Stem, Inc. v. Scottsdale Insurance Company

Background

Stem, Inc. sued its liability insurer, Scottsdale Insurance Company, for allegedly breaching the insurance contract by failing to cover Stem’s losses from a 2017 lawsuit. The underlying lawsuit involved claims by certain Stem shareholders concerning a 2013 Series B financing round and a 2017 loan from Stem board member David Buzby to Stem.

In an earlier summary-judgment order, the court held that the 2017 Buzby Loan Claim triggered Scottsdale’s coverage obligations, but that the 2013 Series B Financing Round Claim did not. Stem then moved for partial summary judgment on the proper measure of damages. The motion concerned the type and scope of expenses Scottsdale must pay, not the amount of damages Stem ultimately incurred.

Arguments

Stem argued that California law required Scottsdale to pay all fees and costs Stem incurred while defending its directors and officers in the 2017 lawsuit. Under that position, Scottsdale would owe the defense costs for the entire lawsuit even though only the 2017 Buzby Loan Claim was covered.

Scottsdale argued that an exception permitted allocation of specific expenses when an insurer had undeniable evidence that particular costs related only to uncovered claims. Scottsdale contended that allocation was possible because Stem’s legal invoices showed that Stem had paid no fees or costs relating to the 2017 Buzby Loan Claim. Scottsdale also repeated its argument that it owed no defense based on that claim because the underlying plaintiffs sought only disgorgement.

Ruling

The court granted Stem’s motion for partial summary judgment. The court stated that an insurer that breached its duty to defend is generally liable for the reasonable and necessary costs of defending the entire litigation. It rejected Scottsdale’s proposed allocation for two reasons: the cited case law predated the California Supreme Court’s decision in Buss v. Superior Court, which appeared to eliminate the exception, and, even if the exception still existed, Scottsdale had not presented undeniable evidence that specific expenses could be allocated. The underlying lawsuit was ongoing, and Stem had taken steps to defend against the 2017 Buzby Loan Claim that Scottsdale’s proposed allocation did not account for.

The court also concluded that Scottsdale’s liability was not limited to costs associated with defending David Buzby. The underlying complaint indicated that other Stem board members, including Rice and Carrington, could potentially be liable in connection with the 2017 Buzby Loan Claim. The court further rejected Scottsdale’s arguments about the amount of damages and disgorgement, explaining that Stem had moved only on the proper measure of damages and that the underlying complaint sought damages for the alleged improper loan.

Accordingly, the court ruled that Scottsdale must pay Stem’s attorneys’ fees and costs for the entire 2017 lawsuit.