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Bad Faith and Speculation About Unpled Claims

January 22, 2012

Steven R. Inouye, Esq.

The California Court of Appeal recently reached a decision affirming an insurer’s right to deny a claim where third party allegations against an insured cosmetics manufacturer did not support coverage even though extrinsic facts revealed that the underlying complaint could have been amended to allege covered claims.

In Ulta Salon, Cosmetics & Fragrance, Inc. v. Travelers Property Casualty Co. of America, 197 Cal.App.4th 424 (June 10, 2011) (Second District), the Court of Appeal upheld an insurer’s demurrer to a bad faith lawsuit without leave to amend.  The underlying action involved a consumer suit which alleged a single cause of action against a cosmetics manufacturer under the California Safe Drinking Water and Toxic Enforcement Act of 1986 for the failure to warn of toxins in its products.   However, the plaintiff customer never alleged that she used the cosmetics or that she suffered bodily injuries as a result of any contact with the products.  Furthermore, the only remedies sought under the consumer protection statute were for civil penalties and injunctive relief.   Since no bodily injuries were alleged, the insurer Travelers denied coverage under the insured’s CGL policy.  Thus, the manufacturer was forced to defend the lawsuit at its own expense.   After several years of litigation, the insured settled with the consumer and brought a bad faith lawsuit against Travelers.

In response to the bad faith action, Travelers filed a demurrer to the complaint arguing that it had no duty to defend.  Travelers asserted that no coverage was triggered under the CGL policy because the consumer never alleged she suffered “bodily injuries” from using the cosmetics as required by the insuring language.  The trial court agreed, sustaining Travelers’ demurer without leave to amend and effectively dismissing the case.   The manufacturer appealed.

On appeal, the manufacturer argued that the “face of the complaint” included general allegations that the customer had been exposed to toxins in the cosmetics.  The manufacturer asserted that since the consumer could have amended her complaint to allege bodily injuries, a potential for coverage existed.   The insured also asserted that expert discovery conducted during the litigation revealed that the consumer could have been injured by her contact with the toxins.

The Court of Appeal upheld Travelers’ demurrer without leave to amend.   The Court of Appeal agreed with the trial court that there was no coverage because the consumer had not made any bodily injury claims in her complaint.  The Court of Appeal also dismissed the insured’s argument that bodily injury damages were “contemplated” by the consumer because her complaint emphasized the toxic nature of the cosmetics.   The Court of Appeal rejected this argument by stating that “the insured may not speculate about unpled third party claims to manufacture coverage.’” [citing Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992] 10 Cal. App.4th 533, 538.]

The Court of Appeal also held that there was no abuse of discretion in upholding the demurrer without leave to amend.  The appellate court dismissed the insured’s arguments that discovery revealed a potential for coverage such that her bad faith complaint could be amended.   Even though extrinsic facts discovered during the lawsuit showed that the insured may have been exposed to the cosmetics, the Court of Appeal held that extrinsic facts may only create a duty to defend if they are “known to by the insurer at the inception of the third party lawsuit.”  [citing Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1113-1114.]  Further, the court found that there was no potential for coverage noting the difference between being exposed to a toxic product and claiming to be injured as a result.

In light of the Ulta Salon ruling, insurers may be more confident in denying claims under CGL policies which require “bodily injuries” to be alleged, so long as, no facts known at the time of the lawsuit’s inception would indicate that bodily injuries were suffered by a third party plaintiff.  This ruling may be especially useful in analyzing coverage for claims which involve the violation of consumer protection statutes or other regulatory measures.

By: Steven R. Inouye, Esq.

Cochran, Davis & Associates, P.C.

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