Burns v. International Ins. Co.

• Decision Date: 15 March 1989
• Docket Number: No. 88-3710-FMS.,88-3710-FMS.
• Citation: 709 F. Supp. 187
• Court: U.S. District Court — Northern District of California
• Parties: James BURNS, et al., Plaintiff(s), v. INTERNATIONAL INSURANCE CO., et al., Defendant(s).

709 F. Supp. 187

James BURNS, et al., Plaintiff(s), v. INTERNATIONAL INSURANCE CO., et al., Defendant(s).

No. 88-3710-FMS.

United States District Court, N.D. California.

March 15, 1989.

Daniel J. Furniss, Khourie, Crew & Jaeger, P.C., San Francisco, Cal., for James K. Burns.

John F. Banker, Tiburon, Cal., for Patricia Ross.

Peter H. Ferris, Lempres & Wulfsberg, Oakland, Cal., for Walter H. Ratcliff.

Harry W.R. Chamberlain II, Musick, Peeler & Garrett, Los Angeles, Cal., for International Ins., et al.

MEMORANDUM OF DECISION GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

FERN M. SMITH, District Judge.

FACTS

The facts herein are essentially undisputed. Plaintiffs are directors and officers of a now defunct Savings and Loan business (S & L). Defendants are the International Insurance Company, the insurer that issued to plaintiffs a directors' and officers' liability policy (Policy), and International's claims representative, Crum & Forster.

In August 1984, the Federal Savings and Loan Insurance Corporation (FSLIC) investigated the S & L and came to an agreement (Supervisory Agreement) with the S & L whereby the FSLIC became its receiver and the directors and officers, some of whom are plaintiffs here, admitted to having violated certain statutes and regulations. In the Supervisory Agreement, the S & L was informed that a formal enforcement action by the FSLIC might follow.

The Policy herein is a claims made policy requiring plaintiffs to inform defendants of a claim (or a circumstance likely to lead to a claim) within 60 days of the expiration of the term of the policy. The policy term was from March 3, 1982 to March 3, 1985. Plaintiffs did not inform defendants of the FSLIC investigation and Supervisory Agreement until approximately one year after the expiration of the Policy.

Defendants' motion presents the following issues:

1. Whether the FSLIC claim was made during the time the Policy was in effect;

2. Whether plaintiffs timely reported the FSLIC claim to defendants under the Policy;

3. Whether the plaintiffs have stated a claim against defendant Crum & Forster 4. Whether there is sufficient evidentiary support for the punitive damage allegation.

Plaintiffs have cross moved for summary judgment on the first two issues.

Timely Claim

Defendants direct the Court's attention to Hoyt v. St. Paul Fire & Marine Ins. Co., 607 F.2d 864 (9th Cir.1979) and to Bensalem Township v. Western World Ins. Co., 609 F.Supp. 1343 (E.D.Pa.1985). In Hoyt, the Ninth Circuit refused to "write uncertainty of coverage into every policy" by holding that a letter asking for explanations and threatening a claim if the explanations were unsatisfactory was a "claim" for the purposes of an insurance policy. Hoyt, 607 F.2d at 866. In Bensalem, the court was faced with the question whether the EEOC's informal pre-lawsuit proceedings constituted a claim within the meaning of an insurance policy. Even though the EEOC referred to the insured as the "prospective defendant" and alluded to its "alleged unlawful practice," the court held that there was no legal "claim" until the institution of a lawsuit requesting monetary or other relief. Id. at 1348.

Plaintiffs, on the other hand, direct the Court's attention to Mt. Hawley v. Federal Savings & Loan Ins. Corp., 695 F.Supp. 469 (C.D.Cal.1987). Mt. Hawley involved facts similar to those herein. There, the FSLIC was in the process of enforcing its statutes and regulations against certain insureds. Threatening letters and a demand that the insureds adhere to the relevant laws were sent to the insureds during the policy period. The actual lawsuit was filed well after the expiration of the policy. The court held that the demand for compliance with the laws "constituted a claim made against the officers and directors of CSB during the period of the insurance policy." Id. at 479-80.

This Court holds that the FSLIC investigation and the Supervisory Agreement constituted a circumstance that might subsequently give rise to a claim, as defined in the Policy at Section VII.A.(ii). Given the conditional language of the Policy, there need not have been a formal claim or lawsuit for monetary damages.

Timely Notice

The next issue is whether the lack of timely notice, about which there is no material dispute, precludes defendants' liability on the policy. California's "notice-prejudice" rule operates to bar insurance companies from disavowing coverage on the basis of lack of timely notice unless the insurance company can show palpable prejudice from the delay. E.g., Campbell v. Allstate Ins. Co., 60 Cal.2d 303, 32 Cal. Rptr. 827, 384 P.2d 155 (1963); Clemmer v. Hartford Ins. Co., 22 Cal.3d 865, 151 Cal. Rptr. 285, 587 P.2d 1098 (1978).¹ Defendants here have not attempted to make any such showing. Rather, defendants urge that the distinction between a "claims made" insurance policy and an "occurrence" policy requires a departure from the ordinary application of the notice-prejudice rule.

A claims made policy generally provides coverage only for claims made and actually reported to the insured during the period specified in the policy. Occurrence policies cover the insured for any subsequent claim arising out of an occurrence that took place during the period specified in the policy. Under a claims made policy, even if events occur during the policy period which might give rise to valid claims, there is no coverage if claims or potential claims for those occurrences are not made and reported to the insurer during the period specified in the policy. E.g., Pacific Indemnity Co. v. Imperial Cas. & Indemnity Co., 176 Cal.App.3d 622, 626 & n. 1, 222 Cal.Rptr. 115 (1986). Claims made policies are required to have a number of safeguards for consumers, including conspicuous language as to their terms. Cal.Ins.Code Section 11580.01. Under the terms of this Policy, claims for which the insured seeks coverage must have been reported to the insurer within 60 days after the expiration date of the policy.

Defendants contend that the issue of whether the notice-prejudice rule applies to claims made policies has yet to be decided by the California courts.² This appears to be true. A number of cases, applying the law of other jurisdictions, use the fundamental distinction between claims made policies and occurrence policies to militate against application of the notice-prejudice rule. E.g., City of Harrisburg v. Int'l Surplus Lines Ins. Co., 596 F.Supp. 954, 960-61 (M.D.Pa.1984) ("The notice provision of a claims made policy is just as important to coverage as the requirement that the claim be asserted during the policy period. If the insured does not give notice during the contractually required time period ... there is simply no coverage under the policy.").

An insurer may limit policy coverage in plain and conspicuous language and thereby limit the risk it undertakes to assume. Fireman's Fund Ins. Co. v. Fibreboard Corp., 182 Cal.App.3d 462, 466, 227 Cal.Rptr. 203 (1986). Any limitations placed on a policy, however, must conform to the law and public policy and are subject to careful judicial scrutiny. Lumberman's Mut. Cas. Co. v. Wyman, 64 Cal.App.3d 252, 259, 134 Cal.Rptr. 318 (1976).

Defendants also cite authority from various other jurisdictions that have considered and upheld the reporting requirements of claims made policies. E.g., City of Harrisburg, 596 F.Supp. at 960-61; Graman v. Continental Cas. Co., 87 Ill.App.3d 896, 42 Ill.Dec. 772, 775-777, 409 N.E.2d 387, 390-92 (1980); Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So.2d 512, 514-15 (Fla.1983); Zuckerman v. Nat. Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395, 399-400 (1985). In each of the state court cases cited above, the lower court had applied the respective jurisdiction's version of the notice-prejudice rule; in each case the state appellate court reversed, upholding a strict construction of the reporting requirement and refusing to rewrite the contract between the parties. According to defendants, this authority from other jurisdictions, combined with a number of public policy reasons favoring claims made type insurance policies³, would lead the California Supreme Court to enforce the reporting requirement in a policy such as the one in this case. Plaintiffs, however, point out that there has been no type of policy to which the California courts have not applied the notice-prejudice rule, given the opportunity. Moreover, in Mount Hawley v. FSLIC, 695 F.Supp. 469 (C.D.Cal.1987), a federal court applied California's notice-prejudice rule to a claims made policy. The policy in Mount Hawley, however, suffered from public policy deficiencies similar to those discussed in Brown-Spaulding, infra.

In Brown-Spaulding & Assocs. v. Int'l Surplus Lines Ins. Co., 206 Cal.App.3d 1441, 254 Cal.Rptr. 192 (1988), the California Court of Appeal considered a reporting requirement in a claims made policy. Under the policy issued to Brown-Spaulding, coverage extended only to those claims that were made and reported during the policy period. The court, although generally approving of claims made insurance policies, "concluded that as a matter of law the reporting requirement in the insurance policy violates public policy and is unenforceable." Id. at 1450, 254 Cal.Rptr. 192. The court focused on the fact that the policy at issue required any claim to be reported by the policy's termination date. In insurance terms, the policy had no reporting tail. This made it difficult, if not practically impossible, to obtain coverage under the policy for claims made toward the end of the policy period. Id. The policy in Brown-Spaulding expired on December 31, 1984 and was not renewed. The claim was reported on January 21, 1985, three weeks later. Significantly, the court found that the claim had been reported within a reasonable time of the expiration of the policy.

The Brown-Spaulding court distinguished a similar case, Gulf Ins. Co., supra, in which the...