Evanston Insurance v. Oea, Inc. ( 2009 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
EVANSTON INSURANCE COMPANY, 
Plaintiff-counter-defendant-
Appellee,
No. 07-15316
v.
D.C. Nos.
OEA, INC.,
CV-02-01505-
Defendant-counter-claimant-
Appellant,  DFL/EFB
CV-02-01981-
and DFL/PAN
ROYAL INSURANCE COMPANY OF OPINION
AMERICA,
Counter-cross-claimant-
defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of California
David F. Levi, District Judge, Presiding
Argued and Submitted
January 15, 2009—San Francisco, California
Filed May 21, 2009
Before: Procter Hug, Jr., Stephen Reinhardt and
A. Wallace Tashima, Circuit Judges.
Opinion by Judge Hug
6065
6068 EVANSTON INSURANCE v. OEA, INC.
COUNSEL
Jeffrey Isaac Ehrlich, The Ehrlich Law Firm, Claremont, Cali-
fornia, for the appellant.
David Tartaglio, Musick Peeler and Garrett, LLP, Los Ange-
les, California, for appellee Evanston Insurance Company.
Dirk M. Schenkkan and Sean M. SeLegue, Howard Rice
Nemerovski Canady Falk & Rabkin, San Francisco, Califor-
EVANSTON INSURANCE v. OEA, INC. 6069
nia, for appellee Arrowood Indemnity Company, successor-
in-interest to Royal Insurance Company of America.
OPINION
HUG, Circuit Judge:
OEA, Inc. (“OEA”) appeals the final judgment incorporat-
ing the district court’s orders of September 22, 2003 and
March 30, 2004 granting summary judgment for Evanston
Insurance Company (“Evanston”) and Royal Insurance Com-
pany of America (“Royal”) and awarding prejudgment inter-
est to Evanston.1 The insurance policies at issue are general
commercial liability policies, with the Royal policy providing
excess coverage above the Evanston policy. In granting sum-
mary judgment, the district court determined that Evanston
and Royal were not obligated to defend and indemnify OEA
in two actions brought by employees of OEA’s subsidiary
OEA Aerospace, Inc. (“Aerospace”), and that Evanston was
entitled to reimbursement of and prejudgment interest on
funds it had paid toward OEA’s defense and settlement pursu-
ant to a reservation of rights. On appeal, OEA contends that
the district court erroneously decided a disputed issue of fact
in granting summary judgment for Evanston and Royal and
that the district court erred in awarding prejudgment interest
for Evanston where OEA’s liability was not established until
the grant of summary judgment. Because the reimbursement
to Evanston and the award of prejudgment interest were both
proper, we affirm.2
1
OEA also sought appellate review of the district court’s order of July
26, 2005 granting summary judgment for Nutmeg Insurance Company and
Twin City Fire Insurance Company. OEA, Nutmeg, and Twin City have
since entered into a settlement agreement. The appeal was voluntarily dis-
missed as to Nutmeg and Twin City in accordance with Federal Rule of
Appellate Procedure 42(b).
2
In light of our disposition of this appeal, Evanston’s motion to strike
portions of OEA’s reply brief is denied as moot.
6070 EVANSTON INSURANCE v. OEA, INC.
I.
Background
OEA is a Delaware corporation with its principal place of
business in Denver, Colorado. Until 1994, it manufactured
booster caps and other items for use in the aerospace industry;
many of its products had explosive components, including the
booster caps. Aerospace is located in Fairfield, California and
is the wholly owned subsidiary of OEA. OEA alleges that it
transferred its aerospace business to Aerospace in 1994 and,
from that point on, limited its business to manufacturing auto-
motive safety devices.
In two incidents in late 1995 and early 1996, Aerospace
employees Patricia Shugart (“Shugart”) and Karen Wise
(“Wise”) were injured while repairing booster caps originally
sold and manufactured by OEA. Both employees eventually
retained the same attorney—Paul Kranz (“Kranz”). Shugart
filed suit on December 18, 1996, and Wise did so on February
6, 1997. The complaints are virtually identical: both name
“OEA, OEA Aerospace, and Does 1 through 200” as defen-
dants and allege liability under theories of general negligence,
products liability, premises liability, and strict liability.
OEA purchased a general liability policy from Evanston in
1998, with policy limits of $1 million per claim and $2 mil-
lion in the aggregate. The Evanston policy period ran from
May 1, 1998 to May 1, 1999 and provided coverage for
“CLAIMS FIRST MADE . . . DURING THE POLICY PERI-
OD.” The policy defines a “claim” as “a notice received by
the insured of an intention to hold the insured responsible for
an Occurrence involving the policy and shall include the ser-
vice of suit or institution of arbitration proceedings against the
insured.” The Royal policy provided $5 million in excess cov-
erage above the Evanston policy during a policy period coter-
minous with the Evanston policy period. OEA contends that,
EVANSTON INSURANCE v. OEA, INC. 6071
prior to the policy period, it was unaware of Shugart’s and
Wise’s intent to hold OEA liable.
Aerospace was served with Shugart’s complaint on June
10, 1997, but OEA was not served until over a year later on
October 23, 1998. On November 3, 1997, James Welsh
(“Welsh”), OEA’s Director of Personnel and Security, was
served with Wise’s complaint as “Agent for Service of Pro-
cess of OEA Aerospace, Inc.” Welsh, however, was not the
agent for service of process for Aerospace. It does not appear
that Wise made any further attempts to serve OEA or Aero-
space.
When Aerospace received the Shugart complaint in June
1997, it forwarded a copy to Welsh at OEA, but Welsh con-
cluded that Shugart’s claim would be handled exclusively as
a worker’s compensation claim. He notified Aerospace’s
worker’s compensation carrier of the claim through its agent,
Patricia Hollenbeck. When Welsh received the Wise com-
plaint, he followed the same procedure.
OEA and Aerospace filed answers to the Shugart and Wise
complaints on January 8, 1999 and March 30, 1999, respec-
tively. Aerospace was ultimately dismissed from the actions
because the claims were barred under the worker’s compensa-
tion laws.
Following a jury trial, a $13,680,565 judgment (including
$10 million in punitive damages) was entered against OEA in
the Shugart suit. The California Court of Appeal, however,
overturned the jury award on June 27, 2005 and remanded for
a new trial. Shugart v. OEA, Inc., No. A099649, 2005 WL
1503812, at *1 (Cal. Ct. App. June 28, 2005, as modified July
22, 2005). OEA later settled both suits. Under a full reserva-
tion of rights, Evanston paid $345,783.22 toward OEA’s
defense in the Shugart case and paid $1,199,141,10 to defend
and settle the Wise suit.
6072 EVANSTON INSURANCE v. OEA, INC.
Evanston filed suit in state court on November 17, 2001,
alleging that OEA was liable for breach of contract, inten-
tional misrepresentation, and rescission of insurance contract.
After removing these suits to federal court on grounds of
diversity of citizenship, OEA brought counterclaims against
Evanston, Royal, and other insurers not party to this appeal,
alleging breach of contract and breach of the covenant of
good faith and fair dealing. Royal counterclaimed and thereaf-
ter filed a first amended counterclaim against OEA on Octo-
ber 11, 2002.
OEA, Evanston, and Royal filed motions for partial sum-
mary judgment on the issue of whether the Evanston and
Royal policies provided coverage for the Wise and Shugart
claims. In its September 19, 2003 order, the district court con-
cluded that the claims were not covered because they were
first made in 1997, prior to the Evanston and Royal insurance
policy period. The court therefore granted partial summary
judgment for Evanston and Royal.
Evanston then moved for summary judgment, seeking
reimbursement of amounts paid for OEA’s defense and pre-
judgment interest from the date of payment. The district court
granted the motion by its order of March 29, 2004. After the
district court denied OEA’s motion for reconsideration,
Evanston requested the entry of judgment. The judgment and
amended judgment were entered for Evanston on February 7,
2007 and February 9, 2007, respectively, and OEA timely
appealed. We have jurisdiction under 28 U.S.C. §§ 1332,
1291.
II.
Liability for Costs of Defense and Settlement
OEA challenges the district court’s grant of summary judg-
ment on the amounts paid for defense and settlement, arguing
that the district court erred by resolving a factual dispute
EVANSTON INSURANCE v. OEA, INC. 6073
when it determined that the Shugart and Wise claims were
first made prior to the Evanston and Royal policy period. We
review a district court’s grant of summary judgment de novo.
Arakaki v. Hawaii, 314 F.3d 1091, 1094 (9th Cir. 2002). In
reviewing the grant of summary judgment for Evanston and
Royal, “[w]e must determine, viewing the evidence in the
light most favorable to [OEA], whether there are any genuine
issues of material fact and whether the district court correctly
applied the substantive law. See Olsen v. Idaho State Bd. of
Med., 363 F.3d 916, 922 (9th Cir. 2004). We do not weigh the
evidence or determine the truth of the matter; instead, we only
determine whether there is a genuine issue for trial. See Balint
v. Carson City, 180 F.3d 1047, 1054 (9th Cir. 1999) (en
banc).
It is undisputed that OEA became aware of the Shugart
complaint in June 1997 and the Wise complaint in November
1997, before the Evanston and Royal policy periods com-
menced on May 1, 1998. Relying on this fact and the content
of the complaints, the district court held that the claims were
first made in 1997. But, OEA contends that it did not become
aware of Shugart’s and Wise’s intention to hold OEA liable
for their injuries until October 1998, by which time the poli-
cies were in effect. OEA argues that in granting summary
judgment on this issue, the district court wrongly decided a
disputed fact—whether it was reasonable for OEA to read the
complaints as not evincing an intent to hold OEA liable for
the injuries at issue. We disagree. The complaints make clear
Shugart’s and Wise’s intention to hold OEA liable, and the
district court properly held that there was no genuine issue of
material fact as to the date the claims were first made.
Only claims “FIRST MADE AGAINST THE INSURED
DURING THE POLICY PERIOD” are covered by the Evans-
ton and Royal policies. A claim is defined in the Evanston
policy as “a notice received by the insured of an intention to
hold the Insured responsible for an Occurrence involving this
policy and shall include the service of suit or institution of
6074 EVANSTON INSURANCE v. OEA, INC.
arbitration proceedings against the Insured.” The district court
interpreted this language as follows:
The policy defines “claim” as a “notice.” Without
saying so explicitly, Evanston and OEA appear to
agree that the language incorporates a reasonable
person standard. A foolish or overly sophisticated
failure or refusal to realize that one is the intended
object of suit would be of no assistance to an
insured. Similarly, a confusingly vague or indefinite
notification would not amount to a claim if a reason-
able insured would not deem it such.
OEA agrees with this interpretation, but argues that whether
a reasonable insured would understand the complaint as
evincing an intention to hold OEA liable is a question for the
jury.
[1] Given the undisputed content of the complaints and
OEA’s receipt of both complaints, there is no genuine dispute
as to when OEA received notice of Shugart’s and Wise’s
intention to hold OEA responsible for their injuries. Both
complaints clearly list “OEA, OEA Aerospace, and Does 1 to
200” as defendants. OEA and OEA Aerospace are described
as separate business organizations in the complaints. The
causes of action are listed as (1) general negligence, (2) prod-
ucts liability, (3) premises liability, and (4) strict liability. In
alleging a cause of action for products liability, Shugart and
Wise alleged that OEA alone sold the gunpowder, storage
bins and trays, protective gear, and other products that con-
tributed to their injuries. Elsewhere in the complaints, facts
are alleged against both OEA and OEA Aerospace.
OEA argues that other evidence nonetheless creates a genu-
ine issue of material fact as to the reasonableness of OEA’s
understanding that Shugart and Wise did not intend to hold
OEA liable. The evidence does indicate that, as a general mat-
ter, OEA and Aerospace were frequently confused as corpo-
EVANSTON INSURANCE v. OEA, INC. 6075
rate entities and that, at times, Aerospace was referred to as
OEA. It is also undisputed that Shugart and Wise did not seek
to serve OEA independently from Aerospace in 1997. And,
finally, OEA has proffered direct and circumstantial evidence
of various individuals’ subjective beliefs that the complaints
did not state a cause of action against OEA.
[2] Despite OEA’s subjective belief, the complaints at issue
clearly name OEA as a defendant separate from Aerospace.
Taking the evidence in the light most favorable to OEA, the
complaints constituted a notice received by OEA of an inten-
tion to hold OEA responsible for injuries. Any subjective
belief that the complaints solely allege worker’s compensa-
tion claims against Aerospace was unreasonable where the
complaints specifically allege that OEA is liable for injuries
caused by products it manufactured and sold. The factual dis-
putes cited by OEA are immaterial against the undisputed
content of the complaints.
[3] OEA’s contention that summary judgment was
improper because reasonableness is generally a factual
inquiry left to the jury, is also unavailing. Although “the
jury’s unique competence in applying the reasonable man
standard is thought ordinarily to preclude summary judg-
ment,” we have “squarely rejected the contention that reason-
ableness is always a question of fact which precludes
summary judgment.” In re Software Toolworks Inc., 50 F.3d
615, 622 (9th Cir. 1994) (internal quotation marks and cita-
tion omitted). “Rather, reasonableness becomes a question of
law and loses its triable character if the undisputed facts leave
no room for a reasonable difference of opinion.” Id. at 621-
622 (internal quotation marks and citations omitted). In this
case, the facts leave no room for a reasonable difference of
opinion, and summary judgment was appropriate.
[4] Because the claims were made prior to the policy
period, they were not even potentially covered. OEA did not
pay premiums to cover these claims, and when Evanston
6076 EVANSTON INSURANCE v. OEA, INC.
made payments for OEA’s defense and settlement, OEA
received more than its bargained-for coverage. Therefore,
Evanston is entitled to the reimbursement of $1,544,924.32 in
defense and settlement costs.
III.
Prejudgment Interest
[5] OEA also challenges the award of prejudgment interest
to Evanston because the amounts paid for defense and settle-
ment did not vest as required by California Civil Code
§ 3287(a). Under California Civil Code § 3287(a), “[e]very
person who is entitled to recover damages certain, or capable
of being made certain by calculation, and the right to recover
which is vested in him upon a particular day, is entitled also
to recover interest thereon from that day . . . .” The parties
agree that the amount of Evanston’s damages was “certain”
once Evanston made payment toward OEA’s defense and set-
tlement, but OEA contends that Evanston’s right to reim-
bursement did not “vest” prior to the district court’s grant of
summary judgment, making Evanston ineligible for prejudg-
ment interest. The other contention made by OEA is that pre-
judgment interest should not be applicable in the insurer-
insured context.
In its March 30, 2004 order, the district court found that the
right to reimbursement vested when Evanston made payment
to OEA and awarded prejudgment interest from the time the
payments were made. The district court’s interpretation of
state law is reviewed de novo. Paulson v. City of San Diego,
294 F.3d 1124, 1128 (9th Cir. 2002) (en banc). We are bound
to follow the decisions of the state’s highest court, but, where
“the state supreme court has not spoken on an issue, we must
determine what result the court would reach based on state
appellate court opinions, statutes and treatises.” Id. (quoting
Hewitt v. Joyner, 940 F.2d 1561, 1565 (9th Cir. 1991)).
EVANSTON INSURANCE v. OEA, INC. 6077
[6] California cases uniformly have interpreted the “vest-
ing” requirement as being satisfied at the time that the amount
of damages become certain or capable of being made certain,
not the time liability to pay those amounts is determined. See
e.g., Hartford Accident & Indem. Co. v. Sequoia Ins. Co., 211
Cal. App. 3d 1285, 1291, 1307 (1989) (awarding prejudgment
interest from the date plaintiff paid to settle a claim in full
even though the defendants’ legal liability obligating them to
contribute to the settlement was not established until the entry
of summary judgment); Overholser v. Glynn, 267 Cal. App.
2d 800, 809-10 (1968) (holding that the plaintiff-guarantor’s
right to recover the money “vested” when he paid to satisfy
his coguarantors’ indebtedness). The case of Levy-Zentner
Co. v. Southern Pacific Transportation Co., 74 Cal. App. 3d
762 (1977), made an extensive historical review of § 3287
since its enactment in 1872. The court stated that § 3287(a)
applies by its terms without restriction to “Every person who
is entitled to recover damages” as long as the damages are
“certain or capable of being made certain by calculation.” Id.
at 796 (italics in original).
[7] Our opinion in Highlands Insurance Co. v. Continental
Casualty Co. stated, “While a factual dispute respecting dam-
ages will preclude a grant of prejudgment interest under
§ 3287(a) a legal dispute will not.” 64 F.3d 514, 521 (9th Cir.
1995) (citing Hartford, 211 Cal. App. 3d at 1307). The opin-
ion also relies on the Levy-Zentner case in determining that
prejudgment interest runs from the day damages are of a
nature to be certain or capable of being made certain.
[8] It is clear that the “vesting” provision as interpreted by
the California courts and our opinion in Highlands relying on
California law, requires that the amount must be vested, not
that the legal entitlement to that amount be vested. OEA’s
interpretation of § 3287(a) would rule out any prejudgment
interest where legal liability can only be determined after
judgment. The statute and case law, however, make clear that
the California legislature intended to allow for prejudgment
6078 EVANSTON INSURANCE v. OEA, INC.
interest where the amount of damages is certain instead of
restricting plaintiffs to postjudgment interest.
[9] The Levy-Zentner case and our court’s reliance on it in
Highlands also answers the other question of whether the sec-
tion is applicable to the insurer-insured situation. Levy-
Zentner clearly says prejudgment interest is available to every
person who is entitled to recover damages that are certain.
OEA’s arguments concerning prejudgment interest rely on
several district court cases3 that are not precedent in this cir-
cuit. The precedent in this circuit is set forth in our Highlands
case interpreting California law.
Conclusion
[10] The underlying Shugart and Wise claims were first
made prior to the Evanston and Royal policy periods; accord-
ingly, OEA’s defense and settlement costs are not covered by
either policy. Evanston is entitled to reimbursement for the
funds expended for the defense and settlement of the lawsuits
and for prejudgment interest from the time the funds were
expended.
AFFIRMED.
3
Int’l Ins. Co. v. Red & White Co., No. C-93-0659, 1995 WL 150517(N.D. Cal. 1995); Am. States Ins. Co. v. Crawley Constr., Inc., 779 F.
Supp. 137 (N.D. Cal. 1991), aff’d mem., 5 F.3d 534 (9th Cir. 1993);
Omaha Indem. Ins. Co. v. Cardon Oil Co., 687 F. Supp. 502 (N.D. Cal.
1988), aff’d mem., 902 F.2d 40 (9th Cir. 1990).