Metro Services Group v. Travelers Caualty and Surety Company of America

Background

Crown Building Maintenance, Inc. sued Metro and Metro’s officers for breach of contract and trade-secret misappropriation. Metro submitted the matter to Travelers for insurance coverage. Travelers initially denied coverage to Metro but agreed to cover Metro’s officers subject to a reservation of rights. After additional demands, Travelers accepted Metro’s defense subject to a full reservation of rights. Metro alleged that Travelers had agreed to pay Metro’s defense costs without a reservation of rights, but later refused to pay those costs or appoint independent counsel for Metro and its officer.

Metro’s complaint asserted nine claims. Travelers moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally valid claim, to dismiss claims Three through Eight. Claims One, Two, and Nine were not at issue in this motion.

Court’s analysis

Claim Three, Count I: California Civil Code section 2860

Metro alleged that Travelers violated the requirement to provide independent counsel when an insurer and insured have a conflict of interest. The court held that Metro’s complaint showed that Metro had requested independent counsel for its officers, not for Metro itself. Metro therefore did not allege facts showing that it had been injured by Travelers’ refusal to provide counsel to the officers. As to counsel for Metro, the complaint did not allege that Metro had demanded independent counsel or facts showing a conflict of interest. The court granted dismissal of this portion of the claim with leave to amend.

Claim Three, Count II: California Insurance Code section 790.03

The court treated Metro’s references to sections 790.01 and 790.10 as an intended claim under section 790.03. It held that section 790.03 does not create a private civil claim against an insurer. The court dismissed this portion of claim Three with prejudice.

Claim Four: Promissory estoppel

Metro alleged that Travelers promised to pay its defense costs without reservation or limit. The court found that the October 1, 2020 letter appeared to say the opposite because it accepted the defense subject to a reservation of rights. The court also held that Metro could not use the same promise as both the basis for a contract claim and a promissory-estoppel claim when the promise involved bargained-for consideration. The court granted dismissal with leave to amend.

Claims Five and Six: Misrepresentation and fraud

Metro alleged that Travelers promised to pay its legal costs despite allegedly having no intention or reasonable basis to do so, and that Travelers falsely stated that Metro’s officer had waived the right to independent counsel. The court held that Metro did not allege enough facts showing Travelers’ intent, what Travelers knew when it accepted the defense, facts contradicting the October 1 letter, justified reliance, or resulting damages. Because these claims were based on alleged fraud, the court also applied the rule requiring fraud to be pleaded with particular detail. The court granted dismissal with leave to amend.

Claim Seven: Interference with prospective economic advantage

Metro alleged that Travelers diverted money and capital away from new business opportunities. The court held that Metro had not identified the specific economic relationship or opportunity with which Travelers allegedly interfered. The court granted dismissal with leave to amend. For the intentional-interference theory, the court also found that Metro had not adequately alleged an independently wrongful act.

Claim Eight: Racketeer Influenced and Corrupt Organizations Act

Metro asserted claims under sections 1962(a), (b), and (c) of the Racketeer Influenced and Corrupt Organizations Act. The court held that Metro had mainly repeated statutory language without alleging facts showing the required income, enterprise, control, injury, predicate acts, or pattern of racketeering activity. The court also found that Metro’s allegations about other lawsuits involving Travelers did not explain when those lawsuits occurred or how they related to the conduct alleged in this case. The court dismissed the RICO claims and stated that Metro might be allowed to reallege them, while reminding counsel of their obligations under Rule 11.

Disposition

The court granted Travelers’ motion to dismiss. In the conclusion, it dismissed claim Three, Count I, and claims Four through Eight without prejudice. It dismissed claim Three, Count II, with prejudice. Metro was given 21 days to file an amended complaint, and Travelers was required to respond within 21 days after that filing. The order terminated docket number 17.