Safeco Ins. Co. of America v. Guyton

• Decision Date: 17 November 1982
• Docket Number: 79-3385,Nos. 79-3359,s. 79-3359
• Parties: SAFECO INSURANCE CO. OF AMERICA, et al., Plaintiffs-Appellees, v. William GUYTON, et al., Defendants-Appellants. thru 79-3397, 79-3456, 80-5087 and 80-5563.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 551

692 F.2d 551

SAFECO INSURANCE CO. OF AMERICA, et al., Plaintiffs-Appellees, v. William GUYTON, et al., Defendants-Appellants.

Nos. 79-3359, 79-3385 thru 79-3397, 79-3456, 80-5087 and 80-5563.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 6, 1981.

Decided May 17, 1982.

As Amended Nov. 17, 1982.

Jerrold M. Fadem, Fadem, Berger & Norton, Santa Monica, Cal., David P. DeLancy, Newport Beach, Cal., Peter S. Burrows, Los Angeles, Cal., Michael M. Berger, Santa Monica, Cal., William A. Francis, Hollywood, Cal., for defendants-appellants.

Brian E. Brick, Jones & Wilson, Los Angeles, Cal., for third party defendants-appellees.

Long & Levit, Gerald M. Lachowicz, Jeffrey H. Leo, Los Angeles, Cal., for plaintiffs-appellees.

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

Before TANG and BOOCHEVER, Circuit Judges, and TANNER, ^* District Judge.

TANG, Circuit Judge:

This is a consolidated appeal from a district court judgment 471 F.Supp. 1126 awarding declaratory relief to insurance companies from coverage liability and dismissing counterclaims brought by policyholders. The policyholders contend the district court erred in: (1) ruling that the policy did not cover the loss suffered, even though one proximate cause of the loss was covered under the policy; (2) dismissing one of the policyholders' counterclaims for want of subject matter jurisdiction; (3) dismissing a counterclaim alleging bad faith denial of the policyholders' claims; and (4) refusing expert testimony to explain the policy's meaning.

FACTS

On September 10, 1976, record rains accompanying Hurricane Kathleen broke through flood control facilities and inundated parts of the City of Palm Desert, California. The appellants ("the Policyholders") are property-owners who suffered extensive property damage from the floodwaters.

Palm Desert, located in the Coachella Valley, is in an area historically vulnerable to flooding. Various measures have been taken to prevent floodwaters from invading inhabited areas. A channel and sand levee of unknown origin were built between 1939 and 1949 to keep run-off water in a natural flood channel to the east of Palm Desert. The state also built levees near Highway 74 to control floodwater. In addition, the Water District of Coachella Valley ("the Water District") in 1955 constructed a sand dike south of Palm Desert. All these structures failed to halt flooding by Hurricane Kathleen.

The Policyholders held "all-risk home-owners" policies issued by various insurance companies (for convenience, referred to as "Safeco"). The policies covered losses caused by third party negligence. All the policies, however, contained an exclusion, printed in bold letters:

THIS POLICY DOES NOT INSURE AGAINST LOSS:

* * *

1. CAUSED BY, RESULTING FROM, CONTRIBUTED TO OR AGGRAVATED BY ANY OF THE FOLLOWING:

a. FLOOD, SURFACE WATER, WAVES, TIDAL-WATER OR TIDAL WAVE, OVERFLOW OF STREAMS OR OTHER BODIES OF WATER, OR SPRAY FROM ANY OF THE FOREGOING, ALL WHETHER DRIVEN BY WIND OR NOT;

Safeco denied claims for losses incurred in the flood. Shortly after this denial, Safeco brought an action in federal district court in diversity seeking a declaratory judgment that the Safeco policy excluded the flood damage. The Policyholders answered, asserting their losses were proximately caused by the Water District's negligence in maintaining flood-control structures and that the losses were covered under the policies as a loss caused by third party negligence. The Policyholders also asserted two counterclaims. The first counterclaim sought contract damages for Safeco's failure to pay on their insurance claims. The second counterclaim asserted liability in tort for Safeco's alleged bad faith refusal to pay the claims.

Two of the Policyholders, Michael and Josephine Purpura ("the Purpuras") asserted an additional counterclaim against Safeco, alleging that Safeco was negligent in providing an insurance policy that inadequately covered the Purpuras' property. The Purpuras also named, as third party defendants in this counterclaim, the insurance agent, Michael Collins, and the agency that sold them the insurance policy, Collins & Associates (collectively referred to as "Collins").

For the purpose of diversity jurisdiction, Safeco is a Washington citizen and the Purpuras and Collins are California citizens. The Purpuras based subject matter jurisdiction over Collins on pendent party jurisdiction, and argued that the district court could assert jurisdiction over the claim against the non-diverse party, Collins, as a claim ancillary to the claim against the diverse party, Safeco.

During trial, the Policyholders offered expert testimony to substantiate their argument that policies similar to Safeco's are normally interpreted to cover losses such as those sustained by the Policyholders. The district court refused to admit the expert testimony and ruled that the meaning of the language in the Safeco policy was clear and unambiguous without reference to extrinsic evidence.

After trial, the district court ruled that even assuming the Water District's negligence was a proximate cause of the Policyholders' loss, the flood was the "efficient" proximate cause of the loss and the insurance policies did not cover the Policyholders' loss. The district court granted Safeco's prayer for declaratory relief and dismissed the Policyholders' first two counterclaims. The court subsequently granted Safeco summary judgment on the Purpuras' counterclaim. Two months later, the court dismissed the counterclaim against Collins for lack of subject matter jurisdiction, holding that the Purpuras could not rely upon pendent party jurisdiction as a jurisdictional basis for suing Collins.

The Policyholders appeal the declaratory judgment and the dismissal of their counterclaims. The Purpuras appeal the dismissal of their third party claim against Collins.

We affirm in part and reverse in part.

Scope of Policy Coverage.

After reviewing the applicable California authority, the district court concluded that coverage should be found only if the covered risk was the "sole or efficient proximate cause" of the loss and the covered risk preceded in time the operation of the excluded risk. Focusing on the fact that the flood preceded the failure of the flood control structures, the court concluded that the policies did not cover the Policyholders' loss.

We conclude that the district court misinterpreted California law and we therefore reverse the judgment on liability granted to Safeco.

In so proceeding, we are mindful of the rule that interpretations of state law by a district judge of the law of the state in which he sits are entitled to deference. Clark v. Musick, 623 F.2d 89, 91 (9th Cir. 1980). This standard of review stems from Although the district court was correct in stating that California courts have found coverage where an included peril sets in motion a "chain of events" that includes the occurrence of an excluded peril and ultimately results in the loss, ¹ the most recent California Supreme Court authority ² (which was not addressed by the district court) also allows coverage in situations not precisely within that factual setting. ³ In State Farm Mutual Automobile Insurance Co. v. Partridge, 10 Cal.3d 94, 514 P.2d 123, 109 Cal.Rptr. 811 (1973), the insured was covered under a homeowner's policy and an automobile policy issued by the same insurer. The homeowner's policy contained an exclusionary clause that excluded coverage for injuries "arising out of the use" of an automobile. While negligently driving his vehicle, the insured caused the discharge of a .357 Magnum pistol that had been modified by him, and injured his passenger. The question presented was whether there was coverage for the insured's negligent acts under the homeowner's policy, despite the language of the exclusion clause. The court, in holding that the loss was covered, stated:

                the rationale that district judges are familiar with the law in the state in which they sit, both from their current experience in living in the legal milieu of their home state and from past experience as attorneys in the state prior to becoming judges.  Where, as here, the district judge is from an outside jurisdiction, however, and only sitting by designation in the local district court, such deference is less appropriate.  Since the instant controversy turns on an interpretation of California law, we find it unnecessary to accord that degree of deference typically given.   See Allen v. Greyhound Lines, Inc., 656 F.2d 418, 421-22 (9th Cir. 1981)
                

Although there may be some question whether either of the two causes in the instant case can be properly characterized 514 P.2d at 130, 109 Cal.Rptr. at 818 (emphasis in original); see also id. at 130, 109 Cal.Rptr. at 818 n. 10 (suggesting that tort concepts of proximate cause are co-extensive with legal causation under insurance contract coverage provisions).

as the "prime", "moving" or "efficient" cause of the accident, we believe that coverage under a liability insurance policy is equally available to an insured whenever an insured risk constitutes simply a concurrent proximate cause of the injuries.

Safeco attacks the relevance of Partridge on several grounds. It first argues that the Partridge test only applies where the same person initiates two independent acts that result in a loss. The Partridge court itself, however, stated that its decision did not turn on the fact that the same individual was responsible for both causes of the loss at issue. 514 P.2d at 130 n.10, 109 Cal.Rptr. at 818 n.10.

Second, Safeco argues that Partridge only applies where two causes operate independently of each other to cause a loss. Safeco argues that this condition is not satisfied here because the negligently constructed flood control structures would have functioned properly but for the flood knocking them down. We believe...