California Court of Appeal, Fox Paine & Company, LLC v. Twin City Fire Insurance Company, A168803

Settlements

 

Insurance Law

 

California Law

 

 

 

Public policy favoring settlements. (See, e.g., Western Steamship Lines, Inc. v. San Pedro Peninsula Hospital (1994) 8 Cal.4th 100, 110.) As our Supreme Court earlier put it, “‘A man is allowed to negotiate for the purchase of his peace without prejudice to his rights.’ ” (Potter v. Pacific Coast Lumber Co. of California (1951) 37 Cal.2d 592, 600.) So, too, an excess insurer.

 

 

 

(California Court of Appeal, Sept. 5, 2024, Fox Paine & Company, LLC v. Twin City Fire Insurance Company, A168803, Certified for Publication)

 

California Court of Appeal, Fox Paine & Company, LLC v. Twin City Fire Insurance Company, A168803

Excess Insurers

 

Exhaustion of the Underlying Policies

 

Attachment Point of the Excess Policy

 

Breach of Contract

 

Insurance Law

 

California Law

 

Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2023)

 

 

 

(San Francisco County Super. Ct. No. CGC17557275)

 

 

(…) (Archdale v. American International Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 466 [breach of contract cause of action “necessarily relates only to the express promises made by [an insurer] in its policy”]; see also Levy v. State Farm Mutual Auto. Ins. Co. (2007) 150 Cal.App.4th 1, 5, 58 [demurrer properly sustained where plaintiff offered mere allegation of breach without facts demonstrating “a link” between the alleged violations “and the insurance contract”].) And as to the allegation as to what might be a breach of contract, i.e., the failure to pay covered claims, it fails as well, as the policies are excess policies, described this way by the late Justice Croskey in his leading commentary: “‘Excess’ insurance: Excess insurance ‘refers to indemnity coverage that attaches upon the exhaustion of underlying insurance coverage for a claim.’ (Montrose Chemical Corp. Of Calif. v. Superior Court (Canadian Universal Ins. Co., Inc.) (Montrose III) (2020) 9 Cal.5th 215, 222 (internal quotes omitted); Powerine Oil Co., Inc. v. Superior Court (Central Nat’l Ins. Co. Of Omaha) (Powerine II) (2005) 37 Cal.4th 377 (citing text).) “ In other words, excess insurance ‘provides coverage after other identified insurance is no longer on the risk.’ (North American Capacity Ins. Co. v. Claremont Liability Ins. Co. (2009) 177 Cal.App.4th 272, 291.)

 

“An excess insurer’s coverage obligation begins once a certain level of loss or liability is reached; that level is generally referred to as the ‘attachment point’ of the excess policy. [Citations.]” (Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2023) 8:177.) In Reserve Insurance Co v. Pisciotta (1982) 30 Cal.3d 800—there addressing the issue of insolvency of an underlying insurer—our Supreme Court held that “we must look to the excess policy’s express language to determine whether an excess insurer is obligated” on its policy. (Id. at p. 814.) We do that, and easily conclude that plaintiffs show no such “obligation.” The policies have not, in Justice Croskey’s words, “attached.” The St. Paul policy provides that St. Paul “shall only be liable . . . after the total amount of all Underlying Limits of Liability has been paid in legal currency by the Issuers of all Underlying Insurance as covered loss thereunder.”

 

(…)

 

Finally, there are sound policy reasons why the excess insurers should stay on the sidelines without incurring these unnecessary costs. A strict exhaustion requirement brings stability and predictability to the excess insurance system, both for insurers and insureds. “An excess insurer predicates the premiums it charges upon the obligations that it and the primary insurer assume . . ..”  (Hartford Accident and Indemnity Company v. Continental National Insurance Cos. (1988 861 F.2d184, 1187.) Thus, burdening the excess insurers with prematurely litigating coverage issues before exhaustion upsets insurers’ settled expectations. Again, Iolab is apt, where the court concluded that “requiring the excess insurer to defend against [the insured’s] claim would impose on the excess insurers the unnecessary cost of litigating a claim that may never trigger excess coverage and thereby frustrate the policy adopted by the California courts.” (Iolab, supra, 15 F.3d at pp. 1504−1505.)

 

 

 

 

(California Court of Appeal, Sept. 5, 2024, Fox Paine & Company, LLC v. Twin City Fire Insurance Company, A168803, Certified for Publication)

California Court of Appeal, Fox Paine & Company, LLC v. Twin City Fire Insurance Company, A168803

Good Faith

 

Good Faith and Fair Dealing

 

Insurance Contracts

 

California Law

 

 

 

 

Plaintiffs have, as noted above, not alleged exhaustion under the excess policies, and thus no coverage, a failure fatal to their claim for bad faith. As our Supreme Court succinctly put it in Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 408, citing Waller: “Of course, without coverage there can be no liability for bad faith . . .. [Citation.]” Or as Waller itself put it, citing to, and quoting from, a leading Court of Appeal case: “It is clear that if there is no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer.

 

(Love v. Fire Ins. Exchange [(1990)] 221 Cal.App.3d 1136, 1151−1153 [(Love)].)” (Waller, supra, 11 Cal.4th at p. 36.) Addressing claims by insureds similar to those plaintiffs make here, this is how the Court of Appeal distilled the law in Brown v. Mid-Century Ins. Co. (2013) 215 Cal.App.4th 841, 858: “The Browns allege that Mid-Century breached the implied covenant of good faith and fair dealing by failing to investigate their claim properly, engaging in unlawful and deceptive claims practices, and refusing to indemnify the Browns under the policy. Because the policy did not cover the Browns’ claims, however, the Browns do not have a claim for breach of the implied covenant of good faith and fair dealing. (See Kransco v. American Empire Surplus Lines Ins. Co. [,supra,] 23 Cal.4th [at p.] 408 [‘without coverage there can be no liability for bad faith on the part of the insurer’]; Cardio Diagnostic Imaging, Inc. v. Farmers Ins. Exchange [(2012)] 212 Cal.App.4th [69,] 76 [‘because no policy benefits were due under the policy, [the insured’s] claim for breach of the implied covenant of good faith and fair dealing cannot be maintained’].)” This is how Justice Croskey’s commentary puts it: “[12:45] No ‘Bad Faith’ Liability Where No Breach of Contract: The insurer’s obligations under the implied covenant do not extend beyond the purposes and objectives of the existing insurance contract: ‘The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purposes.’ [Citations.] “In short, if the insurer did not breach the policy, it did not breach the implied covenant. (See Waller [, supra,] 11 Cal.4th [at p.] 36 [‘the conclusion that a bad faith claim cannot be maintained unless policy benefits are due is in accord with the policy in which the duty of good faith is [firmly] rooted].’) [Citations.]” (Croskey, et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 12:45.)

 

Love held that “a bad faith claim cannot be maintained unless policy benefits are due.” (Love, supra, 221 Cal.App.3d at p.1153.) Or as that case put it at an earlier point, “there are at least two separate requirements to establish breach of the implied covenant: (1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause.” (Love, supra, 221 Cal.App.3d at p. 1151.)

 

 

 

 

California Court of Appeal, Sept. 5, 2024, Fox Paine & Company, LLC v. Twin City Fire Insurance Company, A168803, Certified for Publication)

 

 

 

U.S. Court of Appeals for the Ninth Circuit, Infanzon v. Allstate Insurance Company, Docket No. 22-56070

Insurance Law

Insurance Agent’s Liability

Joinder

Diversity

California Law

 

 

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

 

The district court correctly found that Leticia Pomes, the Allstate Insurance Sales Agent who was named as a codefendant in Infanzon’s state court complaint, was fraudulently joined. See Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001). “Joinder of a non-diverse defendant is deemed fraudulent, and the defendant’s presence in the lawsuit is ignored for purposes of determining diversity, ‘if the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according to the settled rules of the state.’” Id. (quoting McCabe v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987)). Under California law, an insurance agent acting in the name of a disclosed principal is not personally liable for acts committed within the scope of his or her employment, Lippert v. Bailey, 241 Cal. App. 2d 376, 382 (1966), “unless an agent or employee acts as a dual agent.” Mercado v. Allstate Ins. Co., 340 F.3d 824, 826 (9th Cir. 2003). Here, there is no dispute that Pomes acted on behalf of Allstate, her disclosed principal; that she always held herself out as Allstate’s agent to Infanzon and to others; and that she acted within the scope of her employment. Therefore, because Pomes acted as Allstate’s exclusive agent, Infanzon has no cognizable claim against her under California law, and complete diversity exists.

 

 

(U.S. Court of Appeals for the Ninth Circuit, Aug. 2, 2024, Infanzon v. Allstate Insurance Company, Docket No. 22-56070, Not for Publication)

 

 

U.S. Court of Appeals for the Ninth Circuit, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556

Insurance Law

 

Conflict-of-Laws

 

Affirmative Defense

 

Diversity Cases

 

Choice-of-Law Rules of the Forum State

 

Texas and Nevada Law

 

 

 

 

Appeal from the United States District Court for the District of Nevada

 

 

The Insureds are holding companies incorporated in Nevada and headquartered in Dallas, Texas. In 2015, the Insureds had dozens of subsidiaries, through which the Insureds operated battery recycling facilities and manufactured supplies for the oil exploration industry. EBH II’s principal asset was ownership of 86.9% of Eco-Bat Technologies, Ltd. (Eco-Bat), a supplier of recycled lead based in the United Kingdom. Howard Meyers was a Director and the President of both Insureds in 2015. Albert Lospinoso was the other Director of EBH II. In the summer of 2015, the Insureds sought to renew their Directors and Officers and Private Company Liability Insurance Policy with Illinois National Insurance Company (Illinois National), an American International Group, Inc. (AIG) subsidiary organized pursuant to Illinois law with a principal place of business in New York. The Insureds were seeking to renew coverage not only for themselves but also for dozens of their subsidiary companies, including Eco-Bat and Eco-Bat’s subsidiaries. To facilitate the renewal, the Insureds’ insurance broker sent numerous documents to AIG’s underwriters that summer relating to the finances of the Insureds and their subsidiaries. These documents included a consolidated balance sheet of Eco-Bat America, LLC (EBA), a wholly owned subsidiary of Eco-Bat. This document represented that the subsidiary, EBA, had $29.9 million in long-term debt.

 

 

The District Court erred in concluding that Nevada law, and not Texas law, governs the affirmative defense.

 

It is well-established in the federal courts that a conflict-of-laws analysis may result in the laws of different jurisdictions applying to different issues in the same case. Allstate Ins. Co. v. Hague, 449 U.S. 302, 307 (1981). “It is also well-established that in diversity cases, such as this one, ‘federal courts must apply the choice-of-law rules of the forum state.’” Rustico v. Intuitive Surgical, Inc., 993 F.3d 1085, 1091 (9th Cir. 2021) (quoting Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 484 (9th Cir. 1987)). Here, the forum state is Nevada. “Nevada tends to follow the Restatement . . . in determining choice-of-law questions involving contracts, generally, and insurance contracts, in particular.” Progressive Gulf Ins. Co. v. Faehnrich, 327 P.3d 1061, 1063 (Nev. 2014). That includes § 187 of the Restatement, which, according to the Nevada Supreme Court, permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie Sievers & Lake Tahoe Land Co. v. Diversified Mortg. Invs., 603 P.2d 270, 273 (Nev. 1979). Nevertheless, where an insurance policy does not evince a clear choice-of-law governing a particular issue, the Nevada Supreme Court has instructed its courts to apply § 188 of the Restatement, i.e., the “substantial relationship” test. See, e.g., Sotirakis v. United Serv. Auto. Ass’n, 787 P.2d 788, 789–90 (Nev. 1990). That test requires courts to consider: “(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties.” Restatement § 188. Each factor of the test must be “evaluated according to its relative importance with respect to the particular issue” that gave rise to the choice-of-law dispute in the first place. Id.

 

 

Section 187 of the Restatement permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie, 603 P.2d at 273. Parties typically effectuate that choice through an express choice-of-law provision in their contract. See Restatement § 187 cmt. a (“When the parties have made such a choice, they will usually refer expressly to the state of the chosen law in their contract, and this is the best way of insuring that their desires will be given effect.”). It is undisputed that the insurance policy in this case lacks such a provision. Nevertheless, commentary to the Restatement makes clear that an express choice-of-law provision is not required for § 187 to apply to a particular issue. See Restatement § 187 cmt. a.1 “The fact that a contract contains legal expressions, or makes reference to legal doctrines, that are peculiar to the local law of a particular state may provide persuasive evidence that the parties wished to have the law of that particular state applied.” Id.

 

 

(…) Because we conclude that Texas law applies to the defense of material misrepresentation, there is no reason to entertain the Insureds’ broader argument that Texas law applies to the entire policy. Cf. George K. Baum & Co. v. Twin City Fire Ins. Co., 760 F.3d 795, 799–800 (8th Cir. 2014) (applying comment (a) to § 187 of the Restatement to hold that New York law governed an entire insurance policy that lacked an express choice-of-law clause because it “contained numerous New York-specific provisions”). (Fn. 2).

 

 

 

 

 

 

(U.S. Court of Appeals for the Ninth Circuit, July 29, 2024, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556, for Publication)

U.S. Court of Appeals for the Ninth Circuit, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556

Conflict-of-Laws

 

Affirmative Defense

 

Diversity Cases

 

Choice-of-Law Rules of the Forum State

 

 

 

 

 

The District Court erred in concluding that Nevada law, and not Texas law, governs the affirmative defense.

 

It is well-established in the federal courts that a conflict-of-laws analysis may result in the laws of different jurisdictions applying to different issues in the same case. Allstate Ins. Co. v. Hague, 449 U.S. 302, 307 (1981). “It is also well-established that in diversity cases, such as this one, ‘federal courts must apply the choice-of-law rules of the forum state.’” Rustico v. Intuitive Surgical, Inc., 993 F.3d 1085, 1091 (9th Cir. 2021) (quoting Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 484 (9th Cir. 1987)). Here, the forum state is Nevada. “Nevada tends to follow the Restatement . . . in determining choice-of-law questions involving contracts, generally, and insurance contracts, in particular.” Progressive Gulf Ins. Co. v. Faehnrich, 327 P.3d 1061, 1063 (Nev. 2014). That includes § 187 of the Restatement, which, according to the Nevada Supreme Court, permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie Sievers & Lake Tahoe Land Co. v. Diversified Mortg. Invs., 603 P.2d 270, 273 (Nev. 1979). Nevertheless, where an insurance policy does not evince a clear choice-of-law governing a particular issue, the Nevada Supreme Court has instructed its courts to apply § 188 of the Restatement, i.e., the “substantial relationship” test. See, e.g., Sotirakis v. United Serv. Auto. Ass’n, 787 P.2d 788, 789–90 (Nev. 1990). That test requires courts to consider: “(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties.” Restatement § 188. Each factor of the test must be “evaluated according to its relative importance with respect to the particular issue” that gave rise to the choice-of-law dispute in the first place. Id.

 

 

Section 187 of the Restatement permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie, 603 P.2d at 273. Parties typically effectuate that choice through an express choice-of-law provision in their contract. See Restatement § 187 cmt. a (“When the parties have made such a choice, they will usually refer expressly to the state of the chosen law in their contract, and this is the best way of insuring that their desires will be given effect.”). It is undisputed that the insurance policy in this case lacks such a provision. Nevertheless, commentary to the Restatement makes clear that an express choice-of-law provision is not required for § 187 to apply to a particular issue. See Restatement § 187 cmt. a.1 “The fact that a contract contains legal expressions, or makes reference to legal doctrines, that are peculiar to the local law of a particular state may provide persuasive evidence that the parties wished to have the law of that particular state applied.” Id.

 

 

(…) Because we conclude that Texas law applies to the defense of material misrepresentation, there is no reason to entertain the Insureds’ broader argument that Texas law applies to the entire policy. Cf. George K. Baum & Co. v. Twin City Fire Ins. Co., 760 F.3d 795, 799–800 (8th Cir. 2014) (applying comment (a) to § 187 of the Restatement to hold that New York law governed an entire insurance policy that lacked an express choice-of-law clause because it “contained numerous New York- specific provisions”). (Fn. 2).

 

 

 

 

 

 

(U.S. Court of Appeals for the Ninth Circuit, July 29, 2024, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556, for Publication)

 

U.S. Court of Appeals for the Ninth Circuit, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556

Remand (Federal)

 

Prudential Reasons

 

Alternative Grounds for Affirmance

 

 

 

 

(…) Illinois National, Continental, and Federal devote much of their appellate briefing to arguing why the panel should affirm the district court’s grant of summary judgment on alternative grounds. This includes Illinois National’s argument that Endorsement #23 of the policy precludes coverage for the Insureds’ claims. We decline to reach these arguments in the first instance. See generally Detrich v. Ryan, 740 F.3d 1237, 1248–49 (9th Cir. 2013) (en banc) (observing that it is “standard practice . . . to remand to the district court for a decision in the first instance without requiring any special justification for so doing”), overruled on other grounds by Shinn v. Ramirez, 596 U.S. 366 (2022); Ecological Rts. Found. v. Pac. Lumber Co., 230 F.3d 1141, 1154 (9th Cir. 2000) (discussing prudential reasons why an appellate court typically does not address alternative grounds for affirmance).

 

 

 

 

(U.S. Court of Appeals for the Ninth Circuit, July 29, 2024, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556, for Publication)