In Re: K F Dairies, INC.

• Decision Date: 03 February 1999
• Docket Number: No. 97-55941,97-55941
• Citation: 224 F.3d 922
• Parties: (9th Cir. 2000) In re: K F DAIRIES, INC. & AFFILIATES, Debtors. K F DAIRIES, INC. & AFFILIATES, Appellants, v. FIREMAN'S FUND INSURANCE CO., Appellee. Office of the Circuit Executive
• Court: U.S. Court of Appeals — Ninth Circuit

Page 922

224 F.3d 922 (9th Cir. 2000)

In re: K F DAIRIES, INC. & AFFILIATES, Debtors.

K F DAIRIES, INC. & AFFILIATES, Appellants, v. FIREMAN'S FUND INSURANCE CO., Appellee.

No. 97-55941

Office of the Circuit Executive

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted February 3, 1999

Submission Vacated April 13, 1999

Question Certified to California Supreme Court on June 14, 1999

Certified Question Denied July 28, 1999

Matter Returned to Panel on December 2, 1999

Resubmitted January 5, 2000

Filed August 25, 2000

David R. Scheidemantle (argued) and Aaron P. Allan, Pros-kauer Rose, Los Angeles, California, for the appellants.

Patricia M. Wilson and Melinda Ebelhar (argued), Caron, McCormick, Constants & Goldberg, Glendale, California, for the appellee.

Appeal from the United States District Court for the Central District of California

Gary L. Taylor, District Judge, Presiding

Before: Harry Pregerson, Robert R. Beezer, and Michael Daly Hawkins, Circuit Judges.

HAWKINS, Circuit Judge:

K F Dairies, Inc. and Affiliates ("KF Dairies") appeal the district court's reversal of the bankruptcy court's $1,142,783 judgment against Fireman's Fund Insurance Company ("Fireman's"). The bankruptcy court concluded that Fireman's should not have refused to defend KF Dairies against the State of California's claim in KF Dairies's bankruptcy proceedings for the costs of abatement and cleanup of environmental contamination at sites owned by KF Dairies and for which KF Dairies was strictly liable under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"). The district court reversed, holding that Fireman's had no duty to defend KF Dairies as a matter of law since KF Dairies acquired the sites (and therefore the CERCLA liability) after its policy with Fireman's had expired. We have jurisdiction pursuant to 28 U.S.C.S 1291, and we reverse.

The facts of the case are well known to the parties and can be found in our Order Certifying a Question to the California Supreme Court, see K F Dairies, Inc. v. Fireman's Fund Ins. Co., 179 F.3d 1226 (9th Cir. 1999); we need not repeat them here. We review de novo the district court's grant of summary judgment and interpretation of an insurance contract. See Stanford Ranch, Inc. v. Maryland Casualty Co., 89 F.3d 618, 624 (9th Cir. 1996).

I.

One question of law controls the outcome of this case. As this question involves a construction of state law on which apparently contradictory state court decisions had been rendered, on June 14, 1999, we certified the following question to the California Supreme Court:

Where the state seeks recovery for damage to stateowned groundwater contained within certain property, does the property owner's comprehensive general liability policy provide coverage if the damage occurred within the policy period, but the insured purchased the property after the policy period (although before the state made its claim)?

K F Dairies, 179 F.3d at 1227.¹

The California Supreme Court, without explanation, denied our request for certification.² Accordingly, we must now answer the question, and we do so in the affirmative.

Our decision is solely guided by California law as we believe the California Supreme Court would apply it. See Chemstar, Inc. v. Liberty Mut. Ins. Co., 41 F.3d 429, 432 (9th Cir. 1994) ("The panel applies California law as it believes the California Supreme Court would apply it."). In conducting our analysis, state appellate court decisions are persuasive authority, but we are not bound by them if "we believe[ ] that the California Supreme Court would decide otherwise. " Id.; see also Miller v. County of Santa Cruz, 39 F.3d 1030, 1036 n. 5 (9th Cir. 1994) ("A state appellate court's announcement of a rule of law is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise.") (internal quotations omitted); Singer v. State Farm Mutual Auto Ins. Co., 116 F.3d 373, 378 (9th Cir. 1997) (citing Chemstar and Miller).

Two California Court of Appeal decisions answer the certified question in the negative. That is, they hold that a property owner's general liability policy does not provide coverage if the damage occurred within the policy period, but the insured purchased the property after the policy period had expired.

In A.C. Label Co. v. TransAmerica Ins. Co., 56 Cal. Rptr. 2d 207 (1996), the insured purchased a comprehensive general liability ("CGL") insurance policy from the insurer, Transamerica Insurance Company. The effective coverage period of the policy was from May 1981 through May 1982. In 1984, A.C. Label purchased real property. In 1987, a cleanup and abatement action for the purchased property was brought against A.C. Label for groundwater contamination that had begun in 1967. Transamerica refused to defend or indemnify A.C. Label in the cleanup and abatement action, and A.C. Label subsequently sued for breach of contract. See id. at 208.

On appeal, the court held that Transamerica had no duty to defend or indemnify A.C. Label. The Court of Appeal stated:

The coverage provided by the plaintiff's CGL policy was not triggered during the policy period because plaintiffs had no connection to or nexus with the damage caused by the contamination that occurred on the subsequently acquired property during the policy period.

Id. at 210. Likewise, in FMC Corp. v. Plaisted and Companies, 72 Cal. Rptr. 2d 467 (1998), the California Court of Appeal cited to A.C. Label and held that a "complete factual predicate for a liability subsequently imposed by law must exist during the policy period" in order for coverage to be triggered under a CGL insurance policy. See FMC Corp., 72 Cal. Rptr. 2d at 480.

Both FMC Corp. and A.C. Label appear to be directly on point; were they issued by the California Supreme Court they would be dispositive of the instant case. We believe, however, that the cases are in conflict with generally established principles of insurance contract construction as articulated by the California Supreme Court, and that that tribunal would have decided the cases otherwise.³ Accordingly, we reject the analysis in A.C. Label and FMC Corp., and hold that coverage is provided under a CGL policy if the damage occurred within the policy period, but the insured purchased the property after the policy period (although before the state made its claim with respect to the property).

The California Supreme Court has established a threestep process for analyzing insurance contracts with the primary aim of giving effect to the mutual intent of the parties. See AIU Ins. Co. v. Superior Ct. of Santa Clara County, 799 P.2d 1253, 1264-65 (Cal. 1990). The first step is to examine the "clear and explicit" meanings of the terms as used in their "ordinary and popular sense." Id. at 1264. In assessing the terms' meanings, we may not take individual terms out of context: "Language in a contract must be construed in the context of that instrument as a whole . . . and cannot be found to be ambiguous in the abstract." Bank of the West v. Superior Ct. of Contra Costa County, 833 P.2d 545, 552 (Cal. 1992). "Thus, if the meaning a layperson would ascribe to contract language is not ambiguous we apply that meaning. " AIU, 799 P.2d at 1264.

If (and only if) a term is found to be ambiguous after undertaking the first step of the analysis, the court then proceeds to the second step and resolves the ambiguity "by looking to the expectations of a reasonable insured. " Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. , 855 P.2d 1263, 1276 (Cal. 1993) (citing American Star Ins. Co. v. Ins. Co. of the West, 284 Cal. Rptr. 45, 52 (1991) ("A policyholder's `reasonable expectation' of coverage is only relevant when the policy is ambiguous.") (emphasis added)); see also AIU, 799 P.2d at 1264 ("If there is ambiguity. . . it is resolved by interpreting the ambiguous provisions in the sense the promisor (i.e., the insurer) believed the promisee understood them at the time of formation."). Under California law, an insurance policy provision is "ambiguous when it is capable of two or more constructions both of which are reasonable." Bay Cities, 855 P.2d at 1271.

Finally, if the ambiguity still remains, it is construed against the party who caused the ambiguity to exist. See AIU, 799 P.2d at 1264. In the insurance context, this is almost always the insurer, as the California Supreme Court has held that ambiguities are generally resolved in favor of coverage, see id., and that the courts are to "generally interpret the coverage clauses of insurance policies broadly, protecting the objectively reasonable expectations of the insured. " Id. (citations omitted).

In A.C. Label,⁴ the California Court of Appeal departed from this methodology. In the first step of its analysis, the court found that the "terms of the policy were not ambiguous as to the coverage of the policy; it covered plaintiffs' liability during the policy period." A.C. Label, 56 Cal. Rptr. 2d at 210 (emphasis added). Immediately after finding that the language of the policy was unambiguous as to coverage, the court stated:

Coverage for plaintiffs' after-acquired liability for the damage caused during the policy period by contamination of this property could not possibly have been within the reasonable mutual contemplation of the parties at the time they entered into the insurance contract. No reasonable policyholder could have believed that a CGL policy issued for a policy period in 1981 and 1982 would provide coverage for a loss which was not a liability of the policyholder at any time prior to 1984. Any expectation that plaintiffs may have had that this liability insurance policy would apply to after-acquired liability with which they had no connection during the policy period was unreasonable as a matter of...