Lexington Ins. Co. v. Devaney, 93-16284
| Decision Date | 09 March 1995 |
| Docket Number | No. 93-16284,93-16284 |
| Citation | 50 F.3d 15 |
| Parties | NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. LEXINGTON INSURANCE COMPANY, Plaintiff-Appellant, v. Kenneth W. DEVANEY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Before: FLETCHER, PREGERSON, and RYMER, Circuit Judges.
Lexington Insurance Company appeals the district court's entry of summary judgment against it. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291, and affirm.
Lexington argues that the district court erred when it determined, as a matter of law, that Lexington had not given sufficient notice to Summa of the new exclusion to the D & O policy excluding coverage for claims related to or arising out of the insolvency of the policyholder.
Under Allstate Co. v. Fibus, 855 F.2d 660 (9th Cir.1988), unless the notice of the reduction in coverage is "conspicuous, plain and clear," the "insurance company is bound by a greater coverage in an earlier policy when a renewal policy is issued." Id. at 663 (citing Fields v. Blue Shield of Cal., 209 Cal.Rptr. 781, 785-86 (Cal.Ct.App.1985)). If notice of a new exclusion is inadequate, the exclusion is ineffective. Davis v. United Services Auto Ass'n, 273 Cal.Rptr. 224, 231 (Cal.Ct.App.1990).
In Fibus, the court held that a paragraph printed on the first page of an eight-page "Amendatory Endorsement" was insufficiently conspicuous to provide the requisite notice to the policyholder. The endorsement set forth the paragraph of the policy that had been changed, but there was no conspicuous warning that there had been a reduction in coverage. Fibus, 855 F.2d at 663. Here, Lexington relies on the fact that its broker set out the new exclusion on a separate endorsement where it was one of four paragraphs. However, there is no basis for inferring that the endorsement sheet was attached to the front of the papers sent to Summa, or that it was otherwise in a conspicuous location. Although the cover letter referred to "changes" and the endorsement page used the term "amended," no document explicitly states that there had been a "reduction" or "diminishment" of coverage, or words of similar import. Further, by the time the letter had been sent, John Powel, the broker for Lexington, had spoken three times by telephone with Thomas Pace of Summa. During these conversations Pace informed Powel that Summa was in bankruptcy. Nonetheless, Powel never mentioned the bankruptcy exclusion to Pace. Finally, in light of the telephone conversations, the significant increase in the policy premium would reasonably have been understood as relating to the increased risk stemming from Summa's bankruptcy. In light of these circumstances, we cannot say that the district court erred in holding that Fibus controls and that the notice of coverage reduction was not plain, clear and conspicuous as a matter of law.
Lexington next contends that, even if notice of the insolvency exclusion were inadequate, Devaney is equitably estopped from asserting lack of notice because it detrimentally relied on Barg's failure to assert earlier the invalidity of the insolvency exclusion on the basis of inadequate notice. Lexington claims that, had it known of this argument, it might have acceded to Devaney's original $1.0 million settlement offer or negotiated a lower amount, while reserving its right to contest coverage later. Lexington also argues that it can assert equitable estoppel against Devaney since, as Barg's assignee, Devaney stands in Barg's shoes and is subject to any defenses that could have been raised against the assignor. Royal Bank Export Fin. Co. v. Bestways Distrib. Co., 280 Cal.Rptr. 355, 357 (Cal.Ct.App.1991).
We disagree. Equitable estoppel applies when (1) the party to be estopped knows the facts, (2) the party either intends its act or omission to be acted upon, or acts in a manner such that the party asserting estoppel has a right to believe such intent was present, (3) the party asserting estoppel must be unaware of the true facts, and (4) the party asserting estoppel relies on the other party's conduct to its detriment. Lusardi Constr. Co. v. Aubry, 4 Cal.Rptr.2d 837, 848 (Cal.1992). Nothing in the record shows that Barg actually knew that he had a notice argument against the policy's insolvency exclusion. It is not enough that he knew of the exclusion itself and that Lexington was asserting it as a defense to coverage. Nor does anything in the record indicate that Lexington relied on Barg's failure to raise the inadequate notice issue to its detriment. Neither is there any showing that active steps were taken or that improper conduct was engaged in to induce reliance. As proof of essential elements is missing, summary judgment was properly granted.
Lexington next argues that the district court erred in determining, as a matter of law, that it breached an obligation to Summa or Barg, and thus erred in holding it liable for the full $5 million judgment despite the D & O policy limit of $1.0 million.
Consolidated American Ins. v. Mike Soper Marine, 951 F.2d 186 (9th Cir.1991), applying California law, is controlling. In that case, the insurance company refused to defend the policyholder and refused reasonable settlement offers within policy limits. The policyholder entered into a stipulated default judgment, and in exchange for a covenant not to execute by the plaintiff, the policyholder assigned all of his rights against the insurance company to the plaintiff. This court held:
California law mandates that when an insurer fails to accept a reasonable settlement offer within policy limits because it "believes the policy does not provide coverage [it] assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits." This duty does not require, however, a liability insurer to accept the settlement offer when there is no risk to the insured.
Consolidated American, 951 F.2d at 190 (citations omitted) (quoting Samson v. Transamerica Ins. Co., 178 Cal.Rptr. 343, 353 (Cal.1981)). "[A]n insurer's good faith, though erroneous, belief in noncoverage affords no defense to liability flowing from the insurer's refusal to accept a reasonable settlement offer." Samson, 178 Cal.Rptr. at 353-54 (internal quotation marks omitted).
Lexington correctly points out that it had no duty to defend, but only to reimburse defense costs as part of the loss under the policy. However, under California law a breach of the duty to pay the costs of defense under a D & O policy will be treated much the same as a breach of the duty to defend. Xebec Dev. Partners, Ltd. v. National Union Fire Ins. Co., 15 Cal.Rptr.2d 726, 739 (Cal.Ct.App.1993). Lexington also refused to indemnify or settle within policy limits. Lexington told Summa that "there is no coverage afforded to any of the insureds" and that it "is inconceivable given the allegations of the complaint that there would be coverage under these policies." Lexington's refusal of coverage caused Barg to take steps to protect himself. "When the insurer exposes its policyholder to the sharp thrust of personal liability by breaching its obligations, the insured need not indulge in financial masochism." Samson, 178 Cal.Rptr. at 356 ().
On two occasions Lexington declined to settle for $1.0 million, a figure within policy limits. Devaney's second $1.0 million settlement offer came immediately after a judgment for $5.0 million had been entered in his favor against Barg. It is a breach of the insurance company's duty as a matter of law to refuse an offer to settle within the policy limits once a judgment has been entered in excess of the offer. R.W. Beck & Assoc. v. City and Borough of Sitka, 27 F.3d 1475, 1486 (9th Cir.1994). There is no evidence that the settlement offer was unreasonable. An expert estimated Carolyn Devaney's lifetime cost of care at $5.0 million; Lexington does not contest that. Lexington admits that Devaney could have recovered up to $1.05 million from Summa during Carolyn's lifetime; while it intimates that some of that amount is exhausted, it admits there is no evidence of the degree of exhaustion. Given that Devaney's settlement offer was well below an undisputed estimate of medical costs and within the limits of Summa's coverage, there is no genuine issue of fact as to whether the offer to settle for the $1.0 million policy limit was reasonable.
Lexington also argues that Barg never submitted a claim for reimbursement of defense costs, and thus the district court erred in finding as a matter of law that Lexington breached a duty to pay defense costs. That argument is unavailing. In Samson, the California Supreme Court rejected as "sheer sophistry" the insurance company's claim that, although it denied coverage when a claim was presented, it did not breach its duty to defend because the policyholder never demanded a defense as such. Samson, 178 Cal.Rptr. at 355.
Lexington contends that genuine issues of fact remain concerning the amount of Barg's liability to Devaney, and that it is not bound by the judgment entered in state court against Barg because the trial was uncontested, collusive, and was not an "actual trial" but tantamount to a settlement or stipulated judgment. 1 Thus, Lexington argues, the damage determination by the state court is at most presumptive evidence of the amount of Devaney's claim against it, evidence which it was entitled to rebut...
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