Continental Ins. Co. v. Superior Court

• Decision Date: 27 July 1995
• Docket Number: No. B088741,B088741
• Citation: 37 Cal.App.4th 69,43 Cal.Rptr.2d 374
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 5920, 95 Daily Journal D.A.R. 10,110 CONTINENTAL INSURANCE COMPANY, etc., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent. Dee BANGERTER, Lee Bangerter, and Ted Nelson, Real Parties in Interest.

Page 374

43 Cal.Rptr.2d 374

37 Cal.App.4th 69, 95 Cal. Daily Op. Serv. 5920,

95 Daily Journal D.A.R. 10,110

CONTINENTAL INSURANCE COMPANY, etc., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent Dee BANGERTER, Lee Bangerter, and Ted Nelson, Real Parties in Interest.

No. B088741.

Court of Appeal, Second District, Division 3, California.

July 27, 1995.

Long & Levit, Don A. Lesser, Laura P. Nash and Jeanette Traverso, San Francisco, for petitioner.

No appearance by respondent.

Shernoff, Bidart & Darras, Sharon J. Arkin, Greene, Broillet, Taylor & Wheeler and John C. Taylor, Los Angeles, for real parties in interest.

CROSKEY, Acting Presiding Justice.

An insurer which had issued a Directors and Officers ("D & O") liability policy sought a summary judgment in a bad faith action brought by three director insureds who alleged that the insurer had unreasonably failed to defend or indemnify them in a timely manner thus causing them economic loss and emotional distress. The trial court denied the summary judgment and the insurer seeks writ relief.

Continental Insurance Company ("Continental") ¹ seeks a writ of mandate to compel the trial court to vacate its denial of Continental's motion for summary judgment in the action filed by the real parties in interest, Dee Bangerter, Lee Bangerter and Ted Nelson (collectively, the "plaintiffs") and to issue a new and different order granting said motion. Because we conclude that an issue of

material fact does exist as to whether the plaintiffs in fact suffered any economic loss by virtue of Continental's actions under the policy, we deny the requested writ relief.

FACTUAL AND PROCEDURAL BACKGROUND ²

The plaintiffs are the former directors of a corporation known as Winn Enterprises and a subsidiary corporation, KF Dairies, Inc. During the period October 25, 1983 through October 25, 1987, they were insured for liability for "wrongful acts" committed in their capacity as directors under Continental's "claims made" Directors' and Officers' Liability and Company Reimbursement Policy (Policy No. HI177466; hereinafter the "policy"). The policy provided coverage (1) to Winn Enterprises (and any subsidiaries) under section A, the Company Reimbursement for Directors and Officers Liability and (2) to the Directors and Officers of Winn Enterprises (and any subsidiaries) under section B of the policy. It is this latter section of the policy which is the subject of these proceedings.

Before reviewing the factual context in which this case arises, it would be useful to set forth, at least in summary fashion, the relevant provisions of the policy.

By endorsements, the policy has a $5 million limit of Continental's total liability; it also provides for an insured retention of $250,000. ³ The insuring agreement provided, "This policy shall, subject to its terms, conditions and limitations as hereinafter provided, pay on behalf of each and every person who was or now is ... a director or officer of the corporation ... loss (as hereinafter defined) arising from any claim or claims made against the insureds ... during the policy period by reason of any wrongful act (as hereinafter defined) in their respective capacities as directors or officers...."

The terms "loss" and "wrongful act" were defined in clause 2, subparagraphs (C) and (D) of the policy as follows:

"(C) The term 'loss' shall mean any amount an insured is obligated to pay in respect of his legal liability whether actual or asserted, for a wrongful act (as defined in (D) of this clause), and subject to the applicable limits and conditions of this policy, shall include damages, judgments, settlements and costs, charges and expenses incurred in the defense of actions, suits or proceedings and appeals therefrom.... [p] (D) The term 'wrongful act' shall mean any breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by the insureds or any of the foregoing so alleged by any claimant or any matter claimed against them solely by reason of their being such directors or officers of the corporation." (Emphasis added.)

Finally, the policy spelled out the manner in which actual and potential claims would be reported to Continental:

"7. Loss Provisions

"(A) The time when a loss shall be incurred within the meaning of this policy shall be the date on which the insured shall give written notice to the company as hereinafter provided.

"(B) If during the policy period or during the discovery period, if any, claim is made against the directors or officers, the insured shall as a condition precedent to its rights under this policy give to the company notice as soon as practicable in writing of any such claim.

"C) If during the policy period or during the discovery period if the right is exercised by the insured in accordance with clause 8(A) ⁴ "(i) The insured shall receive written or oral notice from any party that it is the intention of such party to hold the directors or officers responsible for the results of any specified wrongful act by the directors or officers while acting in the capacities aforementioned; or

"(ii) The insured shall become aware of any occurrence which may subsequently give rise to a claim being made against the directors or officers in respect of any such wrongful act;

"And shall in either case during such period give written notice to the company of the receipt of such written or oral notice under (i) above or of such occurrence under (ii) above, then any claim which may subsequently be made against the directors or officers arising out of such wrongful act shall for the purpose of this policy be treated as a claim made within the period of this policy...."

In June of 1983, Winn Enterprises acquired all of the common stock of KF Foods, Inc., in a leveraged buyout. KF Foods was the parent company of KF Dairies, Inc. ("KFD"). The plaintiffs also became directors of KFD. In June of 1985, KFD acquired Foremost Dairies, Inc. ("Foremost"), in another leveraged buyout. It is this transaction which led to this litigation. Prior to KFD's acquisition of Foremost, Foremost itself had been the subject of still another leveraged buyout transaction. As a result, both KFD and Foremost were heavily burdened with debt even before KFD's leveraged acquisition of Foremost. These circumstances ultimately led to the bankruptcy and liquidation of both KFD and Foremost in 1986.

On October 21, 1986, the unsecured creditors committees of these two bankrupt corporations gave written notice of their claims based upon the directors' "breaches of duty and mismanagement which has resulted [in] damage to [the] creditors" and that such "claims may be asserted against [the directors." On October 23, 1987, just two days prior to the expiration of the extended "discovery period," the several directors, including plaintiffs, gave written notice to Continental, through Winn Enterprises' risk management consultant, in which there were identified a number of events and circumstances which had occurred during the policy period and which, according to the notice, constituted "potential claims" within the meaning of the "Loss Provisions" clause of the policy (clause 7(C)).

This notice was extensive and detailed. ⁵ It listed, for example, the creation of various compensation arrangements with current or former managing officers, employment and severance contracts, incentive plans, stock option agreements and pension benefit agreements, all or any of which might be attacked by corporate creditors, shareholders or bondholders as wrongful self-dealing or mismanagement. More to the point of the issue raised in this case, the notice specifically called attention to the potentiality of the On June 30, 1988, eight months after the expiration of the policy's extended coverage period, the underlying action was filed against the plaintiffs and other defendants (KF Dairies, Inc., et al., v. Citicorp North America, Inc., et al., Los Angeles Superior Court No. C690962). It was alleged that the plaintiffs (and other directors) had breached their fiduciary duties as directors of KF Dairies by approving the leveraged acquisition of Foremost in 1985 which, the complaint alleged, was not in the best interest of KF Dairies and ultimately caused its demise.

very claim which was later asserted against Winn Enterprises and for which coverage was sought. Paragraph 14 of the October 23, 1987 notice stated, in pertinent part, "During the policy period, Winn acquired certain entities. Without limiting the generality of the foregoing, in particular, during the policy period, Knudsen acquired Foremost and Winn Enterprises purchased MountainWest Savings and Loan Association. In addition, Knudsen acquired Meyer Dairy, Inc., in a transaction guaranteed by Winn Enterprises. Foremost and Knudsen have since been sold, and the operations of Meyer Diary have ceased. Claims in the future may be asserted challenging the wisdom of these acquisitions or the management of these businesses after they were acquired, or the distribution of the assets of these companies upon their sale, liquidation, ceasing to do business or other disposition...." Emphasis added.)

In the fall of 1988, the plaintiffs notified Continental of this action and requested coverage and a defense under the policy. ⁶ Continental promptly denied coverage on the principal ground that the claim set out in the underlying action had not been made during the policy period. Continental asserted that the potential claim notice of October 23, 1987 was inadequate notice to satisfy the requirements of clause 7(C). Finally, Continental rejected plaintiff's request for a defense of the underlying action on the ground that the policy did not promise a defense and Continental therefore had no obligation to provide one.

In spite of this denial, however, Continental ultimately did participate in settlement discussions with respect to the...