Federal Ins. Co. v. Scarsella Bros., Inc.

• Decision Date: 09 May 1991
• Docket Number: No. 88-4378,88-4378
• Citation: 931 F.2d 599
• Parties: FEDERAL INSURANCE COMPANY, a New Jersey corporation, Plaintiff-Appellant, v. SCARSELLA BROTHERS, INC., a Washington corporation; David Rose; Jane Doe Rose, husband and wife and the marital community composed thereof; Stanley Alan Peters; Diana Peters, husband and wife composed thereof; John F. Kovarik, guardian ad litem for Amber Lynn Peters, a minor; Washington Insurance Guaranty Association, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 599

931 F.2d 599

FEDERAL INSURANCE COMPANY, a New Jersey corporation Plaintiff-Appellant, v. SCARSELLA BROTHERS, INC., a Washington corporation; David Rose; Jane Doe Rose, husband and wife and the marital community composed thereof; Stanley Alan Peters; Diana Peters, husband and wife composed thereof; John F. Kovarik guardian ad litem for Amber Lynn Peters, a minor Washington Insurance Guaranty Association, Defendants-Appellees.

No. 88-4378.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 7, 1990.

Decided April 29, 1991.

As Amended May 9, 1991.

Craig H. Bennion, Cozen and O'Connor, Seattle, Wash., for plaintiff-appellant.

Jerry W. Spoonemore and Stuart P. Kastner, Montgomery, Purdue, Blankinship & Austin, Seattle, Wash., for defendant-appellee (Scarsella).

Martin T. Collier, Betts, Patterson & Mines, P.S., Seattle, Wash., for defendant-appellee (WIGA).

Appeal from the United States District Court for the Western District of Washington.

Before TANG, D.W. NELSON and CANBY, Circuit Judges.

TANG, Circuit Judge:

Federal Insurance Company ("Federal") appeals the decision of the district court granting and denying motions for summary judgment in an action for declaratory relief. Federal contends the district court erred in declaring that Federal was liable under an excess insurance policy to provide coverage in place of Integrity Insurance Company ("Integrity"), an insolvent underlying insurer. We affirm the district court, holding that when an insurer agrees to provide coverage in excess of underlying insurance that has been "exhausted," and the term "exhausted" is not defined by the policy, the excess insurer has assumed the risk of underlying insurers' insolvency.

I

On June 12, 1985, members of the Peters family were severely injured in an automobile accident in King County, Washington. The Peters' vehicle was hit by a truck driven by David Rose and owned by Scarsella Brothers, Inc. ("Scarsella"). The Peters subsequently sued Rose, his wife, and Scarsella in Washington state court for personal injuries allegedly sustained in the accident. The Peters sought damages in excess of $1.5 million.

At the time of the accident, Scarsella's potential liability was covered by three insurance policies layered as to the order in which the insurers were obligated to provide coverage. A policy issued by United Pacific Insurance Company ("United Pacific") provided the primary level of coverage with a limit of $500,000 per occurrence. Integrity provided the first layer of excess liability coverage in the amount of $1 million. Federal provided the second layer of excess liability coverage in the amount of $9 million. Thus, Federal would normally provide coverage only to the extent that Scarsella's liability exceeded $1.5 million.

After the Peters' accident, but before any claims were paid, Integrity became insolvent. Ordinarily, the Washington Insurance Guaranty Association ("WIGA") would provide coverage in place of Integrity, up to a limit of $300,000. See Wash.Rev.Code Sec. 48.32.060(1)(a). ¹ However, WIGA's responsibility with regard to Integrity's liability is uncertain, given the excess liability policy issued by Federal.

On May 3, 1988, Federal filed this action against the Peters, the Roses, Scarsella, and WIGA to obtain a judicial declaration that, under the excess liability policy issued to Scarsella, Federal was not required to "drop down" and cover Scarsella's liability between $500,000 and $1.5 million, the range for which Integrity would have provided coverage but for the insurer's insolvency. Federal also sought a ruling that, regardless of whether Federal had to drop down, WIGA would be required to pay up to $300,000 before Federal would be required to pay. The defendants filed appropriate counterclaims and cross-claims seeking to establish the converse of the relief sought by Federal.

In the order appealed from, the district court granted Scarsella's summary judgment motion, ruling that Federal was obligated to drop down. The court also denied Federal's summary judgment motion, ruling inter alia that Federal must fulfill its obligations under the policy issued to Scarsella before WIGA's obligations would become due. WIGA, however, did not file a cross-motion for summary judgment on this latter issue, nor did WIGA otherwise seek an affirmative judgment on its counterclaim against Federal. Other claims also remain formally unresolved.

Shortly after the district court rendered its decision, Federal agreed to provide the disputed coverage, and to pay the Peters $5 million, less the $500,000 provided for by United Pacific. In settling the Washington state court lawsuit on behalf of Scarsella, Federal initially omitted an express reservation of its rights pending the outcome of this appeal. Subsequently, Federal attempted to insert a reservation of rights clause into the settlement agreement which, in the meantime, had been approved by the state court. The state court refused to amend the settlement agreement with regard to Federal's rights against the Peters, but allowed Federal an express reservation of rights against WIGA. Neither Federal nor WIGA was a party to the state court action. Federal timely appeals the decision of the federal district court.

II

In granting Scarsella's summary judgment motion against Federal, and denying Federal's summary judgment motion against WIGA, the district court established law of the case sufficient to decide every cause of action pleaded in this lawsuit. Yet because WIGA did not move for summary judgment against Federal based on law of the case, WIGA's counterclaim against Federal remains technically undecided. ²

Under these circumstances, we normally would lack jurisdiction over this case absent an express determination by the district court that there was no just reason for delaying Federal's appeal. See Frank Briscoe Co. v. Morrison-Knudsen Co., 776 F.2d 1414, 1416 (9th Cir.1985); Fed.R.Civ.P. 54(b). Furthermore, we usually would be powerless to consider the denial of Federal's summary judgment motion against WIGA. See Suydam v. Reed Stenhouse, Inc., 820 F.2d 1506, 1511 (9th Cir.1987). Nevertheless, because the district court's order resolved all issues necessary to establish the legal rights and duties of the parties, we will consider the order as final for purposes of 28 U.S.C. Sec. 1291, even though its statement of the relationships among the parties is not precise. See Planet Ins. Co. v. Mead Reins. Corp., 789 F.2d 668, 670 (9th Cir.1986). ³ In doing so, we think it important that the only matters left unresolved are purely questions of law on which judgment has been rendered a mere formality by law of the case. Federal's appeal is therefore proper. Cf. Fed.R.App.P. 4(a)(2) (notice of appeal from final order valid even when filed before entry of formal judgment). ⁴

III

After the district court rendered its decision on Federal's summary judgment motion, Federal settled the underlying state court tort action on behalf of its insured, Scarsella. In doing so, Federal provided coverage in place of the insolvent insurer, Integrity. The settlement agreement allegedly did not reserve Federal's rights against Scarsella pending the outcome of this appeal. Subsequent to the signing of the agreement, the state court purportedly included a clause reserving Federal's rights against WIGA.

Federal contends this appeal is not moot because, unless this court affirms the district court, Federal will sue its insured (to recover the amount paid under the settlement agreement) and WIGA (to recover on a claim for contribution). Whether the settlement agreement itself would preclude these lawsuits involves questions of state law which, Federal argues, are not before this court.

These are difficult questions that Federal presents. For example, it is unclear to what degree we must examine a settlement agreement in light of state law in order to determine whether a case is moot. Compare Chemical Waste Management, Inc. v. Broadwater, 758 F.2d 1538, 1539-40 (11th Cir.1985) (declining to rule on novel questions of state law which could determine whether the appeal was justiciable) with Harrison W. Corp. v. United States, 792 F.2d 1391, 1392-93 (9th Cir.1986) (deciding a threshold question of federal law in order to determine whether appeal was moot). Furthermore, the questions of state law on which the present issue of mootness turns are, in themselves, novel and complex.

Where an appeal presents difficult questions concerning jurisdiction, we may forego the resolution of such issues if the merits of the appeal are insubstantial. See Norton v. Mathews, 427 U.S. 524, 532, 96 S.Ct. 2771, 2775, 49 L.Ed.2d 672 (1976); Sundance Land Corp. v. Community First Fed. Sav. & Loan Ass'n, 840 F.2d 653, 666 n. 15 (9th Cir.1988). In deciding whether we may take this course, it is relevant to consider the extent to which the effect of our decision would vary depending on whether the jurisdictional question is addressed. Norton, 427 U.S. at 532, 96 S.Ct. at 2775. As will appear below, the merits of this appeal are insubstantial; the district court's decision is easily affirmed. Furthermore, we note the effect of our decision is likely the same as the effect if we were to find the appeal moot. See Allard v. DeLorean, 884 F.2d 464, 467 (9th Cir.1989) (where appeal mooted by settlement, district court should determine whether judgment should be vacated). Accordingly, in view of the difficult jurisdictional questions presented, we will assume--without deciding--that this appeal is not moot. See Norton, 427 U.S. at 532, 96 S.Ct. at 2775.

IV

This court reviews de novo the district court's construction of an insurance policy. American States Ins. Co. v. Borbor by Borbor, 826 F.2d 888, 890 (9th Cir.1987). A grant of summary judgment is also reviewed de novo, in part to determine whether the substantive law was correctly applied. Darring v. Kincheloe, 783 F.2d 874, 876...