17 I. INTRODUCTION 18 This is an insurance coverage dispute between insureds, Plaintiffs L.A. 19 Terminals, Inc. (“LAT”), and SOCO West, Inc. (“Soco”) (collectively, “Plaintiffs”), 20 and their insurer, Defendant United National Insurance Company (“Defendant” or 21 “United”). Plaintiffs claim United breached its duty to defend them and provide 22 independent counsel in two environmental contamination lawsuits. (Second Am. 23 Compl. (“SAC”) ¶¶ 55–72, ECF No. 50.) Plaintiffs move for summary judgment. 24 (Pls. Mot. Summ. J. (“PMSJ”), ECF No. 79.) For the reasons discussed below, the 25 Court GRANTS IN PART Plaintiffs’ Motion.1 26 27

28 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 2 of 20 Page ID #:4475

1 II. BACKGROUND 2 The following facts are undisputed unless otherwise noted. 3 A. The Policies 4 From 1982 through 1985, United insured Plaintiffs under four primary 5 comprehensive general liability policies (the “Policies”). (Pls. Statement of 6 Uncontroverted Facts (“PSUF”) 1, ECF No. 79-1.) The last three Policies also 7 identify non-party the City of Los Angeles (the “City”) as an additional insured. (Def. 8 Statement Genuine Issues (“DSGI”) & Additional Material Facts (“DAMF”) 2, ECF 9 No. 98-1.) 10 The Policies provide that United “shall have the right and duty to defend any 11 suit against the insured seeking damages on account of . . . property damage.” 12 (PSUF 3.) The Policies further provide that United “will pay on behalf of the insured 13 all sums which the insured shall become legally obligated to pay as damages because 14 of . . . property damage to which this insurance applies, caused by an occurrence.” 15 (PSUF 3.) The Policies define “occurrence,” as “an accident, including continuous or 16 repeated exposure to conditions, which results in . . . property damage neither 17 expected nor intended from the standpoint of the insured.” (See, e.g., Decl. James A. 18 Tabb ISO PMSJ (“Tabb Decl.”) Ex. B (“Oct. 1982 Policy”) 46, ECF Nos. 80, 80-2.) 19 However, the Policies exclude coverage for property damage that is caused by the 20 “discharge, dispersal, release or escape” of “irritants, contaminants or pollutants” (the 21 “Qualified Pollution Exclusion”). (PSUF 4.) This exclusion does not apply where the 22 “discharge, dispersal, release, or escape is sudden and accidental.” (PSUF 4.) 23 B. The Underlying Actions 24 In March 2018, LAT was first served in an action the City filed against it in Los 25 Angeles Superior Court (the “LASC Action”), alleging environmental contamination 26 due to LAT’s operations at a City-owned marine terminal and chemical storage 27 facility (the “Site”) during the policy periods. (PSUF 5–6; see Tabb Decl. Ex. E 28 (“City LASC FAC”) ¶ 11, ECF No. 80-5.) The City alleged the pollution had been

2 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 3 of 20 Page ID #:4476

1 ongoing for decades and was caused, in part, by hazardous materials that “leaked from 2 storage tanks, pipes, spilled or were disposed of on the ground, into the soil and 3 seeped into the groundwater.” (City LASC FAC ¶¶ 18, 23.) The City further alleged 4 that defendants “were negligent in . . . their receiving, storing and handling of 5 hazardous substances and chemicals on the Site premises.” (Id. ¶ 26.) 6 In August 2018, LAT counter- and cross-claimed in the LASC Action against 7 the City and others, contending that these parties were responsible for the alleged 8 pollution at the Site. (PSUF 12.) LAT specifically alleged that the purported 9 environmental contamination was “caused by various sudden and accidental releases, 10 and other discharges and releases of [h]azardous [m]aterials.” (PSUF 12.) 11 In November 2018, LAT initiated a separate action in the Central District of 12 California against the City and others under the Comprehensive Environmental 13 Response, Compensation and Liability Act (“CERCLA”), involving the same alleged 14 “sudden and accidental” environmental contamination at issue in the LASC Action 15 (the “Federal Action”). (PSUF 13; Tabb Decl. ¶ 9.) Third-party defendant Occidental 16 Chemical Corporation (“Occidental”) countersued LAT and sued Soco as a third-party 17 defendant in the Federal Action for the same environmental contamination, and 18 specifically alleged a “sudden and accidental” release of pollutants. (PSUF 19–20.) 19 In May 2019, the City amended its complaint in the LASC Action and added 20 Soco as a defendant. (PSUF 33.) The City’s LASC Second Amended Complaint 21 (“SAC”) also now specified that LAT and Soco’s alleged contamination occurred 22 “suddenly and accidentally, and over long periods of time.” (PSUF 33; Tabb Decl. 23 Ex. Z (“City LASC SAC”) ¶ 41, ECF No. 80-26.)2 24 C. Coverage Dispute 25 In May 2018, LAT first tendered the City’s LASC First Amended Complaint to 26 United for a defense under the policies. (PSUF 8.) In a letter dated August 6, 2018, 27 United, relying on the Qualified Pollution Exclusion, “disclaim[ed] any duty to defend 28 2 The Court refers to the LASC and Federal Actions collectively as the “Underlying Actions.”

3 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 4 of 20 Page ID #:4477

1 or indemnify [LAT]” because, at the time, the City had not expressly alleged a 2 “sudden and accidental” release of pollutants. (Tabb Decl. Ex. M (“United-LAT 2018 3 Disclaim Letter”) at 252–53, ECF No. 80-13.) United invited LAT to provide any 4 additional facts or evidence supporting covered liability. (Id. at 253.) 5 The City, as an additional insured, also tendered its defense of LAT’s claims in 6 the LASC and Federal Actions to United under the policies. In September 2018, 7 United agreed to defend the City under a reservation of rights. (DSGI 18; see Tabb 8 Decl. Exs. P & Q (“United-City 2018 Coverage Letters”) at 274 (P) & 285 (Q), ECF 9 Nos. 80-16, 80-17.) United stated it agreed to defend the City against LAT’s claims 10 because LAT’s pleadings specifically alleged a “sudden and accidental” release of 11 hazardous materials. (United-City 2018 Coverage Letters at 280 (P) & 291 (Q).) 12 In February 2019, LAT and Soco jointly tendered the defense of the LASC and 13 Federal Actions to United. (PSUF 21.) In April 2019, United agreed to defend LAT 14 and Soco in both actions, pursuant to a reservation of rights. (PSUF 22.) Until this 15 time, United had maintained a unified claim file for Plaintiffs and the City, with a 16 single claim handler, Randi Hoffman, managing the claims of each insured against the 17 other. (PSUF 30–31.) After United accepted Plaintiffs’ defense, it split the claim file. 18 (DAMF 56.) 19 In its letter accepting Plaintiffs’ defense, United agreed to defend Plaintiffs in 20 the Federal Action because Occidental’s counterclaim alleged “sudden and 21 accidental” release of hazardous materials, and although the City’s counterclaim did 22 not use this language, it was “premised on the same events and alleged pollution.” 23 (Tabb Decl. Ex. U (“United-LAT 2019 Coverage Letter”) at 356, ECF No. 80-21.) 24 Similarly, United agreed to defend Plaintiffs in the LASC Action because the claims 25 and issues in the LASC Action were “the same claims and issues being contested in” 26 the Federal Action, though those pleadings also lacked explicit allegations of “sudden 27 and accidental” releases. (Id. at 357.) United reserved the right to withdraw the 28 defense if no “sudden and accidental” releases occurred. (Id.)

4 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 5 of 20 Page ID #:4478

1 When LAT was first served with the LASC Action, it retained the law firm of 2 Rutan & Tucker for its defense; Rutan & Tucker continues to defend LAT and Soco in 3 both Underlying Actions. (PSUF 9; Decl. Raj Mehta ISO PMSJ (“Mehta Decl.”) ¶ 4, 4 ECF No. 79-2.) United did not pay for the defense fees and costs LAT and Soco had 5 incurred, (PSUF 23), and offered to appoint John Brydon of Demler Armstrong & 6 Rowland LLP as Plaintiffs’ defense counsel, (PSUF 24). Plaintiffs argued they were 7 entitled to continued representation through Rutan & Tucker, as independent counsel. 8 (PSUF 26.) United refused Plaintiffs’ demand for independent counsel and has not 9 paid any amount of Plaintiffs’ defense costs. (PSUF 27, 29.) 10 D. Procedural History 11 Plaintiffs assert three causes of action against United: (1) declaratory relief— 12 duty to defend upon tender of the LASC Action; (2) declaratory relief—right to 13 independent counsel; (3) breach of the duty to defend.3 (SAC ¶¶ 55–72.) 14 On September 30, 2020, the Court denied United’s Motion to Dismiss 15 Plaintiffs’ SAC. (Order Den. Mot. Dismiss, ECF No. 59.) Notably, the Court found 16 that, under the facts as alleged by LAT and Soco, United owed a duty to defend in the 17 LASC Action as soon as LAT tendered the City’s First Amended Complaint. (Id. 18 at 10.) The Court also found that Plaintiffs had stated a plausible claim for 19 independent counsel, based primarily on the conflict presented by United providing a 20 defense to direct litigation adversaries. (Id. at 14.) 21 Plaintiffs now move for summary judgment on all three claims. (PMSJ 1–4.) 22 The Motion is fully briefed, including a surresponse from United filed with the 23 Court’s permission. (Def. Opp’n MSJ (“Opp’n”), ECF No. 98; Pls. Reply (“Reply”), 24 ECF No. 106; Def. Surresp., ECF No. 114.) 25 26 27

28 3 The parties settled their dispute regarding Plaintiffs’ fourth cause of action for breach of the covenant of good faith and fair dealing. (Notice of Partial Settlement, ECF No. 126.)

5 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 6 of 20 Page ID #:4479

1 III. LEGAL STANDARD 2 A court “shall grant summary judgment if the movant shows that there is no 3 genuine dispute as to any material fact and the movant is entitled to judgment as a 4 matter of law.” Fed. R. Civ. P. 56(a). The burden of establishing the absence of a 5 genuine issue of material fact lies with the moving party, see Celotex Corp. v. Catrett, 6 477 U.S. 317, 322–23 (1986), and the court must view the facts and draw reasonable 7 inferences in the light most favorable to the nonmoving party, Scott v. Harris, 8 550 U.S. 372, 378 (2007); Addisu v. Fred Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir. 9 2000). A disputed fact is “material” where the resolution of that fact might affect the 10 outcome of the suit under the governing law, and the dispute is “genuine” where “the 11 evidence is such that a reasonable jury could return a verdict for the nonmoving 12 party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Conclusory or 13 speculative testimony in affidavits is insufficient to raise genuine issues of fact and 14 defeat summary judgment. Thornhill Publ’g Co. v. GTE Corp., 594 F.2d 730, 738 15 (9th Cir. 1979). Moreover, though the Court may not weigh conflicting evidence or 16 make credibility determinations, there must be more than a mere scintilla of 17 contradictory evidence to survive summary judgment. Addisu, 198 F.3d at 1134. 18 Once the moving party satisfies its burden, the nonmoving party cannot simply 19 rest on the pleadings or argue that any disagreement or “metaphysical doubt” about a 20 material issue of fact precludes summary judgment. See Celotex, 477 U.S. at 322–23; 21 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); Cal. 22 Architectural Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 23 (9th Cir. 1987). A “non-moving party must show that there are ‘genuine factual issues 24 that properly can be resolved only by a finder of fact because they may reasonably be 25 resolved in favor of either party.’” Cal. Architectural Bldg. Prods., 818 F.2d at 1468 26 (quoting Anderson, 477 U.S. at 250). “[I]f the factual context makes the non-moving 27 party’s claim implausible, that party must come forward with more persuasive 28 evidence than would otherwise be necessary to show that there is a genuine issue for

6 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 7 of 20 Page ID #:4480

1 trial.” Id. (citing Matsushita Elec. Indus. Co., 475 U.S. at 586–87). 2 “[U]ncorroborated and self-serving” testimony will not create a genuine issue of 3 material fact. Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 4 2002). The court should grant summary judgment against a party who fails to 5 demonstrate facts sufficient to establish an element essential to his case when that 6 party will ultimately bear the burden of proof at trial. See Celotex, 477 U.S. at 322. 7 IV. PRELIMINARY MATTERS 8 A. Evidentiary Objections 9 United objects to two items of Plaintiffs’ evidence as violating hearsay and best 10 evidence rules, specifically: (1) paragraph five of the Mehta Declaration, and 11 (2) Exhibit AA to the Tabb Declaration. (Def. Obj. Pls. Evid., ECF No. 98-2.) Mehta 12 is the President of LAT and Soco; he declares in paragraph five, “The total amount 13 that Plaintiffs have incurred to date in out-of-pocket defense expenses (fees and costs) 14 in connection with the underlying actions is $3,267,880.04. United National has not 15 paid any of Plaintiffs’ defense expenses.” (Mehta Decl. ¶ 5.) Exhibit AA consists of 16 copies of letters from Latham & Watkins, Plaintiffs’ counsel here, sent to United 17 “providing defense expense amounts incurred by Plaintiffs in connection with the 18 Underlying Actions.” (Tabb Decl. ¶ 22.) United objects to the extent these 19 documents are offered to support Plaintiffs’ sum of monetary damages. (See Def. Obj. 20 Pls. Evid. 2.) 21 Federal Rule of Civil Procedure 56(c)(4) requires that an affidavit or declaration 22 used to support a motion for summary judgment “must be made on personal 23 knowledge, set out facts that would be admissible in evidence, and show that the 24 affiant or declarant is competent to testify on the matters stated.” Mehta’s statement 25 meets these requirements and, to the extent it is offered to state Mehta’s knowledge, 26 does not constitute hearsay or violate the best evidence rule. The Court accepts it for 27 this purpose and United’s objection to paragraph five of the Mehta Declaration is 28 OVERRULED.

7 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 8 of 20 Page ID #:4481

1 The letters from Latham & Watkins to United indicate defense amounts 2 Plaintiffs incurred in the Underlying Actions, but Exhibit AA omits the legal invoices 3 from which the amounts derive. The letters therefore constitute hearsay in that they 4 are offered for the truth of the invoice amounts listed, and Plaintiffs provide no 5 applicable hearsay exception. See Fed. R. Evid. 801, 802. The Court therefore 6 considers the letters only to the extent they establish that Plaintiffs incurred and 7 submitted defense amounts to United, but not for the truth of the invoice figures. 8 When limited to this purpose, the letters do not violate the best evidence rule. 9 Accordingly, United’s objection to Exhibit AA is SUSTAINED IN PART and 10 OVERRULED IN PART. 11 United also objects to portions of a declaration and two exhibits Plaintiffs 12 submitted with the Reply. (See Def. Surresp.; Decl. Kristen C. Jackson (“Jackson 13 Decl.”) ¶¶ 2–3, Exs. AB & AC, ECF Nos. 106-1 to 106-3.) United argues the Court 14 should not consider the new evidence without giving United an opportunity to 15 respond. (Def. Surresp. 2.) However, the Court granted United permission to file the 16 Surresponse, thereby eliminating the prejudice United claims. Accordingly, United’s 17 objection to Plaintiffs’ evidence in Reply is OVERRULED. 18 B. Requests for Judicial Notice 19 United requests that the Court take judicial notice of a partial list of attorneys in 20 an action before the San Francisco Superior Court. (Def. RJN, ECF No. 100.) 21 Plaintiffs object. (Pls. Obj. Def. RJN, ECF No. 107.) The Court finds the material 22 submitted both incomplete and immaterial. United’s request is DENIED. 23 Plaintiffs request that the Court take judicial notice of pleadings filed in this and 24 the Underlying Action. (Pls. RJN, ECF No. 79-3.) United does not object. The Court 25 GRANTS Plaintiffs’ request, but does not take judicial notice of disputed facts within 26 the pleadings. U.S. ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 27 971 F.2d 244, 248 (9th Cir. 1992); Lee v. City of Los Angeles, 250 F.3d 668, 679 28 (9th Cir. 2001).

8 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 9 of 20 Page ID #:4482

1 V. DISCUSSION 2 Plaintiffs move for summary judgment, or partial summary judgment, on 3 Plaintiffs’ claims that: (1) United had a duty to defend Plaintiffs in the LASC Action 4 from initial tender; (2) United must provide a defense through Plaintiffs’ selected 5 independent counsel; and (3) United breached its duty to defend. (PMSJ 1–4.) 6 A. Duty to Defend (First Claim) 7 Plaintiffs move for summary judgment on their first claim, by which they seek a 8 judicial determination that United owed LAT a duty to defend it in the LASC Action 9 from May 4, 2018, the date of initial tender. (PMSJ 12–15.) 10 An insurer’s duty to defend is broader than its duty to indemnify and may apply 11 even in an action where no damages are ultimately awarded. Horace Mann Ins. Co. v. 12 Barbara B., 4 Cal. 4th 1076, 1081 (1993). The duty to defend arises as soon as the 13 insured tenders a claim that involves a potentially covered loss. Montrose Chem. 14 Corp. v. Super. Ct., 6 Cal. 4th 287, 295 (1993). “[T]he insured need only show that 15 the underlying claim may fall within policy coverage; the insurer must prove 16 it cannot.” Id. at 300 (emphasis in original). Even if the precise causes of action 17 pleaded fall outside of the policy coverage, the insurer’s duty to defend may not be 18 excused “where, under the facts alleged, reasonably inferable, or otherwise known, the 19 complaint could fairly be amended to state a covered liability.” Scottsdale Ins. Co. v. 20 MV Transp., 36 Cal. 4th 643, 654 (2005) (citing Gray v. Zurich Ins. Co., 65 Cal. 2d 21 263, 275–76 (1966)). However, the “insurer’s duty to defend does not extend to 22 claims for which there is no potential for liability coverage”; this includes claims 23 which fall outside the scope of the policy or are expressly excluded. See Alterra 24 Excess & Surplus Ins. Co. v. Snyder, 234 Cal. App. 4th 1390, 1401 (2015). 25 In ruling on the Motion to Dismiss, the Court previously compared the City’s 26 LASC First Amended Complaint to the applicable policies and found it “clear that the 27 LASC Action is a ‘suit’ seeking damages against the insured Plaintiffs due to an 28 ‘occurrence’ causing ‘property damage’ during the Policies’ coverage period.” (Order

9 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 10 of 20 Page ID #:4483

1 Den. Mot. Dismiss 8.) “Those bare facts alone give rise to a duty to defend.” (Id.) 2 United fails to raise any genuine dispute on this issue, and nothing before the Court 3 disturbs its prior conclusion. 4 The undisputed facts and evidence only further reinforce that United’s 5 disclaimer of coverage upon LAT’s initial tender was unreasonable. For instance, 6 Plaintiffs submit United’s letters disclaiming coverage, which explain that United 7 denied coverage because the City did not allege the specific language “sudden and 8 accidental” in the LASC First Amended Complaint. (See United-LAT 2018 Disclaim 9 Letter.) The California Supreme Court rejected this very position when it noted that 10 “courts do not examine only the pleaded word but the potential liability created by the 11 suit.” Gray, 65 Cal. 2d at 276. California law is clear that an insurer “cannot 12 construct a formal fortress of the third party’s pleadings and retreat behind its walls.” 13 Id. 14 What matters is whether it was “reasonably inferable” from the LASC First 15 Amended Complaint that the City’s claim against LAT was potentially covered under 16 the Policies. Scottsdale Ins. Co., 36 Cal. 4th at 654. The City alleged that LAT was 17 negligent in handling hazardous substances and chemicals, and the Court found this 18 was broad enough to include “accidental” releases. (See Order Den. Mot. Dismiss 9.) 19 That the contamination allegedly occurred over decades does not foreclose the 20 possibility that LAT’s alleged contribution to the contamination could have been 21 “sudden.” (See id. (quoting Horace Mann, 4 Cal. 4th at 1081 (“Any doubt as to 22 whether the facts give rise to a duty to defend is resolved in the insured’s favor.”)).) 23 Thus, although the City did not use the words “sudden and accidental” in its FAC, it 24 was “reasonably inferable” from the allegations that the claim was at least “potentially 25 covered by the policy” and therefore United owed LAT the duty to defend. See 26 Scottsdale Ins. Co., 36 Cal. 4th at 655. 27 Nevertheless, United now contends Plaintiffs are not entitled to summary 28 judgment on the duty to defend claim. (Opp’n 10.) A district court may grant

10 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 11 of 20 Page ID #:4484

1 declaratory judgment where an actual controversy exists. 28 U.S.C. § 2201(a). 2 United argues the undisputed facts show United eventually agreed to defend Plaintiffs 3 in the Underlying Actions, so declaratory judgment is not available “because no actual 4 controversy about the duty to defend exists.” (Id.) 5 The undisputed facts of this case do establish that United agreed in April 2019 6 to defend Plaintiffs in both Underlying Actions. (PSUF 22.) However, United 7 continues to dispute that its duty to defend was triggered upon LAT’s initial tender in 8 May 2018. (Opp’n 3, 20–21.) United goes so far as to urge the Court to “revisit” and 9 reverse its prior ruling on the matter. (Id. at 20–21; see Order Den. Mot. Dismiss 10.) 10 As such, an actual controversy persists regarding when United’s duty to defend arose. 11 The undisputed facts establish that United owed a duty to defend immediately 12 upon LAT’s initial tender in May 2018, and United presents nothing to controvert this 13 conclusion. Plaintiffs are therefore entitled to judgment as a matter of law on the first 14 claim. 15 B. Right to Independent Counsel (Second Claim) 16 Plaintiffs also move for summary judgment on their second Claim, seeking a 17 judicial determination that they are entitled to independent counsel. (PMSJ 15–22.) 18 When competing interests of the insured and the insurer create an ethical 19 conflict for counsel, the insurer must provide its insured with the insured’s chosen 20 independent counsel. See, e.g., Long v. Century Indem. Co., 163 Cal. App. 4th 1460, 21 1469 (2008); Previews, Inc. v. Cal. Union Ins. Co., 640 F.2d 1026, 1028 (9th Cir. 22 1981). This is known as Cumis counsel, emanating from the California case San 23 Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 24 3d 358 (1984). Cumis was later codified in California Civil Code section 2860, which 25 clarifies the rights of the insurer in conflict of interest situations. However, “not every 26 conflict of interest triggers an obligation on the part of the insurer to provide the 27 insured with independent counsel.” Golden Eagle Ins. Co. v. Foremost Ins. Co., 28 20 Cal. App. 4th 1372, 1394 (1993). The conflict of interest must be actual and

11 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 12 of 20 Page ID #:4485

1 significant, not merely theoretical. James 3 Corp. v. Truck Ins. Exch., 91 Cal. App. 2 4th 1093, 1101 (2001). 3 Plaintiffs argue they are entitled to independent counsel on three grounds: 4 (1) the direct conflict between the City and Plaintiffs as direct adversary-insureds; 5 (2) United’s reservation of rights as to Plaintiffs’ defense; and (3) United’s breach of 6 its duty to defend upon LAT’s initial tender. (PMSJ 17–24.) The Court finds 7 summary judgment for Plaintiffs warranted based on the direct conflict and United’s 8 reservation of rights, and therefore does not reach Plaintiffs’ third argument. 9 1. Direct Conflict 10 Plaintiffs contend United’s agreement to defend direct adversaries—the City 11 and Plaintiffs—creates an untenable conflict of interest necessitating independent 12 counsel. (PMSJ 17–22.) The Court previously found Plaintiffs had plausibly stated a 13 claim for independent counsel on this basis. (Order Den. Mot. Dismiss 10–14.) Now, 14 on summary judgment, United repeats the same arguments and authority it raised in its 15 motion to dismiss, which the Court previously considered and rejected. United 16 presents no valid basis for reconsideration and has not addressed the legal standard for 17 such a request. (See Opp’n.) In any event, the Court finds the undisputed facts and 18 evidence here demonstrate that Plaintiffs are entitled to independent counsel. 19 In the Underlying Actions, the City and Plaintiffs sued each other for liability, 20 contribution, and indemnity, among others claims, all relating to environmental 21 contamination at the Site. (See PSUF 5–6, 12–13.) United first agreed to defend the 22 City as an additional insured under the Policies, against LAT’s claims; it later agreed 23 to defend Plaintiffs in the same actions against the City’s claims on the same issues. 24 (DSGI 18; PSUF 22.) Thus, the undisputed facts and evidence establish that United 25 agreed to provide a defense to adversary-insureds in direct litigation conflict, each 26 seeking to find the other liable for all or part of the alleged contamination. The Court 27 previously found such a direct conflict supports the need for Plaintiffs’ independent 28 counsel, and the Court reaffirms that finding here. (Order Den. Mot. Dismiss 14); see

12 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 13 of 20 Page ID #:4486

1 also James 3, 91 Cal. App. 4th at 1101 (citing O’Morrow v. Borad, 27 Cal. 2d 794, 2 799 (1946)); Centex Homes v. St. Paul Fire & Marine Ins. Co., 19 Cal. App. 5th 789, 3 803 (2018) (discussing O’Morrow and finding the “conflict was clear” between the 4 direct-adversary-insureds, such that the insurer could not “control both sides of the 5 litigation”). 6 United argues that, even if the Court finds a conflict of interest warranting 7 independent counsel, United reconciled the conflict by splitting the claim file for each 8 insured and appointing segregated liability adjusters. (Opp’n 17.) This argument is 9 unavailing. The evidence establishes that, after United agreed to defend LAT and 10 Soco, in April 2019, it separated the claim files and hired different law firms to defend 11 the City and Plaintiffs. (See Tabb Decl. Ex. I (“Hoffman Dep.”) 174–76, ECF 12 No. 80-9; PSUF 30–32; DAMF 56.) But the undisputed facts and evidence also 13 establish that at least six months passed after United accepted the City’s defense 14 before United finally segregated the file. (DSGI 18 (United accepted City’s defense in 15 September 2018); PSUF 22 (United agreed to defend Plaintiffs in April 2019).) It was 16 not until United agreed to defend Plaintiffs as well that it finally split the claim file. 17 Throughout this time, a single claims handler, Randi Hoffman, handled the unified file 18 and when the file was eventually split, Hoffman sent the “master files”—including an 19 attorney’s claims assessment report—to both new adjusters. (Reply 6; Jackson Decl. 20 Exs. AB, AC.) United argues that the new adjusters did not “actually read 21 documentation about the other side of the claim,” (Def. Surresp. 5), but offers no 22 support for this speculative, eleventh-hour argument, which in any event does not 23 negate that United sent the master claims files to both sides. Thus, United did not 24 reconcile the conflict of interest created by its defense of direct litigation adversaries. 25 The undisputed facts establish that Plaintiffs are entitled to independent counsel 26 as a matter of law, and United fails to raise a genuine dispute of material fact to 27 disturb that conclusion. Plaintiffs’ Motion is therefore granted as to the second claim. 28

13 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 14 of 20 Page ID #:4487

1 2. Reservation of Rights 2 Plaintiffs also argue that United’s reservation of rights, specifically its right to 3 deny coverage if the alleged contamination in the Underlying Actions is proven to fall 4 within the Qualified Pollution Exclusion, creates grounds for independent counsel. 5 (PMSJ 20.) 6 An insurer that agrees to defend its insured may reserve its rights regarding that 7 defense, for instance to later deny coverage, withdraw defense, or disclaim indemnity. 8 See Fed. Ins. Co. v. MBL, Inc., 219 Cal. App. 4th 29, 42–44 (2013). Not every 9 reservation of rights by an insurer necessarily constitutes a conflict of interest 10 requiring the insurer to provide independent counsel. Id. at 42. Rather, such a conflict 11 usually “involve[s] the insured trying to obtain coverage and the insurer trying to 12 avoid it.” Assurance Co. of Am. v. Haven, 32 Cal. App. 4th 78, 84 (1995). Thus, 13 independent counsel may be required “when an insurer reserves its rights on a given 14 issue and the outcome of that coverage issue can be controlled by counsel first 15 retained by the insurer for the defense of the claim.” Cal. Civ. Code § 2860(b). 16 United reserved “the right to disclaim indemnity and the right to withdraw from 17 defending [Plaintiffs] should it be discovered that no ‘sudden and accidental’ releases 18 did, in fact, occur.”4 (See United-LAT 2019 Coverage Letter 357.) Under those 19 circumstances, the Qualified Pollution Exclusion would apply and exclude coverage. 20 The City sued numerous parties, who in turn countersued the City and each other, 21 based on allegations of environmental contamination both deliberate and accidental, 22 sudden and over long periods of time. (See PSUF 33 (quoting City LASC SAC).) 23 These claims and counterclaims put the nature of the alleged contamination at issue in 24 the Underlying Actions, including whether and to what extent Plaintiffs may be liable. 25 Thus, by controlling Plaintiffs’ defense, United would have the ability to direct a more 26 vigorous defense against a liability theory based on ongoing, deliberate pollution 27 4 United attempts to parse its reservation of rights by waiving “accidental” while reserving “sudden” 28 contamination. (See Opp’n 19.) But the Qualified Pollution Exclusion excepts “sudden and accidental,” not “sudden or accidental.” (See, e.g., Oct. 1982 Policy 33.)

14 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 15 of 20 Page ID #:4488

1 (which precludes Plaintiffs’ coverage) versus sudden, unexpected contamination 2 (which provides Plaintiffs’ coverage). Therefore, United’s appointed counsel could 3 control the outcome of the very issue on which United has reserved its right to 4 withdraw Plaintiffs’ defense. This conflict of interest warrants independent counsel. 5 See Golden Eagle, 20 Cal. App. 4th at 1395 (describing insurer-appointed attorney- 6 control of a coverage dispute as a paradigmatic conflict of interest requiring 7 independent counsel). 8 The circumstances here are not like those in Federal Insurance Co. v. MBL, 9 Inc., where the court found the insurer’s assumption of the defense under a full 10 reservation of rights created no conflict. 219 Cal. App. 4th at 42–44. The court in 11 MBL rejected the insured’s argument that a conflict arose due to the insurer’s 12 reservation of rights under the qualified pollution exclusion because the insurer had 13 never issued a reservation of rights under that exclusion. Id. at 44 (“Where the insurer 14 has not expressly reserved its right to deny coverage under a particular exclusion in its 15 policy, there can be no actual conflict based on the application of that exclusion during 16 the pendency of the action.”). Here, in contrast, United did expressly reserve its right 17 to disclaim coverage based on the Qualified Pollution Exclusion. 18 The undisputed facts establish that United’s express, specific reservation of 19 rights under the Qualified Pollution Exclusion created a conflict of interest requiring 20 independent counsel as a matter of law. Accordingly, Plaintiffs are entitled to 21 summary judgment on their second claim for this reason as well. 22 C. Breach of the Duty to Defend (Third Claim) 23 Plaintiffs move for summary judgment on the third claim, that United breached 24 its duty to defend Plaintiffs by refusing to (a) immediately defend LAT upon its initial 25 tender of the LASC Action; (b) reimburse LAT’s and Soco’s defense costs to date, 26 once United did accept the defense; and (c) provide LAT and Soco independent 27 counsel. (PMSJ 22–24.) 28

15 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 16 of 20 Page ID #:4489

1 “When the underlying complaint states an injury potentially covered by the 2 insurance contract, the insurer breaches its duty to defend by refusing to defend its 3 insured.” Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953, 964 (E.D. Cal. 4 2011) (citing Gray, 65 Cal. 2d at 279). The duty to defend arises when tender is 5 made. The Hous. Grp. v. PMA Cap. Ins. Co., 193 Cal. App. 4th 1150, 1155 (2011). 6 To defend meaningfully, an insurer must defend immediately and entirely. Buss v. 7 Super. Ct., 16 Cal. 4th 35, 59 (1997). Thus, an insurer also breaches its defense 8 obligations under California law by failing to timely pay defense costs. See The Hous. 9 Grp., 193 Cal. App. 4th at 1157 (finding that insurer’s failure to pay defense fees until 10 the end of the litigation was “the equivalent of a defense denial”); Janopaul + Block 11 Cos. v. Super. Ct., 200 Cal. App. 4th 1239, 1249 (2011) (“Unreasonable delay in 12 paying policy benefits . . . is an actionable withholding of benefits which may 13 constitute a breach of contract . . . .” (first alteration in original)). 14 United contends that it did not breach because it eventually accepted LAT’s 15 defense of the LASC Action, and because it accepted LAT’s first tender of the Federal 16 Action and Soco’s initial tender of both actions. (Opp’n 10–12, 15–21.) United also 17 contends that LAT is responsible for United’s delay accepting the defense because 18 LAT refused to provide additional facts and evidence to establish LAT’s coverage. 19 (Opp’n 12–14.) The Court first addresses whether United breached its duty with 20 respect to LAT’s defense in the LASC Action, and then addresses whether United 21 breached its duty with respect to LAT’s defense in the Federal Action or Soco’s 22 defense in both Underlying Actions. 23 1. LAT—LASC Action 24 The Court has already explained, more than once, that United owed a duty to 25 defend LAT in the LASC Action upon LAT’s initial tender in May 2018. United 26 disclaimed coverage in August 2018 and again in September 2018. Therefore, United 27 breached its duty by refusing to defend LAT. See Gray, 65 Cal. 2d at 279–80. 28

16 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 17 of 20 Page ID #:4490

1 United may not shift the blame to LAT by arguing LAT failed to provide facts 2 and evidence to establish its own policy coverage. In attempting to shift its burden to 3 LAT, United misapplies well-established law. See Montrose, 6 Cal. 4th at 295 (“[T]he 4 insured need only show that the underlying claim may fall within policy coverage; the 5 insurer must prove it cannot.” (alteration in original)). Nor does United’s eventual 6 acceptance, nearly a year later and after LAT tendered defense of the LASC Action 7 again, cure its breach. See Shade Foods, Inc. v. Innovative Prod. Sales & Mktg, Inc., 8 78 Cal. App. 4th 847, 881 (2000), as modified on denial of reh’g (Mar. 29, 2000) 9 (“[A] belated offer to pay the costs of defense may mitigate [the insurer’s] damages 10 but will not cure the initial breach of duty.”). 11 Next, although United eventually accepted LAT’s defense in the LASC Action, 12 in April 2019, United refused to pay LAT’s incurred defense costs. Indeed, there is no 13 dispute that, to date, United has still not paid one cent of LAT’s defense costs. 14 (PSUF 23, 29.) One reason the duty to defend arises immediately upon a showing of 15 potential coverage is to “reliev[e] the insured from the burden of financing his own 16 defense.” See The Hous. Grp., 193 Cal. App. at 1156. United’s refusal to defend 17 forced LAT to fund its own defense of the LASC Action. Therefore, United’s refusal 18 to reimburse LAT’s incurred defense costs, even after belatedly acknowledging its 19 duty to defend, also constitutes a breach of United’s defense obligations. See Buss, 20 16 Cal. 4th at 58 (“The insurer has a duty . . . to mount and fund a defense.” (emphasis 21 added)). 22 Finally, United still refuses to provide Plaintiffs independent counsel for the 23 LASC Action. As discussed above, United reserved its rights as to a factual, 24 coverage-determinative issue, thereby entitling LAT to independent counsel. 25 Accordingly, United’s refusal to provide independent counsel, or to reimburse LAT for 26 the defense costs incurred, also constitutes a breach. See Golden Eagle, 20 Cal. App. 27 4th at 1394–95; Previews, 640 F.2d at 1028 (stating that the duty to defend extends to 28 funding independent counsel).

17 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 18 of 20 Page ID #:4491

1 2. LAT—Federal Action; Soco—LASC & Federal Actions 2 LAT first tendered its defense in the Federal Action to United in February 2019. 3 This is also when Soco first tendered its defense in both the LASC and Federal 4 Actions. United accepted LAT’s and Soco’s defense upon these initial tenders. Thus, 5 United did not breach its duty to defend by refusing coverage. Cf. Burgett, 830 F. 6 Supp. 2d at 964 (stating that an insurer breaches its duty to defend by refusing to 7 defend where there is a potential for coverage). 8 However, United refused to reimburse LAT and Soco for defense costs incurred 9 in defending these actions and refused to fund independent counsel after reserving its 10 right to withdraw the defense based on a coverage-determinative issue. As discussed 11 above, these actions by United constitute breaches of its defense obligations, as to 12 LAT in its defense of the Federal Action and as to Soco in its defense of both actions. 13 3. Damages from Breach 14 United argues that, even if the Court finds United breached its duty to defend, 15 Plaintiffs cannot establish the third claim because they cannot prove the damages 16 element of the breach cause of action. (Opp’n 21–25.) 17 The measure of damages for breach of duty to defend comprises “the full 18 amount of any obligation” the insured reasonably incurs in mounting and conducting 19 its defense. Gray, 65 Cal. 2d at 280. This generally “consists of the insured’s cost of 20 defense in the underlying action, including attorney fees.” Janopaul, 200 Cal. App. 21 4th at 1249. 22 First, United argues Plaintiffs failed to mitigate their damages when they did 23 not accept defense coverage from excess insurers. (Opp’n 21–23.) However, United 24 owed a duty to defend its insureds, “separate and independent” from any other insurer. 25 See Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 70 (1997). United 26 offers no authority that requires Plaintiffs to accept excess insurance, in this case to 27 their detriment, to cover the costs Plaintiffs incurred because United breached its duty. 28 (See Reply 10 (explaining that the excess policies would erode coverage limits).)

18 Case 8:19-cv-00286-ODW-PVC Document 129 Filed 06/21/22 Page 19 of 20 Page ID #:4492

1 Next, United argues Plaintiffs cannot establish their claim for breach because 2 Plaintiffs submitted inadequate proof of damages with the Motion. (Opp’n 24–25.) 3 The insured must prove the existence and amount of costs incurred in defense of an 4 action before the burden shifts to the insurer to prove the claimed expenses are 5 unreasonable or unnecessary. State v. Pac. Indem. Co., 63 Cal. App. 4th 1535, 1548– 6 49 (1998) (quoting Aerojet, 17 Cal. 4th at 64). 7 Plaintiffs submit letters they sent to United, informing United of Plaintiffs’ 8 incurred defense costs and attaching Plaintiffs’ legal invoices. (Reply 11.) Plaintiffs 9 also submit Mehta’s declaration stating that the invoices totaled $3,267,880.04 when 10 the Motion was filed. (Mehta Decl. ¶ 5.) However, Plaintiffs did not submit the legal 11 invoices themselves to the Court, due to their sensitive nature. (Reply 11.) Plaintiffs 12 have thus established the fact of their damages, but not specific amounts. As noted, 13 the Court does not accept the letters or Mehta’s declaration as establishing the truth of 14 the defense costs asserted. Additionally, by omitting the invoices themselves from the 15 evidence offered to support Plaintiffs’ Motion, Plaintiffs have deprived United of the 16 opportunity to challenge, on the record, the reasonableness and necessity of the 17 claimed expenses. This lack is not remedied by Plaintiffs’ offer of in camera review. 18 Plaintiffs moved for partial summary judgment, and the undisputed facts 19 establish Plaintiffs have incurred defense costs due to United’s breach—costs United 20 still refuses to pay. Therefore, Plaintiffs are entitled to judgment as a matter of law on 21 United’s liability for breach. However, Plaintiffs fail to establish the amount of 22 damages incurred as a result of United’s breach, so Plaintiffs are not entitled to 23 summary judgment on the amount of their damages. 24 VI. CONCLUSION 25 As discussed above, the Court GRANTS IN PART Plaintiffs’ Motion for 26 Summary Judgment. (ECF No. 79.) The Court finds: (1) United owed a duty to 27 defend from May 4, 2018; (2) Plaintiffs are entitled to independent counsel to be 28 provided by United; and (3) United breached its duty to defend LAT and Soco.

19 8:19-cv-00286-ODW-PVC pou on Filed 06/21/22 Page 20o0f20 Page ID

1 The Court finds the amount of Plaintiffs’ damages from United’s breach, as well 2 | as the reasonableness and necessity of those expenses, is most appropriately resolved 3 || by the Court. See Pac. Indem. Co., 63 Cal. App. 4th at 1548-49 (describing the 4 || respective burdens of proof for establishing an insured’s costs incurred in defense of 5 || an action). Accordingly, the Court orders the following briefing schedule. On or 6|| before July 1, 2022, Plaintiffs shall submit a supplemental brief establishing 7 || Plaintiffs’ claimed damages resulting from United’s breach of duty as well as 8 | Plaintiffs’ admissible evidence in support of that damages figure. Plaintiffs may apply 9 || to file any confidential material under seal pursuant to the Court’s Local Rules. On or 10 | before July 11, 2022, United may file a supplemental brief in response to Plaintiffs’ 11 || claimed damages from United’s breach. The parties may note any objection to the 12 || Court determining Plaintiffs’ damages in their briefs. 13 The matter shall be deemed submitted as of the Court’s receipt of United’s 14 || response or on July 12, 2022, whichever occurs first. The Court will set a hearing 15 || should it find one necessary. 16 17 IT IS SO ORDERED. 18 19 June 21, 2022

9 OTIS D. GHT, II 33 UNITED STATES,DISTRICT JUDGE

24 25 26 27 28

20