Teleflex Medical Inc. v. National Union Fire Insurance Co. of Pittsburgh , 851 F.3d 976 ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TELEFLEX MEDICAL INCORPORATED, No. 14-56366
Plaintiff-Appellee,
D.C. No.
v. 3:11-cv-01282-
WQH-DHB
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA,
Defendant-Appellant. OPINION
Appeal from the United States District Court
for the Southern District of California
William Q. Hayes, District Judge, Presiding
Argued and Submitted August 3, 2016
Pasadena, California
Filed March 21, 2017
Before: Diarmuid F. O’Scannlain, Johnnie B. Rawlinson,
and Consuelo M. Callahan, Circuit Judges.
Opinion by Judge Callahan
2 TELEFLEX MED. V. NAT’L UNION FIRE INS.
SUMMARY*
California Insurance Law
The panel affirmed the district court’s judgment in favor
of the insured, LMA North America, Inc., and award of
attorney’s fees, and denied National Union Fire Insurance
Company of Pittsburgh, PA’s motion for certification of an
issue to the California Supreme Court, in LMA’s diversity
contribution action against its excess insurance carrier,
National Union.
In Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins.
Co., 227 Cal. App. 3d 563 (1991), a California appellate court
held that an excess insurer has three options when presented
with a proposed settlement of a covered claim that has met
the approval of the insured and the primary insurer: approve
the proposed settlement; reject it and take over the defense;
or reject it, decline the defense, and face a potential lawsuit
by the insured seeking contribution.
Concerning LMA’s breach of contract claim, the panel
held that the district court correctly followed the Diamond
Heights rule in this diversity action governed by California
law because the case had not been overruled and was not
distinguishable. The panel also held that the district court did
not commit prejudicial err in defining the standard of proof
applicable to LMA’s breach of contract claim.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
TELEFLEX MED. V. NAT’L UNION FIRE INS. 3
Concerning LMA’s bad faith claim, the panel held that
the district court correctly concluded that the genuine dispute
doctrine was subsumed within the standard Judicial Council
of California Civil Jury Instructions for breach of good faith
and fair dealing, which the district court gave to the jury. The
panel concluded that the district court did not err in denying
National Union’s proposed jury instruction on the genuine
dispute doctrine. The panel also rejected National Union’s
argument that it acted reasonably due to a genuine dispute
existing about the application and viability of Diamond
Heights. The panel held that a jury could reasonably
conclude not only that the settlement was reasonable, but also
that any dispute about coverage was less than genuine. The
panel, therefore, rejected National Union’s challenge to the
bad faith claim based on the sufficiency of the evidence. The
panel held that the district court did not err in awarding
attorney’s fees that LMA failed to segregate between work
done on its recoverable and nonrecoverable claims. The
district court concluded that the district court’s chosen
apportionment of the fees appeared to be fair under California
law.
COUNSEL
Paula M. Carstensen (argued), Jodi S. Green, and Barbara I.
Michaelides, Nicolaides Fink Thorpe Michaelides Sullivan
LLP, Chicago, Illinois; Paul D. Motz and John W. Patton, Jr.,
Patton & Ryan LLC, Chicago, Illinois; Christopher R.
Wagner and David L. Jones, Gordon & Rees LLP, Los
Angeles, California; for Defendant-Appellant.
James Christopher Martin (argued), Melissa A. Meth, and
Douglas C. Rawles, Reed Smith LLP, Los Angeles,
4 TELEFLEX MED. V. NAT’L UNION FIRE INS.
California; Thomas W. Ports, Jr., Tillman J. Breckenridge,
and Gary S. Thompson, Reed Smith LLP, Washington, D.C.;
for Plaintiff-Appellee.
OPINION
CALLAHAN, Circuit Judge:
In Diamond Heights Homeowners Association v. National
American Insurance Co., 227 Cal. App. 3d 563 (1991), a
California appellate court ruled that an excess liability insurer
has three options when presented with a proposed settlement
of a covered claim that has met the approval of the insured
and the primary insurer. The excess insurer must (1) approve
the proposed settlement, (2) reject it and take over the
defense, or (3) reject it, decline to take over the defense, and
face a potential lawsuit by the insured seeking contribution
toward the settlement. Id. at 580–81. Under Diamond
Heights, the insured is entitled to reimbursement if the excess
insurer was given a reasonable opportunity to evaluate the
proposed settlement, and the settlement was reasonable and
not the product of collusion.
This diversity case presents such a contribution action.
The insured, LMA North America, Inc. (LMA),1 sued its
excess insurance carrier, National Union Fire Insurance
Company of Pittsburgh, PA (National Union), in connection
with National Union’s refusal to either contribute $3.75
million toward the settlement of claims brought by a third
party or take over the defense. We must decide whether the
1
LMA merged with Teleflex Medical Incorporated, but the parties
continue to refer to the business as LMA.
TELEFLEX MED. V. NAT’L UNION FIRE INS. 5
district court erred in applying the Diamond Heights rule,
instructing the jury, denying National Union’s motion for
judgment as a matter of law, and awarding fees and costs.
We affirm.
I.
A. LMA’s insurance policies
LMA had two general liability insurance policies
covering claims that LMA disparaged other companies: (1) a
primary policy issued by Transcontinental Insurance
Company (called CNA) with a $1 million limit, and (2) an
excess policy issued by National Union with a $14 million
limit.
The National Union policy contained a “no voluntary
payments” provision stating that “[n]o insureds will, except
at their own cost, voluntarily make a payment, assume any
obligation, or incur any expense, other than for first aid,
without [National Union’s] consent.” The policy also
contained a “no action” clause stating in relevant part that
“[t]here will be no right of action against us under this
insurance unless . . . [t]he amount you owe has been
determined with our consent or by actual trial and final
judgment.” The policy also recognized National Union’s
right to “participate” in the defense of a claim and, following
exhaustion of coverage by the primary insurer, a “duty to
defend” the claim.
B. The underlying Ambu litigation
LMA and its competitor Ambu distribute competing
laryngeal mask airway products. In 2007, LMA brought a
6 TELEFLEX MED. V. NAT’L UNION FIRE INS.
patent infringement suit in federal district court against Ambu
related to certain laryngeal masks. Ambu filed trade
disparagement and false advertising counterclaims,
demanding $28 million. The counterclaims were premised on
allegedly false, disparaging statements in LMA’s advertising
regarding Ambu’s products. CNA agreed to defend LMA on
the counterclaims. National Union does not dispute that the
counterclaims were covered by its insurance policy.
In 2009, the district court granted summary judgment in
Ambu’s favor on the patent claims and denied LMA
summary judgment on the counterclaims. The district court
stayed the counterclaims pending resolution of LMA’s
appeal. In 2010, the Federal Circuit reversed dismissal of the
patent claims. Laryngeal Mask Co. v. Ambu, 618 F.3d 1367
(Fed. Cir. 2010).
The parties then held a mediation on January 10–11,
2011. National Union did not attend the mediation, but CNA
did. LMA’s counsel, Stephen Marzen, updated National
Union each day. On the second day, LMA and Ambu
reached a conditional settlement agreement, under which
Ambu would pay LMA $8.75 million for the patent claims
while LMA would pay Ambu $4.75 million for the
disparagement claims. The settlement was conditioned on
LMA’s ability to obtain approval and funding from CNA and
National Union.
While CNA committed its full $1 million limit, National
Union was reluctant to recognize that Ambu’s counterclaims
could invade its coverage layer. On February 14, 2011,
National Union requested an updated analysis of liability and
damages from Marzen. Marzen had previously provided
National Union with information regarding the counterclaims,
TELEFLEX MED. V. NAT’L UNION FIRE INS. 7
including copies of pleadings and discovery, verbal reports,
access to other information, and a January 22, 2010 case
report assessing potential liability. The 2010 case report
explained that, if the counterclaims went to trial, Ambu could
support its damages claim by using internal LMA executive-
level emails that suggested knowledge of a false advertising
campaign. The report concluded that LMA’s possible
liability ranged up to $10 million, excluding potential treble
damages.
On March 17, 2011, LMA provided the updated analysis
requested by National Union. The analysis concluded that,
“considering the risk of a damages award substantially in
excess of $10 million, and not counting the substantial
defense costs to defend against the product disparagement
counterclaims through trial, and possible appeal, $4.75
million is a fair and reasonable settlement of Ambu’s product
disparagement counterclaims.” LMA also informed National
Union that CNA had approved the settlement and committed
its policy limit. LMA requested a prompt reply, explaining
that “time is scarce.”
On March 23, LMA repeated its request for a response.
Two days later, LMA again requested a response and clarified
that National Union’s options were to (1) accept the
settlement, (2) reject the settlement and take over the defense,
or (3) reject the settlement and refuse to undertake the
defense, leaving LMA the option of pursuing reimbursement
in a subsequent action.
On March 25, 2011, National Union sent a list of
questions to Marzen about the proposed settlement. Marzen
replied four days later, and followed up with a conference call
during which he again stated National Union’s three options.
8 TELEFLEX MED. V. NAT’L UNION FIRE INS.
National Union promised to respond by April 1, but later
committed to “Wednesday [April 6] at the latest.”
On April 7, 2011, National Union declined to consent to
the proposed settlement without offering to take up the
defense. On April 13 and 14, LMA again requested that
National Union take up the defense if it chose to reject the
settlement. LMA stated that, absent a prompt response, LMA
would finalize the settlement.
Having still not heard from National Union regarding
taking over the defense, LMA finalized the settlement with
Ambu on April 18. LMA promptly notified National Union.
On April 21, National Union advised that it would assume the
defense of the underlying suit if LMA could “undo” the
settlement. LMA promptly responded that the executed
settlement could not be undone. LMA further stated that
National Union had acted in bad faith in handling the matter,
including by waiting until after the settlement to state a
willingness to take on the defense, which LMA considered to
be an attempt to manufacture a defense that LMA failed to
gain National Union’s “consent” to the settlement.
C. The insurance coverage litigation
Following execution of the settlement, LMA sued
National Union for breach of contract and bad faith. LMA
sought contract damages, interest, attorney’s fees and costs,
and punitive damages. After discovery, National Union
moved for summary judgment, arguing that it had the
absolute right to veto the settlement under the policy’s “no
voluntary payments” and “no action” clauses.
TELEFLEX MED. V. NAT’L UNION FIRE INS. 9
The district court denied National Union’s motion for
summary judgment. LMA N. Am., Inc. v. Nat’l Union Fire
Ins. Co. of Pittsburgh, Pa., 924 F. Supp. 2d 1188, 1208 (S.D.
Cal. 2013). The district court ruled that the state appellate
court’s decision in Diamond Heights provided the applicable
rule: an “excess insurer may waive its rights under [a no
action] clause if it rejects a reasonable settlement and at the
same time fails to offer to undertake the defense.” Id. at
1202. The district court disagreed with National Union’s
positions that Diamond Heights had been overruled and was
factually distinguishable. Id. at 1202–04. The court also
denied summary judgment on LMA’s bad faith claim, ruling
that “a reasonable jury could conclude that National Union
acted unreasonably in delaying its response to LMA’s request
that National Union fund the contingent settlement or take
over defense of the [c]ounterclaims.” Id. at 1206.
The case proceeded to trial and the jury unanimously
found for LMA on both the breach of contract and bad faith
claims, but decided not to award punitive damages. On April
7, 2014, the district court entered judgment in LMA’s favor
for $6,080,568.43, including $3,750,000 in contract damages;
$1,216,580.99 in attorney fees, expert fees and costs; and
prejudgment interest of $1,113,987.44. Finally, the court
denied National Union’s “motion for a new trial and/or
judgment to be entered in its favor.”
National Union timely appealed and we have jurisdiction
under 28 U.S.C. § 1291.
II.
On appeal, National Union argues that the district court
erred in (1) applying the Diamond Heights rule to this case;
10 TELEFLEX MED. V. NAT’L UNION FIRE INS.
(2) instructing the jury on both the breach of contract and bad
faith claims; (3) denying its motion for judgment as a matter
of law on the bad faith claim; and (4) awarding $1,216,580.99
in fees and costs.
A. LMA’s breach of contract claim based on Diamond
Heights
National Union’s leading argument requires us to decide
whether the district court erred in applying the rule
announced by a California appellate court in Diamond
Heights.
California substantive law governs this diversity
insurance coverage action, including the question of whether
excess insurers have an absolute right to veto a settlement
under a policy’s “no action” and “no voluntary payments”
clauses. Hyundai Motor Am. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 600 F.3d 1092, 1097 (9th Cir. 2010); see also
Erie R. Co. v. Tompkins, 304 U.S. 64, 71–80 (1938). As we
have explained:
When interpreting state law, federal courts are
bound by decisions of the state’s highest
court. In the absence of such a decision, a
federal court must predict how the highest
state court would decide the issue using
intermediate appellate court decisions,
decisions from other jurisdictions, statutes,
treatises, and restatements as guidance.
However, where there is no convincing
evidence that the state supreme court would
decide differently, a federal court is obligated
TELEFLEX MED. V. NAT’L UNION FIRE INS. 11
to follow the decisions of the state’s
intermediate appellate courts.
Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958,
960 (9th Cir. 2001) (quoting Lewis v. Tel. Employees Credit
Union, 87 F.3d 1537, 1545 (9th Cir. 1996)). In other words,
when, as here, “there is relevant precedent from the state’s
intermediate appellate court, the federal court must follow the
state’s intermediate appellate court decision unless the federal
court finds convincing evidence that the state’s supreme court
likely would not follow it.” Ryman v. Sears, Roebuck & Co.,
505 F.3d 993, 994 (9th Cir. 2007).
According to National Union, the district court should not
have applied the Diamond Heights rule because the California
Supreme Court has effectively overruled the decision or,
alternatively, would not apply the Diamond Heights rule to
this case’s facts. National Union also argues that the district
court improperly instructed the jury on the burden an insured
must carry to prevail on a claim based on Diamond Heights.
We first describe the Diamond Heights decision in greater
detail and then explain that the district court appropriately
followed it.
1. The Diamond Heights rule
In Diamond Heights, a condominium developer sued its
excess insurer, Central, seeking contribution toward the
settlement of construction defects claims covered by the
excess insurance policy. 227 Cal. App. 3d at 569. The
developer and its primary insurer notified Central that the
plaintiffs’ settlement demand exceeded the primary coverage
layer and that it was likely the primary policy limits would be
exhausted. The excess insurer sent a reservation of rights
12 TELEFLEX MED. V. NAT’L UNION FIRE INS.
letter and stayed out of the defense. Though Central offered
to contribute a relatively small sum toward settlement, the
matter settled on the first day of trial, without Central’s
contribution and over its objection. Under a provision of
California law that is not at issue here, the trial court
reviewed the settlement and found it to be reasonable and not
the product of collusion. Id. at 574–75.
The developer then sued Central, seeking contribution
toward the settlement. Central moved for summary judgment
on the ground that the settlement was entered without its
consent and therefore violated the policy’s “no action” clause.
The trial court granted summary judgment in Central’s favor,
but the court of appeal reversed. Id. at 570, 574. The
appellate court ruled that, subject to certain conditions, “a
primary insurer may negotiate a good faith settlement of a
claim in an amount which invades excess coverage, and . . .
enter into such settlement binding upon the excess insurer
without the excess insurer’s consent, notwithstanding the ‘no
action’ clause.” Id. at 580. Specifically, “the excess insurer
may waive its rights under that clause if it rejects a reasonable
settlement and at the same time fails to offer to undertake the
defense.” Id. at 581.
The court explained in detail “[t]he legal basis and policy
considerations which support [its] conclusion.” Id. at 580. In
terms of legal basis, the court grounded its rule in the duty of
good faith owed between insured and insurer, and between
insurers:
Consistent with its good faith duty, the excess
insurer does not have the absolute right to
veto arbitrarily a reasonable settlement and
force the primary insurer to proceed to trial,
TELEFLEX MED. V. NAT’L UNION FIRE INS. 13
bearing the full costs of defense. A contrary
rule would impose the same unnecessary
burdens upon the primary insurer and the
parties to the action, among others, as does the
primary insurer’s breach of its good faith duty
to settle.
Id. at 580–81. The court noted, “In a somewhat analogous
situation, when a primary insurer wrongfully denies coverage,
unreasonably delays processing a claim, or refuses to defend
an action against the insured as required by the policy, the
insured is entitled to make a reasonable settlement of the
claim in good faith and then sue for reimbursement, even
though the policy prohibits settlements without the consent of
the insurer.” Id. at 581 (collecting cases).
The court cited several policy considerations supporting
its rule that the excess insurer does not have an absolute right
to veto a reasonable settlement. A contrary rule would
“imperil[] the public and judicial interests in fair and
reasonable settlement of lawsuits.” Id. (citation omitted).
Similarly, a contrary rule would have inequitable
consequences for the insured in cases where liability may
exceed excess limits, as well for primary insurers in cases
where liability does not. Such a rule would effectively allow
excess insurers to “get a ‘free ride’ at the expense of the
primary insurer to the detriment of all other parties involved.”
Id. at 582. Finally, the court explained that its rule is not
unfair for excess insurers because they are “not without a
means of avoiding a proposed settlement or challenging a
final settlement.” Id. An excess insurer “may . . . agree to
undertake the defense . . . and either conduct its own
settlement negotiations or take the action to trial.” Id. The
excess insurer “may also challenge the settlement on the
14 TELEFLEX MED. V. NAT’L UNION FIRE INS.
ground of unreasonableness or that it is a product of collusion
between primary insurer and insured.” Id.
Applying its rule, the appellate court in Diamond Heights
reversed the trial court’s summary judgment in favor of
Central. The court remanded because material factual issues
related to the developer’s reimbursement claim remained,
“including the issue of whether Central was afforded a
reasonable opportunity to undertake the defense prior to the
settlement.” Id. at 583.
2. National Union has not presented convincing
evidence that the California Supreme Court would
not follow Diamond Heights.
We review the district court’s determination of state law
de novo. Salve Regina College v. Russell, 499 U.S. 225, 231
(1991). National Union argues that the district court should
not have followed Diamond Heights because the case is
inconsistent with the California Supreme Court’s subsequent
decision in Waller v. Truck Insurance Exchange, Inc., 11 Cal.
4th 1 (1995). Waller rejected “the automatic waiver rule
announced in dictum in McLaughlin v. Connecticut General
Life Ins. Co., 565 F. Supp. 434 (N.D. Cal. 1983).” Waller,
11 Cal. 4th at 32, 33. “[T]he McLaughlin . . . court held that
an insurance company which relies on specified grounds for
denying a claim thereby waives the right to rely in a
subsequent litigation on any other grounds which a
reasonable investigation would have uncovered.” Id. at 32.
In rejecting this waiver rule, the California Supreme Court
explained:
Case law is clear that waiver is the intentional
relinquishment of a known right after
TELEFLEX MED. V. NAT’L UNION FIRE INS. 15
knowledge of the facts. The burden is on the
party claiming a waiver of a right to prove it
by clear and convincing evidence that does
not leave the matter to speculation, and
doubtful cases will be decided against a
waiver. The waiver may be either express,
based on the words of the waiving party, or
implied, based on conduct indicating an intent
to relinquish the right.
Id. at 31 (alteration and citations omitted).
National Union asserts that Waller’s rule that an insurer
waives a policy defense only upon an intentional
relinquishment of a known right is irreconcilable with the
Diamond Heights rule, which does not require the intentional
relinquishment of an excess insurer’s rights under a “no
action” clause. We disagree for several reasons.
First, as the district court noted, Waller did not mention
Diamond Heights and only “reiterated waiver principles that
existed before Diamond Heights.” LMA, 924 F. Supp. 2d at
1203.
Second, California appellate courts have relied on
Diamond Heights after Waller. Risely v. Interinsurance
Exch. of Auto. Club, 183 Cal. App. 4th 196, 210, 217 (2010);
Executive Risk Indem., Inc. v. Jones, 171 Cal. App. 4th 319,
332 (2009); Fuller-Austin Insulation Co. v. Highlands Ins.
Co., 135 Cal. App. 4th 958, 987 (2006), as modified on denial
of reh’g (Feb. 17, 2006).
Fuller-Austin and Risely represent two post-Waller
endorsements of the Diamond Heights rule by two other
16 TELEFLEX MED. V. NAT’L UNION FIRE INS.
districts of the California Court of Appeal. Fuller-Austin
provides the strongest endorsement. In that case, the
appellate court concluded that an approved bankruptcy plan
resolving third-party claims is a settlement that was binding
on excess insurers, even though the insurers did not consent
to the settlement as required by the insurance policy. Fuller-
Austin, 135 Cal. App. 4th at 969, 982–91. However, in
opposing a contribution action by the insured, the excess
insurers may “challenge the Plan for fairness, reasonableness
and lack of fraud or collusion.” Id. at 990. In so holding, the
court agreed with “[t]he rationale of Diamond Heights”:
It would impose an unnecessary burden on
primary insurers and parties to an underlying
action to hold that an excess insurer has an
absolute right to withhold its consent to a
settlement, while at the same time decline to
participate in the action. . . . Allowing [the
insured] to enter into a global settlement in
the bankruptcy court without [the excess
insurers’] participation, while permitting [the
excess insurers] to challenge the Plan for
fairness, reasonableness and lack of fraud or
collusion in the instant action, does no
violence to the policy language requiring [the
excess insurers’] consent. (Diamond Heights,
Cal. App. 3d at 581.) We do not believe that
the policies can be read to permit an excess
insurer to hover in the background of critical
settlement negotiations and thereafter resist all
responsibility on the basis of lack of consent.
Id. at 987.
 TELEFLEX MED. V. NAT’L UNION FIRE INS. 17
Risely involved a dispute against a primary insurer, but
the Risely court also quoted Diamond Heights in holding that
an “insurer is deemed to have waived its rights under the ‘no
action’ clause by such conduct constituting a breach of its
obligations under the policy.” Risely, 183 Cal. App. 4th at
201, 210.
We note that Diamond Heights has been criticized by
other courts. See, e.g., Hartford Accident & Indem. Co. v.
Superior Court, 29 Cal. App. 4th 435, 440 n.4 (1994); Pac.
Estates, Inc. v. Superior Court, 13 Cal. App. 4th 1561,
1567–76 (1993). But as the Fuller-Austin court explained,
“this criticism revolves around its further conclusion that
Central was bound by the good faith settlement determination
as a ‘co-obligor.’” 135 Cal. App. 4th at 987 n.11.
“Subsequent cases have clarified that an excess insurer is not
conclusively bound by a good faith settlement determination
in [underlying litigation in] which it did not participate.” Id.
This part of Diamond Heights has no bearing here because
there is no argument that the settlement between LMA and
Ambu had preclusive effect on National Union in this action
for reimbursement.
Third, Diamond Heights and Waller are reconcilable.
Waller stands for the proposition that a insurer does not waive
a right under an insurance policy simply by failing to mention
it in a claim letter. 11 Cal. 4th at 33. By contrast, Diamond
Heights is about how an insurance policy should be read in
order to reconcile an excess insurer’s contractual rights under
“no action” and “no voluntary payments” clauses with the
insured’s rights under the implied covenant of good faith and
fair dealing. In other words, notwithstanding the court’s use
of the word “waiver” in Diamond Heights, the rule is not so
much about the waiver of an insurer’s contractual right than
18 TELEFLEX MED. V. NAT’L UNION FIRE INS.
it is about an insurer’s breach of a contractual obligation.
Whereas Waller prevents a policy from being expanded
beyond the contracting parties’ intent, the covenant of good
faith underlying Diamond Heights is grounded on “honoring
the reasonable expectations created by the autonomous
expressions of the contracting parties.” Tymshare, Inc. v.
Covell, 727 F.2d 1145, 1152 (D.C. Cir. 1984) (Scalia, J.).
The wisdom of the Diamond Heights rule may not be
beyond reasonable debate. But for the implied covenant of
good faith and fair dealing, the rule would be contrary to the
language of the “no action” and “no voluntary payments”
provisions. The rule thus arguably gives the insured and
primary insurers more than was bargained for, at least if
excess insurers have not raised their rates to accommodate for
additional costs imposed by the rule. National Union notes
that primary insurers charge a premium for the duty to
defend, while excess insurers do not, as they generally may
rely on defense funded by primary insurers.
However, as noted, the rule is fairly supported by other
insurance principles and policy considerations. Indeed, the
underlying notion that “no action” and “no voluntary
payment” clauses do not create absolute rights to veto
settlements is long established. Many courts have held that
“when a primary insurer wrongfully denies coverage,
unreasonably delays processing a claim, or refuses to defend
an action against the insured as required by the policy, the
insured is entitled to make a reasonable settlement of the
claim in good faith and then sue for reimbursement, even
though the policy prohibits settlements without the consent of
the insurer.” Diamond Heights, 227 Cal. App. 3d at 581
(collecting cases).
TELEFLEX MED. V. NAT’L UNION FIRE INS. 19
We hold that National Union has failed to show that the
district court erred in “follow[ing] the state’s intermediate
appellate court decision,” because National Union has not
proffered “convincing evidence that the state’s supreme court
likely would not follow it.” See Ryman, 505 F.3d at 994.2
3. Diamond Heights is not distinguishable on its facts.
National Union also argues that the district court wrongly
extended Diamond Heights in applying it to this case’s
different facts. National Union distinguishes this case from
Diamond Heights because “[1] CNA’s $1 million limit was
not exhausted; [2] CNA never withdrew its defense;
[3] LMA’s liability for the Ambu disparagement claim was
uncertain; [4] discovery was not complete; [5] there was no
pending trial date; and [6] [there was] no exposure to LMA
beyond the $15 million in available insurance coverage.”
None of these facts materially distinguishes this case from
Diamond Heights.
First, CNA committed its policy limit over a month before
settlement, which is earlier than the primary insurer in
Diamond Heights. Second, in both cases, the primary insurer
funded the defense up until settlement, and the excess insurer
did not take over the defense. Regardless of who funds
counsel, the insured and the primary insurer owe a duty of
good faith that runs not only to each other but also to the
excess insurer. See Diamond Heights, 227 Cal. App. 3d at
2
National Union’s motion to certify the question of the Diamond
Heights rule’s validity to the California Supreme Court is denied. In light
of consistent California appellate court decisions addressing the duties of
excess carriers with respect to the settlement of covered claims against the
insured, we find that certification is not warranted.
20 TELEFLEX MED. V. NAT’L UNION FIRE INS.
578–79. Third, the insured’s liability was not certain in either
case. The parties in both cases settled before judgment and
the settlements were found to be reasonable assessments of
potential liability. Fourth, the fact that discovery had not
been completed in this case may be relevant to the
reasonableness of settlement but does not render the rule
inapplicable. Here, the jury found the settlement to be
reasonable. Indeed, there may be good reasons to settle mid-
discovery, such as the risk of disclosing damaging
documents, rather than on the eve of trial. Fifth, the fact that
no trial date was set might bear on the settlement’s
reasonableness and whether the insurer had sufficient time to
consider the settlement, but does not distinguish Diamond
Heights. The jury decided both of these issues in LMA’s
favor. In fact, National Union’s foot-dragging may
reasonably be seen as more egregious than the excess
insurer’s conduct in Diamond Heights. The excess insurer in
Diamond Heights had less than two weeks to consider the
settlement, whereas National Union had months. Finally, in
both cases, potential liability was not projected to exceed
excess policy limits. See id. at 575, 582.
National Union also contends more generally that
Diamond Heights should not be applied because “LMA’s
self-interest was the driving force behind the settlement.”
The structure of the settlement may suggest that LMA did not
have a strong incentive to achieve the lowest settlement of the
disparagement claims. Arguably, LMA had an incentive to
fork over its insurers’ money in satisfaction of the
disparagement counterclaims in order to secure a larger
payout on the patent claims. However, a jury found that the
settlement was reasonable and not a product of collusion.
Substantial evidence supports the jury’s unanimous findings,
which National Union appears to concede.
TELEFLEX MED. V. NAT’L UNION FIRE INS. 21
In sum, Diamond Heights has not been overruled and is
not distinguishable. The district court correctly followed the
Diamond Heights rule in this diversity action governed by
California law.
4. The district court did not commit prejudicial error
in defining the standard of proof applicable to
LMA’s breach of contract claim.
Again relying on Waller, National Union argues that the
district court applied the wrong standard of proof to LMA’s
claim based on Diamond Heights. National Union contends
that, under Waller, LMA should have been required to prove
its contract claim by clear and convincing evidence rather
than by a preponderance of the evidence. We review the
district court’s jury instructions for an abuse of discretion, but
we consider “de novo whether the challenged instruction
correctly states the law.” Wilkerson v. Wheeler, 772 F.3d
834, 838 (9th Cir. 2014).
National Union’s argument fails because California courts
have not required a burden of proof more demanding than the
preponderance of the evidence standard that LMA met. In
analogous cases, California courts have held that an insured
bears a prima facie burden of showing: “(1) the insurer
wrongfully failed or refused to provide coverage or a defense,
(2) the insured thereafter entered into a settlement of the
litigation which was (3) reasonable in the sense that it
reflected an informed and good faith effort by the insured to
resolve the claim.” Pruyn v. Agric. Ins. Co., 36 Cal. App. 4th
500, 528 (1995). After the insured so shows, “the burden of
proof will shift to the defendant insurers to persuade the trier
of fact, by a preponderance of the evidence, that [the
insured’s] settlement did not represent a reasonable resolution
22 TELEFLEX MED. V. NAT’L UNION FIRE INS.
of plaintiff’s claim or that the settlement was the product of
fraud or collusion.” Id. at 530. Pruyn’s burden-shifting
framework persists after Waller. See, e.g., Nat’l Steel Corp.
v. Golden Eagle Ins. Co., 121 F.3d 496, 502–03 (9th Cir.
1997); Safeco Ins. Co. v. Superior Court, 71 Cal. App. 4th
782, 790 n.5 (1999).
Applying this burden-shifting rule to claims under the
Diamond Heights rule would mean that the insured’s prima
facie burden includes, in addition to the elements listed
above, showing that the insurer was “afforded a reasonable
opportunity of undertaking the defense in order to avoid
settlement.” Diamond Heights, 227 Cal. App. 3d at 580.
Once a prima facie showing is made, the burden of proof on
this element would then shift to the excess insurer to show, by
a preponderance of the evidence, that it was not provided
with a reasonable opportunity to evaluate the settlement and
decide whether to undertake the defense.
National Union’s argument that LMA should have been
held to a clear and convincing evidence standard fails in light
of California cases applying a less demanding, burden-
shifting framework to analogous claims. While the district
court did not employ the burden-shifting framework and
instead required LMA to prove its claim by a preponderance
of the evidence, any error in defining the burden of proof
benefitted National Union and therefore was harmless. See,
e.g., Mockler v. Multnomah Cty., 140 F.3d 808, 812 (9th Cir.
1998).
B. LMA’s bad faith claim
National Union challenges the judgment on the bad faith
claim on two related grounds. National Union first argues
TELEFLEX MED. V. NAT’L UNION FIRE INS. 23
that the judgment should be vacated because the district court
did not instruct the jury on the genuine dispute doctrine.
National Union contends that, under this doctrine, it did not
act in bad faith because “a genuine dispute as to its coverage
liability exist[ed]” due to uncertainty regarding “the
applicability and viability of Diamond Heights.”
Even assuming that the genuine dispute doctrine applies
to this case, National Union’s argument fails.3 The district
court correctly concluded that the doctrine is subsumed
within the standard Judicial Council of California Civil Jury
Instructions (CACI) for breach of good faith and fair dealing,
which the district court gave to the jury.4 See Judicial
3
The genuine dispute doctrine has been applied in related contexts.
See Lunsford v. Am. Guar. & Liab. Ins. Co., 18 F.3d 653, 656 (9th Cir.
1994); Opsal v. United Servs. Auto. Ass’n, 2 Cal. App. 4th 1197, 1205–06
(1991). However, our court and several California appellate courts have
expressed skepticism about its applicability to “third party claim” cases
like this one. Mt. Hawley Ins. Co. v. Lopez, 215 Cal. App. 4th 1385, 1424
(2013) (“It is doubtful that the so-called ‘genuine dispute doctrine’ applies
in third party duty to defend cases like this one.”); Howard v. Am. Nat’l
Fire Ins. Co., 187 Cal. App. 4th 498, 530 (2010) (“[I]t has never been held
that an insurer in a third party case may rely on a genuine dispute over
coverage to refuse settlement.”); Yan Fang Du v. Allstate Ins. Co.,
697 F.3d 753, 758 (9th Cir. 2012) (finding the question of “whether the
genuine dispute doctrine applies to the duty to settle third party claims”
uncertain). Cf. CalFarm Ins. Co. v. Krusiewicz, 131 Cal. App. 4th 273,
286–87 (2005) (applying the genuine dispute doctrine in the context of the
duty to indemnify, but explaining that “[w]hen the issue of the insurer’s
objective reasonableness depends on an analysis of legal precedent,
reasonableness is a legal issue reviewed de novo”).
4
Under CACI 2331, the standard jury instruction for determining
“breach of good faith and fair dealing” requires five elements: “(1) the
insured suffers loss covered under an insurance policy; (2) the insurer was
notified of the loss; (3) the insurer unreasonably fails or delays payment
24 TELEFLEX MED. V. NAT’L UNION FIRE INS.
Council of California Civil Jury Instructions No. 2331,
Direction for Use (2016). Indeed, a California appellate court
has affirmed a trial court’s refusal to give special instructions
on the genuine dispute doctrine beyond CACI 2331. McCoy
v. Progressive W. Ins. Co., 171 Cal. App. 4th 785, 794
(2009). The court agreed with the trial court that “the
genuine dispute doctrine was subsumed within the concept of
what is reasonable and unreasonable as set forth in CACI
2331.” Id. at 792. In other words, if a genuine dispute “as to
the insurer’s liability under the policy” exists, the insurer did
not withhold its payment unreasonably, which is “[t]he
linchpin of a bad faith claim.” Id. at 793. Accordingly, the
district court did not err in denying National Union’s
proposed instruction on the genuine dispute doctrine.
National Union also argues that, as a matter of law, it
acted reasonably because a genuine dispute existed about the
application and viability of Diamond Heights.5 National
Union presented this argument to the jury, contending that it
was reasonable to refuse the settlement and tell LMA’s
counsel to “fight on” without agreeing to assume the defense.
The jury unanimously disagreed, and their verdict is
of the policy benefit; (4) the insured is harmed; and (5) the insurer’s
failure or delay is a substantial factor in causing the insured’s harm.”
5
We review the district court’s decision denying judgment as a matter
of law de novo. First Nat’l Mort. Co. v. Fed. Realty Inv. Trust, 631 F.3d
1058, 1067 (9th Cir. 2011). “If sufficient evidence is presented to a jury
on a particular issue and if the jury instructions on the issue stated the law
correctly, the court must sustain the jury’s verdict.” Harper v. City of Los
Angeles, 533 F.3d 1010, 1021 (9th Cir. 2008). “A jury’s verdict must be
upheld if supported by substantial evidence, which is evidence adequate
to support the jury’s conclusion, even if it is also possible to draw a
contrary conclusion.” Id.
TELEFLEX MED. V. NAT’L UNION FIRE INS. 25
supported by substantial evidence. LMA’s counsel
repeatedly advised National Union that, under Diamond
Heights, National Union’s options were to accept the
settlement, or reject it and take over the defense. National
Union did neither, and continued to drag out any final
response with respect to its obligations. In fact, National
Union waited until two days after the settlement, when it
knew that the case had already been settled, to state any
willingness to take on the defense.
The jury could rationally conclude based on these facts
that National Union acted unreasonably by refusing to take
over the defense or approve the reasonable settlement,
knowing full well of its obligations under California law. In
other words, a jury could reasonably conclude not only that
the settlement was reasonable, but also that any dispute about
coverage was less than genuine. This determination is
controlling “even if it is also possible to draw a contrary
conclusion.” Harper, 533 F.3d at 1021. We therefore reject
National Union’s challenge to the bad faith claim based on
the sufficiency of the evidence.
C. The district court’s award of fees and costs
Where an insurer has breached the implied covenant of
good faith and fair dealing by unreasonably refusing to settle
a claim, California law entitles the insured to fees related to
“obtain[ing] the benefits due under a policy.” Brandt v.
Super. Ct., 37 Cal. 3d 813, 817 (1985). Brandt, however,
does not entitle the insured to recover “[f]ees attributable to
obtaining any portion of the plaintiff’s award which exceeds
the amount due under the policy.” Id. at 819.
26 TELEFLEX MED. V. NAT’L UNION FIRE INS.
The parties agree that Brandt entitles LMA to fees
attributable to its breach of contract claim but not to fees
attributable solely to its bad faith claim and related punitive
damages claim. However, National Union contends that the
district court erred in awarding attorney’s fees that LMA
failed to segregate between work done on its recoverable and
non-recoverable claims. We review the district court’s
attorney’s fees award for abuse of discretion. Childress v.
Darby Lumber, Inc., 357 F.3d 1000, 1011 (9th Cir. 2004).
National Union’s argument that the district court was
required to deny all unsegregated fees is plainly contrary to
California law providing for “apportionment of Brandt fees.”
Cassim v. Allstate Ins. Co., 33 Cal. 4th 780, 813 (2004).
National Union’s alternative argument that the fee award
should be vacated and remanded for a new hearing with
instructions that the fees “be split evenly” also fails. Even
assuming that the district court was required to apportion the
fees between the contract and bad faith claims
notwithstanding those claims’ intertwinement, see Reynolds
Metals Co. v. Alperson, 25 Cal. 3d 124, 129–30 (1979),
National Union has not shown that the district court abused
its discretion. The district court apportioned 10% of the
unsegregated fees to the bad faith claim, explaining that this
apportionment was “reasonable . . . and supported by the
evidence and the history of the litigation.” We are not left
with a definite and firm conviction that the district court
committed a clear error of judgment; rather, the chosen
apportionment appears to be fair. As National Union noted
in its reply brief, “[t]he applicability and viability of Diamond
Heights was, and continues to be, the focal point of the
parties’ dispute.”
TELEFLEX MED. V. NAT’L UNION FIRE INS. 27
III.
We affirm the district court’s judgment in favor of LMA
and its award of attorney’s fees. We deny National Union’s
motion for certification. The costs of this appeal are taxed
against National Union.
AFFIRMED.