I. INTRODUCTION

19 Defendant Maiden Reinsurance North America, Inc. (“MRNA”) moves to 20 dismiss Plaintiffs California Capital Insurance Company, Eagle West Insurance 21 Company, Monterey Insurance Company, and Nevada Capital Insurance Company’s 22 (collectively, “CIG”) second cause of action for breach of the covenant of good faith 23 and fair dealing. Alternatively, MRNA moves to strike CIG’s second cause of action 24 including the request for attorneys’ fees and statutory penalties. For the reasons that 25 26 27 28 1 follow, the Court GRANTS MRNA’s Motion to Dismiss and GRANTS in part and 2 DENIES in part MRNA’s Motion to Strike.1 3 II. BACKGROUND 4 From 2006 through 2016, MRNA reinsured CIG, and in 2012, the insurance 5 companies formalized their agreement by signing a Multiple Line Excess of Loss 6 Reinsurance Agreement, which delineates the terms of the reinsurance. (Notice of 7 Removal Ex. A (“Compl.”) ¶ 11, ECF No. 1-3.) In 2018, Enstar Insurance Company 8 (“Enstar”), which purchases failing insurance companies, purchased MRNA. (Compl. 9 ¶ 12.) 10 After Enstar acquired MRNA, CIG alleges MRNA began fabricating 11 reinsurance coverage disputes as to livery, trucking, and habitability claims. (Compl. 12 ¶¶ 5, 12–23.) For example, MRNA allegedly refused to pay valid claims it had 13 previously agreed to pay under the livery program, failed to reimburse CIG for livery 14 losses covered under the reinsurance contract, altered its treatment of habitability 15 claims minimizing its reinsurance obligation, and demanded return of reinsurance 16 payments MRNA had previously made for livery claims, trucking losses, and 17 habitability claims. (Compl. ¶¶ 14–23.) 18 As a result of these changes, CIG filing suit against MRNA for breach of 19 contract and breach of the implied covenant of good faith and fair dealing. (Compl. ¶¶ 20 24–40.) As for the second cause of action, CIG alleges MRNA failed to reimburse 21 CIG according to the reinsurance contract, unreasonably rejected CIG and MRNA’s 22 original intent and mutual understanding of the terms of the reinsurance contract, 23 failed to conduct appropriate investigations, and wrongfully and unreasonably delayed 24 payment of valid claims. (Compl. ¶ 34.) CIG alleges it has sustained damages as a 25 direct and proximate cause of MRNA’s breach and seeks interest at the legal rate, 26 attorneys’ fees, and statutory penalties according to applicable state law. (Compl. 27

28 1 After carefully considering the papers filed related to the Motions, the Court deemed the matters appropriate for decision without oral argument. Fed. R. Civ. P. 78; L.R. 7-15. 1 ¶ 36.) 2 On December 23, 2019, CIG filed a Complaint in Los Angeles County Superior 3 Court, which MRNA removed under diversity jurisdiction on February 7, 2020. (See 4 Compl.; Notice of Removal, ECF No. 1.) On March 2, 2020, MRNA moved to 5 dismiss CIG’s second cause of action for breach of the covenant of good faith and fair 6 dealing, or alternatively, strike CIG’s second cause of action. (See Mot. to Dismiss 7 and Strike (“Mot.”), ECF No. 11.) 8 III. MOTION TO DISMISS 9 A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable 10 legal theory or insufficient facts pleaded to support an otherwise cognizable legal 11 theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). “To 12 survive a motion to dismiss . . . under Rule 12(b)(6), a complaint generally must 13 satisfy only the minimal notice pleading requirements of Rule 8(a)(2)”—a short and 14 plain statement of the claim. Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 2003); see 15 also Fed. R. Civ. P. 8(a)(2). The “[f]actual allegations must be enough to raise a right 16 to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 17 (2007). The “complaint must contain sufficient factual matter, accepted as true, to 18 state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 19 678 (2009) (internal quotation marks omitted). “A pleading that offers ‘labels and 20 conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not 21 do.’” Id. (citing Twombly, 550 U.S. at 555). 22 Whether a complaint satisfies the plausibility standard is a “context-specific 23 task that requires the reviewing court to draw on its judicial experience and common 24 sense.” Id. at 679. A court is generally limited to the pleadings and must construe all 25 “factual allegations set forth in the complaint . . . as true and . . . in the light most 26 favorable” to the plaintiff. Lee v. City of Los Angeles, 250 F.3d 668, 679 (9th Cir. 27 2001). But a court need not blindly accept conclusory allegations, unwarranted 28 deductions of fact, and unreasonable inferences. Sprewell v. Golden State Warriors, 1 266 F.3d 979, 988 (9th Cir. 2001). A court may not “supply essential elements of the 2 claim that were not initially pled.” Pena v. Gardner, 976 F.2d 469, 471 (9th Cir. 3 1992). 4 A. Discussion 5 MRNA contends that CIG’s second cause of action should be dismissed 6 because reinsureds may not recover tort damages in California for breach of the 7 covenant of good faith and fair dealing. (Mot. 1.) CIG argues that because 8 reinsurance is a form of insurance, tort remedies should be available in the 9 reinsurance context. (Opp’n to Mot. (“Opp’n”) 6–7, ECF No. 14.) MRNA counters 10 that the relationship between a reinsurer-reinsured is fundamentally different from 11 that of an insurer-insured, and thus should not be subject to liability in tort. (See 12 Mot. 3–8) 13 The Supreme Court of California has yet to address this issue, and there is no 14 controlling California Court of Appeal authority on point. In the absence of 15 precedent, the Court must predict and apply the rule it believes the California 16 Supreme Court would adopt under the circumstances. Wyler Summit P’ship v. 17 Turner Broad. Sys., Inc., 135 F.3d 658, 663 n.10 (9th Cir. 1998). Consequently, the 18 Court will consider the circumstances in which the California Supreme Court has 19 imposed tort liability in contractual relationships and the policy reasons for 20 extending tort liability to insurance contracts. 21 1. California Supreme Court Treatment 22 To determine whether California’s high court would impose tort liability in a 23 reinsurance contract, the Court considers the circumstances in which California 24 courts have imposed, or declined to impose, such liability in the past. Although the 25 California Supreme Court has yet to decide this issue, it has consistently limited tort 26 recovery for breach of the covenant of good faith and fair dealing and cautioned 27 courts from extending the recovery of tort damages to other contract contexts. Cates 28 Constr., Inc. v. Talbot Partners, 21 Cal. 4th 28, 44 (1999); see, e.g., Erlich v. 1 Menezes, 21 Cal. 4th 543, 548 (1999) (denying recovery of tort damages in 2 negligent breach of a contract to build a house); Foley v. Interactive Data Corp., 47 3 Cal. 3d 654, 654 (1988) (holding that tort damages are not available for breach of an 4 employment contract). “Whereas contract actions are created to enforce the 5 intentions of the parties to the agreement, tort law is primarily designed to vindicate 6 social policy.” Foley, 47 Cal. 3d at 683 (internal quotation marks omitted). 7 The covenant of good faith and fair dealing is a contract term that “has almost 8 always been limited to contract rather than tort remedies,” except in cases that 9 involve insurance contracts. Id. at 684. Although this exception was “a major 10 departure from traditional principles of contract law,” California’s high court has 11 permitted tort recovery for breach of the implied covenant in the insurance context 12 for various policy reasons. Id. at 684–90. Specifically, it has considered how 13 insurance policies are unique when compared to contracts for goods or services 14 because they are quasi-public and “characterized by elements of adhesion, public 15 interest and fiduciary responsibility.” Cates, 21 Cal. 4th at 44. 16 CIG argues that because reinsurance is a type of insurance, tort damages are 17 automatically available for a breach of the implied covenant. (Opp’n 6.) The Court 18 is not persuaded. Although reinsurance is a type of insurance, CIG fails to consider 19 the significant differences between the two relationships. In Cates, the California 20 Supreme Court rejected the very argument that tort damages were available where 21 there was a breach of the implied covenant in every insurance context. 21 Cal. 4th at 22 52. It held that tort damages could not be recovered for a breach of the implied 23 covenant in a surety bond, even though a surety bond is a type of insurance 24 mentioned in the California Insurance Code. Id. at 52, 60. To reach this conclusion, 25 the California Supreme Court considered the relationship between the parties in 26 surety arrangements and determined that those parties “have certain rights and 27 defenses that . . . typical insurance relationships” simply do not share. Id. at 48. The 28 court looked at the relationship between the parties to “evaluate whether the policy 1 considerations recognized in the common law support the availability of tort 2 remedies in the context of a performance bond.” Id. at 52–56. 3 Because the California Supreme Court has consistently limited tort recovery 4 for breaches of the covenant of good faith and fair dealing, the Court determines that 5 California’s high court would only extend liability to reinsurance contracts if they 6 were at risk of the same violations of social policy that led the court to extend tort 7 liability to insurance contracts. Here, the Court will look at the same policies the 8 California Supreme Court considered in Cates to determine whether tort damages 9 should extend to reinsurance contracts. 10 2. Policy Considerations 11 To determine whether the California Supreme Court would extend tort 12 liability to the reinsurance context, the Court considers whether a breach of a 13 reinsurance contract violates the same social policies as a breach of an insurance 14 contract. Thus, the Court must consider whether a reinsurance contract is 15 characterized by the same elements as an insurance contract to implicate similar 16 policy concerns, specifically “elements of adhesion and unequal bargaining power, 17 public interest and fiduciary responsibility.” Id. at 44. 18 First, the Court will consider whether reinsurance is marked by elements of 19 adhesion and unequal bargaining power. Individuals obtain insurance policies for 20 “peace of mind and security” and typically must accept an insurance policy on a 21 “take-it-or-leave-it” basis. Id. at 52. In contrast, insurance companies obtain 22 reinsurance policies to increase profits, and those policies are negotiated between 23 two sophisticated business parties where the reinsureds have the ability to “include 24 penalty provisions in their reinsurance contract . . . [and] know[] how to employ the 25 legal process to recover for such a breach.” Stonewall Ins. Co. v. Argonaut Ins. Co., 26 75 F. Supp. 2d 893, 909 (N.D. Ill. 1999) (finding that the California Supreme Court 27 would not extend tort remedies to reinsurance contracts). Given that CIG is an 28 insurance company, or a sophisticated business party, that can negotiate its 1 reinsurance contract, the Court finds the reinsurance relationship between MRNA 2 and CIG is not marked by the same elements of adhesion and unequal bargaining 3 power that led the California Supreme Court to justify tort damages for breaches of 4 insurance contracts. Cates, 21 Cal. 4th at 52–53; (Compl. ¶ 1–4.) 5 Next, the Court will consider whether reinsurance contracts sparks similar 6 public interest concerns as insurance contracts. The California Supreme Court has 7 recognized two public interest considerations that support tort remedies in insurance 8 cases. First, the high court reasoned “that tort remedies are appropriate in the 9 insurance policy context because insureds generally do not seek to obtain 10 commercial advantages by purchasing policies; rather, they seek protection against 11 calamity.” Cates, 21 Cal. 4th at 53. “[T]he typical insurance policy protects an 12 insured against accidents and generally unforeseeable losses caused by a calamitous 13 or catastrophic event such as disability, death, fire, or flood.” Id. Thus, “[t]he 14 insurers’ obligations are . . . rooted in their status as purveyors of a vital service 15 labeled quasi-public in nature.” Foley, 47 Cal. 3d at 684–85 (quoting Egan v. Mut. 16 of Omaha Ins. Co., 24 Cal. 3d 809, 820 (1979)). Second, “an insured faces a unique 17 economic dilemma when its insurer breaches the implied covenant of good faith and 18 fair dealing.” Cates, 21 Cal. 4th at 43 (internal quotation marks omitted). Typically, 19 parties in contract are able to “seek recourse in the marketplace in the event of a 20 breach.” Id. This is not generally the case for an insured as “an insured will not be 21 able to find another insurance company willing to pay for a loss already incurred.” 22 Id. 23 Unlike liability insurance which provides insureds with peace of mind and 24 protection against calamity, insurance companies purchase reinsurance to increase 25 profits by spreading the burden of indemnification, which allows them to “write 26 more policies than their reserves would otherwise sustain.” Catholic, 42 Cal. 4th at 27 368; see Cates, 21 Cal. 4th at 53–54 (finding that surety bonds provided creditors 28 with commercial advantage and additional financial security rather than protection 1 against calamity). Unlike liability insurance, reinsurance is not quasi-public in 2 nature; rather, reinsurance is a contract whereby “an insurer procures a third person 3 to insure him against loss or liability by reason of such original insurance.” Cal. Ins. 4 Code § 620. “Reinsurance agreements are separate and distinct from the policy 5 agreements entered into by the insurer and its insured,” and “[t]he original insured 6 has no interest in a contract of reinsurance.” Am. Re–Insurance Co. v. Ins. Comm’n 7 of Cal., 527 F. Supp. 444, 453 (C.D. Cal. 1981) (quoting Cal. Ins. Code § 623). 8 However, “[r]einsureds do face the economic dilemma recognized by the 9 California Supreme Court. In the event of non-payment by the reinsurer, they are 10 not able ‘to find another insurance company willing to pay for a loss already 11 incurred.’” Cal. Joint Powers Ins. Auth. v. Munich Reinsurance Am., Inc., No. CV 12 08-956-DSF (RZx), 2008 WL 1885754, at *4 (C.D. Cal. Apr. 21, 2008) (quoting 13 Cates, 21 Cal. 4th at 43). Nevertheless, on balance, providing tort damages for 14 breach of an insurance agreement “was a major departure from traditional principles 15 of contract law,” and the California Supreme Court has been cautious to extend it to 16 other contract settings. Foley, 47 Cal. 3d at 690. Therefore, the Court finds that the 17 California Supreme Court would not impose tort liability on reinsurers because of 18 this public interest issue alone. 19 Finally, the Court will consider whether reinsurance is marked by elements of 20 fiduciary responsibility. The California Supreme Court has “observed that the tort 21 duty of a liability insurer ordinarily is based on its assumption of the insured’s 22 defense and of settlement negotiations of third party claims.” Cates, 21 Cal. 4th 23 at 44. However, the court has noted that “reinsurers have no comparable duties to 24 investigate or defend claims between third parties and the underlying liability 25 insurers or their insureds, nor do they owe any duty of good faith and fair dealing to 26 the original insureds, unless the reinsurance agreement somehow specifically so 27 provides.” Catholic, 42 Cal. 4th at 369 (internal quotation marks omitted). Thus, 28 the California Supreme Court clearly indicates: reinsurers do not have the same 1 fiduciary responsibilities that insurers do to justify imposing tort liability on 2 reinsurers. 3 In summary, the policy reasons the California Supreme Court considered 4 when extending tort remedies to a breach of the implied covenant in insurance cases 5 are absent from the reinsurer-reinsured relationship. That, along with the California 6 Supreme Court’s reluctance to extend this exception to other contract settings, leads 7 the Court to predict that the California Supreme Court would not extend this 8 exception to the reinsurance context. 9 Accordingly, the Court GRANTS MRNA’s Motion to Dismiss and dismisses 10 the implied covenant cause of action to the extent that CIG seeks tort remedies. The 11 cause of action premised on contractual damages remains. 12 IV. MOTION TO STRIKE 13 Under Rule 12(f), the Court may strike “any insufficient defense or any 14 redundant, immaterial, impertinent or scandalous matter.” Fed. R. Civ. P. 12(f). 15 “[T]he function of a 12(f) motion to strike is to avoid the expenditure of time and 16 money that must arise from litigating spurious issues by dispensing with those issues 17 prior to trial.” Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983). 18 “Motions to strike are generally regarded with disfavor because of the limited 19 importance of pleading in federal practice, and because they are often used as a 20 delaying tactic.” Neilson v. Union Bank of Cal., N.A., 290 F. Supp. 2d 1101, 1152 21 (C.D. Cal. 2003); see also Sapiro v. Encompass Ins., 221 F.R.D. 513, 518 (N.D. Cal. 22 2004) (“Courts have long disfavored Rule 12(f) motions, granting them only when 23 necessary to discourage parties from making completely tendentious or spurious 24 allegations.”). 25 “In ruling on a motion to strike under Rule 12(f), the court must view the 26 pleading in the light most favorable to the nonmoving party.” Cholakyan v. 27 Mercedes-Benz USA, LLC, 796 F. Supp. 2d 1220, 1245 (C.D. Cal. 2011). “Thus, 28 ‘before granting such a motion, the court must be satisfied that there are no questions 1 of fact, that the claim or defense is insufficient as a matter of law, and that under no 2 circumstance could it succeed.’” Id. (alterations omitted) (quoting Tristar Pictures, 3 Inc. v. Del Taco, Inc., No. CV 99-07655-DDP (Ex), 1999 WL 33260839, at *1 (C.D. 4 Cal. Aug. 31, 1999)). 5 A. Discussion 6 MRNA contends that CIG’s second cause of action should be stricken because 7 the breach of the implied covenant of good faith and fair dealing as a contract claim is 8 redundant of the first cause of action for breach of contract. (Mot. 1.) MRNA 9 additionally asserts that CIG’s prayers for attorneys’ fees and statutory penalties 10 should be stricken as there is no basis for them. (Mot. 1.) The Court will address 11 each argument in turn. 12 1. Whether CIG’s Second Cause of Action Should be Stricken 13 The Court previously discussed CIG’s second cause of action as related to tort 14 damages. Here, the Court addresses whether the theory for CIG’s second cause of 15 action that sounds in contract should be stricken. “If the allegations [of a complaint 16 for breach of the implied covenant of good faith and fair dealing] do not go beyond 17 the statement of a mere contract breach and, relying on the same alleged facts, 18 simply seek the same damages or other relief claimed in a companion cause of 19 action, they may be disregarded as superfluous as no additional claim is actually 20 stated.” Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371, 1395 21 (1990). 22 MRNA argues that the second cause of action is duplicative of the first cause 23 of action as it reiterates the same two allegations. (Mot. 9.) In its Opposition, CIG 24 contends that there is nothing redundant about its second cause of action. 25 (Opp’n 12.) To support its breach of contract cause of action, CIG asserts that 26 MRNA failed to pay its obligations under the reinsurance contract and improperly 27 demanded return payments. (Compl. ¶ 28.) While CIG does reiterate the same 28 allegations to support its cause of action for breach of the implied covenant, CIG 1 additionally asserts that MRNA altered prior course of conduct under the 2 reinsurance contract and in bad faith contested claims on the books of the insurer. 3 (See Compl. ¶ 32.) Additionally, CIG asserts that MRNA unreasonably rejected 4 CIG and MRNA’s original intent and mutual understanding of the terms of the 5 reinsurance contract, MRNA failed to conduct appropriate investigations, and 6 MRNA wrongfully or unreasonably delayed payment of valid claims. 7 (Compl. ¶ 34.) It is clear that CIG alleges bad faith conduct that goes beyond the 8 statement of a mere contract breach. Because the Court must view the pleading in 9 the light most favorable to CIG, and there appear to be additional facts alleged in the 10 second cause of action giving rise to a unique claim, the Court finds that the second 11 cause of action is not redundant of the first. 12 Accordingly, the Court DENIES MRNA’s Motion to Strike CIG’s implied 13 covenant claim premised on contractual damages. 14 2. Whether There is a Basis for CIG’s Prayers for Attorneys’ Fees and 15 Statutory Penalties 16 In addition to CIG’s prayer for damages for MRNA’s breach of contract and 17 breach of the implied covenant, CIG seeks attorneys’ fees and “any statutory 18 penalties, according to applicable state law.” (Compl. ¶ 40.) For the following 19 reasons, the Court finds these prayers for relief improper. 20 CIG prays for attorneys’ fees as allowed by applicable law pertaining to its 21 second cause of action. (Compl. ¶ 36.) Generally, each party pays its own 22 attorneys’ fees unless a contract allocates them differently. Trope v. Katz, 11 Cal. 23 4th 274, 278 (1995). Attorneys’ fees may also be recoverable in the event a party is 24 liable in tort. Brandt v. Super. Ct., 37 Cal. 3d 813, 817 (1985). Given that CIG did 25 not allege the reinsurance contract allocated attorneys’ fees differently, and the 26 Court has dismissed CIG’s second cause of action as it relates to tort damages, the 27 Court finds CIG’s prayer for attorneys’ fees improper. 28 1 Additionally, CIG prays for “‘any statutory penalties, according to applicable 2 || state law.” (Compl. § 40.) The Court may strike any insufficient claim. Cholakyan, 3 || 796 F. Supp. 2d at 1245; Fed. R. Civ. P. 12(f). CIG did not identify the penalties it seeks, did not identify the applicable state law that authorizes those penalties, and 5 || did not even mention statutory penalties in its Opposition. (Opp’n 12-13; see 6 || generally Compl.) Because CIG does not allege any statutory violation that permits 7 || penalties in its Complaint or in its Opposition, the Court finds CIG’s request for that 8 || type of relief improper as a matter of law. Cholakyan, 796 F. Supp. 2d at 1245. 9 Accordingly, the Court GRANTS MRNA’s Motion to Strike CIG’s prayers 10 | for attorneys’ fees and statutory penalties. 11 IV. CONCLUSION 12 For the foregoing reasons, the Court GRANTS MRNA’s Motion to Dismiss 13 | CIG’s second cause of action as to the tort remedies, DENIES MRNA’s alternative 14 || Motion to Strike CIG’s second cause of action, and GRANTS MRNA’S Motion to 15 || Strike CIG’s request for attorneys’ fees and statutory penalties. 16 IT IS SO ORDERED. 17 18 July 16, 2020 19 . 20 Yel Yup i

OTIS D. WRIGHT, II

UNITED STATES DISTRICT JUDGE

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