RLI Insurance Company v. Engineering

Background

RLI Insurance Company brought the lawsuit concerning four excess insurance policies issued for 2014, 2015, 2016, and 2017. RLI alleged that Langan falsely answered questions 28(b) and 28(d) on applications for the 2014, 2015, and 2016 policies. Those questions asked whether the applicant knew of circumstances that might result in a claim and whether the applicant knew of injuries or property damage at projects where it had provided professional services.

According to the complaint, Langan's alleged knowledge arose from its 2010 purchase of assets from T&R Consolidated and acquisition of many of T&R's principals and staff. T&R had performed geotechnical engineering work on San Francisco's Millennium Tower, including reports about the building's projected settlement. The complaint alleged that, during due diligence before the purchase, Langan learned that T&R had notified its insurer in 2008 about a potential claim involving excessive or differential settlement. Langan later notified its primary insurer of a circumstance involving T&R's alleged work and the resulting allegations of structural damage. In 2016, Langan was named in lawsuits based on successor liability for T&R's work.

The defendants moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which requires dismissal when a complaint does not adequately state a claim for relief. The court considered the complaint's factual allegations true for purposes of the motion and drew reasonable inferences in RLI's favor.

Claims 1–4: Rescission

RLI's first four claims sought rescission, meaning cancellation, of the insurance policies. The court stated that RLI had to allege that the insured misrepresented or concealed information in the applications, that the information was material, and that the insured knew of the material misrepresentation or concealment.

The defendants argued that question 28(b) asked for opinions rather than facts, that Langan answered question 28(d) truthfully, that the answers were not material to RLI's decision to issue the policies, that Langan had no duty to disclose T&R's potential liability, that RLI waived its right to rescind, and that RLI issued the 2017 policy on a different basis.

The court rejected those arguments at the pleading stage. It held that the complaint adequately alleged misrepresentation and concealment, materiality, and that the claims were filed within the applicable limitations period. The court said the defendants' arguments might succeed at trial or on a motion for summary judgment but did not justify dismissal at that point. The motion to dismiss was denied as to claims 1 through 4.

Claims 5–6: Fraud and Negligent Misrepresentation

The court explained that a fraud claim under California law requires a misrepresentation, knowledge that it was false, an intent to induce reliance, justifiable reliance, and resulting damage. The court found that RLI adequately alleged a misrepresentation and knowledge of falsity.

The court nevertheless held that RLI did not adequately allege damages. RLI alleged only that it had incurred costs and might have to spend additional money because it issued the allegedly fraudulently induced policies, with the amount to be proven at trial. The court found those allegations vague and speculative. The motion to dismiss was granted as to claims 5 and 6, with leave to amend. The court also granted the defendants' motion to strike RLI's request for punitive damages, doing so without prejudice.

Claims 7–8: Declaratory Relief

The seventh and eighth claims sought declaratory relief. The defendants argued that RLI confused notice of a lawsuit with notice of circumstances that might lead to a claim and incorrectly characterized the policies as "claims made and reported" policies rather than "claims made" policies.

The court held that RLI had adequately pleaded these claims. It stated that the defendants' arguments might be persuasive at the summary-judgment stage but did not support dismissal. The motion to dismiss was denied as to claims 7 and 8.

Disposition

The court's conclusion states that the defendants' motion to dismiss was denied in part and granted in part. It was denied as to claims 1 through 4 and 7 through 8. Claims 5 and 6 were dismissed with leave to amend, and any amended complaint had to be filed by September 27, 2019. The court also granted the defendants' requests for judicial notice. Judge Susan Illston vacated the hearing on the motion but stated that the case-management conference would proceed as scheduled.