Colony Insurance Company v. Glenn E. Newcomer Construction

Background

Colony Insurance Company brought a declaratory-relief action seeking a determination of the parties’ rights and obligations under a general-liability insurance policy issued to Glenn E. Newcomer Construction. The dispute arose from an underlying lawsuit alleging breach of contract, negligence, and fraud related to construction and remodeling work. Colony had agreed to defend Newcomer under a full reservation of rights but asserted that the policy did not require it to provide defense or indemnity coverage.

Newcomer’s amended counterclaims alleged breach of contract, anticipatory breach of contract, and breach of the implied covenant of good faith and fair dealing. Newcomer alleged that Colony failed to accept responsibility for indemnity, created a conflict by using the same adjuster in the underlying defense and the coverage lawsuit, and failed to comply with California insurance laws and regulations. Newcomer also alleged that Colony had first declined to provide defense or indemnity and later agreed to continue defending it subject to a reservation of rights.

Rule 12(b)(6) standard

The court evaluated Colony’s motion under Federal Rule of Civil Procedure 12(b)(6), which asks whether the pleaded facts state a legally sufficient and plausible claim. At this stage, the court generally accepts factual allegations as true but does not accept mere labels or conclusions. The court also generally considers only the pleadings, not factual material presented in briefing.

Breach of contract

The court dismissed the theory that Colony breached the policy by failing to indemnify Newcomer. The policy provided coverage for sums that the insured became legally obligated to pay as damages, but Newcomer did not allege that it had become legally obligated to pay damages. Because Newcomer had already received an opportunity to amend this theory, the court dismissed it without leave to amend.

The court also dismissed Newcomer’s allegation that Colony breached the policy by creating a conflict involving the same adjuster. The amended counterclaim did not explain how that alleged conflict breached the insurance contract. Newcomer argued in its opposition brief that Colony was required to provide independent counsel under California Civil Code section 2860, but the court held that the theory was not clearly pleaded in the amended counterclaim. The court dismissed this portion with leave to amend.

Newcomer separately alleged that Colony breached the policy by failing to comply with California insurance regulations and California Insurance Code section 790.03(h)(1). The court focused on the allegation that Colony responded too slowly to Newcomer’s tender of the defense. It held that the amended counterclaim did not identify a specific policy provision that Colony breached by allegedly violating the regulation. This contract theory was dismissed with leave to amend. The court also stated that the amended counterclaim’s allegation under section 790.03(h)(1) was not clear; the final order specified that the contract claim based on that provision was dismissed without leave to amend.

Anticipatory breach

The court dismissed the anticipatory-breach counterclaim with leave to amend. Under California law, anticipatory breach requires a clear, positive, and unequivocal refusal to perform, or conduct making substantial performance impossible. The court found that Newcomer had not alleged such a refusal because Colony later stated that it had reconsidered its position and would continue providing a defense subject to a reservation of rights. Newcomer also had not alleged conduct making performance impossible.

Implied covenant of good faith and fair dealing

The court dismissed this counterclaim with leave to amend. It explained that, under California law, an insurance-based claim for breach of the implied covenant requires an underlying breach of the insurance contract. Because Newcomer had not adequately alleged a contract breach, it had not adequately alleged breach of the implied covenant.

Disposition

The court granted Colony’s motion to dismiss. It dismissed Newcomer’s amended counterclaims with leave to amend, except for the breach-of-contract theories based on failure to indemnify and California Insurance Code section 790.03(h)(1), which it dismissed without leave to amend. Newcomer was required to file any second amended counterclaim within 14 days and to plead its best case. The court also continued the case-management conference to March 3, 2021.