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AKH Co., Inc. v. Universal Underwriters Insurance Co.

United States District Court, D. Kansas

October 7, 2019

AKH COMPANY, INC., Plaintiff,



         This is a commercial liability insurance coverage dispute filed by AKH Company, Inc. ("AKH") against its insurance carrier, Universal Underwriters Insurance Company ("UUIC"), arising out of an underlying trademark infringement action between AKH and Reinalt-Thomas Corporation d/b/a Discount Tire ("RT") that UUIC defended and settled under a reservation of rights ("RT litigation"). UUIC counterclaimed, and both parties amended to assert various tort and contract theories. In 2018, the Court allowed UUIC leave to amend to add two counterclaims against AKH and several new parties for alter ego liability and fraudulent transfer.[1] The new claims were based on allegations that after this lawsuit was filed, AKH diverted its assets to these related parties to avoid any potential judgment in this case. AKH alleges five claims against UUIC in contract and tort; UUIC alleges 13 counterclaims against AKH in contract and tort, in addition to its fraudulent transfer and alter ego liability claims against AKH and the new Counter-Defendants.

         Before the Court are the parties' cross-motions for summary judgment (Docs. 638, 632, 634). AKH moves for summary judgment on AKH Counts I-III, and on all of UUIC's counterclaim counts. UUIC moves for summary judgment on all remaining AKH counts, [2] and on UUIC Counts VI, XII, XIV, and XV. AKH and the other Counter-Defendants move for partial summary judgment on UUIC Counts XIV and XV. These motions are fully briefed and the Court is prepared to rule. As described more fully below, the Court grants in part and denies in part AKH and UUIC's cross-motions for summary judgment. AKH's motion is denied on AKH Counts I-III, as well as on UUIC Counts I-IV, and VII-XV. AKH's motion is granted as to UUIC Counts V and VI. UUIC's motion is granted as to all remaining AKH claims- Counts I-IV and VI-and is otherwise denied. The Counter-Defendants' motion for partial summary judgment is denied.

         I. Summary Judgment Standard

         Summary judgment is appropriate if the moving party demonstrates that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.[3] In applying this standard, the court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party.[4] "There is no genuine issue of material fact unless the evidence, construed in the light most favorable to the nonmoving party, is such that a reasonable jury could return a verdict for the nonmoving party."[5] A fact is "material" if, under the applicable substantive law, it is "essential to the proper disposition of the claim."[6] An issue of fact is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the non-moving party."[7]

         To prevail on a motion for summary judgment on a claim upon which the moving party also bears the burden of proof at trial, the moving party must demonstrate "no reasonable trier of fact could find other than for the moving party."[8] The facts "must be identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated therein."[9] Rule 56(c)(4) provides that opposing affidavits must be made on personal knowledge and shall set forth such facts as would be admissible in evidence.[10] The non-moving party cannot avoid summary judgment by repeating conclusory opinions, allegations unsupported by specific facts, or speculation.[11] "Where, as here, the parties file cross-motions for summary judgment, we are entitled to assume that no evidence needs to be considered other than that filed by the parties, but summary judgment is nevertheless inappropriate if disputes remain as to material facts."[12]

         Finally, summary judgment is not a "disfavored procedural shortcut;" on the contrary, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action."[13] In responding to a motion for summary judgment, "a party cannot rest on ignorance of facts, on speculation, or on suspicion and may not escape summary judgment in the mere hope that something will turn up at trial."[14]

         II. Uncontroverted Facts

         The following material facts are either stipulated, uncontroverted, or viewed in the light most favorable to the nonmoving party.[15]

         AKH operates under the name "Discount Tire Centers," selling and installing tires through its retail garages in California and on its Internet website. AKH registered the domain name on July 20, 1997. AKH operated its website from AKH's office located in California from July 1, 1997 to at least May 1, 2009. UUIC, AKH's insurance company during the time frame at issue in this lawsuit, is a subsidiary of Zurich American Insurance Company ("Zurich").

         The Policy

         UUIC issued a commercial liability policy ("the Policy") to AKH for the coverage period of May 1, 2007 to May 1, 2008. The Policy was renewed for five consecutive one-year periods from May 1, 2008 to May 1, 2013. The Policy provides that UUIC will defend and indemnify AKH against a covered "SUIT," subject to its terms, conditions, provisions, and exclusions. The Policy includes Garage Unicover Coverage Part 500 (Edition 3-98) ("1998 Garage Coverage"). The 1998 Garage Coverage provides coverage for "DAMAGES" because of "INJURY" caused by an "OCCURRENCE" arising out of "GARAGE OPERATIONS."[16] "In addition to our limits for INJURY ..., WE will also pay: (a) all costs and expenses in defending an INSURED, and interest on that part of the judgment covered by this Coverage Part within OUR limits, that accrues after entry of any judgment in any SUIT WE defend, but only until WE have paid, offered to pay or deposited in court that part of the judgment that is within OUR limit."[17]

         The Policy also includes Umbrella Coverage Part 980 (Edition 3-98) ("1998 Umbrella Coverage"). The 1998 Umbrella Coverage provides coverage for a "LOSS" in excess of any "UNDERLYING INSURANCE."[18] The Umbrella Coverage provides that "WE WILL ALSO PAY - If there is no UNDERLYING INSURANCE or any other insurance available to an INSURED, and coverage is afforded by this Coverage Part (except for the INSURED'S retention) WE will pay, in addition to OUR limit: (a) all costs and expenses in defending an INSURED, and interest on that part of the judgment covered by this Coverage Part within OUR limits, that accrues after entry of any judgment in any SUIT WE defend, but only until WE have paid, offered to pay or deposited in court that part of the judgment that is within OUR limit."[19]

         The Policy further provides: "Each INSURED must cooperate and assist U.S. in the investigation, settlement, defense, enforcement of contribution or indemnification, "[20] and states that the insurer has "no duty to provide coverage under any Coverage Part unless [the insured has] fully complied with all Conditions applicable to that Coverage Part."[21]

         The Unicover General Conditions section

states CHANGES - The only way this policy can be changed is OUR issuing an endorsement(s) or substituting the declarations. They must be signed by one of OUR representatives when required by law. Nothing else will change this policy, waive any of its terms, or stop U.S. from asserting any of OUR rights, not even notice to or knowledge learned by one of OUR representatives.[22]

         The Policy's limits of liability are $5 million.

         The RT Litigation and Tender

         On May 14, 2010, RT filed suit against AKH in the United States District Court for the District of Arizona ("RT action"). RT's action alleged claims of trademark infringement, trademark dilution and false designation of origin as to the "DISCOUNT TIRE" mark under the Lanham Act, a violation of the Anticybersquatting Consumer Protection Act ("ACPA"), and Arizona state law claims for trademark infringement, dilution, and unfair competition. On October 22, 2010, AKH filed its own complaint against RT in the United States District Court for the Central District of California ("AKH action"). AKH's action alleged claims for breach of contract and declaratory relief related to a 1991 Settlement Agreement between AKH and RT relating to the use of the "DISCOUNT TIRE" mark. AKH also alleged claims for unfair competition, and trademark infringement under state and federal law. On February 9, 2011, the two matters were consolidated in the Central District of California ("RT litigation").

         During the RT litigation, CEO Michael Schaeper, Hratch Andonian, Sergio Andonian, and Andy Andonian were all executives of AKH authorized to act on its behalf.

         AKH tendered to UUIC its defense and indemnity of RT's First Amended Complaint on December 9, 2011. By letters dated January 5, 2012 and February 29, 2012, UUIC agreed to defend AKH as to RT's claims against AKH, subject to a reservation of rights. On January 5, 2012, Jena Palmer on behalf of UUIC sent AKH the first Reservation of Rights letter. She confirmed receipt of the RT action filed in the United States District Court for the District of Arizona. Palmer summarized the claims alleged by RT against AKH in that lawsuit, and the applicable policy language during the coverage period. Palmer indicated that UUIC was "providing coverage for this suit. . . under a reservation of rights," because it believed the claims were not covered by the Policy. Palmer's letter relayed that AKH "may want to employ your own attorney to participate in the defense of this matter... . However, this Company will not be responsible for any services incurred by your attorney."[23]

         UUIC initially assigned the law firm Gordon & Rees to defend AKH as panel counsel, but AKH strongly urged UUIC to permit the law firm of Paul Hastings LLP, its counsel of choice, to continue as counsel to AKH instead. AKH had retained Paul Hastings to defend it several months before AKH tendered the RT action. Paul Hastings was authorized to act on AKH's behalf. At some point before July 5, 2011, AKH and Paul Hastings entered into a contingency fee agreement. The terms of that agreement were revised after July 2011. RT was represented by Ballard Spahr LLP, and Gallagher & Kennedy, P.A. in the RT litigation.

         On February 1, 2011, Palmer emailed Hratch Andonian, one of AKH's owners, to confirm their phone conversation from the day before, during which "you agreed to pay the difference of your attorney's rate, and the attorney we've hired to represent you. Also, if you would please provide a budget through trial from your attorney, I would appreciate it and will elevate your request."[24] Schaeper sent Palmer an email on February 9, 2012, thanking Palmer for her voice message that she had received the Paul Hastings Budget, and asking her to forward him a copy of the Zurich Reporting Guidelines to provide to Paul Hastings. He stated, "[w]e look forward to receiving formal final approval of Paul Hastings as soon as possible."[25] Palmer sent Hratch Andonian and Schaeper the billing guidelines and Zurich rates in a February 10, 2012 email, and explained that if Paul Hastings agreed to these billing rates and guidelines, UUIC would allow Paul Hastings to defend AKH.[26] The rates Palmer sent on February 10, 2012 are: $__for partners, $__for associates, $__ for junior associates, and $__ for paralegals. These are identical to the rates that UUIC would have paid Gordon & Rees, a Zurich panel firm, to handle the same case in California. AKH agreed that Paul Hastings would comply with the Zurich Reporting Guidelines.

         On February 29, 2012, Stephanie Cole on behalf of UUIC sent AKH the second Reservation of Rights letter. In that letter, Cole informed AKH that she had taken over handling AKH's claim from Palmer, and was supplementing Palmer's January 5 letter.

This letter specifically addresses Universal's insurance coverage obligations to AKH company, Inc. arising from the First Amended Complaint filed in the United States District Court, District of Arizona entitled The Reinalt-Thomas Corporation d/b/a Discount Tire, a Michigan corporation vs. AKH company, Inc., a California corporation (Complaint) which was transferred to the United States District Court for the Central District of California and which has now been consolidated with AKH Company, Inc. v. The Reinalt-Thomas Corporation DBA Discount Tire, Southern California Discount Tire Company, Inc (Reinalt) filed in the United States District Court Central District of California.[27]

         Cole's letter also notified AKH that UUIC agreed to "pay for AKH's choice of counsel instead of assigning provided that AKH's choice of counsel agrees to abide by the terms of California Civil Code section 2860 and complies with Universal's defense counsel guidelines and billing rates, which were forwarded to you on 2/10/12."[28] As with the first Reservation of Rights letter, Cole's letter explained that UUIC would provide AKH with a defense in the RT action, subject to a "complete reservation of rights," on the basis of the timing of the allegedly wrongful conduct, and the fact that certain claims may not be covered by the terms of the Policy. UUIC specifically invoked its right to "initiate a separate action to determine our duty to defend or indemnify you. . . [and to] reclaim any amounts paid as defense expenses for any amounts that are not reasonable or that can be attributed to liability that is not potentially covered."[29]

         Cost-Sharing Agreement

         After Cole took over the claim on behalf of UUIC, she exchanged several emails with Paul Hastings attorneys Kimberly Kepler and Glenn Dassoff about how to segregate and account for Paul Hastings' fees incurred in the AKH action, given that the two actions were consolidated and Paul Hastings represented AKH in both actions.[30] UUIC asked Paul Hastings to segregate its bills between the two actions. But Paul Hastings instead proposed a "50/50 split" between AKH and UUIC of the legal fees and costs incurred in RT litigation, believing that arrangement may require UUIC to pay a greater share of the costs than if the firm segregated out defense costs. AKH authorized Paul Hastings to negotiate this arrangement on its behalf. On March 14, 2012, Kepler relayed to Cole that Schaeper and Hratch Andonian believed that they had previously reached an agreement with Palmer that Paul Hastings would submit to the UUIC billing guidelines and panel rates with the understanding that UUIC would "be paying without apportionment," and forwarded the emails between Palmer and Schaeper where Palmer sent the billing guidelines and panel rates to Schaeper. Kepler asked Cole to allow Paul Hastings to submit

100% of its billed hours to Zurich, in accordance with Zurich's Guidelines, and Zurich will pay Paul Hastings directly for those hours, albeit at the previously-agreed upon rates. We of course understand that Zurich will reserve any rights that it has to later seek reimbursement of fees paid as they may relate solely to non-covered work.[31]

         The following day, Cole responded to Kepler and disagreed with her characterization of AKH's previous agreement with Palmer based on the referenced emails. "No where in the emails did Jena Palmer ever agree to pay AKH's attorneys' fees to prosecute the claim against Reinalt."[32] Cole stated that UUIC only agreed to defend AKH in the RT action "subject to our Reservation."[33] Cole advised Kepler that since Paul Hastings did not agree on the 50/50 split, it should separate out its expenses for prosecuting AKH's claims against RT.

         On March 24, 2012, Kepler replied to Cole's email that her prior email "did not intend to reject the 50/50 split that you had agreed was a reasonable way to resolve any issues related to prosecution vs. defense." Kepler continued,

Given Zurich's position that it will not pay for prosecution of AKH's claims against Reinalt, we still feel that the 50/50 split is the best way to address that position. The prosecution and defense of the claims in this consolidated case are so closely related that our tasks related to each are overlapping and intertwined. Logistically, I believe it would be a practical impossibility to split our tasks between two separate billing numbers and realistically, an attempt to do so would likely result in roughly a 50/50 situation, with layers of complication and distraction for each time keeper added to the mix. In light of this, I would respectfully request that we return to the agreement that Zurich will pay its rates for 50% of the hours that Paul Hastings bills in connection with this case to address the prosecution/defense concerns.[34]

         After this email, Cole and Kepler exchange several other emails confirming that they were in agreement on a "50/50 split." As part of an email string discussing expert fees in April 2012, Kepler inserted that AKH does not "waive any rights our clients would otherwise have to reevaluate any divisions of payments at a later date."[35] Cole responded as follows:

The only reservation on the split was my reservation on the Buss. If you are no longer in agreement with the 50/50 split (without reservation) let me know now. I consider your email below a showing that there is no agreement. I will no longer pay 50/50 on the bills. Please separate and bill separately.[36]

         Kepler immediately replied, "I'm sorry, that is just our standard language, we are still in agreement with the 50/50 split."[37] The parties stipulated in the Pretrial Order that they agreed to a 50/50 split of the bills, legal fees, and costs submitted in the RT litigation.

         Separately, AKH voluntarily agreed to pay Paul Hastings: (1) the difference between Paul Hastings' full rates and the panel counsel rates paid by UUIC; and (2) any fees or expenses written off by UUIC under its billing guidelines. AKH stopped appealing UUIC's write-offs after a few months.

         Paul Hastings' 2012 Status Reports

         Paul Hastings was required to submit periodic status reports to UUIC about the RT action. Kepler drafted the first status report on behalf of Paul Hastings, and sent it to UUIC on March 24, 2012, copying Andy Andonian, Hratch Andonian, and Schaeper. Kepler estimated RT's likelihood of success on its claims against AKH as follows: 50% on the federal trademark infringement of common law trademark and false designation of origin claims, 50% on the federal trademark infringement of a registered trademark claim, 80% on the ACPA claim, 90% on the federal trademark dilution claim, 50% on the Arizona common law trademark infringement claim, 90% on the Arizona trademark dilution claim, and 70% on the Arizona unfair competition claim. On each of these claims, Kepler estimated $3, 500, 000 in possible damages. Kepler advised UUIC that the parties had engaged in preliminary settlement discussions, but "[c]omments from Reinalt-Thomas's counsel suggest that Reinalt-Thomas will not be willing to pay much, if any, money to settle the case."[38] She anticipated filing summary judgment motions after the close of fact discovery.

         Kepler sent Cole another update on September 4, 2012, after fact discovery closed. Kepler stated that both parties intended to move for summary judgment, advising that "Paul Hastings believes that the chance of success on its motion for summary judgment are reasonably good," and adjusted her likelihood of success projections from the March 24 initial report. Kepler estimated that AKH's likelihood of success on RT's registered trademark claim was now 60%, on the ACPA claim was now 50%, and on the dilution claim was now 50%. Kepler also summarized RT's damages expert's alternative damages calculations, and adjusted her previous damages estimate of $3.5 million down to $2.1 million. Kepler advised that the parties were planning to participate in court-ordered mediation in the coming weeks.

         September 2012 Mediation

         Kepler contacted Cole by email the next day, September 5, advising that the parties had scheduled mediation for September 21, 2012, and asked whether someone from UUIC could join in person or by phone that day. Cole responded that she was unavailable that day, and "[g]iven the complex nature of this case no one else will be available for the mediation. Any contribution by this company would be minimal given the coverage position."[39] Kepler understood from her Cole____[40]

         The mediation proceeded on September 21, 2012, without UUIC. RT made AKH a settlement offer that involved, inter alia, UUIC paying RT $1 million, with AKH giving up all rights to use the Discount Tire Centers name. On September 26, 2012, Kepler emailed Cole to advise her of RT's offer. She explained that the offer was "completely unreasonable and untenable .... [that] is not even on the table even assuming that RT would have a complete win at trial."[41] Cole responded, asking why RT was making a demand against UUIC, and asking for details about RT and AKH's demands at the mediation. Kepler responded to her question about UUIC: "they are aware that Zurich is involved and they may have believed that such a demand is not as offensive to the clients as taking money directly out of their own pockets would be. That is speculation, RT didn't say why they did it that way."[42]

         Settlement Discussions in October and November 2012

         After the failed mediation, principals at AKH and RT continued to have periodic discussions about settlement, often without counsel. They exchanged communications regarding a "settlement structure" and engaged in at least one conference call to further discuss settlement. AKH proposed a settlement at that time by which RT would pay it an amount depending on the outcome of other motions.

         In mid-October 2012, AKH retained Gauntlett & Associates ("Gauntlett") as its coverage counsel in the RT litigation. Paul Hastings and Gauntlett were both authorized to communicate on behalf of AKH with UUIC or its counsel about settlement.

         On October 19, 2012, both parties' summary judgment motions were denied in the RT litigation. James Lowe, a Gauntlett attorney, wrote Cole advising her about the summary judgment rulings. Schaeper, Dassoff, Kepler, and David Gauntlett were copied on the letter. The subject line of the letter referenced the AKH action as the lead case in the consolidated RT litigation. Lowe advised in his letter that RT "finally appears to have some serious interest in a settlement discussion that could result in a resolution. Therefore we will seek information for Zurich's evaluation and then expect to seek settlement authority from you concerning this case."[43] Lowe also indicated that he wanted to "resolve any disputes about reimbursement of defense expenses and expedite regular payment," adding "AKH does now and always has reserved all its rights concerning insurance coverage including defense and coverage for the above suit, rates and amounts paid by Zurich for defense of this suit, settlement, indemnification, identification and allocation of defense expenditures, settlement and indemnity, and any other issues.[44]

         At some point in November 2012, RT proposed to purchase AKH's trademarks for $8 million, but AKH rejected this offer as too low. By late November, AKH and RT had agreed to a high-level framework for settlement whereby RT would provide a net payout to AKH of $8 million, with a potential "contribution" from UUIC.[45] Despite this framework, AKH wanted more than $8 million in the settlement, so it took steps to seek contribution from UUIC to increase its recovery.

         During the course of settlement discussions, Gauntlett advised Paul Hastings and AKH that they would need a formal demand letter from RT to present to UUIC. After communications with counsel and preparing a script, AKH executives spoke directly to RT executives to request a "demand" that could be provided to UUIC. On November 14, 2012, RT complied, issuing a written demand for $20 million to AKH. AKH did not provide this demand letter to UUIC, but did send it to counsel at Gauntlett and Paul Hastings, asking if it should ask RT for more information, and advising that "R-T is willing to provide any additional information and/or supporting documentation you deem worthwhile to submit to our insurance provider."[46]

         In response to RT's demand letter, AKH and its counsel discussed having Paul Hastings go to RT's counsel and ask for a new letter by phone because "we need more to send to Zurich."[47] Gauntlett and Paul Hastings attorneys agreed that the letter did not contain ___.[48] Dassoff initially expressed hesitation that "any changes to RT's discussion of potential punitive damages will appear collusive when the carrier [UUIC] conducts discovery and sees there was a significant softening in RT's position. I will ask, as you suggest, if the discussion can be a little more 'theoretical.'"[49] After AKH's counsel spoke to RT's counsel, AKH's counsel reported that "[t]here is great concern about possible exposure to Zurich for 'collusion' (i.e. that Zurich might later come back against RT and claim that it deliberately misled the carrier w/ its demand at the same time it was well into negotiations to pay $8MM to AKH)."[50] RT agreed to AKH's request for a new communication for UUIC's benefit.

         On November 20, 2012, Lowe sent Cole an email attaching three documents: (1) a November 20, 2012 ten-page letter from Lowe to Cole evaluating a possible settlement with RT, and requesting settlement authority; (2) a November 19, 2012 letter from Ballard Spahr to Dassoff, providing RT's "position regarding damages on its claims that have recently withstood . .. [AKH's] summary judgment motion"; and (3) a November 19, 2012 letter from Dassoff to Cole with a subject heading next to the consolidated case name of "Analysis of Settlement as an Alternative to Trial and of Reinalt-Thomas's November, 19, 2012 Settlement Demand."[51]Schaeper was copied on this email, and the Lowe and Dassoff letters. Andy Andonian, Hratch Andonian, and Sergio Andonian were also copied on the Dassoff letter.

         RT intended its letter from Ballard and Spahr to be a recitation of RT's potential request for damages at trial and AKH's potential exposure, not a formal settlement demand. Yet, the cover email from Lowe referred to the communication from RT as a "settlement demand of $20 million."[52] The letters from Paul Hastings and Gauntlett recommended that UUIC pay the "settlement demand." And Lowe requested that UUIC authorize a settlement offer for AKH of $15 million "as a response to Reinalt-Thomas's demand."[53] Dassoff s letter to Cole advised: "I disagree with several of the claims made in [RT's] demand letter, but, on the whole, I believe it is a reasonable calculation of what a jury could award [RT] at trial."[54] He proceeded to explain the basis for this conclusion by itemizing the range of possible damages as between $1.4 million and $90 million. In light of this range, Dassoff concluded that $20 million was a "reasonable calculation of what a jury might determine."[55]

         On November 27, 2012, attorneys from Ballard Spahr sent Dassoff a Draft Settlement Agreement and Mutual Release "for review and feedback."[56] The draft was a single global settlement agreement for the consolidated RT litigation. In the "Payment" section of the draft, it provided that RT would pay AKH $8 million, but left blank which portions of that amount would be paid by RT to AKH to settle "the AKH Lawsuit," and which portion would be paid to transfer the domain name. This document was not provided to UUIC during the underlying litigation; it was provided for the first time during discovery in this litigation. Kepler her that____[57]

         On November 28, 2012, Gauntlett and Paul Hastings attorneys exchanged emails about the draft, on which Andy Andonian was copied. Gauntlett recommended that the RT action be addressed in an agreement that does not reference the AKH action, "or the parties' settlement or business issues."[58] Dassoff responded that it would be difficult to persuade AKH and RT to agree to the two separate agreements. Further, "given the direction from AKH to complete this settlement as soon as possible, I am concerned that taking this approach could significantly delay completion of the settlement and payment by RT to AKH."[59]

         On December 2, 2012, Cole requested further information from Kepler and Dassoff about Dassoff s November 19 letter and RT's $20 million settlement demand, explicitly asking for "more details regarding the complete settlement demand and the recommended settlement."[60]Dassoff and Gauntlett attorneys discussed how to address her questions. On December 4, 2012, Dassoff sent Cole another email summarizing a phone conversation with her the day before. He discussed the impact of the summary judgment rulings on his firm's assessment of damages exposure and likelihood of success at trial. Furthermore, he stated:

As a matter of general practice, we have recommended to AKH that they speak to their insurance broker regarding putting other potential insurance carriers on notice. However, as we have emphasized, we are not coverage counsel and we do not offer any opinions related to these issues. Further, we have been instructed by our clients that we are not to discuss any monetary terms of the settlement of AKH's claims against [RT] with Zurich and that your inquiries on these issues should be directed to the Gauntlett firm. Given Zurich's refusal to pay any fees associated with the prosecution of AKH's claims, it should not come as a surprise that our clients would consider such terms of no moment to Zurich, as Zurich cannot dictate to its insured how to resolve its business disputes.[61]

         Dassoff concluded by stating that it was "imperative that a prompt response be given to [RT]" and asking UUIC for $5 million in settlement authority "to avoid losing this opportunity for settlement."[62] AKH was copied on this letter.

         By letters dated December 11, 2012 and December 12, 2012, Gauntlett advised UUIC of the following: (1) UUIC's demand to see a draft of the settlement terms was "improper" because Universal was not entitled to know how the parties are resolving their "business issues"; (2) "[a]s no money has yet been offered regarding [RT's] claims, [Universal] can have no legitimate objection to the continued exploration of this settlement opportunity"; and (3) AKH believed that securing authority for $5 million may be sufficient to settle the case if it is communicated promptly to RT.[63]

         On December 11, 2012, Gauntlett sent UUIC counsel a letter with the subject line, "$5 Million Settlement Authority-The Time for Delay is Over."[64] The letter advised UUIC that RT demanded that the "matter be resolved by close of business tomorrow or any proposal to settle RT's action against AKH will be withdrawn and the matter will proceed to trial."[65] AKH executives reviewed this letter before it was sent to UUIC. Yet, RT never set a "drop-dead" date for its settlement offer.[66] AKH and its counsel proposed a year-end resolution for the consolidated underlying lawsuits. RT understood that its deal with AKH would "blow up if we couldn't close it by year end because of tax considerations specific to AKH."[67]

         On December 13, 2012, UUIC offered the policy limits of $5, 000, 000 to RT in settlement, subject to a complete reservation of rights. In its lengthy letter offering policy limits, and outlining the reason for its reservation of rights, UUIC noted its surprise at RT's settlement demand and "the urgency of accepting it," and "reiterate[d] its request that AKH apprise it of all the settlement terms, including all non-monetary terms being discussed."[68]

         The parties in the underlying RT litigation drafted a separate settlement agreement for each lawsuit. On the same day that UUIC sent its letter offering policy limits and requesting more information about the settlement, AKH's counsel discussed with one another and with AKH executives' potential revisions to the two settlement agreements, and how much of the settlement agreements to share with UUIC. The Gauntlett firm took the position that the settlement agreement for the RT action should not reference the settlement agreement for the AKH action, but Dassoff replied:

We can ask again, but at this point it is pretty clear that RT is going to insist that some language be included in the RT agreement referencing the separate AKH agreement. Inclusion of these recitals in our next draft to RT will also likely delay finalizing the agreements as we go back and forth w/RT's attorneys on the issue. Given the commitment by Zurich to fund the $5 million, isn't it more likely than not that Zurich will still pay that amount when they see the references to the AKH agreement (and we continue to refuse to let them see this other settlement agreement that has RT paying AKH $13 million)?[69]

         Jesse Abrams, a Gauntlett attorney, disagreed with Dassoff, explaining:

If that integration is present, it will be extremely difficult to avoid giving both agreements to Universal. Once they see all dynamics of both deals they may raise a number of issues, possibly arguing that their $5 million is unnecessary and that they granted the authority based on a misperception of the deals taken together.[70]

         Dassoff responded that the Gauntlett attorneys should "be prepared for the likelihood that they will reject our demands to remove this language," out of a "largely unfounded concern about being accused later on of collusion by Zurich."[71]

         Also on December 13, Schaeper wrote to Gauntlett: "[M]ajor congratulations to everyone at Gauntlett and Associates for this excellent news and accomplishment."[72] Schaeper wrote separately to Paul Hastings: "[Y]our direct involvement with Zurich/Universal and their attorneys has resulted in a very favorable (and unanticipated) quick response. A big 'thank you' to you on all counts."[73]

         On December 17, 2012, Gauntlett sent UUIC a letter explaining that before UUIC extended $5 million in settlement authority, the parties had not agreed on an amount to be paid, and were instead addressing other business issues. "We are now negotiating a dollar figure with [RT] and believe we can settle if we can secure $5 million from Universal well in advance of year's end. .. . this offer will remain open until 12:00 pm (noon) PST on Wednesday, December 19, 2012 ... .[74] Schaeper was copied on this letter. In another letter dated December 17, 2012, Gauntlet sent UUIC counsel a response to UUIC's December 13 letter, informing UUIC that its "quest for information unrelated to its defense duty is improper," and argued that AKH need not disclose the parties' resolution of "business disputes" in order to fulfill its duty to cooperate.[75]

         Receipt and Execution of Settlement Agreements

         AKH provided drafts of both settlement agreements to UUIC on December 20, 2012- one week after UUIC had committed to paying its $5 million policy limits to RT to settle RT's claims against AKH, but before it tendered payment. In her email sending the drafts, Kepler told UUIC counsel that she had "been informed that these drafts need to be communicated to you immediately so as to fund the settlement in this calendar year."[76] UUIC responded on December 20 that it would need to review the final versions before issuing the settlement check. RT wanted UUIC to sign the settlement agreement. RT's attorneys

also suggested that the 5 million-dollar payment [] simply flow directly to the insured, to AKH, and clearly spell out the participation of the carrier and further to expressly state that the carrier was aware of the second agreement and the other side of the settlement that R-T was paying AKH 8 million dollars so that the carrier had a full understanding what was happening in the settlement to decide what to put into the settlement.[77]

         On December 21, 2012, UUIC counsel Karen Bizzini provided some comments to the draft agreement to settle the RT action, advised that RT would not sign the agreement, and asked that references to the insurer be removed as it is not a party to the lawsuit. Bizzini confirmed that UUIC's $5 million was to be paid in settlement of RT's action, noted that she did not "anticipate further communications with UUIC until after Christmas," and stated that if she received comments from her client about the settlement agreement draft before then, she would let AKH know.[78] Kepler responded that in lieu of UUIC's signature, RT would like a confirming note that UUIC has had an opportunity to review the settlement documents, and asked if that would be possible. Bizzini responded, "Yes."[79]

         AKH sent counsel for UUIC the final unsigned settlement agreements for both lawsuits on December 22, 2012. On December 24, 2012, AKH again provided UUIC with the final settlement agreements and a draft escrow agreement. The settlement agreements were signed by AKH on December 23, 2012, and by RT on December 24, 2012. The Settlement Agreement for the RT Action provided, among other things, that AKH would pay RT $5 million, and that UUIC and the parties "agree to the establishment of an escrow for the receipt and distribution of settlement funds to the parties and to further facilitate a comprehensive settlement that involves both this Agreement and the separate terms and conditions of the AKH Agreement."[80] The RT Agreement also provides that "[t]o the best of AKH's knowledge, Universal is fully informed that RT is receiving $5, 000, 000 in connection with the Settlement Payment herein and AKH is receiving $13, 000, 000 in connection with the Settlement Payment pursuant to the AKH Agreement."[81] However, neither of the settlement agreements nor the escrow agreement directly states that UUIC's money was being used to compensate AKH, that AKH was using the $5 million to maximize its own recovery, that UUIC's money was only necessary because AKH wanted to increase its recovery beyond what RT was willing to pay, or that RT had agreed to pay only $8 million and accept nothing in return, among other facts.

         Having received no confirmation of review yet from UUIC, Kepler wrote Bizzini again on December 27, asking for written confirmation that she received the documents sent on December 24. Later on December 27, Bizzini, responded to Kepler's email as follows:

As I advised you on Friday 12/21, no one representing Universal, including my firm as its coverage counsel, was available to review or respond to communications concerning this matter between 12/22 and 12/26. Accordingly, no one representing Universal reviewed the final versions of the RT Lawsuit Agreement and AKH Lawsuit Agreement that you sent, nor any version of the Escrow Agreement prior to the parties' execution of these agreements on 12/24. No. one representing Universal was ever given an opportunity to read the Escrow Agreement until after it was already executed.[82]

         Bizzini identified problems with the documents, reminded Kepler that UUIC agreed to the settlement under reservation of its right to seek reimbursement of the indemnity payment, and relayed that UUIC "takes no position concerning any of the provisions of the three agreements signed by RT and AKH on 12/24. As we previously advised, Universal assumes that the Paul Hastings law firm as appointed defense counsel for AKH fully assisted AKH in negotiating, drafting and executing these three agreements."[83]

         UUIC issued the $5 million settlement check later on December 27, 2012; Paul Hastings received it on December 31, 2012. In connection with the settlement of the RT litigation, the following payments were made via escrow: (1) RT issued $5 million to AKH and AKH issued $5 million to RT on December 26, 2012, to support dismissal of the consolidated underlying lawsuits; (2) RT paid the Confidential Settlement Amount to AKH on December 28, 2012, to purchase certain domain rights; and (3) Universal issued a check to RT for $5 million and, upon receipt, RT wired that $5 million to AKH on January 4, 2013. RT, following receipt of the $5 million settlement sum from Universal, paid AKH a total of $13 million.

         Paul Hastings was paid a contingency fee based on AKH's recovery of $8 million.

         In total, UUIC paid $805, 383.08 in attorneys' fees, costs, and expenses connected to defending the RT action. AKH maintains that the total amount of reasonable and necessary defense costs incurred is $2, 671, 601.74.

         On January 2, 2013, AKH filed this coverage action against Universal. On February 12, 2013, UUIC filed its answer and counterclaim seeking reimbursement.

         AKH's Asset Transfers

         Andy Andonian and Hratch Andonian are the sole owners of AKH, with ownership percentages of 55% and 45%, respectively. In 2011 and 2012, AKH owned and operated 41 retail stores under the name Discount Tire Centers. Prior to 2013, AKH considered making corporate changes to its entity, including the possibility of splitting the business between the Andonian brothers. Schaeper testified that when he met with the Andonians in 2010 and discussed working for AKH, the Andonians told him they were interested in "succession planning" for their sons, which would involve splitting AKH. Despite these conversations, in 2012 the brothers discussed going their separate ways, and communicated that intent to their accountant, Darryl Whitehead. They began to discuss with Whitehead how to value AKH for that purpose. In 2012, AKH decided not to sell, split, or transfer any assets because of the ongoing RT litigation.

         The parties present several conflicting valuations of AKH prior to its sale of assets in 2013. On March 16, 2013, Whitehead prepared a report for AKH with a valuation of the company as of December 31, 2012. Using a capitalized cash flow method, based on the assumptions outlined in the report, Whitehead determined that AKH had a fair market value of $13 million. In the summer of 2013, AKH rejected a third-party offer from Empirical Group of $17 million to purchase stores and the Discount Tire Centers trade name because AKH believed the offer was too low. In connection with that negotiation, AKH presented to Empirical Schaeper's EBTDA[84] valuation of AKH as of July 1, 2013, of $20 million not including the wholesale and ecommerce divisions.[85] Hratch and Andy told Empirical that the "price tag for all of the stores with the trade name including licensees [was] between 25 million to 30 million."[86]In August 2013, Andy Andonian believed a reasonable value for AKH was $25-30 million. UUIC's expert valued AKH at $29 million as of December 31, 2012.

         On July 21, 2013, Hratch Andonian asked AKH's CFO Rene Peth what liabilities would be left in the event of a wind-down of AKH, "excluding Zurich's 5.0 Million." Peth's response characterized the "$5, 000, 000 Zurich Payment" as an "Accrued Expense."[87] Peth testified that an accrued expense "would be something that you would be relatively certain would happen... . [I]t's incurred. It's just you haven't either received a bill for it yet or you haven't paid the bill for it."[88] Whitehead considered the $5 million indemnity payment to be deferred revenue in AKH's 2015 tax return.

         Beginning in August 2013, AKH began selling or transferring most, if not all of its assets. Pep Boys purchased 18 Discount Tire Center stores from AKH for approximately $10.7 million under an asset purchase agreement dated August 16, 2013. Approximately $___ of that purchase price was for goodwill and the balance was for tangible assets. Andy and Hratch Andonian received personal distributions of approximately $___.

         On August 30, 2013, AKH executed a Plan of Conversion, by which it converted into an entity called "AKH Company, LLC," organized under Nevada law. AKH Company, LLC was created in part for tax reasons. Hratch and Andy Andonian then began creating new business entities and sold or transferred AKH's assets to those entities.

         TradeCo, LLC ("TradeCo") was formed on September 10, 2013; Andy and Hratch Andonian were the sole members, with interests of 55% and 45% respectively. Also on September 10, 2013, AKH transferred ownership of the "Discount Tire Centers" trademark to TradeCo for zero consideration. Currently, Andy Andonian is the sole owner of TradeCo.[89] TradeCo receives licensing and management fees from each Discount Tire Centers licensees and franchisees in amounts between $1000 and $1500 per month. TradeCo's address is 1160 N. Anaheim Boulevard. Its profits since 2015 are more than $345, 000 per year.

         55, Inc. is a California corporation created on August 5, 2013. It is owned by Hratch Andonian and located at 3685 Motor Avenue in Los Angeles, California. Under an October 1, 2013 asset purchase agreement, AKH sold two Discount Tire Centers stores to 55, Inc. for a purchase price of $115, 721. The purchase price was the net book value of the fixed assets but did not include tire inventory. AKH's financial obligation under the asset purchase agreement was reduced by tire rebates and adjustments such as returns and warranties credited to AKH for inventory purchased by 55, Inc. In total, 55, Inc. paid to AKH $125, 000.[90] AKH and 55, Inc. were represented by the same counsel in preparing the asset purchase agreement. A bill of sale dated September 30, 2013, shows that AKH sold to 55, Inc. tire inventory, other resale inventory, equipment, and "other assets" for a total consideration of $347, 250.00.[91] The price of these goods was based on net book value. 55, Inc. pays a monthly licensing fee to TradeCo to use the Discount Tire Centers name on the two stores it purchased from AKH. It also operates four other stores not purchased from AKH, and not operating under the Discount Tire Centers name. AKH and 55, Inc. have separate bank accounts. 55 Inc. uses a different point-of-sale system than AKH and has its own computer network. It keeps its books, records, and assets separate from AKH. It has a separate payroll system and its own insurance policy. Hratch Andonian testified that as part of his 45% interest in AKH, he received the two Discount Tire Centers stores now owned by 55, Inc., which were valued at $1.75 million.

         Andonian Enterprises, Inc. ("AEI") is a California corporation created on September 10, 2013, with its principal place of business in California. It is owned by Andy Andonian and located at 1160 N. Anaheim Boulevard in Anaheim, California. AKH sold AEI its remaining 23 Discount Tire Center stores under an asset purchase agreement dated October 1, 2013, for a purchase price of $1, 146, 021. This purchase price was set by Andy and Hratch Andonian and reflected the book value of the purchased assets. The purchase price does not include amounts attributable to the value of inventory associated with the stores even though the agreement indicates that the inventory was transferred to AEI as part of the sale. AKH's financial obligation under the asset purchase agreement was reduced by tire rebates and adjustments such as returns and warranties credited to AKH for inventory purchased by AEI. AEI also paid AKH for inventory. AKH does not know how much AEI actually paid to receive these stores.[92] AKH and AEI were represented by the same counsel in preparing the asset purchase agreement. Andy Andonian gave a portion of his Pep Boys distribution to AEI to fund its purchase of AKH's assets. The stores purchased from AKH by Andonian Enterprises, Inc. operate under the Discount Tire Centers name and AEI pays a licensing fee to TradeCo.

         TireNetwork Group ("TNG") is a California corporation with its principal place of business in California. It is owned by Andy Andonian and is located at 1160 N. Anaheim Boulevard in Anaheim, California. AKH transferred its wholesale and ecommerce business to TNG under an asset purchase agreement executed in December 2012. Under the agreement, the parties had until May of 2013 to agree on the values for these parts of AKH's business. The purchase price was listed in the agreement as $2, 165, 897. This amount was set by the Andonians and reflected an amount less than the book value of the assets and the replacement value of the inventory. The Andonians decided to deduct approximately $90, 000 from the book value calculated by Peth when they set the purchase price. TNG did not actually pay AKH the full amount set forth in the asset purchase agreement; AKH wrote off hundreds of thousands of dollars.[93] Andy Andonian personally loaned money to TNG to fund its purchase of AKH's assets.

         Banking records produced by the Counter-Defendants show millions of dollars flowing among the parties. After the transfers outlined above, there was a transition period whereby AKH continued to purchase tire inventory from parties with whom it had existing relationships on behalf of AEI, TNG, and 55, Inc. AKH then received rebates and credits for these purchases, which it used to reduce these parties' financial obligations under the asset purchase agreements. Also during this period, AKH paid utilities, administrative expenses, payroll, and insurance for 55, Inc., TNG, and AEI, and those entities paid some of AKH's debts and obligations. For several months after the transfers, AEI did not have a depository bank account for its central California stores, so store deposits for those stores were made into AKH's Bank of America account and transferred to AEI's U.S. Bank account. In 2013, AEI made a tax payment on behalf of AKH, for which it was eventually reimbursed.

         The Andonian brothers loaned money to AKH over the years; often these loans did not carry interest rates. In one instance prior to the transfers outlined above, Hratch Andonian obtained a person loan from AKH President Michael Schaeper to support AKH's operations. The loan was repaid with interest.

         At the end of 2012, AKH's sales were over $__ annually and it had over $__ in reported assets. Its net income that year was $__. At the end of 2013, AKH listed approximately $__ in cash as an asset in its tax return; at the end of 2014, AKH listed less than $__ cash in its tax return. AKH currently has no revenue. According to Hratch Andonian, AKH "just manage[s] the day-to-day, some of the legal matters, obviously. The tax returns and-and if there are any other things-it's on hold because of all this situation right now. We're not really doing much other than trying to manage it right now."[94] AKH depends on gifts and loans from its owners to manage expenses. Currently, Andy and Hratch Andonian borrow money from third parties other than banks, who will not loan directly to AKH. Then, they infuse that money into AKH for it to pay debts, and the Andonians repay lenders with personal funds.

         In contrast, AEI, TNG, and 55, Inc. garnered substantial assets and sales after they were created. In 2013, TNG reported $___ in sales and $___ in assets, with a net income of $___. 55, Inc. reported $___ in sales and $___ in assets, with a net income of| |. AEI reported $___ in sales and over $___ in assets, with a net income __ By 2016, those assets and sales were substantially higher. TNG reported $___ in sales and $___ in assets, with $___ in net income. 55, Inc. reported $___ in sales and $___ in assets, with ___ in net income. AEI reported $___ in sales and $___ in assets, with ___ in net income.

         After the transfers, AKH employees became employees of 55, Inc. and AEI under the terms of the asset purchase agreements. Some AEI employees are also TNG employees. RT owns the domain name The Discount Tire Centers trademark is owned by TradeCo; RT rescinded a May 2013 offer to buy the trademark. In January 2019, Andy Andonian testified that AKH owns the domain name Prior to his testimony, Hratch Andonian had testified that AEI owned that domain name; therefore, UUIC learned for the first time that AKH owned this asset in January 2019.[95]

         III. Discussion

         A. Insurance Claims

         In Counts I through III of its Amended Complaint, AKH seeks declarations that Universal breached its duties to defend and settle the RT action, which collectively amount to a breach of the duty of good faith and fair dealing. UUIC responds that it did not breach its duties to defend and settle, and that AKH breached its duty to cooperate under both the insurance contract and Cal. Civ. Code § 2860(d), extinguishing its duty to defend and providing a right to reimbursement of the settlement funds and defense costs.

         Under a prior Order of this Court, and as stipulated by the parties, California law applies to the claims and defense raised on these issues.[96] The Court begins its analysis by considering Universal's duty to defend in the RT litigation.

         1. UUIC's Duty to Defend

         An insurer has a duty to defend "in any action brought against the insured seeking damages for any covered claim."[97] The duty applies to claims that are potentially covered by the policy, "in light of the facts alleged or otherwise disclosed," and "arises as soon as tender is made."[98] The Supreme Court of California has held that in a "mixed action," where "some of the claims are at least potentially covered and the others are not.... the insurer has a duty to defend the action in its entirety."[99] This duty "implies the prophylactic duty to defend 'entirely,' without pausing to parse among potentially covered and clearly uncovered claims."[100] "To defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend entirely."[101] It is uncontroverted that UUIC had a duty to defend AKH in the action filed against it by RT.

         The duty to defend includes "providing competent counsel and paying all reasonable and necessary costs."[102] AKH argues that UUIC failed to provide a complete and meaningful defense by insisting on allocation between the two lawsuits at billing requirements far below Paul Hastings' customary rates. AKH's arguments in favor of this position misapprehend governing law, and ignore important uncontroverted facts in this case.

         a. Mixed Actions

         AKH first suggests that the "mixed action" rule announced in Buss applies to the consolidated RT litigation, requiring UUIC to pay for all charges by Paul Hastings upon tender of the defense. UUIC responds that Buss does not apply to consolidated cases that include defensive and affirmative claims; it only applies to actions against the insured that include both claims that are potentially covered and those that are not. Moreover, UUIC argues that the parties reached agreements that govern UUIC's payment of the costs of AKH's defense: (1) UUIC's February 12, 2012 Reservation of Rights letter agreed to pay AKH's chosen counsel provided that counsel agrees to abide by the terms of Cal. Civ. Code § 2860 and comply with UUIC's defense counsel guidelines and billing rates; and (2) the parties separately agreed that AKH would pay for 50% of Paul Hastings' work on the consolidated action.

         The Court agrees with UUIC that the Buss court's discussion of "mixed actions" does not apply to separate actions that are not tendered. "Mixed actions" are actions where some claims are potentially covered by the insurance policy and some are not.[103] Buss makes clear that the duty to defend arises as soon as tender is made. "[T]he duty to defend goes to any action seeking damages for any covered claim."[104] It is uncontroverted that the only "action" tendered to UUIC was RT's action against AKH. Because AKH's lawsuit against RT was an affirmative action and was not part of the tender, there is no genuine issue of material fact that UUIC had no duty to "defend" in that affirmative action despite the fact that it was consolidated with RT's action against AKH.

         AKH insists that where the insured's lawyers' duties defending against a lawsuit are intertwined with its duties prosecuting an affirmative action, the duty to defend requires the insurer to fund the entire dispute, without allocating between the covered and uncovered actions. The Court has reviewed the many cases AKH cites for this proposition and finds that they are inapposite or distinguishable. None of these cases hold that the duty to defend includes the duty to pay costs to prosecute an action by the insured. Instead, the cited-to cases deal with the burden of proof that applies to determine reimbursable defense costs after it is determined that the insurer breached the duty to defend.

         For example, in California v. Pacific Indemnity Co., the California Court of Appeals considered whether the insurer bore the burden of proving the amount of costs incurred in defense of an action where the insured was entitled to defense fees and the attorneys were unable to separate out from their records time spent on the defense and time spent prosecuting related claims.[105] The court held that the insured must prove the existence of the amount of the expense, and the insurer must demonstrate that the cost is unreasonable.[106] The insured in that case met its burden by "providing] testimony that the work was all related to the defense. Pacific Indemnity has provided no evidence to rebut that claim."[107] The appellate court did not hold that Pacific Indemnity breached the duty to defend by declining to pay the costs of prosecuting an affirmative lawsuit. It merely sets forth the relative burdens of proof on the amount of defense fees owed where a duty to defend is breached and some of the costs are intertwined with the costs of prosecuting an affirmative lawsuit.[108]

         Likewise, in United Coastal Insurance Co. v. Strategic Organizational Systems International, Inc., the insurer conceded that some of the claims against the insured were potentially covered by the policy, yet it paid none of the insured's defense costs, instead arguing that it had no duty to defend, and that the insured must show that its defense costs are traceable to potentially covered claims.[109] In arguing that the insured had a duty to allocate, United Coastal contended that placing an allocation burden on it would unfairly subsidize the insured's costs in prosecuting a cross-appeal in the underlying case.[110] The court rejected that argument because "[c]osts exclusively attributable to these other lawsuit [were] expressly excluded from reimbursement," and to the extent expenses for defense and prosecution overlapped, that "mere fortuity" did not alone relieve the insurer of its duty to pay those costs.[111] Of course here, UUIC did not decline to pay all defense costs, only those associated with the affirmative suit.

         One case relied on by AKH is directly on point, however, it stands for the opposite proposition. In Larkin v. ITT Hartford, Judge Breyer explained that the issue of whether there is a duty to defend a suit prosecuted by the insured is a separate question from whether costs and attorneys' fees prosecuting such action are recoverable as part of defense costs in a related action:

The Court finds that Hartford did not have a duty to fund the prosecution of the Larkin action. Plaintiffs have not cited a single case in which an insurer was held to have a duty to fund the prosecution of a separate action for damages in which the insured is a plaintiff. The Court declines to extend California law to create a duty to pay litigation expenses incurred in prosecuting an action for damages on the ground that a finding in favor of the plaintiff in that damages action might be used by the plaintiff to successfully defend a separate lawsuit.[112]

         Similarly, in this case, UUIC's duty to defend is a separate question from the appropriate allocation of fees between the defensive and affirmative action. In order to demonstrate that certain costs and attorneys' fees incurred during the insured's prosecution of a related action may be recoverable if they did "double duty" for the defense, the insured must, inter alia, identify such costs and submit evidence that they were "reasonable and necessary to the defense."[113]

         This showing includes:

(1) that the costs and fees sought are associated with actions conducted within the temporal limits of [UUIC's] duty to defend, i.e., between tender of the defense and conclusion of the action; (2) the actions taken amount to a reasonable and necessary effort to avoid or at least minimize liability; and (3) the actions taken are reasonable and necessary for that purpose.[114]

         AKH does not identify which fees UUIC failed to pay that were reasonable and necessary to the defense. To the extent AKH suggests that UUIC had a duty to fund the entire consolidated action up front, its position is not supported by California law. UUIC was not required to prophylactically "assume expenses alleged by its insured to be 'reasonable and necessary' to minimize liability in a covered action."[115] Other than its proffered expert, Andre Jardini, AKH has come forward with no evidence that the entirety or majority of Paul Hastings' fees were reasonable and necessary to the defense of the RT action other than conclusory assertions. And the Court has excluded Jardini's expert opinion on this point because his opinion that virtually all of Paul Hastings' work on the two lawsuits should be attributed to the defense relies on faulty methodology and assumptions. Namely, his opinion is limited to fees he determined were "reasonable" under a different standard that the one set out above. Conclusory assertions that Paul Hastings' work on the affirmative lawsuit was reasonable and necessary to the defense are not sufficient to defeat summary judgment on that point.

         AKH also fails to consistently relay its position on which fees are properly attributable to the defense. Its expert opines that almost all fees, $1, 866, 218.88 (all but 4% of the total fees submitted), incurred by Paul Hastings should have been paid by UUIC.[116] But in its reply to UUIC's motion for summary judgment, AKH contends that "AKH is not owed for every fee that was affirmative in nature, but where the fees were both defensive and affirmative, those are considered defensive fees and should have been paid by Universal."[117] Later, AKH concedes that UUIC does not have a duty to fund the affirmative lawsuit, but argues "that does not mean Universal did not have a duty to pay for some of those costs where they are properly characterized as defense costs."[118] Despite Jardini's opinion, AKH never submits on summary judgment how much of Paul Hastings' fees were "reasonable and necessary" to the defense of the RT action. In fact, it explicitly disclaims that there is a need to reach that question, arguing that it "rather seeks a declaration that Universal breached its duty to defend AKH, with the exact amount of damages Universal caused subject to proof at trial."[119]

         To be sure, determining whether UUIC breached a duty to defend is the first order of business. The Court has determined that it did not. For AKH to prevail on summary judgment, the Court must agree that UUIC was required to fund the entire consolidated litigation and seek reimbursement and allocation at a later time. This position is not well taken.

In the general case, it is the insured that must carry the burden of proof on the existence, amount, and reasonableness and necessity of.. . defense costs, and it must do so by the preponderance of the evidence."[120] It is only in exceptional cases "wherein the insurer has breached its duty to defend, [where] the insured . .. must carry the burden of proof on the existence and amount of the site investigation expenses, which are then presumed to be reasonable and necessary as defense costs, and it is the insurer that must carry the burden of proof that they are in fact unreasonable or unnecessary.[121]

         Either way, the insured has a burden to at least identify the existence and amount of such expenses. AKH wholly fails to do so, and its argument that this matter should be left for trial is unavailing in the face of UUIC's motion for summary judgment pointing to a lack of evidence that the more than $800, 000 in fees it paid under the cost-sharing agreement and billing guidelines were insufficient to meet the reasonable and necessary mandate in the governing statute and case law.

         The statute requires that "[a]ny dispute concerning attorney's fees ... shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute."[122] California case law identifies two limited circumstances where an insurer may forfeit the right to arbitrate the issue of attorney's fees: (1) where the insurer fails to pay at all; and (2) where the insurer improperly refuses to accept tender of the defense.[123] Neither situation applies here given that UUIC agreed to defend and has paid more than $800, 000 in defense costs.

         Once a trial court makes preliminary decisions about whether the insurer has a duty to defend, or has violated the covenant of good faith and fair dealing, the parties are required to arbitrate any dispute over the amount of defense costs.[124] Now that the Court has ruled on the scope of UUIC's duty to defend and on the parties' claims of breach of the covenant of good faith and fair dealing, any remaining dispute as to the amount of fees owed to AKH by UUIC is subject to mandatory arbitration.

         AKH is simply wrong on the law that UUIC's duty to defend required it to pay the costs of the entire consolidated RT litigation up front. UUIC's duty to defend only reached claims potentially covered by the Policy that were in fact tendered. It had a duty to defend AKH in the RT action and nothing more. To the extent some costs did "double duty" because they were incurred for work spent on both actions, AKH fails to come forward with admissible evidence that the remaining costs billed by Paul Hastings were reasonable and necessary to the defense.

         b. Cost-Sharing Agreement

         AKH's claim that UUIC's duty to defend required it to pay for virtually all hours expended on the consolidated RT litigation ignores the key fact that the parties reached a separate allocation agreement that, along with UUIC's agreement to defend under a reservation of rights, governed the scope of UUIC's duty to fund the consolidated RT litigation.

         Prior to Cole's February 29, 2012 Reservation of Rights letter, executives at AKH provided information to Palmer by email to convince UUIC to approve Paul Hastings' representation of AKH in the RT Action.[125] Palmer explained to Hratch Andonian and Schaeper in a February 10, 2012 email that if Paul Hastings agreed to UUIC's billing rates, UUIC would allow Paul Hastings to defend AKH.[126] In the February 29, 2012 Reservation of Rights letter, Cole informed AKH that she had taken over handling AKH's claim from Palmer, and supplemented Palmer's January 5 letter by agreeing to "pay for AKH's choice of counsel instead of assigning provided that AKH's choice of counsel agrees to abide by the terms of California Civil Code section 2860 and complies with Universal's defense counsel guidelines and billing rates, which were forwarded to you on 2/10/12."[127] Paul Hastings was AKH's counsel of choice-AKH retained Paul Hastings before it tendered the RT lawsuit to UUIC. And the uncontroverted facts show that AKH continued to retain Paul Hastings after it received UUIC's February 29, 2012 letter. There is no evidence that AKH rejected UUIC's demand that Paul Hastings agree to abide by UUIC's billing guidelines and rates in exchange for UUIC funding defense costs for AKH's counsel of choice. In fact, AKH executives received the governing billing rates and guidelines prior to Cole's February 29 Reservation of Rights letter.

         After the February 29, 2012 letter, Cole advised Paul Hastings attorneys Kepler and Dassoff by email that UUIC would agree to split 50/50 the attorneys' fees, "subject to this company's prior Reservation of Rights letters," which included the condition that UUIC would pay AKH's choice of counsel at UUIC's billing rates. Initially, Kepler balked at this proposal, arguing that Palmer had not previously advised AKH executives that the Paul Hastings' work would be subject to apportionment; they believed from their conversations with Palmer that UUIC would pay 100% of Paul Hastings' billed hours under UUIC's billing guidelines and rates. Kepler proposed to Cole in her email that the parties proceed based on the AKH executives' understanding of the agreement. But Cole replied on March 16, 2012, that "[n]o where in the emails did Jena Palmer ever agree to pay AKH's attorney's fees to prosecute the claim against Reinalt. The only thing that Zurich agreed to was to allow AKH to use Paul Hastings to defend AKH in this case subject to our Reservation."[128] Since Paul Hastings did not agree to the 50/50 split, Cole asked Kepler to "separate their expenses for prosecution of the claim against Reinalt and for the defense of the claim by Reinalt. Zurich will not agree to pay for the prosecution of AKH's claim against Reinalt."[129] Kepler responded on March 24, 2012, explaining that it would be a "practical impossibility to split our tasks between two separate billing numbers ... I respectfully request that we return to the agreement that Zurich will pay its rates for 50% of the hours that Paul Hastings bills in connection with this case to address the prosecution/defense concerns."[130]

         As supported by this email correspondence, the parties stipulate that Paul Hastings proposed a "50/50 split" between AKH and Universal of the legal fees and costs incurred in RT litigation, and that they "agreed to a '50/50 split' between AKH and Universal of the bills submitted in the Consolidated Underlying Action."[131] It is uncontroverted that AKH authorized Paul Hastings to negotiate the 50/50 split. It is also uncontroverted that AKH agreed to pay the difference between Paul Hastings' full rates and the panel counsel rates paid by UUIC, and for any expenses written off by UUIC under its billing guidelines.

         Now, AKH appears to disavow this stipulation by arguing that the 50/50 cost-sharing agreement is unenforceable because it (1) breaches the terms of the insurance policy and Reservation of Rights letters; and (2) lacks consideration. AKH characterizes the 50/50 split as "nothing more than an improper bid to force its insured to pay for a significant part of its own defense."[132] The Court rejects AKH's contention that the cost-sharing agreement is unenforceable.

         First, the Court disagrees with AKH that the cost-sharing agreement breached the Policy provision that obligates UUIC to pay for "all costs and expenses in defending" AKH, and the obligation set forth in its Reservation of Rights letter that it would provide a "complete and unconditional defense." The cost-sharing agreement did not violate the Policy for the same reasons explained above: UUIC had no duty under the Policy to pay for any costs expended on prosecuting the AKH claim. It only had a duty to defend in the RT action. Although UUIC gave AKH the option of segregating its expenses and paying only those expenses attributable to the RT action, AKH's attorneys proposed and ultimately agreed to a 50/50 split based on their assertions that segregating out the billing records would be impractical and cumbersome. The fact that UUIC entered into an agreement with AKH to pay for half of Paul Hastings' work, and to subject that work to its own billing guidelines and rates, does not contravene the plain language of the Policy or the Reservation of Rights letters obligating it to provide a full defense.

         AKH next argues that UUIC did not abide by the Policy provisions that govern changes to the Policy when the parties entered into the cost-sharing agreement. This provision only applies, however, if there is a change to the Policy. As stated above, the Court finds no genuine issue of material fact about whether UUIC breached its duty to defend by declining to fund the consolidated lawsuit. The cost-sharing agreement was a side agreement entered into by the parties to resolve the practical difficulty of segregating Paul Hastings' bills between the two lawsuits. It was Paul Hastings that suggested the 50/50 split, after UUIC repeatedly gave it the option of segregating fees. This agreement was a method devised by the parties to allocate attorneys' fees and expenses properly attributable to the claim for which UUIC agreed to defend; it did not modify the insurance contract.[133]

         Finally, AKH argues without adequate explanation that the cost-sharing agreement lacked consideration, asserting that "AKH took what it could get from Universal while continuing to protest that it was entitled to more."[134] But the consideration was that UUIC permitted Paul Hastings to continue as AKH's chosen counsel without segregating its work on the two lawsuits. The act of segregating, in the words of Paul Hastings' counsel, would add "layers of complication and distraction for each time keeper added to the mix."[135] The cost-sharing agreement saved Paul Hastings' time segregating its work, and "realistically .. . would likely result in roughly a 50/50 situation."[136] The alternative-that Paul Hastings would segregate its work before submitting it to UUIC for reimbursement-was not appealing to AKH, and UUIC went beyond its obligation under the contract to provide a defense to AKH in the RT suit by allowing it to split its costs by half on the consolidated lawsuit, part of which UUIC had no duty to defend.[137] It is uncontroverted that AKH authorized Paul Hastings to negotiate this agreement, which is the type of agreement explicitly contemplated under the Cumis statute.[138]For all of these reasons, the Court finds that as a matter of law, the cost-sharing agreement was enforceable

         c. Failure to Provide Independent Counsel

         AKH argues that UUIC did not provide it with independent counsel, violating its duty to defend. But the Court has already ruled on this issue and found that UUIC complied with any duty it may have had to appoint independent counsel under the Cumis statute, Cal. Civ. Code § 2860.[139] The Court declines to revisit this ruling and finds no genuine issue of material fact about whether UUIC breached the duty to defend by failing to provide AKH with independent counsel.

         d. Use of Billing Guidelines and Panel Rates

         Finally, AKH maintains that UUIC breached its duty to defend by relying on billing guidelines and unreasonable hourly rates to reduce its counsel's fees and unreasonably delay payment. According to AKH, these practices in conjunction with UUIC's knowledge that AKH agreed to pay the remainder of Paul Hastings' fees, amounted to UUIC not funding a complete and meaningful defense.

         In order to show that UUIC's billing guidelines breached its duty to defend, AKH must demonstrate that the guidelines were "unreasonable or unnecessary," or that Paul Hastings' attorneys were "precluded from engaging in any specific discovery, hiring of expert witnesses, conducting research, or pursuing any other litigation tactic."[140] AKH has come forward with no admissible evidence demonstrating the unreasonableness of the guidelines, or any specific efforts precluded by their application to this matter. As this Court already noted in a 2015 order granting UUIC's partial motion for summary judgment that it fulfilled its duty to provide AKH with independent counsel, there was "no evidence that UUIC's billing guidelines implicated any of Paul Hastings' strategic decisions in the underlying suit. And there is no evidence to suggest that Paul Hastings did not owe its primary obligation to AKH in its defense of the underlying litigation."[141] AKH argues that this ruling is not binding because it was from an earlier summary judgment record, but UUIC is correct that the Court did not simply deny AKH's motion for partial summary judgment on this issue; it granted UUIC's motion for partial summary judgment.

         And on this current record, AKH fails to come forward with further evidence to support this claim. AKH fails to demonstrate that UUIC breached its duty to defend by refusing payment for fees in excess of what it deemed reasonable and necessary, particularly in the face of its payment to Paul Hastings of $805, 383.08 in defense costs and fees. UUIC was "entitled to refuse to pay any amounts in excess of what is required under section 2860 or which are not reasonable and necessary for Plaintiffs' defense in the underlying action."[142] As discussed in the Court's Daubert ruling, the only evidence in support of AKH's contention that UUIC failed to pay all reasonable and necessary fees in the RT action is Jardini's report and testimony, which must be excluded based on an unreliable methodology, and faulty legal and factual assumptions.

         As for Paul Hastings' hourly rates, under the Cumis statute UUIC was required to pay Paul Hastings "only those fees equivalent 'to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.'"[143] It is uncontroverted that UUIC paid Paul Hastings the same rates it would have paid its panel counsel, Gordon & Rees, to handle the case, therefore it met its statutory duty to pay AKH's attorneys panel rates.[144] Moreover, as set forth above, the statute mandates that any remaining claim by AKH that UUIC failed to properly allocate all reasonable and necessary defense costs is subject to arbitration.

         In sum, the Court grants UUIC's motion for summary judgment on AKH's claim that it breached its duty to defend in the RT Action by failing to pay all, or nearly all, of Paul Hastings' fees and expenses incurred during the consolidated RT litigation (AKH Count I). UUIC provided an immediate and complete defense upon tender of the RT action. It had no duty to fund AKH's affirmative lawsuit against RT and the cost-sharing agreement was enforceable. To the extent certain additional defense amounts should have been paid under the governing agreements and Cumis statute, that question is subject to mandatory arbitration. Therefore the Court denies AKH's motion for summary judgment on UUIC's Count XL Although the Court finds that the cost-sharing agreement was enforceable, it grants AKH's motion for summary judgment on UUIC's Count VI for breach of the cost-sharing agreement because as a matter of law, AKH did not breach this e-mail contract merely by challenging its enforceability in this litigation. The uncontroverted facts show that AKH performed under the cost-sharing agreement by accepting payment under the 50/50 split; it only later challenged the agreement's enforceability. The fact that the Court disagrees with AKH's position does not render the taking of that position a separate breach.

         2. UUIC's Duty to Settle

         The parties cross-move for summary judgment on AKH's Count II for a declaratory judgment that UUIC breached its duty to settle the RT action under the Policy. UUIC's motion for summary judgment is granted and AKH's motion for summary judgment is denied. AKH's claim is based on UUIC's stated intention at the time of settlement that it would seek reimbursement of the settlement payment in its entirety. Under California law, "[a]n insurer does not breach any duty to the insured merely by reserving its rights under the policy."[145]

If an insurer could not unilaterally reserve its right to later assert noncoverage of any settled claim, it would have no practical avenue of recourse other than to settle and forgo reimbursement. An insured's mere objection to a reservation of right would create coverage contrary to the parties' agreement in the insurance policy and violate basic notions of fairness.[146]

         AKH argues that because UUIC seeks reimbursement for defense costs that are potentially covered by the policy, it is entitled to a judicial declaration that UUIC was duty-bound to pay the settlement in the RT litigation. This argument lacks merit. First, this position is entirely dependent upon AKH prevailing on Count I. For the reasons explained above, UUIC's motion for summary judgment is granted and AKH's is denied on that claim. Second, UUIC's reimbursement claims are based on its position that none of the claims in the RT litigation are potentially covered by the Policy due to AKH's breach of the cooperation clause, or in the alternative, because several other Policy exclusions apply. UUIC reserved its right to bring these claims when it agreed to defend AKH, and again when it agreed to extend its liability limits for settlement. California ...

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