Northern Ins. Co. of New York v. Allied Mut. Ins. Co.
| Decision Date | 07 February 1992 |
| Docket Number | Nos. 90-35579,90-35631,s. 90-35579 |
| Citation | 955 F.2d 1353 |
| Parties | NORTHERN INSURANCE COMPANY OF NEW YORK, Plaintiff-Appellee-Cross-Appellant, v. ALLIED MUTUAL INSURANCE COMPANY, Defendant-Appellant-Cross-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
A. Richard Dykstra, Stafford Frey Cooper & Stewart, Seattle, Wash., for plaintiff-appellee-cross-appellant.
I. Franklin Hunsaker, Bullivant, Houser, Bailey, Pendergrass & Hoffman, Portland, Or., for defendant-appellant-cross-appellee.
Appeal from the United States District Court for the Western District of Washington.
Before WRIGHT, NORRIS and HALL, Circuit Judges.
This is a dispute between two insurance companies over which one must pay the defense costs of a long since dismissed product liability suit. The two insurers present several issues:
1. When liability is transferred by operation of law under a theory of product-line successor liability, do policy benefits arising from insurance on the underlying risk transfer as well? If so, do these benefits include the right to a defense?
2. When two insurers share a common obligation to provide a defense, can one be obligated for defense costs incurred by the other before the first has been tendered the defense?
3. In this dispute, does California or Washington law apply in determining whether the insurers have met their obligation to provide a defense?
The Howards sought damages from the makers of California Cooler after their child was born suffering from fetal alcohol syndrome. They claimed that Dawn Howard's consumption of California Coolers during her pregnancy caused the birth defects. After about two years of pretrial litigation, they voluntarily dismissed the suit.
Brown-Forman Corporation bought California Cooler in July 1985, two years after the birth of the Howards' injured child and two years before the Howards filed suit. The sale was executed through an asset purchase agreement. The agreement specified that (1) California Cooler would indemnify Brown-Forman for any product liability claims arising from California Cooler's presale activities and (2) Brown-Forman would not assume obligation for any such claims. The agreement also excluded from the sale the assignment of any contract that required consent to assign.
When Brown-Forman received the Howards' complaint in November 1987, it hired the Seattle firm of Preston, Thorgrimson to provide a defense, and then tendered the defense to Northern Insurance Company. Northern sought to have the Lane, Powell firm represent Brown-Forman because Lane, Powell had lower rates. Brown-Forman insisted, however, on retaining Preston, Thorgrimson. Northern acquiesced and Brown-Forman eventually agreed to pay part of the fees.
A few months later, in February 1988, Northern tendered the defense to a second insurer, Allied Mutual. Although Northern had insured California Cooler during the last 12 days of the pregnancy, Allied had provided coverage for the period starting at about the fourth month of pregnancy and ending 12 days before birth. Before Allied responded to Northern's tender, Brown-Forman also tendered the defense to Allied.
Allied accepted the defense under a reservation of rights. It refused, though, to retain Preston, Thorgrimson and instead hired the Betts, Patterson firm. Brown-Forman objected, but eventually agreed to allow Betts, Patterson to participate in the defense with Preston, Thorgrimson.
After the Howards dismissed their complaint, Northern brought this action, seeking contribution from Allied for defense costs. On cross motions for summary judgment, the district court ruled that:
1. Although the asset purchase agreement did not transfer Allied's insurance policy to Brown-Forman, Allied nonetheless had a duty to provide Brown-Forman a defense. Liability for presale injuries transferred to Brown-Forman as a matter of law. The court held that the policy benefits transferred with the liability.
2. California law governed the determination of whether Allied had discharged its obligation to provide a defense by hiring Betts, Patterson.
3. Because of the inherent conflict of interest between Allied and its insured, Allied failed to discharge its obligation by refusing to retain Preston, Thorgrimson.
4. Allied was not liable for defense costs incurred before the defense was tendered to Allied.
5. Allied's contribution to Northern for post-tender costs would be determined based on equitable factors, through mandatory arbitration as specified by California law.
Both parties appeal. A summary of the key dates and events follows.
Insurance Coverage Howard Lawsuit
January 1983
(pregnancy begins)
April 4, 1983
(Allied coverage begins)
September 20, 1983
(Allied coverage ends/Northern coverage begins)
October 2, 1983
(injured child's
birth)
July 2, 1985
(asset sale transferring California Cooler to
Brown"Forman)
September 20, 1985
(Northern coverage ends)
Insurance Coverage Howard Lawsuit
November 1987
(suit filed/defense tendered to Northern)
February 1988
(Northern tenders to Allied)
March 1988
(Brown"Forman tenders to Allied)
July 1989
(suit dismissed)
----------
Allied argues, and the district court found, that the asset purchase agreement excluded Allied's liability policy from the assets transferred. We agree that the contract as a whole shows that the parties did not intend to transfer the policy.
Although the agreement includes a list of insurance policies transferred to Brown-Forman, it omits any specific reference to the Allied policy. The list does not purport, however, to be complete. In addition, the agreement includes a broad provision that transfers "all of the assets" of California Cooler to Brown-Forman, including "all contracts, ... insurance policies, ... and other binding contracts." The parties limited this broad language with a clause exempting "Excluded Assets."
Included among the "Excluded Assets" are any contracts that require consent to assign. By its terms, Allied's policy required California Cooler to obtain its consent before assigning the policy. Arguably, transferring policy benefits arising from presale activity is different from transferring the policy itself, and could have been done without Allied's consent. See, e.g., Greco v. Oregon Mutual Fire Ins. Co., 191 Cal.App.2d 674, 12 Cal.Rptr. 802, 806 (1961). Yet we find little evidence of any intent to transfer these policy benefits. The question then is whether the agreement transferred the policy itself, and we find that given the plain language of the no assignment clause in Allied's policy, it falls within the agreement's "Excluded Assets".
California and Washington, like many other jurisdictions, apply a rule of product-line successor liability. Under this theory, a purchaser of substantially all assets of a firm assumes, with some limitations, the obligation for product liability claims arising from the selling firm's presale activities. Liability is transferred irrespective of any clauses to the contrary in the asset purchase agreement. See, e.g., Martin v. Abbott Laboratories, 102 Wash.2d 581, 689 P.2d 368, 384 (1984); Ray v. Alad Corp., 19 Cal.3d 22, 560 P.2d 3, 11, 136 Cal.Rptr. 574 (1977).
The district court found that the right to indemnity arising from California Cooler's policy transferred together with the potential liability. This right to indemnity followed the liability rather than the policy itself. As a result, even though the parties did not assign Allied's policy in the agreement, the right to indemnity under the policy transferred to Brown-Forman by operation of law.
The right to indemnity is, however, of little importance in this case. The Howards failed to obtain an award and there is no indemnity. The key question is whether the right to a defense also followed the liability. The district court held that it did, relying on Ocean Accident & Guar. Corp. v. Southwestern Bell Tel. Co., 100 F.2d 441 (8th Cir.), cert. denied, 306 U.S. 658, 59 S.Ct. 775, 83 L.Ed. 1056 (1939).
The court in Ocean Accident considered a dispute analogous to the one here. Southwestern Bell bought Kansas City Telephone. After the sale, three employees sued for injuries suffered before the sale. Kansas City's insurer, Ocean Accident, refused to pay, contending that it had not consented to an assignment of rights under the policy for presale injuries. The court nevertheless held that Ocean Accident had to reimburse Southwestern Bell for the loss, including attorneys' fees. Id. at 444-45.
We agree with the Ocean Accident court that the rationale for honoring "no assignment" clauses vanishes when liability arises from presale activity. Id. at 444. Insurers take account of the nature of the insured when issuing a policy. Risk characteristics of the insured determine whether the insurer will provide coverage, and at what rate. An assignment could alter drastically the insurer's exposure depending on the nature of the new insured. "No assignment" clauses protect against any such unforeseen increase in risk. When the loss occurs before the transfer, however, the characteristics of the successor are of little...
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