Zaracotas v. AmGUARD Insurance Company

Background

Timoleon Zaracotas and Corinne Zaracotas sued AmGUARD Insurance Company for breach of an insurance policy, breach of the implied covenant of good faith and fair dealing, and equitable contribution. The parties filed cross-motions for partial summary judgment, meaning each asked the court to decide some issues without a trial. The facts relevant to the motions were undisputed.

The Zaracotases owned commercial buildings in Hayward, California. One building was leased to Thao Truong for a nail salon, and other space was leased to Sarvarinder S. Gill and Jezusette B. Baltazar for a bar and restaurant. After the Zaracotases hired Camelot Roofing to repair a roof, the buildings caught fire on August 31, 2019. The buildings were boarded up, Truong’s business stopped operating, and the City of Hayward later ordered the buildings demolished.

AmGUARD had issued an insurance policy to Thao Truong doing business as Megan Nail Salon. The policy identified the Zaracotases as additional insureds for liability arising from ownership, maintenance, or use of the leased premises. The policy required AmGUARD to pay covered damages for bodily injury, property damage, or personal and advertising injury, and to defend lawsuits seeking those damages.

The fire led to lawsuits by Gill and Truong against the Zaracotases. Aspen Specialty Insurance Company, which had separately insured the Zaracotases’ properties, provided a defense under a reservation of rights and paid the settlements and defense costs. The underlying lawsuits were settled for a total of $375,000.02, and Aspen paid the settlement amounts and the fees and costs of the appointed defense counsel. The Zaracotases separately retained attorney Nick T. Reckas and were billed $17,600 for his work. They did not receive reimbursement for those fees from Aspen or AmGUARD.

The Zaracotases notified AmGUARD of Truong’s lawsuit in January 2021 and later repeatedly asked AmGUARD to provide defense and indemnity coverage. The record did not contain a response from AmGUARD to the January 2021 tender. AmGUARD admitted that it did not defend the underlying lawsuits. It also did not dispute that it had a duty to defend the Zaracotases.

Breach of the Insurance Policy

The court held that the Zaracotases established the insurance contract, their performance or excuse for nonperformance, and AmGUARD’s breach because AmGUARD failed to defend them despite having a duty to do so. The remaining disputed issue was damages.

The Zaracotases argued that Reckas’s $17,600 in fees were recoverable because they retained him while AmGUARD failed to respond and while Aspen’s appointed counsel continued asking how much the Zaracotases would personally contribute to settle the underlying cases. AmGUARD argued that the fees were not recoverable because Aspen had already provided a complete defense and paid the settlements.

The court distinguished the authority relied on by AmGUARD because, in that case, the insurer had accepted the tender, paid defense expenses, and contributed to the insured’s defense. Here, AmGUARD never responded to the January 2021 tender and never contributed to the defense. The court concluded that a reasonable jury could find that the Zaracotases were reasonably compelled to retain Reckas to protect their rights and that at least some of his fees could be recoverable damages. AmGUARD’s motion was therefore denied as to the policy claim based on attorney-fee damages.

The court also denied the Zaracotases’ motion on the attorney-fee issue. It explained that the Zaracotases had not shown as a matter of law that Reckas’s fees were recoverable in these circumstances. A reasonable jury could instead find that the fees were not reasonably incurred because Aspen provided a complete defense and indemnification.

The court ruled that emotional-distress damages were not recoverable for the breach-of-policy claim. The Zaracotases did not contend, and the facts did not establish, that the express purpose of the insurance policy was their mental or emotional well-being. Accordingly, the Zaracotases’ motion was denied on this issue, and AmGUARD’s motion was granted on the policy claim to the extent it was based on emotional-distress damages.

Breach of the Implied Covenant of Good Faith and Fair Dealing

The Zaracotases argued that AmGUARD acted unreasonably and without proper cause by refusing to defend them. AmGUARD argued that the bad-faith claim could not proceed because the Zaracotases could not recover on their breach-of-policy claim.

The court denied AmGUARD’s motion because the breach-of-policy claim remained viable to the extent it sought attorney-fee damages. AmGUARD did not dispute that it had a duty to defend or that it failed to do so, and it did not respond to the Zaracotases’ argument that its failure was unreasonable, which the court treated as a concession of that element.

The court also denied the Zaracotases’ motion. A reasonable jury could find that the Zaracotases suffered economic loss through attorney fees they were reasonably compelled to incur, but a reasonable jury could also find that they were not reasonably compelled to retain Reckas or that the fees were not reasonably incurred. Because that factual dispute remained, summary judgment was not appropriate on the bad-faith claim. The court did not award emotional-distress damages on this claim at this stage.

Equitable Contribution

The Zaracotases pursued equitable contribution as Aspen’s assignee for the amounts Aspen paid to settle the Gill and Truong lawsuits. Equitable contribution can require one insurer to reimburse another when both insurers owe obligations to the same insured and one insurer paid more than its share.

The court examined whether AmGUARD had an obligation to indemnify the Zaracotases under its policy. It concluded that Gill’s claimed losses—such as money paid on a lease for unusable space, rent and utilities during construction, liquor-license expenses, and similar investment losses—were intangible economic losses, not physical injury to tangible property covered as property damage.

The court reached the same conclusion regarding Truong’s claims for loss of goodwill and business reputation, time and costs involved in finding and improving a replacement location, lost income and business opportunities, and lost employees. It also concluded that Truong’s emotional-distress claim was not bodily injury under the policy and that the claim for lost inventory and trade fixtures fell within policy exclusion “k.”

The court further held that the policy’s personal-and-advertising-injury coverage did not apply. That provision covered, among other things, wrongful eviction, wrongful entry, or invasion of the right of private occupancy of a room, dwelling, or premises that a person occupies. The court concluded that this language did not cover the commercial nail-salon premises involved here.

Because AmGUARD established that it had no obligation to provide indemnity coverage for the underlying actions, the court granted AmGUARD’s motion on the equitable-contribution claim concerning indemnity and denied the Zaracotases’ motion on that claim.

Disposition

The court granted in part and denied in part AmGUARD’s motion for partial summary judgment. Specifically, AmGUARD’s motion was granted on the breach-of-insurance-policy claim to the extent it was based on emotional-distress damages, granted on the equitable-contribution claim regarding indemnity, and otherwise denied. The Zaracotases’ motion for partial summary judgment was denied.

The court also vacated the existing pretrial and trial dates because they conflicted with a trial in a lower-numbered case. It scheduled a case-management conference for March 20, 2024, and required an updated joint case-management statement by March 13, 2024.