Flowers v. Camico Mut. Ins.
Filed 6/12/13 Flowers v. Camico Mut. Ins.
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
ONE
SYLESTER
FLOWERS et al.,
Plaintiffs and Appellants,
v.
CAMICO
MUTUAL INSURANCE COMPANY,
Defendant and Respondent.
A134890
(Alameda
County
Super. Ct. No. RG09-450678)
In
this insurance coverage dispute, plaintiffs Sylester Flowers, Helen
Chiongson-Flowers, Alta Tierra Properties, LLC, The Apothecary Eastmont Town
Center, Inc., and Ramsell Holding Corporation appeal from the order of the
trial court finding that the underlying action at issue here alleged a single claim
under the applicable policy, thus triggering the per-claim limit of liability
only, and not the aggregate policy limit.
We affirm.
FACTUAL
BACKGROUND AND PROCEDURAL HISTORY
The
facts are undisputed.
name="_ftnref1" title="">[1] Defendant CAMICO Mutual Insurance Company is
an insurance company that issued the professional
liability policy at the heart of this case.
All the corporate plaintiffs in this action are entities owned by
Sylester Flowers and his wife, Helen Chiognson-Flowers. Flowers is the Chairman and CEO of Ramsell
Holding Corporation (Ramsell). The
Apothecary Eastmont Town Center, Inc. (AETC) is a wholly owned subsidiary of
Ramsell. Additionally, at all times
relevant to this action, the Flowers owned 99 percent of Alta Tierra
Properties, LLC (Alta Tierra).
Defendant
issued Accountants Professional Liability Insurance Policy No. CAL04227 to the
Bertorelli Firm (the Firm), which was in effect from January 1, 2005, to
January 1, 2006 (the Policy). The
Policy’s insuring agreement provides that defendant will pay “those sums that
an Insured becomes legally obligated
to pay as Damages because of a
omission in rendering or failing to render Professional
Services performed after the Retroactive
Date and before the end of the Policy
Period.â€
title="">[2]
The
Policy defines a “claim†(which by definition includes a “multiple claimâ€) as
follows: “A Claim means a demand
received by any Insured for money or
services, and includes the service of suit(s), or a demand for
arbitration. A Claim also includes a Multiple
Claim, which is formed by two or more Claims
arising out of or resulting from a single act, error or omission in the
rendering of Professional Services,
or from related or identical acts,
errors or omissions in the rendering of Professional
Services, whether such demands are made: (1) against one or more
The
Firm purchased limits of liability of $2 million per claim, with $4 million as
the policy aggregate. The Policy
explains the per-claim limit of liability as follows: “The maximum amount
payable by the Company for Damages and
Claim Expenses for each covered
Insureds involved.†The aggregate limit is defined as “[t]he
maximum amount payable by the Company for Damages
and Claim Expenses for all covered
Beginning
in early 2000, Ranni Hillyer was retained to provide accounting, financial
planning, and investment services for plaintiffs. In 2001, Hillyer introduced Flowers to Rajiv
Behti, a member of the Firm. Thereafter,
plaintiffs retained Behti and the Firm to serve as their accountants.
In
August 2001, Hillyer commenced her role as chief financial officer (CFO) of
Ramsell, AETC, Alta Tierra, and the personal equivalent thereof for Flowers and
his wife. The underlying action asserts
that Hillyer used her role as CFO, and her limited authority over Flowers’ bank
accounts, to embezzle millions of dollars from plaintiffs. Plaintiffs discovered her embezzlements
shortly after her employment terminated in February 2005.
In
March 2005, plaintiffs filled a lawsuit against Hillyer, seeking to recover the
stolen funds.
On
February 5, 2007, plaintiffs filed suit against Behti and the Firm in the
underlying action. Plaintiffs sought to
recover damages arising from Hillyer’s embezzlements pursuant to legal theories
of accounting malpractice, breach of fiduciary duty, breach of contract, and
negligent misrepresentation. The
complaint alleged that the Firm negligently, carelessly, and recklessly
rendered professional services by repeatedly failing to discover Hillyer’s
fraudulent scheme of embezzlement, due to Behti’s friendship with Hillyer
and/or because the Firm benefited financially from her actions. Plaintiffs claim the Firm’s multiple acts,
errors and omissions resulted in approximately 72 unauthorized transactions
resulting in almost $5 million in combined damages. Behti and the Firm tendered their defense to
defendant.
On
March 20, 2009, the parties entered into a settlement
agreement and mutual release relating to the February 2007 complaint. Defendant consented to submit itself to a
declaratory relief action, in which the parties agreed to allow the trial court
to determine whether the alleged acts, errors, or omissions giving rise to the
underlying lawsuit constituted one claim so as to invoke the per-claim limit of
$2 million, or constituted more than one claim so as to implicate the aggregate
limit of $4 million.
On
May 5, 2009, plaintiffs filed this declaratory
relief action.
On
February 14, 2012, the trial court issued an order in favor of defendant. The court concluded that the term “relatedâ€
in the Policy’s definition of a “claim,†was not an ambiguous term, and meant
having a “logical or causal connection.â€
Based upon this definition, the court determined that all the wrongful
acts stipulated to by the parties were “related.†Specifically, the court concluded that
“although the errors and omissions involved several different accountants,
several different clients, several different losses, and different engagements
or other transactions, they all involved a failure and a breach of duty to
detect or guard against embezzlement or other diversions of funds or property
by Hillyer, which diversions constitute the sole harm allegedly suffered by the
various Plaintiffs.â€
On
March 1, 2012, the trial court entered judgment against plaintiffs. This appeal followed.
DISCUSSION
Where
the decisive facts underlying a declaratory judgment are undisputed, the
reviewing court is confronted with a question of law which is reviewed de
novo. (Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965,
974.)
Lawyers’ Mutual Ins. Co. (1993) 5 Cal.4th
854 (Bay Cities)
The
parties agree the dispositive case here is Bay
Cities. In Bay Cities, a general contractor retained an attorney to represent
it in connection with construction work it was performing. (Bay
Cities, supra, 5 Cal.4th 854, 858.)
The contractor had completed work on a project, but was unable to
collect a substantial portion of the amount it was owed. The attorney filed a mechanic’s lien on
behalf of the contractor. (
However, he did not serve a stop notice on the construction lenders and
did not timely seek to foreclose the mechanic’s lien, thereby committing two
separate acts of negligence. In the
ensuing legal malpractice action, the contractor contended it was asserting two
separate claims under the attorney’s professional liability insurance
policy. The trial court agreed, finding
that there were two separate acts of legal malpractice and, therefore, the
limits of liability under the policy were doubled. (Ibid.) The insurance company appealed, contending
there was but one claim being asserted.
(Id. at p. 859.) Our Supreme Court held that the two errors
were related and arose out of a specific transaction, the collection of a
single debt. Therefore, there was only
one claim for purposes of the applicable policy provision, which limited coverage
for claims arising out of a series of related acts, errors, or omissions. (Id.
at p. 873.) In the instant case, the
parties agree that Bay Cities
controls, as it involved the argued relatedness of claims under a “claims made
and reported†policy that is similar to the policy at issue here.
A
primary right is an individual’s right to be free of the particular injury
alleged. (Mycogen Corp. v. Monsanto Corp. (2002) 28 Cal.4th 888, 904.) Plaintiffs note that in Bay Cities, the Supreme Court discussed primary rights because the
contractor in that case had sought relief for a single injury under two
different legal theories. The court
highlighted the fact that, had the plaintiff prevailed in a lawsuit, it would
have been limited to recovering only what it lost (payment for its work) due to
multiple negligent acts and omissions. (
860.) The court stated, “[the plaintiff]
had one primary right—the right to be free of negligence by its attorney in
connection with the particular debt collection for which he was retained.†(Ibid.) The court further explained, “[the plaintiff]
had a single right—the right to payment for its construction. The loss of that right as a result of the
attorney’s two omissions resulted in a single injury.†(Id.
at p. 861.)
Here,
plaintiffs focus our attention on four separate instances of malpractice
alleged in the underlying action. For
purposes of this appeal it is not necessary to describe them in great detail. In brief, plaintiffs allege that (1)
accountants at the Firm failed to detect and guard against Hillyer’s
embezzlements when they audited Ramsell’s 2002 and 2003 financial statements,
(2) Behti failed to protect against Hillyer’s embezzlements when he was
retained by Flowers to review the procedures governing Hillyer’s investment
authority, (3) the Firm’s accountants failed to discover Hillyer’s
embezzlements when retained by Alta Tierra to provide accounting and tax
services, and (4) the accountants failed to detect Hillyer’s embezzlement of
Flowers’ funds when retained to set up accounting records for a real estate
investment. Plaintiffs assert that each
individual plaintiff in this case possesses his, her, or its own primary rights
to be free of injuries. They also claim
that when their primary rights are analyzed, it is evident that different
members of the Firm committed separate acts, errors, and omissions that caused
different injuries to the different plaintiffs, and were therefore not related.
As
defendant correctly observes, the Supreme Court in Bay Cities never intended that the primary rights theory be used in
such a manner, at least not in the context of the kind of insurance policy that
is at issue here. The court’s primary
rights discussion was in the context of determining whether there was more than
one claim at issue, and had no bearing on whether the claims were related:
“Under [the policy language], if an attorney’s single error harmed two clients
and gave each of them a separate claim, those two claims would be treated as a
single claim under the policy’s limitation of liability. It would be anomalous to limit liability in
that circumstance but to disregard the limitation when, as in this case, a
single client suffers a single injury as a result of multiple errors.†(Bay
Cities, supra, 5 Cal.4th 854, 861.)
The trial court here recognized and correctly found that: “[T]he
time there is more than one ‘primary right’ involved, this means the alleged
errors and omissions cannot be ‘related’ as used in the applicable policy
language. To the contrary, the Court
addressed and applied the policy term ‘related acts, errors or omissions’ as an
independent basis of its ruling that the claims against the attorney should be
treated as a single ‘claim’ as defined under the policy.†We agree with the trial court’s
analysis. Plaintiffs’ argument thus
fails.
Plaintiffs
also misread another aspect of Bay Cities. The Bay
Cities court held that the term “related†as it is commonly understood and
used “encompasses both logical and causal connections.†(Bay
Cities, supra, 5 Cal.4th 854, 873.)
The court found that, as used in the policy at issue and the
circumstances of that case, “ ‘related’ is not ambiguous and is not limited
only to causally related acts.†(
The court also recognized, however, that “At some point, a relationship
between two claims, though perhaps ‘logical,’ might be so attenuated or unusual
that an objectively reasonable insured could not have expected they would be
treated as a single claim under the policy.â€
(Ibid.) The court rationalized that the allegations
in that case were not attenuated, as “They arose out of the same specific
transaction, the collection of a single debt.
They arose as to the same client.
They were committed by the same attorney. They resulted in the same injury, loss of the
debt.†(Ibid.) Plaintiffs repeatedly
assert in their brief on appeal that, in this passage, the court intended to
create a “four-factor test.†They are
wrong. The court was merely emphasizing
why, on the facts of that case, the two acts of legal malpractice were
“related†within the meaning of the applicable insurance policy.
In
the present case, despite the Firm’s various engagements for plaintiffs, in
every instance, the allegations against the Firm remain the same, that is, the
Firm repeatedly failed to detect and guard against Hillyer’s embezzlement
scheme, which resulted in the same injury to the plaintiffs, namely, the loss
of their funds.
title="">[4] We also agree with defendant that even if the
underlying action alleges more than one claim, those claims nonetheless form a
multiple claim, and trigger only a single per-claim limit of liability under
the Policy. Further, it is critical to
note that while there were multiple plaintiffs, as to the Firm there was
essentially one client only, namely, the Flowers. As noted above, all the corporate entity
plaintiffs were owned by the Flowers, and the Flowers themselves were the only
individual plaintiffs. We thus agree
with the trial court’s conclusion that the alleged acts, errors, and omissions
are “related†within the meaning of the Policy’s provisions regarding “claims,â€
including “multiple claims.â€
Finally,
plaintiffs complain that the Policy’s provision regarding “related†claims is
ambiguous and should have been construed against defendant and in favor of
coverage. Again, this issue was fully
addressed in Bay Cities. (Bay
Cities, supra, 5 Cal.4th 854, 873.)
Plaintiffs’ attempt to distinguish the instant Policy from the one
addressed by the Supreme Court in Bay
Cities is not persuasive.
name="_ftnref5" title="">[5] The court in Bay Cities clearly and specifically held that the term “related,†as
used in a context substantially similar to the present case, was
unambiguous. (Ibid.)
The
Bay Cities opinion gives broad
reading to the notion of “related.â€
Multiple errors arising from an ongoing relationship between a
professional (the insured, the Firm and its accountants) and retained clients
(Flowers and his entities) are within the scope of the decision.
The separateness of the particular omissions does not change the
insurance policy consequences since the retained client was the party who suffered
from the several instances of misconduct.
The notion of “claim†incorporates malpractice logically as well as
causally connected. Multiple instances
of misconduct serving the same client, and based on a retained services
agreement is enough for one claim under a policy even if arising from advice
covering various features of the professional relationship. According to Bay Cities, “related†is a “broad word . . . and is not
limited only to causally related acts.â€
(Bay Cities, supra, 5 Cal.4th
854, 873.)
DISPOSITION
The
judgment is affirmed.
__________________________________
Dondero,
J.
We
concur:
__________________________________
Margulies,
Acting P. J.
__________________________________
Banke,
J.
name="_ftn1" title="">[1]
The parties agreed to and submitted stipulated
facts relative to characterizing and describing the underlying action.
name="_ftn2" title="">[2]
Certain words and phrases are specially defined
in the Policy, and are italicized.
