Anthem Electronics v. Pacific Employers Ins.

• Decision Date: 05 September 2002
• Docket Number: No. 01-16402.,01-16402.
• Parties: ANTHEM ELECTRONICS, INC., Plaintiff-Appellant, v. PACIFIC EMPLOYERS INSURANCE COMPANY, a California corporation; Federal Insurance Company, an Indiana corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

302 F.3d 1049

ANTHEM ELECTRONICS, INC., Plaintiff-Appellant, v. PACIFIC EMPLOYERS INSURANCE COMPANY, a California corporation; Federal Insurance Company, an Indiana corporation, Defendants-Appellees.

No. 01-16402.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 12, 2002.

Filed September 5, 2002.

COPYRIGHT MATERIAL OMITTED

David A. Gauntlett, James A. Lowe, Gauntlett & Assoc., Irvine, CA, for the plaintiff-appellant.

Stephen L. Newton, O. Antony Abdollahi, Newton, Kastner & Remmel, Mountain View, CA, for defendant-appellee Federal Insurance Co.

Robert B. Stringer, Cyril & Crowley LLP, San Francisco, CA, for defendant-appellee Pacific Employers Insurance Co.

Appeal from the United States District Court for the Northern District of California; James Ware, District Judge, Presiding. D.C. No. CV-97-20296-JW (PVT).

Before SCHROEDER, Chief Judge, D.W. NELSON and REINHARDT, Circuit Judges.

OPINION

D.W. NELSON, Circuit Judge.

We are asked to decide whether, under California law, the plaintiff's general liability insurance policies required the defendants, two insurance companies, to defend their insured against a negligence and breach of contract suit brought by a third party. The district court granted summary judgment to the insurers. Because the complaint at issue clearly raised the possibility that the claims against the insured would be covered under the insurance policies, we reverse, grant partial summary judgment to the plaintiff, and remand.

I. Background

In April 1991, plaintiff and appellant Anthem Electronics agreed to supply circuit boards to KLA Instruments Corp., a manufacturer, to be incorporated into scanners that KLA then sold.¹ KLA took delivery of Anthem circuit boards from about August 1991 through November 1992.

Both the circuit boards supplied by Anthem and KLA's final scanner products were quality tested before they were shipped to customers. Despite this, the circuit boards had latent defects that caused some of the scanners to fail once in use. The circuit boards supplied by Anthem, it turns out, were physically defective such that heat, physical vibration or electrical current over time could cause the electrical connections on the circuit boards to crack or lift apart, causing electrical "opens" that prevented the scanners from working. Anthem admits that these defects were due to manufacturing flaws (though it blames its own subcontractor for these flaws).

Because some of the scanners in use by KLA's customers failed, KLA was forced to replace them and to incur other unexpected costs due to the loss of use of the scanners into which Anthem's circuit boards had been installed. To recoup these costs, KLA sued Anthem in state court. The complaint, filed in November 1994, states causes of action against Anthem for breach of contract, negligence, breach of express warranty, breach of implied warranty of fitness, breach of implied warranty of merchantability, negligent misrepresentation, indebitatus assumpsit, and constructive trust. It alleges that the circuit boards supplied by Anthem were defective; that KLA installed these boards into KLA products; that the boards intermittently failed; and that, as a result of the defective boards, KLA suffered damages exceeding $4.5 million.

In answer to interrogatories, KLA categorized its damages claim as including, among other expenses, the following:

• Approximately $2.2 million in depreciation expenses for "loaner" scanners placed at 14 customer sites while defective KLA scanners were under repair

• Approximately $0.5 million in interest expenses (inventory cost) for scanners rendered unshippable by the defective Anthem components

• Approximately $0.7 million in lost interest revenue as a result of customers' failures to pay bills on time because of defective scanners

Anthem tendered KLA's complaint to its two general liability coverage insurers, Pacific Employers Insurance Co. ("Pacific") and Federal Insurance Co. ("Federal") (collectively, "the insurers"), and requested that the insurers defend Anthem against the KLA suit. The insurers refused, arguing that the losses alleged in KLA's complaint were not covered under their insurance policies.

The two insurance policies at issue are both commercial general liability ("CGL") policies. Pacific's policy covered Anthem from June 1, 1991, through June 1, 1992. Federal's CGL policy covered Anthem from June 1, 1992, through June 1, 1994. The two are nearly identical in all relevant aspects, and both are based on standard forms used nationally. Thus, we will detail the Federal policy and will discuss the Pacific policy separately only when a difference so requires.

The Federal policy provides that:

We [Federal] will pay damages the insured becomes legally obligated to pay ... because of ... property damage caused by an occurrence ... to which this insurance applies.

* * *

This insurance applies ... to property damage which occurs during the policy period....

The policy defines "property damage" as: "Physical injury to tangible property, including ... loss of use of tangible property that is not physically injured." An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions which result in bodily injury or property damage." Thus, the policy covers damages Anthem is required to pay to third parties because of loss of use of tangible property due to an occurrence. The policy also gives Federal the duty to defend Anthem against any suit seeking covered damages.

Lastly, the policy contains an "impaired property exclusion" which excludes coverage for:

Property damage to impaired property or property that has not been physically injured arising out of: (1) defect, deficiency, inadequacy or dangerous condition in [Anthem's] product or [Anthem's] work; or (2) A delay or failure by [Anthem] or anyone acting on [its] behalf to perform a contract in accordance with its terms. BUT this exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to [Anthem's] product or [Anthem's] work after it has been put to its intended use.

After the insurers refused to defend Anthem against KLA's suit, Anthem undertook its own defense and eventually settled with KLA. Anthem then filed the current action against the insurers for breach of contract, seeking attorney's fees, reimbursement for the settlement, and declaratory relief. The district court issued a judgment on the pleadings for the insurers, which was reversed by this court.

Anthem then filed a motion for partial summary judgment against the insurers on the "duty to defend" question, that is, whether the insurers were required to defend Anthem against the KLA suit.² Federal filed a cross motion for summary judgment against Anthem on this question, which Pacific later joined. On March 28, 2001, the district court denied Anthem's motion for partial summary judgment and granted the insurers' motion for summary judgment. The district court based its ruling on two grounds: (1) the failures of the SMT assemblies were not "occurrences" under the policies, and (2) even if the failures were occurrences, the policies' impaired property exclusion barred coverage.

We have jurisdiction under 28 U.S.C. § 1291. We review de novo the district court's grant of summary judgment. Lopez v. Smith, 203 F.3d 1122, 1131 (9th Cir.2000). We must determine, viewing the evidence in the light most favorable to Anthem, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Id.

II. Discussion

The insurance policies at issue are so-called "third party liability policies," that is, policies that provide coverage for liability of the insured to third parties. Such policies provide broader coverage than typical first party property insurance policies, such as homeowners' policies, in which the insurer "promises to pay money to the insured upon the happening of an event, the risk of which has been insured against." Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 663, 42 Cal. Rptr.2d 324, 913 P.2d 878 (1995). In third party liability policies, by contrast, the carrier "assumes a contractual duty to pay judgments the insured becomes legally obligated to pay as damages because of bodily injury or property damage caused by the insured." Id.

Whereas first party insurance coverage is typically triggered by certain enumerated perils, e.g., physical and fortuitous events, the "right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause and duty.... [B]y insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks [than in first-party insurance policies]." Id. at 664, 42 Cal. Rptr.2d 324, 913 P.2d 878 (emphasis omitted).

An insurer has a very broad duty to defend its insured under California law. The California Supreme Court has stated that "the insured is entitled to a defense if the underlying complaint alleges the insured's liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy." Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 299, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993). "[O]nce the insured has established potential liability by reference to the factual allegations of the complaint, the terms of the policy, and any extrinsic evidence upon which the insured intends to rely, the insurer must assume its duty to defend unless and until it can conclusively refute that potential." Id. (emphasis added). To protect an insured's right to call on the insurer's "superior resources for the defense of third party claims ... California courts have been consistently...