San Juan Dupont Plaza Hotel Fire Litigation, In re

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Citation45 F.3d 569
Docket NumberNos. 93-2115,93-2116,s. 93-2115
PartiesIn re SAN JUAN DUPONT PLAZA HOTEL FIRE LITIGATION. William LYON and Holders Capital Corporation, Appellants, Cross-Claimants, and Cross-Defendants, v. PACIFIC EMPLOYERS INSURANCE COMPANY and First State Insurance Company, Appellees, Cross-Defendants, and Cross-Claimants. . Heard
Decision Date07 October 1994

Maureen E. Mahoney and Theodore A. Pianko with whom Milton A. Miller, Michael Bruce Abelson, Max L. Gillam, Latham & Watkins, Los Angeles, CA, Etienne Totti Del Valle, Dominguez & Totti, Hato Rey, PR, and Sidley & Austin, Los Angeles, CA, were on joint briefs, for William Lyon and Holders Capital Corp.

Ralph W. Dau with whom Peter B. Ackerman, O'Melveny & Myers, Los Angeles, CA, Raul E. Gonzalez-Diaz, A.J. Bennazar-Zequeira and Gonzalez & Bennazar, Hato Rey, PR, were on brief, for Pacific Employers Ins. Co.

Homer L. Marlow with whom Marlow, Connell, Valerius, Abrams, Lowe & Adler, Miami, FL, was on brief, for First State Ins. Co.

Before BOUDIN, Circuit Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.

BOUDIN, Circuit Judge.

These two appeals stem from the third and final phase of the San Juan Dupont Plaza Hotel fire litigation 1 and concern insurance coverage. Appellants William Lyon and Holders Capital Corporation ("Holders") challenge the district court's determination that certain excess liability policies issued by Pacific Employers Insurance Company ("PEIC") and First State Insurance Company ("FSIC") to Lyon and others do not cover the appellants' fire-related obligations. We affirm the district court.

I.

Lyon is a principal shareholder and director of Holders, a holding company that invested in various hotels, including the ill-fated Dupont Plaza. In phase I of the fire litigation, the fire victims sued Holders and Lyon as well as the hotel and other defendants affiliated with it. (Phase II concerned liability claims against suppliers of goods and services to the hotel, and phase III sought to allocate liability of insurers.) Hoping to establish Lyon's personal liability (and so to reach his personal fortune), the fire victims sought in phase I to pierce Holders' corporate veil and to prove that the hotel was actually managed and controlled by a de facto partnership of Holders' three shareholders, Brian Corbell, William Eberle and Lyon (the so-called "Holders partnership").

In May 1989, after eight weeks of trial, Holders and Lyon, along with the other phase I defendants, entered into a multimillion dollar settlement agreement with the fire victims. Under the agreement, Lyon was to seek contribution from his various insurers, which included PEIC and FSIC, to fund his portion of the settlement. PEIC and FSIC both paid their policy limits to Lyon, $3 million and $2 million, respectively, subject to their right to seek repayment by Lyon if it was later determined in phase III that their policies did not cover the hotel fire. Phase III does not affect the victim's settlement fund. See In re Nineteen Appeals, 982 F.2d at 606.

The insurance policies at issue here were part of an excess coverage plan for the William Lyon Company, a southern California residential building and development company, as well as numerous other listed affiliated insureds, including Lyon himself. Within the excess coverage framework, the PEIC and FSIC policies provided second- and third-level excess coverage; first-level excess coverage was provided by National Union Fire Insurance Company. Other than Lyon himself, no entity connected to the Dupont Plaza was expressly listed as an insured.

In phase III of the litigation, Holders and Lyon both filed claims in the district court to affirm that PEIC and FSIC were responsible to provide coverage for the fire. To this end appellants needed a theory that would not On this theory, Holders and Lyon claimed coverage under the PEIC policy based on a so-called "omnibus" clause; this clause (they argued) extended coverage to any entity (here, Holders and the Holders partnership) in which a named insured (here, Lyon) had management responsibility or responsibility for insurance. Lyon claimed coverage for himself under the FSIC policy based on a "joint venture endorsement," which he argued explicitly covered his involvement in the alleged Holders partnership. Both policy provisions are set forth below.

only show that the policies extended to Lyon or Holders but also explain how Lyon or Holders could be liable for the fire under the policies; after all, the hotel was not insured by PEIC or FSIC; and in view of the settlement, no court had ever held Lyon or Holders liable for the fire. Accordingly, Lyon and Holders adopted the position taken by the fire victims in phase I of the litigation, i.e., that Holders was merely a corporate shell and that Lyon had operated the hotel through the alleged Holders partnership.

On December 7, 1992, the district court granted summary judgment for PEIC and FSIC, ruling that neither policy covered Holders' or Lyon's fire-related obligations. The court held inter alia that PEIC's omnibus clause was ambiguous as to who was covered and thus should be construed against Lyon, its supposed drafter; and that a sole proprietor endorsement applicable to both the PEIC and FSIC policies, which limited coverage for individual insureds to their sole proprietorships, precluded coverage for Lyon's business involvement in the Dupont Plaza. The district court ordered Lyon to reimburse PEIC and FSIC the five million dollars they had advanced for the settlement obligations and then awarded PEIC and FSIC prejudgment interest on the amount. These appeals followed.

II.

1. Because the district court disposed of the case on summary judgment, we review the court's ruling de novo, Goldman v. First Nat'l Bank of Boston, 985 F.2d 1113, 1116 (1st Cir.1993), and first address coverage under the PEIC policy. Holders and Lyon claim that the district court erred in finding that the omnibus clause was ambiguous and then in construing it against Holders and Lyon. They contend that the clause unambiguously extends coverage to Holders and the Holders partnership and, if ambiguous, then it should be construed against the insurers or at least a trial should be provided.

The omnibus clause is contained at the end of the named insured endorsement which lists by name 53 insureds, beginning with the William Lyon Company and including among many business entities two individuals, one being Lyon. The omnibus clause reads:

NAMED INSURED ENDORSEMENT

It is understood and agreed that item 1 of the policy declarations ["Name of Insured"] shall read as follows:

...

* * *

The interest of the William Lyon Company or any of its affiliated entities in any joint power agreement, joint venture, partnership or similar entity, and any entity in which any named insured owns majority interest, possesses management responsibility, or responsibility for insurance.

Holders and Lyon treat the last 17 words of the final sentence (beginning "any entity") as an independent clause; assert that Lyon is a "named insured" and possessed management or insurance responsibility for Holders, the alleged Holders partnership, or both; and conclude that Holders and the Holders partnership are each "any entity" of the type described in the last 17 words and thus are insured under the policy.

One may wonder at first glance why it is necessary to trace through the omnibus clause to Holders or the Holders partnership, since under an earlier clause of the endorsement Lyon himself is unquestionably a named insured. However, as a partner or manager of Holders, Lyon was barred from making a claim in his own right as a named insured because of the PEIC policy's sole proprietor endorsement, which contains a special limitation on coverage otherwise

available to a named individual insured. The sole proprietor endorsement reads as follows:

INDIVIDUAL AS NAMED INSURED

It is agreed that if any named insured designated in the declaration is an individual, coverage under this policy for such individual named insured shall apply only with respect to the conduct of a business of which he is the sole proprietor.

In our view this provision excludes coverage not only for Lyon claiming directly but also for Holders, or the supposed Holders partnership, claiming through Lyon under the omnibus clause. This is PEIC's first argument in its appeals brief and we think that it is persuasive.

The parties are agreed that California law governs the interpretation of the insurance policies in this case. But there is nothing in the California precedents cited to us that relates directly to the interplay between an omnibus clause and a sole proprietor endorsement. We thus confront the language of the two provisions head-on, mindful that an insurance policy--like any other contract--is to be construed as a whole and not by reading its parts in isolation. Cal.Civ.Code Sec. 1641; Bank of the West v. Superior Court, 2 Cal. 4th 1254, 10 Cal.Rptr.2d 538, 545, 833 P.2d 545, 552 (1992).

Reading the parts together, we think that a reference to "any named insured" in the omnibus clause fairly means any company or individual named in the named insured endorsement but subject to any other language that directly restricts the extent to which that company or individual is classified as a named insured. The sole proprietor endorsement does impose such a restriction as to Lyon: it says that even though named as an insured, he is covered "only with respect to the conduct of a business of which he is the sole proprietor." As already noted, it is for this reason that Lyon, even if personally liable for the fire, would not be directly protected as a named insured.

Appellants argue that we are not faced with a claim by Lyon in his own right but rather with a claim by "any entity"--here, Holders and the Holders partnership--in which Lyon as "any named...

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