Employers Ins. of Wausau v. Granite State Ins. Co.

• Decision Date: 04 June 2003
• Docket Number: No. 02-55024.,No. 01-57231.,01-57231.,02-55024.
• Citation: 330 F.3d 1214
• Parties: EMPLOYERS INSURANCE OF WAUSAU, a Mutual Company, Plaintiff-Appellant, v. GRANITE STATE INSURANCE COMPANY, Defendant-Appellee. Employers Insurance of Wausau, a Mutual Company, Plaintiff-Appellee, v. Granite State Insurance Company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

330 F.3d 1214

EMPLOYERS INSURANCE OF WAUSAU, a Mutual Company, Plaintiff-Appellant, v. GRANITE STATE INSURANCE COMPANY, Defendant-Appellee.

Employers Insurance of Wausau, a Mutual Company, Plaintiff-Appellee, v. Granite State Insurance Company, Defendant-Appellant.

No. 01-57231.

No. 02-55024.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 5, 2003.

Filed June 4, 2003.

Bryan M. Barber, Larson King, San Francisco, CA, for the appellant-cross-appellee.

Mark G. Bonino and Marta B. Arriandiaga, Ropers, Majeski, Kohn & Bentley, San Jose, CA, for the appellee-cross-appellant.

Appeal from the United States District Court for the Central District of California; Stephen V. Wilson, District Judge, Presiding. D.C. No. CV-92-00406-SVW.

Before HALL, THOMPSON, and BERZON, Circuit Judges.

Opinion by Judge CYNTHIA HOLCOMB HALL; Dissent by Judge DAVID R. THOMPSON

CYNTHIA HOLCOMB HALL, Circuit Judge.

The instant case is a subrogation action between a primary insurer, Employers Insurance of Wausau ("Wausau"), and an excess insurer, Granite State Insurance Company ("Granite"). The parties dispute whether Granite is liable to Wausau as a result of a settlement paid by Wausau on behalf of California Water Services ("CWS"), a mutual insured.

Wausau appeals the district court's decision to vacate a $9,549,950 judgment against Granite,¹ arguing that the district court improperly applied a two-year statute of limitations. Granite cross-appeals the district court's original grant of summary judgment to Wausau. Granite contends that even if the action is not time-barred, Granite is not liable for any portion of the CWS settlement because coverage under Wausau's primary policy was never exhausted.

This court has jurisdiction pursuant to 28 U.S.C. § 1291. We REVERSE the district court's decision to dismiss the action as time-barred, REVERSE the district court's decision that Granite's excess policy was triggered, and REMAND with instructions to enter judgment in favor of Granite.

FACTS

Wausau issued five general liability insurance policies to CWS during the five-year period from January 1, 1980 to January 1, 1985. Granite issued five excess policies covering the same time period. The parties stipulated to the following characterization of their insurance policies:

1) "Each of the Wausau policies contained a per year limit of liability of $2 million for each occurrence and a $2 million aggregate limit of liability."

2) "The Granite State policies were first layer excess policies over the Wausau policies, and each of the Granite State policies contained a $5 million limit of liability for each occurrence and a $5 million aggregate limit of liability."²

Beginning in 1980, a group of homeowners experienced property damage caused by a landslide that was activated, in part, by ruptures in CWS's underground waterlines. Thirty-two homeowners subsequently brought suit against CWS. Wausau defended CWS, and ultimately settled the homeowners' claims for a total of $7,752,070.

Wausau filed the instant subrogation action against Granite on January 21, 1992, seeking $5 million. At Granite's request, on March 22, 1993, the district court stayed the action pending resolution of several potentially relevant California cases.³ On March 31, 1993, during the stay, Granite filed a motion for summary judgment, asserting that Wausau's action was barred by a two-year statute of limitations. The district court denied the motion, holding that the case was governed by California Code of Civil Procedure § 337, which provides for a four-year statute of limitations in actions based on insurance policies and other written instruments.

On February 23, 2000, Granite filed an unsuccessful motion to dismiss for failure to prosecute. Thereafter, the parties filed cross-motions for summary judgment. On March 15, 2001, the district court granted Wausau's motion and denied Granite's motion. On August 23, 2001, Granite filed a timely motion for reconsideration. The district court granted Granite's motion, concluding that its prior decisions had erroneously applied a four-year statute of limitations. The court held that Wausau's action was not founded on a written instrument, and thus was barred by the two-year statute of limitations provided for in California Code of Civil Procedure § 339.⁴ Accordingly, the district court vacated its earlier judgment in favor of Wausau, and entered judgment in favor of Granite. The parties filed timely Notices of Appeal and Cross-Appeal.

STANDARDS OF REVIEW

We review a district court's grant of summary judgment de novo. Ventura Packers, Inc. v. F/V Jeanine Kathleen, 305 F.3d 913, 916 (9th Cir.2002). We also review de novo interpretation of a contract, Fireman's Fund Ins. Cos. v. Alaskan Pride P'ship, 106 F.3d 1465, 1471 (9th Cir.1997), and the applicable statute of limitations, S.V. v. Sherwood Sch. Dist., 254 F.3d 877, 879 (9th Cir.2001).

STATUTE OF LIMITATIONS

The district court held that subrogation is an equitable cause of action, and is therefore subject to a two-year statute of limitations. See Cal.Code Civ. P. § 339 (providing that a two-year statute of limitations applies to actions "upon a contract, obligation or liability not founded upon an instrument in writing"). Because, as Granite concedes, a direct action by CWS against Granite would have been subject to a four-year statute of limitations, Wausau contends that the district court's ruling contravenes the established rule that a subrogation suit is purely derivative of the subrogor's underlying cause of action.

The principle that the right of subrogation is derivative of the subrogor's cause of action is firmly ensconced in California law. See, e.g., United States v. California, 507 U.S. 746, 756, 113 S.Ct. 1784, 123 L.Ed.2d 528 (1993) (The subrogee "stands in the place of one whose claim he has paid.") (internal quotation and citation omitted); Brown v. Rouse, 125 Cal. 645, 650, 58 P. 267 (1899) (A subrogee "is put in all respects in the place of the party to whose right he is subrogated."); Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.App.4th 1279, 1292, 77 Cal.Rptr.2d 296 (1998) (The insurer "stand[s] in the shoes" of the insured) (quotation omitted).

Because of the derivative nature of subrogation, a subrogee insurer is subject to "the same statute of limitations that would have been applicable had the insured brought suit in his or her own behalf." Great Am. W., Inc. v. Safeco Ins., 226 Cal.App.3d 1145, 1152, 277 Cal.Rptr. 349 (1991) (quoting WINDT, INSURANCE CLAIMS AND DISPUTES, § 10.11, at p. 554. (2d ed. 1988)). See also Redington v. Cornwell, 90 Cal. 49, 57, 27 P. 40 (1891); Auto. Ins. v. Union Oil Co., 85 Cal.App.2d 302, 304-05, 193 P.2d 48 (1948). In Auto. Ins., the California Court of Appeal articulated the policy basis for applying the subrogee's statute of limitations to the subrogor:

Upon principles of reason as well as natural justice, it seems only fair, right, just, and equitable that one who is subrogated to the rights and remedies of another should be allowed the same time in which to enforce such rights as the law would have allowed to the person to whose rights and remedies he succeeds.

Id. at 305, 193 P.2d 48.

Despite the established principle that a subrogation action is purely derivative of the subrogor's underlying cause of action, the district court held that Wausau was not entitled to the same statute of limitations that would have been applicable if CWS had brought suit against Granite on its own behalf. Instead, the district court adopted Granite's theory that because the doctrine of subrogation has its roots in equity, rather than in contract, California Code of Civil Procedure § 339 limits the statute of limitations to two years. See CAL. CODE CIV. P. § 339 (pertaining to actions "upon a contract, obligation or liability not founded upon an instrument of writing").

In its decision adopting Granite's view, the district court relied heavily on the conclusion that Century Indem. Co. v. Superior Ct., 50 Cal.App.4th 1115, 1117, 58 Cal.Rptr.2d 69 (1996) (holding § 339 applicable in an action between co-insurers) more accurately represents California law than does Liberty Mut. Ins. Co. v. Colonial Ins. Co., 8 Cal.App.3d 427, 432, 87 Cal.Rptr. 348 (1970) (holding § 339 inapplicable in an action between co-insurers). This focus is misplaced. Both Liberty and Century involve contribution between co-insurers as opposed to a subrogation action involving a primary insurer and excess insurer.

There is a critical distinction between the right of contribution and that of subrogation. "The right of equitable contribution belongs to each insurer individually. It is not based on any right of subrogation to the rights of the insured, and is not equivalent to standing in the shoes of the insured." Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.App.4th 1279, 1294, 77 Cal.Rptr.2d 296 (1998) (citation and quotation omitted) (emphasis added). Unlike subrogation, the right of equitable contribution exists independently of the rights of the insured. Id.

For these reasons, Century is inapposite. Instead, the instant case is governed by the well-established line of cases holding that the statute of limitations in a subrogation action is that which would have been applicable had the insured brought suit on its own behalf. A direct action by CWS against Granite would have been subject to a four-year statute of limitations. Accordingly, Wausau should be afforded a four-year period in which to enforce CWS's rights against Granite. Because the parties do not dispute that Wausau brought suit within four years of when the cause of action arose, we REVERSE the district court's decision to dismiss Wausau's action as time-barred.⁵

WAUSAU'S POLICY LIMITS

Granite cross-appeals the district court's interpretation of the Wausau insurance policy, which limited Wausau's total liability to $2 million, thus exposing...