Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_02-cv-01505/USCOURTS-caed-2_02-cv-01505-5/pdf.json

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

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

EVANSTON INSURANCE CO., 

Plaintiff,

v.

OEA, INC., and DOES 1-20,

inclusive,

Defendants. 

OEA, INC., 

Counterclaimant, 

v. 

EVANSTON INSURANCE CO., et al.,

Counterdefendants.

CIV-S-02-1505 DFL PAN

MEMORANDUM OF OPINION 

AND ORDER 

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

2

Counterdefendants Certain Underwriters at Lloyd’s, et al.

(“Lloyd’s”) move for partial summary judgment on counterclaimant

OEA, Inc.’s (“OEA”) claim that Lloyd’s breached the covenant of

good faith and fair dealing. OEA opposes the motion and requests

a continuance under Fed. R. Civ. P. 56(f). For the reasons

discussed below: (1) Lloyd’s motion is GRANTED in part and DENIED

in part; and (2) OEA’s request for a continuance is DENIED. 

I.

This insurance coverage action arises out of two accidents

that occurred at the OEA Aerospace plant in Fairfield,

California. The court has already issued several lengthy orders

and will not rehearse the facts here. 

In June 2003, Lloyd’s moved for summary judgment on the

coverage issue. In September 2003, the court granted the motion,

finding that OEA’s two-year delay in notifying Lloyd’s breached

the terms of the insurance contract. Evanston Ins. Co. v. OEA,

Inc., CIV-S-02-1505 DFL PAN slip op. at 34, 36 (E.D. Cal. Sep.

19, 2003) (“Evanston I”). Because Colorado followed the “notice

standard” at the time, the court held that Lloyd’s was not

obligated to cover OEA’s damages. Id. at 34. 

However, on January 31, 2005, the Colorado Supreme Court

changed Colorado law from a notice standard to a “noticeprejudice standard” for liability insurance contracts. Friedland

v. Travelers Indem. Co., 105 P.3d 639, 647 (Colo. 2005). Under

the notice-prejudice standard, an insurer must show that it was

prejudiced by an insured’s delayed notification before it can

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

3

deny a claim on the grounds of late notice. Id. Because Lloyd’s

had not shown prejudice before denying OEA’s claim, OEA moved for

reconsideration of the Evanston I decision. Evanston Ins. Co. v.

OEA, Inc., CIV-S-02-1505 DFL PAN slip op. at 2 (E.D. Cal. Jul.

25, 2005) (“Evanston II”). In July 2005, the court found that

the rule announced in Friedland applied retroactively and granted

OEA’s motion for reconsideration. Id. at 23. 

Lloyd’s now moves for partial summary judgment on OEA’s

breach of the covenant of good faith and fair dealing and

punitive damages claims. 

II.

Both sides agree that: (1) to prevail on its claim of bad

faith, OEA must show that Lloyd’s acted unreasonably; (2) a

finding of bad faith is required before the court can award

punitive damages; and (3) the reasonableness of Lloyd’s decision

to deny coverage must be evaluated as of the time it was made. 

(Mot. at 2, 7, 13; Opp’n at 1; Chateau Chamberay Homeowners Ass’n

v. Associated Int’l Ins. Co., 90 Cal.App.4th 335, 347 (2001).) 

Lloyd’s argues that, as a matter of law, it acted reasonably

in denying OEA’s claim because: (1) OEA failed to provide timely

notice to Lloyd’s; and (2) at the time that Lloyd’s denied the

claim, Colorado applied the notice standard for liability

insurance policies. (Mot. at 2 (citing Marez v. Dairyland Ins.

Co., 638 P.2d 286 (Colo. 1981).) In addition, Lloyd’s alleges

that OEA cannot pursue a claim of bad faith based solely on

Lloyd’s defensive pleadings in this litigation. (Reply at 7.) 

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

4

OEA contends that Lloyd’s denial was unreasonable because

the notice standard was “in the process of being abandoned” at

the time Lloyd’s rendered its decision. (Opp’n at 1.) OEA also

argues that the court cannot grant Lloyd’s motion in its entirety

because: (1) Lloyd’s entire course of conduct is subject to

review for bad faith; and (2) Lloyd’s continued denial of the

claim after Colorado adopted the notice-prejudice standard for

liability policies is unreasonable. (Id. at 13-14.)

A. Reasonableness of the April 18, 2001 Denial

OEA argues that Lloyd’s denial of OEA’s claim based on the

notice standard was unreasonable in light of the Colorado Supreme

Court’s decision in Clementi v. Nationwide Mut. Fire Ins. Co., 16

P.3d 223 (9th Cir. 2001). In Clementi, Nationwide Mutual Fire

Insurance Company (“Nationwide”) brought a declaratory judgment

action against an insured to whom it had issued an uninsured

motorist (“UIM”) policy. 16 P.3d at 224. Nationwide sought a

determination by the court that it would not be responsible for

covering the insured on a potential claim because the insured had

failed to notify Nationwide in a timely fashion. Id. The trial

court held that Nationwide was not required to show prejudice

before denying coverage of a late-noticed claim. Id. The court

of appeals affirmed, citing Marez. Id. The Colorado Supreme

Court reversed. Id. 

While the court “expressly adopt[ed] the notice-prejudice

rule in UIM cases,” it explicitly refrained from applying this

new rule to liability insurers. Id. In fact, throughout the

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

5

opinion, the court treats UIM and liability policies as subject

to different legal rules. For example, even though courts of

appeal had routinely cited Marez for many years to justify

applying the notice standard to UIM cases, the Supreme Court held

that Marez only applied to liability insurers. Id. at 225. As a

result, it found that determining the correct standard for UIM

claims was “a matter of first impression” in Colorado. Id. 

In addition, the court stressed that certain policy

concerns, unique to UIM cases, justified a notice-prejudice

standard. The court noted that automobile insurance policies are

the products of “unequal bargaining power” and that the Colorado

legislature had stated that there is a significant public

interest in compensating injured individuals. Id. at 229-30. 

Finally, to alleviate any confusion regarding the impact of

Clementi on Marez, the court stated twice that Clementi did not

overrule Marez. Id. at 224, 228 n.5. 

OEA characterizes the case differently. It argues that

Clementi provided a “reasonably apparent implication” that the

Colorado Supreme Court would soon overrule Marez and establish

the notice-prejudice standard as the rule in liability insurance

cases. (Opp’n at 3.) To support its argument, OEA points to the

language contained in footnote 5 of the opinion; the two

Tennessee cases cited in that footnote; and a statement by the

Colorado Supreme Court in Friedland, the case that overturned

Marez in 2005. 

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

6

Footnote 5 states in its entirety:

We need not consider today whether our ruling in Marez

continues to apply to liability insurance cases because

this issue is not presented by the case at bar. Cf.

Alcazar [v. Hayes, 982 S.W.2d 845, 856 n. 14 (Tenn.

1998)] (declining to decide whether the noticeprejudice rule should apply to a standard liability

policy since the case before the court involved only a

UIM policy); but see Am. Justice Ins. Reciprocal v.

Hutchison, 15 S.W.3d 811, 817 (2000) (applying noticeprejudice rule in a liability case sixteen months after

Alcazar was decided). However, to the extent that the

court of appeals has extended our holding in Marez to

non-liability late-notice cases, see Estate of Rick

Harry, 972 P.2d at 282; Shelter, 942 P.2d at 1373;

Graton, 740 P.2d at 534; Emcasco, 678 P.2d at 1054, we

disapprove.

Clementi, 16 P.3d at 228 n. 5. Although this footnote intimates

that the Colorado Supreme Court might reconsider Marez at some

point in the future, it does not fairly suggest that Marez’s

demise was all but certain. 

OEA’s argument regarding the two Tennessee cases cited in

the footnote is also unpersuasive. In Alcazar, the Tennessee

Supreme Court abandoned the notice standard for UIM cases. In

Hutchison, the court did the same for liability cases. OEA

contends that “[t]here was absolutely no reason” that the court

would have referenced these cases unless “it was telegraphing its

view concerning the future application of the notice prejudice

rule to liability cases in Colorado.” (Opp’n at 6.) 

OEA puts too much emphasis on the reference to these cases. 

The court cites them as support for its claim that it “need not

decide today” whether Marez continues to govern liability cases. 

The two cases demonstrate that at least one other state chose to

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

7

change the standard for UIM cases while leaving liability cases

subject to the traditional notice standard. Therefore, contrary

to OEA’s assertion, the court had at least one alternate reason

to cite these cases. 

More importantly, law is what courts hold and legislators

write. Citizens are entitled to rely on the written word, not

vague hints of possible future action. If the Colorado Supreme

Court intended to convey that it was unreasonable for liability

insurers to rely on Marez’s notice standard, as OEA asserts, then

it was the duty of that court to overrule Marez. It did not do

so, and a “Cf.” citation to two Tennessee cases in a footnote is

no substitute. 

Finally, in Friedland, four years after Clementi, the

Colorado Supreme Court commented that “insurers and the legal

profession did not mistake a reasonably apparent implication that

the Clementi rationale would also apply to liability policies,

despite Marez.” 105 P.3d at 646. OEA argues that this statement

shows that a reasonable insurance company would not have relied

on Marez after Clementi. But a “reasonably apparent implication”

is not tantamount to holding, particularly in a case that

acknowledges, indeed stresses, the difference between liability

and automobile insurance, and that throws out “hints” pointing in

several different directions. 

In sum, the court finds that it was reasonable for Lloyd’s

to conclude that Clementi did not change the notice standard that

had traditionally applied to liability insurance policies. 

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

8

Therefore, Lloyd’s April 18, 2001 denial of OEA’s claim was

reasonable as a matter of law. Lloyd’s motion is GRANTED as it

relates to this denial.

B. Reasonableness of Lloyd’s Actions After the Colorado Supreme

Court Established a Notice-Prejudice Standard

OEA argues that Lloyd’s conduct after Colorado adopted the

notice-prejudice standard has been unreasonable because Lloyd’s

continues to deny OEA’s claim. (Opp’n at 14.) Lloyd’s contends

that OEA’s argument is meritless because OEA cannot base its bad

faith claim solely on Lloyd’s pleadings. (Reply at 6 (citing

Cal. Physicians’ Serv. v. Super. Ct., 9 Cal.App.4th 1321, 1330

(1992).)

In California, an insured can introduce evidence of the

insurer’s conduct during the litigation to support a claim of bad

faith, but the claim cannot be based exclusively on the insurer’s

pleadings. White v. W. Title Ins. Co., 40 Cal.3d 870, 886

(1985); Cal. Physicians’, 9 Cal.App.4th at 1330. 

OEA does not allege that Lloyd’s filed its pleadings in bad

faith or asserted bad faith affirmative defenses. Instead, OEA

argues that Lloyd’s is acting in bad faith by continuing to deny

OEA’s claim, apparently in reliance upon the other reasons stated

in the original denial. There is no bar to this claim. 

Therefore, Lloyd’s motion is DENIED as it relates to Lloyd’s

reliance upon the other reasons for denial after the Colorado

Supreme Court overruled Marez.

C. Continuance

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

9

OEA requests a continuance of the summary judgment motion

under Fed.R.Civ.P 56(f). (Woolverton Decl. ¶ 2.) It argues that

it should be accorded additional time to conduct discovery before

the court decides Lloyd’s motion for summary judgment because

Lloyd’s has failed to provide OEA with the information necessary

to make out its claim of bad faith. (Id. ¶ 4.) 

The court DENIES the motion because: (1) no additional

evidence can change the reasonableness of Lloyd’s 2001 denial;

(2) the court denied Lloyd’s motion as it related to Lloyd’s

conduct after Colorado adopted the notice-prejudice rule; and (3)

OEA may conduct discovery on this latter issue until April 5,

2006. 

III.

For the reasons stated above, the court: (1) GRANTS Lloyd’s

motion as it relates to the April 18, 2001 denial; (2) DENIES

Lloyd’s motion as it relates to Lloyd’s actions after the

Colorado Supreme Court overruled Marez; and (3) DENIES OEA’s

motion for a continuance under Fed.R.Civ.P 56(f). 

IT IS SO ORDERED.

Dated: 12/20/2005

DAVID F. LEVI

United States District Judge

Case 2:02-cv-01505-DFL-EFB Document 496 Filed 12/21/05 Page 9 of 9