Philadelphia Indemnity Insurance v. Findley , 395 F.3d 1046 ( 2005 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PHILADELPHIA INDEMNITY INSURANCE 
COMPANY, a Pennsylvania
Insurance Company,
Plaintiff-Appellee,
v.
RICHARD FINDLEY; DENIKAN No. 03-56651
BREWER; DESIRIE BREWER; DANE
FLORES; DELESA FLORES; JAVIER  D.C. No.
CV-02-03616-
CORTEZ, RSWL
Defendants,
and
BLANCA MONTES-HARRIS; MONICA
ARREDONDO; CAMILLA TONI HARRIS,
Defendants-Appellants.

499
500 PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS
PHILADELPHIA INDEMNITY INSURANCE 
COMPANY, a Pennsylvania
Insurance Company,
Plaintiff-Appellee,
v.
No. 03-56652
RICHARD FINDLEY; DENIKAN
D.C. No.
BREWER; DESIRIE BREWER; DANE
FLORES; DELESA FLORES; BLANCA  CV-02-03616-
RSWL
MONTES-HARRIS; MONICA
ARREDONDO; CAMILLA TONI HARRIS, ORDER
Defendants,
and
JAVIER CORTEZ,
Defendant-Appellant.

Filed January 13, 2005
Before: Betty B. Fletcher, John T. Noonan, and
Richard A. Paez, Circuit Judges.
ORDER
PAEZ, Circuit Judge:
We certify to the California Supreme Court the question set
forth in Part II of this order. All further proceedings in this
case are stayed pending final action by the California
Supreme Court, and this case is withdrawn from submission
until further order of this court.
PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS 501
I. CAPTION AND COUNSEL
A. The caption of the case is as follows:1
PHILADELPHIA INDEMNITY INSURANCE COMPANY,
a Pennsylvania Insurance Company,
Plaintiff - Appellee,
v.
RICHARD FINDLEY; DENIKAN BREWER; DESIRIE
BREWER; DANE FLORES; DELESA FLORES; JAVIER
CORTEZ,
Defendants,
and,
BLANCA MONTES-HARRIS; MONICA ARREDONDO;
CAMILLA TONI HARRIS,
Defendants - Appellants.
PHILADELPHIA INDEMNITY INSURANCE COMPANY,
a Pennsylvania Insurance Company,
Plaintiff - Appellee,
v.
RICHARD FINDLEY; DENIKAN BREWER; DESIRIE
BREWER; DANE FLORES; DELESA FLORES; BLANCA
MONTES-HARRIS; MONICA ARREDONDO; CAMILLA
TONI HARRIS,
Defendants,
and,
JAVIER CORTEZ,
Defendant - Appellant.
B. The names and addresses of counsel are:
For Blanca Montes-Harris, et al.: Robert Marc Hindin,
Hindin & Abel LLP, 11601 Wilshire Blvd., Suite 2490, Los
Angeles, California 90025.
1
The certified question pertains to two consolidated appeals: Nos. 03-
56651 and 03-56652.
502 PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS
For Javier Cortez: David R. Denis, 633 W. Fifth Street,
70th Floor, Los Angeles, California 90071.
For Philadelphia Indemnity Insurance Company: David M.
Glasser, Greenspan, Glasser & Rosson, 300 Corporate Pointe,
Suite 375, Culver City, California 90025. James E. Green, Jr.
and Julia Forrester-Sellers, Conner & Winters, 15 East 5th
Street, Suite 3700, Tulsa, Oklahoma 74103-4344.
II. QUESTION OF LAW
Pursuant to Rule 29.8(a) of the California Rules of Court,
we respectfully request the Supreme Court of California to
decide the certified question presented below. There is no
controlling precedent regarding the certified question, the res-
olution of which may be determinative of this appeal. Our
phrasing of the question should not restrict the Court’s con-
sideration of the issues involved. We agree to accept the deci-
sion provided by the California Supreme Court. The question
of law to be decided is:
Does the duty of an insurer to investigate the insur-
ability of an insured, as recognized by the California
Supreme Court in Barrera v. State Farm Mut. Auto.
Ins. Co., 71 Cal. 2d 659, 79 Cal. Rptr. 106, 456 P.2d
674 (1969), apply to an automobile liability insurer
that issues an excess liability insurance policy in the
context of a rental car transaction?
III. STATEMENT OF FACTS
Appellants Javier Cortez, Blanca Montes-Harris, Monica
Arredondo, and Camilla Toni Harris appeal from the district
court’s judgment declaring that Appellee Philadelphia Indem-
nity Insurance Company (“Philadelphia”) has no liability for
damages appellants sustained in an accident involving a rental
car driven by Alric Burke. Burke purchased an excess liability
insurance policy issued by Philadelphia when he rented the
PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS 503
car from Budget Rent-A-Car (“Budget”). The policy provided
third-party liability coverage in excess of the primary mini-
mum statutory coverage ($15,000 per person for bodily
injury, with a maximum of $30,000 per occurrence) up to
$1,000,000, subject to an exclusion, among other things, for
bodily injury or property damage arising out of the use, or
permitting the use, of a rental car that was obtained through
fraud or misrepresentation.
At the time of the rental transaction on June 6, 2001, Burke,
a resident of Arizona, presented to Budget what appeared to
be a valid Arizona driver’s license. The State of Arizona in
fact had suspended Burke’s driver’s license and driving privi-
leges over two months earlier. The Budget rental agent took
Burke’s license, made a photocopy of it, and asked Burke to
sign the rental agreement.
Four days later, on June 10, 2001, Burke was involved in
a car accident in Los Angeles, California while driving the car
he had rented from Budget. The accident injured numerous
people, including appellants Javier Cortez, Blanca Montes-
Harris, Monica Arredando, and Camilla Toni Harris. Cortez
brought suit against Budget and Burke in Los Angeles County
Superior Court for damages arising out of the accident.
Montes-Harris, Arredando, and Toni Harris filed a separate
action against Budget and Burke in the same court.
On May 3, 2002, Philadelphia filed suit in federal district
court seeking a judgment declaring that Philadelphia has no
liability for damages arising out of the June 10, 2001 accident.
A bench trial was held on February 4, 2003. In its findings of
fact and conclusions of law, the district court found that (1)
Burke negligently misrepresented to Budget that he had a
valid driver’s license and (2) the excess liability policy
excluded coverage for rentals obtained through misrepresenta-
tion. Thus, the court declared that Philadelphia had no liabil-
ity for damages arising out of the accident.
504 PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS
On March 27, 2003, Cortez filed an ex parte application for
relief from judgment, which was joined by Montes-Harris,
Arredando, and Toni Harris. The application asked the court
to grant relief on the basis of a recent California Court of
Appeal decision in United Servs. Auto. Ass’n v. Pegos, 107
Cal. App. 4th 392, 131 Cal. Rptr. 2d 866 (2003), which clari-
fied and confirmed the law as stated by the California
Supreme Court in Barrera v. State Farm Mut. Auto. Ins. Co.,
71 Cal. 2d 659, 79 Cal. Rptr. 106, 456 P.2d 674 (1969). The
district court denied the application on April 8, 2003. On
March 28, 2003, Montes-Harris, Arredando, and Toni Harris
filed a notice of appeal. Cortez joined the appeal on April 11,
2003.
IV. THE NEED FOR CERTIFICATION
We respectfully request the California Supreme Court to
decide the certified question of law because the decision
could determine the outcome of this appeal, and because the
decisions of the California appellate courts provide no con-
trolling precedent on the question. See Cal. R. of Ct.
29.8(a)(1) & (2). Furthermore, whether Barrera applies to
excess liability insurers in the rental car context is an issue of
significant public policy importance. See Kremen v. Cohen,
325 F.3d 1035, 1037 (9th Cir. 2003) (“The certification proce-
dure is reserved for state law questions that present significant
issues, including those with important public policy ramifica-
tions, and that have not yet been resolved by the state
courts.”). Following is a summary of the relevant case law
and the parties’ arguments with respect to this issue.
A. The Barrera Decision
In Barrera v. State Farm Mutual Auto. Ins. Co., 71 Cal. 2d
659, 79 Cal. Rptr. 106, 456 P.2d 674 (1969), the plaintiff,
who had been injured in a car accident, sued the insured
driver for negligence and obtained an unsatisfied judgment.
Id. at 664-66. The plaintiff then sued the driver’s insurer,
PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS 505
State Farm, to recover her damages, and State Farm brought
a cross-action for declaratory relief seeking to void the policy
on the ground that it was obtained through misrepresentation.
The insured had claimed on his application that his license
had not been suspended in the last five years when in fact it
had. Id. at 665. The trial court found that rescission was justi-
fied on the basis of this misrepresentation and entered judg-
ment for State Farm. Id. at 662.
The California Supreme Court accepted the trial court’s
finding of misrepresentation but reversed its decision, holding
that automobile liability insurers have a duty, which inures
directly to the benefit of those who may be injured by an
insured, to make a reasonable investigation of insurability
within a reasonable time of issuing a policy. Id. at 663, 677
n.14. Where an insurer fails to conduct a reasonable investiga-
tion, it loses its right to rescind the policy on the basis of an
insured’s misrepresentation. Id. at 678. Thus, an injured party
who obtains an unsatisfied judgment against the insured may
recover the amount of the judgment, within the policy limits,
from the insurer. Id. at 667. An insurer that fulfills its obliga-
tion to reasonably investigate, on the other hand, retains the
right to rescind and thereby avoid liability to injured third par-
ties. Id. at 678.
The Barrera court noted that even where an insurer fails to
meet its duty to reasonably investigate, it does not “forfeit[ ]
all remedies against the insured for his misrepresentations.”
Id. at 681. For instance, an insurer may sue the insured for
misrepresentation after satisfying the injured parties’ claims.
Id. Additionally, if the insured sues the insurer after paying a
judgment to an injured party, the insurer may defend such an
action on the ground of misrepresentation. Id. Further,
although the policy must remain in effect at least through the
time of the accident, the insurer may cancel the policy there-
after. Id. at 681.
The court held that whether an insurer has breached its duty
to the public to make a reasonable investigation within a rea-
506 PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS
sonable time is generally a question of fact. Id. at 682. Bar-
rera held that three factors should be considered in assessing
the reasonableness of an insurer’s conduct—1) the cost of
obtaining information from the Department of Motor Vehicles
(DMV), 2) the availability of this information from the DMV
or elsewhere, and 3) the administrative burden of making this
investigation—factors that should be weighed against the
importance of protecting innocent members of the public from
the consequences of voidable liability policies of drivers who
injure them. Barrera, 71 Cal. 2d at 682, 79 Cal. Rptr. 106,
456 P.2d 674. Thus, the court remanded to the trial court for
a determination of whether State Farm acted reasonably in
light of its duty. Id.The Barrera court explained that the rationale for its deci-
sion was based on both the quasi-public nature of the insur-
ance business and the public policy underlying California’s
Financial Responsibility Law.2 First, the insurer’s role as a
quasi-public entity requires a court, when determining the
rights and responsibilities of the insurer, to “look to the rea-
sonable expectation of the public and the type of service
which the entity holds itself out as ready to offer.” Id. at 669.
The court noted that “[t]he reasonable expectation of both the
public and the insured is that the insurer will duly perform its
basic commitment: to provide insurance.” Id.
2
At the time of the California Supreme Court’s decision in Barrera,
California’s Financial Responsibility Law provided that after an accident
in which a driver negligently caused injuries to another, the driver would
be financially responsible for those injuries and, if he was unable to cover
the damages, his license would be suspended. See id. at 670 n.9; former
Cal. Veh. Code § 16000 et seq. The California Legislature amended the
law in 1974 to require every owner or driver of a motor vehicle to main-
tain an approved form of financial responsibility at all times and to be able
to provide proof of this responsibility after an accident. Cal. Veh. Code
§ 16054; Anacker v. Sillas, 65 Cal. App. 3d 416, 421, 135 Cal. Rptr. 537(1976). The Financial Responsibility Law provides for a minimum level
of insurance coverage. Cal. Veh. Code §§ 16054, 16056.
PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS 507
Second, the recognition of this duty furthers the public pol-
icy underlying California’s Financial Responsibility Law,
which seeks “to make owners of motor vehicles financially
responsible to those injured by them in the operation of such
vehicles.” Id. at 670-71 (internal quotations omitted). The
court explained that a contrary rule, allowing insurers to delay
investigation of insurability until it suited their financial inter-
ests, would “directly thwart[ ] a chief purpose of the Financial
Responsibility Law: to provide compensation for those
injured through no fault of their own.” Id. at 671-72 (internal
quotations omitted).
B. Extension of Barrera to Excess Liability Insurers in the
Rental Car Context
Appellants argue that Barrera applies to all automobile lia-
bility insurers, including excess insurers. Therefore, appel-
lants assert that Philadelphia may not avoid liability for their
damages by rescinding Burke’s policy on the ground that he
misrepresented his status as a licensed driver.3 Appellants
argue that the Barrera court did not limit its holding to pri-
mary insurers; rather, it referred to the duty of “the automo-
bile liability insurer” or “the carrier” in general. See, e.g., 71
Cal. 2d at 681, 79 Cal. Rptr. 106, 456 P.2d 674 (“Failure of
the automobile liability insurer reasonably to investigate the
insurability of the insured within a reasonable time after issu-
ance of the policy . . . results in the loss of the carrier’s right
to rescind . . . .”) (emphasis added).
Further, appellants argue that the two rationales of the Bar-
rera decision support its extension to excess liability insurers.
First, with respect to the quasi-public nature of the insurance
industry, appellants assert that the public’s reasonable expec-
3
Appellants do not contest the district court’s finding that Burke misrep-
resented his status. Rather, they argue that Philadelphia owed a duty to
third parties to reasonably investigate Burke’s insurability despite this
misrepresentation, and that Philadelphia failed to meet this duty.
508 PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS
tation that insurers will perform their basic commitment to
provide insurance, see id. at 669, is just as applicable to
excess insurers as it is to primary insurers. Second, appellants
contend that the public policy underlying the Financial
Responsibility Law, to compensate members of the public
who are injured by an insured, see id. at 671-72,4 is broad
enough to extend to excess liability insurers, as long as excess
coverage is needed to compensate for their injuries.
Philadelphia argues that Barrera only applies to primary
liability insurers, and therefore the district court properly
voided Burke’s policy on the basis of his misrepresentation
and correctly concluded that Philadelphia has no liability for
damages arising out of the accident. Philadelphia contends
that the reasoning of the Barrera decision does not support its
application to excess liability insurers because the Financial
Responsibility Law requires that primary insurance policies
provide minimum levels of coverage, and excess liability pol-
icies need not meet these requirements. See Cal. Veh. Code
§§ 16054, 16056; Cal. Ins. Code § 11580.1(a). Further, Phila-
delphia notes that excess insurance policies may contain
exclusions that are broader than those allowed for primary
policies. See Hertz Corp. v. Home Ins. Co., 14 Cal. App. 4th
1071, 1077, 1079 & n.8, 18 Cal. Rptr. 2d 1071 (1993) (stating
that an excess policy may contain an exclusion for drunk driv-
ing whereas a primary policy is prohibited from containing
such an exclusion). Philadelphia argues that the public policy
underlying the Financial Responsibility Law, and therefore
4
See also id. at 678 (“The purpose of the imposition of such a duty is
to reduce the number of motorists on our highways who are, in fact, finan-
cially irresponsible; the goal is to protect the motoring public generally
against the inability to recover compensation for death or injuries caused
by automobile accidents.”); id. at 680 (stating that the purpose of the duty
is “to avoid the possibility that the third person will be unable to obtain
compensation for the loss”); id. at 673 (analogizing the philosophy under-
lying the Financial Responsibility Law to the rationale underlying the
established “duty upon all insurers to act promptly upon an application for
insurance”) (emphasis added).
PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS 509
underlying the Barrera decision, is to ensure that those
injured in car accidents are covered by policies that provide
minimum levels of coverage;5 thus, issuers of excess liability
policies should not be subject to the duty to investigate estab-
lished in Barrera.
Although no California appellate court has addressed
whether the duty to investigate recognized in Barrera applies
to excess insurers, subsequent decisions of the California
Court of Appeal have confirmed that Barrera is still good law
as applied to automobile liability insurers in general. For
instance, in United Servs. Auto. Ass’n v. Pegos, 107 Cal. App.
4th 392, 131 Cal. Rptr. 2d 866 (2003), the California Court
of Appeal held that the duty recognized in Barrera applies
when an insured adds a new car to an existing insurance pol-
icy. The court stated:
For over 30 years, the law of this state has required
insurers to conduct a reasonable investigation of the
insurability of insureds before they may rescind
automobile insurance policies based on an insured’s
misrepresentation in an application when innocent
third parties have been injured by the insured’s
actions. The same rule applies to the addition of a
new car to the policy.
Id. at 401; see also Fireman’s Fund Am. Ins. Co. v. Escobedo,
80 Cal. App. 3d 610, 621, 145 Cal. Rptr. 785 (1978) (holding
that the duty to investigate insurability under Barrera applies
5
In at least two instances, the Barrera court referenced the minimum
coverage requirements of the Financial Responsibility Law. See, e.g., 71
Cal. 2d at 678, 79 Cal. Rptr. 106, 456 P.2d 674 (“Prompt notice to the
insured of the revocation of his policy of insurance will most certainly
impel him to seek other means of compliance with the potential require-
ments of the Financial Responsibility Law.”); id. (“After the insured per-
son has obtained a judgment against the insured, therefore, he may compel
the insurer to pay the judgment to the extent of the monetary limits set
forth in the Financial Responsibility Law.”).
510 PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS
to assigned risk liability insurers and the duty may not be del-
egated); cf. Am. Cont’l Ins. Co. v. C & Z Timber Co., 195 Cal.
App. 3d 1271, 1279, 241 Cal. Rptr. 466 (1987) (holding that
the duty imposed in Barrera “was compelled by statutory
public policy considerations emanating from the automobile
Financial Responsibility Law” and does not apply to aircraft
insurers); Fireman’s Fund Ins. Co. v. Superior Court, 75 Cal.
App. 3d 627, 633, 142 Cal. Rptr. 249 (1977) (same).
Finally, Philadelphia argues that even if the duty to investi-
gate applies to excess insurers, Budget satisfied this duty as
a matter of law by complying with Cal. Veh. Code §§ 14604,
14608(b), which require rental car agents to inspect the driv-
er’s license of the renter and compare the signature on the
license with the signature written in the agent’s presence.
Appellants counter that Budget’s statutory obligations as a
rental car owner conducting a rental transaction are entirely
distinct from Philadelphia’s duty to conduct a reasonable
investigation as an insurer. Appellants argue that Philadelphia
breached this duty as a matter of law, or in the alternative, that
whether Philadelphia met its duty is a question of fact. See
Barrera, 71 Cal. 2d at 682, 79 Cal. Rptr. 106, 456 P.2d 674.
In sum, whether Barrera applies to excess liability insurers
in the rental car context could determine the outcome of this
appeal, and is a question of significant public policy impor-
tance that has not been resolved by the California appellate
courts. Accordingly, we respectfully request that the Califor-
nia Supreme Court decide the certified question.
V. ACCOMPANYING MATERIALS
The clerk of this court is hereby directed to file in the Cali-
fornia Supreme Court, under official seal of the Ninth Circuit
Court of Appeals, copies of all relevant briefs and an original
and ten copies of this request with a certificate of service on
the parties, pursuant to California Rules of Court 29.8(c) &
(d).
PHILADELPHIA INDEMNITY INS. v. MONTES-HARRIS 511
IT IS SO ORDERED.
__________________________
The Honorable Richard A. Paez
United States Circuit Judge
PRINTED FOR
ADMINISTRATIVE OFFICE—U.S. COURTS
BY THOMSON/WEST—SAN FRANCISCO
The summary, which does not constitute a part of the opinion of the court, is copyrighted
© 2005 Thomson/West.