Greco & Traficante v. Fidelity & Guaranty Ins. Co.

Filed 1/26/09 Greco & Traficante v. Fidelity & Guaranty Ins. Co. CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, Ronald S. Prager, Judge. Affirmed.

This appeal arises from the trial court's resolution of cross-motions for summary judgment or adjudication regarding the interpretation of a first party commercial property insurance policy issued by Fidelity & Guaranty Insurance Company (Fidelity) to Greco & Traficante (Greco). Plaintiff and appellant Greco, a law firm, sued defendant and respondent Fidelity for breach of contract, breach of the duty of good faith and fair dealing, and declaratory relief after Fidelity denied Greco's claim for recovery of a $57,000 loss sustained when billing data became unavailable. The trial court granted Fidelity's motion for summary judgment and denied Greco's cross-motion for summary adjudication. (Code Civ. Proc.,  437c)

Greco appeals, contending the trial court erroneously granted Fidelity's motion for summary judgment. Greco claims the trial court misapplied the analysis of Ward General Services, Inc. v. Employers Fire Insurance Co. (2003) 114 Cal.App.4th 548 (Ward), when it determined Greco had failed to demonstrate any direct physical loss of covered property under Fidelity's policy.

We conclude the trial court properly granted Fidelity's motion for summary judgment. Greco failed to carry its burden of showing its claim comes within the scope of Fidelity's policy, which insured against risks of direct physical loss. Greco's claim was not based on physical loss of covered property. Its remaining causes of action also lack merit. Accordingly, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Loss

In its work, Greco uses billing software called "WinVan" to record attorney time and to store and generate its accounts receivable. WinVan records both billing history data and work-in-progress data. The difference between the two is that "billing history data is different from work-in-progress data inasmuch as the only time it is resourced is when the administrator is asked to provide a summary printout of the total amount of fees and costs billed on a particular matter. This is typically requested prior to a settlement conference or in response to a motion for attorneys' fees. In other words, this information is sourced only when [Greco is] looking to someone other than a client to pay or reimburse our client for attorneys' fees."

In December 2005, Greco's secretary, Aulani Ludwig, attempted to enter billing records from the past few months for one of Greco's attorneys, but she encountered difficulty accessing WinVan. Ludwig called Elizabeth Class, Greco's office administrator, and informed her about the problem. Class contacted William McNeely, Greco's information technology supervisor, and told him about the issue. After analyzing the computer, McNeely was able to fix WinVan's access problem.

After the problem was resolved, Class again accessed WinVan in order to generate the firm's December 2005 billing report. After logging on, however, she discovered the billing time from November 2005 was missing. Believing this problem only implicated work-in-progress data for November, and did not affect the billing history data for months prior, Class reentered the missing time entries for November by using attorneys' paper time sheets.

In March 2006, at the request of Greco attorney Jon Brick, Class again accessed WinVan to generate a billing history report for a matter that was in settlement negotiations. Based in part on Class's generated report, Greco settled the matter for $400,000. Shortly after the settlement was reached, however, Class discovered the amount billed was inaccurate because the billing report did not reflect any of the September, October and November 2005 billing time. Subsequently, out of settlement monies, Greco refunded $33,000 to the client and decided to forego collecting $24,000 in unpaid invoices, resulting in a $57,000 loss to the firm.

B. The Claim

Greco conducted an internal investigation into the matter and determined that the billing data from September, October and November 2005 was missing as a result of a power anomaly.^[1] On March 24, 2006, Greco filed an insurance claim with Fidelity for recovery of $57,000. According to Greco's claim, the missing billing data constituted covered property, which suffered a direct physical loss as a result of a covered cause of loss, the power anomaly.

Fidelity conducted its own investigation. In July 2006, Fidelity denied Greco's claim for failure to "identify a covered cause of loss." Fidelity's investigators could not determine whether the cause of loss was a result of a power anomaly or some other cause. For example, Chuck Olds, Fidelity's initial investigator, posited that either McNeely or WinVan was "responsible for their loss because they told them in November that the problem had been fixed and, lo and behold, it had not." Fidelity's secondary investigator, Price-Hollingsworth, an engineering firm, determined "the computer did not experience a

hardware failure. As a result, the issue was most likely related to the software." In sum, Fidelity concluded no covered loss was shown by Greco.

C. The Pleadings

On October 10, 2006, Greco filed a complaint against Fidelity, alleging causes of action for breach of contract, breach of the duty of good faith and fair dealing, and declaratory relief. Fidelity subsequently filed a demurrer, which the trial court sustained, granting Greco leave to amend. In granting leave to amend, the trial court emphasized that Greco must allege a direct physical loss of covered property to bring its claim within the terms of Fidelity's coverage.

On March 13, 2007, Greco filed a second amended complaint alleging the same causes of action. It added allegations of direct physical damage to a computer.

D. Motions for Summary Judgment

Greco and Fidelity filed cross-motions for summary judgment or adjudication that were calendared together. Apparently, these were handled in a somewhat unusual way, in that Fidelity's opposition papers to the Greco summary adjudication motion also served as the reply papers for the companion Fidelity summary judgment motion. The index to appellant's appendix does not show that any separate Fidelity reply papers were filed, after Greco opposed the Fidelity motion. However, the same coverage and causation issues were set forth in both motions.^[2]

In the rulings, the trial court first resolved Greco's motion by determining that Fidelity had presented evidence showing there never was any physical damage to any covered property, so that Greco's motion seeking a declaration of coverage was denied. In connection with that ruling, the court sustained evidentiary objections brought by Fidelity to portions of the McNeely deposition testimony, on the grounds of lack of foundation and speculation. Those portions of the deposition referred to McNeely's conclusions about the causes of data loss, in light of his admission that there was no physical damage to the computer system. Fidelity thus objected to Greco's attempt to pursue the theory that the cause of the lost data was an interruption in electrical power to the computer system. Fidelity's objection to a portion of Greco's attorney declaration (Brick) was sustained for lack of foundation, to the extent it contended that Greco's use of an inaccurate figure in the settlement negotiations was caused by the lost computer data. This evidentiary ruling and minute order are found both in the appellant's and the respondent's appendices.

After taking the remaining matter under submission, the trial court granted Fidelity's motion, finding coverage is not available to Greco under the electronic data processing systems coverage, which was the only type of coverage argued in the motions. The court found one cannot suffer direct physical loss to computer data without corresponding physical damage to a computer system. Relying chiefly on Ward, supra, 114 Cal.App.4th 548, the trial court found Fidelity had presented enough evidence showing there was "never any physical damage" suffered to Greco's computer. Accordingly, the coverage provisions of Fidelity's policy were not triggered. Greco appeals the Fidelity motion ruling.

DISCUSSION

I

STANDARD OF REVIEW

We review the trial court's summary judgment ruling on a de novo basis, "considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports." (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.)

The trial court's ruling on summary judgment should be upheld only if "all the papers submitted show[ed] that there [was] no triable issue as to any material fact and . . . the moving party [was] entitled to a judgment as a matter of law." (Code Civ. Proc.,  437c, subd. (c).) A triable issue of fact exists if, "and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850, fn. omitted.) Because this appeal is from a grant of summary judgment in favor of Fidelity, we review the evidence in the light most favorable to Greco. (Ambriz v. Kelegian (2007) 146 Cal.App.4th 1519, 1523, fn. 1; Fischer v. First International Bank (2003) 109 Cal.App.4th 1433, 1438.)

To defeat a motion for summary judgment, the nonmoving party must make "an independent showing by a proper declaration or by reference to a deposition or another discovery product that there is sufficient proof of the matters alleged to raise a triable question of fact . . . ." (Wiz Technology, Inc. v. Coopers & Lybrand (2003) 106 Cal.App.4th 1, 10-11.) Thus, any opposition to a summary judgment motion will be "deemed insufficient when it is essentially conclusionary, argumentative or based on conjecture and speculation." (Id. at p. 11.)

II

POLICY TERMS

A. Rules of Interpretation

Greco's claim on the Fidelity policy sought to recover $57,000 based on the offsets it allowed to its attorney fees owing out of the underlying settlement. The coverage provisions of Fidelity's policy are subject to several limitations. To successfully claim a loss under Fidelity's policy, Greco must show the existence of a nonexcluded "direct physical loss" suffered upon covered property, resulting from a covered cause of loss. Thus, the burden is on Greco to "establish that the claim is within the scope of coverage and on [Fidelity] to establish that the claim is specifically excluded." (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 648.)

"While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply." (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264 (Bank of the West).) Thus, Fidelity's insurance provisions must be read under the ordinary rules of contract interpretation, and the words of the policy must be "understood in their ordinary and popular sense." (Civ. Code,  1644.)

In interpreting these policy provisions, we look to see if the "contractual language is clear and explicit." (Bank of the West, supra, 2 Cal.4th at p. 1264; Civ. Code,  1638.) If so, "[t]he 'clear and explicit' meaning of these provisions, interpreted in their 'ordinary and popular sense,' unless 'used by the parties in a technical sense or a special meaning is given to them by usage' [citation], controls judicial interpretation. [Citation.] Thus, if the meaning of a layperson would ascribe to contract language is not ambiguous, we apply that meaning." (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822.)

According to its policy, Fidelity agreed to "pay for direct physical loss to Covered Property . . . caused by or resulting from any Covered Cause of Loss." Covered property under Fidelity's policy includes "Electronic Data Processing Systems," defined as "[e]lectronic data processing, recording or storage media such as films, tapes, discs, drums, or cells" and "[d]ata stored on such media." Greco contends the missing billing data from September, October and November 2005 constitute such covered property. This requires us to discuss, first, Greco's theory on why it suffered a physical loss, and to what property. We then turn to the causation issue.

B. Direct Physical Loss; Covered Property

Billing data may exist in the abstract, as amounts of hours spent and fees earned, and it may also be stored or recorded on computer equipment. In other words, as information, billing data could be "stored in a physical medium, such as a magnetic disc or tape, or even as papers in three-ring binders or a file cabinet, but the [data] itself [will] remain[] intangible." (Ward, supra, 114 Cal.App.4th at p. 556.) Thus, it seems logical to say that one cannot suffer a direct physical loss of computer data unless that data has been stored on media and is unavailable for use as a result of corresponding computer damage. (Id. at pp. 556-557 [holding the loss of data without corresponding loss to tangible property is not a " 'direct physical loss of or damage to' covered property under the terms of the subject insurance policy, and, therefore, the loss is not covered"]; see SoutheastMental Healthcare Center, Inc. v. Pacific Insurance Company, LTD (2006) 439 F.Supp.2d 831, 838-839 (Southeast Mental Healthcare Center) [holding that a computer had suffered covered physical damage when it lost stored programming information and configurations that were necessary for it to function, where a power outage was the covered cause of a business interruption].)

The definitions of Fidelity's policy reveal "data" constitutes covered property only when it is "stored on" "storage media such as films, tapes, discs, drums, or cells." This strongly suggests that if data has not yet been stored on any storage media, coverage will not be provided under this policy. (Ward, supra, 114 Cal.App.4th at pp. 556-557.)

Greco presents no evidence to suggest the missing billing data from September, October, and November 2005 was ever "stored" on Greco's computer system. In fact, the record suggests just the opposite. In its second amended complaint, Greco alleges it suffered a "power outage at its office which unexpectedly caused one of the computers to malfunction at a secretarial station while the secretary was inputting data into the firm's billing software program." (Italics added) Further, in his deposition testimony lodged with the court, Greco attorney Peter Shulz opined the data could be missing because the computer storage media "either wasn't accepting data or that it became -- the data became misaligned." McNeely also admits in his deposition testimony that he had no "evidence or knowledge of what data was being written to the system at the time of the flickering lights." This evidence falls short of a showing that Greco had successfully created covered property.

Even if the missing data were somehow stored on the computer, there is no evidence suggesting any loss of use or functionality of the computer occurred that would amount to a physical loss of covered property. (See Southeast Mental Healthcare Center, supra, 439 F.Supp.2d 831, 838 [a business interruption policy may provide coverage for physical damage that results in loss of functionality of the computer system].) The only evidence suggesting any computer functionality issues was a reference by McNeely during his deposition testimony that "during the investigation [Ludwig] had said that she had to reboot shortly thereafter." McNeely also admitted during his deposition testimony that he found no physical damage occurred to any of Greco's computers. Further, Fidelity adjuster Jamie Clark, who investigated the claim, did not "admit" coverage for electronic computer data, assuming it was never stored on media such as tapes or discs that were physically damaged. In any case, the adjuster's interpretation of the policy does not control a judicial interpretation of the policy. (See Industrial Indemnity Co. v. Apple Computer, Inc. (1999) 79 Cal.App.4th 817, 835, fn. 4.)

Consequently, the summary judgment motion was well taken on this point, because Greco failed to carry its burden in showing a direct physical loss to covered property (i.e., stored data) occurred within the meaning of the policy.

C. Covered Cause of Loss

Even if we assume arguendo that Greco's missing billing data in this case could have constituted covered property, and that Greco can show some direct physical loss of such stored billing data, summary judgment for Fidelity was still proper. Greco failed to carry its burden in showing a covered cause of loss of such data was operating here, within the meaning of the policy.

The property coverage part of the policy defines the coverage provided. Section IA states Fidelity will pay for direct physical loss to covered property, resulting from a "covered cause of loss." Section IA3d extends coverage to "Electronic Data Processing Systems" as defined in part V6 of the policy (stored data.) In section IB, covered causes of loss are defined as "risks of direct physical loss unless the loss to Covered Property is excluded . . . ." Section IC then sets forth exclusions of losses caused by such forces as water, earth movement, etc. Here, we are concerned only with whether Greco can show its data was harmed by a risk of direct physical loss, which would be a covered cause of loss.

Greco contends the covered cause of loss in this case was a power anomaly "which corrupted the data on Greco's WinVan system." This assertion, however, is made without evidentiary support. Greco cites to McNeely's deposition testimony as the sole source of evidence for the power anomaly theory. In fact, Greco contends it met its burden in demonstrating a covered cause of loss by "providing the opinion of an expert identifying the cause of loss as a power anomaly." This deposition testimony, however, was excluded by the trial court when it ruled upon the companion motion brought by Greco, and this removed any evidentiary basis for supporting the claim that a power anomaly was the cause of loss. We note that Greco's opening brief on appeal did not address this evidentiary ruling, nor did it file a reply brief, although it did request oral argument. We have received no explanation from Greco on why the evidentiary ruling in its own summary adjudication motion should not also be binding in the related motion, originally calendared together and resolved two weeks later. There was only one deposition by McNeely that addressed his theory of causation of the loss, and it was relied upon in both motions.

In any case, we will examine the entire record that has been provided to us of the two related motions, including that evidentiary ruling, to evaluate the judgment with regard to the essential element of causation of loss. A trial court has broad discretion in ruling on the admissibility of evidence. (Evid. Code,  352; People v. Karis (1988) 46 Cal.3d 612, 637.) Broadly speaking, we review any ruling by a trial court as to the admissibility of evidence for abuse of discretion. (People v. Williams (1997) 16 Cal.4th 153, 197; People v. Alvarez (1996) 14 Cal.4th 155, 201.) The trial court's discretion is abused when the court exceeds the bounds of reason, all of the circumstances being considered. (People v. Bradford (1976) 17 Cal.3d 8, 20 (Bradford).)

In support of its arguments, Greco lodged the deposition of McNeely. Upon objections by Fidelity, the trial court excluded parts of McNeely's testimony on grounds of speculation and lack of foundation. It is difficult to understand why Greco ignores this issue on appeal. In any case, the record shows no foundation was established by Greco on McNeely's level of expertise, if any, in determining power outages and their subsequent effects. Moreover, McNeely admitted that he had no direct evidence of any power anomalies occurring at the office in the fall of 2005. Thus, his testimony as to the occurrence of a power failure in 2005 is pure speculation and has no foundation.

We cannot find any abuse of discretion in the trial court's evidentiary ruling, which was within the bounds of reason. (Bradford, supra, 17 Cal.3d at p. 20.) With this testimony properly excluded, no evidence was provided to show that any power anomaly operated to cause loss. Instead, according to Price-Hollingsworth's report:

"The Insured was not able to provide a specific day of loss. . . . [S]ince the computer returned to operation, they had no repair work accomplished on the computer . . . . [T]here was no report that the attorneys identified any issues regarding the hours which were entered into the system during November . . . San Diego Gas & Electric reported that they had no record of a power anomaly at the Insured's location in October or November of 2005."

Without McNeely's causation testimony, there was no evidentiary support for Greco's theory a power failure was the operative cause of loss. Consequently, Greco did not carry its burden of showing a covered cause of loss existed as defined in Fidelity's policy. The trial court correctly concluded that Greco had no evidentiary support suggesting there were triable issues about (1) the existence of covered property, (2) the existence of any direct physical loss of covered property, and (3) that any covered cause of loss, such as a risk of direct physical loss, occurred.

Greco's related bad faith theories are likewise unsupported. (Progressive West Ins. Co. v. Yolo County Superior Court (2005) 135 Cal.App.4th 263, 279 ["[T]here is no cause of action for breach of the covenant of good faith and fair dealing when no benefits are due"].) Therefore, the trial court properly granted Fidelity's motion for summary judgment, while denying that of Greco, and entered judgment in Fidelity's favor.

DISPOSITION

The judgment is affirmed. Costs on appeal are awarded to Fidelity.

HUFFMAN, Acting P. J.

WE CONCUR:

McDONALD, J.

IRION, J.

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^[1] The primary source of the power anomaly theory is McNeely's deposition testimony. According to McNeely, the billing data went missing as a result of an isolated power anomaly. This deposition testimony, however, was excluded by the trial court as speculative and lacking in foundation. The remaining record references to McNeely's power anomaly theory are all based exclusively on his opinion. We discuss this evidentiary ruling further in Part IIC, post.

^[2] It should also be noted that the appellant's appendix prepared by Greco is in violation of the rules of court by failing to provide pagination of the index to its five volumes, which has made it very difficult to use. (Cal. Rules of Court, rules 8.124(d); 8.144(b).) It also lacks any index tabs or other means of distinguishing among the 1,306 pages of record, which has also presented some difficulty, but in the interest of reaching the merits, we have endeavored to pursue the issues without returning the matter to counsel for a corrected appendix.