Conestoga Services v. Executive Risk Indemnity

• Decision Date: 27 November 2002
• Docket Number: No. 01-16693.,01-16693.
• Citation: 312 F.3d 976
• Parties: CONESTOGA SERVICES CORPORATION, Plaintiff-Appellant, v. EXECUTIVE RISK INDEMNITY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

312 F.3d 976

CONESTOGA SERVICES CORPORATION, Plaintiff-Appellant, v. EXECUTIVE RISK INDEMNITY, INC., Defendant-Appellee.

No. 01-16693.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 6, 2002.

Filed November 27, 2002.

Lee S. Harris, Brian E. Soriano, Goldstein, Gellman, Melbostad, Gibson & Harris, LLP, Matthew Wertheim, Law Office of Matthew Wertheim, Elizabeth E. Bader,

Law Office of Elizabeth E. Bader, San Francisco, CA, for plaintiff-appellant.

Stephen L. Young, Oakland, CA, for Amici Curiae on Behald of Plaintiff/Appellant.

Robert B. Best, Jr., Husch & Eppenberger, LLP, Kansas, MO, for Amicus Curiae on Behalf of Plaintiff/Appellant.

Gilbert D. Jensen, Musick, Peeler & Garrett, LLP, Los Angeles, CA, for defendant-appellee.

Appeal from the United States District Court for the Northern District of California, Samuel Conti, District Judge, Presiding, D.C. No. CV-99-05343-SC.

Before B. FLETCHER, ARNOLD^* and RAWLINSON, Circuit Judges.

OPINION

BETTY B. FLETCHER, Circuit Judge.

Plaintiff-appellant Conestoga Services Corp. ("Conestoga"),¹ an insurance brokerage, sued defendant-appellee Executive Risk Indemnity, Inc. ("Executive Risk"), claiming that Executive Risk breached its liability insurance contract with Conestoga when it refused to defend Conestoga in a malpractice suit. Executive Risk maintained that it was not obliged to defend Conestoga under Conestoga's insurance policy because the policy contained an exception that precluded coverage for claims "based on or directly or indirectly arising out of or resulting from the bankruptcy of, or suspension of payments or failure or refusal, in whole or in part, to pay by ... any self-insurance plan...." The district court agreed that the exception was applicable and granted summary judgment to Executive Risk on all claims.

Conestoga now appeals the district court's grant of summary judgment on its claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory judgment. We have jurisdiction under 28 U.S.C. § 1291, and now reverse in part and vacate and remand in part.

I. BACKGROUND

A. The Contract

Plaintiff-appellant Conestoga is an insurance brokerage firm. Beginning in June 1995, Conestoga entered into an insurance contract with Executive Risk whereby Executive Risk provided Conestoga with a "Specialized Insurance Agents and Insurance Brokers Professional Liability Policy" (the "Policy"). This type of policy is generally referred to as "errors-and-omissions" liability insurance; it is essentially malpractice insurance for insurance brokers.

The Policy at issue here insured Conestoga against damages and defense expenses incurred by Conestoga "for a Wrongful Act first committed on or after the Retroactive Date stated in item 6 of the Declarations." The policy defines "wrongful act" as "any actual or alleged act, error, or omission committed solely in the performance of, or failure to perform, Professional Services." "Professional Services," in turn, is defined as "only insurance services performed for others for a fee as an insurance agent, insurance broker, managing general agent, general agent, surplus lines broker, wholesale insurance broker or insurance consultant including notary public, premium financing, claims adjusting and loss control services"; however, the term "others" cannot include entities affiliated with the insured.

The Policy also contained various exclusion clauses. At issue in this case is Exclusion L, which provides as follows:

This Policy shall not apply to any Claim... based on or directly or indirectly arising out of or resulting from the bankruptcy of, or suspension of payments or failure or refusal, in whole or in part, to pay by:

(1) any broker or dealer in securities or commodities, or

(2) any bank or banking firm, or

(3) any bonding company or insurance company or reinsurance company, or

(4) any self-insurance plan, insurance pool or reciprocal, captive insurance company, risk retention group or risk purchasing group.

B. The "Wrongful Act"

In May 1995, the Frontier Pacific Insurance Co. ("Frontier") wrote a surety bond through Conestoga for $5,743,000. The surety bond was part of a workers' compensation self-insurance plan for a retail paint store, the Standard Brands Paint Company ("Standard"): It guaranteed the payment of Standard's workers' compensation obligations to its employees, as required under Cal. Labor Code § 3701. The obligee on the bond was the State of California; Frontier, the surety, required the paint store, as the principal on bond, to post collateral in the amount of $3,158,650.

On August 16, 1995, Standard and the Director of the Department of Industrial Relations for the State of California ("Director") agreed to reduce the amount of the bond by $1,837,728. The Director forwarded a one-page Surety Bond Decrease Rider ("Rider") to Conestoga for execution. Conestoga then forwarded the Rider to Frontier; Frontier executed it and returned it to Conestoga with directions to forward it back to the Director, so that the Director could execute the final copy. Conestoga, however, unbeknownst to Frontier, never forwarded the Rider to the Director for final execution. Meanwhile, Frontier, acting pursuant to the Rider, reduced the collateral required against the bond to $2,000,000.

In December 1995, Standard filed for bankruptcy. The Director notified Frontier, the surety, that the principal had defaulted, and requested that Frontier cover Standard's workers' compensation liabilities up to the original amount of the bond, on the grounds that the Rider had never been executed and thus was not valid. Frontier, maintaining that the Rider was valid, argued that it should only be obliged to pay $3,905,272 — the amount of the surety bond as amended by the Rider. Although Conestoga ultimately forwarded the Rider to the Director on February 26, 1996, the Director did not change his position that the Rider was invalid.

Frontier sued Conestoga in California Superior Court on August 6, 1999, alleging breach of contract, breach of fiduciary duty, and negligence. On August 18, 1999, Conestoga tendered the defense of the Frontier lawsuit to Executive Risk, enclosing with its letter a copy of the Frontier complaint. On August 30, 1999, Executive Risk denied coverage for the Frontier lawsuit, based on the provision in Exclusion L that excluded claims "based on or directly or indirectly arising out of or resulting from the bankruptcy of, or suspension of payments or failure or refusal, in whole or in part, to pay by ... any self-insurance plan, insurance pool or reciprocal, captive insurance company, risk retention group or risk purchasing group."

C. The Present Suit

Conestoga filed the instant lawsuit in California Superior Court, seeking damages for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence, as well as declaratory relief establishing that the Policy obligated Executive Risk to defend Conestoga in the Frontier action. The case was removed to federal court on diversity grounds on December 21, 1999. On May 11, 2001, the district court granted Executive Risk's motion for partial summary judgment, holding that Executive Risk had no duty to defend Conestoga, denying Conestoga's breach of contract and negligence claims, and rejecting its claim for declaratory relief.

In its Order, the district court agreed with Executive Risk that the Policy clearly and unambiguously excluded the Frontier suit from coverage. Exclusion L exempted from coverage claims "based on or directly or indirectly arising out of or resulting from the bankruptcy of, or suspension of payments or failure or refusal, in whole or in part, to pay by ... any self-insurance plan." Conestoga had argued that the term "self-insurance plan" applied only to insurance companies, but the district court rejected that construction, noting that it would render the explicit exemption for insurance companies in paragraph (3) redundant and unnecessary. Conestoga Servs. Corp. v. Exec. Risk Indem., Inc., No. C 99-5343 SC, slip op. at 8 (N.D.Cal. May 11, 2001). Conestoga also argued that Exclusion L did not apply to the Frontier case because it excluded claims arising from the "bankruptcy of a self-insurance plan," and Standard is not a self-insurance plan, but a paint store. The district court rejected this argument as well, on the grounds that Exclusion L also covered claims based on, arising out of, or resulting from "suspension of payments or failure or refusal ... to pay by ... any self-insurance plan"; "it was the cessation of payments by Standard Brands' self-insurance plan that triggered Frontier's obligations under the bond." Id. at 9.

Finally, the district court noted that, under California law, negligence claims do not generally lie against insurers. Id. at 9-10 (citing Sanchez v. Lindsey Morden Claims Servs., Inc., 72 Cal.App.4th 249, 254, 84 Cal.Rptr.2d 799 (1999); Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1166 (9th Cir.1995); Aas v. Superior Court, 24 Cal.4th 627, 643, 101 Cal.Rptr.2d 718, 12 P.3d 1125 (2000)).

Executive Risk then moved for summary judgment on the remaining claim for breach of the implied covenant of good faith and fair dealing, a motion the district court granted on July 20, 2001. Under California law, the district court observed, "an insured can not maintain a claim of breach of the covenant of good faith and fair dealing where the insurer does not have a duty to defend or indemnify." Conestoga Servs. Corp. v. Exec. Risk Indem., Inc., No. C 99-5343 SC, 2001 WL 868701, at *1 (N.D.Cal. July 20, 2001) (citing Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 36, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995); Love v. Fire Ins. Exch., 221 Cal.App.3d 1136, 1151-53, 271 Cal.Rptr. 246 (1990)). Because the district court found no such duty in this case, it ruled that Conestoga's breach of covenant of good faith and...