Unreported / Non-Citable
Background
Shore Management, Inc. and Justin D. Hoech (together, Shore) allege that they bought an errors and omissions policy from United States Liability Insurance Company (USLI). They allege it required USLI to defend and pay costs for covered claims arising from Shore's wrongful acts, but excluded claims involving bodily injury, emotional injury and property destruction. Ricardo and Keely Daximillion sued Shore and Mr. Hoech in California Superior Court. Shore alleges that some causes of action in that suit fell within the exclusions, but that others were potentially covered: negligence, professional negligence, failure to manage and maintain the property, and wrongful eviction. Shore further alleges that it timely reported the suit, that USLI denied coverage on the position that it owed no defense to an entire lawsuit if any cause of action implicated an exclusion, and that Shore then incurred significant defense costs.
Separately, Scottsdale Insurance Company, another Shore insurer, sued Shore in this court seeking a declaration that it has no duty to defend under its own policy. Shore then filed a third-party complaint against USLI for breach of the duty to defend. USLI moved to dismiss under Rule 12(b)(6) and asked the court to notice the policy and four coverage letters. The facts above are Shore's allegations, accepted as true only for purposes of the motion.
The Court’s Holding
The court first granted USLI's unopposed request for judicial notice. The complaint referred to the policy and the coverage letters, they were central to the breach claim, and no one questioned their authenticity. On the merits, the court read the exclusion together with the policy's definition of "Claim." The exclusion bars loss or defense costs for any Claim arising out of, or "in any way involving," bodily injury, emotional distress or tangible property damage. "Claim" includes a judicial proceeding brought against an insured to hold it responsible for wrongful acts. Substituting the definition into the exclusion, the court concluded that the policy unambiguously treats the whole lawsuit as the excluded claim, because a lawsuit is a single proceeding rather than a collection of them. With no ambiguity, interpretation was a question of law that could be decided at the pleading stage.
The court acknowledged the default California rule that an insurer must defend an entire action when some claims are potentially covered, but held that parties may contract around it. It relied on authority enforcing catch-all exclusions that remove an entire suit from the duty to defend. It distinguished Health Net v. RLI and a related Northern District of California decision, where the policy used "claim" inconsistently, and found no such inconsistency here. It also rejected Shore's argument that the exclusion was not conspicuous, plain and clear. Having to consult a defined term elsewhere in the short policy did not make the exclusion unclear.
Because the unambiguous terms left USLI with no duty to defend, Shore failed to state a claim. The court could not say the defects were incurable, so it dismissed with leave to amend rather than with prejudice. Shore has thirty days to file an amended complaint that cures the deficiencies and stands alone, and any claim not realleged is waived.
Key Takeaways
- Where a policy defines "Claim" to include a judicial proceeding, an exclusion for claims involving bodily injury can remove the entire underlying lawsuit from the duty to defend, even if some causes of action are potentially covered.
- The default rule that an insurer defends a mixed action in full is not mandatory, and clear policy language can displace it.
- An exclusion is not inconspicuous or unclear merely because it incorporates a term defined elsewhere in the policy, since reading a contract's provisions together is ordinary interpretation.
- Where policy language is unambiguous, a court may construe it on a motion to dismiss and dismiss a breach-of-duty-to-defend claim without relying on the insured's reasonable expectations.
- This ruling is a dismissal with leave to amend, not a final judgment, and it does not decide Scottsdale's separate declaratory claim or any indemnity question.
Why It Matters
The order shows how a short, cross-referenced definition of "Claim" can decide a duty-to-defend dispute at the pleading stage. Insureds and brokers should read how "Claim" or "suit" is defined, and whether the policy uses the term consistently, before assuming a mixed-action lawsuit will be defended in full. The court's reliance on inconsistent use of "claim" in Health Net indicates where an insured may still argue ambiguity.
This is a district court order, so it is not binding on other courts and is persuasive at most. Shore may still amend, and the order resolves only whether USLI's policy, as written, supports the pleaded breach of the duty to defend.