801 F.2d 1560 (9th Cir. 1986), 84-6630, James B. Lansing Sound, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa.

Docket Nº:84-6630.
Citation:801 F.2d 1560
Party Name:JAMES B. LANSING SOUND, INC., Plaintiff/Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, a Pennsylvania corporation, Defendant/Appellee.
Case Date:October 15, 1986
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1560

801 F.2d 1560 (9th Cir. 1986)

JAMES B. LANSING SOUND, INC., Plaintiff/Appellant,



Pennsylvania corporation, Defendant/Appellee.

No. 84-6630.

United States Court of Appeals, Ninth Circuit

October 15, 1986

        Argued and Submitted Dec. 5, 1985.

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        Shirley M. Hufstedler and Seth M. Hufstedler, Hufstedler, Miller, Carlson & Beardsley, Los Angeles, Cal., for plaintiff/appellant.

        Lisa B. Margolis and Michael D. Dempsey, Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, Beverly Hills, Cal., for defendant/appellee.

        On appeal from the United States District Court for the Central District of California.

        Before GOODWIN, SCHROEDER, and BOOCHEVER, Circuit Judges.

        BOOCHEVER, Circuit Judge:

        This is an appeal in a diversity of citizenship insurance case in which California law controls. James B. Lansing Sound, Inc. ("JBL"), a Delaware corporation with its principal place of business in California, appeals a judgment by the district court, sitting without a jury, denying recovery in JBL's action for breach of its comprehensive employee dishonesty insurance policy against National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National"). The case was tried on stipulated facts pursuant to a Pre-Trial Conference Order limiting the issues of fact and law to be tried.

        Two of JBL's employees perpetrated a complex fraud on JBL, which sought recovery from National Union. The insurance company denied liability because it contended

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that JBL should offset amounts received from payments made by one of the employees to JBL for equipment fraudulently sold. The district court agreed and also subjected JBL's losses to allocation with those under a second insurance company's dishonesty policy. Finally, the court held that the measure of JBL's loss was the cost to JBL to remanufacture the sound equipment, and did not include commissions paid to one of the defrauding employees or freight charges fraudulently billed to and paid by JBL. Because we find that the insurance policy is ambiguous in regard to the proper measure of loss, we conclude that the wholesale price rather than the manufacturing cost is the proper measure, and we reverse in part.


The Insurance

        This case involves two "Comprehensive Dishonesty, Disappearance and Destruction" insurance policies issued by National to JBL. The first policy was in effect from December 15, 1978 to February 29, 1980, and provided for a maximum liability coverage of $2.5 million for loss of money, securities, and other property through any fraudulent or dishonest act committed by an employee. Any loss to JBL prior to December 15, 1978 is recoverable under the National policy to the extent that the loss would have been covered and recoverable had the National policy been in effect at the time of the loss. The second National policy, insuring against the same risks, was in effect from March 1, 1980 through June 30, 1980, and provided for a maximum liability coverage of $10 million. While the first National policy was in effect, in December, 1979, JBL obtained a "Comprehensive Crime Policy" from the Insurance Company of North America ("INA"), which provided for substantially the same and overlapping coverage as the National policy, with provision for maximum liability coverage of $2.5 million. Each policy contained a like "excess insurance clause" designed to protect insurers against double recovery. After June 30, 1980, INA's policy provided JBL's sole insurance coverage.

        For purposes of this litigation, there are four time periods during which damage to JBL occurred. The parties agree that during the first period (Period A) from June, 1977 until December, 1979, National is solely liable for covered losses JBL incurred. The parties also agree that during the final period (Period D), from June 30, 1980 onward, National assumes no liability for JBL losses. The parties dispute the proper allocation of covered losses in the two time periods (Period B, December 1, 1979 to February 29, 1980, and Period C, March 1, 1980 to June 30, 1980) during which JBL had double coverage from National and INA.

The Fraud

        JBL is a Los Angeles manufacturer and seller of stereo equipment and speakers. Russell Mott was JBL's exclusive sales representative for California and Nevada, and received a seven percent commission calculated on the invoice price (without discount) on all goods ordered through him. Richard Bernal was a salaried employee working as an accountant in JBL's marketing department, and had access to JBL's computer.

        In March, 1977, Mott, with the cooperation of dishonest Northern California dealers, submitted large, fictitious purchase orders for JBL equipment in the name of the dealers. Bernal received these fictitious orders and caused JBL's computer to issue shipping documents for the equipment to be freighted to San Francisco. In fact, Mott and Bernal sent the equipment to another Los Angeles firm, which in turn shipped the equipment to Japan. The trucking company which transported the equipment to the Los Angeles firm charged JBL for fictitious shipments to San Francisco, and JBL paid these fraudulent freight charges. Bernal also caused JBL's computer to issue invoices applying lower than normal sales prices (usually the previous year's wholesale prices) on the fraudulently sold equipment, and to change the terms of JBL's normal 10 percent discount for payments made within 30 days to 10 percent

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discount for payments made within 90 days. The fraudulently lowered invoice prices permitted Mott to sell the equipment to unauthorized Japanese dealers and undercut authorized Japanese JBL dealers. Mott would then take the receipts from the fraudulent sales and pay JBL the discounted amounts. Although Mott's payments were made around 90 days after invoicing, the payments did not appear delinquent because of the altered computer discounts. Mott received his regular seven percent commission on the sales.

        After JBL discovered the fraud, it submitted its proof of loss to INA and to National. INA settled with JBL, but National maintained that JBL incurred no recoverable losses. JBL then brought this action for breach of its insurance contract.

JBL's Losses and National's Liability

        In its trial brief and at oral argument in the district court, JBL asked for $666,451 as compensation for (1) loss of merchandise (based upon fair market value), (2) loss of commission payments, and (3) loss of freight payments. 1 National maintained that JBL had no recoverable losses, because the amounts JBL claimed either were offset by payments made by Mott or were profits and thus excluded under the terms of the policy. National also asserted that JBL must first deduct $100,000 under the terms of the policy.

        The parties have computed JBL's losses in two ways--JBL's total losses for the entire operation of the scheme, broken down into the four time periods, and its allocated losses calculated by percentage of insurance coverage between the National and INA policies during the four time periods. As the parties agreed, National is liable for 100 percent of JBL's covered losses during Period A, and zero percent during Period D. The parties disagree on the appropriate allocation, if any, of the recoverable losses during Periods B and C. They stipulated, however, that if the court determines that the appropriate allocation is to be based upon the respective policy limits of National and INA, then National would be liable for 50 percent of JBL's covered losses during Period B and 80 percent during Period C. 2

        INA ultimately settled with JBL, paying it $553,343, of which $47,468 is attributed to that period in which both INA and National insured JBL.

        The district court found that the 100%-50%-80%-0% allocation was the appropriate measure of National's liability. The court applied these proportions both to JBL's losses and to the payments from Mott, which it held should be offset against the insurance company's liability. The court also held that, under the terms of National's policy, National had properly exercised its option to pay JBL the "replacement cost" for JBL's lost goods, and that this cost was measured by JBL's replacement cost (i.e. cost to manufacture the equipment) and not National's replacement cost (i.e. cost to go into the market and purchase like equipment for JBL). Included in

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JBL's replacement costs were materials and labor, other manufacturing costs, and administrative costs. Excluded were variable selling expenses, fraudulent freight payments, commission payments to Mott, marketing expenses, and profits. The bottom line was that JBL was held entitled to $1,691,075 under the terms of National's policy, which was offset by Mott's allocated payments of $1,940,175. Therefore, the court held JBL was not entitled to any further recovery from National. Because National had no actual liability to JBL, it was unnecessary for the court to address National's assertion that it was entitled to a $100,000 deductible.


Standard of Review

        The interpretation of a contract presents a mixed question of law and fact subject to de novo review. Hanson v. Prudential Insurance Co., 783 F.2d 762, 764 (9th Cir.1985); see also Interpetrol Bermuda, Ltd. v. Kaiser Aluminum International Corp., 719 F.2d 992, 998 (9th Cir.1983). Under California law, where the evidence is uncontradicted, the interpretation of the policy is solely a judicial function, and a reviewing court is not bound by the interpretation of the trial court. Graydon-Murphy Oldsmobile v. Ohio Casualty Insurance Co., 16 Cal.App.3d 53, 57, 93 Cal.Rptr. 684, 687 (1971).

        The existence of an ambiguity must be determined as a...

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