Navigators Specialty Insurance Company v. SVO Building One, LLC

Background

Navigators issued SVO an insurance policy effective June 12, 2017, through August 12, 2019. The policy covered certain bodily injury, property damage, and personal and advertising injury. Liebert Corporation later brought an arbitration proceeding against SVO asserting 18 causes of action, including breach of contract, trade-secret misappropriation, patent infringement, defamation, fraud, negligent misrepresentation, and civil conspiracy.

After SVO tendered the claim, Navigators agreed to defend SVO under a reservation of rights. After Liebert dismissed its defamation claim, Navigators told SVO that it would withdraw from the defense because there was no coverage. SVO objected, and Navigators continued defending the action while reserving its rights. The underlying action later settled, and the parties filed a joint notice of dismissal with prejudice.

Navigators then brought this action seeking declaratory relief on three matters: reimbursement for defense fees and costs incurred after March 24, 2021; reimbursement for costs attributable to uncovered claims; and a declaration that it had no duty to indemnify SVO. In an earlier ruling, the court dismissed the indemnity claim without prejudice for lack of ripeness and allowed Navigators to amend the first two claims. Navigators filed its First Amended Complaint, and SVO moved to dismiss the two remaining causes of action.

Legal standard

The court applied Rule 12(b)(6) of the Federal Rules of Civil Procedure, which allows dismissal when a complaint does not state a legally recognized claim or does not allege enough facts to make the claim plausible. At this stage, the court accepted the complaint’s factual allegations as true and viewed them in the light most favorable to Navigators.

Analysis

Under California law, an insurer must defend claims that are potentially covered by its policy. In an action containing both potentially covered and non-covered claims, the insurer must defend the action as a whole but may seek reimbursement for defense costs that can be allocated solely to claims that were not even potentially covered. The insurer bears the burden of proving entitlement to that reimbursement.

SVO argued that the amended complaint was deficient because it sought reimbursement for “all” defense fees and costs and did not allege that the costs were allocated solely to claims that were not potentially covered. The court rejected that argument. It read the complaint as stating that Navigators did not seek reimbursement for fees and costs incurred defending potentially covered claims. The court concluded that this allegation used the standard described in the California Supreme Court’s decision in Buss v. Superior Court and was sufficient to state a claim at the motion-to-dismiss stage.

SVO also argued that Navigators sought reimbursement for fees and costs paid by Hallmark Financial Services, Inc. The court rejected that argument as well. The invoices attached to SVO’s motion showed that Navigators and Hallmark were each billed 50 percent of the cost on each invoice; they did not show that Navigators sought reimbursement for costs paid by Hallmark. The court also declined to dismiss based on SVO’s argument that some allegations in the underlying complaint were potentially covered because SVO did not explain why those allegations were potentially covered under the policy.

Disposition

Judge Araceli Martinez-Olguin denied SVO Building One, LLC’s motion to dismiss. The order therefore left Navigators’ two reimbursement causes of action in the First Amended Complaint in the case.