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Johnson v. Aetna Casualty & Surety Co.

filed*fn*: April 21, 1994.


Appeal from the United States District Court for the Central District of California. D.C. No. CV-91-6936-KN. David V. Kenyon, District Judge, Presiding

Before: Hall, Leavy and Fernandez, Circuit Judges


Petey Johnson appeals the entry of summary judgment denying her claim against Aetna Casualty & Surety Company for breach of the duty to defend. We affirm.


Johnson was employed by Assured Content Restoration (Assured) and covered by employee health insurance issued by Reserve Life Insurance Company. A few months after Johnson was seriously injured, Reserve Life notified Assured that it was going to substantially increase the insurance premium. Assured chose to let the policy lapse.

Johnson sued Assured and Assured tendered the defense of the action to its general liability insurer, Aetna. Aetna denied coverage and withdrew from the defense on the grounds that Johnson's complaint did not allege an occurrence and the exclusion for bodily injury to an employee was applicable. Johnson, as Assured's assignee, brought this action against Aetna for breach of the duty to defend Assured. The district court, holding that there was no potential for coverage, granted summary judgment for Aetna.*fn1


A. Duty to Defend

An insurer has a duty to defend when there is a potential for indemnity based on the allegations of the complaint and facts known to the insurer. See, e.g., Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081, 17 Cal. Rptr. 2d 210, 213-14, 846 P.2d 792 (1993); Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 276-77, 54 Cal. Rptr. 104, 113, 419 P.2d 168 (1966). The corollary to this principle is that if damages are not of the nature and kind contemplated by the policy, there is no potential for indemnification and no duty to defend. See Gray, 65 Cal. 2d at 274, 54 Cal. Rptr. at 111; Dykstra v. Foremost Ins. Co., 14 Cal. App. 4th 361, 367-69, 17 Cal. Rptr. 2d 543, 546 (1993); Aim Ins. Co. v. Culcasi, 229 Cal. App. 3d 209, 228, 280 Cal. Rptr. 766, 776-77 (1991). If there can be no coverage, there can be no duty to defend. See State Farm Mut. Auto. Ins. Co. v. Longden, 197 Cal. App. 3d 226, 233, 242 Cal. Rptr. 726, 730-31 (1987); cf. Crane v. Royal Ins. Co. of Am., No. 92-55874, slip op. 2031, 2035-38, 1994 WL 56439 (9th Cir. Feb. 28, 1994) (no duty to defend action excluded by policy).

1. Complaint Based on Contract

Aetna agreed to "pay those sums that [Assured] becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage.'" This policy language covers only tort claims, not claims based on breach of contract. Aim, 229 Cal. App. 3d at 214, 280 Cal. Rptr. at 768; Fragomeno v. Ins. Co. of the West, 207 Cal. App. 3d 822, 828, 255 Cal. Rptr. 111, 114 (1989); Fireman's Fund Ins. Co. v. City of Turlock, 170 Cal. App. 3d 988, 995, 216 Cal. Rptr. 796, 800 (1985); International Surplus Lines Ins. Co. v. Devonshire Coverage Corp., 93 Cal. App. 3d 601, 611, 155 Cal. Rptr. 870, 875 (1979).

In determining whether the claim sounds in tort or in contract, the critical inquiry is whether, absent the contract, defendant could have been liable for the resultant damage. City of Turlock, 170 Cal. App. 3d at 996, 216 Cal. Rptr. at 800; see Fragomeno, 207 Cal. App. 3d at 828-31, 255 Cal. Rptr. at 114-17; International Surplus, 93 Cal. App. 3d at 610-12, 155 Cal. Rptr. at 874-76; cf. Aim, 229 Cal. App. 3d at 216, 280 Cal. Rptr. at 769 (tort claim based on allegation that employer voluntarily undertook to forward employee's insurance application to insurer and told employee that she would be properly enrolled).

Assured's duty to secure health insurance for Johnson was based solely on the employment contract. Unlike the situation in Aim, Assured did not voluntarily undertake a duty to maintain insurance benefits for her apart from the employment contract. Absent the employment contract, Assured had no duty to provide insurance at all and could not be liable to Johnson when it decided to let the policy lapse because of the premium increase.

Johnson also alleged that Assured breached a statutory duty to inform her of conversion rights. See Cal. Lab. Code §§ 2800.2, 2800.3; Caldwell v. Mutual Benefit Life Ins. Co., 177 Cal. App. 3d 381, 384, 223 Cal. Rptr. 7, 8 (1986) (employer must inform employee of conversion rights).*fn2 She claims that she stated an action against Assured for violation of the statutes. Here, however, the statutory duty, if any, is parasitic on the employment contract; it has no force apart from the contract. See Fragomeno, 207 Cal. App. 3d at 831, 255 Cal. Rptr. at 116-17. Absent the contract, Assured would have had no duty to inform ...

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