Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_02-cv-04976/USCOURTS-cand-5_02-cv-04976-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

E-FILED on 5/23/05

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

EMPLOYERS INSURANCE OF WAUSAU, an

Wisconsin company,

Plaintiff,

v.

AMERICAN INTERNATIONAL SPECIALTY

LINES INSURANCE COMPANY, an Alaska

corporation,

Defendant.

No. C-02-04976 RMW

FINDINGS OF FACT AND CONCLUSIONS

OF LAW

This action was tried by the undersigned from September 13, 2004 to September 21, 2004. 

Plaintiff Employers of Wausau ("Wausau") was represented by its counsel, Malcolm A. Misuraca and

Marlis McAllister. Defendant American International Specialty Lines Insurance Company ("AISLIC")

appeared through its counsel, John L. Winchester III. The court has heard and evaluated the evidence, has

considered the arguments of counsel and now issues its Findings of Fact and Conclusions of Law.

I. FINDINGS OF FACT

A. Nature of Case

1. This is an action for declaratory relief, contractual contribution, and equitable contribution

by one insurer against another. Plaintiff Wausau and defendant AISLIC both insured Nu-kote

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

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International, Inc. ("Nu-kote"). Nu-kote manufactured and sold replacement ink cartridges and refills for

printers, fax machines and copiers. 

2. Plaintiff Wausau issued, and subsequently renewed, a $1 million primary

Comprehensive General Policy ("CGL policy") to Nu-kote, covering the period from April 1, 1992 through

March 31, 1994. The original policy and the renewal have an endorsement that added "patent

infringement" to the list of offenses under the "advertising injury" coverage. The list of offenses also included

infringement of copyright and trademark. 

3. AISLIC agreed in a written binder on March 31, 1995 to issue a patent infringement

indemnity policy to Nu-kote with a $25 million limit. This policy was canceled effective July 12, 1995.

4. On April 3, 1995, without any prior notice to Nu-kote, Canon Computer Systems

filed a lawsuit against Nu-kote setting forth claims, among others, for patent infringement and trademark

and trade dress infringement. On April 25, 1995, Seiko-Epson Corporation commenced an action against

Nu-kote on nearly identical allegations. Nu-kote tendered the claims to Wausau and to AISLIC. In

response to the tender, AISLIC reserved its rights. Wausau accepted the tender and ultimately paid

$9,031,431.77 to defend Nu-kote in the Canon v. Nu-Kote lawsuit and $6,769,457.75 to defend the

Seiko-Epson suit. In addition, Wausau paid $300,000 in indemnity to settle the Seiko-Epson action. 

5. After resolution of the underlying Canon and Seiko-Epson lawsuits, Wausau

brought this action against AISLIC on October 15, 2002 seeking contribution. Wausau did not pursue at

trial a claim for contractual indemnity under the assignment of rights it received from Nu-kote and approved

by the Bankruptcy Court on July 3, 2000. Rather, it only claimed entitlement to contribution based upon

equitable considerations.

B. Nu-kote's Acquisition of the Wausau CGL Policy

6. Nu-kote obtained from Wausau a $1 million primary CGL policy and renewed

that policy with a combined coverage period from April 1, 1992 through March 31, 1994. The original

policy and the renewal had a nonpremium endorsement that added patent infringement to the offenses

covered by its "advertising injury" liability coverage. Other offenses covered included infringement of

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28 1 The evidence concerning the premium involved the estimated premium.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

3

copyright and trademark. The Wausau policy appears to have had an annual premium of approximately

$76,500.1 

C. Nu-kote's Acquisition of the AISLIC Patent Infringement Indemnity Policy

7. In early 1995, AISLIC began an underwriting investigation for the potential issuance

of a patent infringement indemnity policy to Nu-kote. The AISLIC underwriters included Yutain Gong and

Anthony Codding. AISLIC's underwriters did not believe there were other patent infringement policies on

the market. They did not believe that typical commercial general liability insurance policies covered patent

infringement. At the end of the underwriting review, AISLIC agreed on March 31, 1995 in a written binder

to issue to Nu-kote a $15 million patent infringement indemnity policy for a premium of $275,000.

D. Coverage Provided By Wausau's CGL Policy

8. The nonpremium endorsement on Wausau's CGL policy which provides coverage for

"advertising injury" liability reads in relevant part:

We will pay those sums that the insured becomes legally obligated to pay as damages

because of . . . "advertising injury" to which this insurance applies. We will have the right

and duty to defend any "suit" seeking those damages. We may, at our discretion,

investigate any offense which may result in . . . "advertising injury" and settle any claim or

"suit" which may result . . . .

Ex. 4, endorsement GL2402. The endorsement adds "patent infringement" to the list of offenses under the

"advertising injury" coverage. "'Advertising injury' means injury . . . arising out of one or more of the

following offenses committed in the course of 'your advertising activities:' . . . Infringement of copyright,

title, trademark, patent or slogan." Id. (Emphasis added).

9. Wausau's CGL policy has an "Other Insurance" provision which reads: 

If other valid and collectible insurance is available to the insured for a loss we cover, . . .

our obligations are limited as follows:

a. Primary Insurance

This insurance is primary except [inapplicable exception] . . . . If this insurance is

primary, our obligations are not affected unless any of the other insurance is primary. Then

we will share with all that other insurance by the method described in c. below.

* * *

c. Method of Sharing

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

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If all of the other insurance permits contribution by equal shares, we will follow this

method also . . . .

If any of the other insurance does not permit contribution by equal shares, we will

contribute by limits.

Ex. 4.

E. Coverage Provided By AISLIC's Patent Infringement Indemnity Insurance

10. The AISLIC policy is titled "Patent Infringement Indemnity Insurance" and in

"claims made" form covering generally liability "FOR ONLY THOSE CLAIMS THAT ARE FIRST

MADE AGAINST THE INSURED AND REPORTED IN WRITING TO THE COMPANY WHILE

THE POLICY IS IN FORCE." Ex. 586, Cover Sheet. It covers Nu-kote as the named insured for a

policy period of March 31, 1995 to March 31, 1996 with limits of $15,000,000 per claim and

$15,000,000 in the aggregate with amounts incurred for legal defense reducing the limits. Declarations. The

insured has a $100,000 self-retention for each claim. The premium was $275,000. The policy was

canceled effective July 12, 1994.

11. The insuring agreement of the AISLIC policy provides:

This policy shall reimburse the Insured for all sums which the Insured shall become legally

obligated to pay and shall have paid as Damages resulting from any Claim or Claims first

made against the Insured . . . during the Policy Period . . . for any Covered

Infringement caused by the manufacture, use, distribution, advertising or sale of a

Covered Product committed by the insured . . . but only if such Covered Infringement

occurs on or after the Retroactive Date (March 31,1995) and before the end of the

Policy Period . . . .

Id. The coverage includes reimbursement for defense expenses: "With respect to any Covered

Infringement . . . the Company shall: (1) reimburse the Insured for sums which the Insured shall have

incurred and paid as Defense Expenses in the defense of Claims alleging Covered Infringements . . . ;

and (2) have the right but not the duty to assume the defense of any Claim against the Insured . . . ." Id.

12. The policy defines "covered infringement" as:

any actual or alleged Patent Infringement caused by the manufacture, use, distribution,

advertising or sale of a Covered Product where, as a condition precedent to the Patent

Infringement being deemed Covered Infringement, if a reasonably prudent patent

attorney familiar with the type of business in which the Insured is engaged would have

conducted an Infringement Search and Infringement Safeguarding prior to:

(1) first manufacturing, using, distributing, advertising or

selling the Covered Product, or

(2) the inception of this policy,

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

5

then the Insured shall have done so.

Id. "Infringement Search"and "infringement safeguarding" are defined.

Infringement Search means the careful review by a patent attorney or patent agent to

determine whether manufacture, use, distribution, advertising or sale of a Covered Product

that the Insured is about to first manufacture, use, distribute, advertise or sell would result

in Patent Infringement.

. . . Infringement Safeguarding means, subsequent to performing an Infringement Search,

concluding in good faith, by means of a written opinion prepared by a patent attorney

retained or employed by the Insured, that the manufacture, use, distribution, advertisement

or sale by the Insured of the proposed Covered Product either:

(1) will not result in Patent Infringement; or

(2) would result in Patent Infringement but for the fact that said patent

attorney found to be invalid the patent(s) that would be infringed; or

(3) would result in Patent Infringement and immediately the Insured

either:

(a) designs around the Patent Infringement so as to avoid

Patent Infringement, or

(b) purchases sufficient rights to the infringed patent through

license, cross-license or assignment, so as to avoid Patent

Infringement, or

(c) abandons the product prior to its manufacture, use,

distribution, advertising or sale, and subsequently the

Insured concludes in good faith, by means of a written

opinion prepared by a patent attorney retained or

employed by the Insured, that the Insured's action

pursuant to one or more of the above sub-paragraphs

2.g(3)(a), (b) and (c) is sufficient such that subsequent

manufacture, use, distribution, advertisement or sale by the

insured of the proposed Covered Product will not result in

Patent Infringement.

Id. at 4-5. "Damages means monetary sums paid to a claimant pursuant to either judgments, or

settlements negotiated with the written consent of the Company . . . ." Id. at 4.

13. The AISLIC policy requires AISLIC to pay only for those amounts in excess of the

Nu-kote's self-retention of $100,000.

RETENTION

The Company shall be liable only for those amounts payable hereunder in satisfaction of

judgments, settlements, Defense Expense and Injunction Expense which are in excess of the

applicable retention stated in Item 5 of the Declarations. The retention shall apply to each

Claim or Injunction Claim and shall be borne by the Insured and remain uninsured by the

Company and not insured by any other insurer. Claims or Injunction Claims arising out of

the same Covered Infringement shall be subject to only one retention.

Id. at 8. The policy also has a provision calling for Nu-kote to pay five percent of any damages or 

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

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defense expense in excess of the retention amount and for that the coinsurance percentage to be 

borne by Nu-kote and not be insured.

COINSURANCE

The Insured shall be liable to pay the coinsurance percentage (six percent) of Damages,

Defense Expense . . . in excess of the retention amount stated in Item 5 of the Declarations .

. .The Company shall be liable to pay the remainder . . ., it being a condition of this

insurance that thhe coinsurance percentage shall be borne by the insured at its own risk and

be uninsured.

Id. 

14. The AISLIC policy has an "Other Insurance" provision.

OTHER INSURANCE

Subject to the provisions of Section 4, LIMITS OF LIABILITY, sub-paragraph f, this

policy shall be excess over any other valid and collectible insurance or indemnification

agreement available to the Insured, whether such insurance or indemnification agreement is

stated to be primary, pro-rata, contributory, excess, contingent or otherwise; however, this

clause shall not apply to other insurance written specifically as excess over the limits of

liability of this policy. 

Id.

15. The AISLIC policy contains exclusions.

EXCLUSIONS

This policy does not apply to any claim:

* * * 

j. not arising out of a Covered Product;

k. arising from the violation of any right in non-patented intellectual property,

including but not limited to any right in trademark, tradedress, copyright or

trade secret;

* * *

n. arising out of the manufacture, use, distribution, advertising or sale of any

Covered Product, which any Insured, prior to the effective date of this

policy, knew or with the advice of patent counsel could have reasonably

foreseen would result in Patent Infringement;

* * *

Id.

F. Canon and Seiko-Epson Litigation

16. The Canon and Seiko-Epson lawsuits involved claims of trademark and trade dress

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2 An objection was sustained to the admission of some purported opinions rendered after the

commencement of the Canon and Epson-Sieko lawsuits based upon failure to disclose those opinions prior

to trial.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

7

infringement as well as claims of patent infringement. Wausau defended Nu-kote. It did not reserve its

rights as to the patent infringement claims, although it denies that patent infringement could have arisen out

of Nu-kote's advertising activities. Wausau acknowledges that it had a duty to defend the lawsuits because

they claimed trademark and trade dress infringement arising out of Nu-kote's advertising activities. The

majority of the defense work was devoted to the patent claims. In the early stages of the cases, Nu-kote

redesigned its packages and labeling which appears to have essentially mooted the trademark and trade

dress claims. Wausau, however, never segregated the defense costs that were attributable to the patent

infringement claims or those that Wausau believes fell under the coverage of the AISLIC policy.

17. Nu-kote's counsel in a letter sent on August 10, 1995 to Jeffrey Hutcheson,

Liability Claim Specialist for Wausau, asked for a prompt decision on Nu-kote's tender and set forth a list

of the Nu-kote products at issue, the products' release dates and the insurance policies in force. The

AISLIC policy was not listed.

18. Wausau paid $300,000 to facilitate the settlement of the Canon case. No consent was

was sought or obtained from AISLIC for the settlement. However, no prejudice was suffered by AISLIC

from the failure to provide notice. The $300,000 settlement payment cut off the potential for incurring

substantially more than that in additional defense costs.

19. Nu-kote did not perform an "infringement search" or "infringement safeguarding" as

specified in the AISLIC policy. No witness testified that Nu-kote had a patent attorney or agent conduct

an infringement search prior to the first manufacturing, use, distributing, advertising or selling of the accused

product or do so at the inception of coverage under the ASLIC policy. No written opinion prepared by a

patent attorney was received in evidence.2 However, when conducting her underwriting investigation for

the AISLIC policy, Gong reviewed the Nu-kote safeguarding procedure and found it "good." 

Q. What did you conclude during the underwriting before the binder was

issued about Nu-kote's attitude toward intellectual property?

A. Based on my notes I liked them. I think their management is sensitive

to the issue.

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3 The court took under submission the objection to the admissibility of the brochure (Ex. 32). 

The court finds that a sufficient foundation was laid to authenticate the brochure as an AISLIC brochure

prepared in June 1995. Its relevance is limited to the light it sheds on underwriting intent and the materiality

of the Patent Infringement Search and Safeguarding condition.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

8

Q. What did you think about their safeguarding procedure?

A. I thought it was good.

Q. Was the safeguarding procedure in writing?

A. Yes. I thought it was good.

Depo. of Gong, 40:10-20

20. Three days after AISLIC issued its binder on March 31, 1995, Canon sued Nu-kote on

a variety of claims including patent infringement. AISLIC immediately cancelled the binder. Nu-kote

protested the cancellation and held meetings with AISLIC to prove that Nu-kote did not know that the

Canon suit was coming.

21. The discussions at the meetings included a series of questions to Nu-kote from

AISLIC, which asked whether Nu-kote had adhered to its internal patent search and safeguarding

procedure. AISLIC did not question whether Nu-kote had adhered to the search and safeguarding

procedure set forth in the ASLIC policy. AISLIC rather inquired as to whether Nu-kote had adhered to

its own procedure but did not inquire as to the substance of that procedure. When these meetings were

concluded, AISLIC reinstated the patent infringement policy.

22. At trial, Karl Limbach, an experienced and well qualified patent attorney, testified

that a reasonable patent attorney would have conducted an infringement search and safeguarding as

described in the AISLIC policy, particularly in light of the industry involved.

23. A marketing brochure that AISLIC printed in June 1995, approximately three months

after AISLIC bound coverage, includes a "Patent Infringement Insurance Fact Sheet." Ex. 323. That sheet

contains sections on "Product Highlights," "Underwriting Information Requirements" and "Customer

Profile." It also includes a "Patent Risk Management" self-assessment guide as "an aid in formulating,

implementing and maintaining an effective patent risk management policy." The brochure did not say that

coverage is conditioned on the insured's having done a particular infringement search or undertaken

safeguarding.

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

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G. AISLIC's Reservation of Rights Letters

24. On November 29, 1995 AISLIC's counsel sent essentially identical reservation of

rights letter to Nu-kote pertaining to the Canon and Seiko-Epson lawsuits. The letters, among other things,

state that to the extent "coverage may be available under the terms and conditions to the policy, such

coverage would be limited to damages arising from only such Coverage Infringements which may have

occurred . . . between March 31, 1995 and July 12, 1995." Ex. 28. The letter further points out (1) that

any claim is subject to a 5% co-insurance; (2) that there is no coverage for trademark infringement, unfair

competition or trademark dilution; (3) the definition of "covered infringement"; (4) that pursuant to the coinsurance provision the coverage "is excess over' . . . any other valid and collectible insurance or

indemnification agreement available to the Insured, whether such insurance or identification agreement is

stated to be primary, pro-rata, contributory, excess, contingent or otherwise. . .'"; and (5) that the policy "is

not a defense policy and that AISLIC has no obligation to reimburse defense expenses prior to the final

disposition of any claim." Id.

25. AISLIC now contends that there is no coverage under the AISLIC policy for a

number of reasons:

(1) the Wausau policy is primary and AISLIC's policy is excess and has never been triggered;

(2) the requirements of the "Covered Infringement" provisions of AISLIC's policy have never

been satisfied;

(3) the requirements of the self-insured retention provisions of the AISLIC policy have never

been satisfied;

(4) the consent terms of the AISLIC policy were not met;

(5) the requirement that the insured pay defense expenses has not been met;

(6) the coinsurance condition of the AISLIC policy was not satisfied; 

(7) the exclusions under the AISLIC policy prohibit a finding of coverage; and

(8) the statute of limitations has run on Wausau's claim for equitable contribution.

II. CONCLUSIONS OF LAW

A. Excess Versus Primary Insurance

1. A primary carrier who pays the defense costs or pays the loss is entitled to 

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4 The parties agree that Wausau was required to defend the Canon and Seiko-Epson

lawsuits because they asserted claims covered under the advertising injury coverage for trademark

infringement. Because the suits alleged covered claims, Wausau had the duty to defend the entire action.

See Buss v. Superior Court, 16 Cal. 4th 35, 48 (1997).

The parties disagree whether Wausau also had a duty to defend because patent infringement is

listed as a covered offense under the advertising injury endorsement. Wausau never reserved its rights as to

patent infringement claims. However, as Wausau now argues, the California Supreme Court held in Bank

of the West v. Superior Court, 2 Cal. 4th 1254 (1992) held that patent infringement could not occur in

advertising because infringement at the time was the unauthorized production, sale or use of a patented

product and not its advertisement. See 35 U.S.C. § 271(a) (1992). 

AISLIC points out that patent infringement was added as a covered advertising offense in the

Wausau policy after the decision in Bank of the West. Further, the endorsement was presumably intended

to cover something. A persuasive argument can be made that the added patent infringement endorsement

may have dispensed with the requirement that the infringement had to be the advertisement itself as

opposed to the production, use or sale of the advertised patented product. See International

Communications Materials, Inc. V. Employer's Insurance of Wausau, 1996 U.S. Dist. LEXIS 21825

(1996).

The court does not resolve the effect of Wausau's adding patent infringement as a covered

advertising offense as resolution is not necessary to decide the case. 

FINDINGS OF FACT AND CONCLUSIONS OF LAW

C-02-04976 RMW

10

equitable contribution from other primary carriers.

[W]here two or more insurers independently provide primary insurance on the same risk

for which they are both liable for any loss to the same insured, the insurance carrier who

pays the loss or defends a lawsuit against the insured is entitled to equitable contribution

from the other insurer or insurers . . . .

Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal. App. 4th 1279, 1289 (1998). Wausau

acknowledges that it provided primary coverage to Nu-kote4 but claims that it is entitled to equitable

contribution from AISLIC as the AISLIC policy "has all the objective indicia of a primary policy, despite

the effort to characterize itself otherwise." Wau.'s Rev. Prop. F & C ¶ 37.

2. AISLIC argues that it was solely an excess insurer and, therefore, has no obligation to

reimburse Wausau for any of the amount Wausau paid as defense costs or indemnity on behalf of Nu-kote.

In the context of liability insurance, a primary insurer generally has the primary duty to

defend and to indemnify the insured, unless otherwise excused or excluded by specific

policy language. Excess insurance provides coverage after other identified insurance is no

longer on the risk. "Excess" coverage means "coverage whereby, under the terms of the

policy, liability attaches only after a predetermined amount of primary coverage has been

exhausted."

Fireman's Fund, 65 Cal. App. 4th at 1305 (internal citations omitted). "[A] true excess insurer--- one that

is solely and explicitly an excess insurer providing only secondary coverage---has no duty to defend or

indemnify until all the underlying primary coverage is exhausted . . . ." Id. 

3. AISLIC argues its policy contains three features which establish that it was only an

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

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excess carrier. The policy: (1) is subject to a $100,000 self-insured retention, (2) does not impose a duty

to defend, and (3) "only attaches to payments 'actually made' by the insured, and then only after 'final

disposition' of the suit or claim." AISLIC's Prop. F & C, p. 8:17-18.

Self-Insured Retention

4. Although coverage under the AISLIC policy is subject to a self-insured retention, that

does not necessarily mean that the ASLIC policy should be viewed as excess viz-a-viz the Wausau policy

once the self-insured retention had been paid. AISLIC relies heavily on National Union Fire Insurance

Company of Pittsburg, P.A. v. Lawyers Mutual Insurance Company, 885 F.Supp 202 (S.D. Cal.

1995) which held that a malpractice policy which provided coverage in excess of the self-insured retention

of $250,000 was excess over a primary policy with limits of the amount of the self-insured retention

($250,000) and which included a duty to defend. The case settled for $200,000. The reasonable

expectation of the insured in National Union was clear---it intended the primary policy to cover the

defense and indemnity as to the self-insured retention. In contrast, in the instant case, the self-insured

retention was paid and, assuming covered infringements under the AISLIC policy, there is nothing, except a

boilerplate co-insurance clause, that suggests that AISLIC's obligation to pay defense costs and indemnity

was intended to be secondary to Wausau's obligation. In other words, the AISLIC policy should not be

viewed as excess viz-viz the Wausau policy.

5. AISLIC argues that the presence of a self-insured retention makes a policy 

"excess." See, e.g., Pacific Employer's Ins. Co. v. Domino's Pizza Inc., 144 F.3d 1270, 1276-77 (9th

Cir. 1998) ("policies which are subject to self-insured retentions are 'excess policies' which have no duty to

indemnify until the self-insured retention is exhausted."). The question, however, is excess to what. In

Domino's Pizza the coverage terms explicitly stated that coverage was in excess of the amount of the selfinsured retention and coverage provided by other designated policies. Id. at 1277. The court did not hold

that the mere presence of a self-insured retention makes an indemnity policy excess viz-a-viz another carrier

which provides primary coverage.

6. If the Canon and Seiko-Epson claims involved covered infringements under the

ASLIC policy, the ASLIC and Wausau policies should both be considered as providing primary coverage

once Nu-kote's self-insured retention was exhausted. That conclusion is consistent with the reasonable

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expectations of both AISLIC's underwriter and the insured, Nu-kote, as suggested by underwriting

considerations and the policy language. The ASLIC policy was presumably drafted and underwritten with

the knowledge that Nu-kote had CGL coverage as would most potential insureds who would be interested

in a patent infringement indemnity policy. Nevertheless, the ASLIC policy makes no mention of underlying

insurance and contemplates that the insured's self-retention will not be covered by insurance. However, the

ASLIC policy was apparently underwritten on the assumption that standard CGL policies do not cover the

risk of patent infringement. Therefore, the fact that Nu-kote did not pay the self-insured retention is of no

consequence. 

7. The reasonable expectation of an insured, such as Nu-kote, under AISLIC's policy

would be that the policy provides indemnity for defense costs and loss suffered as a result of a claim of

patent infringement. The policy in bold print on page 1 has the title "PATENT INFRINGEMENT INDEMNITY

INSURANCE" and sets forth its coverage: "This Policy shall reimburse the Insured for all sums which the

Insured shall become legally obligated to pay and shall have paid as Damages resulting from any Claim

or Claims first made against the Insured . . . during the Policy Period . . . for any Covered

Infringement . . . . ." (AISLIC policy, p. 1). If the AISLIC policy were truly intended to be an excess

policy over underlying insurance, some language to that effect should have been set forth in the insuring

agreement. Further, it seems unlikely that an insured, such as Nu-kote, would purchase a patent

infringement policy if it thought that it had coverage under its CGL policy.

Lack of Duty to Defend

8. AISLIC also argues that its policy only provides excess or secondary coverage because it

does not carry a duty to defend, and a duty to defend is "[o]ne of the hallmarks of 'primary' (as distinct

from secondary, contingent, or excess insurance). . . ." (D's Prop. F & C, p.8). AISLIC is correct that

primary liability policies usually contain a duty to defend. That does not mean, however, that an indemnity

policy that provides for reimbursement for defense costs is necessarily an excess policy. Signal Co.'s v.

Harbor Ins. Co., 27 Cal. 3d 359 (1980), cited by AISLIC, says that if a policy explicitly provides that its

coverage will not attach until the primary coverage has been exhausted and the primary coverage includes a

defense obligation, the policy is an excess policy and the carrier has no duty to defend until the primary

coverage has been exhausted. Here, AISLIC has no duty to defend and does not have an obligation to

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indemnify until the claim has been resolved and the self-insured retention exhausted. However, once the

conditions for indemnity have been met, the AISLIC policy says nothing, except in a boilerplate other

insurance provision that attempts to make the policy excess to any other insurance or indemnification

agreement, suggesting it has no duty to equitably contribute to the payment of defense costs if another

carrier paid the defense costs in full. If AISLIC were able to avoid any obligation for defense costs for the

defense of a covered patent infringement claim merely because of the fortuitous existence of a policy like

Wausau's, AISLIC would escape an obligation for which Nu-kote paid a premium. AISLIC would

thereby realize a windfall at the expense of Wausau. "Other insurance" clauses, such as contained in the

AISLIC policy, are disfavored and the modern trend is to require equitable contribution regardless of the

type of "other insurance" clause in the policies. See, e.g., Dart Industries, Inc. v. Commercial Union Ins.

Co., 28 Cal.4th 1059, 1079-80 (2002). Further, 

the reciprocal rights and duties of several insurers who have covered the same event do not

arise out of contract, for their agreements are not with each other. . . . Their respective

obligations flow from equitable principles designed to accomplish ultimate justice in the

bearing of a specific burden. As these principles do not stem from agreement between the

insurers their application is not controlled by the language of their contracts with the

respective policy holders. 

Signal Co.'s, 27 Cal. 3d at 369 (quoting Amer. Auto Ins. Co. v. Seaboard Surety Co., 155 Cal.App.2d

192, 195-96 (1957)). 

Indemnity Obligation Only Attaches to Payments "Actually Made" by the Insured and

Only after Final Disposition of the Claim

9. AISLIC submits that since its policy requires payment by Nu-kote of its self-insured

retention before any payment obligation on AISLIC's part arises and since the AISLIC policy's coinsurance provision says that "this policy shall be excess over any other valid and collectible insurance or

indemnification agreement available to the Insured," the AISLIC policy is an excess policy. As discussed

above, AISLIC and Wausau both had obligations to pay defense costs. The fact that the AISLIC policy

does not require payment until a claim is resolved does not mean that its obligation was negated because

Wausau supplied a defense and paid for that defense on an on-going current basis. The court has found no

authority supporting the proposition that a liability carrier that fulfills its obligation to provide a defense

thereby extinguishes an indemnity carrier's obligation to reimburse for defense costs.

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B. The Covered Infringement Requirement

10. Although the right to contribution does not arise out of contract---coinsurers'

respective obligations flow from equitable principles designed to accomplish justice in bearing the burden of

the loss involved---an insurer cannot be asked to contribute if it does not cover the loss.

One of the firm principles undergirding the doctrine of equitable contribution is that two or

more insurers share an obligation to the common insured. Every California case of which

we are aware has enforced an insurer's contribution claim only where the other insurer was

also obligated to pay on the claim. 

American Continental Insurance Co. v. American Casualty Company, 86 Cal.App.4th 929, 937

(2001); see Truck Insurance Exchange v. Unigard Insurance Company, 79 Cal.App. 4th 966, 974

(2000) ("[A]bsent compelling equitable reasons, courts should not impose an obligation on an insurer that

contravenes a provision in its insurance policy.").

11. AISLIC contends that it did not provide coverage because neither the Canon nor

Sieko-Epson lawsuit involved a "Covered Infringement," a condition precedent to coverage under the

AISLIC indemnity policy. Since a patent attorney familiar with the type of business in which Nu-kote

engaged did not do an "infringement search" and "infringement safeguarding" with respect to the accused

products, AISLIC contends that the alleged infringements were not "covered infringements" under the

AISLIC insuring agreement.

12. Wausau maintains that ASLIC waived the search and safeguarding procedures set

forth in the AISLIC policy. 

13. To fall within AISLIC's coverage, the claims made in the Canon and Epson litigations must

have involved covered infringements which means that, as a condition precedent to coverage, Nu-kote

must have conducted an infringement search and infringement safeguarding prior to its first manufacturing,

using, distributing, advertising or selling the product or at the inception of the policy, if a reasonably prudent

patent attorney familiar with the type of business in which Nukote was engaged would have done so.

14. Wausau produced no evidence to indicate Nu-kote ever complied with the patent

search and safeguarding provisions of the AISLIC policy. Wausau offered no evidence on whether a

reasonably prudent patent attorney would or would not have conducted, or did or did not do, an

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infringement search or safeguarding on the products at issue prior to first manufacturing, using distributing,

advertising, or selling those products or at the inception of the policy. In fact, no evidence was admitted

which showed whether patent searches had ever been conducted (even in the face of corporate policy to

do so) or written opinions obtained. 

15. AISLIC's patent expert, Mr. Limbach, explained that a reasonable patent attorney in

the business of Nu-kote would have conducted an infringement search and safeguarding. Wausau did not

sustain its burden that Nu-Kote met the coverage requirement of the AISLIC policy.

Waiver

17. Wausau, however, asserts that AISLIC waived the patent safeguarding requirements

of its policy. It argues that Wausau says that AISLIC did so by: (1) accepting Nu-kote as an insured after

its underwriting investigation of Nu-kote which included a review of Nu-kote's internal safeguarding

procedures; (2) knowing that Nu-kote had products on the market at the time the policy was issued and

thus Nu-kote would not have conducted the search and safeguarding procedures in the policy unless, by

coincidence, they were the same as Nu-kote's existing procedures; and (3) reinstating the AISLIC

indemnity policy after it initially cancelled the binder following the institution of the Canon suit. Wausau

further argues that the search and safeguarding procedure set forth in the AISLIC policy could not have

been viewed as critical by AISLIC as its marketing brochure, although discussing a prospective insured's

own internal procedures, did not mention the search and safeguarding procedures contained in the policy. 

AISLIC's patent infringement policy brochure dated in June, 1995 (a date well after the Nu-Kote policy

was bound and incepted) makes no mention of the patent safeguarding requirement of the policy; (2)

AISLIC, prior to issuing its policy, reviewed Nu-Kote's corporate policy on patent searches and expressed

no disapproval of it; and in fact, described it as "good"; and (3) AISLIC reinstated its policy, after initially

canceling it upon learning of the Canon suit.

18. AISLIC did review Nu-kote's safeguarding procedure during its underwriting

investigation of the risks of issuing a patent indemnity policy to Nu-kote. The underwriters' description of

Nu-kote's policy as "good," however, does not equate to a relinquishment of a requirement of the policy. 

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Nu-kote's corporate policy might well have been "good," but not in accordance with AISLIC's

requirements. 

19. Wausau argues that AISLIC waived the policy's search and safeguarding provisions

because it knew that Nu-kote had products on the market at the time the policy was issued and, therefore,

Nu-kote would not have conducted the search and safeguarding procedures in the policy unless, by

coincidence, they were the same as Nu-kote's existing procedures. However, Wausau overlooks that the

policy allowed Nu-kote to do its infringement search and infringement safeguarding either (1) before first

manufacturing or selling the product, "or (2) the inception of this policy." (Ex. 586) (emphasis added). 

Thus, Nu-kote, although it apparently did not do so, could have performed the search and safeguarding as

required by the policy when it first reviewed the coverage offered by AISLIC.

20. The search and safeguarding provision of the AISLIC policy does narrowly

define those infringement claims that are covered. However, the provision was obviously designed to

substantially reduce exposure to AISLIC and thus presumably allowed AISLIC to charge Nu-kote a lower

premium than it would have charged absent the safeguarding provision. Further, before AISLIC issued its

binder, the coverage language was apparently provided to Nu-kote for its attorney's review to determine

whether Nu-kote wanted to have the coverage.

21. AISLIC's sales brochure for its patent infringement indemnify policy, which was

distributed approximately three months after AISLIC's policy was issued to Nu-kote, does not expressly

highlight the search and safeguarding coverage requirements. However, AISLIC is neither required nor

necessarily should be expected to have included every condition of its indemnity policy in its advertising

material.

22. Nothing AISLIC said to Nu-kote when AISLIC agreed to reinstate the policy after

initially cancelling the binder because it believed, among other things, that Nu-kote must have had prior

knowledge of the Canon claim prior to the issuance of the binder, relinquished the search or safeguarding

or other coverage requirements of its policy.

23. The cases cited by Wausau do not support a waiver by AISLIC of its search and

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safeguarding provisions. Intel Corp. v. Hartford Acc. & Ind. Co. 952 F.2d 1551, 1559 (9th Cir. 1991)

deals with an insurer's waiver of an exclusion not asserted in its letter denying the claim. In contrast, 

AISLIC reserved its rights as to the Patent Safeguarding requirement. Further, Intel found no waiver

because there was no showing of reliance by the insured. "In cases where waiver has been found, there is

generally some element of misconduct by the insurer or detrimental reliance by the insured." Id. at 1560. In

the instant case, there was no prejudice to Nu-kote because the alleged waiver did not occur until Nu-kote

was required to have completed its patent search and safeguarding. Nor was there any detrimental reliance

by Nu-kote as its defense was entirely paid for by other insurance.

24. Neither does B&E Convalescent Center, 8 Cal.App. 4th 78, 86, n.7 (1992) assist

Wausau. That case involved a declaratory relief, breach of contract, and bad faith action brought by B&E,

the insured, against State Fund (the insurer) after State Fund refused to defend or indemnify B&E against a

wrongful termination of employment action brought by one of B&E's former employees. B&E argued that

State Fund failed to raise in its initial denial of coverage that the claim was not covered because the

employee had alleged that her emotional injuries did not arise out of or in the course and scope of her

employment. Id. at 86-87. The court stated that the mere failure to raise that ground in its denial of

coverage letter was not enough to show waiver. B&E had failed to show that State Fund had intentionally

relinquished its coverage position or that it (B&E) relied to its detriment on the failure to initially assert a

reservation based upon scope of employment. Id. at 86, n.7.

25. Finally, Owen v. American Home,153 F.Supp. 928 (N.D. Cal. 1957), also relied on by

Wausau, involved the issue of whether the insurer could rely on a provision of a policy that excluded

coverage for a watercraft with a motor in excess of ten horsepower. Plaintiffs' watercraft had a forty

horsepower motor. The court found that the insurer could not do so because its agent had led the plaintiffs

to believe that their watercraft would be covered, without any limitation on horsepower. The court held:

"The law in California is clear that where an insurance agent gives a misleading, incorrect or incomplete

answer, without qualification (even though, perhaps, carelessly made) to a specific question by the

prospective insured concerning coverage, the insurer is not, after reliance has been placed thereon by the

insured, allowed to deny liability on the basis of a provision which is contrary to, and does not truly reflect,

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the representations of the agent." Id. at 930. Owen is clearly distinguishable from the current case because

there is no evidence that any agent of AISLIC’s ever represented to Nu-Kote that it would not have to

conduct the policy's patent search and safeguarding requirements.

26. The court concludes that AISLIC did not waive any of its coverage conditions.

California courts will find waiver when a party intentionally relinquishes a right, or

when that party's acts are so inconsistent with an intent to enforce the right as to induce a

reasonable belief that such right has been relinquished. The doctrine of waiver looks to "the

act, or the consequences of the act, of one side only," in contrast to the doctrine of

estoppel, which "is applicable where the conduct of one side has induced the other to take

such a position that it would be injured if the first should be permitted to repudiate its acts."

In the insurance context, however, the waiver doctrine has developed somewhat

differently, and the distinction between waiver and estoppel has been blurred. In cases

where waiver has been found, there is generally some element of misconduct by the insurer

or detrimental reliance by the insured.

* * * 

Federal cases applying California law also suggest such misconduct or reliance

must be shown.

Intel, 952 F.2d at 1559-1560) (internal citations omitted); see Waller v. Truck Ins. Exchange, Inc., 11

Cal.4th 1 (1995). Here, the evidence shows no "intentional relinquishment" by AISLIC of its rights under

the policy, nor any conduct from which a reasonable insured could infer that it had done so. In fact,

AISLIC's reservation of rights letter expressly points to the search and safeguarding portions of the policy

and requests copies of any patent opinions. There was no evidence that any opinions were provided.

C. Conclusion

27. Since AISLIC' was not obligated to pay on the Canon and Epson-Seiko claims

because they did not involve "covered infringements," the court does not reach the additional issues raised

by the parties. Wausau is not entitled to recover from AISLIC on an equitable contribution theory because

AISLIC was not obligated to pay on the claim. Judgment will be entered in favor of Defendant American

International Specialty Lines Insurance Company and against Employer Insurance of Wausau.

DATED: 5/23/05 /s/ Ronald M. Whyte

RONALD M. WHYTE

United States District Judge

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Notice of this document has been electronically sent to:

Counsel for Plaintiff(s):

Malcolm A. Misuraca mam@aliscafi.us 

Philip C. Hunsucker pch@reslawgrp.com 

Bryan M. Barber bbarber@larsonking.com 

Jeffrey Cleary jcleary@larsonking.com

Jesse F. Ruiz jfr@r-winc.com 

Counsel for Defendant(s):

Archie S. Robinson asr@r-winc.com 

Thomas R. Fellows trf@r-winc.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not registered for

e-filing under the court's CM/EC program.

Dated: 5/23/05 DOH

Chambers of Judge Whyte

Case 5:02-cv-04976-RMW Document 137 Filed 05/23/05 Page 19 of 19