Colony Insurance Company v. Glenn E. Newcomer Construction

Background

Colony filed an action for declaratory relief, meaning it asked the court to determine the parties’ rights and obligations under a general liability insurance policy issued to Glenn E. Newcomer Construction. The dispute concerned claims brought by Hayley Melidonis against Newcomer in an underlying lawsuit involving alleged cost overruns, defective work, negligence, breach of contract, and fraud arising from a condominium renovation project.

Colony alleged that it agreed to defend Newcomer in the underlying lawsuit while reserving its rights, but that the policy did not cover the claimed damages or that policy exclusions applied. Newcomer’s second amended counterclaims alleged breach of contract, anticipatory breach of contract, and breach of the implied duty of good faith and fair dealing. Newcomer sought, among other things, independent counsel at Colony’s expense under California Civil Code section 2860, as well as attorneys’ fees, litigation costs, and punitive damages.

Colony moved to dismiss the counterclaims under Federal Rule of Civil Procedure 12(b)(6), which tests whether a pleading states a legally sufficient and plausible claim.

Breach of contract and independent counsel

Newcomer alleged that Colony breached the insurance policy by refusing to provide independent counsel, commonly called counsel chosen by the insured when the insurer’s defense creates a qualifying conflict of interest. Under California law, a reservation of rights alone does not automatically create that conflict. The conflict must be actual and significant, rather than merely possible or theoretical, and the insurer’s retained defense counsel must be able to control an issue affecting coverage in a way that conflicts with the insured’s position in the underlying case.

Newcomer relied mainly on the fact that Colony was defending the underlying lawsuit under a reservation of rights while also pursuing this coverage action. Newcomer alleged that whether it performed work, supplied workers, or provided products for the condominium could affect Colony’s coverage arguments and the underlying defense. The court found that allegation unclear and insufficient because Newcomer did not explain how Colony’s defense counsel could control the outcome of that issue or how the reservation of rights required factual or legal positions contrary to Newcomer’s position in the underlying lawsuit. The court also found Newcomer’s allegation that a conflict “will exist” to be conclusory.

The court therefore held that Newcomer had not plausibly alleged an actual conflict or a duty under California Civil Code section 2860. It dismissed the breach-of-contract counterclaim based on the refusal to provide independent counsel without leave to amend because Newcomer had already been given an opportunity to amend it.

Anticipatory breach

Newcomer alleged that Colony had anticipatorily repudiated the insurance contract by making clear that it would not indemnify Newcomer for the underlying lawsuit. Under California law, anticipatory breach requires a clear, positive, and unequivocal refusal to perform, or conduct that makes performance impossible.

The court found that Newcomer had not alleged a clear refusal by Colony to indemnify it if the coverage dispute were resolved in Newcomer’s favor. Although Colony had at one point declined to provide a defense or indemnity, it later agreed to continue defending Newcomer under a reservation of rights and filed this action seeking a declaration that it had no defense or indemnity obligation. Newcomer also did not allege conduct making performance impossible. The court dismissed this counterclaim without leave to amend.

Implied duty of good faith and fair dealing

Newcomer’s third counterclaim alleged that Colony breached the implied duty of good faith and fair dealing in the insurance contract. The court explained that, under California law, this claim cannot proceed without an underlying breach of the insurance contract. Because Newcomer had not adequately alleged a contract breach, the court dismissed this counterclaim without leave to amend.

Disposition

The court granted Colony’s motion to dismiss the second amended counterclaims. It dismissed each counterclaim without leave to amend, and the conclusion states that Newcomer’s counterclaims were dismissed with prejudice.