# Cornerstone Community Alcohol and Other Drug Recovery System v. Service American Indemnity Company

> District Court, E.D. California · March 1, 2023

URL: https://www.frixlaw.com/law-library/cases/10050816

## Case

- **Court:** District Court, E.D. California
- **Decided:** March 1, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

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8 UNITED STATES DISTRICT COURT
9 FOR THE EASTERN DISTRICT OF CALIFORNIA
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11 CORNERSTONE COMMUNITY Case No.: 1:22-cv-00225-SKO
ALCOHOL AND OTHER DRUG
12 RECOVERY SYSTEM dba KINGS ORDER GRANTING DEFENDANT
GOSPEL MISSION, a Nonprofit ARTHUR J. GALLAGHER & CO.’S
13 Organization, MOTION TO DISMISS SECOND
AMENDED COMPLAINT AS TO
14 Plaintiff, DEFENDANT ARTHUR J. GALLAGHER
& CO.
15 v.
[Doc. 23]
16
SERVICE AMERICAN INDEMNITY ORDER DIRECTING CLERK OF COURT
17 COMPANY, an Oklahoma Corporation; TO TERMINATE CASE
TANGRAM INSURANCE SERVICES,
18 INC., a California Corporation; ARTHUR
J. GALLAGHER & CO., an Illinois
19 Corporation; and DOES 1 THROUGH 50,
inclusive,
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Defendants.
21

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I. Introduction
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On October 28, 2021, Plaintiff Cornerstone Community Alcohol And Other Drug
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Recovery System, dba Kings Gospel Mission, (“Cornerstone”) commenced this action in the
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Kings County Superior Court against Defendants Service American Indemnity Company
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(“SAIC”), Tangram Insurance Services, Inc., (“Tangram”), and Arthur J. Gallagher & Co.
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(“Gallagher”). On December 2, 2021, Plaintiff filed a First Amended Complaint (“FAC”),
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1 voluntarily dismissing Defendant Tangram. The FAC alleged five causes of action: breach of
2 contract, equitable estoppel, breach of implied covenant of good faith and fair dealing, negligent
3 performance of contract, and declaratory judgment. On February 22, 2022, Defendant Gallagher
4 removed the action to this Court pursuant to 28 U.S.C. §§ 1441 and 1446(b)(3), as this Court has
5 original jurisdiction over Plaintiff’s claims based on diversity pursuant to 28 U.S.C. § 1332.
6 (Doc. 1.)
7 On March 1, 2022, Defendant Gallagher filed a motion to dismiss the FAC pursuant to
8 Fed. R. Civ. P. Rule 12(b)(6) based on failure to state a claim. (Doc. 6.) Following briefing by
9 the parties, on November 2, 2022, the Court granted the motion to dismiss.1 (Doc. 21.) Plaintiff
10 was granted leave to amend the first claim for breach of contract and the fifth claim for
11 declaratory judgment as to Defendant Gallagher.
12 On December 2, 2022, Plaintiff filed a Second Amended Complaint (“SAC”). (Doc. 22.)
13 As to Defendant Gallagher, the SAC alleges claims for breach of implied contract and
14 professional negligence. On December 14, 2022, Defendant Gallagher filed a motion to dismiss.
15 (Doc. 23.) Plaintiff filed an opposition on December 28, 2022, and Defendant filed a reply on
16 January 5, 2023. (Docs. 25, 26.)
17 On February 6, 2023, Plaintiff and Defendant SAIC filed a joint stipulation and proposed
18 order for dismissal with prejudice. (Doc. 28.) On February 7, 2023, the Court directed the Clerk
19 of Court to terminate Defendant SAIC from the case, leaving Defendant Gallagher as the sole
20 remaining defendant.
21 II. Factual Background
22 According to the SAC, Plaintiff maintained worker’s compensation insurance as required
23 by California law. Plaintiff’s insurance broker for the five years preceding this action was The
24 Merriam Agency, an entity which was later acquired by Gallagher. Defendant Gallagher operated
25 as Plaintiff’s insurance broker, and Defendant Gallagher’s insurance agent was Jon Barron
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27 1 All parties having consented to the jurisdiction of the Magistrate Judge pursuant to 28 U.S.C. §
636(c)(1), on September 22, 2022, the case was reassigned to the undersigned for all further proceedings.
28 (Docs. 3, 16, 18, 19.)
1 (“Barron”).
2 On December 22, 2020, Gallagher employee Monique Wilson (“Wilson”) contacted
3 Plaintiff by email requesting that Plaintiff provide necessary documentation to effectuate renewal
4 of Plaintiff’s worker’s compensation insurance policy for the year 2021.
5 On January 5, 2021, Plaintiff provided the requested documentation to Barron’s office.
6 On January 12, 2021, Wilson emailed Plaintiff to confirm that the documents requested had been
7 received by Barron’s office, and that Plaintiff’s worker’s compensation insurance coverage would
8 renew effective February 1, 2021, with an annual premium of $11,892. On March 17, 2021,
9 Plaintiff received from Gallagher employee Patty Knee a copy of Worker’s Compensation
10 Insurance Policy No. SATIS0396700 (the “Policy”), issued by Defendant SAIC. (Doc. 22 at 13-
11 55.) The Policy indicated that coverage would commence on February 1, 2021, through February
12 1, 2022, and SAIC was the insurance carrier.
13 In May of 2021, an employee of Plaintiff
14 experienced an on-the-job injury, and Plaintiff tendered a worker’s compensation claim to
15 Gallagher. On May 20, 2021, Barron emailed Plaintiff, stating that the Policy had lapsed and was
16 cancelled due to alleged non-payment of premiums. Plaintiff forwarded Barron a copy of the
17 Policy received on March 17, 2021, and advised Barron that it had not received any delinquent
18 notices regarding non-payment of premiums.
19 Barron responded that there had been a “mix up,” but he would see if the Policy could be
20 reinstated. Barron later informed Plaintiff that reinstatement of the Policy with Defendant SAIC
21 was not possible, and the claim would be denied for lack of coverage.
22 As a result of the cancellation of the Policy, Plaintiff was compelled to cover the full cost
23 of the claim of the injured employee, expend funds to secure replacement coverage, and expend
24 funds to defend an action brought by the employee before the California Worker’s Compensation
25 Appeals Board. Plaintiff was also placed at risk of incurring fines and penalties for not
26 maintaining sufficient worker’s compensation coverage.
27 /////
28 /////
1 III. Discussion
2 A. Standards Applicable to Motions to Dismiss Pursuant to Rule 12(b)(6)
3 A motion to dismiss brought pursuant to Rule 12(b)(6) tests the legal sufficiency of a
4 claim. Conservation Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (quotation marks
5 and citations omitted), cert. denied, 132 S.Ct. 1762 (2012). In resolving a 12(b)(6) motion, a
6 court’s review is generally limited to the operative pleading. Daniels-Hall v. National Educ.
7 Ass’n, 629 F.3d 992, 998 (9th Cir. 2010); Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007);
8 Huynh v. Chase Manhattan Bank, 465 F.3d 992, 1003-04 (9th Cir. 2006); Schneider v. California
9 Dep’t. of Corr., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998). Court may, however, properly consider
10 matters subject to judicial notice and documents incorporated by reference in the pleading without
11 converting the motion to dismiss to one for summary judgment. U.S. v. Ritchie, 342 F.3d 903,
12 908 (9th Cir. 2003).
13 “Dismissal can be based on the lack of a cognizable legal theory or the absence of
14 sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901
15 F.2d 696, 699 (9th Cir. 1990). A plaintiff must set forth “enough facts to state a claim to relief
16 that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167
17 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that
18 allows the court to draw reasonable inferences that the defendant is liable for the misconduct
19 alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
20 In considering whether a complaint states a claim on which relief may be granted, the
21 court accepts as true the allegations in the complaint and construes the allegations in the light
22 most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81
23 L.Ed.2d 59 (1984). The court is not required to assume the truth of legal conclusions that are cast
24 in the form of factual allegations. Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th
25 Cir. 1994). Although Rule 8(a) does not require detailed factual allegations, “it demands more
26 than an unadorned, the defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678. A
27 pleading is insufficient if it offers more “labels and conclusions” or “a formulaic recitation of the
28 elements of a cause of action.” Twombly, 550 U.S. at 555; see also Iqbal, 556 U.S. at 676
1 (“Threadbare recitals of the elements of a cause of action, supported by mere conclusory
2 statements, do not suffice.”). It is inappropriate to assume that the plaintiff “can prove facts which
3 it has not alleged or that defendants have violated the ... laws in ways that have not been alleged.”
4 Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526,
5 103 S.Ct. 897, 74 L.Ed.2d 723 (1983).
6 In ruling on a motion to dismiss brought under Rule 12(b)(6), the court is permitted to
7 consider material which is properly submitted as part of the complaint, documents that are not
8 physically attached to the complaint if their authenticity is not contested and the plaintiff's
9 complaint necessarily relies on them, and matters of public record. Lee v. City of L.A., 250 F.3d
10 668, 688–89 (9th Cir.2001).
11 B. Breach of Implied Contract
12 Plaintiff claims that Plaintiff and Defendant Gallagher entered into a written contract
13 whereby Gallagher, as an insurance broker, covenanted to tender to Plaintiff a valid and
14 enforceable worker’s compensation insurance policy if Plaintiff provided a completed application
15 authorizing Gallagher to do so. Plaintiff contends that it performed all or substantially all of the
16 requirements of the contract. Plaintiff claims that Gallagher failed to perform as promised by
17 failing to acquire and deliver a valid, enforceable policy—instead providing an unenforceable
18 insurance policy that Gallagher knew or reasonably should have known would not have been
19 honored by the carrier. Plaintiff contends that the Policy appeared in all respects facially valid as
20 Gallagher represented; however, the Policy was in fact defective.
21 Defendant Gallagher contends that the claim fails as a matter of law because Plaintiff has
22 not alleged facts supporting its contention that Gallagher breached its obligations. Gallagher
23 contends the SAC relies on the conclusory allegation that it agreed to provide an “enforceable”
24 insurance policy. Gallagher claims it performed what it was contracted to do, which was to
25 obtain the SAIC policy that Gallagher provided to Plaintiff on March 17, 2021. Gallagher states
26 that Plaintiff admits in the SAC that the Policy was in fact cancelled due to Plaintiff’s non-
27 payment of premium, noting that in the SAC Plaintiff asserts that SAIC breached the Policy “by
28 unilaterally canceling Plaintiff’s worker’s compensation insurance coverage.” (Doc. 22 at 5.)
1 Gallagher further contends there are no allegations showing any causal connection between
2 Gallagher’s conduct and the cancellation of the Policy.
3 Plaintiff responds that Gallagher contracted to provide Plaintiff with an enforceable
4 contract. Plaintiff contends Gallagher failed to fulfill its obligations by failing to provide a valid
5 policy. Plaintiff alleges that Gallagher’s actions had the appearance of conformity with its
6 contractual obligations, but Gallagher did not perform as required because it provided Plaintiff an
7 ineffective and unenforceable contract. Plaintiff maintains that Gallagher represented that the
8 Policy had been successfully renewed when in fact that was not true.
9 Defendant Gallagher responds that there are no plausible allegations that it failed to fulfill
10 its duty to assist Plaintiff in securing a policy. Gallagher states that SAIC cancelled the Policy
11 after issuance because SAIC did not received the premium owed by Plaintiff for the Policy.
12 Gallagher further contends there are no factual allegations that it impliedly agreed or promised to
13 ensure that the Policy would remain in effect even if Plaintiff failed to pay the premium.
14 Gallagher contends that the SAC does not allege that Gallagher engaged in any conduct that
15 caused or was connected to Plaintiff’s non-payment of premium, the cancellation of the Policy, or
16 the dispute about whether SAIC provided proper notice of cancellation.
17 In federal court in California, to state a claim for a breach of contract, Plaintiff must
18 sufficiently allege that: (1) a contract exists between the parties; (2) plaintiff performed his
19 contractual duties or was excused from nonperformance; (3) defendant breached his contractual
20 duties; and (4) plaintiff’s damages were a result of the breach. Walters v. Fidelity Mortg. of Cal.,
21 Inc., No. 2:09-cv-3317 FCD-KJM, 2010 WL 1493131 at *7 (E.D.Cal. Aug.14, 2010); Oasis West
22 Realty, LLC v. Goldman, 124 Cal. Rptr. 3d 1115, 1121 (Cal. 2011). A cause of action for breach
23 of an implied contract “has the same elements as . . . breach of contract, except that the promise is
24 not expressed in words but is implied from the promisor’s conduct.” Yari v. Producers Guild of
25 Am., Inc., 161 Cal. App. 4th 172, 182, 73 Cal. Rptr. 3d 803, 811 (2008) (citing Chandler v.
26 Roach, 156 Cal.App.2d 435, 440, 319 P.2d 776 (1957)); see also Retired Emps. Assn. of Orange
27 Cnty., Inc. v. Cnty. of Orange, 52 Cal. 4th 1171, 1178, 266 P.3d 287, 290 (2011) (“a contract
28 implied in fact ‘consists of obligations arising from a mutual agreement and intent to promise
1 where the agreement and promise have not been expressed in words’”) (quoting Silva v.
2 Providence Hospital of Oakland, 14 Cal.2d 762, 773 (1939)).
3 Under California law, all insurance brokers have a duty to “use reasonable care, diligence,
4 and judgment in procuring the insurance requested.” Pacific Rim Mech. Contractors, Inc. v. Aon
5 Risk Ins. Servs. West, Inc., 138 Cal. Rptr. 3d 294, 297 (Cal. Ct. App. 2012). California also
6 recognizes that a breach of contract cause of action arises where the agent or broker breaches an
7 oral agreement to obtain insurance as requested by the client. Saunders v. Cariss, 224 Cal.App.3d
8 905, 909, 274 Cal.Rptr. 186 (Cal. 1990); see also AMCO Ins. Co. v. All Sols. Ins. Agency, LLC,
9 244 Cal. App. 4th 883, 890, 198 Cal. Rptr. 3d 687, 692 (Cal. 2016).
10 Plaintiff fails to set forth sufficient facts to state a plausible claim for breach of implied
11 contract. First, Plaintiff has not plausibly alleged that Gallagher breached the contract. According
12 to the facts presented, Gallagher procured a policy for Plaintiff from SAIC for the period from
13 February 1, 2021, through February 1, 2022, and with an annual premium payment of $11,892.
14 (Doc. 22 at 3, 13-55.) Plaintiff contends that Gallagher did not tender an “enforceable” contract,
15 but instead tendered a “defective” contract. There are no facts to support this contention, and
16 there are no facts from which this contention could be reasonably inferred. Rather, the facts as
17 pled by Plaintiff show that the policy was as purported to be: a contract for the relevant period of
18 time, with the coverage requested, and signed by the President and Secretary of SAIC. (Doc. 22 at
19 13-14.) Further, the SAC alleges that the policy was “unilaterally cancelled” by SAIC “due to
20 Plaintiff’s alleged nonpayment of insurance premiums.” (Doc. 22 at 5-6.) Second, Plaintiff has
21 not plausibly demonstrated causation. There are no facts from which the court can draw a
22 reasonable inference that Plaintiff’s damages were a result of Gallagher’s actions or inactions.
23 Rather, as noted above, the SAC alleges that Plaintiff suffered damages as a result of Defendant
24 SAIC’s action in unilaterally cancelling the contract due to the nonpayment of premiums.
25 Plaintiff has failed to set forth sufficient facts to state a plausible claim for breach of
26 implied contract. Twombly, 550 U.S. at 570. Thus, the first cause of action against Gallagher
27 must be dismissed.
28 //
1 C. Professional Negligence
2 In its previous order dismissing the FAC, the Court dismissed Plaintiff’s negligence claim
3 against Defendant Gallagher. Plaintiff again raises a negligence cause of action against Defendant
4 Gallagher, alleging a cause of action for professional negligence. Plaintiff again fails to establish
5 a claim of negligence against Gallagher.
6 Plaintiff claims Gallagher negligently failed to provide a valid insurance policy. Plaintiff
7 alleges that Gallagher breached its duty of care as a broker by misrepresenting that the policy was
8 valid when in fact it was not.
9 A professional negligence claim must allege “(1) the defendant's legal duty of care
10 towards the plaintiff, (2) the defendant's breach of that duty, (3) injury to the plaintiff as a
11 proximate cause result of the breach, and (4) damage to the plaintiff.” Jones v. Grewe, 189
12 Cal.App.3d 950, 954, 234 Cal.Rptr. 717 (1987) (citation omitted). An insurance agent or broker
13 “assumes only those duties found in any agency relationship such as reasonable care, diligence,
14 and judgment in procuring the insurance requested by an insured.” Paper Savers, Inc. v. Nacsa, 51
15 Cal.App.4th 1090, 1095, 59 Cal.Rptr.2d 547 (1996). In rare instances, an insurance broker or
16 agent may augment his duties to the insured if one of the following occurs: “(a) the agent
17 misrepresents the nature, extent or scope of the coverage being offered or provided ..., (b) there is
18 a request or inquiry by the insured for a particular type or extent of coverage ..., or (c) the agent
19 assumes an additional duty by either express agreement or by holding himself out as having
20 expertise in a given field of insurance being sought by the insured.” Dairy Am., Inc. v. N.Y.
21 Marine and Gen. Ins. Co., 2010 WL 1328740, at *7 (E.D. Cal. 2010).
22 It is undisputed that Plaintiff procured an insurance policy from SAIC, and that [policy
23 was tendered to Plaintiff. Plaintiff makes no allegation that Gallagher misrepresented the nature,
24 extent or scope of coverage being offered, that Gallagher offered a specific type of coverage, or
25 that Gallagher assumed an additional duty. Plaintiff attempts to contend that Gallagher
26 misrepresented the scope of coverage by claiming the policy was invalid when presented, and
27 therefore, the actual coverage was zero. This is a separate argument, however.
28 The policy by all accounts set forth the coverages mutually agreed upon, for the term
1 mutually agreed upon, and signed by SAIC’s President and Secretary. As previously discussed,
2 there are no facts in support of the allegation that the policy was void or invalid, that Gallagher
3 knew the policy was void or invalid, or that Gallagher should have known the policy was void or
4 invalid, and there are no facts from which the Court can make such an inference. Rather,
5 according to the SAC, the policy was unilaterally cancelled by SAIC for nonpayment of
6 premiums.
7 To the extent that Plaintiff alleges Gallagher owed a duty to warn Plaintiff that the policy
8 would be cancelled should Plaintiff fail to pay the premium, the claim fails. As previously
9 discussed in the order dismissing the FAC, a similar situation was presented in Kotlar v. Hartford
10 Fire Ins. Co., 83 Cal.App.4th 1116 (2000). In Kotlar, an insured landlord sued an insurer and
11 insurance brokers for their failure to notify him of the cancellation of a commercial liability
12 policy that the insurer had issued to plaintiff and his tenant. Id. When the tenant failed to pay
13 premiums, the policy was cancelled. Id. at 1119. The plaintiff brought an action for breach of
14 contract, negligence, and other causes of action for the defendants’ failure to properly notify the
15 insured landlord prior to cancelation. Id. at 1118-19. With respect to the plaintiff’s negligence
16 claim, the court upheld its dismissal finding “no case holding that an insurance broker owes a
17 duty of care to a named insured to provide the named insured with notice of the insurer's intent to
18 cancel the policy for nonpayment of premiums.” Id. at 1123. As there is no authority for the
19 contention that there is a duty for an insurance broker to advise the insured of the insurer’s intent
20 to cancel the policy, any claim that Gallagher negligently failed to warn Plaintiff of cancellation
21 due to nonpayment of premiums must also fail.
22 IV. Leave to Amend
23 Federal Rules of Civil Procedure Rule 15(a) provides that leave to amend “shall be freely
24 given when justice so requires,” bearing in mind “the underlying purpose of Rule 15 to facilitate
25 decisions on the merits, rather than on the pleadings or technicalities.” Lopez v. Smith, 203 F.3d
26 1122, 1127 (9th Cir. 2000) (en banc) (alterations and internal quotation marks omitted). When
27 dismissing a complaint for failure to state a claim, “a district court should grant leave to amend
28 even if no request to amend the pleading was made, unless it determines that the pleading could
1 not possibly be cured by the allegation of other facts.” Id. at 1130 (internal quotation marks
2 omitted). Accordingly, leave to amend generally shall be denied only if allowing amendment
3 would unduly prejudice the opposing party, cause undue delay, or be futile, or if the moving party
4 has acted in bad faith. Leadsinger, Inc. v. BMG Music Publ’g., 512 F.3d 522, 532 (9th Cir. 2008).
5 Plaintiff requests that leave to amend be granted. (Doc. 25 at 10.) Given that Plaintiff has
6 been granted leave to amend the claims and no new material facts have been pled to support a
7 plausible claim for relief against Defendant Gallagher, the Court finds that further amendment
8 would be futile.
9 V. Conclusion and Order
10 As set forth above, this Court GRANTS Defendant Gallagher’s Motion to Dismiss (Doc.
11 23), dismissing Plaintiff's Second Amended Complaint as to Defendant Gallagher, without leave
12 to amend. Insofar as Defendant Gallagher was the only remaining defendant in this case, the case
13 is hereby TERMINATED.
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IT IS SO ORDERED.
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16 Dated: February 28, 2023 /s/ Sheila K. Oberto .
UNITED STATES MAGISTRATE JUDGE
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10050816. Public record. Not legal advice.