California District Court Fails to Accept Deposition Testimony as Extrinsic Evidence
/California District Court Fails to Accept Deposition Testimony as Extrinsic Evidence
By David A. Gauntlett*
Introduction
A recent Southern District of California decision ignored several critical pieces of California coverage law, including the impact of extrinsic evidence on an insurer’s duty to defend. In Aram Logistics v. United States Liability Insurance Co.,[1] the court refused to acknowledge allegations falling within potential coverage of an insurance policy because they were part of deposition testimony from the underlying action. Judge Huff’s assertions in her decision are like those advanced by adherents of the “Earth is flat” theory.[2]
Deposition Testimony Clarified Potential Coverage
In the underlying action,[3] the Complaint included explicit allegations of Unfair Competition and Breach of the Duty of Loyalty. Among the allegations were explicit assertion that Aram breached its duty “not to promote . . . any . . . business that is competitive with [Diakon]” and did so “for the express purpose of diverting business away from Diakon, and diverting such business to Aram Logistics.” The Complaint alleged that Diakon suffered injury in the form of “disrupt[ion of] many of Diakon’s customer relationships,” “solicit[ing] customers of Diakon on behalf of Aram Logistics,” and “divert[ing] independent contractor carriers servicing Diakon customer accounts to Aram Logistics’ customer accounts instead.”
The exact nature of Aram’s alleged wrongful acts was clarified in the deposition of Diakon’s president. Therein, Diakon alleged that the wrongful solicitation of customers included use of Diakon’s “customer dedicated logistics” advertising idea in Aram’s advertising. Diakon also alleged that copyrighted photographs owned by Diakon were used by Aram in its advertising. Taken at face value, as courts are obligated to do when evaluating the duty to defend,[4] these claims implicated potential coverage under Aram’s Commercial General Liability (“CGL”) policy for offenses “f” and “g.”[5]
Court Rejected Deposition Testimony as a Source of Fact Allegations
In her Order granting summary judgment in favor of the insurer, Judge Huff concluded there was no potential coverage because the deposition testimony could not be considered as a source of allegations triggering the duty to defend. She stated “testimony is not the same thing as an allegation in a cause of action.” The converse of this proposition is in fact true. Conclusory allegations in a Complaint are less cogent evidence of how the asserted liability will be proven at trial than deposition testimony.
The court’s sole cited authority, Soderstedt v. CBIZ Southern California, LLC, 197 Cal. App. 4th 133, 154 (2011), is entirely inapposite. Soderstedt has nothing to do with insurance coverage and does not speak to what must be considered in determining a defense. The actual statement was that “pleadings are allegations, not evidence, and do not suffice to satisfy a party’s evidentiary burden.” The statement addressed a Petition for Removal and supporting Declaration in connection with the court’s quest to assess whether a putative class satisfied the numerosity requirement for class certification. Nowhere does the court hold that statements outside a formal complaint cannot constitute an allegation.
Soderstedt’s statement that allegations are not evidence is not equivalent to a statement that extrinsic evidence cannot be an allegation. In citing to it for support, Judge Huff committed a logical fallacy of taking the court’s statement that “A is B, not C” and asserting it also means “C is not B.” Her assertion would be like taking the statement that “Michael Jordan is an athlete, not a football player” and then claiming “Football players are not athletes.”
To the extent that Judge Huff may have rejected deposition testimony because it does not present a full theory of injury or damages the way a complaint does, that is irrelevant to evaluating potential coverage for “personal and advertising injury.”[6]
Other Decisions Disagree
The court in Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 657 (2005) explained “the insurer's duty to defend arises whenever the third party complaint and/or the available extrinsic facts suggest, under applicable law, the possibility of covered claims.” (emphasis added). For over 30 years, it has been settled California law that there need only be a “bare potential” for coverage, not a “reasonable potential.”[7]
Even Gunderson v. Fire Ins. Exch., 37 Cal. App. 4th 1106, 1114 (1995), a case relied upon by Judge Huff in her decision, held that the duty to defend is determined by “what facts [the insurer] knew at the time [the insured] tendered the defense of the Ferrando lawsuit, both from the allegations on the face of the third party complaint, and from extrinsic information available to it at the time; and whether these known facts created a potential for coverage under the terms of the Policy.” (emphasis added).
Several decisions have explicitly referenced deposition testimony as a source of fact allegations that must be considered in determining whether an insurer has a duty to defend.
Hollyway Cleaners & Laundry Co., Inc. v. C. Nat. Ins. Co. of Omaha, Inc., No. 2:13-CV-07497-ODW EX, 2015 WL 1884311, *6–7 (C.D. Cal. Apr. 23, 2015), rev'd on other grounds, 650 F. App’x 358 (9th Cir. (Cal.) 2016) (“Because the parties agree the Policy includes a duty to defend, the Court must determine whether extrinsic evidence eliminates the possibility of coverage under the Policy and thus Defendant's duty to defend. The extrinsic evidence at issue is Milton and Burton's deposition testimony from the 1989 Action . . . . The Court rejects Plaintiffs' argument that the extrinsic evidence is inadmissible because it is disputed.)[8]
Cetera Financial Holdings, Inc. v. National Union Fire Insurance Co of Pittsburgh, Pa. 2017 WL 2119475 *8-9 (C.D. Cal. Feb. 16, 2017) (“It is well settled that, in determining whether a duty to defend exists, ‘courts do not examine only the pleaded word but the potential liability created by the suit.’ . . .’The duty to defend is determined by reference to the policy, the complaint, and all facts known to the insurer from any source.’ . . . In contrast with the instant case, in which Cetera points to extrinsic evidence [including deposition testimony] indicating disparaging statements were conveyed to its clients through the three defamatory letters, the court in Microtec held that ‘Green Hills did not aver that Microtec had said anything negative about Green Hills.’”)
Contl. Cas. Co. v. City of Richmond, 763 F.2d 1076, 1083 (9th Cir. (Cal.) 1985) (“[District court properly] considered a large quantum of extrinsic evidence consisting of an eighty-five page memorandum opposing summary judgment and a fifty-one page declaration of counsel, along with deposition transcripts, exhibits and other declarations . . . .”)
Conclusion
Numerous decisions under California law have embraced deposition testimony as a source of “extrinsic evidence” that must be evaluated in determining an insurer’s duty to defend. Nevertheless, Judge Huff elected to ignore those allegations and improperly focus on the trade secret misappropriation claims making up the “gravamen” of the underlying complaint, a practice forbidden by California coverage law.[9] In doing so, she repeats the same errors in coverage analysis that led to her recent reversal by the Ninth Circuit in another insurance coverage case.[10]
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Aram Logistics v. United States Liability Insurance Co., No. 3:23-CV-01869-H-DEB, 2024 WL 390076 (S.D. Cal. Jan. 31, 2024).
[2] Rachel Brazil, Fighting flat-Earth theory, https://physicsworld.com/a/fighting-flat-earth-theory/ (July 14, 2020) (“Flat-Earthers seem to have a very low standard of evidence for what they want to believe, but an impossibly high standard for what they don’t want to believe.”) (quoting Lee McIntyre, Boston University).
[3] Diakon Logistics (Delaware) Inc. v. Aram Logistics, Inc., Samuel Rubio, Alvaro Hernandez, and Does 1 to 50, Case No. 32-2021-00028563-CU-BT-CTL in the Superior Court of California, San Diego County (the “Diakon Action”).
[4] New Hampshire Ins. Co. v. Foxfire, Inc., 820 F. Supp. 489, 492 (N.D. Cal. 1993) (“Resolution of the competing motions depends upon the language of the Policy and whether Foxfire's acts as alleged in the underlying action created a potential for liability giving rise to a duty to defend under the Policy.”) (emphasis added).
[5] In standard CGL policies, offenses “f” and “g” are, respectively, defined as “[t]he use of another's advertising idea in your ‘advertisement’” and “[i]nfringing upon another’s copyright, trade dress or slogan in your ‘advertisement’.”
[6] Atlantic Mut. Ins. Co. v. J. Lamb, 100 Cal. App. 4th 1017, 1032 (2002) (“Coverage for personal injury is not determined by the nature of the damages sought in the action against the insured, but by the nature of the claims made against the insured in that action. Under the personal injury policy provision, ‘[c]overage . . . is triggered by the offense, not the injury or damage which a plaintiff suffers.’”)
[7] Montrose Chem. Corp. v. Superior Ct., 6 Cal. 4th 287, 300 (1993).
[8] Though the Hollyway decision was reversed, the Ninth Circuit did so because the insurer failed to interpret evidence in a manner sufficiently favorable to the policyholder, not because it considered evidence it should not have: “Taking all evidence in the light most favorable to Hollyway, there is a genuine dispute as to whether accidental spills occurred at Hollyway's store. . . . Central Insurance failed to meet its heavy burden to prove conclusively that there is no potential for coverage in this case.” Hollyway, 650 F. App’x at 359.
[9] Pension Trust Fund for Operating Engineers v. Federal Ins. Co., 307 F.3d 944, 951 (9th Cir. (Cal.) 2002) (“California courts have repeatedly found that remote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty.”)
[10] See Pulte Home Corp. v. TIG Ins. Co., 794 F. App’x 587, 590 (9th Cir. 2019) (applying Georgia law) (Determining that Judge Huff erroneously concluded there was no potential coverage: “Nothing in the policies requires property damage to ‘manifest’ during the policy period. Rather, the property damage simply must ‘occur’ during the policy period, no matter when it becomes apparent to a homeowner.”)