Opinion
Case No. CV 21-3469 DMG (AFMx)
2022-03-18
STATE FARM GENERAL INSURANCE COMPANY, Plaintiff, v. David PHILLIPS, et al., Defendants.
Karen L. Bizzini, Steven J. Elie, Musick Peeler and Garrett LLP, Los Angeles, CA, for Plaintiff. Dennis Neil Jones, Myers Widders Gibson Jones and Feingold LLP, Ventura, CA, for Defendants.
Karen L. Bizzini, Steven J. Elie, Musick Peeler and Garrett LLP, Los Angeles, CA, for Plaintiff.
Dennis Neil Jones, Myers Widders Gibson Jones and Feingold LLP, Ventura, CA, for Defendants.
ORDER RE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
DOLLY M. GEE, UNITED STATES DISTRICT JUDGE
This matter is before the Court on the motion for summary judgment ("MSJ") brought by Plaintiff State Farm General Insurance Company ("State Farm") on its declaratory relief claims against Defendants David Phillips and NKP Medical Marketing, Inc. ("NKP" and together with Phillips, "Insureds"). [Doc. # 34]. The motion is now fully briefed. Opp. [Doc. # 47]; Reply [Doc. # 49]. The Court held a hearing on the motion on March 18, 2022. For the reasons set forth below, the Court DENIES State Farm's MSJ as to the duty to defend causes of action and STAYS the remainder of this action as to the duty to indemnify.
I.
FACTUAL AND PROCEDURAL BACKGROUND
The summarized facts are uncontroverted. Facts are drawn from Plaintiff's Statement of Undisputed Facts ("SUF") and Defendants’ Additional Facts ("DAF"), as reflected in the Reply Statement, which includes the parties’ responses and sur-responses. [Doc. # 50]. The Court has reviewed the entire record, but only discusses the uncontroverted material facts that are necessary to or affect its analysis.
This is an insurance coverage dispute concerning whether State Farm owes a duty to defend or indemnify Phillips and NKP in a lawsuit brought against them by Steven Fruchter and Fruchter & Co. dba GrowthMed, Inc. ("GrowthMed") in the Los Angeles County Superior Court, titled Fruchter v. Phillips , Case No. 19STCV12636 (the "Underlying Action"). State Farm moves for summary judgment on these issues. See MSJ at 2.
All page references herein are to the page numbers inserted by the CM/ECF system.
A. The Allegations in the Underlying Action
The Complaint in the Underlying Action alleges that Fruchter was the target of a "heinous murder-for-hire plot hatched by Phillips to eliminate a competitor." SUF 10; see also Zimmerman Decl., Ex. 2 ("Underlying Complaint") ¶ 1 [Doc. # 34-4]. Phillips was the president and CEO of NKP, a company that provided website design and internet marketing services to companies in the medical field. SUF 11, DAF 69. For approximately two years, Fruchter worked for NKP as an independent contractor. Fruchter left NKP in 2014 after his relationship with Phillips soured. SUF 12. Fruchter then founded GrowthMed and served as its sole owner and CEO. SUF 13. GrowthMed competed directly with NKP in the same digital marketing space. SUF 14. "Shortly after" Fruchter left NKP, Fruchter's family members allegedly began receiving anonymous letters containing false information about Fruchter, including that he was a "drug addict." DAF 47. "In the years following" Fruchter's departure from NKP, Phillips attempted to recruit individual GrowthMed clients, and on at least one occasion, Phillips approached a client and "defamed" Fruchter and GrowthMed. DAF 51.
GrowthMed was successfully winning over clients from NKP when Phillips began plotting the murder-for-hire scheme. SUF 15. In April 2016, Phillips recruited David Suiaunoa, a drug trafficker, to murder Fruchter. SUF 16. Suiaunoa and Phillips met several times to discuss the murder-for-hire plot, including at NKP's offices, and Phillips paid Suiaunoa $30,000 for the job. SUF 17-18. At another meeting, Phillips gave Suiaunoa a photograph of Fruchter along with Fruchter's address and telephone number. DAF 53.
Unbeknownst to Phillips, federal agents investigating Suiaunoa for drug trafficking discovered the murder-for-hire plot and secured Suiaunoa's cooperation. SUF 20-22. Phillips was subsequently arrested, tried, and convicted in federal court for the murder-for-hire plot. SUF 22. Phillips was sentenced to 90 months in federal prison, and his conviction has since been upheld on appeal. Id.
Phillips’ arrest and conviction are not just alleged in the Underlying Complaint, but are also undisputed as factual matters in their own right. See SUF 40-41. Phillips was convicted under the federal murder-for-hire statute, which makes it a crime to travel or use the facilities of interstate or foreign commerce with the intent that a murder be committed for pecuniary gain. SUF 40; see also 18 U.S.C. § 1958.
B. The Policy
State Farm issued commercial general liability insurance to NKP as the named insured for the policy period of August 4, 2016 through August 4, 2017. SUF 1; see also Zimmerman Decl., Ex. 1 ("Policy") [Doc. # 34-3]. The Policy provides that State Farm "will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury.’ " SUF 3. The insurance applies to "bodily injury" and "property damage" only if they are caused by an "occurrence," which is defined to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." SUF 3, 7. The insurance also applies to " ‘personal and advertising injury’ caused by an offense arising out of your business," with "personal and advertising injury" defined to be injuries caused by certain offenses including "[o]ral or written publication, in any manner, of material that slanders or libels a person or organization," and "[o]ral or written publication, in any manner, of material that violates a person's right of privacy." Id.
The Policy includes exclusions for bodily injury or property damage that is an "expected or intended injury" or the result of "willful and malicious, or criminal acts of the insured." SUF 8. The Policy also excludes coverage for "personal and advertising injury" caused by the insured "with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury" (the "Knowing Violations" exclusion). "Personal and advertising injuries" are also excluded if they are committed by an insured whose business is "designing or determining content of web-sites for others" (the "Internet Services" exclusion). Finally, personal or advertising injuries are excluded if they "aris[e] out of a criminal act committed by or at the direction of the insured" (the "Criminal Acts" exclusion). SUF 8.
C. The Underlying Action and NKP's Tenders
On April 11, 2019, Fruchter and GrowthMed filed a complaint in Los Angeles County Superior Court against Phillips, NKP, and Suiaunoa, pleading four causes of action: (1) intentional infliction of emotional distress; (2) assault; (3) intentional interference with prospective economic advantage; and (4) interference with contractual relations. See Underlying Compl.
NKP tendered its defense of the Underlying Action to State Farm on September 20, 2019. SUF 42. State Farm accepted NKP's tender under a full reservation of rights by letter on October 9, 2019 and appointed counsel to defend NKP. SUF 43. State Farm also determined that it might have a duty to defend Phillips and appointed separate defense counsel to defend him under a full reservation of rights on October 30, 2019. SUF 44. State Farm later concluded that it no longer had a duty to defend Phillips and notified him of such by letter on April 20, 2021. SUF 45. State Farm advised NKP on the same date that it had withdrawn its defense of Phillips but that it would continue to defend NKP in the Underlying Action, subject to the reservation of rights and this declaratory relief action. SUF 46.
D. The Instant Action
On April 23, 2021, State Farm filed its Complaint in this action. [Doc. # 1.] State Farm seeks declaratory relief as to four claims: (1) that it owes no duty to defend Phillips; (2) that it owes no duty to defend NKP; (3) that it owes no duty to indemnify Phillips; and (4) that it owes no duty to indemnify NKP in the Underlying Action. State Farm filed the instant MSJ on January 25, 2022.
II.
LEGAL STANDARD
Summary judgment should be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) ; accord Wash. Mut. Inc. v. United States , 636 F.3d 1207, 1216 (9th Cir. 2011). Material facts are those that may affect the outcome of the case. Nat'l Ass'n of Optometrists & Opticians v. Harris , 682 F.3d 1144, 1147 (9th Cir. 2012) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). A dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Liberty Lobby , 477 U.S. at 248, 106 S.Ct. 2505.
The moving party bears the initial burden of establishing the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its initial burden, Rule 56(c) requires the nonmoving party to "go beyond the pleadings and by [his or] her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue for trial.’ " Id. at 324, 106 S.Ct. 2548 (quoting Fed. R. Civ. P. 56(c), (e) ); see also Norse v. City of Santa Cruz , 629 F.3d 966, 973 (9th Cir. 2010) (en banc ) (" Rule 56 requires the parties to set out facts they will be able to prove at trial."). "In judging evidence at the summary judgment stage, the court does not make credibility determinations or weigh conflicting evidence." Soremekun v. Thrifty Payless, Inc. , 509 F.3d 978, 984 (9th Cir. 2007). "Rather, it draws all inferences in the light most favorable to the nonmoving party." Id.
Where the issues before the Court are questions of law, the case is particularly "well suited" for summary judgment. Del Real, LLC v. Harris , 966 F. Supp. 2d 1047, 1051 (E.D. Cal. 2013) ; see also Asuncion v. Dist. Dir. Of U.S. Immigration & Naturalization Serv. , 427 F.2d 523, 524 (9th Cir. 1970) (district court properly resolved motion for summary judgment where issues presented were comprised solely of questions of law). Additionally, "[c]ontract interpretation is a judicial function that is appropriately resolved on summary judgment." DPR Constr. v. Shire Regenerative Med., Inc. , 204 F. Supp. 3d 1118, 1128 (S.D. Cal. 2016).
III.
DISCUSSION
State Farm argues that it owes no duty to defend or indemnify Phillips or NKP because the murder-for-hire plot alleged in the Underlying Action is not covered by the Policy, either because it is not an "occurrence" or because it falls within one of the exclusions. Insureds respond in their Opposition by acknowledging that the murder-for-hire would not be covered, but they argue that the Underlying Complaint also alleges defamation and invasion of privacy, which would be covered at least insofar as there is a duty to defend.
For the purposes of its MSJ only, State Farm assumes that Phillips is also an insured under the Policy issued to NKP.
A. Duty to Defend Standards
Under California law, an insurer may have a duty to defend or a duty to indemnify, or both. Buss v. Superior Court , 16 Cal. 4th 35, 45-46, 65 Cal.Rptr.2d 366, 939 P.2d 766 (1997). While the duty to indemnify "runs to claims that are actually covered" by a given policy "in light of facts proved," the duty to defend "runs to claims that are merely potentially covered, in light of facts alleged or otherwise disclosed." Id. (duty to indemnify arises "only after liability is established," but duty to defend "arises as soon as tender is made"). Thus, while insurers must indemnify insureds only for proven claims, when an insurer has a duty to defend, the broader "potential for coverage" standard applies. Manzarek v. St. Paul Fire & Marine Ins. Co. , 519 F.3d 1025, 1031 (9th Cir. 2008) ; Horace Mann Ins. Co. v. Barbara B. , 4 Cal. 4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993) ("[T]he duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded."). "To prevail [on the duty to defend], the insured must prove the existence of a potential for coverage , while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. " Montrose Chem. Corp. v. Superior Court , 6 Cal. 4th 287, 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993) (emphases in original).
"The duty to defend is determined by reference to the policy, the complaint, and all facts known to the insurer from any source." Id. (emphasis in original). "The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy." Id. "Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy." Id. at 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153. "Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor." Id. at 299-300, 24 Cal.Rptr.2d 467, 861 P.2d 1153. "If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend." Mirpad v. California Ins. Guarantee Assn. , 132 Cal. App. 4th 1058, 1068, 34 Cal.Rptr.3d 136 (2005).
B. Allegations of Defamation and Invasion of Privacy
Insureds concede that claims stemming from the allegations of the murder-for-hire plot are not covered. See Opp. at 6-7. Rather, the parties contest whether the allegations in the Underlying Action can support claims for defamation or invasion of privacy, and whether such potential claims may be covered.
State Farm's point that Phillips, and possibly also NKP, will be collaterally estopped in the Underlying Action from challenging liability for the murder-for-hire plot by the conviction in the criminal case is therefore superfluous. Insureds do not argue that such liability is covered. The claims that they do argue are covered—defamation and invasion of privacy—were clearly not necessarily decided by the criminal conviction under the murder-for-hire statute. Insureds make much ado about State Farm's argument that NKP is in "privity" with Phillips such that it may also be collaterally estopped by his criminal case. Insureds insist that the privity element tramples on issues of vicarious liability that are being litigated in the Underlying Action, and so this whole action should be stayed pending the resolution of the Underlying Action. Opp. at 3-4. But because collateral estoppel is a non-issue, the Court will not decide the privity question. There is thus no overlap in issues, and so a stay is not warranted.
It is true that the Underlying Complaint does not assert claims for defamation or invasion of privacy. But "that the precise causes of action pled by the third-party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability." Scottsdale Ins. Co. v. MV Transportation , 36 Cal. 4th 643, 654, 31 Cal.Rptr.3d 147, 115 P.3d 460 (2005). Nor would it matter if allegations of possible defamation or invasion of privacy are ancillary to the "dominant factor" of the action. Horace Mann , 4 Cal. 4th at 1084, 17 Cal.Rptr.2d 210, 846 P.2d 792 ("We look not to whether noncovered acts predominate in the third party's action, but rather to whether there is any potential for liability under the policy."). Nor does it matter that Phillips’ criminal conviction may establish with certainty that some underlying allegations are not covered. Id. at 1083, 17 Cal.Rptr.2d 210, 846 P.2d 792 ("[T]he fact of Lee's conviction could not eliminate the duty to defend against the other allegations of misconduct, not amounting to criminal molestation."). State Farm would have a duty to defend other, possibly covered claims that are potentially alleged in the complaint. See CNA Casualty v. Seaboard Surety Co. , 176 Cal. App. 3d 598, 609 n.4, 222 Cal.Rptr. 276 (1986) ("it is not [the] insurer's place to analyze and evaluate the underlying claim of liability in order to reject the defense of any claim that is not meritorious").
In support of the existence of a potential defamation claim, Insureds cite to allegations in the Underlying Complaint that: (1) shortly after Fruchter left NKP, members of his family began receiving anonymous letters that contained false and defamatory information about Fruchter, including that he was a "drug addict"; and (2) on at least one occasion, Phillips approached one of Fruchter's clients and "defamed" Fruchter and GrowthMed to try to recruit the client. These allegations, though they are not the "dominant factor" of Fruchter's Complaint, support the potential for liability for defamation. This alleged defamation is also not "inseparably intertwined" with the murder-to-hire scheme. The interests at play are distinct—the defamation was intended to sully Fruchter's social and business reputation, while the murder-for-hire scheme was intended to kill him. See Horace Mann , 4 Cal. 4th at 1084-85, 17 Cal.Rptr.2d 210, 846 P.2d 792 (alleged negligent public "parasexual" misconduct with child "affected a different interest" from private sexual molestation of the child). The murder-for-hire scheme could have occurred regardless of whether the defamatory acts took place, and the defamatory acts do not necessarily appear to be tethered to the scheme.
Gauntlett v. Illinois Union Ins. Co. , No. 5:CV 11-00455-EJD, 2011 WL 5191808, at *7 (N.D. Cal. Nov. 1, 2011) and Hurley Constr. Co. v. State Farm Fire & Cas. Co. , 10 Cal. App. 4th 533, 538-539, 12 Cal.Rptr.2d 629 (1992), cited by State Farm, are inapposite. While the insured may not speculate about unpled allegations to manufacture coverage, the allegations of defamation are actually pled here, and it does not require speculation to infer the possibility of the claim.
On the other hand, the purported invasion of privacy claim—which is based on Phillips having given Suiaunoa a picture of Fruchter with his address and phone number—may be inextricably intertwined with the murder-for-hire. Phillips divulged this information for the purpose of facilitating the murder. Regardless, because "an insurer has a duty to defend the entire third party action if any claim encompassed within it potentially may be covered," the defamation claim alone would give rise to the duty to defend, so the Court need not delve any further into the invasion of privacy claim. See Horace Mann , 4 Cal. 4th at 1084, 17 Cal.Rptr.2d 210, 846 P.2d 792.
The alleged defamatory acts would fit within the definition of a "personal and advertising injury," in that they are "[o]ral or written publication[s], in any manner, of material that slanders or libels a person or organization." Because these acts are separately alleged from the non-covered allegations, State Farm would thus have a duty to defend the Underlying Action, so long as the acts occurred within the policy period and were not subject to an exclusion.
Unlike bodily injury or property damage, "personal and advertising injury" need not be caused by an "occurrence"—i.e. , an accident—to be covered. "Personal and advertising injury" also must arise out of the insured's business, but State Farm does not contest this point. Given that at least some of the alleged defamatory acts included slandering Fruchter's business for the purpose of stealing clients, it is possible that they arose out of NKP's business.
C. Policy Period
The Policy period began on August 4, 2016, and the Underlying Complaint alleges that Phillips began sending defamatory letters "shortly after" Fruchter left NKP in 2014. The parties therefore dispute whether the defamatory acts occurred within the Policy period. Insureds acknowledge that including August 2016 as "shortly after" 2014 may "stretch the common understanding of the words," but they argue that because Fruchter's relatives allegedly "began" receiving "letters" (plural) shortly after 2014, it is possible that some of those letters were sent after August 4, 2016, even if the first one was not.
State Farm responds by pointing to a Policy exclusion for "personal and advertising injury" arising out of oral or written publications "whose first publication took place before the beginning of the policy period." Policy at 31. This exclusion has been interpreted to apply "whenever the first publication of substantially the same material occurred before the inception of the policy period, without regard to whether or not the defamatory material is literally restated in precisely the same words." Ringler Assocs. Inc. v. Maryland Cas. Co. , 80 Cal. App. 4th 1165, 1182, 96 Cal.Rptr.2d 136 (2000) (emphasis in original). The Underlying Complaint leaves room, however, for the possibility that subsequent letters included different defamatory material, not merely different words. It alleges only that Fruchter's family members "began receiving anonymous letters that contained false and defamatory information about Fruchter, including that he was a ‘drug addict.’ " Underlying Compl. ¶ 15 (emphasis added). The allegations leave open the possibility that some letters may have been defamatory because they accused Fruchter of being a drug addict, but others may have been defamatory for entirely different reasons. And as alleged, it is possible that some of those letters, containing original defamatory material, were sent after August 4, 2016. Again, under California law even the mere possibility of coverage will trigger the duty to defend. See KM Strategic Mgmt., LLC v. Am. Cas. Co. of Reading PA , 156 F. Supp. 3d 1154, 1168 (C.D. Cal. 2015) ("In fact, the insured, in submitting tender for a defense, need not demonstrate that coverage is likely or even ‘reasonably’ likely.").
Moreover, the allegation that Phillips confronted one of Fruchter's clients and defamed Fruchter was included in the paragraph that began with the prefatory phrase, "in the years following his separation." Underlying Compl. ¶ 16. The "years following" 2014 certainly leaves open the possibility that at least this defamatory act occurred after August 4, 2016. State Farm has thus not conclusively established that the covered allegations entirely fell outside the Policy period.
D. Other Exclusions
State Farm argues that the Criminal Acts, Knowing Violations, and Internet Services Exclusions also bar coverage for the alleged "personal and advertising injuries." Under California law, "[an] insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds." Atl. Mut. Ins. Co. v. J. Lamb, Inc. , 100 Cal. App. 4th 1017, 1039, 123 Cal.Rptr.2d 256 (2002). "Exclusionary clauses are strictly construed." HS Services, Inc. v. Nationwide Mut. Ins. Co. , 109 F.3d 642, 645 (9th Cir. 1997). While "it may ultimately be determined that [an insurer] has a viable defense to coverage by virtue of the application of [an] exclusion, this can only affect its liability for indemnification," not its duty to defend, because the "duty to defend depended on the existence of only a potential for coverage." J. Lamb , 100 Cal. App. 4th at 1040, 123 Cal.Rptr.2d 256.
1. Criminal Acts Exclusion
The Criminal Acts Exclusion bars coverage for "personal and advertising injuries" "arising out of a criminal act committed by the insured." As discussed above, the defamatory acts as alleged in the Underlying Complaint are not necessarily intertwined with, and therefore do not "arise out of," the criminal act for which Phillips was convicted. This exclusion therefore does not preclude State Farm's duty to defend.
2. Internet Services Exclusion
The Internet Services Exclusion bars coverage for personal or advertising injuries "committed by an insured whose business is" "[d]esigning or determining content of web-sites for others." Insureds admit that "NKP is a company that designs and markets websites for medical professionals, and does paid advertising and integrates website content with search engine optimization to increase the number of visitors to each website." SUF 31. Nonetheless, it is not entirely clear that the exclusion applies in this scenario.
The alleged defamatory acts were not committed via the internet or on a website, they were done by way of "letters" and orally, in person. The Policy covers "personal and advertising injuries" caused by an offense "arising out of [the insured's] business." SUF 3. It then excludes coverage for those injuries "committed by an insured whose business is" designing websites. SUF 8. One interpretation of these two clauses, read together, is that "personal and advertising injuries" are simply never covered for insureds whose business is designing websites. But another reasonable interpretation is that the injuries are not covered when they arise out of the actual activity of designing websites. "Personal and advertising injuries" may arise from the business in the sense that they were caused by conduct intended to further business aims, but not arise from the actual activity that the business engages in on behalf of its clients or customers. That is the situation here. Phillips’ alleged defamation "arose out of" his business in the sense that he defamed Fruchter and his business, including to Fruchter's clients, in order to gain a competitive advantage. It arose from a business context, but any business could have engaged in this conduct regardless of its nature. In other words, the fact that NKP happens to be in the business of designing websites is irrelevant to the potential defamation claims. It would be odd and arbitrary to exclude claims for defaming a business competitor based simply on the otherwise irrelevant nature of the business.
When insurance policy provisions are subject to more than one reasonable construction, they are considered ambiguous, and must be construed against the insurer and in favor of coverage. Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co. , 18 Cal. 4th 857, 868, 77 Cal.Rptr.2d 107, 959 P.2d 265 (1998). Because a reasonable interpretation of the Internet Services Exclusion is that it applies only when the injury occurs by way of the conduct of designing websites, the Court must apply this interpretation, which is more favorable to Insureds. The Exclusion therefore does not preclude State Farm's duty to defend.
The Policy also includes a related exclusion, for "personal and advertising injuries" committed by an insured whose business is "[a]n Internet search, access, content or service provider." There is no conclusive evidence in the record that NKP's business fits within that definition, but even if there was, the foregoing analysis applies equally—alleged defamation here had nothing to do with the fact that NKP was an internet business of any kind.
3. Knowing Violations Exclusion
The Knowing Violations Exclusion bars coverage for "personal and advertising injury" "[c]aused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury." SUF 8.
As applied to the duty to defend, courts interpret this exclusion extremely narrowly because "[t]here is usually at least a possibility of coverage because, despite the allegations of intentional acts, the insured's conduct may be shown to have been merely reckless or negligent." KM Strategic , 156 F. Supp. 3d at 1170 (citation omitted) (Knowing Violations exclusion did not apply to "unproven and disputed allegations" of defamation). Here, it may ultimately be proven that Phillips did not commit intentional defamation or even defamation at all because, for example, the statements he made about Fruchter were true, or he believed them to be true. Without conclusive evidence that Phillips knew that his statements amounted to defamation in violation of the rights of Fruchter and GrowthMed, the Knowing Violations exclusion does not apply.
E. Duty to Indemnify
Because the Court finds that State Farm has a duty to defend, and the Underlying Action is still pending, the Court cannot resolve the indemnification question. See Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co. , 45 Cal. App. 4th 1, 108, 52 Cal.Rptr.2d 690 (1996) ("[T]he question whether an insurer has a duty to indemnify the insured on a particular claim is ripe for consideration only if the insured has already incurred liability in the underlying action.").
IV.
CONCLUSION
For the foregoing reasons, State Farm's MSJ is DENIED as to the duty to defend Phillips and NKP. Because some unresolved allegations in the Underlying Action introduce the potential for coverage, the duty to defend is established. See Mirpad , 132 Cal. App. 4th at 1068, 34 Cal.Rptr.3d 136 ("If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend."). Therefore, the Court sua sponte grants partial summary judgment in favor of Insureds on the duty to defend claims. See Cool Fuel, Inc. v. Connett , 685 F.2d 309, 312 (9th Cir. 1982) (the court may sua sponte grant summary judgment in favor of non-movant where the issues have been fully briefed).
Because no liability has been established yet in the Underlying Action, the Court STAYS the remainder of this action as to the duty to indemnify and places it in inactive status. The parties shall file a joint status report within one week of the resolution of the Underlying Action updating the Court on whether and how they wish to proceed in this litigation. All dates and deadlines are VACATED and will be reset, if necessary, after the conclusion of the Underlying Action.
IT IS SO ORDERED.