Heritage Bank of Commerce v. Zurich American Insurance Company

Background

Heritage purchased first- and sixth-layer excess insurance policies from Zurich. The policies followed a primary policy issued by Federal Insurance Company and covered the August 2018–2019 period. While renewing the policies for the August 2019–2020 period, Heritage exchanged emails with a Zurich underwriter in July 2019. Heritage later argued that this correspondence gave Zurich notice of circumstances that could lead to a claim.

The court had dismissed Heritage’s original complaint on August 17, 2022, after finding that Heritage had not submitted notice of a claim during the 2018–2019 policy period. The court allowed Heritage to amend, but stated that it was unclear whether Heritage could fix the defects. Heritage filed a First Amended Complaint.

Notice requirement

The court applied Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not allege enough facts to state a legally sufficient claim. The court held that the additional details in the amended complaint did not change its earlier conclusion that Heritage failed to comply with Zurich’s claims-made-and-reported policy.

The court emphasized that Heritage itself acknowledged that its notice of circumstances did not substitute for notice of an actual claim and that it gave notice of an actual claim in 2021, when the underlying claims were made. The court also rejected Heritage’s argument that the email to Zurich’s underwriter satisfied a notice provision in Federal’s policy. Because the notice was not sent to the proper place, Zurich did not actually receive notice of the claim or the circumstances that could lead to one.

The court rejected Heritage’s reliance on substantial compliance, a doctrine that can sometimes excuse less-than-perfect compliance with a contract condition. The court explained that substantial compliance still requires substantial compliance with the policy’s notice terms; sending information to an underwriter was not enough when the policy required notice to a claims department. The court also found no basis for equitable relief, meaning relief based on fairness, because the circumstances did not present the unusual situation that could justify excusing the notice requirement.

The court further rejected Heritage’s assertion that industry custom required the underwriter to forward the correspondence to Zurich’s claims department. It treated that assertion as an unreasonable inference based on material outside the complaint, rather than as an adequate factual allegation. The court also rejected Heritage’s argument that substantial performance was necessarily a factual issue that could not be decided on a dismissal motion, finding the cases Heritage cited distinguishable.

Insolvency exception

Zurich separately argued that coverage was excluded by Section 3l of the Followed Policy. That provision excluded losses based upon, arising from, or resulting from the insolvency of a bank, banking firm, broker, securities dealer, or other person or entity, or the inability of such an entity or person to make a payment, settle, or complete a transaction. The provision contained an exception for certain wrongful acts solely connected with an insured’s investment on behalf of a claimant in the stock of one of those entities.

The court explained that an insured must show a potential for coverage, while the insurer must show that no such potential exists. It also explained that California law gives broad meaning to policy language stating that a claim “arises from” an event, requiring only a minimal causal connection or incidental relationship.

The court considered Heritage’s argument that the underlying actions involved Heritage’s alleged breaches of duty and that two of the three actions at issue—the Solarmore and SEIF actions—were civil actions rather than bankruptcy proceedings. The court nevertheless concluded that the aiding-and-abetting claims, together with claims for equitable contribution or indemnification, were broadly linked to the insolvency that led to Heritage being named as a defendant. The court found that Heritage gave no reason to depart from decisions rejecting a requirement that the insured’s own conduct cause the insolvency.

Disposition

The court granted Zurich’s motion to dismiss without further leave to amend. The order did not state that the dismissal was with or without prejudice.