The Upper Deck Co., LLC v. Federal Ins. Co.

• Decision Date: 12 January 2004
• Docket Number: No. 02-56081.,02-56081.
• Citation: 358 F.3d 608
• Parties: The UPPER DECK COMPANY, LLC, a Delaware limited liability Company, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, an Indiana Corporation, Defendant Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

358 F.3d 608

The UPPER DECK COMPANY, LLC, a Delaware limited liability Company, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, an Indiana Corporation, Defendant Appellee.

No. 02-56081.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 4, 2003 — Pasadena, California.

Filed January 12, 2004.

COPYRIGHT MATERIAL OMITTED

Gary W. Osborne, Osborne & Nesbitt, San Diego, CA, for the plaintiff-appellant.

Peter Abrahams, Horvitz & Levy, Encino, CA, for the defendant-appellee.

Appeal from the United States District Court for the Southern District of California Rudi M. Brewster, District Judge, Presiding, D.C. No. CV-01-01413-RMB.

Before: BRIGHT,^* O'SCANNLAIN, and McKEOWN, Circuit Judges.

Opinion by Judge McKeown.

Concurrence by Judge Bright.

OPINION

McKEOWN, Circuit Judge:

We consider here the scope of an insurer's duty to defend a lawsuit on the basis of an unpled theory of recovery and damages. This case arises out of a lawsuit brought against the Upper Deck Company ("Upper Deck") for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, and various gambling laws for randomly inserting valuable cards into the packages of its entertainment and sports cards. Upper Deck tendered this litigation to Federal Insurance Company ("Federal") under insurance policies covering claims for bodily injury arising out of an accident. Federal rejected the tender on the grounds that there was no accident or occurrence as required under the policy.

Upper Deck then filed suit against Federal for breach of contract and declaratory relief. Upper Deck claimed that, although the lawsuit was styled as a RICO suit, it could have been construed or amended to assert damages for personal injury to children as a result of a gambling addiction. On cross motions for summary judgment, the district court denied Upper Deck's motion and granted Federal's motion. We affirm. Federal had no duty to defend under the policies because neither the complaint nor the extrinsic evidence available at the time of tender could be construed as giving rise to a claim to bodily injury.

BACKGROUND

Upper Deck is a manufacturer of sports and entertainment trading cards, such as National Football League football cards and Princess Gwenevere and the Jewel Riders cards. Upper Deck sells packs of these cards, some of which contain randomly inserted "chase" cards. Chase cards are coveted and can have substantial value due to their limited production. The chance of finding a chase card in a pack is typically displayed on the package's wrapping and other advertising materials.

In July 1996, Upper Deck was named as a defendant in a class action lawsuit ("underlying lawsuit") claiming that the practice of inserting chase cards in packs of trading cards amounted to illegal gambling and violated RICO and California law.¹ Specifically, the underlying litigation alleged that the plaintiffs had "been injured in their business or property" as a direct and proximate result of Upper Deck's violations of 18 U.S.C. §§ 1962(b) and (d). The plaintiffs sought treble damages, attorney's fees, declaratory relief, injunctive relief, restitution, and disgorgement of Upper Deck's improper gains.

During the relevant times, Federal insured Upper Deck under successive primary and umbrella commercial general liability policies. The terms of each renewed primary policy were virtually identical and provided in part:

We will pay the damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract because of:

bodily injury or property damage caused by an occurrence; or personal injury or advertising injury to which this insurance applies.

This insurance applies:

1. to bodily injury or property damage which occurs during the policy period; and

2. to personal injury or advertising injury only if caused by an offense committed during the policy period.

We will defend any claim or suit against the insured seeking such damages. We will pay in addition to the applicable limit of insurance the defense expense.

(emphasis added). "Bodily injury" is defined as, "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time." The policy defines "occurrence" as, "an accident, including continuous repeated exposure to substantially the same general harmful conditions which results in bodily injury or property damage" (emphasis added). The umbrella policies are substantially similar to the primary policies except that "bodily injury" is more broadly defined as "injury to the body, sickness or disease, disability or shock, mental anguish or mental injury sustained by any person; including death from any of these at any time...."

Upper Deck tendered the defense of the underlying lawsuit to Federal. In late 1996, Federal rejected the tender and denied its duty to defend Upper Deck, contending that there was "no coverage for the events and damages alleged." Two and a half years later, in May 1999, Upper Deck asked Federal to reconsider this decision. In support of its view that the policy covered the events and damages alleged in the underlying lawsuit, Upper Deck supplemented its request with extrinsic evidence.² One day later, Federal reiterated its denial.

As a consequence of the denials, Upper Deck filed a complaint against Federal for breach of contract of its duty to defend and for declaratory relief. The parties filed cross-motions for summary judgment. Along with its motion for summary judgment, Upper Deck submitted the same documents that it had enclosed in its May 1999 letter to Federal, as well as excerpts from depositions of three plaintiffs in the underlying litigation.

The district court concluded that, under applicable California law, Upper Deck had failed to establish that there was coverage under the policy, because the events involved were intentional, such that there was no "occurrence" or "accident" as required by the policy. Because the district court ruled in favor of Federal on the coverage question, it declined to reach the alternative issue of whether Federal breached its duty to defend.

DISCUSSION

The district court focused on whether there was coverage under the policy. This question, in turn, leads to two lines of California cases, the Hogan and Geddes line of cases from the California Supreme Court, and the more recent Quan and Merced line of cases from the California Court of Appeal. Hogan v. Midland Nat'l Ins. Co., 3 Cal.3d 553, 91 Cal.Rptr. 153, 476 P.2d 825 (Cal.1970); Geddes & Smith, Inc. v. St. Paul Mercury Indem. Co., 51 Cal.2d 558, 334 P.2d 881 (Cal.1959); Quan v. Truck Ins. Exch., 67 Cal.App.4th 583, 79 Cal.Rptr.2d 134 (Cal.Ct.App.1998); Merced Mut. Ins. Co. v. Mendez, 213 Cal. App.3d 41, 261 Cal.Rptr. 273 (Cal.Ct.App. 1989). The parties' views of the cases are polar opposites. The Hogan and Geddes line of cases suggests that an accident can be an unforeseen consequence of an intended act. See Hogan, 91 Cal.Rptr. 153, 476 P.2d at 827; Geddes & Smith, Inc., 334 P.2d at 884. In contrast, the Quan and Merced line of cases suggests that the results of an intentional act cannot be considered an accident. See Quan, 79 Cal. Rptr.2d at 144; Merced Mut. Ins. Co., 261 Cal.Rptr. at 279. Rather than dip a toe into this quagmire, we resolve the case on an alternate ground — the scope of Federal's duty to defend.

I. SCOPE OF THE DUTY TO DEFEND

Under California law, "a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity." Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 17 Cal. Rptr.2d 210, 846 P.2d 792, 795 (1993). An insurance provider must "defend a suit which potentially seeks damages within the coverage of the policy." Id. at 795, 17 Cal.Rptr.2d 210 (internal quotation marks omitted) (italics in original). This rule leads to the conclusion that "the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded." Id. at 795 (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, 177, 178 (1966)). Consequently, the duty to defend may exist even though the complaint does not reflect a potential for liability if facts extrinsic to the underlying complaint generate the duty. Id.

Once it has been established that there is a duty to defend, "the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim." Id. at 795-796. "Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured's favor." Id. at 796.

II. TIMING OF DETERMINATION OF DUTY TO DEFEND

The determination of potential coverage is made at the time the lawsuit is tendered to the insurance company. Gunderson v. Fire Ins. Exch., 37 Cal.App.4th 1106, 44 Cal.Rptr.2d 272, 277 (Cal.Ct.App. 1995); see also Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 24 Cal Rptr.2d 467, 861 P.2d 1153, 1157 (Cal.1993) ("[T]he existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit." (internal quotation marks omitted)). Once an insurer determines, on the basis of the complaint and the facts known to it at the time of tender, that there is no potential for coverage, the insurer does "not have a continuing duty to investigate or monitor the lawsuit to see if the third party later made some new claim, not found in the original lawsuit." Gunderson, 44 Cal.Rptr.2d at 279. If new extrinsic evidence raises a potential covered claim, the insured should submit a new tender of defense. In the absence of a new...