Helfand v. National Union Fire Ins. Co.

• Citation: 10 Cal.App.4th 869,13 Cal.Rptr.2d 295
• Decision Date: 28 October 1992
• Docket Number: No. A049442,A049442
• Court: California Court of Appeals
• Parties: Leonard HELFAND, et al., Plaintiffs and Respondents, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant and Appellant.

Page 295

13 Cal.Rptr.2d 295

10 Cal.App.4th 869

Leonard HELFAND, et al., Plaintiffs and Respondents, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant and Appellant.

No. A049442.

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

Oct. 28, 1992.

Rehearing Denied Nov. 30, 1992.

Review Denied Feb. 11, 1993.

Pettit & Martin, D. Wayne Jeffries, Saul D. Bercovitch San Francisco, Stroock, Stroock & Lavan, Michael F. Perlis, Los Angeles, Robinson & Wood, Inc., Archie S. Robinson, Thomas R. Fellows, San Jose, Horvitz & Levy, Ellis J. Horvitz, Peter Abrahams, Encino, for defendant and appellant.

Ross, Dixon & Masback, Barbara E. Etkind, F. Clinton Broden, Washington, D.C., for amicus curiae on behalf of appellant.

Cotchett, Illston & Pitre, Joseph W. Cotchett, Susan Illston, Marie Seth Weiner, Burlingame, Remcho, Johansen & Purcell, Joseph Remcho, Robin B. Johansen, Karen Getman, Wendy S. Stimling, San Francisco, Crosby, Heafey, Roach & May, Ronald L. Murov, Howard A. Janssen, Oakland, Morgan, Ruby, Schofield Franich & Fredkin, Allen J. Ruby, Lexie D. Schroeder, San Jose, Thomas Anderson & Associates, Thomas T. Anderson, Samuel Trussell, Indio, Severson & Werson, Gerald J. Buchwald, Michael B. Murphy, Elizabeth A. Syufy, San Francisco, for plaintiffs and respondents.

ANDERSON, Presiding Justice.

I. INTRODUCTION AND BACKGROUND

This appeal is but one round in the complex, bitter legal battle between the defrauded investors of Technical Equities Corporation (Technical Equities) and its insurer--appellant National Union Fire Insurance Company of Pittsburgh, Pa. (National Union). At stake are millions of dollars in insurance proceeds to pay for claims which the investors pursued against the officers and directors of Technical Equities and over $140 million in damages later assessed against National Union.

National Union is the liability insurer of the directors and officers ¹ of Technical Equities. Respondents Leonard and Eileen Helfand (plaintiffs) invested in securities offered by Technical Equities, only to find their investment substantially worthless after the company's financial collapse and bankruptcy. Hundreds of investors like plaintiffs have sued the company's directors and officers; multiple judgments have been entered in these suits against them for economic losses, emotional distress and prejudgment interest.

Plaintiffs' action ² is for declaratory relief to determine the scope of coverage under the "Directors and Officers Liability and Corporation Reimbursement" policy of insurance which Technical Equities took out with National Union for the three-year period from August 1, 1984 to August 1, 1987. Technical Equities prepaid its $30,290 premium in return for $10 million in coverage for each policy year.

National Union concedes there is $10 million in coverage for the second policy year. At issue is whether there is coverage under the first and third policy years, and whether the policy itself is a wasting asset, so that defense costs are included within the policy limits of $10 million per year.

The trial court ruled against National Union on all three issues. The judgment in this case and in the companion case of Chatton v. National Union (Super.Ct. Santa Clara County, 1991, No. 600306 [See Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846, 13 Cal.Rptr.2d 318 for opinion on appeal] ) (involving coverage under a comprehensive general liability (CGL) policy) set the stage for two insurance bad faith suits against National Union brought on a coordinated basis by over 500 investors. McLaughlin et al. v. National Union (Super.Ct. Santa Clara County, 1991, No. 666839), combining seven plaintiff groups on a test case basis, resulted in judgment against National Union for $48,943,165.45, including $43 million in punitive damages for all plaintiffs. Abelson v. National Union (Super.Ct. Santa Clara County, 1991, No. 666840), in which National Union was found liable to all remaining plaintiffs, resulted in judgment of $120,500,181. (Both McLaughlin and Abelson are also on appeal, albeit not yet fully briefed.)

We conclude that (1) defense costs reduce the policy's liability limits and (2) there is $20 million available under the policy to pay for second and third year claims. Accordingly, we reverse in part and affirm in part.

II. DEFENSE COSTS ARE INCLUDED WITHIN THE LIABILITY LIMITS

A. Introduction

National Union's first challenge is to the trial court's ruling that defense costs do not deplete the limits of liability available under the policy to pay for claims. Upon reconsideration of its summary adjudication ruling, the court concluded: "The National Union 1984-1987 D & O policy is not 'wasting' or 'self-consuming,' and National Union is obligated to pay the reasonable costs, charges and expenses of defense, including attorneys' fees of any insured under the policy, in addition to the limit of liability." The court reasoned that any "self-consuming" provisions were contrary to the reasonable expectations of the insureds, as a matter of law. Moreover, it concluded the policy was ambiguous, "such that a normal insured would not be aware of its 'self-consuming' nature."

The defense obligations of D & O carriers typically differ in nature and scope from the defense obligations of general liability carriers. For example, D & O policies generally do not obligate the carrier to provide the insured with a defense. More likely, they require the carrier to reimburse the insured for defense costs as an ingredient of "loss," a defined term under the policy. (See 1 Hutcheon & Thompson, Business Insurance Law and Practice Guide (Matthew Bender ed. 1992) Directors' & Officers' Liability Insurance, § 3.06; Knepper & Bailey, Liability of Corporate Officers and Directors (4th ed. 1988) Liability Insurance § 21.09, pp. 705-709; Harley, Directors' and Officers' Liability Insurance (PLI ed. 1990) pp. 326-329.)) This being the case, it is the insured, or the insured with the mutual agreement of the insurer, who selects defense counsel and controls the defense of the underlying case.

How the carrier's reimbursement obligation specifically interfaces with the limits of liability in a given D & O policy can only be determined by examining the language of that policy. This we do hand in hand with the familiar tools of contract interpretation.

The overriding goal of contract interpretation is to give effect to the parties' mutual intentions as of the time of contracting. (Civ.Code, § 1636.) Where contract language is clear and explicit and does not lead to an absurd result, we ascertain this intent from the written provisions and go no further. (Civ.Code, §§ 1638, 1639; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253.) The words of a contract generally are to be understood in their ordinary and popular sense unless the parties use them in a technical sense or "a special meaning is given to them by usage...." (Civ.Code, § 1644.)

However, if the terms of a contractual promise are ambiguous or uncertain, we must interpret the promise "in the sense in which the promisor believed, at the time of making it, that the promisee understood it." (Civ.Code, § 1649.) "This rule, as applied to a promise of coverage in an insurance policy, protects ... 'the objectively reasonable expectations of the insured.' " (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1265, 10 Cal.Rptr.2d 538, 833 P.2d 545.) If use of this rule does not eliminate the uncertainty, then we construe the applicable language against the insurer, the drafter who created the uncertain language in the first place. (Ibid.; Civ.Code, § 1654.)

A policy provision is ambiguous if it is capable of more than one reasonable construction. (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 912, 226 Cal.Rptr. 558, 718 P.2d 920.) However, we will not strain the policy language to create an ambiguity. (Ibid.) Moreover, we will not label a provision ambiguous simply upon isolating phrases and considering them in the abstract. Rather, we must construe the provision in relation to the whole of the instrument, with each clause giving meaning to the other. (Id., at pp. 916-917 and fn. 7, 226 Cal.Rptr. 558, 718 P.2d 920; Civ.Code, § 1641.)

B. Discussion

Our analysis of this D & O policy uncovers no ambiguity concerning its "self-consuming" nature. The plain terms of the policy make it clear that defense costs are payable against the limits of liability just like any other element of "loss" ³ as defined in the policy. We arrive at this conclusion by examining the policy as a whole and the interplay between the defined concept of "loss" and various related provisions.

First, in the insuring clause National Union promises to pay on behalf of the insured officers and directors "against loss ... arising from any claim or claims which are first made against the Insureds ... during the policy period by reason of any Wrongful Act ... in their respective capacities as Directors or Officers." (Emphasis added.) Next, clause 5 (titled "LIMIT AND RETENTION"), paragraph (b) as amended states: "[T]he Insurer's liability for any claim or claims made against it shall ... be the amount stated in Item 3 of the Declarations which shall be the maximum liability of the Insurer in a) each policy year...." Item No. 3 of the Declarations in turn reads: "LIMIT OF LIABILITY: $10,000,000 each policy year...."

Finally, endorsement No. 3, captioned "COSTS, CHARGES AND EXPENSES AND DEFENSE INCLUDED IN LIMIT OF LIABILITY", replaces the predecessor clause No. 6 (captioned only "COSTS, CHARGES AND EXPENSES AND DEFENSE") in its entirety. It states in pertinent part that when payment not exceeding "the Limit of Liability has to be made to dispose of a claim, costs, charges, expenses and settlements shall be payable up to the Limit of Liability...." ⁴

From these provisions it is apparent that the...