Cahill v. Liberty Mut. Ins. Co.

• Decision Date: 25 March 1996
• Docket Number: No. 94-55943,94-55943
• Citation: 80 F.3d 336
• Parties: 96 Cal. Daily Op. Serv. 1974, 96 Daily Journal D.A.R. 3349 Charles H. CAHILL; Aniko Der Cahill, Plaintiffs-Appellants, v. LIBERTY MUTUAL INSURANCE CO., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 336

80 F.3d 336

96 Cal. Daily Op. Serv. 1974, 96 Daily Journal

D.A.R. 3349

Charles H. CAHILL; Aniko Der Cahill, Plaintiffs-Appellants, v. LIBERTY MUTUAL INSURANCE CO., Defendant-Appellee.

No. 94-55943.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 8, 1996.

Decided March 25, 1996.

John T. Wise, Stegman & Wise, Los Angeles, California, for plaintiffs-appellants.

Susan T. Olson and Lisa M. Kralik, Grace, Skocypec, Cosgrove & Schirm, Los Angeles, California, for defendants-appellees.

On Appeal from the United States District Court for the Central District of California, No. CV-92-03518-R(JR); Manuel L. Real, Chief Judge, Presiding.

Before BRIGHT ^*, SKOPIL, and WIGGINS, Circuit Judges.

BRIGHT, Senior Circuit Judge:

Charles and Aniko Cahill filed suit against Liberty Mutual Insurance Co. (Liberty), seeking to recover from Liberty the amount of an existing default judgment obtained in the Los Angeles County Superior Court against Associated Farm Management, Inc. (AFM). Upon remand from this court, the district court ¹ dismissed the complaint without leave to amend, determining that the Cahills could not bring a direct action against Liberty, and that the "advertising injury" clause of the insurance policy did not cover the damages granted by the default judgment. On appeal, the Cahills argue that the district court should not have dismissed the case. We affirm on the basis that the policy does not cover the Cahills' claim.

BACKGROUND

For the purposes of this appeal we assume the following facts: Although AFM's business primarily consisted of the management of agricultural properties owned by others, it also marketed agricultural properties as an adjunct to its primary business. In July of 1983, the Cahills bought certain agricultural property known as Valley View Farms from a third party. AFM participated in the marketing and advertising of that property. The investment prospectus AFM provided the Cahills contained numerous misrepresentations and omissions upon which the Cahills relied.

In September 1986, the Cahills filed a lawsuit in the Los Angeles County Superior Court against AFM and other related defendants based upon their purchase of Valley View Farms. AFM is insured by Liberty under an umbrella excess liability policy. Although AFM has other policies, this appeal regards only the umbrella excess liability policy.

Although AFM apparently failed to notify Liberty of the suit, the Cahills' attorney did inform Liberty of the litigation. Liberty did not participate in the suit. AFM failed to mount a defense, and the court entered a default judgment in favor of the Cahills on their claims of negligent misrepresentation, unfair competition, and negligence among others. Cahill v. A. Duda & Sons, Inc., L.A.S.C. Case No. 616848.

The Cahills then brought this action against Liberty alleging breach of contract for failure to provide coverage and seeking to satisfy the default judgment from the insurance policy. The Cahills claimed that AFM's liability for the default judgment is covered by the advertising injury provision of the umbrella excess liability policy. Liberty filed a motion to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief could be granted. The district court granted the motion and dismissed the complaint without leave to amend.

On appeal, this court vacated the district court's order and remanded in an unpublished memorandum opinion. Cahill v. Liberty Mutual Insurance Co., 24 F.3d 245 (9th Cir. April 20, 1994) (No. 92-56280). We determined that the district court abused its discretion by denying leave to amend without stating the reasons for that denial, and remanded for a statement of reasons supporting denial of leave to amend. We did not reach the merits of the dismissal.

On remand, the district court reinstated its judgment of dismissal and filed a twelve-point statement of reasons. Basically, the district court determined that (1) the Cahills could not bring a direct action against Liberty and (2) the damages sought and awarded in the default judgment were not covered under the insurance policy.

DISCUSSION

We review de novo the district court's dismissal for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Stone v. Travelers Corp., 58 F.3d 434, 436-37 (9th Cir.1995); Franceschi v. Schwartz, 57 F.3d 828, 830 (9th Cir.1995). All allegations of material fact are taken as In their complaint, the Cahills assert that their claims against AFM are covered under the "advertising injury" clause in Liberty's umbrella policy. The policy defines "advertising injury" as:

                true and construed in the light most favorable to the nonmoving party.  National Wildlife Federation v. Espy, 45 F.3d 1337, 1340 (9th Cir.1995).   A complaint should not be dismissed unless a plaintiff can prove no set of facts in support of his claim which would entitle him to relief.  Parks School of Business, Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995)
                

personal injury (other than bodily injury) and injury to intangible property sustained by a person or organization arising out of causes of injury first published in connection with the named insured's advertising activities during the policy period as the result of libel, slander, defamation, piracy, infringement of copyrights, invasion of the right of privacy or any negligent act, error or omission in the use of advertising or merchandising ideas.

[C.R. 5 at 105] (emphasis added). The Cahills focus on the underlined portion of the definition, arguing that the incorrect statements and significant omissions in advertisements, upon which they relied, are covered by the policy.

California state law governs this diversity case. We thus interpret the "advertising injury" clause of the insurance policy in accordance with California law. See Bell Lavalin Inc. v. Simcoe and Erie General Ins. Co., 61 F.3d 742, 745 (9th Cir.1995). In Bank of the West v. Superior Court, 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992), the California Supreme Court was faced with the interpretation of certain provisions of a comprehensive general liability policy. In Bank of the West, the court stated,

[A] court that is faced with an argument for coverage based on assertedly ambiguous policy language must first attempt to determine whether coverage is consistent with the insured's objectively reasonable expectations. In so doing, the court must interpret the language in context, with regard to its intended function in the policy.

10 Cal.Rptr.2d at 545, 833 P.2d at 552; see also AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 274 Cal.Rptr. 820, 831-32, 799 P.2d 1253, 1264-65 (1990). Given the precise language and the context of the "advertising injury" clause in the Liberty policy, an insured could not reasonably expect that misrepresentations which induce a party to purchase property would be covered under the policy.

The pivotal language in the clause is the final phrase "or any negligent act, error or omission in the use of advertising or merchandising ideas." Contrary to the Cahills' assertion, this language does not create liability for general negligence. The policy language itself does not extend to any negligent act, error or omission in the advertisement, but rather creates liability only for a negligent act, error or omission in the use of advertising or merchandising ideas. The damages the Cahills are asserting do not arise from the misuse of advertising or merchandising ideas.

The context of the phrase further indicates that the kinds of misdeeds asserted by the Cahills are not the type that the insurance policy was intended to cover. The "advertising injury" clause lists...