Unreported / Non-Citable
Background
Bayside Interiors Inc. was a subcontractor on an Applied Materials, Inc. project in Sunnyvale, California. It bought project materials, including a flooring system, and stored them in a Corporate Interior Solutions (CIS) warehouse after learning they were not yet needed. According to the complaint, Bayside discovered in September 2024 that a CIS warehouse manager had been stealing the materials since July 2024. Applied Materials carried construction risk coverage from a group of insurers, and Bayside was listed as an additional insured. The court noted that the parties do not dispute the theft.
Bayside sued seven defendants, including the insurers, for wrongfully investigating and failing to pay more than $1,500,000 in losses. It also sued Engle Martin & Associates, LLC, the independent adjusting firm the insurers hired to investigate the claim. Bayside alleges that on March 18, 2025, an Engle Martin executive general adjuster conveyed the insurers' denial in a letter emailed to an Applied Materials employee, not to Bayside. The letter quoted a policy exclusion for dishonest or criminal acts by anyone else to whom the insured property is entrusted and concluded that no coverage was available. Bayside's only claim against Engle Martin is negligent misrepresentation (Claim 3). It contends the letter falsely represented that the property was entrusted to a CIS employee when Bayside actually entrusted it to CIS itself. Only Engle Martin moved to dismiss.
The Court’s Holding
The court granted Engle Martin's motion to dismiss Claim 3 with leave to amend. It applied California's five elements of negligent misrepresentation and, citing Gilmore v. Wells Fargo Bank, treated the claim as a species of fraud that must be pleaded with the particularity Rule 9(b) requires. The court also treated the letter, which was attached to the complaint, as incorporated by reference, because the parties did not dispute that point.
The court identified several pleading defects. First, Bayside did not sufficiently allege that the letter's representations were directed to Bayside rather than Applied Materials, particularly because Bayside was neither the policyholder nor the recipient. Under Bily v. Arthur Young & Co., Bayside must plead that it belongs to the class for whom the representations were made and that Engle Martin knew with substantial certainty that Bayside or its class would rely on them. Becoming aware of a statement and acting on it is not enough. Second, Bayside did not plead a discrepancy between the letter's language about anyone else to whom the property was entrusted and Bayside's own account that a CIS employee committed the theft. The court said Bayside may be able to explain why the difference between entrusting CIS and entrusting a CIS employee is material, but the complaint did not do so. Third, Bayside did not show that Engle Martin lacked reasonable ground to believe the statement true or that it intended to induce Bayside's reliance. Fourth, bare statements that Bayside reasonably relied and incurred damages did not explain how it relied or what damages resulted.
The court agreed with Bayside that an insured can bring a negligent misrepresentation claim against an insurance adjuster, citing Bock v. Hansen, and noted that Engle Martin did not argue otherwise. The problem was the pleading, not the legal theory. Bayside has 14 days to amend only Claim 3 and must file a redline against its original complaint. It may not amend other claims, add claims, or add parties without leave of court.
Key Takeaways
- An insured can sue an independent adjuster for negligent misrepresentation under California law, but must plead facts tying the challenged statement to the plaintiff.
- A plaintiff who is not the policyholder and did not receive the coverage letter must allege that it belongs to the class for whom the statement was made and that the adjuster knew with substantial certainty it would rely.
- Conclusory assertions of reasonable reliance and damages do not satisfy Rule 9(b); the complaint must explain how reliance occurred and how it caused harm.
- The order is a dismissal with leave to amend, not a final judgment, and it does not decide whether the denial letter was actually inaccurate.
Why It Matters
This is a short pleading ruling, and nothing in it determines whether the denial letter was accurate or whether the insurers owe coverage; the claims against the insurers were not before the court. Its practical value is as a checklist for additional insureds who sue adjusters under the Bily framework.
Because the dismissal grants leave to amend limited to Claim 3, the claim remains alive if Bayside can plead the missing facts in an amended complaint due within 14 days.