Xebec Development Partners, Ltd. v. National Union Fire Ins. Co.

• Decision Date: 13 January 1993
• Docket Number: No. H007441,H007441
• Citation: 12 Cal.App.4th 501,15 Cal.Rptr.2d 726
• Court: California Court of Appeals
• Parties: XEBEC DEVELOPMENT PARTNERS, LTD., Plaintiff and Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant and Appellant.

Page 726

15 Cal.Rptr.2d 726

12 Cal.App.4th 501

XEBEC DEVELOPMENT PARTNERS, LTD., Plaintiff and Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant and Appellant.

No. H007441.

Court of Appeal, Sixth District, California.

Jan. 13, 1993.

Rehearing Denied Feb. 10, 1993.

Review Denied April 1, 1993.

Robinson & Wood, Inc., Thomas R. Fellows, Roberta M. Knapp, Helen A. Sabo, San Jose, James Bohm, Costa Mesa, for defendant and appellant.

William Bisset, Charles Avrith, Los Angeles, for plaintiff and appellant.

STONE, Associate Justice, Assigned. ^*

Defendant National Union Fire Insurance Company of Pittsburgh, Pa., appeals from a judgment for more than $7 million obtained against it by plaintiff Xebec Development Partners, Ltd. (XDP) on claims assigned to XDP by insureds under a policy of directors and officers liability and corporate reimbursement insurance (the D & O policy) issued by National Union. XDP cross-appeals from the same judgment, asserting that the amount of its judgment was improperly limited.

The jury implicitly, and properly, found that National Union had breached the D & O policy. But the jury's assessment of damages cannot stand; the judgment must be reversed and the matter remanded for further trial of the issue of damages for breach of contract. XDP is entitled to no recovery from National Union beyond such damages, together with prejudgment interest and costs (excluding attorney fees) ancillary to such damages, as may be fixed in further proceedings conducted in accordance with this opinion.

The D & O policy had been issued by National Union to Xebec Corporation (Xebec) and was applicable to claims made during the policy period. Subject to policy terms and conditions, the D & O policy provided for payment of indemnity in two categories:

(1) Loss: National Union promised to pay, on behalf of directors and officers of either Xebec or any of its designated subsidiaries, "loss ... arising from any claim or claims ... made ... by reason of any Wrongful Act ... in their respective capacities as Directors or Officers." "Loss" was defined as "any amount which the Insureds are legally obligated to pay for a claim or claims made against them for Wrongful Acts, and shall include damages, judgments, settlements, costs, charges and expenses ... incurred in the defense of actions...." "Wrongful Act" was defined as "any breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by the insureds ... or any matter claimed against them solely by reason of their being such Directors or Officers...." National Union also promised to pay, on behalf of Xebec and its designated subsidiaries, "any amount [Xebec or a subsidiary] shall be required or permitted by law to pay to a Director or Officer as indemnity" for claims of essentially the kind defined with respect to directors and officers. The policy provided no coverage for claims made against Xebec or its subsidiaries as entities.

(2) Costs of defense: The policy provided that "[n]o costs, charges, expenses and settlements shall be incurred without the Insurer's consent which shall not be unreasonably withheld; however, in the event of such consent being given, the Insurer will pay, [subject to provisos and limitations not relevant here], 100% of all such costs, charges, expenses and settlements...." Under the policy terms National Union could arguably require that the corporation (always subject to National Union's consent) advance the costs of defense, to be reimbursed by National Union upon completion of the defense. But there was evidence that as a matter of industry practice, generally followed by National Union, D & O insurers would be willing, upon some showing of the corporation's inability to pay, to advance costs of defense currently. This procedure was referred to as "interim funding."

The D & O policy, and the policy application which became a part of the policy, further provided in pertinent part:

(a) That "as a condition precedent" to their rights to be indemnified under the policy Xebec, its subsidiaries, and its directors and officers "shall ... give to the insurer notice as soon as practicable in writing of any claims made upon" directors or officers.

(b) That Xebec, its subsidiaries, and its directors and officers "shall give the Insurer such information and cooperation as it may reasonably require and as shall be in the ... power" of the corporations, directors and officers.

(c) That "all Directors and Officers shall furnish the insurer with copies of investigations, pleadings, and all other papers relating to an occurrence which could give rise to a possible claim under the ... policy."

(d) That "the Directors and Officers will give the insurer the right to associate with them in the defense and settlement of any claim that appears reasonably likely to involve the insurer and the Directors and Officers will cooperate with the insurer in the defense of such claim."

Beginning in 1983 XDP, a limited partnership, had entered into research and development agreements (RDA's) with Xebec by the terms of which XDP was to provide nearly $14 million in funding to Xebec for certain high-technology research and development work, and Xebec was to assign specified proprietary rights in the technology to XDP. Xebec agreed that the money XDP provided under the RDA's would be used only for specified costs incurred in performing the research and development work.

In 1985 certain XDP limited partners, including one Crary, concluded that Xebec had been diverting the research funds to unauthorized uses, and thereupon filed a lawsuit (the Crary lawsuit) against Xebec and certain of its subsidiaries. The Crary lawsuit was filed as a partner derivative action, and XDP was designated as a technical defendant.

None of Xebec's directors or officers was named as a defendant in the Crary lawsuit. Nevertheless, in December 1985 Xebec submitted a copy of the Crary complaint to National Union as notice of a "potential occurrence" under the D & O policy, pointing out that the complaint designated "Doe" defendants. Early in 1986 National Union acknowledged receipt of the complaint, stated that it would "treat this matter as an occurrence which may subsequently give rise to a claim ...," and asked that National Union be notified if the complaint were amended to name directors or officers as defendants. The language "occurrence which may subsequently give rise to a claim" came directly from the policy, invoking a policy provision under which XDP's subsequent lawsuit against Xebec directors and officers (the Toreson-Hoebich lawsuit) was treated as a claim made during the policy period.

It appears that National Union received no further notice concerning the Crary lawsuit. Nor did it receive notice of a cross-complaint by XDP or of an independent lawsuit by XDP, both arising out of the RDAs and filed during 1986 but neither directed to individual directors or officers of Xebec.

In January 1986 a Xebec shareholder named Heideman (and one other shareholder) filed a securities class action (the Heideman lawsuit), not directly related to the RDAs, against Xebec and other entities and individuals, including Xebec's officers and directors. National Union was notified of the claims against officers and directors in the Heideman lawsuit and concurred in selection of counsel (the Orrick firm) to represent both Xebec and its officers and directors in that lawsuit. National Union provided interim funding for defense of directors and officers in the Heideman lawsuit.

Because there had been no activity reported to it for one year, National Union closed its file on the Crary lawsuit in January 1987.

In February 1987, as an economy measure, Xebec allowed the D & O policy to expire.

In March 1987 XDP and another entity filed the Toreson-Hoebich lawsuit against Xebec directors and officers Toreson and Hoebich, asserting conversion and breach of fiduciary duties with respect to the RDAs and praying for approximately $6.5 million in damages. Toreson and Hoebich retained the Orrick firm to represent them in the Toreson-Hoebich lawsuit. It is undisputed that, by virtue of the December 1985 notice to National Union of the Crary lawsuit, the Toreson-Hoebich lawsuit constituted a claim made within the policy period of the D & O policy. But until September 24, 1987, no one notified National Union of the Toreson-Hoebich lawsuit.

The Heideman lawsuit proceeded along its own track, separate from the lawsuits arising out of the RDA's. The Crary lawsuit had been submitted to binding arbitration, and by April 1987 all the lawsuits arising out of the RDA's had been consolidated in the arbitration proceedings. An arbitration "trial," before a panel of three attorney-arbitrators, was set for July 1987 but was then continued to September 28, 1987.

By late spring 1987 Xebec had fallen behind in paying the Orrick firm's legal fees. To reduce its legal costs Xebec retained an attorney named Haun, formerly both a member of the Orrick firm and house counsel at Xebec, to do part of its legal work at a lower cost. By early summer 1987 the Orrick firm had advised Xebec that it wished its account brought up to date.

In August 1987 the Orrick firm moved for summary judgment on behalf of Xebec in the arbitration proceeding, arguing primarily that Xebec had performed sufficiently under the RDA's and therefore that XDP was not entitled to recover the money it had provided. In response XDP submitted extensive documentation to show that Xebec and its subsidiaries, officers, and directors had in fact wrongfully diverted a substantial part of the money. The arbitrators denied summary judgment, and from the arbitrators' remarks both Haun and the Orrick firm's attorneys concluded that the arbitration trial might produce a result unfavorable to all defendants including Toreson and Hoebich as individuals.

In mid-...