Scottsdale Ins. Co. v. Mv Transp.

• Decision Date: 25 July 2005
• Docket Number: No. S123766.,S123766.
• Court: California Supreme Court
• Parties: SCOTTSDALE INSURANCE COMPANY, Plaintiff and Appellant, v. MV TRANSPORTATION et al., Defendants and Respondents.

31 Cal.Rptr.3d 147

36 Cal.4th 643

115 P.3d 460

SCOTTSDALE INSURANCE COMPANY, Plaintiff and Appellant, v. MV TRANSPORTATION et al., Defendants and Respondents.

No. S123766.

Supreme Court of California.

July 25, 2005.

Selman Breitman, Neil Selman, Jan L. Pocaterra, Lynette Klawon, Alan B. Yuter and Rachel E. Hobbs, Los Angeles, for Plaintiff and Appellant.

Wiley Rein & Fielding, Laura A. Fogan, Alicia C. Ritter; Sinnott, Dito, Moura & Puebla, Randolph P. Sinnott and John J. Moura, Los Angeles, for Complex Insurance Claims Litigation Association as Amicus Curiae on behalf of Plaintiff and Appellant.

Greines, Martin, Stein & Richland, Irving H. Greines, Feris M. Greenberger and Robert A. Olson, Los Angeles, for Truck Insurance Exchange, Farmers Insurance Exchange and Fire Insurance Exchange as Amici Curiae on behalf of Plaintiff and Appellant.

Hancock Rothert & Busnhoft, W. Andrew Miller, William J. Baron, Kathryn C. Ashton and Molly K. Kane, San Francisco, for Great American Insurance Company and London Market Insurers as Amici Curiae on behalf of Plaintiff and Appellant.

Heller Ehrman White & McAuliffe, Richard DeNatale, Peter F. McAweeney, David B. Goodwin, San Francisco, Deanna M. Wilcox, Los Angeles; and John Andrew Baird for Defendants and Respondents.

Latham & Watkins, David L. Milliken, Marc D. Halpern and Edward J. Balsamo, San Diego, for Montrose Chemical Corporation of California as Amicus Curiae on behalf of Defendants and Respondents.

BAXTER, J.

May a commercial general liability (CGL) insurer obtain reimbursement of its expenses of defending its insured against a third party lawsuit, when it is ultimately determined, as a matter of law, that the policy never afforded any potential for coverage, and that a duty to defend thus never arose? Where, as here, the insurer properly reserved its right to such reimbursement, we conclude that the answer is "yes."

Defendant MV Transportation (MV) was sued by a third party (third party action). Plaintiff Scottsdale Insurance Company (Scottsdale) advanced the costs of defending MV, its insured, in the third party action, but did so under a reservation of its right, if any, to recoup such costs. While the third party action was pending, Scottsdale sued MV (the insurance action), seeking a declaration, inter alia, that because its policies afforded no potential coverage of the third party action, it owed no defense, and was therefore entitled to reimbursement of its defense costs.

The third party action ended in settlement. Thereafter, in the insurance action the superior court found a potential for coverage, but the Court of Appeal ultimately disagreed. For reasons of law, the Court of Appeal held that the allegations in the third party's complaint never triggered any possibility of coverage under Scottsdale's policies. Nonetheless, the Court of Appeal concluded that Scottsdale was not entitled to reimbursement. The Court of Appeal reasoned, in essence, that its no-potential-coverage determination "extinguished" Scottsdale's defense duty only from that time forward. Hence, the Court of Appeal determined, Scottsdale could not "retroactively" recover defense costs expended before its duty was "extinguished."

We disagree. By ruling, as a matter of law, that the third party action never presented any possibility of coverage by Scottsdale's policies, the Court of Appeal established not that the duty to defend was thereupon prospectively "extinguished," but that it never arose. Therefore, Scottsdale may recover amounts it expended in defending the insured under its reservation of rights. To the extent the Court of Appeal held otherwise, its judgment must be reversed.

FACTS

Defendants in this action by Scottsdale are Scottsdale's insured, MV, and several of MV's employees. The underlying lawsuit, for which Scottsdale seeks reimbursement of defense costs, was filed by MV's competitor in the transportation industry, Laidlaw Transit Services, Inc. (Laidlaw). The parties do not dispute the pertinent facts as stated by the Court of Appeal. We therefore adopt the Court of Appeal's statement, as follows (with bracketed insertions by this court and deletions indicated by ellipses):

The underlying lawsuit by Laidlaw

In January of 2000, Laidlaw filed an action against MV and several of MV's employees who had previously worked for Laidlaw, including MV's new president and chief operating officer (Jon Monson). Laidlaw's complaint . . . alleged causes of action for breach of fiduciary duty, tortious inducement to breach the duty of loyalty and fiduciary duty, intentional interference with contractual relations and with prospective business advantage, misappropriation of trade secrets, and unlawful, unfair, and fraudulent business practices.

In essence, Laidlaw's suit alleged certain contractual breaches, unlawful business practices, and misappropriation of trade secrets by using [Laidlaw's] confidential, proprietary information to compete unfairly in bidding for and obtaining new busing contracts in urban public transportation services markets. The complaint specified two markets in particular, Lawrence, Kansas, and Indianapolis, Indiana, and noted other unspecified cities as well. The confidential, proprietary information included bidding models, bidding formulas, and other nonpublic information used in developing Laidlaw's bids, such as Laidlaw's overhead costs and financial objectives allocated to each project. As alleged in the complaint, MV used such information, as well as Laidlaw's customer list and other trade secrets, to "significantly impede Laidlaw's ability to market itself as a unique provider" of its services.

Soon after Laidlaw filed its complaint, MV's legal counsel tendered the defense to its insurer, Scottsdale. Scottsdale asserted that although one Ninth Circuit case had "concluded that certain trade secret misappropriation claims fall within the scope of the advertising injury liability coverage of a general liability policy," the underlying facts in that case . . . [were] distinguishable, and Scottsdale's defense obligations were not triggered by the Laidlaw suit. Nonetheless, Scottsdale agreed to provide a defense . . . to MV and the individuals named in the Laidlaw suit under a reservation of certain rights, including the right to seek a declaration of its rights and duties under the policy and "[t]he right to seek reimbursement of defense fees paid toward defending causes of action which raise no potential for coverage, as authorized by the California Supreme Court in Buss v. Superior Court (Transamerica Ins. Co.) (1997) 16 Cal.4th 35 [65 Cal.Rptr.2d 366, 939 P.2d 766]."

In December of 2000, Laidlaw and MV agreed to settle the suit by Laidlaw. Pursuant to the settlement agreement, MV and the individual defendants agreed to return to Laidlaw documents containing allegedly misappropriated bid models, bid formulas and other trade secrets, and to refrain from using such material in developing MV's bids or proposals to customers in the public transportation market. However, the settlement agreement did not require that MV pay any money to Laidlaw. Attorney fees and costs incurred [by Scottsdale] in defending the Laidlaw suit were approximately $340,000.

The coverage dispute between Scottsdale and MV

Scottsdale issued two CGL policies to MV, one effective from December 1, 1998, to December 1, 1999 (hereinafter, the first CGL policy), and the other from December 1, 1999, to December 1, 2000 (hereinafter, the second CGL policy). The first CGL policy [included Scottsdale's agreement] to defend MV against any suit and to pay any damages due to "`advertising injury' caused by an offense committed in the course of advertising [MV's] goods, products or services." The policy defined the term "advertising injury" as including the "[m]isappropriation of advertising ideas or style of doing business."

The second CGL policy also obligated Scottsdale to pay MV's damages and costs of suit for any advertising injury. The policy language, however, was somewhat different from that in the first CGL policy. Specifically, the second CGL policy defined advertising injury as, in pertinent part, "[t]he use of another's advertising idea in [the insured's] `advertisement.'" And the policy defined "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about [the insured's] goods, products or services for the purpose of attracting customers or supporters."

During the course of the underlying Laidlaw litigation, in June of 2000, Scottsdale filed the present declaratory relief action against MV and other defendants named in the Laidlaw action. After settlement of the underlying action, Scottsdale moved for summary judgment seeking a determination that it owed no legal defense obligations, and seeking reimbursement of the full amount paid for defense costs and fees and a declaration that it owed no further costs and fees. The trial court denied Scottsdale's motion for summary judgment and ruled that it had a duty to defend. The court observed that Laidlaw "alleged a broader audience than simply" the two cities noted in the complaint where MV sought business (i.e., Lawrence, Kansas, and Indianapolis, Indiana), and concluded that "[b]roadly construed, the . . . [c]omplaint alleged misappropriation of Laidlaw's `advertising ideas,' for which there is at the very least the potential of coverage, and therefore Scottsdale's duty to defend is established as a matter of law."[¹] Recognizing that the trial court's ruling on the motion for summary judgment disposed of the entire case, the parties stipulated to a final judgment against Scottsdale. In April 2001, the superior court entered a stipulated judgment.

Scottsdale appealed, urging that "advertising," as used in standard CGL policies covering advertising injury, was limited to "widespread promotional activities directed to the public at large." (Bank of the West v....