Smith v. Financial Pacific Ins. CA2/5

Filed 11/15/21 Smith v. Financial Pacific Ins. CA2/5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE
MARSHALL W. SMITH, B302014

Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC711308)
v.

FINANCIAL PACIFIC
INSURANCE COMPANY,

Defendant and Appellant,

TRAVELERS PROPERTY
CASUALTY COMPANY OF
AMERICA,

Defendant and Respondent.

APPEAL from a judgment of the Superior Court of Los
Angeles County, Dennis J. Landin, Judge. Affirmed in part,
reversed in part, and remanded.
Law Offices of Richard A. Jones, Richard A. Jones and
Jarrick S. Goldhamer for Plaintiff and Appellant.
Selman Breitman, Eldon S. Edson and Laura R. Ramos for
Defendant and Appellant.
Weston & McElvain, Aaron C. Agness and Edmond Sung
for Defendant and Respondent.
 INTRODUCTION
In this insurance coverage and bad faith action, we
consider two different insurance policies. Plaintiff Marshall
Smith, while riding a motorcycle, was injured in a collision with
an SUV driven by Luke Gardner. Gardner’s insurer accepted the
claim and is not a party here. At issue is insurance provided to
Gardner’s father-in-law, Gerry Paddock, who was held
vicariously liable for Gardner’s negligence. Paddock was the sole
proprietor of two businesses which operated under fictitious
names.1 One, a construction business, was Carmel Valley
Construction. The other, a cattle ranching business, was
Paddock Land & Cattle. Prior to the automobile accident,
Paddock had suffered a stroke and was unable to handle the day-
to-day affairs of Paddock Land & Cattle. His daughter, Emily,
was his ranch manager. On the day of the accident, Emily had
requested her husband, Gardner, to drive the SUV to some leased
land and take care of the cattle. Gardner, who was not an
employee of Paddock, agreed. He collided with motorcyclist
Smith on his way to the property.
At the time of the accident, Paddock had policies from two
different insurers. Travelers Property Casualty Company of
America provided an Agribusiness policy, covering the operations
of Paddock Land & Cattle. That policy contained an automobile
exclusion. Financial Pacific Insurance Company provided
liability insurance for Paddock’s construction operations, Carmel
Valley Construction. Its policy included automobile insurance.
Gardner’s accident was tendered to Travelers and Financial
Pacific. Both denied coverage.

1 We use “Paddock” alone to refer to Gerry Paddock, not any
of his businesses.

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 In the underlying personal injury action between Smith
and Paddock (and Gardner), the court entered a judgment in
Smith’s favor in excess of the combined policy limits of Travelers
and Financial Pacific. Paddock then assigned both contractual
and extra-contractual rights to Smith, and Smith brought suit
against both insurers for breach of contract and bad faith.
Broadly speaking, the theories were these: (1) as against
Travelers (which provided Agribusiness coverage to Paddock dba
Paddock Land & Cattle, with an auto exclusion), Smith argued
the auto exclusion did not apply, because that exclusion applied
only when the vehicle was used by an insured, and Gardner was
not an insured; and (2) as against Financial Pacific (which issued
a policy in the fictitious business name Carmel Valley
Construction, with auto coverage), Smith argued that the auto
portion of the policy covered Paddock and all of his sole
proprietorships, and was not limited to the construction business.
On cross-motions for summary judgment/summary adjudication,
the court concluded: (1) the Travelers policy did not cover the
accident; (2) the Financial Pacific policy did provide coverage; but
(3) Financial Pacific did not act in bad faith. The court entered
judgment in favor of Travelers; and in favor of Smith as against
Financial Pacific, in the full amount of the underlying judgment,
in excess of policy limits. Smith appeals the judgment in favor of
Travelers; Financial Pacific appeals the judgment against it on
coverage; Smith cross-appeals the finding of no bad faith against
Financial Pacific. We conclude: (1) the Travelers policy did not
cover the accident; (2) the Financial Pacific policy did cover the
accident; and (3) Financial Pacific did not negate a triable issue
of fact on the bad faith claim. We therefore affirm the judgment
in favor of Travelers, reverse the judgment against Financial
Pacific, and remand for further proceedings.

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 FACTUAL AND PROCEDURAL BACKGROUND
The facts and relevant policy language are largely, if not
entirely, undisputed. The main issues on appeal are questions of
coverage, which we resolve as a matter of law on undisputed
facts. (Crown Capital Securities, L.P. v. Endurance American
Specialty Ins. Co. (2015) 235 Cal.App.4th 1122, 1128.)
1. The Accident
On October 5, 2014, Gardner was driving his Bronco to Palo
Corona Regional Park, where he planned to tend to Paddock’s
cattle. There were a number of motorcycles coming up behind
him; the lead one was driven by Smith. Gardner slowed to turn
left into the park; whether he used his turn signal was disputed.
As the Bronco slowed, Smith decided to pass it on the left. As
Smith began to pass, Gardner started his turn, and the vehicles
collided. Smith lost control of the motorcycle and was thrown
some distance. He was evacuated from the scene by helicopter.
When the matter was ultimately tried, fault was apportioned
50/50 between Gardner and Smith.
2. The Underlying Action
A. Complaint
On July 31, 2015, Smith brought suit against Gardner. He
also named Paddock dba Paddock Land & Cattle and Paddock
Land & Cattle as two additional defendants. 2 The action was

2 As we shall discuss below, although Smith had purported to
sue Paddock dba Paddock Land & Cattle and Paddock Land &
Cattle as two separate entities, the use of a fictitious business
name does not create a separate legal entity. (Pinkerton’s, Inc. v.
Superior Court (1996) 49 Cal.App.4th 1342, 1348.) Thus,
Paddock – the individual – was the only legitimate defendant.
However, the record before us does not indicate whether this
issue was raised in the underlying case, and both Paddock dba
Paddock Land & Cattle and Paddock Land & Cattle remained

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filed on a form complaint. In the complaint, Paddock dba
Paddock Land & Cattle and Paddock Land & Cattle were alleged
to be liable as employers and/or principals of Gardner. Smith
specifically alleged that Gardner “was acting in the scope of his
agency at the time of the accident for defendant Gerry Paddock,
dba Paddock Land & Cattle, Paddock Land & Cattle and [Does].”
B. Travelers and Financial Pacific Deny Coverage
Gardner was insured by GEICO. GEICO provided a
defense to both Gardner and Paddock in the underlying action,
although GEICO’s policy limit was $15,000. The action was
tendered to Travelers, whose Agribusiness policy to Paddock dba
Paddock Land & Cattle had a $1,000,000 limit. The record is not
entirely clear whether Travelers declined the defense; there is no
dispute, however, that it declined coverage. The action was also
tendered to Financial Pacific, who purported to insure “Carmel
Valley Construction” with $1,000,000 of auto liability coverage.
Financial Pacific refused to defend or indemnify Paddock in the
underlying action.
C. Covenant Not to Execute
On December 21, 2017, prior to the trial of the underlying
action, Smith entered into a settlement with Gardner and one or
more Paddock entities.3 In exchange for a covenant not to

named defendants in that action through the entry of judgment.
We therefore refer to the Paddock entities exactly as the court did
in the underlying action.

3 The agreement, at various times, mentions Paddock as an
individual, Paddock dba Paddock Land & Cattle, and Paddock
Land & Cattle. Financial Pacific argued that there was no
assignment of rights under its policy, as the document did not
encompass Paddock dba Carmel Valley Construction. As the trial

5
execute on the anticipated judgment, Gardner and the Paddock
signatories assigned to Smith all their rights to indemnity from
Travelers and Financial Pacific as well as their rights to extra-
contractual damages, including bad faith. 4
D. Judgment
The underlying personal injury action was tried to a referee
over two days in February 2018. The referee heard testimony
and reviewed transcripts, declarations and other documentary
evidence. The referee found Smith’s damages to be $4,000,000.
As he was 50 percent negligent, the net damages awarded were
$2,000,000.5
As to the issue of the liability of Paddock dba Paddock Land
& Cattle and Paddock Land & Cattle, the referee’s written ruling
– ultimately incorporated into the court’s judgment – stated as
follows: “AGENCY - a major issue in the case was whether Luke
Gardner was the agent of the Paddock defendants. Clearly, he
was. At the time of the accident here involved, Gardner was
driving on his way to land leased for cattle grazing by the
Paddock defendants. At that location, he was to feed, medicate,
inspect and otherwise care for the cattle. He was doing this at
the request of and under the direction of Paddock Land & Cattle
made by its Ranch Manager, Emily Paddock. The evidence on
this point was uncontroverted. [¶] Gardner was not an employee
of the Paddock defendants, but employment is not required to

court did not address the issue, and Financial Pacific does not
pursue it on appeal, we express no opinion on this dispute.

4 Smith also received the $15,000 GEICO policy limits.

5 The judgment ultimately entered in March 2018 included
10 percent prejudgment interest from May 2016, so the total
exceeded all policy limits when entered.

6
establish an agency relationship. The CACI jury instructions
dealing with agency ([Nos.] 3700 & 3701) and the cases cited
there use the term ‘agent’ and ‘employee’ interchangeably.
Gardner was not merely ‘doing a favor’; he was doing Paddock’s
work, at Paddock’s direction and under Paddock’s control. [¶]
Gardner was driving his own vehicle, but was not in a ‘going or
coming’ situation, rather, he was using the vehicle in furtherance
of the tasks assigned to him by Paddock. This is the essence of
an agency relationship.”
On March 29, 2018, judgment in the underlying action was
entered in favor of Smith against Gardner, Paddock dba Paddock
Land & Cattle, and Paddock Land & Cattle in the amount of
$2,000,000 plus costs and prejudgment interest.
3. Pleadings in the Current Action
A. Smith’s Complaint
On June 25, 2018, Smith, pursuant to the direct action
statute (Ins. Code, § 11580, subd. (b)(2)) and his assignment that
was part of the covenant not to execute, filed the current action
against Travelers and Financial Pacific. He stated three causes
of action: (1) breach of contract; (2) bad faith; and (3) declaratory
relief.
As to breach of contract, Smith alleged that the defendant
insurance companies violated their contractual duties to defend,
indemnify and settle the underlying action. He alleged that, as a
proximate result of their failure to defend and indemnify, the
underlying trial resulted in a judgment in excess of $2.4 million.
As to bad faith, Smith enumerated a laundry list of ways in
which the defendants purportedly violated the implied covenant
of good faith and fair dealing – including that they failed to
objectively evaluate the claim, interpreted their policies in an

7
unduly restrictive manner, and rejected settlement demands
within policy limits.
B. The Insurance Companies’ Answers
Travelers and Financial Pacific both filed answers
consisting of denials and affirmative defenses. As relevant to this
appeal, Financial Pacific’s second affirmative defense claimed
that its policy was issued to Carmel Valley Construction and
provided no coverage to Paddock Land & Cattle or Gardner.
C. Financial Pacific’s Cross-Complaint
Financial Pacific also filed a cross-complaint, although it
would not be filed until after Smith had filed his motion for
summary adjudication against Financial Pacific. The cross-
complaint alleged three causes of action for declaratory relief
(seeking declarations of no duty to defend, no duty to indemnify,
and, in the alternative, the amount owed) and one to reform the
policy.6 In its cause of action for declaratory relief regarding
amount owed, Financial Pacific argued that the underlying action
was based in part on stipulated evidence “and resulted in a
judgment much greater than would have been given in a fully
contested hearing.” The cause of action for reformation alleged
that, to the extent its policy does not reflect the true intent of the
parties to limit coverage to only liabilities arising out of Carmel
Valley Construction, the policy should be reformed to reflect that
intent.
4. Cross-Motions on the Travelers Policy
On February 18, 2019, Smith moved for summary
adjudication that Travelers had a duty to indemnify for the
underlying judgment against Paddock. On March 6, 2019,

6 Paddock died prior to the filing of the cross-complaint.
Financial Pacific named the Estate of E. Gerry Paddock as a
cross-defendant. The estate is not a party to this appeal.

8
Travelers filed its own motion for summary judgment on the
basis that its policy did not provide coverage for this accident.
The issue raised by the cross-motions was one of policy
interpretation. We will set forth the relevant terms in more
detail in our discussion. Suffice it to say, the policy contained an
auto exclusion which applies whenever the car involved in the
accident is driven by an “insured.” In turn, the policy includes
among the insureds “volunteer workers” who act “at the direction
of and within the scope of duties determined by” the named
insured. Here, Gardner was doing the work of Paddock Land &
Cattle, as directed by Emily Paddock, its ranch manager.
Travelers argued that this rendered him an insured, triggering
the auto exclusion. Smith argued, to the contrary, that in order
for Gardner to have been an insured “volunteer worker,” he had
to have been acting at the personal direction of Gerry Paddock
himself. As he was not, Gardner was not an insured, and the
auto exclusion did not apply.7
The trial court agreed with Travelers, concluding that
Gardner was a volunteer worker and the auto exclusion applied.
While the court’s ruling was based on policy interpretation, it
also noted that a ruling in favor of coverage would be inconsistent
with the findings in the underlying judgment: “The Monterey
court in the underlying action found Mr. Paddock and [Paddock
Land & Cattle]’s liability based on their vicarious liability for Mr.
Gardner’s negligence because Mr. Gardner was found to be their
agent. [Citation.] (Mr. Gardner was ‘doing Paddock’s work, at
Paddock’s direction and under Paddock’s control.’) However, as
Plaintiff asserts, if [Paddock Land & Cattle]’s directions should

7 Although Smith argues that Gardner was not an insured,
Smith seeks to hold Travelers liable for the entire underlying
judgment due to its coverage of Paddock.

9
not be construed as Mr. Paddock’s business activities, there
should not have been any vicarious liability tied to Mr. Paddock
and, therefore, Plaintiff should not have been allowed to reach
Mr. Paddock’s insurance in the first place.” The court granted
Travelers’s motion and denied Smith’s.
5. Cross-Motions on the Financial Pacific Policy
Contemporaneously with the cross-motions on Travelers’s
policy, Smith and Financial Pacific were also litigating cross-
motions for summary adjudication. On February 18, 2019, Smith
moved for summary adjudication of two issues: (1) Financial
Pacific had a duty to indemnify Paddock for the accident; and
(2) as to Financial Pacific’s second affirmative defense – its policy
covered only Carmel Valley Construction, not Paddock Land &
Cattle. On April 22, 2019, Financial Pacific moved for summary
judgment on the basis that its policy provided no coverage for the
accident, as it covered only Carmel Valley Construction activities.
In the alternative, it moved for summary adjudication of the
issue of bad faith.8 Specifically, although not exclusively,
Financial Pacific relied on the genuine dispute doctrine to shield
it from bad faith liability. (E.g., Chateau Chamberay
Homeowners Assn. v. Associated Internat. Ins. Co. (2001)
90 Cal.App.4th 335, 347.)
As with the Travelers’s cross-motions, we will discuss the
Financial Pacific cross-motions in greater detail in the Discussion

8 Financial Pacific also sought summary adjudication of
Smith’s claim for punitive damages against it. As Smith had
sought punitive damages only in connection with bad faith, and
Financial Pacific had argued that punitive damages were
unavailable because the bad faith claim was meritless, the claim
for punitive damages rises and falls with the cause of action for
bad faith, and we need not discuss them separately.

10
section below. In summary, it was not disputed that Financial
Pacific provided Paddock with auto insurance. The issue
presented by these motions was whether the auto coverage
provided by the Financial Pacific policy extended to Paddock’s
Paddock Land & Cattle business activities or whether it was
limited to Paddock’s Carmel Valley Construction activities.
Financial Pacific’s argument depended largely on the name
of the “insured” in its policy (“Carmel Valley Construction c/o
Gerry Paddock”) and the designation of the insured’s business as
“CONSTRUCTION.”
Smith, in contrast, relied on legal authority that a fictitious
business name is not a legal entity that can be an insured; thus,
Financial Pacific’s insured had to be Paddock, not Carmel Valley
Construction. Smith also relied on a great deal of extrinsic
evidence (discussed below) supporting the proposition that
Paddock’s reasonable expectation was that the auto liability
coverage of the Financial Pacific policy applied to all his
endeavors.
On September 16, 2019, the trial court entered its order.
The court ruled in favor of Smith on coverage, concluding that
Carmel Valley Construction was a legal fiction and Financial
Pacific’s insured was simply Paddock. The court further held
that, even if there were ambiguities in the policy, the ambiguities
must be construed in favor of the objectively reasonable
expectations of the insured, which would also result in coverage,
based on Smith’s evidence.
However, the court granted Financial Pacific summary
adjudication of Smith’s cause of action for bad faith, on the basis
of the genuine dispute doctrine. The court stated, “Upon review
of [Financial Pacific]’s arguments, the Court finds that [Financial
Pacific] did not unreasonably and in bad faith withhold payment

11
of Mr. Paddock’s claim because there was a genuine dispute as to
policy coverage.”
6. Entry of Judgments and Appeals
Judgment was entered in favor of Travelers, based on the
ruling in its favor on the cross-motions for summary judgment.
Financial Pacific objected to the prejudgment and postjudgment
interest, but not the $2,000,000. It submitted its own proposed
judgment for judgment to be entered in favor of Smith on his
breach of contract cause of action in a blank amount. Financial
Pacific’s proposed judgment also stated “Financial Pacific
Insurance Company’s cross-complaint has been adjudicated
through the Court’s September 16, 2019 Order. Financial Pacific
Insurance Company shall take nothing from cross-defendants.”
After briefing, the court entered judgment in favor of Smith
and against Financial Pacific, in the amount of $2,763,860.85.
Financial Pacific filed a timely notice of appeal. The following
day, Smith filed a notice of cross-appeal.
DISCUSSION
We first discuss the standard of review and an issue
regarding fictitious business names that applies to both policies.
Next, we address the judgment in favor of Travelers. We agree
with the trial court that the auto exclusion applies, and affirm
the judgment. We then turn to the judgment against Financial
Pacific. We agree with the trial court that the policy provided
coverage for the accident, so summary adjudication on the issue
of indemnity was appropriately granted to Smith. However, we
disagree on the issue of bad faith, as the genuine dispute doctrine
does not support the grant of summary adjudication. We
therefore remand for further proceedings as between Smith and
Financial Pacific only.

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1. Standard of Review and Norms of Contractual
Interpretation
“ ‘ “When determining whether a particular [insurance]
policy provides a potential for coverage . . . , we are guided by the
principle that interpretation of an insurance policy is a question
of law.” ’ [Citation.] The standard of review is de novo with
respect to an order granting summary judgment when, on
undisputed facts, the order is based on the interpretation or
application of the terms of an insurance policy. [Citation.]”
(Crown Capital Securities, L.P. v. Endurance American Specialty
Ins. Co., supra, 235 Cal.App.4th at p. 1128.)
“ ‘ “In reviewing de novo a superior court’s summary
adjudication order in a dispute over the interpretation of the
provisions of a policy of insurance, the reviewing court applies
settled rules governing the interpretation of insurance contracts
. . . . [¶] ‘ “While insurance contracts have special features, they
are still contracts to which the ordinary rules of contractual
interpretation apply.” [Citations.] “The fundamental goal of
contractual interpretation is to give effect to the mutual intention
of the parties.” [Citation.] “Such intent is to be inferred, if
possible, solely from the written provisions of the contract.”
[Citation.] “If contractual language is clear and explicit, it
governs.” [Citation.]’ [Citation.]” [Citations.]’ ” (Crown Capital
Securities, L.P. v. Endurance American Specialty Ins. Co., supra,
235 Cal.App.4th at p. 1128.)
“A policy provision is ambiguous when it is susceptible to
two or more reasonable constructions. [Citation.] Language in
an insurance policy is ‘interpreted as a whole, and in the
circumstances of the case, and cannot be found to be ambiguous
in the abstract.’ [Citation.] ‘The proper question is whether the
[provision or] word is ambiguous in the context of this policy and

13
the circumstances of this case. [Citation.] “The provision will
shift between clarity and ambiguity with changes in the event at
hand.” [Citation.]’ [Citation.] Ambiguity ‘ “ ‘is resolved by
interpreting the ambiguous provisions in the sense the [insurer]
believed the [insured] understood them at the time of formation.
[Citation.] If application of this rule does not eliminate the
ambiguity, ambiguous language is construed against the party
who caused the uncertainty to exist. [Citation.]’ ‘This rule, as
applied to a promise of coverage in an insurance policy, protects
not the subjective beliefs of the insurer but, rather, “the
objectively reasonable expectations of the insured.” ’ ” [Citation.]
“Any ambiguous terms are resolved in the insureds’ favor,
consistent with the insureds’ reasonable expectations.” ’
[Citation.]” (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004)
32 Cal.4th 465, 470–471.)
The insured has the burden of establishing the claim comes
within the scope of coverage and the insurer has the burden of
establishing the claim comes within an exclusion. The insurer
must establish its interpretation of the policy is the only
reasonable one. Even if the insurer’s interpretation is
reasonable, if any other reasonable interpretation would permit
coverage for the claim, the court must interpret the policy in the
insured’s favor. (Ventura Kester, LLC v. Folksamerica
Reinsurance Co. (2013) 219 Cal.App.4th 633, 641.)
2. A Fictitious Business Name is Not a Legal Entity
Each policy implicated in this case included a fictitious
business name as the insured. The Travelers policy insured “E.
Gerry Paddock dba Paddock Land & Cattle.” The Financial
Pacific policy named “Carmel Valley Construction c/o Gerry
Paddock.”

14
 “Use of a fictitious business name does not create a
separate legal entity.” (Pinkerton’s, Inc. v. Superior Court, supra,
49 Cal.App.4th at p. 1348.) There is no difference between the
owner and its fictitious business name. (Ibid.) A sole
proprietorship is not a legal entity separate from its individual
owner. (Ball v. Steadfast-BLK (2011) 196 Cal.App.4th 694, 701.)
This established, we now turn to the summary judgment
motions.
3. The Court Correctly Granted Travelers Summary
Judgment
Travelers obtained summary judgment on the basis that its
policy, issued to “E. Gerry Paddock dba Paddock Land & Cattle,”
did not provide coverage for the accident.
A. Relevant Policy Terms
The parties agreed, via separate statements on summary
judgment/adjudication, to the relevant terms of the policy. The
insured is “E. Gerry Paddock dba Paddock Land & Cattle.” When
the policy refers to “you,” it means the named insured. The
insuring clause provides, in pertinent part, “We will pay those
sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to which
this insurance applies.” There is no dispute that Paddock was
“legally obligated to pay” the judgment in the underlying action.
The question is whether the judgment encompassed damages “to
which this insurance applies.”
Travelers relied on the policy’s auto exclusion. That
provision states as follows: “This insurance does not apply
to: [¶] . . . [¶] g. Aircraft, Auto Or Watercraft [¶] ‘Bodily
injury’ or ‘property damage’ arising out of the ownership,
maintenance, use or entrustment to others of any aircraft, ‘auto’
or watercraft owned or operated by or rented or loaned to any

15
insured. Use includes operation and ‘loading and unloading’. [¶]
This exclusion applies even if the claims against any insured
allege negligence or other wrongdoing in the supervision, hiring,
employment, training or monitoring of others by that insured, if
the ‘occurrence’ which caused the ‘bodily injury’ or ‘property
damage’ involved the ownership, maintenance, use or
entrustment to others of any aircraft, ‘auto’ or watercraft that is
owned or operated by or rented or loaned to any insured.’ ”
The parties agree that the damages arose out of the “use” of
an auto. The disagreement is on whether the auto was used
“by . . . any insured.” In other words, if Gardner – who was
driving his own SUV at the time – was an “insured,” the auto
exclusion applies and there is no coverage.
The parties agreed that, “[i]n addition to providing
coverage for the named insured, Travelers’ policy also identifies
additional insureds: ‘Your “volunteer workers” only while
performing duties related to the conduct of your business or your
“employees” . . . but only for acts within the scope of their
employment by you or while performing duties related to the
conduct of your business.’ ” Gardner concededly was never
Paddock’s employee. The coverage issue thus turns on whether
Gardner was a “volunteer worker.” 9 The parties further agreed:
“The policy specifically defines ‘volunteer worker’ as ‘a person
who is not your “employee”, and who donates his or her work and
acts at the direction of and within the scope of duties
determined by you, and is not paid a fee, salary or
compensation by you or anyone else for their work performed for
you.’ (Emphasis added.)”

9 There is no dispute that, if Gardner was a “volunteer
worker,” he was “performing duties related to the conduct of your
business.”

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 B. Arguments on Appeal
The language bolded above is the heart of matter. When
Gardner was driving to Palo Corona Regional Park to care for
Paddock’s cattle at the immediate direction of his wife, ranch
manager Emily Paddock, was he acting “at the direction of and
within the scope of duties determined by” the named insured? As
the named insured was “E. Gerry Paddock dba Paddock Land &
Cattle,” and the referee in the underlying action expressly
concluded that Gardner was acting “at the request of and under
the direction of Paddock Land & Cattle made by its Ranch
Manager, Emily Paddock,” the trial court concluded in ruling on
summary judgment that Gardner was acting at the direction of
and within the scope of duties determined by the named insured,
therefore rendering him a volunteer worker. As such, Gardner
was an insured under the policy, thereby triggering the auto
exclusion. On appeal, Smith argues that because the fictitious
business name of Paddock Land & Cattle is not a legal entity
distinct from Paddock himself, Paddock was the sole named
insured and only volunteers who acted “at the direction of and
within the scope of duties determined by” Paddock alone qualified
as insureds under the policy.
C. Gardner Was an Insured Under the Policy
Smith’s interpretation of the policy is simply not
reasonable. We agree that Paddock himself was the insured.
Nonetheless, Gardner acted at the direction of and within the
scope of duties determined by Paddock – although this direction
was conveyed by Paddock’s ranch manager Emily, Paddocks’s
daughter and Gardner’s wife. There is no language in the policy
stating that, in order to be a considered a covered volunteer

17
worker, the worker must act at the personal direction of the
named insured.10
More importantly, we return to the language of the
underlying judgment. The referee found, “Gardner was not
merely ‘doing a favor’; he was doing Paddock’s work, at Paddock’s
direction and under Paddock’s control.” Whether the referee was
referring to Paddock by his given name or to his business
operation does not matter. Paddock Land & Cattle does not exist
as a legal entity; it is Paddock. The very same fictitious business
name rule that makes Paddock the insured (when applied to the
policy), makes Paddock the principal of Gardner (when applied to
the underlying judgment). Smith cannot argue that Paddock
stands in the stead of Paddock Land & Cattle in the named
insured clause but not in the underlying judgment. Paddock is
the insured; for our purposes, Paddock was Gardner’s principal;
and Paddock directed and controlled Gardner, rendering Gardner
a volunteer worker and, thus, an insured.
4. Even if the Policy is Ambiguous, We Construe it in
Favor of Gardner as an Insured
Even if there is an ambiguity in the clause – as to whether
a volunteer constitutes an insured volunteer worker only if
directed personally by Paddock or if he can be insured if directed
by one of Paddock’s agents – it is the latter interpretation that
protects the objectively reasonable expectations of the insured.
We are concerned with a clause that defines volunteer workers as

10 Paddock argues that the trial court improperly rewrote the
policy, by replacing the word “you” in “at the direction of and
within the scope of duties determined by you” with “you or others
on your behalf.” We disagree; it is Paddock who rewrites the
policy by requiring the direction to have been personal, rather
than through an agent.

18
insureds – i.e., it broadens coverage. An owner of a ranching
business such as Paddock would expect his volunteer workers to
be covered by his policy if they were following the directions
conveyed to them by Paddock’s ranch manager – not excluded
from coverage unless he personally gave them the direction. (See
Sprinkles v. Associated Indemnity Corp. (2010) 188 Cal.App.4th
69, 81–82 [if a policy is ambiguous, we resolve the ambiguity in
favor of a more expansive reading of the word “insured,” even if it
results in the expanded application of an exclusion and limits
coverage in the case at hand].)
Moreover, we cannot overlook the larger picture. This
policy contained an auto exclusion, and neither the insured nor
the insurer expected it to cover auto accidents. If Paddock had
been driving rather than Gardner, there would have been no
coverage. If Paddock’s wife had been driving, there would have
been no coverage. If it had been any of Paddock’s employees in
the driver’s seat, there would have been no coverage. If Gardner
had been using one of Paddock’s vehicles, there would have been
no coverage. It is only because Gardner was using his own
vehicle while doing unpaid work for Paddock under Emily’s
direction that Smith asserts the auto exclusion does not apply. It
is difficult to conceive of any insured who would agree to exclude
coverage for himself, his spouse, his employees, and the
volunteers he personally directed, but purchase coverage for
vicarious liability only for volunteers directed through agents.11

11 In his opening brief, Smith concedes that this may be “an
unintended gap in the policy’s definitions and parameters,” but
believes Travelers is bound by the language of the policy. As we
have said, the plain language of the policy favors Travelers.
When we consider the possibility of an ambiguity in the policy,

19
 The Travelers policy provided no coverage for this accident.
As there was no coverage under the policy, there was also no duty
to defend. (Schaefer/Karpf Productions v. CNA Ins. Companies
(1998) 64 Cal.App.4th 1306, 1312.) Summary judgment in favor
of Travelers was therefore correctly granted.
5. The Judgment Against Financial Pacific Must Be
Partially Reversed
We next turn to the cross-motions involving the Financial
Pacific policy. This discussion will encompass three issues:
whether there was coverage; whether Financial Pacific met its
burden to establish there was no triable issue of fact of bad faith;
and whether there are issues that may arise on remand.
A. Summary Adjudication in Favor of Smith on the Duty
to Indemnify Was Correct
1. Arguments of the Parties and Evidence
Presented in the Trial Court
On the question of coverage, the cross-motions of Financial
Pacific and Smith argued in the trial court that their
interpretation of the policy was correct as a matter of law. Smith
focused on the fact that the insured was Carmel Valley
Construction, which was indisputably a fictitious business name
of Paddock. Smith argued that Paddock, the individual, was the
insured, and received auto coverage with respect to all of his
businesses, including Paddock Land & Cattle. 12 Financial

we are concerned with the objectively reasonable expectations of
the insured, not an “unintended gap.”

12 Financial Pacific’s policy had a number of different types of
auto coverage, described by number. In this case, Paddock
purchased among others, coverage “09,” which applied to autos
Paddock did not own, but which were used in connection with his

20
Pacific, for its part, drew attention to the fact that its insured
was “Carmel Valley Construction.” It argued that the fictitious
business name issue was a “red herring,” because, regardless of
the named insured, “the policy on its face still only covers
construction related operations.” Financial Pacific emphatically
pointed to the absence of any mention of Paddock Land & Cattle
in the policy, and claimed that the declarations page of the policy
demonstrates that the policy was intended to cover only
“construction” and “aggregate hauler” risks.
Both parties also submitted evidence beyond the plain
language of the policy to support the argument that their
interpretation was in line with the reasonable expectations of the
insured. Financial Pacific submitted a declaration to the effect
that it does not issue auto policies to ranching businesses at all.
Smith, in contrast, relied on a number of facts demonstrating
that Paddock reasonably believed the Financial Pacific policy
covered Paddock Land & Cattle operations. These facts included:
(1) several individuals who worked for Paddock Land & Cattle,
but not Carmel Valley Construction, were specifically listed on
the application as drivers to be covered by this policy; (2) several
vehicles used in the business of Paddock Land & Cattle were
specifically listed as covered by this policy; 13 (3) Monterey

business. “This includes ‘autos’ owned by your employees or
partners or members of their households but only while used in
your business or your personal affairs.” Smith argued that, since
the insured was actually Paddock, the reference to “your
business” included Paddock’s ranching business as well as his
construction business.

13 In fact, the policy was amended for the purpose of “[a]dding
1951 [t]railer” for an additional $65 premium. The trailer was
“used in relation to Mr. Paddock’s cattle ranching operations at

21
Peninsula Regional Park District – which leased the grazing
rights at Palo Corona Regional Park to Paddock Land & Cattle –
had required a certificate of insurance reflecting auto coverage as
part of its lease, which Financial Pacific then supplied; and
(4) when Paddock had applied for the Financial Pacific policy, his
application includes the answer “N” (for “No”) to the question
asking “DOES APPLICANT HAVE OTHER BUSINESS
VENTURES FOR WHICH COVERAGE IS NOT REQUESTED?”
Financial Pacific did not dispute these facts. It chose
instead to challenge their relevance. Financial Pacific argued
that the application was handled – and the certificate of
insurance issued – by Paddock’s insurance broker, Neilson &
Phillips. Financial Pacific took the position that Neilson &
Phillips was an independent broker, and its knowledge and
actions could not be imputed to Financial Pacific. This, in turn,
raised the question of whether Neilson & Phillips was an agent
who could bind Financial Pacific. Smith submitted a document
from the Department of Insurance website indicating that
Neilson & Phillips was a licensed broker-agent “authorized to
transact on behalf of” a number of insurers, including Financial
Pacific.
2. The Trial Court’s Ruling
On summary judgment, the trial court concluded that the
insured was Paddock, not Carmel Valley Construction, and the
policy covered Paddock with respect to all of his business
activities. The court also observed that, while specific coverage
limitations could have been set out in the declarations page of the
policy, there were none. Finally, if there were ambiguities, the

the Palo Corona Regional Park; [and] was occasionally used to
haul hay fed to the cattle at Palo Corona Regional Park.”

22
policy must be interpreted in favor of coverage. The trial court
concluded: “As many courts recognized, the responsibility lies in
the insurer for any ambiguities or uncertainties existing in the
insurance policy language, and the rule of construction protects
the objectively reasonable expectations of the insured.”
3. Analysis: The Policy Does Not Limit Coverage
to Paddock’s Carmel Valley Ranch Operations
As we have discussed, a fictitious business name does not
stand on its own as a new legal entity; the individual who is
operating the fictitiously named business remains the relevant
legal entity. In Providence Washington Ins. Co. v. Valley Forge
Ins. Co. (1996) 42 Cal.App.4th 1194 (Providence), Division One of
the First Appellate District considered the application of this
legal principle in the specific context of insurance. In Providence,
a number of persons were riding in a rented van when one of the
van’s tires exploded, causing the van to overturn. The injured
victims sued on the basis that the van’s owner, Paul Hifai, had
negligently maintained and rented the van. (Id. at p. 1198.)
Hifai operated a number of businesses under fictitious business
names; and had multiple insurance policies covering himself
“dba” the different business names. Specifically, he owned a
rental car business, through which he had rented the van to the
victims, and a gasoline service station business, through which
he had serviced the van. The insurer covering Hifai’s rental car
business defended and settled the actions against Hifai, then that
insurer sought contribution from the insurers who had provided
coverage to Hifai’s service station business. (Ibid.)
The policies covering the service station business excluded
coverage for the use of an auto owned by the “insured.”
(Providence, supra, 42 Cal.App.4th at p. 1198.) The van was
owned by the rental car business, which was nominally different

23
from the service station business. This did not, however,
preclude the owned-auto exclusion from applying. Although the
van was registered to the rental car business, that fictitiously
named business was not a legal entity; its owner, Hifai, owned
the van. (Id. at p. 1199.) Similarly, even though the service
station policies purported to insure Hifai dba the service stations,
the insured was not the service stations but Hifai himself. “[A]
sole proprietorship like Tennyson Mobil Service is not a legal
entity. An ‘insured’ must be a legal ‘person,’ such as an
individual, partnership, or corporation. [Citation.] The
designation ‘dba’ or ‘doing business as’ simply indicates that Hifai
operates his sole proprietorship under a fictitious business name.
[Citations.] ‘The designation “d/b/a” means “doing business as”
but is merely descriptive of the person or corporation who does
business under some other name. Doing business under another
name does not create an entity distinct from the person operating
the business.’ [Citation.] The business name is a fiction, and so
too is any implication that the business is a legal entity separate
from its owner. Here, our conclusion that Hifai individually, and
not his business, is the insured is supported by the identification
of the insured’s status, in both policies, as an individual.
Accordingly, Hifai is the insured and the van he owned is subject
to the policy exclusion.” (Id. at p. 1200.)
The Providence court recognized that there was contrary
authority in other states, but disagreed with it. (Providence,
supra, 42 Cal.App.4th at pp. 1201–1202.) It concluded the policy
language was unambiguous. “The insured is the individual, and
the ‘dba’ designation simply means that the individual operates
under a fictitious name.” (Id. at p. 1202.) Nor did the court find
the “dba” language to be a limiting phrase restricting the
meaning of the named insured. The court recognized that an

24
insurer could limit coverage to certain business operations by
means of “specific exclusions or endorsements.” (Ibid.) But using
a “dba” in the name of the insured was not sufficient to do so.
Financial Pacific disagrees with Providence, arguing that it
is “against the weight of judicial authority,” and relying on a
number of out of state cases instead. Typical of those cases is
Musselwhite v. Florida Farm General Ins. Co. (Fla.Dist.Ct.App.
2019) 273 So.3d 251 (Musselwhite). That case involved a
corporate entity, JODH3, which operated a feed store under the
fictitious business name of “Bell Feed & Farm,” and obtained
insurance for it. The insurance contained a specific endorsement
limiting coverage to injury arising out of the operation,
maintenance, or use of identified premises, and described the
premises as the feed store. (Id. at p. 253.) Later, JODH3 began a
new, well drilling business, which it gave the fictitious name
“Bell Feed & Farm, Well & Pump.” When JODH3’s principal
sought insurance for the well drilling business, he learned that
his feed store insurers did not cover drilling operations, and
another insurer wanted more money than he could then afford.
He chose not to obtain coverage for the well drilling business.
(Id. at p. 253.) When an employee of the well drilling business
was later injured drilling a well, he sought to recover against
JODH3’s policy for Bell Feed & Farm, on the basis that both Bell
Feed & Farm and Bell Feed & Farm, Well & Pump were fictitious
business names of the single legal entity JODH3. (Id. at p. 254.)
The Musselwhite court recognized there was law on both
sides of the issue, including Providence. It rejected Providence,
with the following analysis: “We conclude that the greater
weight of authority supports the trial court’s conclusion that the
‘d/b/a’ designation limited liability to JODH3’s feed store business
operated under the fictitious name. To hold otherwise would

25
frustrate the intent clearly expressed in the policy declarations,
subject [the insurers] to open-ended exposure to liability for any
new business operations that JODH3 might unilaterally decide to
undertake, and force [the insurers] to insure risks that they
never contracted to cover. JODH3 cannot be allowed to
effectively rewrite the policy by requiring [the insurers] to insure
risks arising from a well drilling business that did not exist when
the policy terms were agreed upon.” (Id. at p. 255.)
We believe Providence and Musselwhite can be reconciled.
Providence itself recognized that a policy could limit coverage to a
particular business by means of “specific exclusions or
endorsements.” The policy in Musselwhite contained such an
endorsement, limiting coverage to injuries arising out of
operation of the feed store. Indeed, the Musselwhite court relied
on that endorsement as an additional basis for its holding.
(Musselwhite, supra, 273 So.3d at pp. 256–257.) Other California
authority is agreement. The “dba” designation alone does not
trigger coverage for all of an owner’s unrelated business entities;
the court must review the policy as a whole. (See, e.g., Fidelity &
Deposit Co. v. Charter Oak Fire Ins. Co. (1998) 66 Cal.App.4th
1080, 1083–1088 [when an insurer issues a policy to a bank “dba”
a motel it acquired in Arkansas, and the policy specifies the
business insured is a motel, and includes a hotel and motel
endorsement, the policy does not cover the bank’s construction
activities in California].)
In short, California law regarding fictitious business names
in insurance policies is as follows. A fictitious business name is
not a legal entity and cannot be an insured; the owner of the
fictitious business is the insured. However, courts must consider
the policy as a whole; specific exclusion or endorsement language
could limit the coverage to the activities of the named business.

26
 Here, the named insured is “Carmel Valley Construction.”
Although the policy does not identify Carmel Valley Construction
as a fictitious business name of Paddock, it is undisputed that it
is. Carmel Valley Construction is not the insured, Paddock is.
Indeed, Financial Pacific had previously filed a certificate of
insurance with the California Department of Motor Vehicles,
indicating that its insured was “ELDBRIDGE G PADDOCK
(DBA) C V C.”14
The issue then becomes whether the policy provides auto
coverage to Paddock in all his business entities or only for Carmel
Valley Construction activities.15 The declarations page contains
little useful information. Near the top of the page, the phrase
“(2) COMMERCIAL AUTO AGGREGATE HAULERS” has been
typed, but there is no indication as to its meaning (or if there is a
“(1)” that corresponds to the “(2).”) Where there is a space for
“BUSINESS DESCRIPTION:” the word “CONSTRUCTION”
appears, with an indication that the “FORM OF BUSINESS” is
“individual.” The “SCHEDULE OF COVERAGE AND

14 The certificate appears to pertain to the previous year’s
policy, but we consider that immaterial. When Smith attempted
to rely on this document in opposition to Financial Pacific’s
motion for summary judgment, Financial Pacific objected,
claiming “The 2013 policy which is [the] policy referred to in the
document is not at issue and not in evidence.” Curiously, this
page was submitted by Financial Pacific in support of its own
motion for summary judgment. It was marked as page 35 of
Exhibit A, which purported to be “a true and correct copy of the
Financial Pacific policy at issue in this suit.” In any event, the
trial court did not rule on any objections and neither party
pursues them on appeal; we therefore consider the document.

15 We are concerned only with the auto part of the policy. The
commercial general liability part of the policy is not at issue.

27
COVERED AUTOS” provides liability coverage for three classes
of autos, including symbol “07” which pertains to the autos
specifically described in the declarations. Some of these, as we
have discussed, were used in the business of Paddock Land &
Cattle. The third class of covered autos, symbol “09,” applies to
non-owned autos “that are used in connection with your business.
This includes ‘autos’ owned by your employees or partners or
members of their households but only while used in your business
or personal affairs.” In addition, a page entitled “BUSINESS
AUTO SUPPLEMENTAL DECLARATIONS” appears to set forth
the rating basis that supported the premium calculation for non-
ownership liability. Under “NAMED INSURED’S BUSINESS” it
states, “Other than a Social Service Agency.” The rating basis is
the number of employees, and the premium is calculated for “0 –
25” employees.16
The policy does not specifically define “business,” nor does
it have an exclusion eliminating from coverage any particular
businesses, or an endorsement limiting coverage to construction-
related auto liability. There is a clause relating to newly formed
businesses, which includes, as an additional insured, “BROAD
FORM NAMED INSURED [¶] Any business entity newly
acquired or formed by you, other than a partnership, joint
venture or limited liability company during the policy period
provided you own 50 [percent] or more of the business entity and
the business entity is not separately insured for Business Auto
Coverage. Coverage is extended up to a maximum of 180 days
following acquisition or formation of the business entity.” While
this clause does not appear to apply to Paddock Land & Cattle,

16 The record does not indicate the total number of employees
of Carmel Valley Construction and/or Paddock Land & Cattle at
the time the policy was written.

28
which predated this policy, it suggests that coverage was not
limited to construction businesses, but instead broadly applied
across Paddock’s business ventures.
Taken together, we do not find a clear indication that the
policy limits auto coverage to Paddock’s construction business.
While Financial Pacific points to the words “CONSTRUCTION”
and “AGGREGATE HAULERS” on the declarations page, Smith
counters with the broader “Other than a Social Service Agency”
as the named insured’s business on the Business Auto
Supplemental Declarations page. Neither phrase specifically
indicates that it describes the limits of coverage, and they appear
to be contradictory to the extent that they do so. Paddock
purchased coverage not just for listed vehicles, but also for non-
owned autos, which provided coverage to employees or members
of their households “while used in your business or personal
affairs.” That this coverage extended to Paddock’s “personal
affairs” indicates that coverage was not strictly limited to Carmel
Valley Construction operations; that the policy never defined
“business,” but, instead, provided coverage for new businesses of
any type, further implies a lack of limitation. Taken together, we
agree with the trial court that Financial Pacific failed to establish
the broad coverage presumed by Providence was limited by policy
terms.
4. Construing any Ambiguity in Favor of the
Reasonable Expectations of the Insured, There
is Coverage
To the extent there is an ambiguity in the nature of the
business ventures covered, we must construe the ambiguity in
favor of the reasonable expectations of the insured, Paddock.
Here, the evidence is overwhelming that Paddock reasonably
believed the policy provided auto coverage for Paddock Land &

29
Cattle. When he applied for the policy, he indicated he had no
other business ventures he wanted excluded from coverage. (The
Travelers policy, as we have explained, had an auto exclusion.)
He had vehicles that were used for Paddock Land & Cattle listed
in the policy. He identified as drivers to be protected by the
policy some people who were employed solely by Paddock Land &
Cattle. Finally, when Paddock needed a certificate of insurance
to satisfy his auto insurance obligations for the lease of Palo
Corona Regional Park held in the name of Paddock Land &
Cattle, Financial Pacific supplied one.
Financial Pacific would overlook this evidence because
these actions were not taken by Financial Pacific directly, but by
Paddock’s insurance broker, Neilson & Phillips. Therefore,
according to Financial Pacific, all of this evidence relates only to
Paddock’s subjective intent regarding coverage, which was never
communicated to Financial Pacific, and thus could not give rise to
a reasonable expectation of coverage.
This argument is not factually supported. Insurance Code
section 31 defines an “Insurance agent” as a person authorized,
by and on behalf of an insurer, to transact insurance on behalf of
the company. In contrast, Insurance Code section 33 defines an
“Insurance broker” as a person who, on behalf of another person
transacts insurance “with, but not on behalf of, an insurer.”
These two professions are not separately licensed, but instead
licensed under the single title of “broker-agent.” (Ins. Code,
§§ 33.5, 1625, subd. (a).) An independent broker is not the agent
of an insurer with whom it places insurance. (Marsh &
McLennan of Cal., Inc. v. City of Los Angeles (1976) 62
Cal.App.3d 108, 117.) However, when a broker-agent has been
authorized to conduct business on behalf of an insurer, and that
authorization is evidenced by a notice of appointment filed with

30
the Department of Insurance, any presumption that the broker-
agent is independent is rebutted. (Ins. Code, § 1623, subd. (c)(1).)
In fact, if that authorization is combined with a written agency
agreement with the insurer, the broker-agent is conclusively
established to be the insurer’s agent. (Loehr v. Great Republic
Ins. Co. (1990) 226 Cal.App.3d 727, 732–733.) Here, Smith
submitted a printout from the Department of Insurance
indicating that Neilson & Phillips possessed a broker-agent
license, and was “authorized to transact business on behalf of” a
number of listed insurers, including Financial Pacific. Financial
Pacific’s assertion that Neilson & Phillips was simply an
independent broker is unsupported by the facts. As such,
Financial Pacific cannot disregard the evidence that, in Paddock’s
dealings with Financial Pacific through Neilson & Phillips, he
had an objectively reasonable expectation that his auto coverage
extended to Paddock Land & Cattle activities.
B. Financial Pacific Did Not Defeat Bad Faith
Financial Pacific sought summary adjudication of the cause
of action for bad faith on multiple grounds, including the genuine
dispute doctrine. The court granted summary adjudication in its
favor on that basis, concluding “Upon review of [Financial
Pacific]’s arguments, the Court finds that [Financial Pacific] did
not unreasonably and in bad faith withhold payment of Mr.
Paddock’s claim because there was a genuine dispute as to policy
coverage. Therefore, Plaintiff’s bad faith claim and request for
punitive damages fail.”
The argument is based on this principle: “It is now settled
law in California that an insurer denying or delaying the
payment of policy benefits due to the existence of a genuine
dispute with its insured as to the existence of coverage liability or
the amount of the insured’s coverage claim is not liable in bad

31
faith even though it might be liable for breach of contract.
[Citation.]” (Chateau Chamberay Homeowners Assn. v.
Associated Internat. Ins. Co., supra, 90 Cal.App.4th at p. 347
(Chateau).) “ ‘The genuine dispute rule does not relieve an
insurer from its obligation to thoroughly and fairly investigate,
process and evaluate the insured’s claim. A genuine dispute
exists only where the insurer’s position is maintained in good
faith and on reasonable grounds.’ [Citation.]” (Ghazarian v.
Magellan Health, Inc. (2020) 53 Cal.App.5th 171, 186.)
The doctrine “has been applied primarily in first-party
coverage cases, usually involving disputes over policy language or
its application. [Citations.]” (Century Surety Co. v. Polisso (2006)
139 Cal.App.4th 922, 951.) Occasionally it has been used in third
party cases (see, e.g., Lunsford v. American Guarantee &
Liability Ins. Co. (9th Cir. 1994) 18 F.3d 653, 656.)
California authority does not appear to have resolved
whether the genuine dispute doctrine is applicable in third party
cases. (Croskey et al., Cal. Practice Guide: Insurance Litigation
(The Rutter Group 2012) ¶ 12:618, p. 12B-104; see Mt. Hawley
Ins. Co. v. Lopez (2013) 215 Cal.App.4th 1385 [finding it
“doubtful” that the doctrine applies to third party bad faith cases
based on duty to defend].) But the doctrine cannot apply in a
case, such as this, where the insurer’s alleged bad faith is not
only a failure to defend and indemnify, but also a failure to settle.
(Howard v. American National Fire Ins. Co. (2010)
187 Cal.App.4th 498, 530–531.) As the Howard court explained,
“In first party cases, where payment is sought for the insured’s
direct losses, an insurer may raise a reasonable dispute over
coverage without being guilty of bad faith. (Chateau, supra, 90
Cal.App.4th at p. 347[]) But it has never been held that an
insurer in a third party case may rely on a genuine dispute over

32
coverage to refuse settlement.” (Howard v. American National
Fire Ins. Co., supra, 187 Cal.App.4th at p. 530.)
The reason is found in the difference between the
obligations imposed on insurers in first and third party cases.
In a first party case, a claim for bad faith denial of policy benefits
requires that the insurer acted unreasonably or without proper
cause. Where there is a genuine dispute as to coverage, there can
be no bad faith liability imposed on the insurer for advancing its
side of the dispute. (Bosetti v. United States Life Ins. Co. in City
of New York (2009) 175 Cal.App.4th 1208, 1237, fn. 20.) In a
third party failure to settle case, however, a genuine dispute as to
coverage does not absolve the insurer from liability, because the
insurer has a duty to accept a reasonable settlement, and runs
the risk of excess damages when it refuses a reasonable
settlement on an ultimately-mistaken belief there is no coverage.
“The implied covenant of good faith and fair dealing imposes a
duty on an insurer to accept a reasonable offer to settle a claim
against its insured. [Citation.]” (Archdale v. American Internat.
Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 464.) The
only permissible consideration in evaluating the reasonableness
of an offer is whether, in light of the victim’s injuries and the
probable liability of the insured, the ultimate judgment is likely
to exceed the amount of the settlement offer. (Ibid.) “The
existence of a coverage dispute, however meritorious the insurer’s
position, is simply not a proper consideration in deciding whether
to accept an offer to settle the claim against the insured.” 17 (Id.
at pp. 464–465.)

17 The court continued, “Such a clear rule imposes no unfair
burden upon an insurer that may, in all good faith, believe that
its policy provides no coverage for the claim. If the insurer rejects
a settlement offer on that ground, and its coverage position is

33
 Thus, while a genuine dispute as to coverage provides a
complete defense to a claim of bad faith in a first party dispute
(Chateau, supra, 90 Cal.App.4th at p. 347), it does not provide a
similar defense to a claim of third party bad faith based on a
failure to reasonably settle, because a coverage dispute should
not affect a decision as to whether the settlement offer is
reasonable. (Howard v. American National Fire Ins. Co., supra,
187 Cal.App.4th at pp. 529–531.)
Here, Smith alleged Financial Pacific’s failure to
reasonably settle as a basis for bad faith. As such, the genuine
dispute doctrine did not provide a complete defense to Smith’s
cause of action for bad faith. On appeal, Financial Pacific offers
no alternative basis on which to uphold the summary
adjudication in its favor.
C. The Issue of Damages Must Be Addressed by the Trial
Court
As Smith’s cause of action for bad faith is still outstanding,
the judgment in his favor and against Financial Pacific must be

later vindicated, it will have no liability for the damages flowing
from such refusal. In order to mitigate the consequences should
its coverage position be ultimately rejected, an insurer may
reserve its right to dispute coverage but then go ahead and accept
the reasonable settlement offer so as to protect its insured
against exposure to an excess judgment. Such action would
preclude any claim of bad faith against the insurer in the event
coverage was later established; and the insurer would have a
remedy in the event that its coverage position was ultimately
vindicated. ‘If, having reserved such rights and having accepted
a reasonable offer, the insurer subsequently establishes the
noncoverage of its policy, it would be free to seek reimbursement
of the settlement payment from its insured.’ [Citation.]”
(Archdale v. American Internat. Specialty Lines Ins. Co., supra,
154 Cal.App.4th at p. 465, fn. 15.)

34
reversed as premature. On appeal, Financial Pacific argues that
the court did not resolve certain issues that it raised in opposition
to Smith’s motion for summary adjudication – specifically, that
its contract of insurance should be reformed to match the intent
of the parties to limit coverage to Carmel Valley Construction
and that it was not liable for the entire underlying judgment
because the amount of that judgment was excessive due to
collusion. Financial Pacific is correct; the only issue raised by
Smith’s motion for summary adjudication was whether the policy
provided coverage – it did not address reformation or damages. 18
Reformation and damages remain for resolution.19
DISPOSITION
The judgment in favor of Travelers and against Smith is
affirmed. Smith shall pay Travelers’s costs on appeal.
The judgment in favor of Smith and against Financial
Pacific is reversed and the matter remanded for further
proceedings. Specifically, the summary adjudication of the issue

18 On appeal, we asked the parties to address, by letter briefs,
the issue of whether the court erred by awarding damages in
excess of Financial Pacific’s policy limits, given the court’s finding
that Financial Pacific had not committed bad faith. As we
conclude the court’s resolution of bad faith was incorrect we need
not decide the policy limits issue.

19 We note that there is some suggestion in the appellate
record that, after succeeding on his summary adjudication
motion, Smith filed a second motion to resolve some of the
outstanding issues. The motion is not part of the record on
appeal; we know of it only due to references in briefing on a
motion to tax costs. On remand the trial court must consider, in
light of our opinion, whether and to what extent proceedings
related to the second motion impact any future judgment in the
case.

35
of Financial Pacific’s duty to indemnify was properly resolved in
favor of Smith; all remaining issues raised in Smith’s complaint
and Financial Pacific’s cross-complaint remain for adjudication.
Financial Pacific is to pay Smith’s costs on appeal.
Smith’s motion for sanctions against Financial Pacific is
denied.

RUBIN, P. J.
WE CONCUR:

MOOR, J.

KIM, J.

36