1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 10 AMERICAN CLAIMS MANAGEMENT, Case No.: 18-CV-925 JLS (MDD)

INC.,

11

ORDER GRANTING DEFENDANT’S

Plaintiff, 12 MOTION FOR SUMMARY v. JUDGMENT 13

ALLIED WORLD SURPLUS LINES

14 INSURANCE COMPANY (f/k/a Darwin (ECF No. 133) 15 Select Insurance Company), 16 Defendant. 17 18 Presently before the Court is Defendant’s Motion for Summary Judgment (“MSJ,” 19 ECF No. 133), Plaintiff’s Opposition to the Motion (“Opp’n,” ECF No. 137), and 20 Defendant’s Reply (“Reply,” ECF No. 134).1 After reviewing the briefs, the evidence, the 21 law, and hearing oral arguments, see ECF No. 143, the Court GRANTS Defendant’s 22 Motion. 23 BACKGROUND 24 Plaintiff American Claims Management, Inc. is a third-party claims handler for 25 insurance companies. Opp’n at 7. Defendant Allied World Surplus Lines Insurance 26

27 1 The Parties previously filed redacted copies of their respective briefs, along with motions to seal. After 28 the Court granted in part and denied in part the motions to seal, the Parties refiled the briefs now before 1 || Company, formerly known as Darwin Select Insurance Company, insured Plaintiff under 2 ||a Professional Liability Insurance Policy (the “ACM Policy”) from October 1, 2010 to 3 || October 1, 2011. Declaration of Dane Voris (“Voris Decl.) Ex. 1 at 11. The events that 4 to this litigation involve multiple parties with various connections between them: 5 6 7 8 Jos 9 Bee eae Sse 11 Sy > 13 CMA Represent 14 Auto Policy 15

17 18 || Mot. at 7. 19 During the relevant claims period, Plaintiff acted as a third-party administrator for 20 || QBE Insurance Corporation. Voris Decl. Ex 4; Ex. 7 at 137. In 2011, QBE issued an 21 || automotive insurance policy to Galdino Cortes with a $30,000 policy limit. See id. Ex. 40 22 401. Mr. Cortes caused a car accident which injured members of the Cardona family. 23 Ex. 7 at 137. The Cardona family sent a policy limit demand to Plaintiff, but Plaintiff 24 failed timely to resolve the claim within Mr. Cortes’ policy limits. Jd. at 138. 25 ||Subsequently, Plaintiff notified Defendant that QBE might bring a claim against Plaintiff 26 related to its mishandling of the Cardona matter, and Defendant assigned an adjuster to the 27 matter. Id. Ex. 40 at 395-96. 28

1 The Cardona family then sued Mr. Cortes. Id. Ex. 7 at 138. In March 2014, as the 2 claim approached trial, Defendant appointed attorney Alan Jampol of Jampol Zimet as 3 counsel for Plaintiff. Id. Ex. 13 at 173. Shortly after being appointed as counsel, Mr. 4 Jampol orchestrated an assignment agreement whereby QBE would pay Mr. Cortes to 5 assign his extra-contractual rights under his insurance policy back to QBE. Id. Ex. 39; Ex. 6 58 at 634. Plaintiff, Defendant, and QBE agreed to pursue the assignment. See Id. Ex. 76 7 at 841–44. Mr. Cortes signed the assignment agreement while he was in prison and without 8 an attorney present. Id. Ex. 7 at 139. 9 The Cardona claim proceeded to trial, and, in June 2015, the Cardona family won a 10 $21 million jury verdict against Cortes. Id. Ex. 7 at 138. Cortes then challenged the QBE 11 assignment and sued QBE for bad faith. Id. Evaluating the assignment in 2016, Judge 12 Randolph A. Rogers of the Los Angeles Superior Court called the assignment scheme 13 “contrary to public policy” and “sufficient to support a prima facie claim for fraud.” Id. 14 Ex. 39; Ex. 58 at 634. QBE eventually settled with Cortes and the Cardonas, paying $15 15 million. Declaration of Guyan Knight (“Knight Decl.”) Ex. 2 at 597–98. 16 In October 2015, QBE filed an arbitration demand against Plaintiff for 17 reimbursement of all amounts paid to settle the Cardona matter. Voris Decl. Ex. 7 at 138; 18 Ex. 53; Ex. 54. On July 24, 2017, the arbitration panel issued its decision and awarded 19 QBE $18.5 million in damages. Id. Ex. 5 (the “Arbitration Award”). 20 Plaintiff demanded Defendant pay its portion of the arbitration award and three 21 months later, Defendant forwarded its policy limits to fund partially the arbitration 22 judgment under a reservation of rights. Id. Ex. 38 at 365. The policy limits did not cover 23 all of Plaintiff’s liability––approximately $4.9 million of the judgment remains unfunded 24 after Defendants and excess insurer Chubb’s payments. Id. Plaintiff filed its original 25 complaint on May 11, 2018 to recover this unfunded amount. See generally ECF No. 1. 26 The Court now considers the Motion for Summary Judgment before it. 27 /// 28 /// 1 LEGAL STANDARD 2 Under Federal Rule of Civil Procedure 56(a), a party may move for summary 3 judgment as to a claim or defense or part of a claim or defense. Summary judgment is 4 appropriate where the Court is satisfied that there is “no genuine dispute as to any material 5 fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); 6 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Material facts are those that may affect 7 the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A 8 genuine dispute of material fact exists only if “the evidence is such that a reasonable jury 9 could return a verdict for the nonmoving party.” Id. When the Court considers the 10 evidence presented by the parties, “[t]he evidence of the non-movant is to be believed, and 11 all justifiable inferences are to be drawn in his favor.” Id. at 255. 12 The initial burden of establishing the absence of a genuine issue of material fact falls 13 on the moving party. Celotex, 477 U.S. at 323. The moving party may meet this burden 14 by identifying the “portions of ‘the pleadings, depositions, answers to interrogatories, and 15 admissions on file, together with the affidavits, if any,’” that show an absence of dispute 16 regarding a material fact. Id. When a plaintiff seeks summary judgment as to an element 17 for which it bears the burden of proof, “it must come forward with evidence which would 18 entitle it to a directed verdict if the evidence went uncontroverted at trial.” C.A.R. Transp. 19 Brokerage Co. v. Darden Rests., Inc., 213 F.3d 474, 480 (9th Cir. 2000) (quoting Houghton 20 v. South, 965 F.2d 1532, 1536 (9th Cir. 1992)). 21 Once the moving party satisfies this initial burden, the nonmoving party must 22 identify specific facts showing that there is a genuine dispute for trial. Celotex, 477 U.S. 23 at 324. This requires “more than simply show[ing] that there is some metaphysical doubt 24 as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 25 586 (1986). Rather, to survive summary judgment, the nonmoving party must “by her own 26 affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ 27 designate ‘specific facts’” that would allow a reasonable fact finder to return a verdict for 28 the non-moving party. Celotex, 477 U.S. at 324. The non-moving party cannot oppose a 1 properly supported summary judgment motion by “rest[ing] on mere allegations or denials 2 of his pleadings.” Anderson, 477 U.S. at 256. 3 ANALYSIS 4 Defendant argues that judgment in its favor is appropriate because (1) three different 5 policy exclusions apply and bar coverage for Plaintiff, Mot. at 14–18; (2) Plaintiff has 6 failed to show any record evidence able to support its bad faith claim, id. at 18–23; and 7 (3) Defendant satisfied its duty to defend and indemnify, id. at 24–25. Defendant also 8 contends the Court should enter judgment on its counter claim for reimbursement of the 9 money it paid Plaintiff under the policy. Id. at 25. The Court considers each argument in 10 turn. 11 I. Policy Exclusions 12 There are three exclusions in the ACM Policy at issue: (1) the “Claims Services 13 Exclusion”; (2) the “Fraud or Dishonest Act Exclusion”; and (3) the “Contract Exclusion.” 14 Defendant contends that all three apply and bar coverage. Mot. at 14–25. Plaintiff 15 disagrees and offers its own interpretations of the exclusions, under which none apply. 16 Opp’n at 26–30. 17 “While insurance contracts have special features, they are still contracts to which the 18 ordinary rules of contractual interpretation apply.” N. Am. Bldg. Maint., Inc. v. Fireman’s 19 Fund Ins. Co., 137 Cal. App. 4th 627, 641 (2006). The goal of interpreting an insurance 20 policy to give effect to “the mutual intention of the parties and, where possible, to infer this 21 intent from the terms of the policy.” Haynes v. Farmers Ins. Exch., 32 Cal. 4th 1198, 1204 22 (2004). The court will look no further than the terms of the policy if the “language is clear 23 and explicit,” Bank of the W. v. Super. Ct., 2 Cal. 4th 1254, 1264 (1992) (citing Cal. Civ. 24 Code § 1638), and will interpret the words in the policy according to their “ordinary and 25 popular sense.” Haynes, 32 Cal. at 1204 (citing AIU Ins. Co. v. Super. Ct., 51 Cal. 3d 807, 26 822 (1990)). 27 “On the other hand, if the terms . . . are in any respect ambiguous or uncertain,” Bank 28 of the W., 2 Cal. 4th at 1264 (internal quotations omitted), the Court must “give effect to 1 the insured’s objectively reasonable expectations.” Kavruck v. Blue Cross of Cal., 108 Cal. 2 App. 4th 773, 780 (2003). A policy provision in an insurance contract is ambiguous if it 3 is capable of two or more reasonable constructions. Waller v. Truck Ins. Exch., Inc., 11 4 Cal. 4th 1, 18 (1995). But policy provisions “cannot be found ambiguous in the abstract,” 5 id. (citing Bank of the W., 2 Cal. 4th at 1265), and the “Court will not strain to create an 6 ambiguity where none exists.” Id. (citing Reserve Ins. Co. v. Pisciotta, 30 Cal. 3d 800, 807 7 (1982)). 8 In addition to the general interpretation principles for insurance policies, 9 “[p]articular rules apply to the interpretation of insurance policy exclusions.” N. Am. Bldg. 10 Maint., 137 Cal. App. 4th at 642. “[E]xclusionary clauses are strictly construed against the 11 insurer and in favor of the insured.” Id. “[A]lthough the insured has the burden of proving 12 the contract of insurance and its terms, the insurer bears the burden of bringing itself within 13 a policy’s exclusionary clauses.” Id. (citation omitted). “An insurer may rely on an 14 exclusion to deny coverage only if it provides conclusive evidence demonstrating that the 15 exclusion applies . . . in all possible worlds.” Atl. Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. 16 App. 4th 1017, 1039 (2002). If the insurer meets this burden, a majority of courts then 17 shift the burden back onto the insured to prove that an exception to the exclusion applies. 18 See 17A Plitt, Steven et al., Couch on Ins. § 254:13 (3rd ed. 2018) (collecting cases); cf. 19 Travelers Cas. & Sur. Co. v. Super. Ct., 63 Cal. App. 4th 1440, 1454 (1998) (placing 20 burden of proof on insured to prove exception to a policy exclusion). 21 A. The Claims Services Exclusion 22 Defendant first argues that the Claims Services Exclusion applies and bars coverage. 23 Mot. at 21–24. The Claims Services Exclusion is contained in a manuscript endorsement 24 which excludes coverage for any loss or claim that is: 25 based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged: 26

27 28 1 (c1la)i lmac okr o ofb gloigoadt ifoanit har oisri nfagi ru dnedaelri nagn iinn tshuer ahnacned clionngt roafc at noyr 2 policy or from any benefit plan; 3 . . . The applicability of Exclusion (1) above may be determined by 4 an admission, final adjudication or a finding in the proceeding 5 constituting the Claim or in a proceeding separate from or collateral to the Claim. If any Insured in fact engaged in the 6 conduct specified in this Exclusion, such Insured and the Named 7 Insured will reimburse the Insurer for any Defense Expenses advanced to or on behalf of such Insured. 8

9 ACM Policy, Endorsement No. 9. 10 Construing the language in favor of Plaintiff, the Court finds the Exclusion’s 11 meaning is “clear and explicit”—the Exclusion applies if Plaintiff seeks coverage for a 12 claim that (1) arises out of or involves any actual or alleged lack of good faith or fair dealing 13 (2) in the handling of any claim or obligation under an insurance policy, (3) which may be 14 determined only by an admission, final adjudication, or a finding in the claim proceeding 15 or any other proceeding collateral to the claim. According to this explicit language, the 16 Court finds Defendant has met its burden to show the Claims Services Exclusion applies 17 and thus bars coverage. Plaintiff’s coverage claim arises out of and involves QBE’s 18 allegation that Plaintiff handled its obligations under the Cortes insurance policy in bad 19 faith, and the allegation of bad faith can be determined by the arbitration panel’s final order. 20 First, the Court finds Plaintiff’s claim “arises out of” an allegation of bad faith. 21 Under California law, the phrase “arising out of” is construed broadly, requiring only a 22 “minimal causal connection or incidental relationship” between the “factual situation” and 23 “the event creating liability.” Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal. App. 4th 24 321, 328 (1999). And this Exclusion is even broader, allowing claims “directly or 25 indirectly resulting from, in consequence of, or in any way involving” the alleged bad faith. 26 Here, Plaintiff’s coverage claims stems from its initial handling of the Cortes claim. In its 27 opening brief of the Arbitration, QBE’s sixth cause of action alleged Plaintiff carried out 28 its claims handling obligations in bad faith, leading to extra-contractual liability. See 1 Knight Decl. Ex. 49. Plaintiff now seeks coverage for its liability to QBE. The Court finds 2 this satisfies the “minimal causal connection” required to show that Plaintiff’s claims arise 3 out of an allegation of bad faith. 4 Important to this finding, the Court notes that for the exclusion to apply, all that is 5 necessary is for the claim to arise out of or involve an allegation of bad faith. Instructive 6 here, a North Carolina court discussed the implications of the term “allegation” in an almost 7 identical exclusion in Greenwich Insurance Company v. Medical Mutual Insurance 8 Company of North Carolina, 88 F. Supp. 3d 512 (2015). There, the policy “exclude[ed] 9 from coverage all ‘loss, including defense expenses, resulting from any claim for . . . any 10 actual or alleged lack of good faith or unfair dealing in the handling of any claim or 11 obligation under any insurance contract.’” Id. at 516. The court found that based on the 12 exclusion’s plain terms, “any loss resulting from any claim, no matter upon what legal 13 theory that claim is based, that is merely alleged to be proximately caused by” the insured’s 14 lack of good faith would be excluded from coverage. Id. “Thus, even if the trier of fact in 15 the [underlying action] finds” no bad faith, “there is no coverage under the . . . policy if the 16 [underlying] complaint alleged a lack of good faith and fair dealing in [the insured]’s 17 handling of” an insurance policy claim. Id. 18 The Court finds this interpretation persuasive. For the Claims Services Exclusion to 19 apply, the Court need only find that Plaintiff’s claim arises out of an allegation of bad faith; 20 the actual determination of that claim matters not. As noted above, QBE alleged Plaintiff 21 handled the Cortes claim in bad faith. Under the exclusion’s clear and explicit meaning, 22 that is enough. 23 Second, the Court finds the allegation of bad faith arises from the “handling of any 24 claim or obligation arising under an insurance contract or policy.” Plaintiff contends that 25 this phrase indicates the exclusion applies only to a party that could be liable for bad faith 26 under an insurance policy; in other words, Plaintiff must be potentially liable to the insured. 27 Opp’n at 26. Plaintiff argues that because Plaintiff is as a third party to the Cortes insurance 28 policy, it cannot be liable to Cortes for bad faith, and thus the Exclusion cannot apply. Id. 1 It is true that a third-party administrator cannot be liable to the insured for bad faith. 2 See Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 824 (1979). But that principle does 3 not illuminate the proper interpretation of this exclusion’s meaning. The Exclusion states 4 only that the lack of good faith and fair dealing must have arisen from the “handling of any 5 claim or obligation arising under an insurance contract or policy.” It does not require 6 Plaintiff to have issued the policy under which the claim arose or otherwise be liable for 7 bad faith to the policy holder. For the Court to demand actual or potential liability to QBE’s 8 policy holder for the Claims Services Exclusion to apply, it would require the addition of 9 words and phrases not found in the Exclusion itself, which the Court cannot do. See Safeco 10 Ins. Co. of Am. V. Robert S., 26 Cal. 4th 758, 763 (2001) (declining to read words into an 11 exclusion because “[t]o do so would violate the fundamental principle that in interpreting 12 contracts, including insurance contracts, courts are not to insert what has been omitted”). 13 Important here, Plaintiff had a contractual obligation to handle QBE’s insurance policy 14 claims. As in any contract, Plaintiff had a duty to carry out this obligation to QBE in good 15 faith. QBE alleged Plaintiff’s handling of its obligation to service the Cortes claim was 16 done in bad faith. That is sufficient for the Exclusion to apply. 17 In addition to being contrary to the plain meaning, Defendant contends that 18 Plaintiff’s interpretation requiring actual liability for bad faith would make the Claims 19 Services Exclusion superfluous. Mot. at 23–24. When interpreting an insurance policy, 20 the Court “must interpret [the policy] to give effect to all of its terms and avoid an 21 interpretation that renders a term mere surplusage.” S. Cal. Counseling Ctr. v. Great Am. 22 Ins. Co., 162 F. Supp. 3d 1045, 1050, 1053 (C.D. Cal. 2014), aff’d, 667 F. App’x 623 (9th 23 Cir. 2016). Here, Plaintiff is a third-party claims administrator and does not issue 24 insurance—as Plaintiff has repeatedly noted, it therefore could never be liable for bad faith 25 to an insured. Under this interpretation, the exclusion would never apply. Thus, the Court 26 must reject Plaintiff’s interpretation; to do otherwise would “render the . . . exclusion a 27 nullity.” Id. 28 /// 1 Plaintiff attempts to dodge the nullity problem by arguing that the Exclusion is a 2 standard form used by Defendant in other policies,2 which indicates that under “other 3 circumstances, to different insureds, or perhaps under different state law,” the Exclusion 4 might apply. Opp’n at 27. This argument is without merit. “A standard form contract is 5 governed by the ordinary rules of interpretation of contracts.” Mid-Century Ins. Co. v. 6 Bash, 34 Cal. Rptr. 382, 385 (Ct. App. 1989). And the Court must interpret the policy’s 7 language to give effect to the intentions of the parties to the contract, not hypothetical out- 8 of-state parties that may sign a similar endorsement. 9 Third, the Court finds the Claim Services Exclusion’s applicability “may be 10 determined by an admission, final adjudication, or a finding in the proceeding constituting 11 the Claim or in a proceeding separate from or collateral to the Claim.” ACM Policy, 12 Endorsement No. 9. Defendant contends the term “may” in this phrase is permissive and 13 allows the Court to determine the applicability from any source, even those not listed. Mot. 14 at 22–23. Plaintiff, on the other hand, contends that “may” is permissive only to the extent 15 the Court may determine the applicability from the listed sources, but no others. Opp’n at 16 27–28. While the Court agrees with Defendant that “may” is generally understood to be 17 permissive, see Ceausu v. Progressive Cas. Ins. Co., 2013 WL 12131280, at *7 (C.D. Cal. 18 Oct. 10, 2013) (collecting cases from Ninth Circuit and California Supreme Court finding 19 the plain meaning of the term “may” is ordinarily understood in a permissive or 20 discretionary manner), even under Plaintiff’s narrow interpretation, the Court finds the 21 Exclusion applicable. 22 Plaintiff does not dispute that the arbitration panel’s order was a final adjudication 23 of QBE’s claim against Plaintiff, thus falling within one of the listed sources. Once again, 24 Plaintiff attempts to require a finding of liability, contending that the arbitration order is 25 insufficient for purposes of this Exclusion because “the panel never found QBE or 26 27 28 2 Defendant does not agree with this assertion and argues that the endorsement was specifically written 1 [Plaintiff] acted in bad faith.” Opp’n at 28. Once again, the Court must reject Plaintiff’s 2 untenable interpretation. As noted above, all that is required is an allegation of bad faith. 3 In its opening brief, QBE raised a claim for bad faith against Plaintiff for its handling of 4 the Cortes insurance policy. Knight Decl. Ex. 53. And the arbitration panel noted the 5 extensive evidence QBE brought forth in support of that claim. Although the arbitration 6 panel ultimately declined to find Plaintiff liable for bad faith, the allegation of bad faith 7 handling of the Cortes insurance claim is clear on the face of the arbitration order.3 Thus, 8 the Court can determine the Claims Services Exclusions applies from a final adjudication 9 of a proceeding constituting the claim. 10 Plaintiff makes a final plea against the conclusion that the exclusion applies, 11 asserting that if the exclusion applies in this case, it would “strip [Plaintiff] of the ‘No. 1 12 reason’ it obtained insurance from Defendant in the first place”—coverage for bad faith 13 liability. Opp’n at 27. Plaintiff argues that in circumstances where application of an 14 exclusion would make coverage illusory, California courts have declined to enforce such 15 exclusions. Id. But “[e]ven if [bad faith claims] are the predominant type of Claim 16 envisioned under the policy,” Plaintiff has “not shown that application of” the Claims 17 Services Exclusion “would eliminate coverage entirely.” Jeff Tracy, Inc. v. U.S. Specialty 18 Ins. Co., 636 F. Supp. 2d 995, 1007 (C.D. Cal. 2009). Without such a showing, the Court 19 cannot say that the coverage is illusory. Moreover, Plaintiff is a sophisticated party whose 20 entire business is handling insurance contracts. That Plaintiff signed this Exclusion is an 21 indication it understood what the policy did and did not cover. 22 In sum, the Court concludes the Claims Services Exclusion applies. 23 /// 24 /// 25

26 3 If the arbitration panel’s Order is deemed to be insufficient to fall under this language, the Court still 27 concludes that the Exclusion applies. This litigation is a “proceeding separate from or collateral to the 28 Claim.” The Court the finds that Plaintiff’s coverage claim against Defendant arises out of and is related 1 B. The Dishonest Act Exclusion 2 Next, Defendant contends that the Dishonest Act Exclusion applies. Under the 3 Dishonest Act Exclusion: 4 A) No coverage will be available under this Policy for Loss or Defense Expenses, from any Claim or Disciplinary Proceeding: 5

6 (1) against any Insured brought about or contributed to by any dishonest or fraudulent act or omission or any willful 7 violation of any statute, rule, or law by any Insured; 8 . . . .

9 The applicability of EXCLUSIONS A(1) and A(2) may be 10 determined by an admission, final adjudication or a finding in the proceeding constituting the Claim or in a proceeding separate 11 from or collateral to the Claim. 12 13 ACM Policy, § IV(A)(1). 14 Defendant contends the arbitration panel found Plaintiff “committed numerous acts 15 of dishonesty.” Mot. at 24. These dishonest acts, argues Defendant, contributed to the 16 panel’s finding of liability for QBE’s claim against Plaintiff. Id. Although the panel did 17 not make an explicit finding of fraud, Defendant contends that “[t]he exclusion’s language 18 ‘establishes the parties’ intent to adopt an expansive [] Exclusion, not one that parses 19 among different types of fraud.’” Id. (citing Nat’l Bank of Cal. v. Progressive Cas. Ins. 20 Co., 938 F. Supp. 2d 919, 931 (C.D. Cal. 2013)). 21 Plaintiff responds, arguing that there has been “no admission, finding, or 22 adjudication of fraud or dishonest conduct.” Opp’n at 29. Plaintiff points to the panel’s 23 decision to decline QBE’s punitive damages request based on any alleged fraud. Id. And 24 even though the arbitration panel found several arguments advanced by Plaintiff 25 “undermined [its] credibility,” there was no finding that Plaintiff was intentionally 26 dishonest. Id. 27 /// 28 /// 1 A fair reading of the arbitration order, however, indicates the arbitration panel did, 2 in fact, make findings of Plaintiff’s dishonest conduct. 3 • The panel found that an email from Plaintiff telling QBE it had “not received a 4 demand” was “not true.” Arbitration Award at 5. The panel agreed with QBE’s 5 expert that this email was “disingenuous.” Id. at 9. 6 • In what the panel called a “disturbing pattern,” Plaintiff “apparently chose to 7 withhold from QBE evidence of its own negligent performance.” Id. 8 • The panel evaluated the testimony of Timothy Walker, QBE’s expert witness, who 9 “believ[ed] the failure to document [Plaintiff’s] belated discovery of the demand 10 letter and withholding this information from QBE was intentional . . . and that 11 ACM’s claims handling fell below industry standards with respect to its disclosure 12 of facts to QBE.” Id. at 9. The panel “agree[d] with Walker that ACM’s lack of 13 candor [was] stunning.” Id. at 10. 14 • The panel found that the information Plaintiff provided to QBE, on which QBE 15 based its defense of the Cardona matter, was “inadequate and misleading.” Id. at 10. 16 • The panel noted that Plaintiff’s repeated denials that it received the original demand 17 letter on February 28, despite “incontrovertible” evidence indicating otherwise, 18 “considerably undermined ACM’s credibility.” Id. at 9 n.9. 19 • In addressing punitive damages, the panel found “it egregious that ACM has 20 repeatedly tried to conceal and misrepresent the fact of timely receipt of the letter 21 demand from the Cardonas.” Id. at 18. 22 • In rejecting Plaintiff’s defense that QBE failed to mitigate its damages, the panel 23 found “that ACM . . . concealed information that QBE would have needed to 24 independently assess it risk and protect itself from extra-contractual liability to its 25 insured.” Id. at 14. 26 • The panel also found Plaintiff “misrepresented its counsel’s prior success” with 27 regard to the failed assignment when it tried to persuade QBE to agree to the 28 1 assignment scheme. Id. The manner in which the assignment was obtained was 2 sufficient to “support a prima facie claim for fraud.” Id. at 8. 3 The Court concludes these findings by the arbitration panel show dishonest acts or 4 omissions sufficient to fall under the Dishonest Acts Exclusion.4 5 Plaintiff contends that even if it was dishonest, Defendant has failed to show any 6 dishonest act “brought about or contributed to” QBE’s claim. Opp’n at 29. Plaintiff argues 7 that the panel found “QBE’s losses were the direct result of ACM’s failure to resolve the 8 Cardona matter within policy limits,” and “any conduct by ACM after the Cardonas’ 9 demand expired—including the arbitration itself—is incidental and could not have 10 ‘brought about’ or even ‘contributed to’ QBE’s claim.” Id. 11 While much of the dishonest conduct occurred after Plaintiff’s initial failure to 12 immediately resolve the Cardona matter within policy limits, the dishonest conduct 13 “contributed to” QBE’s loss nonetheless. In rejecting Plaintiff’s defense that QBE failed 14 to mitigate, the panel found “that ACM . . . concealed information that QBE would have 15 needed to independently assess its risk and protect itself from extra-contractual liability to 16 its insured.” Arbitration Award at 14. Without the necessary information, QBE was unable 17 to limit the damages it sought from Plaintiff; it can therefore be said that the dishonest 18 conduct contributed to higher damages. The panel also made explicit that its finding of 19 liability under the contract was “based on the above evidence,” which included the 20 dishonest acts described above. Id. 21 Based on these findings, the Court concludes the Dishonest Acts Exclusion applies. 22 /// 23 /// 24 /// 25

26 4 To the extent the arbitration panel’s findings do not meet the threshold for the Exclusion to apply, the 27 Court makes those findings here. For purposes of determining whether the Exclusion applies, the Court 28 finds that Plaintiff’s dishonest acts or omissions, as outlined in this Order, contributed to Plaintiff’s 1 C. The Contract Exclusion 2 Finally, Defendant contends the Contract Exclusion bars coverage. Mot. at 24–25. 3 The Contract Exclusion reads as follows: 4 (A) No coverage will be available under this Policy for the Loss or Defense Expenses, from any Claim or Disciplinary 5 Proceeding: 6 . . . .

7 (7) for any actual or alleged liability under any express 8 contract or agreement, unless such liability would have attached in the absence of such contract or agreement. For 9 the purposes of this EXCLUSION (A)(7), an “express 10 contract or agreement” is an actual agreement among the contracting parties, the terms of which are openly stated in 11 distinct or explicit language, either orally or in writing, at 12 the time of its making.

13 14 ACM Policy § IV(A)(7). 15 The Court previously found this exclusion applies because Plaintiff’s liability arose 16 under its contract with QBE. See ECF No. 50 at 9. The Court also found Plaintiff failed 17 to meet its burden to show that an exclusion to the Contract Exclusion—which states that 18 the Contract Exclusion does not apply if liability “would have attached in the absence of 19 such contract or agreement”—applies. Id. The Court based this finding on Plaintiff’s 20 failure to “allege any facts that could support a claim that would impose liability in the 21 absence of the contract between Plaintiff and QBE.” Id. As part of its reasoning, the Court 22 noted that the Arbitration Award was not part of the pleadings and therefore could not be 23 considered for purposes of the motion to dismiss. Id. 24 Now, on the current record, the Court finds that Plaintiff has met its burden to show 25 liability would have attached absent the contract. As Plaintiff noted, QBE asserted multiple 26 extra-contractual claims against Plaintiff. Opp’n at 30; see also Arbitration Award at 3. 27 And the Court agrees the Arbitration Award establishes that liability would have attached 28 absent the contract. Therefore, the Contract Exclusion does not apply. 1 II. Bad Faith 2 Defendant moves to for summary judgment on Plaintiff’s bad faith claims. Mot. at 3 25–31. Because the Court has determined there is no coverage, there can be no cognizable 4 bad faith claim. Waller v. Truck Ins. Exchange Inc., 11 Cal.4th 1, 37 (1995) (“Because 5 [insurer] was under no obligation to . . . indemnify the [underlying] action, it did not breach 6 the implied covenant of good faith and fair dealing.”). The Court therefore GRANTS 7 Defendant’s motion as to Plaintiff’s bad faith claims. 8 III. Duty to Defend 9 Next, Defendant asks the Court to enter judgment in its favor on Plaintiff’s duty to 10 defend claim. Mot. at 31–32. Although the Court finds there is no coverage because of 11 policy exclusions, the duty to defend is still applicable because there was the potential for 12 coverage. 13 An insurer must defend any action that seeks damages potentially covered by the 14 insurance policy, either as alleged in the third-party complaint or known to the insurer at 15 the time of the insured’s tender of defense. Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 16 (1996). “When an insurer provides a defense to its insured, the insurer can be held liable 17 if the defense it provides is inadequate, causing its insured losses which an otherwise 18 adequate defense would have prevented, even though there is an ultimate determination the 19 insurer had no duty to indemnify or defend.” Love v. Fire Ins. Exch., 221 Cal. App. 3d 20 1136, 1152 (1990). The duties required by the insurer when there is potential coverage 21 include: 22 (1) to make immediate inquiry into the facts of any serious 23 accident as soon as practicable after its occurrence; (2) on the 24 filing of suit against its assured to employ competent counsel to represent the assured and to provide counsel with adequate funds 25 to conduct the defense of the suit; (3) to keep abreast of the 26 progress and status of the litigation in order that it may act intelligently and in good faith on settlement offers. 27 28 1 Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 882 (1973). An insurer is not liable for 2 appointed counsel’s negligence unless counsel is instead controlled by the insurer and 3 therefore not independent. See Travelers Ins. Co. v. Lesher, 187 Cal. App. 3d 169, 191 4 (1986). 5 Plaintiff contends Defendant failed to satisfy its duty to defend because (1) its 6 appointed counsel, Mr. Jampol, was not competent, and (2) Mr. Jampol was controlled by 7 Defendant. See generally Compl. ¶¶ 68–76. Defendant contends that, as a matter of law, 8 Mr. Jampol was competent, and Plaintiff has not raised sufficient evidence of control. Mot. 9 at 31–33. 10 First, the Court finds that Mr. Jampol was competent at the time of his appointment. 11 Jampol has practiced law in California since 1972. Id. at 10–11 (citing Knight Decl. Ex. 12 73). He is a certified specialist in legal malpractice, and his practice focuses on “insurance 13 related matters.” Id. at 11 (citing Knight Decl. Ex. 73). His experience includes over 50 14 cases tried to verdict, two of which involved bad faith. Id. These qualifications are 15 sufficient for the Court to conclude that Jampol “was capable of adequately representing” 16 Plaintiff. See Ghiglione v. Discover Prop. & Cas. Co., No. C 06 1276 SC, 2007 WL 17 963250, at *3 (N.D. Cal. Mar. 29, 2007) (assessing competency of appointed counsel based 18 on counsel’s experience at the time he was appointed). 19 Despite these qualifications, Plaintiff argues that the record evidence shows 20 otherwise he was not competent. Most of Plaintiff’s evidence points to Jampol’s actions 21 after he was appointed as counsel. See Opp’n at 24–25. Evidence of mistakes made during 22 the representation, however, is not instructive as to whether counsel was competent at the 23 time he was appointed. Merritt, 34 Cal. App. at 881–82 (“If [appointed] counsel 24 negligently conducts the litigation, the remedy for this negligence is found in an action 25 against counsel for malpractice and not in a suit against [the carrier that appointed him].”). 26 The Court will therefore only consider Jampol’s qualifications when he was appointed. 27 To this point, Plaintiff contends Jampol “had no experience with auto accident cases, 28 and he never handled a bad-faith case involving the notorious law firm representing the 1 Cardonas.” Opp’n at 25. This evidence does not show incompetence. Plaintiff gives no 2 reason why an auto accident case such as this would be more complex than other bad-faith 3 insurance claims that Jampol had experience handling. Nor does Plaintiff identify any 4 skills or knowledge necessary to litigate an auto accident case that Jampol lacked. And 5 Plaintiff points to no authority indicating that to be competent, appointed counsel must 6 have experience litigating against the opposing counsel in that case. In sum, Plaintiff has 7 not shown Jampol was not competent counsel at the time he was appointed. 8 Second, the Court finds Plaintiff failed to present sufficient evidence to show there 9 is a material dispute of fact as to whether Defendant controlled Jampol during the 10 representation. The Court notes that neither Party has found any case that has ruled on a 11 claim that an insurer controlled its appointed counsel. And throughout the litigation, 12 Plaintiff has not provided any standard for the Court to consider this claim under. Rather, 13 Plaintiff has simply raised evidence that supports its arguments and claimed that is enough 14 to find Defendant liable. 15 Defendant, on the other hand, has argued that in order for it to be found liable, the 16 Court must find Jampol was a de facto employee, rather than the presumed independent 17 contractor. Under California law, that determination is made using a multi-factor test, 18 which primarily looks to whether the defendant “retain[ed] all necessary control” over the 19 alleged employees day to day duties and operations. See Ross v. Chipotle Mexican Grill, 20 Inc., 2016 WL 7634445, at *9 (S.D. Cal. Aug. 8, 2016) (citing S.G. Borello & Sons, Inc. 21 v. Dep’t of Indus. Relations, 769 P.2d 399, 408 (1989)). The Court concludes the California 22 Courts are likely to adopt this test if they ever confront such a claim. 23 Considering all the evidence in the light most favorable to Plaintiff, the Court finds 24 Jampol was an independent contractor, not a de facto employee. Plaintiff has failed to put 25 forward evidence sufficient to create a genuine dispute of material fact that Defendant 26 controlled Jampol to such a degree as to create liability. Indeed, rather than control Jampol 27 as an employee, Plaintiff’s evidence is consistent with an insurer’s “right to control a 28 defense.” See also Centex Homes v. St. Paul Fire & Marine Ins. Co., 237 Cal. App. 4th 1 23, 31 (2015) (emphasis added). For example, Plaintiff contends that because Jampol 2 stated he had to get consent from Defendant before moving forward with various litigation 3 decisions, this shows he was controlled. Opp’n at 25 (citing Voris Decl. Ex. 73 at 807; Ex. 4 72 at 787). But in every instance in which Jampol said this, he also stated he first discussed 5 the decisions with and sought approval from Plaintiff. See Voris Decl. Ex. 73 at 807; Ex. 6 72 at 787; see also Centex Homes, 237 Cal. App. 4th at 31 (“An insurer has the right to 7 control a defense.”). Plaintiff also points out that Defendant “directed Jampol to a 8 bilingual lawyer to present the assignment to Cortes.” Opp’n at 25. But recommending a 9 lawyer to help with an assignment that Plaintiff signed off on first is not an indication of 10 control; instead, it indicates Defendant’s interest in the outcome of the litigation and its 11 right to control that litigation, not Jampol’s decision making. Finally, Plaintiff points to 12 “Jampol’s financial relationship” with Defendant, noting that Defendant appointed 13 Jampol’s firm “at least 63 times” in “ten years.” Id. But as Defendant points out, this type 14 of relationship is not abnormal. Mot. at 25. Indeed, Plaintiff’s independent counsel 15 appointed after Jampol noted that he had been appointed by a different insurance company 16 for “between 50 and 100 cases” over the past 10 years. Id. And Plaintiff’s own employee 17 indicated that repeated assignment pf appointed counsel is encouraged. Reply at 14. 18 In sum, Plaintiff’s evidence fails to show that any decision Jampol made was carried 19 out at the direct behest of Defendant without Plaintiff’s approval. Plaintiff instead asks 20 the Court to pile inferences on top of one another to create a possible story in which 21 Defendant controlled Jampol during the litigation. Plaintiff “is alleging conclusions 22 without substance, not facts.” Centex Homes, 237 Cal. App. 4th at 32. The Court finds 23 there is no genuine dispute of material fact that Defendant satisfied its duty to defend. The 24 Court therefore GRANTS Defendant’s Motion as to Plaintiff’s duty to defend claim. 25 IV. Defendant’s Counterclaims 26 Defendant’s counterclaims seek reimbursement for payments made to Plaintiff 27 under a reservation of rights. Mot. at 25. Defendant contends that it can recoup the 28 $4,390,341 it paid Plaintiff on November 29, 2017. Id. Defendant also contends it can 1 |}recoup the $605,569 it paid providing a defense because Plaintiff's claim was never 2 || covered, and the Claims Services and Dishonest Act Exclusions provide for reimbursement 3 defense costs if they apply. Jd. The Court concludes Defendant is entitled to 4 ||reimbursement of the coverage payment and defense costs. 5 CONCLUSION 6 Based on the foregoing, the Court GRANTS Defendant’s Motion for Summary 7 || Judgment (ECF No. 99) in its entirety. The Defendant’s Motion for Judgment on the 8 || Pleadings (ECF No. 62) is DENIED AS MOOT. 9 IT IS SO ORDERED. 10 || Dated: September 3, 2020 . f te 11 on. Janis L. Sammartino D United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28