Canadian Ins. Co. v. Rusty's Island Chip Co., B088485

CourtCalifornia Court of Appeals
Writing for the CourtMIRIAM A. VOGEL; SPENCER, P.J., and ORTEGA
Citation36 Cal.App.4th 491,42 Cal.Rptr.2d 505
Parties, 95 Cal. Daily Op. Serv. 5174, 95 Daily Journal D.A.R. 8819 CANADIAN INSURANCE COMPANY OF CALIFORNIA, Plaintiff and Respondent, v. RUSTY'S ISLAND CHIP COMPANY et al., Defendants and Appellants.
Docket NumberNo. B088485,B088485
Decision Date30 June 1995

Page 505

42 Cal.Rptr.2d 505
36 Cal.App.4th 491, 95 Cal. Daily Op. Serv. 5174,
95 Daily Journal D.A.R. 8819
RUSTY'S ISLAND CHIP COMPANY et al., Defendants and Appellants.
No. B088485.
Court of Appeal, Second District, Division 1, California.
June 30, 1995.

Page 506

[36 Cal.App.4th 492] Pircher, Nichols & Meeks and James L. Goldman, Los Angeles, for defendants and appellants.

[36 Cal.App.4th 493] Fisher & Hurst, Dennis Gildea, David A. Firestone and Heidi Burch, San Francisco, for plaintiff and respondent.

MIRIAM A. VOGEL, Associate Justice.

In this declaratory relief action brought by an insurance company against two third-party claimants who had obtained a liability judgment against the carrier's insured, the trial court held that the claimants, having been dragged into this coverage dispute by the carrier, had no standing to litigate the carrier's waiver of its right to deny coverage. We reverse.


Rusty's Island Chip Company (a partnership comprised of Rusty Vasterling and Carol Mersch) distributes potato chips under its registered trademarks, "Rusty's Island Chips" and "Island Chips." Aloha Pacific, Inc. is Rusty's exclusive licensee. In 1989, Rusty's was having some financial problems and it suspended its operations (but it did not abandon or otherwise dispose of its trademarks). At about that time, Jay Feinberg and Gary Quick, having failed in their efforts to buy Rusty's, started a new potato chip company, Island Industries, Inc. Island then made various offers to Vasterling to purchase or obtain by assignment all of Rusty's trademarks but Vasterling refused to sign anything. Island nevertheless started using Rusty's trademarks and, when asked to stop, refused.

In November 1989, Rusty's and Aloha filed a federal court action against Island, asking for preliminary and permanent injunctions to stop Island's infringements. Island, which was insured under a comprehensive general liability policy issued by The Canadian Insurance Company of California, tendered defense of that action to its insurer. Canadian determined that a provision excluding coverage for trademark infringement claims did not apply, but nevertheless refused to provide a defense--on the ground that no money damages were sought in the federal action. 1 Island then retained its own attorneys and answered the complaint, contending Vasterling had assigned Rusty's trademarks to Island.

In February 1990, the federal district court issued a preliminary injunction prohibiting Island from using Rusty's protected marks or any confusingly [36 Cal.App.4th 494] similar mark. 2 Undeterred, Island continued to infringe on

Page 507

Rusty's trademarks in direct violation of the injunction and, in addition, attempted to liquidate its inventory by selling large quantities of discounted chips in packages which infringed on Rusty's licensed marks. As a result, Rusty's and Aloha asked for and were granted permission to amend their complaint to add a claim for damages. 3 Island, in turn, again tendered defense of the federal action to Canadian. Subject to a reservation of specified rights, Canadian agreed to provide a defense. 4

In August 1992, the federal district court determined the liability issues in favor of Rusty's, finding (by means of a partial summary judgment) that Rusty's was entitled to recover from Island its actual damages, plus Island's wrongfully obtained profits, prejudgment interest, treble damages, and reasonable attorneys' fees and costs, all as thereafter proved. Meanwhile (in October 1990), Island had filed a voluntary bankruptcy proceeding. To avoid the automatic stay, Rusty's agreed (with the consent of the bankruptcy trustee and Island) to limit its recovery in the federal action to the coverage provided by Canadian. In addition, Rusty's agreed to dismiss its claims against Feinberg and Quick. The net result of all this is that Rusty's can recover only if there is coverage under the CGL policy Canadian issued to Island. 5

In November 1992, Canadian filed the action now before us, a complaint for declaratory relief against Rusty's alleging that a controversy "exists regarding the duty and obligation of Canadian to pay any judgment that Rusty's ... might receive in the [federal] action." Rusty's answered and [36 Cal.App.4th 495] cross-complained against Canadian alleging, among other things, that Canadian had waived all coverage defenses not set out in its reservation of rights letter. Canadian answered the cross-complaint.

During a three-day court trial, Canadian attempted to prove (1) that there is no coverage because Rusty's damages were caused by Island's willful acts; (2) that the claims asserted by Rusty's in the federal action were all based on excluded trademark infringements; (3) that Rusty's had no standing in this action to assert coverage by waiver or estoppel because it is not Canadian's insured or the insured's assignee; and (4) that no coverage exists because Island breached the policy's cooperation clause. Rusty's disputed all of these claims.

Almost three months after taking the matter under submission, 6 the trial court issued a minute order indicating its intent to enter judgment for Canadian for the following (and only the following) reasons: "Court finds that the contract was one to indemnify the policy holder and was not a third party beneficiary. [p] Further, the policy holder never

Page 508

assigned any rights he may have under the p[o]licy to [Rusty's]." The judgment prepared by Canadian and signed by the court goes far beyond the court's actual ruling. Among other things, it provides (1) that Insurance Code section 533 7 prohibited Canadian from indemnifying Island for the consequences of its willful wrongdoing; (2) that all of the damage claims asserted by Rusty's in the federal action arose from Island's willful conduct; (3) that Island's CGL policy excluded coverage for the trademark infringement claims involved in the federal action; and (4) that Rusty's has no standing to assert coverage by waiver or estoppel because they are third-party claimants, not Canadian's insureds.

This appeal followed the denial of Rusty's post-trial motions.


We reduce Rusty's claims of errors to the two dispositive issues. First, we explain that, contrary to the trial court's finding on the legal issue, Rusty's [36 Cal.App.4th 496] does have "standing" in this litigation. Second, we explain that, consistent with the trial court's factual finding, there was a waiver by Canadian of all rights not asserted in its reservation of rights letter. For these reasons (and because Canadian does not suggest there is any other basis to affirm the trial court's order), we reverse.


Canadian's position, accepted by the trial court, is that Rusty's, as its insured's adversary, must have an assignment from the insured in order to "bring an action upon a duty owed to the insured by [its] insurer." (See Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 889, 151 Cal.Rptr. 285, 587 P.2d 1098; Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942-944, 132 Cal.Rptr. 424, 553 P.2d 584.) Whatever truth there may be to that rule in the abstract or where a third party...

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