Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 1 of 36 Page ID #:10144 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 10 PEPSI-COLA METROPOLITAN BOTTLING COMPANY, INC., 12 Plaintiff, 13 15 INSURANCE COMPANY OF NORTH AMERICA, INC.; and ONEBEACON AMERICA INSURANCE COMPANY, 16 Defendants. 17 18 19 SC R 14 v. I. ) ) ) ) ) ) ) ) ) ) ) ) ) IP 11 PS CENTRAL DISTRICT OF CALIFORNIA 9 CV 10-2696 SVW (MANx) ORDER GRANTING CENTURY'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT REGARDING ? 2860 IN PART; DENYING CENTURY'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT IN PART; GRANTING PEPSI'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT IN PART [108], [114], [121], [126], [141], [144] BACKGROUND 20 A. 21 This is an insurance action stemming from the release of hazardous The Underlying Actions 22 contaminants from a manufacturing plant in Willits, California 23 ("Willits Site"). 24 Hydraulics, Inc. ("Remco") from about 1948 to 1968, when it was 25 acquired by Stanray Corporation ("Stanray"). 26 of acquisitions and mergers that are not currently relevant to these 27 proceedings, eventually merged with Pepsi-Cola Metropolitan Bottling 28 Company ("Pepsi"). The Willits site was owned and operated by Remco Stanray, through a series Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 2 of 36 Page ID #:10145 1 Pepsi alleges that it has been sued by more than 1,100 claimants 2 in suits stemming from the contaminants released at the Willits Site. 3 Pepsi hired the law firm of Latham & Watkins ("Latham") to defend it in 4 these suits. 5 Avila, et al. v. Willits Environmental Remediation Trust, et al., No. 6 C-99-3491-SI (N.D. Cal.) ("Avila Suit") (filed August 1999); Arlich, et 7 al. v. Willits Environmental Remediation Trust, et al., No. 8 C-01-0266-SI (N.D. Cal.) ("Arlich Suit") (filed January 2001); 9 Nickerman, et al. v. Remco Hydraulics, Inc., et al., No. C-06-2555-SI The relevant suits, in chronological order, include: (N.D. Cal.) ("Nickerman Suit") (filed April 2006); and Whitlock, et al. 11 v. PepsiAmericas, Inc., No. C-08-2742-SI (N.D. Cal.) ("Whitlock Suit") 12 (filed May 2008). 13 for bodily injury or property damage arising from the release of 14 contaminants from the manufacturing plant in Willits. PS 10 IP In all of these suits, the plaintiffs seek damages 15 B. 16 On behalf of its predecessors, Pepsi asserts four claims against a SC R The Current "Core Dispute" 17 primary liability insurer, Century Indemnity Company ("Century") as 18 successor to Insurance Company of North America ("INA").1 19 speaking, the claims are: (1) a breach of contract claim for failure to 20 reimburse defense costs, (2) a breach of contract claim for failure to 21 pay settlements, (3) a declaratory relief claim seeking to establish 22 its rights and the insurer's duties for future liability from the 23 Willits site, and (4) a tortious breach of the implied covenant of good 24 faith and fair dealing for knowing refusals to pay claims or defense Generally 25 26 27 28 1 INA was restructured in 1995, whereby INA allegedly transferred its insuring obligations relating to actual and potential environmental liabilities to CCI Insurance Company, which merged with Century Indemnity Company. 2 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 3 of 36 Page ID #:10146 1 costs and responding to Pepsi's communications. 2 arise from Century's alleged duties to defend and duties to indemnify 3 Pepsi for costs and settlements in the Avila, Arlich, Nickerman, and 4 Whitlock suits. 5 All of these claims Century has raised a variety of defenses to Pepsi's claims and 6 asserted its own Counterclaims. 7 declaration that it owes no duty to defend Pepsi, that a prior judicial 8 determination of the allocated share of defense costs between insurers 9 is binding, and that Pepsi is required to arbitrate any disputes under California Civil Code ? 2860.2 11 12 2 Second, Century seeks monetary damages PS 10 Century seeks a determination and 28 Cal. Civ. Code ? 2860(c). 14 15 16 17 18 19 20 21 22 23 24 25 26 SC R 13 IP 27 As discussed in more detail below, ? 2860 (c) requires arbitration for attorneys fees fee disputes between an insurer and its insured in certain situations. The section states: When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage. The insurer's obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. This subdivision does not invalidate other different or additional policy provisions pertaining to attorney's fees or providing for methods of settlement of disputes concerning those fees. Any dispute concerning attorney's fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute. 3 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 4 of 36 Page ID #:10147 1 for unjust enrichment for payments already made to Pepsi that it 2 contends were not due under its policies.3 3 determination that it is not obligated to indemnify Pepsi in the 4 underlying suits. 5 rights, the defense costs incurred by Pepsi were neither reasonable nor 6 necessary pursuant to California Civil Code ? 2860. 7 Third, Century seeks a Century alleges that pursuant to its reservation of Further, Century asserts that there is no potential for coverage 8 for any of the Underlying Actions for a variety of reasons, including: 9 (1) that defense costs were voluntarily incurred prior to notice, (2) settlements were voluntarily entered without proper notice, and (3) 11 there is no coverage for the actions under the policy terms. 12 extent that there is coverage, Century argues that as per a Statement 13 of Decision After Bench Trial in a Superior Court of California, 14 Century is not obligated to pay more than the judicially-determined 15 allocation of defense costs for Century, which is 12.91%.4 To the SC R IP PS 10 16 C. 17 Century has filed Crossclaims against six of Pepsi's primary 18 liability insurers,5 Travelers Indemnity Company ("Travelers"), 19 20 21 22 The Cross-Defendant Dispute 3 Roughly speaking, it would appear that Century has reimbursed Pepsi around $5 million in defense costs, which is roughly around 5-10% of the defense payments made by Pepsi. 4 23 The case was affirmed in Employers Insurance Company of Wausau v. Travelers Indemnity Company, et al., 141 Cal. App. 4th 398 (2006) ("Wausau"). 24 5 25 26 27 28 For the sake of clarity, the Court does not address OneBeacon's claims against Pneumo Abex in this Order. As to Cross-Defendant Pneumo Abex, OneBeacon seeks a declaration that it owes no duty to defend or to indemnify Pneumo Abex and it also seeks damages for unjust enrichment for money paid to Pneumo Abex. This dispute has been addressed in the Court's prior Order granting Pneumo-Abex's Motion to Dismiss, but with leave to amend. (Doc. No. 107). OneBeacon has not amended its complaint. 4 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 5 of 36 Page ID #:10148 1 Continental Insurance Company ("Continental"), Northwestern National 2 Insurance Company of Milwaukee, Wisconsin ("Northwestern"), National 3 Union Fire Insurance Company of Pittsburgh ("National Union"), 4 Employers Insurance Company of Wausau ("Wausau"), and OneBeacon America 5 Insurance Company ("OneBeacon") (Collectively "Third-Party 6 Defendants"). 7 Century has also sued Allstate, an excess insurer. All of the Third-Party Defendants except for Wausau and OneBeacon 8 settled with Pepsi (at that time, known as Whitman) in 1997 and 1998 to 9 resolve a coverage dispute of environmental claims raised in another case arising from areas including the Willits site. 11 App. 4th at 401. 12 Third-Party Defendants from any obligation to defend or indemnify it 13 against past, present, and future environmental actions. 14 Pepsi also agreed to indemnify the Third-Party Defendants against any 15 claims by third parties under their policies, including other insurers' 16 claims for contribution. 17 of approximately $24 million. 18 Century were not parties to the settlement. 19 compel contribution to claims made by Pepsi from the settling insurers 20 in 2005 and the Superior Court determined that the settling insurers 21 were still liable on claims under the Policies, and further, 22 apportioned liability amongst all the insurers, including the non- 23 settling insurers. 24 ruling in 2006, Wausau also settled with Pepsi, leaving only OneBeacon 25 and Century outside the scope of the settlements. 26 this suit, OneBeacon also settled with Pepsi, leaving Century as the 27 only non-settling primary liability insurer. PS 10 Wausau, 141 Cal. SC R IP As part of these settlements, Pepsi released the Id. Id. at 401. In return, Pepsi received an aggregate Id. at 402. Wausau, OneBeacon, and Wausau filed suit to After the California Court of Appeals upheld the 28 5 After the filing of Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 6 of 36 Page ID #:10149 1 Century alleges that these Third-Party Defendants, and each of 2 them, have a duty to defend and indemnify Pepsi for the underlying 3 suits. 4 defense or indemnity to Pepsi, the Third-Party Defendants are 5 responsible for an equitable share of such an award. 6 seeks reimbursement from the Third-Party Defendants for their equitable 7 share of amounts that Defendants have allegedly paid in excess for 8 Pepsi. 9 or equitable subrogation from these Third-Party Defendants. Century seeks a declaration that to the extent they owe any Century also Essentially, Century seeks contribution, equitable indemnity, Century argues that the Third-Party Defendants' liability has been previously 11 adjudicated by the Superior Court and they are estopped from 12 relitigating these issues. 13 PS 10 IP On November 3, 2010, this Court stayed all indemnity-related 14 claims, counterclaims, and crossclaims pending resolution of the 15 underlying suits. 16 claims against Allstate, an excess insurer, until the pending "core 17 dispute" between Pepsi and Century is resolved. 18 II. SC R 19 On December 13, 2010, the Court also stayed all LEGAL STANDARD Rule 56(c) requires summary judgment for the moving party when the 20 evidence, viewed in the light most favorable to the nonmoving party, 21 shows that there is no genuine issue as to any material fact, and that 22 the moving party is entitled to judgment as a matter of law. 23 R. Civ. P. 56(c); Tarin v. County of Los Angeles, 123 F.3d 1259, 1263 24 (9th Cir. 1997). 25 See Fed. The moving party bears the initial burden of establishing the 26 absence of a genuine issue of material fact. 27 Catrett, 477 U.S. 317, 323-24 (1986). 28 6 See Celotex Corp v. That burden may be met by Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 7 of 36 Page ID #:10150 1 "'showing' -- that is, pointing out to the district court -- that there 2 is an absence of evidence to support the nonmoving party's case." 3 at 325. 4 requires the nonmoving party to go beyond the pleadings and identify 5 specific facts that show a genuine issue for trial. 6 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 7 of evidence or evidence that is merely colorable or not significantly 8 probative does not present a genuine issue of material fact. 9 Fred Meyer, 198 F.3d 1130, 1134 (9th Cir. 2000). Id. Once the moving party has met its initial burden, Rule 56(e) See id. at 323-34; A scintilla Addisu v. Only genuine disputes "where the evidence is such that a reasonable jury could return a 11 verdict for the nonmoving party" over facts that might affect the 12 outcome of the suit under the governing law will properly preclude the 13 entry of summary judgment. 14 Aprin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 919 (9th Cir. 15 2001) (the nonmoving party must identify specific evidence from which a 16 reasonable jury could return a verdict in its favor). 17 III. CURRENT MOTIONS PS 10 SC R IP See Anderson, 477 U.S. at 248; see also 18 Century has four pending motions before the Court. First, Century 19 seeks an order to compel arbitration of Pepsi's dispute regarding 20 Century's duty to defend as a fee dispute under Cal. Civ. Code ? 2860. 21 (Doc. No. 108). 22 declaratory relief claim that Third-Party Defendants must contribute to 23 Pepsi's claims under the Policies as per the Wausau decision. 24 No. 114). 25 declaratory relief claim asserting the applicability of ? 2860 to this 26 suit. 27 on its declaratory relief claim that it only needs to contribute its Second, Century seeks partial summary judgment on its (Doc. Third, Century seeks partial summary judgment on its (Doc. No. 121). Finally, Century seeks partial summary judgment 28 7 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 8 of 36 Page ID #:10151 1 allocated share as per the Wausau decision in response to Pepsi's 2 claims under the policies. 3 (Doc. No. 126). Pepsi has two pending motions before the Court. First, Pepsi 4 seeks summary judgment as to Century's affirmative defenses and a 5 finding that ?2860 does not apply to this suit. 6 Second, and somewhat relatedly, Pepsi seeks partial summary judgment as 7 to its claim that Century has breached its duty to defend. 8 144). 9 (Doc. No. 141). (Doc. No. The Court first reviews Pepsi's Motion for Summary Judgment on Century's breach of its duty to defend before turning to arguments 11 implicating ? 2860. PS 10 12 A. 13 An insurer's "duty to defend is broader than its duty to IP Pepsi's Motion for Summary Judgment on Duty to Defend 14 indemnify." 15 "insurer's duty to defend runs to claims that are merely potentially 16 covered, in light of facts alleged or otherwise disclosed." Id. 17 arises as soon as tender is made and it is discharged when the action 18 is concluded or if it is determined that a claim cannot be in fact 19 covered. 20 and necessary [defense] costs" on the part of the insurer. 21 Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal.4th 38, 58 22 (1977). 23 SC R Buss v. Superior Court, 16 Cal.4th 35, 46 (Cal. 1997). Id. An It The duty to defend "requires the incurring of reasonable "Imposition of an immediate duty to defend is necessary to afford 24 the insured what it is entitled to: the full protection of a defense on 25 its behalf." Montrose Chemical Corp. v. Superior Court, 6 Cal.4th 287, 26 295 (Cal. 1993). 27 reasonably expect that he would stand a better chance of vindication if "In purchasing his insurance the insured would 28 8 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 9 of 36 Page ID #:10152 1 supported by the resources and expertise of his insurer than if 2 compelled to handle and finance the presentation of his case. 3 would, moreover, expect to be able to avoid the time, uncertainty and 4 capital outlay in finding and retaining an attorney of his own." Gray 5 v. Zurich Ins. Co., 65 Cal.2d 263, 278 (1966). He 6 "If the insurer is obliged to take up the defense of its 7 insured, it must do so as soon as possible, both to protect the 8 interests of the insured, and to limit its own exposure to loss. . . . 9 [T]he duty to defend must be assessed at the outset of the case. It follows that a belated offer to pay the costs of defense may mitigate 11 damages but will not cure the initial breach of duty." 12 Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 13 847, 881 (Cal.App.1.Dist. 2000) (internal citations and quotations 14 omitted); see also Buss, 16 Cal. 4th at 49 ("To defend meaningfully, 15 the insurer must defend immediately."). "A breach of the duty to defend 16 in itself constitutes only a breach of contract but it may also violate 17 the covenant of good faith and fair dealing where it involves 18 unreasonable conduct or an action taken without proper cause." Shade 19 Foods, 78 Cal. App. 4th at 881. 20 breach of duty to defend consists of the insured's cost of defense in 21 the underlying action, including attorney fees." Intergulf Development 22 v. Superior Court,107 Cal.Rptr.3d 162, 165, 183 Cal.App.4th 16, 20 23 (Cal. App. 4 Dist. March 24, 2010). Shade Foods, SC R IP PS 10 "The general measure of damages for 24 It is undisputed that Century's insurance policies contain a 25 clause whereby Century has agreed to provide a defense for its insured 26 in third-party actions based on potentially covered risks. 27 Pepsi does not contend that Century failed to acknowledge its duty to 28 9 In fact, Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 10 of 36 Page ID #:10153 1 provide Pepsi a defense for the underlying lawsuits in a timely manner. 2 However, Pepsi's essential allegation is that despite acknowledging its 3 duties, Century did not carry out its duties in a reasonable fashion. 4 Pepsi's Motion for Summary Judgment on Century's breach of its 5 duty to defend is based upon four principal arguments, alleging either 6 that Century failed to defend Pepsi "immediately" or "entirely" as 7 required by California law. 8 timely pay for Pepsi's defense and in some instances, waited over to 9 two years before it paid even a fraction of Pepsi's tendered bills. First, Pepsi argues that Century failed to Second, Pepsi alleges that Century unilaterally and improperly decided 11 to only reimburse Pepsi for 12.91% of its defense costs, despite the 12 Superior Court allocating order in a suit filed by Wausau. 13 Pepsi argues that Century improperly applied Wausau's billing 14 guidelines in either refusing to pay certain costs or reducing bill 15 payments. 16 hourly rates charged by Latham. 18 IP Third, Finally, Pepsi alleges that Century improperly "slashed" the SC R 17 PS 10 (1) Failure to Defend "Immediately" Century argues that California law does not require that an 19 insurer immediately pay defense costs for Cumis counse without a proper 20 investigation. 21 the requirement that an insurer provide an "immediate" defense is not 22 so easily satisfied that an insurer need only recognize its duty to 23 defend an insured in a timely fashion and then engage in investigations 24 in perpetuity. 25 reasonably timely fashion, including by timely paying reasonable and 26 necessary fees for Cumis counsel when appropriate. 27 law may not require an insurer to blindly pay unreasonable and Though there is some support for Century's argument, The insurer must actually defend its insured in a 28 10 Although California Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 11 of 36 Page ID #:10154 1 unnecessary Cumis defense costs for obvious reasons,6 unreasonable 2 delays are undoubtedly grounds for a breach of the insurer's duty to 3 defend. 4 policy benefits or paying less than the amount due is actionable 5 withholding of benefits which may constitute a breach of contract as 6 well as bad faith giving rise to damages in tort."). 7 effectively deprive the insured of its entitled defense under its 8 bargained-for agreement with the insurer. 9 Intergulf,183 Cal.App.4th at 20 ("Unreasonable delay in paying Such delays could Pepsi has put forth the declaration of Evy M. Wild in support of its arguments that Century has breached its duty to defend and the 11 covenant for good faith and fair dealing as a matter of law. 12 147) ("Wild Decl."). 13 Motion because it purports to identify all of the requests sent by 14 Pepsi to Century for defense costs, the amounts of these defense costs, 15 the date these requests were sent, the time it took for Century to 16 respond, and the amount paid by Century, it is appropriate to discuss 17 its admissibility at the outset. PS 10 (Doc. No. SC R IP As the Wild Declaration is central to Pepsi's 18 Century objects to the Wild Declaration and attached Exhibits 2 19 and 3, which contain Pepsi's records of its defense costs, the date and 20 amount of invoices sent to Century, as well as the date and amount of 21 payments made by Century. 22 the fact that it believes Wild's testimony is without personal Century's objections are primarily based on 23 24 25 26 27 28 6 As stated in United Pacific v. Hall, 199 Cal.App.3d 551, 557 (1988), while "Cumis may prohibit an insurer from dictating the tactics of litigation, it does not delegate to Cumis counsel a meal ticket immunized from judicial review for reasonableness." 11 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 12 of 36 Page ID #:10155 1 knowledge, and is based on unauthenticated records.7 Wild is the 2 director of a financial consulting firm in Los Angeles, California, 3 which has been retained by Howrey, Pepsi's counsel, to collect, review, 4 track, and analyze Pepsi's defense costs in the underlying suits. 5 Decl. ? 3. 6 these tasks from Howrey, and Wild is personally involved in reviewing 7 and analyzing the data as part of her regular responsibilities. 8 Decl. ? 4. 9 regarding Century's delay in responding to invoices, attached in Wild Wild's firm receives the documentation needed to perform Wild Wild prepared charts containing the relevant information 10 Exhibit 2 and 3 of her declaration. 11 dates indicated on checks from insurer's payments in her analysis. 12 Wild Supp. Decl. ? 3. 13 copies of related correspondence in support of her declaration. 14 e.g., Wild Decl. Ex. 44. 15 official letterhead of Century's firm, signed by an attorney and dated. 16 The attached correspondence references the invoices that relate to the 17 payments being made. 18 not object to the admission of these checks and letters. PS Wild Decl. ?? 9-10. Wild used the IP Wild attached copies of checks from Century and The attached correspondence is on the SC R 19 See, The attached checks contain dates. Century does The party offering the evidence has the burden of presenting 20 sufficient evidence showing that the evidence is what is purported to 21 be. 22 authenticated by a knowledgeable witness. 23 901(b)(1). 24 charts and a "true and correct copy" is attached. Fed. R. Evid., Rule 901(a). Documentary evidence may be Fed. R. Evid., Rule Here, Wild has herself stated that she herself prepared the Wild Decl. ?? 9-10. 25 26 27 28 7 Century also makes evidentiary objects to the Declarations of David S. Cox and Troy L. Chute, which were made in support of Pepsi's Motion. However, Century's objections relate to collateral matters, the Court focuses on the testimony legally relevant to this Motion. 12 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 13 of 36 Page ID #:10156 1 Further, as Century does not dispute the admissibility of the exhibits 2 on which Wild bases her charts, the Court itself can determine the 3 delays between tender and payments. 4 Wild's reliance on the letters are also meritless, as the letters 5 themselves are authenticated and are clearly party admissions. 6 Any hearsay objections regarding Having found that the charts are admissible, the Court now turns 7 to whether any factual disputes exist as to whether the delays were 8 unreasonable. Some of the delays highlighted in the Wild Declration 9 are egregious. In some instances, Century waited almost two years 10 before it paid an invoice. 11 been over one year for the Avila and Arlich suits between 2003 and 12 2009. 13 close to a year. 14 over a year to reimburse Pepsi for the last two requests submitted by 15 Pepsi. PS For the Nickerman suit, Century's average delay appears to be IP Similarly, for the Whitlock suit, Century has waited SC R 16 The average delay in paying an invoice has The evidence establishes that for the Avila, Arlich, Nickerman and 17 Whitlock suits, Century has breached its duty to defend through its 18 pattern of delaying its reimbursements to Pepsi. 19 does not find that California law requires that an insurer must blindly 20 pay even unreasonable and unnecessary Cumis fees immediately as a 21 matter of law, here, Century has not offered any evidence to show its 22 year-long, and in some instances, two year-long delays could be 23 reasonable.8 Although the Court Though it is clear that the underlying suits created 24 8 25 26 27 28 Pepsi cites to California Code of Regulations, Title 10, Chapter 5, Subchapter 8, ? 2695.7 (b), which states that in "no event more than forty (40) calendar days later, [an insurer must] accept or deny the claim, in whole or in part." Although this regulation has not been applied in the duty to defend context, it is at least some indication of the timeframe considered reasonable in responding to an insured's claim under a policy. 13 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 14 of 36 Page ID #:10157 1 voluminous records of attorneys' fees for Century to review in 2 determining which fees were reasonable and necessary, Century has not 3 offered any persuasive evidence showing that it attempted to 4 investigate these bills in a timely manner or that delays of greater 5 than one year were reasonable to rebut the evidence presented by Pepsi. 6 Moreover, a merely colorable theory that the voluminous records could 7 have caused such delays even for a sophisticated insurer does not 8 present a genuine issue of material fact. 9 that Century's delay in responding to Pepsi's reimbursement requests Although the Court finds was a breach of the duty to defend, the amount of damages remains to be 11 proven.9 12 (2) PS 10 Failure to Defend "Entirely" Pepsi cites to Buss for the general principle that an insurer must 14 defend an action "entirely" under its duty to defend, and by failing to 15 pay all Cumis fees, Century has breached its duty to defend. 16 Cal. 4th at 49 ("To defend meaningfully, the insurer must defend 17 immediately. 18 (citation omitted). 19 insurer parsing potentially covered claims and potentially uncovered 20 claims in its defense of an insured's case ("mixed"cases). 21 court announced the principle that in such a "mixed" action, the 22 insurer must defend the entire action so as not to prejudice the SC R IP 13 Buss, 16 To defend immediately, it must defend entirely.") This principle was announced in the context of an The Buss 23 24 25 26 27 28 9 The general breach of contract damages for a breach of the duty to defend would include a determination of reasonable and necessary attorneys fees and costs. This amount remains to be proven. The Court notes that Pepsi may attempt to seek consequential damages. At this time, however, Pepsi has not shown that it was forced to hire other counsel and nor does it claim that its defense was prejudiced as a result of delays by Century. In fact, Pepsi retained Latham throughout its litigation and paid Latham's defense costs. 14 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 15 of 36 Page ID #:10158 1 insured in its time of need, but may seek reimbursement for claims that 2 were never even potentially covered. 3 Id. at 49-53. Regardless of whether a case is "mixed," the general principle 4 announced in Buss applies when an insurer refuses to pay all the 5 defense costs for the reason that the insured also has other coverage. 6 "[W]hile each of the insurers 'on the risk' has a duty to defend the 7 action in its entirety and the duty is separate and independent from 8 the other insurers, each also has a 'corresponding right of some sort 9 to require the others to share in discharging the duty or at least 10 contribute to its costs.'" 11 Guide: Insurance Litigation (The Rutter Group 2009), at ? 7:677.1 12 (quoting Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 13 70 (1997)). 14 between an insured and an insurer, California courts have held that 15 even if multiple policies are triggered on a single claim, the 16 insurer's right to contribution "has no bearing upon the insurers' 17 obligations to the policyholder. . . . to cover the full extent of the 18 policyholder's liability (up to the policy limits)." 19 Inc. v. Commercial Union Ins. Co., 28 Cal. 4th 1059, 1080 (2002); 20 Armstrong World Indus. v. Aetna Cas. and Sur. Co., 45 Cal. App.4th 1, 21 52 (1996) ("[A] policyholder may obtain full indemnification and 22 defense from one insurer, leaving the targeted insurer to seek 23 contribution from other insurers covering the same loss.") (quotations 24 omitted). 25 reasonable and necessary defense costs based on the contention that 26 there may be other coverage available is a breach of the duty to 27 defend. PS Croskey, Heeseman & Popik, Cal. Prac. SC R IP Similarly, in the context of an indemnification dispute Dart Industries, Further, an insurer's failure to pay the full amount of Croskey, Heeseman & Popik, Cal. Prac. Guide: Insurance 28 15 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 16 of 36 Page ID #:10159 1 Litigation (The Rutter Group 2008), at ? 7:631 ("Where several insurers 2 share the risk, each owes a duty to defend the entire action . . . an 3 insurer who at the outset accepts 'only its pro-rata share' of defense 4 costs is in effect breaching its duty to defend.") (citing Haskel, Inc. 5 v. Sup. Ct. (Aetna Cas. & Sur. Co.) (1995) 33 CA 4th 963, 976, 39 CR2d 6 520, 526, fn. 9). 7 insured. 8 bargained-for benefit under each applicable insurance contract when 9 multiple insurers cover the same risk, California courts have left The reasoning behind this rule is to protect the In finding that the duty to defend is an independent and battles of allocation of costs to separate contribution suits between 11 liability insurers, rather than subjecting the insured to additional 12 litigation. 13 PS 10 IP Century argues that the principle that an insurer must defend the 14 entire action does not have any bearing on the special facts of this 15 case. 16 determination that Century has an equitable right of contribution, but 17 Century contends that it would effectively receive all costs paid 18 greater than the amount required by the allocation back from Pepsi 19 itself. 20 allowing them to "buy back" their policies. 21 found that this settlement did not eliminate the settling insurers' 22 liability to non-settling insurers for equitable contribution for costs 23 and claims paid on the same risk covered by all the insurers. 24 141 Cal. App. 4th at 405-06. 25 Allocation Order of the Superior Court apportioning defense costs 26 between insurers, including Century, which shared 25.81% of the defense 27 costs with OneBeacon under the prior order based upon a time-on-the- SC R Here, not only has apportionment already occurred with a final It appears that Pepsi settled with Third-Party Defendants by However, the Wausau court Wausau, As such, the Wausau court upheld a 2005 28 16 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 17 of 36 Page ID #:10160 1 risk analysis. 2 were also held to be responsible for defense costs, as per the 3 settlement agreements, Pepsi has promised to indemnify the settling 4 insurers for any claims under the policy, including defense costs. 5 Century contends that Pepsi is estopped from arguing otherwise. 6 according to Century, the effect of requiring Century to pay all the 7 defense costs in this case would require a needless procedure: Century 8 would receive equitable contribution from the settling insurers based 9 on its rights and the allocations as determined by the Wausau court, Id. at 406. Although the remaining settling insurers Thus, and the settling insurers would then receive indemnification from Pepsi 11 for the amounts contributed to Century. 12 PS 10 However, Century's reasoning is flawed because there has been no judicial determination regarding all of the effects of Pepsi's 14 settlement agreements as between Pepsi and the settling insurers, and 15 further, Century may not be entitled to contribution from all the 16 insurers. 17 amongst the insurers, it did not fully analyze the legal effect of each 18 of the settlement agreements on Pepsi. 19 that the settlement agreements operate as Century suggests they do, the 20 Court could preclude possible legal defenses and claims under the 21 agreements that Pepsi may assert against settling insurers seeking 22 indemnification. 23 binding as to insurers' contribution rights, it did not fully address 24 Pepsi's indemnification liabilities under the agreements. 25 contractual interpretation issues are not currently before the Court on 26 summary judgment. 27 SC R IP 13 First, though the Wausau court allocated contribution rights If this Court were to assume Thus, though the Wausau court's rulings may be These Second, though the Wausau court also found that the underlying 28 17 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 18 of 36 Page ID #:10161 1 policies covered by the settlements were not exhausted simply because 2 the settlement agreements deemed the underlying insurance policies to 3 be "exhausted," the Wausau court did not and could not have determined 4 whether some of the policies would actually exhaust through settlements 5 and liability determinations in the underlying suits.10 6 various settlements with third parties involved in the underlying suits 7 may have exhausted some of the policies since the ruling in Wausau, 8 thereby possibly terminating an insurer's duty to defend. 9 Heeseman & Popik, Cal. Prac. Guide: Insurance Litigation (The Rutter 10 Group 2009), at ? 7:652 ("Exhaustion of policy limits by payment of a 11 settlement or judgment against the insured may terminate any further 12 defense duty."). 13 and limits - some may have had caps on defense costs, while others may 14 not. 15 would change based on which policies were exhausted and the 16 interpretation of its settlement agreements and policies themselves. 17 If at some point, one of the policies became exhausted, Pepsi could 18 have no obligation to indemnify an insurer because the insurer could 19 have defenses to contribution sought by Century; therefore, Century 20 could remain liable to Pepsi under its duty to defend for an amount 21 greater than 12.91% of the defense costs. In this case, PS Croskey, IP Further, the underlying policies had different terms SC R Naturally, Pepsi's liabilities under its settlement agreements 22 Thus, the seemingly needless procedure of providing defense costs 23 on one hand and receiving the same money back from Pepsi through the 24 other hand would not take place under a scenario where either some or 25 all of the policies have been exhausted or Pepsi has a defense to 26 27 28 10 The issue of the preclusive effect of the 2005 Allocation Order and whether it addressed exhaustion is discussed further in Section III, Part C. 18 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 19 of 36 Page ID #:10162 1 indemnification of some or all of the settling insurers. 2 Century has not provided the Court with the information to properly 3 determine whether none of the policies have yet exhausted.11 Even if the 4 Court had such information, embarking on such a challenge, while also 5 substantively determining the legal effect of Pepsi's settlement 6 agreements, would deprive Pepsi of its bargained-for benefit to a full 7 and timely defense by each insurer and would subject Pepsi to a 8 litigation war on two fronts. 9 breached its duty to defend Pepsi by insisting that it only needed to 10 reimburse 12.91% of the defense costs in maximum, despite its reliance 11 on an allocation order determining the insurer's rights to contribution 12 amongst themselves. Therefore, the Court finds that Century PS 13 Further, IP Pepsi also argues that Century's reliance on Wausau's "billing guidelines" was improper, and that Century breached its duty to defend 15 when it "slashed" Latham's hourly rates.12 16 that by reducing its rates under the billing guidelines and other 17 standards, Century violated its duty to defend and impinged upon 18 Latham's independent professional judgment in rendering legal services 19 as Cumis counsel. 20 control of counsel through the application of these guidelines - a SC R 14 Essentially, Pepsi argues Pepsi asserts that Century has attempted to regain 21 22 11 23 24 25 26 27 28 Pepsi has submitted the Declaration of Troy L. Chute, in which Chute presens records of the exhaustion of certain of the policies for bodily injury arising out of Willits Chute states that the only remaining unexhausted primary coverage is the policies remaining for OneBeacon and Century. However, the impact of Pepsi's recent settlement with OneBeacon is unclear. 12 In some instances, Latham charged over $800 per hour for its partners. Century appears to have cut these rates roughly in half in some instances based on its experience with counsel's rates in similar cases. 19 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 20 of 36 Page ID #:10163 1 violation of Cumis principles as well as a basis for a breach of 2 Century's duty to defend. 3 performed by Wausau's independent auditors, the Flores Group. 4 Flores Group utilized Wausau's "billing guidelines" in recommending 5 various reductions in payments of Latham's bills. 6 Flores Group rejected bills in a certain "block billing" format, for 7 time billed in conferences, for alleged activities which may not have 8 actually occurred, overhead costs, and excessive research costs (just 9 to name a few). For example, the Declaration of David S. Cox, Ex. 1. at 5-8; Ex. 2, 12- 17. 11 The PS 10 Pepsi specifically objects to the audits Pepsi can cite no binding law for the proposition that the insurer's reduction of Cumis fees based on standardized "billing 13 guidelines" is a breach of the duty to defend rather than a dispute 14 over the amount of "reasonable and necessary" defense costs. 15 contends that its application of "billing guidelines" is essentially a 16 Cumis fee dispute to be arbitrated under ? 2860, and not a question of 17 a breach of Century's duty to defend the action "entirely."13 Century SC R IP 12 18 This Court agrees that the use of "billing guidelines" and 19 reducing hourly rates was not a breach of the duty to defend in this 20 case, but addresses the question of whether the dispute can be sent to 21 arbitration in Part B. 22 [Cumis counsel's] professional judgment about how best to competently 23 represent the insureds." 24 61 Cal. App. 4th 999, 1009 (Cal. App. 4d 1998). Such guidelines may not "be permitted to impede Dynamic Concepts, Inc. v. Truck Ins. Exch., However, the evidence 25 26 27 28 13 At least one court has found that a strategy-neutral application of "billing guidelines" and third-party audits of Cumis fees by an insurer are subject to ? 2860(c) arbitration and does not amount to a breach of an insurer's duty to defend. See Wallis v. Centennial Ins. Co., 2010 WL 2612734 at *2 (E.D. Cal. June, 2010) (Shubb, D.J.). 20 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 21 of 36 Page ID #:10164 1 does not show that the "billing guidelines" were applied in a manner 2 that influenced Latham's substantive strategy decisions, but instead, 3 it appears that the purpose and result of the guidelines is to reduce 4 overall fees based on objective standards relating to billing 5 practices. 6 2860 to conform with those ordinarily charged in the community, the 7 application of the guidelines in this case appears to turn on reducing 8 costs that the insurer finds needless or unexplained, under strategy- 9 neutral criteria. Much like reducing the overall hourly billing rates under ? The insurers in this case further separated themselves from direct involvement in the management of Pepsi's case by 11 hiring a third-party auditing group, Flores, to make recommendations 12 regarding the areas where Flores determined costs were duplicative, 13 excessive, or unnecessary. 14 unreasonable and unnecessary defense costs would fly in the face of 15 California law. 16 Co., 114 Cal.App.4th 1185, 1189 (Cal. App. 4d 2004) ("[The] duty [to 17 defend] includes providing competent counsel and paying all reasonable 18 and necessary costs."); Aerojet, 17 Cal.4th at 58 ("[The duty to 19 defend] requires the incurring of reasonable and necessary [defense] 20 costs."). 21 PS 10 IP A finding that insurers must pay even SC R See Gray Cary Ware & Freidenrich v. Vigilant Insurance In conclusion, there is no genuine dispute of material fact 22 surrounding Century's breach of its duty to defend by unreasonably 23 delaying defense cost payments and capping payments at 12.91% of the 24 total defense costs. 25 Judgment on Duty to Defend is GRANTED. 26 Motion for Partial Summary Judgment of Declaratory Relief Re: 27 Allocation of Defense Costs Against Plaintiff is DENIED. Accordingly, Pepsi's Motion for Partial Summary 28 21 For the same reasons, Century's In making Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 22 of 36 Page ID #:10165 1 this determination, the Court does not rely on Pepsi's other arguments. 2 Specifically, Pepsi's argument that Century improperly cut fees by 3 applying billing guidelines and reduced hourly rates is ultimately a 4 dispute over whether the incurred defense costs are reasonable and 5 necessary, and does not rise to the level of a breach of a duty to 6 defend. 7 B. 8 Pepsi argues that under recent California law, the dispute over 9 Century's Motion to Compel Arbitration Under ? 2860 the application of "billing guidelines" and cutting of Latham's hourly 10 rates must be resolved before this Court. 11 controlling California law requires that such disputes be resolved 12 through binding arbitration. 13 approximate state law as closely as possible in order to make sure that 14 the vindication of the state right is without discrimination because of 15 the federal forum." 16 (quotations and citations omitted). 17 California Supreme Court's pronouncements, or if the California Supreme 18 Court has not addressed the question, "we must predict how the Court 19 will decide the issue, based on decisions of [California] courts, 20 decisions from other jurisdictions, treatises, and restatements." 21 Matsuura v. Alston & Bird, 166 F.3d 1006, 1008 n.3 (9th Cir. 1999) (per 22 curiam). 23 PS Century responds that IP In deciding this issue, this Court "must SC R Orkin v. Taylor, 487 F.3d 734, 741 (9th Cir. 2007) Thus, this Court must follow the California law has long recognized that in certain situations, 24 counsel hired by an insurer to defend its insured may have a conflict 25 of interest. 26 select independent counsel at the expense of the insurer ("Cumis 27 counsel") subject to the limitations of California Civil Code, Section In such an event, California law allows an insured to 28 22 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 23 of 36 Page ID #:10166 1 2860(c), which states: 2 6 7 8 9 10 11 12 13 14 15 16 17 PS 5 IP 4 When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage. The insurer's obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. This subdivision does not invalidate other different or additional policy provisions pertaining to attorney's fees or providing for methods of settlement of disputes concerning those fees. Any dispute concerning attorney's fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute. SC R 3 Cal. Civ. Code ? 2860(c) (emphasis added). 18 Pepsi contends that the California Court of Appeals has found that 19 a court must first decide preliminary questions of duty to defend prior 20 to compelling ? 2860 arbitration, and further, that if the court 21 determines there has been a breach of the duty to defend, a liability 22 insurer may not take advantage of the protections and limitations set 23 forth in ? 2860. 24 contains no such requirements. 25 Intergulf,183 Cal.App.4th at 20. Section 2860 itself In Intergulf, an insured sued its insurer for bad faith and 26 breach of contract because, although the insured requested Cumis 27 counsel, the insurer never responded to the insured's request. 28 23 Id. at Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 24 of 36 Page ID #:10167 1 19. 2 costs, the insured filed suit against the insurer and only then did the 3 insurer make two lump sum payments towards defense costs. 4 insurer then sought to compel arbitration for what it characterized as 5 a Cumis fee dispute between it and its insured, under the purview of ? 6 2860(c). 7 damages for breach of contract and bad faith turns on: (1) whether [the 8 insurer] owed [the insured] a duty to defend in the first instance; and 9 (2) whether [the insurer] breached that duty by failing to defend [the Over a year after tendering the request and submitting defense Id. Id. The The court reasoned that the insured's "entitlement to insured] 'immediately' and 'entirely' on tender of the defense." 11 at 21 (citations omitted). 12 would be prejudiced if the insurer could avail itself of ? 2860(c) 13 before the question of duty to defend and breach raised by the insured 14 were determined by the trial court. 15 that unlike other cases, the present dispute was not over the amount or 16 hourly rate to be paid to independent counsel. 17 the insured's breach of contract and bad faith claims were based on the 18 factual question of whether the insurer "failed to accept [the 19 insured's] selection of independent counsel and pay its share of 20 defense costs in a timely manner." Id. 21 PS 10 Id. SC R IP The Intergulf court held that the insured Id. at 21-22. The court found Id. at 22. Instead, The Intergulf court specifically stated that it did not disagree 22 with the holdings of Compulink Management Center, Inc. v. St. Paul Fire 23 & Marine Ins. Co., 169 Cal. App. 4th 289, 87 Cal. Rptr. 3d 72 (2008), 24 and Long v. Century Indemnity Co., 163 Cal. App. 4th 1460, 78 Cal. Rptr. 25 3d 483 (2008). Id. at 21. This affirmation of Compulink poses some 26 27 28 24 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 25 of 36 Page ID #:10168 1 perplexing questions.14 In Compulink, the California Court of Appeals 2 granted a motion to compel arbitration under ? 2860 (c) even though the 3 insured claimed the insurer failed to accept a timely defense, underpaid 4 legal fees, reneged on agreements regarding fees, impeded settlements, 5 and refused to contribute to settlements. 6 at 293. Compulink, 169 Cal. App. 4th The Compulink court reasoned that "the presence of other non- 7 arbitrable issues in an action does not preclude arbitration of Cumis 8 fee issues, as long as any disputed matters regarding the duty to defend 9 . . . are resolved by the trial court." Id. at 300. The Court found PS 10 that "[w]hile [the insured's] complaint alleges wrongful conduct beyond 11 the mere failure to pay attorney's fees, the parties do not dispute that 12 the amount of attorney's fees owed by [the insurer] is a contested issue Pursuant to section 2860, subdivision (c), that issue IP 13 in this action. 14 must be resolved by an arbitrator . . .. [the bad faith settlement SC R 15 claims] fall outside the scope of section 2860's arbitration provision, 16 and thus are to be adjudicated in the trial court." Id. at 300. Thus, 17 under Compulink, the proceedings would take place on two parallel tracks 18 - the issues of bad faith and breach of the duty to defend would remain 19 with the trial court, while the alleged Cumis fee dispute would be 20 21 22 23 24 25 26 27 28 14 The Court is more concerned with the interplay between Intergulf and Compulink rather than Long, in which the California Court of Appeal faced a more distinguishable scenario. The Long decision involved a suit by an attorney against Century seeking attorneys' fees not subject to the cap of ?2860(c), and the "gravamen of the breach-ofimplied-covenant claim [was that the attorney] was not paid the hourly rate he sought." Long, 163 Cal. App. 4th at 1466 n.5. In this suit, however, Pepsi has alleged that Century has failed to make timely payments, in some cases, taking over two years to pay tendered legal fees. Further, Pepsi has alleged, and the Court has found, that Century in fact has breached its duty to defend by insisting it is only obligated to pay 12.91% of Pepsi's defense costs at maximum and by delaying defense payments. Thus, Pepsi's suit is not just "plainly [] over the amount of fees paid." Id. 25 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 26 of 36 Page ID #:10169 1 arbitrated. 2 Id. The Intergulf court distinguished Compulink on the basis that 3 Compulink did not "involve the preliminary question of duty to defend or 4 [a] dispute[] over if and when the insurer recognized the insured's 5 right to select independent counsel." 6 21. Intergulf, 183 Cal. App. 4th at Further, according to the Intergulf court, Compulink was 7 distinguishable because "the insurer agreed to allow Compulink to select 8 independent counsel to defend the third party suit, and Compulink's 9 complaint for breach of contact and bad faith expressly alleged that the Id. at 22. PS 10 insurer underpaid attorney fees and costs." The Intergulf 11 court emphasized this was "a distinction with a difference." 12 (emphasis in original). Id. Both Intergulf and Compulink involved IP 13 substantial allegations by the insured of a complete breach of the 14 insured's duty to defend. The Compulink court explicitly recognized SC R 15 that ? 2860(c) does not only apply when the "sole issue in dispute is 16 the amount or rate of Cumis counsel's fees," rather, it held that "Cumis 17 fees questions must be arbitrated" even if there are additional 18 allegations. Compulink, 169 Cal. App. 4th at 300 (emphasis added). In 19 Compulink, the court principally interpreted the plain meaning of ? 2860 20 to find that ? 2860 mandated arbitration of any fee dispute, while the 21 insurer's other claims would be allowed to proceed to trial.15 22 23 24 25 26 27 28 15 The plain meaning statutory interpretation approach in determining the meaning of ?2860(c) has also been employed by the California Court of Appeal in Gray Cary Ware & Freidenrich v. Vigilant Ins. Co., 114 Cal. App. 4th 1185 (Cal. App. 4d 2004). In Gray Cary, the court was faced with the issue of determining whether ?2860(c) required arbitration of disputes concerning independent counsel's costs, in addition to "attorney[ ] fees" as stated in the statute itself. Id. at 1192-93. Though the court noted that ? 2860(c) does not define "attorney[ ] fees," attorney costs are specifically distinguished from attorney fees in other portions of California codes, and "had 26 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 27 of 36 Page ID #:10170 1 Compulink, 169 Cal. App. 4th at 300. However, in dicta, the Intergulf 2 court noted that if the suit was parsed as in Compulink, the insured 3 could be prejudiced because the arbitrator could determine that the 4 insured's counsel charged fees far in excess of the amounts actually 5 paid by the insurer in the ordinary course of business in similar 6 actions before any trial court determination on a breach of the duty to 7 defend.16 Intergulf, 183 Cal. App. 4th at 22. According to the 8 Intergulf court, in such an instance, it would be unfair to allow an 9 insurer to benefit from the ? 2860(c) rate cap even if it is later PS 10 determined that the insurer breached its duty to defend. 11 Id. The only reasonable way to give meaning to distinctions between 12 Compulink and Intergulf, while acknowledging the Intergulf court's IP 13 explicit affirmation of Compulink, is to find that ? 2860(c) must apply 14 to a Cumis fee dispute as long as an insurer timely acknowledges its SC R 15 duty to pay for Cumis counsel, however, if the insurer does not, then 16 Intergulf mandates that the protections of ? 2860(c) do not apply. 17 Intergulf, the insurer only acknowledged its duty In to provide Cumis 18 counsel years after the insurer was informed that the insured was 19 invoking ? 2860, and only after the insured filed suit against the 20 insurer.17 Id. at 19. In Compulink, however, the insurer acknowledged 21 22 23 24 25 the Legislature intended to require the arbitration of Cumis defense expenses as well as Cumis attorney fees, it could have so specified." Id. at 1193. Thus, under Gary Cary, attorney costs would fall outside of ? 2860(c) arbitration, which is in accordance with the Compulink court's textual approach to interpreting the intent behind ? 2860(c). 16 26 27 28 The Intergulf court's dicta relied neither on the language nor the intent behind ? 2860(c). 17 Arguably, the insurer may never have acknowledged its duty to provide independent counsel in Intergulf. Id. 27 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 28 of 36 Page ID #:10171 1 its duty to provide Cumis counsel in a timely fashion and the issue of 2 whether ? 2860(c) would apply even if an insurer did not timely 3 acknowledge its insured's right to Cumis counsel was not before the 4 court. Compulink, 169 Cal. App. 4th at 293. It is worth repeating that 5 the importance of this distinction is stressed clearly in Intergulf 6 itself, which states Compulink is distinguishable because it did not 7 involve the "preliminary question of duty to defend or disputes over if 8 and when the insurer recognized the insured's right to select 9 independent counsel." Intergulf, 183 Cal. App. 4th at 21. The PS 10 distinction highlighted by the Intergulf court in distinguishing 11 Compulink is supported by a reasonable construction of ? 2860(c) itself. 12 It is implicit that a statute that requires the recognition of IP 13 independent counsel in situations of a conflict of interest, and 14 thereafter provides for arbitration to resolve fee disputes between SC R 15 insurers and independent counsel, would only require arbitration if the 16 insurer actually recognized the insured's right to independent counsel 17 in the first place. 18 See ?? 2860(a)-(c). In this case, Pepsi does not allege that Century failed to timely 19 acknowledge Pepsi's right to independent counsel under ? 2860(c). As 20 such, the dispute regarding whether Century improperly reduced Latham's 21 billed hours and cut Latham's hourly rates is subject to ? 2860(c) 22 arbitration. However, as noted above, both Intergulf and Compulink 23 would require the issues of the breach of the duty to defend and bad 24 faith to remain with this Court.18 25 26 27 28 18 Although it appears that the Intergulf court may have broken with the Compulink court in requiring that issues regarding the duty to defend and bad faith be addressed prior to arbitration under ? 2860(c), this Court is not in a position to address that subject. Intergulf, 183 Cal. App. 4th at 22. Due to the procedural posture of 28 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 29 of 36 Page ID #:10172 1 Pepsi argues that the Court should give the dicta in Intergulf - 2 that any breach of the duty to defend blocks the availability of ? 3 2860(c) - more weight than the analysis in Compulink despite the 4 Intergulf court's own affirmance of Compulink. First, Pepsi argues that 5 other federal district courts have held that ? 2860(c) only applies if 6 an insurer has not breached its duty to defend. Pepsi relies primarily 7 on Atmel Corp. v. St. Paul Fire & Marine, 426 F. Supp. 2d 1039, 1047 8 (N.D. Cal. 2005), which held that "if plaintiff is able to establish a 9 breach of the duty to defend, its damages are not limited by California The Atmel court quoted Concept Enterprises, Inc. v. PS 10 Civil Code ? 2860." 11 Hartford Ins. Co. Of the Midwest, 2001 U.S. Dist. LEXIS 6901, 2001 WL 12 34050685, at *3 (C.D. Cal. May 22, 2001) which states, "To take IP 13 advantage of the provisions of ? 2860, an insurer must meet its duty to 14 defend and accept tender of the insured's defense, subject to a 16 fairness Though these cases appeal to a certain sense of SC R 15 reservation of rights." - that an insurer shirking its duties should not be given the 17 protections of ? 2860(c) and the rate cap imposed therein - these cases 18 do not rely on any clear California law or the language of ? 2860(c) 19 itself in coming to these conclusions. Only the Atmel case cites to any 20 California law, State v. Pacific Indem. Co., 63 Cal. App. 4th 1535, 1544 21 (Cal. App. 2d 1998) ("Pacific"), where the California Court of Appeals 22 inherently conceded the trial court's finding that after a breach of 23 duty to defend, an insurer could not assert rates to be paid for defense 24 should be capped at rates ordinarily paid by insurer. However, as 25 acknowledged in Atmel itself, the Pacific case did not squarely address 26 27 28 this case, the Court has simultaneously addressed the duty to defend question with Century's Motion to Compel Arbitration. 29 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 30 of 36 Page ID #:10173 1 the issue but merely noted in passing that the trial court found that ? 2 2860 did not apply, unlike Compulink and Intergulf, which focus on the 3 issue. Atmel, 426 F. Supp. 2d at 1047. 4 Compulink and Intergulf.19 Moreover, Atmel predates both As noted earlier, this Court is tasked with 5 approximating the meaning of state law, based on decisions of the state 6 courts. 7 As such, Pepsi's argument is unavailing. Second, Pepsi argues that the dicta in Intergulf deserves some 8 weight because the procedural posture of Intergulf supports the view 9 that the California Supreme Court favored a finding that ? 2860(c) PS 10 should not apply if an insurer breaches its duty to defend for any 11 reason, rather than just by failing to acknowledge an insured's right to 12 independent counsel. Pepsi argues that the Superior Court in Intergulf IP 13 cited Long and Compulink in granting an insurer's petition to compel 14 arbitration and continued the trial pending completion of arbitration. SC R 15 Intergulf, 183 Cal. App. 4th at 19-20. The insured in Intergulf then 16 challenged the ruling by filing a writ of mandate in the California 17 Court of Appeal, which was summarily denied for unexplained reasons. 18 Id. at 20. The California Supreme Court then granted the insured's 19 Petition for Review and transferred the matter back to the California 20 Court of Appeal with directions to vacate the order denying mandate and 21 issue an order to show cause why the relief sought should not be 22 23 19 24 25 26 27 Another recent federal district court case addresses this issue, but incorporates the same deficiencies as Atmel. In Seagate Technology LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, __ F.Supp.2d __, 2010 WL 2898299, at *4 (N.D.Cal. July 21, 2010), the court comes to the same conclusion as Atmel by citing only Concept Enterprises, a federal court decision, and Pacific, a California case that does not squarely address the issue. The Seagate court does not discuss Compulink or Intergulf. 28 30 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 31 of 36 Page ID #:10174 1 granted. Id. The language of the decision of the California Supreme 2 Court, however, does not suggest that the California Supreme Court 3 favored a rule barring the application of ? 2860(c) when there is a 4 breach of the duty to defend for any reason. The decision, in its 5 entirety, states: 6 7 The petition for review is granted. 8 The matter is transferred to the Court of Appeal, Fourth Appellate District, Division One, with directions to vacate its order denying mandate and to issue an order directing respondent superior court to show cause why the relief sought in the petition should not be granted. 9 PS 10 11 12 Intergulf Development (Kettner), LLC. v. S.C. (Interstate Fire & IP 13 Casualty Company), 2009 Cal. LEXIS 11461 (Oct. 28, 2009). 14 SC R 15 The inferences suggested by Pepsi are speculative and indiscernible 16 17 18 19 20 from the opinion of the Supreme Court of California. simply been directing the Court of Appeal to explain its reasoning in earlier denying the writ, rather than directing the Court of Appeal to change California law as Pepsi suggests. Accordingly, the Court GRANTS Century's Motion to Compel 21 22 23 24 25 26 27 28 The Court may have Arbitration, but issues aside from the reduction of Latham's hours and the dispute over Latham's hourly rate will remain with the Court. Further, for the same reasons above, the Court GRANTS Century's Summary Judgment Motion seeking an order stating that ? 2860 applies in this action to the portion of the dispute over Cumis attorney fees. \\ \\ 31 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 32 of 36 Page ID #:10175 C. 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 out by the Superior Court ("2005 Allocation Order") is still binding on the settling insurers, and that the allocation order and judgment specifically found that the settling insurers' policies were not exhausted; and therefore, that the settling insurers owe their allocated shares to Pepsi. Under California law, a litigant must have had an appropriate opportunity to litigate an issue in the earlier suit before he or she PS 4 Century has moved for an Order declaring that the allocation set will be issue-precluded, or collaterally estopped, from relitigating that issue in a later suit. 1143 (9th Cir. 2004). Kougasian v. TMSL, Inc., 359 F.3d 1136, If applicable, collateral estoppel operates as an IP 3 Century's Motion Regarding the Estoppel Effect of the Prior Allocation Order on Cross-Defendants estoppel or conclusive adjudication as to such issues in the second action that were actually litigated and determined in the first action. SC R 1 Preciado v. County of Ventura,143 Cal. App. 3d 783, 786-787, fn. 2 (1982). Collateral estoppel applies when the following test is met: First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding. 26 27 Lucido v. Superior Court, 51 Cal.3d 335, 341 (1990). 28 32 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 33 of 36 Page ID #:10176 1 In this case, the Court need not move beyond the first and second 2 elements in denying that the 2005 Allocation Order has the preclusive 3 effect sought by Century: that an affirmative determination had been 4 made that the settling insurers' policies were not exhausted. As 5 previously discussed in Section III, Part A(2), it does not appear that 6 the issue of actual exhaustion was identical to any issue raised or 7 actually litigated in the Superior court.20 The 2005 Allocation Order 8 makes no finding on exhaustion - instead, it only makes a finding of 9 allocation percentages. The Superior Court and the Wausau appellate PS 10 decision both hold that a mere settlement between an insurer and its 11 insured stating that underlying policies are held to be exhausted does 12 not bar another insurer from exercising equitable contribution rights IP 13 against the settling insurer; however, these courts do not make a 14 determination regarding the exhaustion of the underlying policies SC R 15 resulting from the payment of benefits. It appears that the settling 16 insurers stipulated that they would not assert the defense of exhaustion 17 in the Superior Court because they merely sought a declaration that the 18 settlement agreements created exhaustion, but reserved their right to 19 assert actual exhaustion of the policy limits in later actions. As 20 stated in the Chute Declaration, some of the underlying policies have 21 been exhausted since the 2005 Allocation Order, and Pepsi's recent 22 settlements with OneBeacon and Wausau may have changed the allocations 23 of the prior order. Further, apart from its reliance on the 2005 24 Allocation Order, Century has offered no persuasive evidence that the 25 policies are not actually exhausted. 26 Century also asserts that equitable estoppel and judicial estoppel 27 28 20 The Court has taken judicial notice of the 2005 Allocation Order. 33 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 34 of 36 Page ID #:10177 1 apply in this situation. However, having determined that the issue of 2 actual exhaustion was never raised in the prior proceeding, these 3 estoppel arguments have no basis. Further, the Cross-Defendants do not 4 refute that the allocated shares based on the information provided to 5 the Superior Court were binding. Thus, Century's Partial Motion for 6 Summary Judgment is DENIED.21 7 D. 8 In a Motion for Partial Summary Judgment, Pepsi requests that the 9 13 14 15 PS 12 pending Willits suits, that Century's contractual obligation to Pepsi cannot be reduced by any equitable contribution rights Century may have, and that no past or future defense costs may be allocated to Pepsi for IP 11 Court order that Century provide an immediate and complete defense for uninsured periods or to self-insured 1977-1985 policies issued by ThirdParty Defendants Continental, Northwestern, and National Union.22 SC R 10 It is not entirely clear what, if anything, is sought in this 16 17 18 19 20 21 Pepsi's Motion for Partial Summary Judgment as to Certain Affirmative Defenses Motion in regards to Century's duty to defend that is not already determined under the Motions already addressed. As already determined above, the Court finds that Century's acknowledgment of a potential of coverage under its policies requires that it must defend Pepsi in all of the suits in which there is a potential for coverage in their entirety 22 21 23 24 25 26 27 28 The Court notes that to the extent that the policies are determined not to be exhausted, the 2005 Allocation Order could have preclusive effect on the settling insurers. The Wausau court itself found that the Superior Court had "correctly apportioned defense costs." Wausau, 141 Cal. App. 4th at 401. However, the Court need not decide this issue until there has been a determination regarding exhaustion. If exhaustion is found in some or all of the policies, the allocated percentages in the 2005 Allocation Order must necessarily change. 22 Pepsi alleges that during the period from 1977-1985, its predecessor was self-insured for the first $250,000 layer of coverage. 34 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 35 of 36 Page ID #:10178 1 by paying all reasonable and necessary defense costs, despite the 2005 2 Allocation Order. 3 insurers. Century may then seek contribution from settling If Pepsi is seeking an injunction, or a Court Order requiring 4 Century to defend the suits fully, it certainly has not attempted to 5 show any of the requisite criteria that would entitle Pepsi to such 6 relief. 7 Second, Pepsi invites this Court to address issues of self- 8 insurance if it were to reach any allocation issues now. The Court is 9 not inclined to address issues of allocation at this stage. These PS 10 issues appear suited to be addressed alongside the issue of damages for 13 \\\ 14 15 16 17 18 19 20 SC R 12 \\ IP 11 breach of the duty to defend or at a later stage in the proceedings. 21 22 23 24 25 26 27 28 35 Case 2:10-cv-02696-SVW -MAN Document 251 Filed 12/28/10 Page 36 of 36 Page ID #:10179 1 IV. CONCLUSION 2 The Court DENIES two of Century's Motions for Partial Summary 3 Judgment as addressed in this opinion (Doc. Nos. 114 and 126). The 4 Court GRANTS Century's Motions for Partial Summary Judgment to compel 5 arbitration under ? 2860(c) in accordance with this opinion. 6 108 and 121). (Doc. Nos. The Court GRANTS Pepsi's Motion for Partial Summary 7 Judgment on Breach of Duty to Defend and GRANTS Pepsi's Motion for 8 Partial Summary Judgment on Century's Affirmative Defenses to the extent 9 that the Motion raises the same issues already addressed in this opinion PS 10 and conform to this opinion (Doc. Nos. 144 and 141, respectively). The 11 Court purposefully does not address issues of self-insurance and 12 allocation raised in Pepsi's Motion for Partial Summary Judgment on 15 16 17 18 DATED: 19 20 IT IS SO ORDERED. SC R 14 IP 13 Century's Affirmative Defenses. December 28, 2010 STEPHEN V. WILSON UNITED STATES DISTRICT JUDGE 21 22 23 24 25 26 27 28 36 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 1 of 10 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA __________________________________________ CIVIL NO. 10-mc-222 PS : PEPSI-COLA METROPOLITAN : BOTTLING CO., INC. : Plaintiff, : v. : : INSURANCE CO. OF NORTH : AMERICA, INC; and : : ONEBEACON AMERICA INSURANCE CO. : Defendants. : __________________________________________: RUFE, J. IP MEMORANDUM OPINION AND ORDER January 25, 2011 SC R Pending before the Court is Non-Party Resolute Management Inc., Mid-Atlantic Division's Motion to Quash and/or for a Protective Order. Pursuant to Federal Rule of Civil Procedure 78, no oral argument was held. For the reasons that follow, the Motion will be denied. I. Background Resolute Management Inc., Mid-Atlantic Division ("Resolute"), a non-party to this case, currently pending in the United States District Court for the Central District of California, now moves this Court to quash a Rule 30(b)(6)1 Subpoena to testify issued by plaintiff Pepsi-Cola Metropolitan Bottling Company, Inc ("Pepsi"), or, alternatively, to enter a protective order 1 Under Fed. R. Civ. P. 30(b)(6), a "party may name as the deponent a public or private corporation . . . and must describe with reasonable particularity the matters for examination. The named organization must then designate one or more officers, directors, or managing agents, or designate other persons who consent to testify on its behalf." 1 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 2 of 10 excusing Resolute from presenting itself for deposition. A brief review of the pending California litigation is necessary to the disposition of Resolute's Motion. On April 14, 2010, Pepsi sued one of its insurers, Insurance Company of North America ("INA") for its alleged failure to pay Pepsi's defense costs in a series of environmental lawsuits,2 claiming, inter alia, breach of contract and bad faith.3 Century Indemnity Company ("Century"), answered the Complaint and appeared as the defendant on behalf of INA.4 On December 28, 2010, the California District Court granted partial summary PS judgment on Pepsi's motion, ruling that INA/Century had breached its contractual defense obligations through: (1) a "pattern of delaying its reimbursements to Pepsi";5 and (2) its failure to IP fully reimburse Pepsi for its litigation costs.6 The court bifurcated the determination of damages, ordering that attorneys' fees be decided in arbitration,7 and other remaining damages be decided SC R by a jury.8 On November 17, 2010, Pepsi deposed INA/Century pursuant to the Federal Rule of Civil 2 3 Id. at 3. Pepsi-Cola Metro. Bottling Co., Inc. v. Ins. Co. of N. Am., Inc., at 2, No. CV 10-2696 (C.D. Cal. Dec. 28, 2010) (doc. no. 251). 4 INA was restructured in 1995, and was succeeded by CCI Insurance Company, which merged with Century Indemnity Company. For the purposes of this litigation, INA is the same entity as Century, and for ease of reading, shall be referred to as INA/Century throughout this opinion. See Id. at 2 n.1. 5 Id. at 13. 6 Id. at 19. 7 Id. at 31. 8 Id. at 28. 2 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 3 of 10 Procedure 30(b)(6).9 Kevin Winey, an employee of Resolute, appeared as INA/Century's 30(b)(6) designee. Through Winey's deposition, and documents provided by INA/Century to Pepsi in October or November 2010, Pepsi learned that Resolute--a company located in Philadelphia, Pennsylvania--has managed all of INA/Century's claim-handling activities in connection with the underlying suits since 2004.10 Accordingly, Pepsi issued a 30(b)(6) subpoena for Resolute, and two subpoenas for Winey's supervisors, Gregory Kelder and Daniel Brehm. Resolute produced Kelder and Brehm for half-day depositions on December 17, 2010, PS but refused to designate a witness for the 30(b)(6) subpoena. Instead, Resolute filed this Motion to Quash the Subpoena, or Alternatively, for a IP Protective Order. In its Motion, Resolute first argues that the subpoena seeks "unreasonably cumulative and/or duplicative" information that Pepsi already had the opportunity to gather from SC R Winey, Kelder, and Brehm.11 Second, Resolute claims that the subpoena seeks the disclosure of irrelevant, privileged and confidential information. Finally, Resolute claims that the burden imposed by the subpoena outweighs its likely benefit. In response, Pepsi argues that the Resolute 30(b)(6) deposition is necessary to the development of its bad faith claim, and that it seeks information not yet obtained through any other discovery. The Court has considered the Motion, Response in Opposition, Reply and Sur-reply, and this matter is now ready for disposition. 9 Def.'s Opp'n at 3. 10 Decl. of Michael Molland, ? 3 ("Molland Decl."). 11 Mot. to Quash at 7-8. 3 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 4 of 10 I. DISCUSSION The Federal Rules of Civil Procedure allow the examination of a deponent concerning "any matter, not privileged, which is relevant to the subject matter involved in the pending action."12 Relevance under Rule 26(b)(1) is therefore construed more broadly for discovery than for trial; the information sought does not need to be admissible at trial, so long as the discovery appears reasonably calculated to lead to the discovery of admissible evidence. Therefore, relevancy is not limited to the precise issues set out in the pleadings.13 Notably, "[a] district court PS whose only connection with a case is supervision of discovery ancillary to an action in another district should be 'especially hesitant to pass judgment on what constitutes relevant evidence IP thereunder."14 Therefore, if relevance is unclear, Rule 26(b)(1) indicates that the court should be permissive.15 SC R "While broad, the scope of discovery is not boundless."16 Courts have the discretion to limit relevant discovery under certain circumstances: The frequency or extent of use of the discovery methods otherwise permitted under these rules and by any local rule shall be limited by the court if it determines that (i) the discovery sought is 12 Fed. R. Civ. P. 26(b). 13 Oppenheimer Fund, Inc. v. Sanders, 437 US 340, 351 (1978). 14 Truswal Sys. Corp. v. Hydro-Air, 813 F.2d 1207, 1211-12 (quoting Horizons Titanium Corp. v. Norton Co., 290 F.2d 421, 425 (1st Cir. 1961); see also Application of Zenith Radio Corp., 1 F.R.D. 627, 630 (E.D. Pa. 1941); In re Gateway Eng'rs, Inc., No. 2:09-mc-209, 2009 WL 3296625, at *3 (W.D. Pa. Oct. 9, 2009). 15 In re Gateway Engineers, Inc., 2009 WL 3296625 at *3. 16 Unicasa Mktg. Grp., LLC v. Spinelli, No. 04-4173, 2007 WL 2363158, at *2 (D.N.J. Aug. 15, 2007). 4 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 5 of 10 unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery had ample opportunity by discovery in the action to obtain the information sought; [or] (iii) the burden or expense of the proposed discovery outweighs its likely benefit. . . .17 Further, under Rule 45(d)(1), a person who has been served with a discovery subpoena may move either for a protective order under Rule 26(c) or for an order quashing or modifying the subpoena under Rule 45(c)(3). Here, Resolute has moved this court to quash the 30(b)(6) PS subpoena, or, alternatively, to enter a protective order excusing it from appearing at the deposition. We address Resolute's arguments in turn. Resolute's Motion for a Protective Order IP A. Under Federal Rule of Civil Procedure 26(c), it is "well-established that a party wishing SC R to obtain an order of protection over discovery material must demonstrate that "good cause" exists for the order of protection."18 "Good cause" to issue a protective order exists when disclosure will result in a "clearly defined and serious injury to the party seeking the protective order."19 The alleged injury must be articulated with specificity; "[b]road allegations of harm, unsubstantiated by specific examples or articulated reasoning" are insufficient.20 In the present case, Resolute has not demonstrated that the subpoena would cause a 17 Fed. R. Civ. P. 26(b)(C)(i)-(iii). 18 Pansy v. Borough of Stroudsburg, 23 F.3d 772, 786 (3d. Cir. 1994). 19 Id. 20 Id. (citing Cipollone v. Liggett Grp., Inc., 785 F.2d 1108, 1121 (3d Cir. 1986), cert. denied, 484 U.S. 976 (1987)). 5 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 6 of 10 "clearly defined and serious injury."21 Although Resolute claims that the subpoena "seeks to delve into irrelevant and commercially sensitive areas of Resolute's operations, including the handling of other active cases and Resolute's business relationship with other corporate entities, all of which are privileged, confidential and protected," it identifies neither the source of the claimed privilege, nor the anticipated injuries that will result from disclosure.22 Resolute's conclusory statements are insufficient to carry Resolute's burden to show good cause: "Absent a showing that a defined and serious injury will result . . . a protective order should not issue.23 PS Therefore, the Court declines to enter a protective order excusing Resolute from answering B. IP Pepsi's 30(b)(6) subpoena. Resolute's Motion to Quash SC R Federal Rule of Civil Procedure 45(c)(3)(A) authorizes a court to quash or modify a subpoena if it subjects a person to an undue burden.24 "Accordingly, a District Court may quash or modify a subpoena if it finds that the movant has met its heavy burden of establishing that compliance with the subpoena would be 'unreasonable and oppressive.'"25 This burden is 21 22 23 Glenmede Trust v. Thompson, 56 F.3d 476, 483 (3d Cir. 1995). Mot. to Quash at 13. Glenmede Trust Co., 56 F.3d at 485. 24 Rule 45(c)(3)(A) also authorizes the Court to quash a subpoena if it requires the production of confidential commercial information. Because the Court has addressed the insufficiency of Resolute's confidentiality claims, supra, there is no need to repeat that analysis here. 25 Composition Roofers Union Local 30 Welfare Trust Fund, et al. v. Graveley Roofing Enter., Inc., 160 F.R.D. 70, 72 (E.D. Pa. 1995) (emphasis added). 6 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 7 of 10 "particularly heavy to support a motion to quash as contrasted to some more limited protection."26 In deciding whether to grant the motion to quash, the district court must balance the relevance of the discovery sought, the requesting party's needs, and the potential hardship to the party subject to the subpoena.27 Here, Resolute argues that the subpoena should be quashed because "it is cumulative and duplicative, irrelevant to the issues germane to the California Coverage Action, and otherwise seeks privileged, confidential, and commercially sensitive information." In response, Pepsi PS argues that the subpoena topics are relevant because Resolute has been in complete control of Pepsi's litigation claims since 2004, and because "Pepsi's bad faith claim against INA is based on Resolute's decisions to decline coverage and reduce payments of Pepsi's defense costs and IP repeated lengthy delays in making any payments that have been made."28 Pepsi also alleges that previous depositions indicate the need to investigate "whether the reinsurance relationship SC R between NICO and Resolute resulted in a conflict of interest or institutional bias that caused the denial or partial denial of its claims."29 To determine the relevancy of Pepsi's request, it is necessary to construe the elements of its bad faith claim. Under California law, "an insurer's denial or delay in paying benefits gives 26 Westinghouse Elec. Corp. v. City of Burlington, 351 F.2d 762, 766 (D.C. Cir. 1965). 27 In re Automotive Refinishing, 229 F.R.D. 482, 296 (E.D. Pa. 2005) (noting that a "[a] discovery objection based on 'undue burden' can be evaluated by considering factors such as 'relevance, the need of the party for the documents, the breadth of the document request, the time period covered by it, the particularity with which the documents are described and the burden imposed"). 28 29 Opp'n at 9. Opp'n at 10. 7 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 8 of 10 rise to tort damages only if the insured shows the denial or delay was unreasonable."30 Because bad faith implies unfair dealing rather than mistaken judgment, a party bringing a bad faith claim must show a "conscious and deliberate act." Therefore, during the jury trial to determine damages, Pepsi must show that INA/Century unreasonably delayed and denied payments.31 In order to gather evidence to support its claim, Pepsi must investigate both the relationship between Resolute and INA/Century and Resolute's claims handling practices. Although Resolute claims that the information sought--specifically, Resolute's operating protocols and PS business practices--is irrelevant to the breach of contract and bad faith allegations, this Court disagrees. To show bad faith, as opposed to mere negligence, "a review of the policies and procedures of the companies in order to determine whether those policies instructed claims IP handlers to act in bad faith or provided them with an incentive structure that led to bad faith actions is necessary."32 Although it is true that "courts are reluctant to open up insurance SC R companies to broad discovery of their internal practices and policies without some kind of prima facie showing that there is a valid reason," Pepsi has sufficiently provided evidence of the relevance of this subpoena.33 Resolute also argues that even if the topics sought by the Resolute subpoena are relevant, the subpoena is unreasonably cumulative and duplicative of the topics covered in the Winey, Brehm, and Kelder depositions. Thus, Resolute argues that because its involvement in the claims 30 Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 723 (2007). 31 Id. at 726. 32 Saldi v. Paul Revere Life Ins. Co., 224 F.R.D. 169, 177 (E.D. Pa. 2004). 33 Id. at 178. 8 Case 2:10-mc-00222-CMR Document 5 Filed 01/25/11 Page 9 of 10 at issue has been fully explained in previous depositions, this discovery is irrelevant and overly broad. However, Pepsi has identified the specific areas where the testimony of the prior deponents was lacking. Specifically, the deponents were unable to address the source of the delays in the payment of Pepsi's claim, Resolute's relationships with the insurers and reinsurers, and the overall scheme of decision-making at Resolute--all topics relevant to Pepsi's bad faith claim.34 Accordingly, the proposed discovery is neither cumulative nor redundant. III. Conclusion PS Therefore, in accordance with the foregoing reasons, the Court will deny SC R IP Resolute's Motion to Quash and/or for a Protective Order. An appropriate order follows. 34 See Opp'n at 11-13. 9 Case Document5 Filed 01/25/11 Page 10 of 10