Trial Court Finds Claim for Bad Faith May Survive a Motion to Dismiss Despite Failure to Properly Plead Claim for Breach of Contract

Mortazavi v. Federal Ins. Co., 2014 U.S. Dist. LEXIS 31555 (S.D. Cal. Mar. 11, 2014), [enhanced version available to subscribers].

In Mortazavi, the district court found in favor of a carrier on its motion to dismiss the insureds’ claim for breach of contract, but found that the insured had properly pled its claim for bad faith.

Mortazavi involved a coverage dispute relating to an underlying action and related cross-complaint filed against the insureds. The specifics of the underlying claims are not discussed in the Mortazavi decision. The insureds tendered their defense and indemnity to two carriers, both of which denied coverage. The insureds then filed the Mortazavi action in San Diego Superior Court. That action included breach of contract and bad faith claims, among others. The carriers removed the action to federal court and moved to dismiss the claims of both insureds. With regard to the claims of one insured, the court found that the allegations in the complaint did not establish potential coverage under the relevant insuring agreement, and therefore dismissed all claims with leave to amend.

The court reached a different result with regard to the other insured. The Mortazavi court found that the breach of contract claim asserted by the second insured must be dismissed because that claim did not contain sufficient facts regarding the underlying action to meet the insured’s burden to establish potential coverage under the relevant insuring agreement. However, with regard to the claim for bad faith, the Mortazavi court denied the motion to dismiss based on the plaintiff’s general allegations that the carriers had a duty to defend, did not properly investigate the insured’s claim to coverage and acted arbitrarily with regard to that claim. In reaching that conclusion, the Mortazavi court did not address any of the numerous California cases—including the California Supreme Court’s decision in Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1 (1995) [enhanced version available to subscribers]—holding that a carrier cannot be found liable for bad faith if it did not breach the insurance contract.

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