Facts

In 2018, Heritage Bank of Commerce purchased insurance from Zurich American Insurance Company. These particular insurance policies only applied if Heritage's primary insurance from Federal Insurance Company was insufficient to cover a loss. Heritage bought multiple amounts of the policy with each beginning in August and lasting a year. Certain Heritage accountholders engaged in a Ponzi type of scheme, later called DC Solar, involving the selling of mobile solar generators. When DC Solar went bankrupt, victims of the DC Solar Ponzi scheme filed suit against Heritage alleging that Heritage aided and abetted the scheme by allowing those running the company to transfer funds from investors' accounts without authorization. Heritage was forced to spend money not only defending itself in those suits but also for a $9 million bankruptcy settlement. After Heritage tendered the DC Solar claims to its primary insurers, because the amounts covered did not fully compensate Heritage for its financial losses, it then sought to recover the balance from the other excess carriers, including Zurich. Zurich denied coverage, claiming it was not provided adequate notice. Heritage then filed suit for, among others, breach of contract for the remaining out-of-pocket losses.

PLAINTIFF’S CONTENTIONS: Plaintiff contended, among others, that it was entitled to coverage under its policies with defendant, arguing that it provided actual notice in July 2019 when, as part of its renewal application, it informed defendant’s underwriting department that there was a legal hold letter relating to DC Solar.

DEFENDANT'S CONTENTIONS: Defendant contended that plaintiff did not follow the specific process required in its policy. Moreover, the policy had an insolvency exception that detailed that where the loss resulted from wrongful acts connected with plaintiff, then defendant would not be liable. Also, the aiding and abetting allegations asserted against Heritage, along with the possibility that those actions caused the damages that incurred because of the bankruptcy, linked the insolvency to plaintiff thus further supporting its argument.

Result

The court granted defendant's motion to dismiss without further leave to amend.

Other Information

On January 25, 2023, Heritage Bank of Commerce appealed the decision of Judge Seeborg to the United States Court of Appeals for the Ninth Circuit, Case No. 23-15115. Heritage Bank of Commerce's Opening Brief is currently due on May 5, 2023 and Zurich American Insurance Company's Answering Brief is currently due on June 5, 2023.