California Union Ins. Co. v. Club Aquarius, Inc.

• Decision Date: 12 December 1980
• Citation: 113 Cal.App.3d 243,169 Cal.Rptr. 685
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA UNION INSURANCE COMPANY, Plaintiff and Respondent, v. Club ACQUARIUS et al., Defendants and Appellants. * Civ. 57856.

Page 685

169 Cal.Rptr. 685

113 Cal.App.3d 243

CALIFORNIA UNION INSURANCE COMPANY, Plaintiff and Respondent, v. Club ACQUARIUS et al., Defendants and Appellants. ^*

Civ. 57856.

Court of Appeal, Second District, Division 4, California.

Dec. 12, 1980.

Brown & Martin, and Carl R. Brown, San Diego, for defendants and appellants.

Wise & Nelson, Anthony F. Wiezorek and Michael J. Pearce, Long Beach, for plaintiff and respondent.

KINGSLEY, Acting Presiding Justice.

Defendants appeal from a judgment in favor of an insurer in an action for declaratory relief. We affirm the judgment.

Defendants procured from plaintiff insurance company a policy which, by endorsement, insured them against liability in connection with two named publications-"Acquarius" and "Diving Dealer and Professional Instructor." In 1974, defendants were sued in federal court for copyright infringement and unfair competition. The complaint in that action named as offending publications only a book referred to as the "Red Book." Defendants, having retained counsel ¹ tendered defense of that action to plaintiff. Plaintiff responded by a letter reading as follows:

"We acknowledge receipt of a copy of a Complaint alleging copyright infringement and unfair competition, Civil Action No. C-74-2168 filed in the U. S. District Court for the Northern District of California on October 10, 1974.

"As you are aware, Publisher's Libel Insurance was added to your coverage by endorsement effective January 19, 1974 and much, if not all, of the issues involved in this litigation pre-date this added coverage. Additionally it is our understanding that this present litigation is essentially a continuation of a similar law suit instituted prior to January 19, 1974 and of which we had no knowledge when adding this additional coverage effective January 19, 1974.

"After a careful review of the allegations set forth in the Complaint together with attendant correspondence, all of which must be considered subject to the terms, conditions and limitations of our policy of insurance, we offer the following:

"(1) We will assume cost of defense for the entire action.

"(2) We do not cover punitive damages, and should there be any award rendered based on count (4) of the prayer for damages seeking exemplary damages, our policy will not respond.

"(3) We do not afford coverage for injunctive relief.

"(4) As applicable Publisher's Libel Insurance coverage did not incept until January 19, 1974, should an award be rendered based on compensatory sustained, our policy will not respond for that portion of the award charged to any time period prior to January 19, 1974 and September 1974, it is expressly stipulated that we reserve all our rights under the policy to disclaim coverage; and the aforesaid action is not to be construed as a waiver on our part of any of our rights under said policy nor to estop us from asserting any of said rights in the future.

"Please acknowledge receipt of this letter and we would ask that defense counsel keep us advised as the matter develops."

Defendants' privately retained counsel agreed to the terms of that letter and the trial of the action therein referred to proceeded. The private counsel reported to counsel designated by plaintiff and their fees were paid by plaintiff. The trial was bifurcated and the liability issues were first tried. That portion of the trial resulted in findings of fact imposing liability on defendants for the publication of the "Red Book" (and, as incident thereto, the repetition of offending parts of that book in another book known as the "Black Book"). No finding was made that either of the two publications expressly mentioned in the insurance policy had infringed the rights of the plaintiff in that action. Plaintiff thereupon proposed to withdraw from supporting the defense in the damage portion of the case and filed the present action for declaratory relief, praying for a declaration that its obligation to defend had come to an end.

I

We think it clear that, except as the letter above quoted may have imposed on plaintiff an obligation broader than its policy created, plaintiff had a right to withdraw from the defense once the federal court, by its findings, had made it clear that the case, in fact, did not involve the limited risk set forth in that policy. (Firco, Inc. v. Fireman's Fund Ins. Co. (1959) 173 Cal.App.2d 524, 628, 343 P.2d 311.) That is a reasonable rule since, under the holding of Firco and of Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, there exists a duty on the insurer to defend an action if potential liability to pay exists, even though that potential liability to pay is remote.

II

The chief contention of defendants here is that, by the letter above quoted, plaintiff had assumed an obligation to defend broader than the policy required. That claim is based on the use, in the letter above quoted, of the provision: "We will assume the cost of the defense for the entire action." As did the trial court, we reject that contention. An insurer, bound to defend an action against its insured, must...