Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_99-cv-05583/USCOURTS-caed-1_99-cv-05583-42/pdf.json

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

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

UNITED STATES FIDELITY & )

GUARANTY COMPANY, )

)

)

)

)

Plaintiff, )

)

vs. )

)

)

LEE INVESTMENTS LLC dba THE )

ISLAND, )

)

)

)

Defendant. )

)

)

No. CV-F-99-5583 OWW/SMS

MEMORANDUM DECISION GRANTING

IN PART AND DENYING IN PART

LEE INVESTMENTS LLC'S MOTION

TO VACATE PARTIAL JUDGMENT

ON JURY VERDICT UPON

MULTIPLE CLAIMS INVOLVING

MULTIPLE PARTIES OR TO ALTER

OR AMEND PARTIAL JUDGMENT

PURSUANT TO RULES 59(e) and

60(a) & (b), FEDERAL RULES

OF CIVIL PROCEDURE (Doc.

704)

Lee Investments LLC (hereafter Lee) moves for an Order

vacating the “Partial Judgment on Jury’s Verdicts Upon Multiple

Claims Involving Multiple Parties” (hereafter Partial Judgment),

(Doc. 681), entered on March 1, 2007 in favor of United States

Fidelity & Guaranty Company (hereafter USF&G), American Specialty

Insurance Services, Inc. (hereafter American Specialty or ASI),

and Aon Risk Services Inc. of Central California Risk Services

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(hereafter Aon). 

The Partial Judgment states:

This case was tried before a jury commencing

January 29, 2007, and concluded upon the

return, by the jury, of its verdicts on

February 26, 2007. The case involves more

than one claim for relief, including counterclaims and third-party claims and involved

multiple parties. The parties have reserved,

by written stipulation and order: USF&G’s

alter ego claims against Richard K. Ehrlich,

an individual, et al., the determination of

the amount of attorneys’ fees and interest

claimed by USF&G; and the claim of Aon Risk

Services Inc. of Central California Insurance

Services (‘Aon’) for relief based on the tort

of another. All other claims of the parties

were adjudicated by the jury, including

USF&G’s claim for rescission based on fraud;

all claims of Lee Investments LLC, dba The

Island, a California limited liability

company. Any claims as to Diane Conley have

been determined by the parties’ stipulation.

Due to the prior delay in, complexity and

contentiousness of this litigation, to avoid

uncertainty and inconsistent verdicts, there

is no just reason for delay and partial

judgment should now therefore be entered.

Based on the jury’s written verdicts returned

in open court February 26, 2007, the

following verdicts were rendered:

A. The jury’s verdicts finding in favor of

USF&G on its claim for rescission finding

fraud and intentional concealment; finding

against Lee on all Lee’s defenses of

statutory waiver, common law waiver,

estoppel, unreasonable delay, wrongful

conduct, and awarding USF&G restitution

damages in the amount of $875,034.99.

B. On Lee’s claims against USF&G, American

Specialty and Aon, finding in favor of USF&G,

American Specialty, and Aon and against Lee

on all Lee’s claims for fraud/intentional

misrepresentation; concealment; conspiracy;

negligent misrepresentation; and negligence. 

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3

Finding against Lee and in favor of Aon on

Lee’s claim for breach of an oral contract

against Aon. Finding in favor of USF&G,

American Specialty and Aon and against Lee on

all their defenses to Lee’s claims based on

fraud of Lee; negligent misrepresentation by

Lee; estoppel against Lee; wrongful conduct

by Lee; common law waiver against Lee; as to

Aon against Lee due to Lee’s intentional tort

as superseding cause; as to Aon, no

unreasonable delay by Lee; and in favor of

Aon and against Lee on Aon’s defense of

assumption of risk.

C. On all Aon’s claims against Lee, finding

in favor of Aon and against Lee on Aon’s

claims for intentional misrepresentation,

negligent misrepresentation and that Lee was

100% comparatively at fault; in favor of

Aon’s claim of negligence against Lee; that

Aon was not negligent. Finding in favor of

Aon and against Lee on all Lee’s affirmative

defenses to Aon’s claims, including fraud,

negligent misrepresentation, estoppel, no

wrongful conduct by Aon; no common law waiver

by Aon, no unreasonable delay by Aon.

Accordingly, on each of these claims and

defenses, JUDGMENT IS ENTERED AS FOLLOWS:

1. In favor of USF&G and against Lee for

rescission and USF&G shall recover from Lee

restitutionary damages of $875,034.99;

2. Against Lee on all Lee’s defenses to

USF&G’S claims for rescission;

3. Against Lee on all its claims and in

favor of USF&G, American Specialty and Aon

against Lee and in favor of USF&G, American

Specialty and Aon on all their affirmative

defenses to Lee’s claims;

4. In favor of Aon on all its claims and

against Lee; and against Lee in favor of Aon

on all on [sic] Lee’s affirmative defenses to

Aon’s claims; and

5. USF&G, American Specialty and Aon shall

recover costs of suit.

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4

 Lee moves pursuant to Rules 59(e) and 60(a) and (b),

Federal Rules of Civil Procedure, asserting as grounds:

1. The Partial Judgment is void in that the

California Workers’ Compensation Appeals

Board (WCAB) has and had exclusive

jurisdiction;

2. The Court committed clear error and its

decisions have been manifestly unjust in

denying Lee judgment as a matter of law on

USF&G’S original and amended complaint for

rescission in that:

a. This Court does not have

jurisdiction and the complaint

fails to state a claim upon which

relief can be granted;

b. California law does not permit

a workers’ compensation insurer to

impose a condition or expectation

on a workers’ compensation policy

except by endorsement to the policy

and then the insurer may only

terminate the policy in accordance

with its cancellation provisions;

c. As a condition or exception to

Lee’s workers’ compensation policy,

Matthew Sackett’s August 11, 1998

facsimile to William Hildebrand was

required to be, but was not, clear

plain and conspicuous;

d. Christy Platt’s August 12, 1998

letter to Matthew Sackett was not

admissible under the parol evidence

rule because it was related to and

contradicted Lee’s workers’

compensation policy;

e. An application was required as

a matter of law;

f. USF&G was bound as a matter of

law by its report of Diana Conley’s

accident as being within

Classification Code 9016 and there

was no evidence that any of Lee’s

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employees’ activities fell outside

a water park classification code.

3. The Court committed clear error and its

decisions have been manifestly unjust in

denying Lee judgment as a matter of law on

the counterclaim of Aon for the reasons set

forth above and in that Lee did not make a

misrepresentation to Aon, Aon did not rely on

any representation, and reliance, if any, by

Aon was not a substantial factor in causing

harm to Aon;

4. The Partial Judgment erroneously does not

require USF&G to return all premiums Lee

paid;

5. The Partial Judgment erroneously

references FRCP 55(b) as the basis for the

judgment;

6. The Partial Judgment erroneously states

that Lee has stipulated that USF&G’s alleged

alter ego claims are reserved for later

determination when Lee has previously

objected to the inclusion of these claims in

the litigation at all and the Court on its

own set them for separate trial;

7. The Partial Judgment erroneously states

that Lee stipulated to a determination of

Diana Conley’s claims;

8. The Partial Judgment prematurely awards

restitution and erroneously fails to include

as issues remaining for further trial (a)

whether USF&G actually paid and is the real

party in interest respecting any amount for

which its seeks restitution, and (b) USF&G’s

breach of its duty to defend Lee in this

action and the WCAB proceeding.

A. Governing Standards.

With regard to a motion to alter or amend judgment pursuant

to Rule 59(e), Federal Rules of Civil Procedure, Wright, Miller &

Kane, Federal Practice and Procedure: Civil 2 § 2810.1, nd

explains:

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Since specific grounds for a motion to amend

or alter are not listed in the rule, the

district court enjoys considerable discretion

in granting or denying the motion. However,

reconsideration of a judgment after its entry

is an extraordinary remedy which should be

used sparingly. There are four basic grounds

upon which a Rule 59(e) motion may be

granted. First, the movant may demonstrate

that the motion is necessary to correct

manifest errors of law or fact upon which the

judgment is based. Second, the motion may be

granted so that the movant may present newly

discovered or previously unavailable

evidence. Third, the motion will be granted

if necessary to prevent manifest injustice. 

Serious misconduct of counsel may justify

relief under this theory. Fourth, a Rule

59(e) motion may be justified by an

intervening change in controlling law.

The Rule 59(e) motion may not be used to

relitigate old matters, or to raise arguments

or present evidence that could have been

raised prior to the entry of judgment. Also,

amendment of the judgment will be denied if

it would serve no useful purpose. [Footnotes

omitted]

Rule 60(a), Federal Rules of Civil Procedure, provides that

“[c]lerical mistakes in judgments, orders or other parts of the

records and errors therein arising from oversight or omission may

be corrected by the court ... on the motion of any party ....”

Rule 60(b), Federal Rules of Civil Procedure, provides in

pertinent part:

On motion and upon such terms as are just,

the court may relieve a party ... from a

final judgment, order, or proceeding for the

following reasons: (1) mistake, inadvertence,

surprise, or excusable neglect; ... (3) ...

misrepresentation, or other misconduct of an

adverse party; (4) the judgment is void; (5)

... it is no longer equitable that the

judgment should have prospective application;

or (6) any other reason justifying relief

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from the operation of the judgment.

Other than reciting these standards, Lee does not otherwise 

refer to them in its memorandum of points and authorities. While

some of the claims are easily relatable to these standards,

others are not. For instance, what is the mistake, inadvertence

or excusable neglect of Lee, and what is the misrepresentation or

other misconduct of an adverse party? In addition, Lee does not

set forth the standards governing resolution of a Rule 60(b)

motion on these two grounds. The Ninth Circuit in Lafarge

Conseils Et Etudes, S.A. v. Kaiser Cement & Gypsum Co., 791 F.2d

1334, 1338 (9 Cir.1986), explains: th

A motion brought under 60(b)(6) must be based

on grounds other than those listed in the

preceding clauses ... Clause 60(b)(6) is

residual and ‘must be read as being exclusive

of the preceding clauses.’ In addition, the

clause is reserved for ‘extraordinary

circumstances.’ .... 

B. WCAB Exclusive Jurisdiction.

Lee asserts that the Partial Judgment is void because the

WCAB had and has exclusive jurisdiction over USF&G’s claim for

rescission of the workers’ compensation insurance policy.

By Order filed on October 23, 1999 (Doc. 21), the Honorable

Robert E. Coyle denied the motion to dismiss filed by then 

Defendant Diana Conley and joined by Lee. Conley and Lee moved

to dismiss this action pursuant to Rule 12(b)(6), Federal Rules

of Civil Procedure, for failure to state a claim upon which

relief can be granted, on the ground that the WCAB has exclusive

jurisdiction over the controversy. Judge Coyle ruled in

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pertinent part:

California Labor Code § 5300(a) provides that

a proceeding for the “recovery of

compensation, or concerning any right or

liability arising out of or incidental

thereto” “shall be instituted before the

appeals board and not elsewhere”. 

In arguing that the allegations of Fidelity’s

Complaint are subject to the exclusive

jurisdiction of the WCAB pursuant to Section

5300(a), defendants rely on a number of

California cases.

Thus, defendants refer the court to General

Acc. Etc. Corp. v. Indus. Acc. Com., 196 Cal.

179 (1925). General Acc. Etc. Corp. involved

a review by the California Supreme Court of

an award made by the Industrial Accident

Commission in favor of the dependents of a

deceased employee, the sole [issue] presented

to the Commission being whether the

petitioner insurance company was, on the day

of the fatal accident, the insurance carrier

of the employer. The employer had applied

for a workers’ compensation insurance policy

but had not paid the premium for it. On the

day the employee was killed, the employer

presented the premium check to his insurance

agent, not advising the agent of the accident

until two days later. The insurance company

petitioned the Commission to rescind the

policy because of fraud in the procurement of

the policy. The California Supreme Court

reversed the award of the Commission on the

ground that the Commission’s finding was not

supported by any evidence. On appeal, the

Supreme Court stated in pertinent part:

It is the contention or suggestion

of respondent Commission that the

dependents of the employee have an

enforceable right against

petitioner under the alleged policy

even though the employer be cut off

from any remedy against petitioner. 

We are unable to understand what

principle of law would give the

dependents of the employee a cause

of action against petitioner upon a

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contract which is void or voidable

as to the employer ... ‘We may

assume that any defense available

to the Insurance Company ...

against ... the employer, would be

equally available against the

employee or his dependents.’ 

Whether the foregoing quotation be

regarded as doctrine or dicta, it

would seem to express an

unimpeachable principle of law ....

There can be no doubt but that the

Commission is vested by

constitutional and legislative

power to hear and determine every

issue raised by the parties to this

controversy, including the validity

of the policy and the question of

fraud alleged in its procurement

and that the parties are not

required to invoke either a court

of law or equity in the

determination of said question.

196 Cal. at 190-191.

Defendants also rely on Bankers Indem. Ins.

Co. v. Indus. Acc. Com., 4 Cal.2d 89, 94-98

(1935), wherein the Supreme Court held that

Industrial Accidents Commission “has been

invested with the power and authority to hear

and determine equitable issues, including

those arising in a controversy involving the

reformation of a written instrument” and that

the Supreme Court “was ... in accord with the

policy of the law which invests in one

tribunal the power to dispose of the whole

controversy involving the right of the

injured employee to secure just compensation

for the injury sustained by him.” 4 Cal.2d

at 98.

Conley argues that the critical fact that

brings this case within the exclusive

jurisdiction of WCAB is that the outcome of

this controversy will determine her rights to

recovery of workers’ compensation benefits. 

Conley refers the court to United States

Fidelity and Guaranty Company v. Superior

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Court, 214 Cal. 468 (1931). In USF&G, in a

proceeding before the Commission in which the

employer and the insurance company were

defendants, the employee procured a

compensation award against the defendants. 

In the proceeding before the Commission, the

employer and the insurance company filed

answers presenting the issue whether the

insurance company was the compensation

carrier for the employer at the time of the

accident. The Commission found that the

insurance company was not then the insurance

carrier for the employer and ordered the

insurance company released and discharged. 

No appeal was taken and the Commission’s

award became final. Some months later, the

employer sued the insurance company for

breach of the insurance contract, seeking

damages for termination of the insurance

policy without notice as required by the

policy. The insurance company unsuccessfully

demurred on the ground of lack of

jurisdiction. The insurance company

petitioned for a writ of prohibition. The

California Supreme Court held that issues

relating to the existence, at the time of the

injury, of an insurance policy affording

coverage and issues relating to the

enforcement against the insurance company of

any liability for compensation or for the

payment of the workmans’ compensation award

had reached a final determination in the

proceedings before the Commission. However,

the Supreme Court held, to the extent the

action is one for damages for breach of

contract to issue and keep in effect the

insurance, the complaint stated a cause of

action within the jurisdiction of the

Superior Court. In so holding, the Supreme

Court explained:

The cause of action for damages

does not involve the construction

of an insurance policy with respect

to coverage thereunder, the

recovery of compensation or

incidental liability or the

enforcement against an insurance

carrier of compensation liability;

it attempts to set forth purely a

claim for damages based upon the

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breach of a contract to insure in a

controversy affecting only the

employer and the insurance carrier,

no rights of the employee being

involved. The mere circumstance

that the damage claimed is the

exact amount of the compensation

award to the employee does not

change the essential nature of the

action and the court should not be

prevented from proceeding with it.

214 Cal. at 471-472.

Defendants further refer the court to

Hartford Acc. Etc. Co. v. Indus. Acc. Com.,

216 Cal. 40 (1932). In Hartford Acc. Etc.

Co., the Commission ordered the employer to

obtain a surety bond as a prerequisite to the

issuance to the employer of a certificate of

self-insurance to secure the payment to its

employees of workers’ compensation benefits. 

The employer obtained a surety bond from

Hartford. During the time the bond was in

force, claims were made by the employees

which awards were covered by the bond. 

Thereafter, in the district court, a receiver

was appointed for all of the property and

assets of the employer. The receiver stopped

payment of the workers’ compensation awards. 

At the time the receiver did so, the total

amount of the awards exceeded the amount of

the bond. The employees then petitioned the

Commission for an order requiring Hartford,

as surety on the bond, to pay or provide

payment of the compensation remaining unpaid

on account of the workers’ compensation

awards. Hartford appeared in the Commission

proceedings. The Commission ordered Hartford

to pay the amount of the bond. On appeal,

Hartford argued that the Commission had no

jurisdiction to render an award against the

surety on a self-insurer’s bond. The Supreme

Court rejected this argument, holding that

the provisions of the workers’ compensation

act regulating a self-insurer employer and

providing for the giving of a bond are one

method of securing the payment of

compensation and, therefore, within the grant

of power to the Commission. Id. at 45-46. 

The Supreme Court further held that the

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employees’ petition was a “proceeding for the

recovery of compensation, or concerning any

right or liability arising out of or

incidental thereto” and that, therefore,

“[t]here can be no question of the

jurisdiction of the Commission to entertain

such a proceeding and to determine all issues

arising therein and to render an award in

accordance with the facts presented to it.” 

Id. at 46. The Supreme Court further stated

in pertinent part:

Petitioner complains that the

granting of relief against it in

the proceedings before the ...

Commission deprived it of legal and

equitable rights to which it would

otherwise be entitled. These

rights petitioner claims are given

it under sections 2845 and 2846 of

the Civil Code and section 1050 of

the Code of Civil Procedure. If

petitioner is entitled to any

rights under these sections of the

code which it could not enforce

before the Commission, it might be

relegated to the courts for the

purpose of enforcing them. This

result would not affect the

jurisdiction of the Commission if

the Constitution and statutes have

conferred jurisdiction upon the

Commission to determine the matter

involved. However, if the

Commission is vested with

jurisdiction over any given subject

matter, it has the power to hear

and determine every issue raised by

the parties in the controversy ...

In such cases the parties are not

required to resort to the courts.

Id. at 47. 

Fidelity argues that Section 5300(a) does not

cover a claim for rescission of an insurance

policy because a claim for rescission does

not involve “the recovery of compensation, or

concerning any right or liability arising out

of or incidental thereto.” Fidelity asserts

that it does not contend that Conley cannot

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proceed before the WCAB for the recovery of

workers’ compensation benefits against Lee

Investments but, rather, that the WCAB does

not have jurisdiction of the claim for

rescission of the Policy. Fidelity argues

that the Supreme Court’s decision in General

Acc. Etc. Corp. is not controlling on this

issue. In so arguing, Fidelity notes that no

issue concerning the Commission’s

jurisdiction was raised by the insurance

company in the appeal because the insurance

company was the petitioner. In addition,

Fidelity notes that the insurance company in

General Acc. Etc. Corp. did not seek

rescission of the policy in proceedings

before the Commission but rather a

determination that the insurance company was

not liable.

Fidelity notes that the type of relief that

can be granted by the court and by the WCAB

differs. Thus, the trial court cannot award

workers’ compensation benefits, and the WCAB

cannot award damages for injuries. La Jolla

Beach & Tennis Club, Inc. v. Industrial

Indemnity Co., 9 Cal.4th 27, 35 (1994); Scott

v. Industrial Acc. Com., 46 Cal.2d 76, 82-83

(1956). In State Comp. Ins. Fund v. Ind.

Acc. Com., 20 Cal.2d 264 (1942), the

California Supreme Court held that the

Commission was “without jurisdiction to

adjudicate a supplemental controversy

involving rights of contribution and

reimbursement between two insurance carriers

jointly and severally responsible for the

payment of a compensation award.” Id. at

266. In so holding, the Supreme Court

distinguished General Acc. Etc. Corp. v.

Indus. Acc. Com., and Bankers Indem. Ins. Co.

v. Indus. Acc. Com., explaining in 

pertinent part:

While petitioner concedes that the

jurisdiction of the commission is

limited to the settlement of

disputes arising out of the

relationship of the employer to his

employee, it urges that once this

status is established the

commission has judicial power to

determine any controversy

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whatsoever that may develop between

parties in interest respecting the

compensation awarded. Upon this

basis the petitioner contends that

its application for an adjustment

of its obligation to make

compensation payments falls within

the scope and intent of the ...

constitutional provision referable

to the insurance features of the

‘system of workman’s compensation’

and the legislative enactment

adopted in pursuance thereof. In

support of its argument the

petitioner first cites several

decisions of this court wherein it

was held that in determining the

liability of an insurance carrier

for compensation to an injured

employee, the commission had the

power to determine all issues of

law and fact upon which the

liability of the insurance carrier

depended ... But in those cases the

respective questions regarding the

insurance aspect of the proceeding

before the commission arose in

connection with the rendition of an

award in favor of an injured

employee or his dependents and

necessarily were involved in the

enforcement of the compensation

benefits contemplated under the

basic liability of the employer to

his employee. The present

situation is readily

distinguishable in that here the

right of action in the employee to

enforce his claim was finally

determined by the joint and several

award in his favor against the

insurance carriers which had

assumed the obligation of the

respective employers in the

premises. By such award the

employee was assured of the

scheduled payments, and the

employers were discharged from all

liability therefor. This

adjudication concluded the

authority of the commission to act

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in the matter. Any controversy

between the insurance carriers

relative to the burden of payment

of the award for which both have

been held responsible concerns

neither the employee nor the joint

employers in their essential

relationship. Application for the

adjustment of such dispute

obviously is not a proceeding ‘for

the recovery of compensation’ nor

does it involve ‘any right or

liability arising out of or

incidental thereto.’ The fact that

the petitioner has joined the

employee as a nominal party in this

proceeding cannot change the basic

character of the litigation as an

independent claim having no

relation to the enforcement of

benefits allowed the employee under

the system of workman’s

compensation established in this

state. The petitioner is seeking

an award in its favor based on a

claim wholly distinct from the

right of an employee to recover

compensation for an industrial

injury. These considerations

plainly indicate that the

commission is not vested with

constitutional or legislative power

to determine the issues involved in

a proceeding supplemental to the

adjudication of the liability of

the employer to his employee, and

the petitioner must seek its relief

in the ordinary courts ....

Id. at 267-268. 

Here, as noted, the Complaint alleges that

Fidelity has paid benefits to Conley under

the Policy because her claims, but for the

rescission of the Policy, would be covered by

the Policy. 

Fidelity further argues that, contrary to

Conley’s assertion, the outcome of this

Complaint for rescission will not determine

Conley’s right to recovery of compensation

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benefits. In so arguing, Fidelity notes

that, pursuant to California Labor Code §

3715(a), an employee whose employer has

failed to secure the payment of compensation

under the workers’ compensation laws may, in

addition to proceeding to proceeding against

the employer by civil action, “file his or

her application with the appeals board for

compensation and the appeals board shall hear

and determine the application for

compensation in like manner as in other

claims and shall make the award to the

claimant as he or she would be entitled to

receive if the employer had secured the

payment of compensation as required ....” 

Section 3715(a) further requires the employer

to pay the award so ordered or furnish a bond

to do so. If the employer fails to pay the

award or post the bond as ordered pursuant to

Section 3715(a), “the award, upon application

by the person entitled thereto, shall be paid

... from the Uninsured Employers Fund ....” 

California Labor Code § 3716(a). Therefore,

Fidelity argues, if rescission is granted,

Conley can recover benefits from her employer

or from the Uninsured Employers Fund.

The court concludes that this motion to

dismiss is denied on this ground. The court

is not persuaded that Fidelity’s claim for

rescission is within the exclusive

jurisdiction of the WCAB because Fidelity has

paid the benefits under the Policy. That 

Fidelity sues to recover the benefits paid

(less premium) from the employer on a theory

of rescission does not affect Conley’s

proceedings before the WCAB or her

entitlement to benefits.

Judge Coyle’s denial of the motion to dismiss for lack of

jurisdiction is contended by Lee to have required Lee to file a

counterclaim against USF&G or risk loss of the counterclaim under

Rule 13(a), Federal Rules of Civil Procedure. See discussion

infra. Lee filed its counterclaim on February 7, 2000. (Doc.

40). A decision by a Workers’ Compensation WCJ issued on October

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20, 1999, found that the WCAB has subject matter jurisdiction

over the issue of rescission of the USF&G policy issued to Lee. 

On December 24, 1999, the WCAB denied USF&G’s petition for

reconsideration of the decision of the WCJ and ruled that the

matter be held in abeyance by the WCJ pending disposition of

Conley’s motion for reconsideration by Judge Coyle. After

USF&G’s petitions for review were denied by the California Court

of Appeal, Fifth Appellate District and the California Supreme

Court, Conley moved for reconsideration by Judge Coyle of his

ruling denying the motion to dismiss. Lee did not join in

Conley’s motion for reconsideration. Conley’s motion for

reconsideration was denied by Order filed on August 17, 2000

(Doc. 57). Judge Coyle ruled in pertinent part:

In moving for reconsideration, Conley relies

on the decisions of the WCAB that the WCAB

has exclusive jurisdiction over the

rescission claim because, if the Policy is

rescinded, there will be an impact on

Conley’s ability to receive benefits. The

WCJ ruled that

While there is available to the

injured worker the Uninsured

Employers Fund there is often

significant delay in obtaining

access to that fund and on occasion

the Fund is not adequately funded

for the year and they run out of

the means to maintain benefit

payments. Also if the rescission

[sic] action is pending in Federal

Court, UEF would not pick up

benefits for the applicant on the

basis that the issue of whether or

not the employer was insured for

workers [sic] compensation

liability had not been decided. A

final decision in Federal Court

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could be delayed for a significant

period of time, whereas the Board’s

procedures are set up for a prompt

resolution of issues. From a

reading of the cases cited in the

briefs and also referred to in the

Federal Court’s decision the

distinguishing fact as to which

forum has jurisdiction over the

rescission [sic] of the contract

issue appears to be whether or not

the applicants [sic] access to

benefits is going to be affected. 

If they are then the WCAB has

jurisdiction if not then the civil

courts (federal or state) have

jurisdiction. For the reasons

discussed above the WCALJ is of the

opinion that if the Board finds

that they do not have jurisdiction

then there would be a significant

impact on the applicant’s ability

to receive benefits in a timely

manner.

This ruling is now final in the California

courts because of the denials of Fidelity’s

petitions for review.

However, in a supplemental brief filed on

March 9, 2000, Fidelity notes that Lee

Investments had filed a counterclaim against,

[sic] Fidelity, AON [sic] Risk Services,

American Speciality [sic] Insurance Services,

Inc., and American Speciality [sic] Risk

Management Services, LLC, alleging causes of

action for breach of fiduciary duty, fraud,

conspiracy to defraud, and negligent

misrepresentation. Fidelity contends that,

because the allegations of the counterclaim

arise out of the same facts as the complaint

for rescission, all of the issues in the

Complaint will be before the court in any

event. Even if the Complaint for Rescission

is dismissed for lack of jurisdiction,

Fidelity’s claim for rescission would be a

compulsory counterclaim to Lee Investments’

counterclaim. Therefore, the court will have

to decide the rescission claim. Furthermore,

any decision by the WCAB concerning

Fidelity’s claim for rescission would not be

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binding on the counterdefendants, because

they are not and cannot be parties to the

workers’ compensation proceedings. 

Therefore, Fidelity contends, Lee

Investments’ counterclaim provides an

independent basis for this court to deny

Conley’s Application for Reconsideration.

The court notes that Conley has not responded

to these grounds for denial of the

Application for Reconsideration. This

failure persuades the court that the

Application for Reconsideration should be

denied. While the decision by the WCAB is

entitled to deference, the court remains

persuaded that its initial decision was not

contrary to law. The filing of Lee

Investments’ counterclaim is another reason

for this court to exercise its jurisdiction.

Lee’s contention that the Partial Judgment is void because

of the exclusive jurisdiction of the WCAB is without merit. As

explained in Wright, Miller & Kane, Federal Practice and

Procedure: Civil 2 § 2862, pp.326-329: nd

A judgment is not void merely because it is

erroneous. It is void only if the court that

rendered it lacked jurisdiction of the

subject matter, or of the parties, or if it

acted in a manner inconsistent with due

process of law.

Lee’s argument about “exclusive jurisdiction” confuses the

issue. “The jurisdiction of the federal courts - their power to

adjudicate - is a grant of authority to them by Congress and thus

beyond the scope of litigants to confer.” Neirbo Co. v.

Bethlehem Shipbuilding Corporation, 308 U.S. 165, 167 (1939). 

This Court had subject matter jurisdiction over this action by

virtue of diversity of citizenship, which subject matter

jurisdiction may not be enlarged or contracted by state law. See

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Bergay v. Kerr-McGee Corp., 682 F.2d 1311, 1315 (9th

Cir.1982)(“Although the states have the power to prevent the

federal court from granting relief in a diversity case by denying

the substantive right of action asserted, they ‘have no power to

enlarge or contract the federal jurisdiction.”); Beach v. OwensCorning Fiberglas Corp., 728 F.2d 407, 409 (7 Cir.), cert. th

denied, 469 U.S. 825 (1984)(“Even though Indiana law vests

exclusive jurisdiction over cases such as this one in its

Industrial Disputes Board, a federal court properly may exercise

jurisdiction over them. State law cannot be construed to enlarge

or contract federal jurisdiction.”). Lee’s contention that the

Partial Judgment must be vacated because of the exclusive

jurisdiction of the WCAB is an issue relating to failure to state

a claim upon which relief can be granted. See discussion infra.

Its argument that the federal court lacks diversity subject

matter jurisdiction over this case is misplaced and is no basis

for setting aside judgment.

Lee’s motion on this ground is DENIED. 

C. Claims of Clear Error and Manifest Injustice By Not

Granting Lee Judgment as a Matter of Law on the Original and

Amended Complaints of USF&G.

1. WCAB Had and Has Exclusive Jurisdiction.

Lee asserts that USF&G’s Complaint and Amended Complaint

fail to state a claim upon which relief can be granted because

the WCAB had and has exclusive jurisdiction. 

Lee relies on a state case, Gilford v. State Compensation

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Ins. Fund, 41 Cal.App.3d 828,834 (1974)(“‘”Where there is any

reasonable doubt as to the jurisdiction, the courts must resolve

such doubts in favor of jurisdiction of the commission.”’”), and

argues that Judge Coyle’s rulings were clearly in error and

manifestly unjust:

Ms. Conley now faces precisely the concerns

that the WCJ expressed. If there were any

reasonable doubt, which there is not, about

the exclusive jurisdiction of the WCAB to

decide the rescission issue ..., that doubt

must be resolved in favor of the exclusive

jurisdiction of the WCAB. 

Lee preserved its position regarding the

exclusive jurisdiction of the WCAB by joining

Ms. Conley’s initial motion. The denial of

that motion compelled Lee to file a

compulsory counterclaim and to otherwise

protect its rights in this action. It was

manifestly unjust and clear error for the

court to deny the initial motion and then,

having erroneously put Lee to the necessity

of filing a compulsory counterclaim, to use

that counterclaim as a basis to say the

motion to dismiss was properly granted in the

first place.

Since USF&G’s complaint was the entire action

when the original motion to dismiss was

filed, the entire action should have been

dismissed on the original motion. Had it

been, Lee would not have filed a counterclaim

nor a third party complaint. The judgment is

therefore void in its entirety.

USF&G and Aon oppose this motion, contending that Judge

Coyle’s rulings were correct as a matter of law. As a matter of

practicality, Connelly has received and continues to receive full

workers’ compensation benefits which have been fully paid by

USF&G under a reservation of rights.

Rule 59(e) may not be used to relitigate old matters, or to

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raise arguments or present evidence that could have been raised

prior to the entry of judgment. That is what Lee is doing here. 

Lee’s motion to amend or alter the partial judgment pursuant to

Rule 59(e) on the ground that the WCAB had and has exclusive

jurisdiction is DENIED. 

USF&G argues that Judge Coyle’s decision that the district

court had jurisdiction over USF&G’s complaint for rescission was

binding on the WCAB because the district court first obtained

jurisdiction over the complaint. USF&G acknowledges that Ms.

Conley’s initial application for workers’ compensation benefits

was filed before USF&G filed the complaint for rescission in the

district court. However, USF&G contends, Ms. Conley’s initial

application named only The Island and GAB Business Services and

only sought liability for temporary disability indemnity and did

not seek adjudication of any claim for rescission by USF&G

against Lee. USF&G filed its complaint for rescission in the

district court on April 26, 1999. USF&G contends that the

declaration of readiness to proceed seeking arbitration by the

WCAB of the rescission complaint was not filed by Conley until

two months later. USF&G cites Scott v. Industrial Accident

Commission, 46 Cal.2d 76 (1956).

In Scott, the California Supreme Court issued a writ of

prohibition to halt proceedings in a matter before the Industrial

Accident Commission until a final judgment was reached in a

superior court action in which damages were sought for the same

injuries as were involved in the Industrial Accident Commission

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matter. The California Supreme Court ruled:

The question thus presented is whether the

Industrial Accident Commission may, and

should, be required to suspend the exercise

of its jurisdiction in the proceeding before

it because of the pendency of the action in

the superior court or on appeal therefrom. 

The issue is not one of simultaneous exercise

of general concurrent jurisdiction; it is,

rather, the right of proceeding

simultaneously in two tribunals, the

jurisdiction of each of which is essentially

exclusive of the other, but each of which has

the power to make a determination of

jurisdiction which, when final, will be

conclusive upon the other. 

Id. at 81. The Supreme Court noted that 

General principles applicable to

controversies in which the same parties and

the same subject matter are involved are

these: When two or more tribunals in this

state have concurrent jurisdiction, the

tribunal first assuming jurisdiction retains

it to the exclusion of all other tribunals in

which the action might have been initiated. 

Thereafter another tribunal, although it

ordinarily might originally have taken

jurisdiction, may be restrained by

prohibition if it attempts to proceed.

Id. The Supreme Court concluded that “the general rule long

recognized as governing tribunals whose jurisdiction is generally

concurrent should be applied here where jurisdiction to determine

jurisdiction is concurrent.” Id. at 89.

Lee replies that California Insurance Code § 11653 defines

“employer” to include the employer’s workers’ compensation

insurer. USF&G was a party to Ms. Conley’s initial application

for workers’ compensation benefits as a matter of law and,

therefore, the WCAB had jurisdiction over USF&G more than one

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month before this action for rescission was commenced. Further,

Lee replies that USF&G’s reliance on Scott is misplaced because

the jurisdiction of the WCAB was exclusive even of this court’s

jurisdiction to determine jurisdiction. Lee argues:

Here, there was no basis for the District

Court to have any jurisdiction to determine

the rights of Conley and Lee against USF&G. 

Unlike Scott, Conley did not sue Lee in this

court seeking damages upon a theory that

Conley was not within the course and scope of

employment. Conley did not otherwise tender

to the District Court a precedential

jurisdictional (‘precedential jurisdiction’

herein shall refer to concurrent jurisdiction

to determine jurisdiction) issue that the

District Court could properly decide to

determine whether the District Court had

exclusive jurisdiction to proceed with the

rescission action.

Aon argues that, even if, arguendo, it is concluded that the

WCAB had exclusive jurisdiction over USF&G’s rescission claim and

the Partial Judgment for USF&G on rescission were vacated for

failure to state a claim, such a ruling should not affect the

rest of the Partial Judgment:

In such an event, it would be an abuse of

discretion for this Court not to continue to

exercise its supplemental jurisdiction over

(and confirm its judgment concerning) Lee’s

claims and defenses against all other

parties, and Aon’s claim and defenses against

all other parties. 

Lee replies that had the motion to dismiss been granted, Lee

would have never filed a counterclaim:

Hence, Aon cannot use the existence of that

counterclaim, which the improper retention of

jurisdiction in this court forced Lee to

file, as a basis to contend that the partial

judgment ought not to be vacated. Had the

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complaint been dismissed, there would be no

basis whatsoever for supplemental

jurisdiction because there were no other

claims filed at that time.

Lee further argues that, even if it is proper at this time

to examine supplemental jurisdiction over Lee’s counterclaim and

third party complaint, supplemental jurisdiction should not be

retained:

First, there is a strong preference for

dismissal of supplemental claims where all

claims over which the court had original

jurisdiction have been dismissed, even if

there have been extensive proceedings in

federal court ... Second, the fundamental

question whether or not there was a

misrepresentation that would allow rescission

of the subject policy is necessarily

precedent to whether Lee could have any

liability to Aon. ... [T]he question whether

the USF&G policy should be rescinded is

exclusively committed to the jurisdiction of

the ... WCAB ... It is thus a state law issue

that substantially predominates ... Third,

the existence of the parallel proceedings

before the WCAB ... strongly supports

dismissal of the entire action rather than

retention of Lee’s counterclaim and third

party complaint. 

Lee’s position concerning the exercise of supplemental

jurisdiction is categorically meritless. The district court has

discretion to retain pendent claims and may consider the

resources invested in a case. See Schneider v. TRW, Inc., 938

F.2d 986, 993-995 (9 Cir.1991). th

Lee assumes, arguendo, if there were “concurrent

precedential jurisdiction for both the WCAB and this court”,

i.e., that the district court had jurisdiction to determine

whether or not the jurisdiction of the WCAB was exclusive under

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the circumstances, the Scott rule required this court to honor

the final decision of the WCAB in favor of the WCAB’s exclusive

jurisdiction. Lee cites a state case, Aetna Casualty & Surety

Co. v. Aceves, 233 Cal.App.3d 544 (1991).

In Aceves, Aetna filed an action in the Superior Court

before Aceves began proceedings before the WCAB. On appeal,

Aetna argued that the Superior Court had jurisdiction to

determine its own jurisdiction, and because Aetna filed the

Superior Court action first, the Superior Court’s determination

took priority. Relying on Scott v. Industrial Accident

Commission, supra, the Court of Appeals agreed. 233 Cal.App.3d

at 551-554.

Lee also argues that it is immaterial that the WCAB would

not afford the same remedy to USF&G that it might otherwise have

in the district court. Lee refers to Goetz v. Aetna Casualty and

Surety Company, 710 F.2d 561 (9 Cir.1983). In Goetz, the th

Goetzes filed an action with the Industrial Accident Commission

when Aetna failed to pay accrued benefits. The Board issued an

award against Aetna, which paid part of the award and failed to

pay the balance. The Goetzes filed a complaint in the district

court alleging that Aetna’s conduct in delaying and refusing to

pay workers’ compensation benefits due them violated California

Insurance Code § 790.03(h). The district court granted Aetna’s

motion to dismiss on the ground that the court lacked

jurisdiction over the subject matter of the action because

California law vested exclusive jurisdiction of the dispute in

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the Appeals Board. 710 F.2d at 563. On appeal, the Goetzes

argued that the California workers’ compensation scheme violates

the equal protection clause of the Fourteenth Amendment. In

rejecting this argument, the Ninth Circuit ruled:

The Goetzes’ equal protection argument

challenges not classifications apparent from

the face of a statute but categories which

result from the differing reaches of the

workers’ compensation and unfair practices

laws. While the challenge is unusual, we do

not reject it for this reason. A statute

does not escape equal protection scrutiny

simply because it does not expressly effect

the objectionable variation ... The

California workers’ compensation law does not

arbitrarily deprive claimants of their

rights, however. The remedy provided by

section 5814 of the Labor Code may not be as

effective as that provided by section 790.03

of the Insurance Code, but this is merely an

aspect of the exclusivity trade-off

underlying the workers’ compensation statute. 

The respective legislative classifications

reasonably relate to the legitimate state

ends underlying the workers’ compensation and

unfair practices statutes. Since they

‘advance[] legitimate legislative goals in a

rational fashion ..., they do not offend

equal protection.

Id. at 564. It is “completely irrelevant in this case”, Lee

contends, that the district court cannot award workers’

compensation benefits and the WCAB cannot award damages for

injuries.” 

USF&G argues that, because Conley abandoned any effort to

challenge the jurisdiction of this Court, Lee cannot now do so. 

USF&G notes that Lee did not join in Conley’s Application for

Reconsideration but, instead, filed on December 17, 1999, a

motion to file a counterclaim in this action against USF&G, ASI,

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and Aon. (Doc. 27). The motion was granted by Magistrate Judge

Snyder on January 26, 2000. (Doc. 37) Lee’s counterclaim was

filed on February 7, 2000. (Doc. 40). Lee was ordered to file

an amended counterclaim by Order filed on August 17, 2000, (Doc.

58), which Lee did on August 31, 2000. (Doc. 59). On January

24, 2001, a Stipulation Dismissing Diana Conley from Action

Without Prejudice was ordered, (Doc. 73), wherein USF&G, ASI, and

Diana Conley stipulated in pertinent part:

1. The above-captioned action shall be

dismissed without prejudice as to defendant

Diana Conley only.

2. Diana Conley shall be bound by all

orders, findings, conclusions,

determinations, decrees, stipulations,

judgments, and/or settlements made, entered

or entered into, as the case may be, in or in

connection with the above-captioned action,

in the same manner and to the same extent as

if Diana Conley had continued to be a party

to said action and had participated in the

litigation therein.

According to the Declaration of Bruce T. Smyth filed in

opposition to Lee’s motion, (Docs. 738-740):

14. On April 18, 2006, seven years after

Diana Conley filed her application for

benefits before the WCAB, and faced with an

imminent trial in this court, Lee filed a

‘declaration of readiness’ to have USF&G’s

complaint adjudicated by arbitration by the

WCAB. USF&G promptly filed objections to the

declaration of readiness and request for

arbitration and reply memorandum to Lee’s

opposition. Conley subsequently filed a

declaration of readiness also ... At a

settlement conference before the Honorable

Adrienne Allen, Workers Compensation

Administrative Law Judge, on May 22, 2006,

Conley withdrew her declaration of readiness

and request for arbitration. Judge Allen

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then set a continued settlement conference

before the presiding judge of the San

Bernardino Division of Workers Compensation

Appeals Board, Honorable Charles Regnell, for

June 13, 2006. At the settlement conference

on June 13, 2006, Judge Regnell held that a

trial should be conducted on the issue of

whether the matter should not be sent to

arbitration, based on the contentions of

USF&G that Lee had warned [sic] and/or was

estopped from asserting the jurisdiction of

the WCAB, and set another settlement

conference, which subsequently [sic] held on

August 29, 2006.

15. At that conference, Lee’s counsel

asserted that the counsel for USF&G in the

workers compensation matter, Greg Geisler of

Morse, Geisler & Callister, in fact had

previously represented Lee. The WCAB

accordingly set another status conference for

September 26, 2006 to consider the threshold

issue of whether there was a conflict of

interest by virtue of Mr. Geisler’s alleged

representation. On November 15, 2006, the

parties entered into a stipulation for the

exchange of information and discovery in

connection with Lee’s subsequent motion

before the WCAB to disqualify Mr. Geisler and

Charston, Revich & Chamberlin, LLP. The

Court set a conference for December 13, 2006,

which was subsequently continued to late

January, 2007. On January 26, 2007, at the

request of counsel for USF&G because of the

trial in this matter, the status conference

before the WCAB was continued to May 2, 2007.

...

16. USF&G contends that its complaint for

rescission of the insurance policy has been

resolved by the jury’s verdict and the

partial judgment. Lee in any event failed to

bring the complaint for rescission to

adjudication by the WCAB, first by failing to

take any action to do so for seven years and

then by delaying any action by a frivolous

motion to disqualify USF&G’s counsel. If

USF&G’s complaint had not been resolved in

this Court, Lee would still need (1) to have

the issue of disqualification of USF&G’s

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counsel heard by the WCAB and (2) then have

the issues of whether Lee waived and/or was

estopped from asserting the jurisdiction of

the WCAB tried by the WCAB. Because the

judgment of rescission against Lee in this

Court bars its claim before the WCAB, Lee

cannot proceed in that forum.

USF&G and Aon argue that Lee’s assertion that Judge Coyle’s 

denial of Conley’s initial motion to dismiss compelled Lee to

file a compulsory counterclaim and to otherwise protect its

rights in this action and that it was manifestly unjust and clear

error to use that counterclaim as a basis to say the motion to

dismiss was properly granted in the first place is without merit

and does not justify granting Lee’s motion. First, Lee argues

that it had to assert its counterclaims in this court or lose

them, because they would have been barred by the statute of

limitations and such claims could not be pursued before the WCAB,

which did not have jurisdiction over the claims for fraud,

negligent misrepresentation, breach of oral contract and

negligence alleged by an alleged policyholder against the insurer

and did not have jurisdiction of claims against the managing

general agent, ASI. Further, it is argued:

Nothing forced Lee to file its claims in

federal court. Lee could have preserved its

claims by filing them in state court or by

entering into a tolling agreement with USF&G. 

Other options were available to Lee as well. 

Lee and Ms. Conley could have petitioned the

Ninth Circuit for a writ to review the denial

of Conley’s motion. Lee and Ms. Conley also

could have sought permission from the Ninth

Circuit to take an interlocutory appeal under

28 U.S.C. § 1292(b). Instead, Lee chose to

litigate its claims in this Court and

aggressively pursued them through summary

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judgment and trial.

Lee replies that USF&G and Aon cite no authority that the

filing of the counterclaim rendered Lee’s objections to

jurisdiction moot:

Parties do not waive objections properly made

and preserved by continuing to participate in

the litigation after their objections have

been overruled. The pertinent question is

whether Lee had filed a counterclaim before

the motion to dismiss was brought and

decided. No such counterclaim had been

filed.

USF&G argues that Lee has waived any right and is estopped

to seek adjudication of USF&G’s complaint by the WCAB by failing

to proceed in that forum for seven years. USF&G notes that Lee

did not assert that the WCAB had jurisdiction in its Answer, as

an affirmative defense or otherwise. Lee did not join in Ms.

Conley’s application for reconsideration of the motion to dismiss

but, rather, filed a counterclaim and expressly sought to have

the District Court adjudicate the issues in USF&G’s Complaint by

moving for summary judgment. USF&G contends that Lee waited

until after its motion for summary judgment had been denied,

“after its phony threat of bankruptcy had been rejected by

USF&G,” and until trial was imminent before filing a “declaration

of readiness” for arbitration before the WCAB. Citing Sea World

Corp. v. Superior Court, 34 Cal.App.3d 494 (1973)) and Magliulo

v. Superior Court, 47 Cal.App.3d 760 (1975), USF&G contends that

Lee has waived any right to seek and is estopped from obtaining

adjudication before the WCAB.

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Lee replies that it has not waived and is not estopped to

have the WCAB adjudicate the rescission issue. Lee asserts that

Sea World is inapposite:

Here ... Conley and Lee promptly moved this

court to dismiss the action based on the

exclusive jurisdiction of the WCAB and did

not submit to this court for decision any

precedential jurisdictional question of fact

as occurred when the employer in Sea World

asked the Superior Court to decide the issue

of course and scope of employment. USF&G

confuses waiver of the right to have a

tribunal determine an issue of concurrent

jurisdiction to determine jurisdiction, such

as course and scope of employment, with

waiver of a right of general jurisdiction

once found. A party can waive having the

WCAB determine a precedential jurisdictional

issue like course and scope of employment by

submitting that issue to the court for it to

decide under its concurrent jurisdiction to

determine jurisdiction, but one cannot waive

the general jurisdiction of either tribunal

once that has been found nor can a tribunal’s

exercise of its own general jurisdiction be a

subject of estoppel.

USF&G and ASI have not cited a single case

that holds that general jurisdiction can be

waived or that the exercise of such

jurisdiction, once obtained, can somehow be

estopped. Although there may be other

remedies for a party’s alleged delay in

pursuing remedies before a tribunal that has

general jurisdiction, USF&G have not pursued

any such other remedies. Sea World and its

progeny are inapplicable to the facts of this

case.

In its reply brief, Lee contends that USF&G’s failure to

join the Uninsured Employers’ Fund (UEF) as a party to this

action requires that the judgment be vacated. This contention

has never been raised in this action. To advance it in a reply

is improper. It should not be considered, but is treated to the

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extent of USF&G’s response.

Lee contends that, “[b]ased on the uncontradicted evidence

of the inadequacy of the UEF,” the only way that the UEF could

provide adequate compensation for Conley is by establishing that

there is coverage under the USF&G workers’ compensation policy.” 

Under California Labor Code § 5600, Lee asserts, “it is evident

that the UEF’s claim for coverage under the USF&G policy falls

within the exclusive jurisdiction of the WCAB”, citing Rinaldi v.

Workers’ Compensation Appeals Bd., 196 Cal.App.3d 571 (1987). 

Lee refers to Aetna Casualty & Surety Co. v. Aceves, supra, 233

Cal.App.3d at 554-555:

A trial court has discretion whether or not

to exercise an action for declaratory relief. 

Aceves contends that the trial court abused

its discretion by taking jurisdiction in this

case, because the court created the

possibility of inconsistent judgments.

If an employer is found to be uninsured, an

injured employee has certain rights to

proceed against the Uninsured Employers Fund

(Fund), which was set up to pay judgments

obtained against uninsured employers.

(Lab.Code, § 3715 et seq.) The Fund was not

named in Aetna’s suit, and the judgment in

that suit therefore cannot bind the Fund ...

Aceves asserts that the Fund might be able to

demonstrate to the WCAB that Aetna did insure

Chesler at the time of the accident. If so,

the Fund would not be liable to Aceves, and

Aceves would be left with an unenforceable

judgment against Chesler.

Aetna does not directly respond to this

argument. Instead, it contends that the

superior court’s final determination

concerning insurance coverage would be

binding on the WCAB. Aetna states that

‘sound public policy [limits] litigation by

preventing a party who has had one fair trial

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on an issue from again drawing it into

controversy.’ ... This proposition, although

legally sound, does not respond to Aceves’

argument. The WCAB is a decisionmaking

forum, not a party to be bound by a prior

judgment. The Fund, in contrast, is commonly

joined as a party in cases involving

controversies over insurance coverage of

employers. As the court explained in Rinaldi

v. Workers’ Comp. Appeals Bd. (1987) 196

Cal.App.3d 571 ..., ‘Rinaldi, as the Director

of the Department of Industrial Relations of

the State of California, is the state

official responsible for administering the

Uninsured Employers Fund. The fund was

created to ensure that workers employed by

illegally uninsured employers are not

deprived of workers’ compensation benefits

(Lab. Code, § 3716, subd. (b)). Rinaldi is

aggrieved by the Board’s order, for he is

required to pay the award if the employer

fails to do so. (Lab. Code, § 3716, subd.

(a)).’ (Id. at p. 572), fn. 1, italics

added.) Thus, although the declaratory

judgment is conclusive as to Aceves, it

cannot be binding on the Fund. (See Scott,

supra, 46 Cal.2d at p.83.)

Aetna contends that because Aceves agreed in

the settlement agreement not to pursue any

personal liability against Chesler in a

workers’ compensation proceeding, there was

no realistic possibility of inconsistent

judgments. Determination of this issue would

require us to determine the interpretation of

and enforceability of the settlement

agreement. That issue was not presented for

resolution in the trial court and is not

properly before us on appeal. See, e.g.,

Labor Code section 5001, which states, ‘No

release of liability or compromise agreement

is valid unless it is approved by the appeals

board ....’ ... The record contains no

suggestion that such approval has been

obtained.

The issue of possible inconsistent judgments

was properly raised before the trial court,

yet no measures were taken to lessen or avoid

prejudice to Aceves ... A trial court’s

exercise of discretion under section 1061

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will be upheld on appeal unless an abuse of

discretion is clearly shown. The test of

abuse of discretion is ‘whether or not the

trial court exceeded the bounds of reason,

all of the circumstances before it being

considered ...’ ... Under the circumstances

presented in this case, we conclude that the

trial court did abuse its discretion in

granting declaratory judgment when the Fund

was not joined as a party.

Relying on Aceves, Lee argues that USF&G likewise failed to

join the UEF and the UEF is not bound by the Partial Judgment:

The risk of inconsistent judgments is

likewise present between a judgment by this

court that USF&G is entitled to rescind and

to restitution as to Lee, and one by the WCAB

in favor of the UEF that USF&G’s policy was

not rescinded and USF&G remains liable for

Conley’s workers’ compensation benefits. 

Presumably, USF&G never joined the UEF to

this action for fear that the UEF’s

involvement would cause the court to

recognize that exclusive jurisdiction and the

proper forum under the Buford and Colorado

River abstention doctrines lay with the WCAB.

Judge Coyle’s Order denying the motion to dismiss also denied

Lee’s request for abstention under Buford and Colorado River. 

Lee’s reference in the reply brief is the first contention by Lee

that the abstention rulings were in error.

In its sur-reply brief, USF&G contends that it “is simply

outrageous and in bad faith that Lee would wait eight years after

the case had been filed and after trial and in a Reply brief to

its own motion to vacate to raise the completely new allegation

that UEF was somehow a necessary party.” USF&G notes that Lee

never asserted this contention in its Answer to the Complaint or

to USF&G’s amended counterclaim. Lee has never raised the issue

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of UEF’s alleged indispensability. It may not do so now, after

the trial is over. 

USF&G further contends that Lee is estopped from asserting

that the UEF was a necessary party. Lee’s Motion in Limine No.

19 (Doc. 449) and the Order granting Motion in Limine No. 19

(Doc. 596)(“There shall be no mention of and no documentary

evidence or testimony before the jury or prospective jurors

relating to any collateral source of funds for the payment of

benefits or damages to Ms. Conley, including, without limitation,

the Uninsured Employer’s Trust Fund ....”). USF&G notes that at

the same time Lee moves to vacate the Partial Judgment because

the UEF is a necessary party, Lee moves for a new trial on the

grounds of counsel’s misconduct in mentioning the UEF during

questioning of Hugh Awtrey. 

USF&G raises Rule 12 to rebut Lee’s contention that the UEF

is a necessary party on that ground is made too late. Fed. R.

Civ. Proc. Rule 12(b)(7) is the means by which the defense of

failure to join a party under Fed. R. Civ. Proc. Rule 19 is

raised by motion. Rule 12(g) provides in pertinent part:

... If a party makes a motion under this rule

but omits therefrom any defense or objection

then available to the party which this rule

permits to be raised by motion, the party

shall not thereafter make a motion based on

the defense or objection so omitted, except a

motion as provided in subdivision (h)(2)

hereof on any of the grounds there stated.

Rule 12(h)(2) provides in pertinent part:

A ... defense of failure to join a party

indispensable under Rule 19 ... may be made

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in any pleading permitted or ordered under

Rule 7(a), or by motion for judgment on the

pleadings, or at the trial on the merits.

Lee did none of these. USF&G further argues that Aceves

does not establish that the Partial Judgment should be vacated

pursuant to Rule 19, Federal Rules of Civil Procedure, because of

the failure to join the UEF as a party. USF&G notes that in

Aceves, the issue of inconsistent judgments was raised in the

trial court, while Lee did not do so. USF&G contends that, in

Rinaldi, the UEF had been named as a defendant by the applicant

in proceedings before the WCAB. That the case noted in passing

that the UEF was an interested party, but did not hold or discuss

whether the UEF was a necessary or indispensable party. 

Finally, USF&G argues, the UEF was neither a necessary nor

an indispensable party to USF&G’s complaint for rescission, as

California Labor Code § 3715(a) vests the right to name the UEF

exclusively in the employee:

Any employee ... whose employer has failed to

secure the payment of compensation as

required by this division ... may, in

addition to proceeding against his or her

employer by civil action in the courts as

provided in § 3706, file his or her

application with the appeals board for

compensation and the appeals board shall hear

and determine the application for

compensation in like manner as in other

claims and shall make the award to the

claimant as he or she would be entitled to

receive if the employer had secured the

payment of compensation as required, and the

employer shall pay the award in the manner

and amount fixed thereby or shall furnish to

the appeals board a bond, in any amount and

with any sureties as the appeals board

requires, to pay the employee the award in

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the manner and amount fixed thereby. 

USF&G contends: “More importantly, the claim against the employee

[sic] may only be made upon an award of the WCAB against the

employer, an event which has not taken place.” Only if the

employer fails to pay the compensation awarded by the WCAB does

the UEF pay the award. Labor Code § 3716(a) and Symmar, Inc. v.

Workers’ Comp. Appeals Bd., 135 Cal.App.3d 65, 70-71 (1982).

Lee’s motion to vacate the partial judgment pursuant to Rule

60(b) on the ground that the WCAB had and has exclusive

jurisdiction is DENIED. Lee’s voluminous briefs on this issue

have been fully considered. Lee’s essential arguments were

unsuccessfully argued to Judge Coyle. Based on Judge Coyle’s

analysis and the arguments of USF&G and Aon in opposition to this

motion, Judge Coyle’s rulings were not contrary to law. Lee’s

failure to join in Conley’s motion for reconsideration, the

filing of Lee’s counterclaim, and the failure to argue that UEF

is a necessary party until the reply brief in support of this

motion are persuasive factors that Lee has not established

grounds to vacate the partial judgment pursuant to Rule 60(b).

2. California Law Re an Insurer’s Imposition of a

Condition or Exception on a Workers’ Compensation Policy Except

by Means of an Approved Endorsement and Insurer’s Termination

Rights.

Lee asserts that California law clearly requires that any

limitation on a workers’ compensation policy be by an approved

form of endorsement to the policy, citing California Insurance

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Code §§ 11657, 11659, 11660 and 10 C.C.R. 2268.

Insurance Code § 11657 provides:

Subject to the provisions of Sections 11659

and 11660, limited workers’ compensation

policies may be issued insuring either the

whole or any part of the liability of any

employer for compensation, provided that the

policy is previously approved, as to

substance and form, by the commissioner. 

Subject to those provisions, the policy may

restrict or limit the insurance in any manner

whatsoever.

Insurance Code § 11659 provides:

Such approved form of policy, limited

pursuant to Section 11657, shall not be

otherwise limited except by indorsement

thereon in accordance with a form prescribed

by the commissioner or in accordance with

rules adopted by the commissioner. Such

indorsement form shall not be subject to

Section 11658. Before prescribing such

indorsement form or adopting such rule, the

commissioner shall consult concerning it with

the Workers’ Compensation Appeals Board.

Insurance Code § 11660 provides:

Failure to observe the requirements of

Section 11657 and 11659 shall render a policy

issued under Section 11657, and not complying

therewith, unlimited.

10 C.C.R. § 2268 provides:

No collateral agreements modifying the

obligation of either the insured or the

insurer shall be made unless attached to and

made a part of the policy, provided, however,

that if such agreements are attached and in

any way restrict or limit the coverage of the

policy, they shall conform in all respects

with these rules.

Lee refers to the trial testimony of Cathy Hacker,

contending that Ms. Hacker testified that the requirement for Lee

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to assure underwriting that Lee would not do construction was a

“condition” for the issuance of the policy:

Q. Oh. Now, when you had these - you had a

discussion or - with Mr. Sackett and Mr.

Sheehan about the possibility of a policy

being issued through American Specialty as a

USF&G Workers’ Compensation policy. What was

discussed in that conversation?

A. In order for us to write a USF&G policy

for Workers’ Compensation coverage, there

were certain criteria that we needed before

we could write that policy.

Q. What were the criteria discussed?

A. We needed a verification from the

insured, Splash Island, in writing that their

employees would no longer be performing

construction work.

...

Q. And do you recall what Stan said about

potentially issuing a USF&G policy to

American Specialty to The Island for Workers’

Compensation insurance?

A. My recollection is that he would consider

writing it only on the condition that we had

verification that Splash Island employees no

longer performed any construction work.

(Trial testimony of Hacker, Feb. 2, 2007, 52:8-19, 55:16-21). 

Lee asserts that USF&G argued that Lee’s August 12, 1998 letter

to ASI clearly stated that certain activities would not be

performed and thus constituted an exception to the policy

coverage and a limitation thereon. Lee contends that, as such,

the limitation was required to be set forth in the policy and to

comply with the above cited California Insurance Code provisions.

 USF&G asserts that Lee continues to disregard the issues 

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that were tried and applicable California law by arguing that the

August 12, 1998 letter to ASI constituted an “endorsement or

exclusion” to its policy of insurance. USF&G has consistently

maintained its workers’ compensation policy was complete, fully

integrated and unrestricted and has never asserted that the

August 11 and 12, 1998 letters modified the coverage in the

policies. USF&G asserts that Lee’s contention that USF&G argued

that Lee’s August 12, 1998 letter to ASI clearly stated that

certain activities would not be performed and thus constituted an

exception to the policy coverage and a limitation thereon is

“simply not true:” 

The central issue in this case, as asserted

by USF&G, was that Lee made material

misrepresentations and omissions in the

policy application process, not that there

was any limitation in coverage.

USF&G also argues that Lee’s reliance on the testimony of

Cathy Hacker that Lee’s false representations in its August 12,

1998 letter constituted a restriction or condition on the policy

is totally unfounded:

Ms. Hacker did not testify that construction

work would not be covered or that the policy

contained a condition that it would not cover

construction work. Rather, her testimony

clearly states that USF&G would not write the

policy in the first place if Lee was going to

perform construction work. 

Lee replies that Cathy Hacker’s testimony established that

Mr. Sackett’s August 11, 1998 letter stated a condition or

exception to coverage under the policy. In addition to the

testimony quoted above, Lee refers to other testimony by Cathy

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Hacker:

Q. And what was discussed in that meeting?

A. We discussed receipt of the letter

[Christy Platt’s August 12, 1998 letter]

promising that they would no longer employ

construction laborers and our considering

quoting it under USF&G. 

...

Q. All right. So rather that issuing an

exclusionary endorsement, Mr. Sackett sent

this August 11, 1998 letter to Aon in place

of an exclusionary endorsement?

A. No.

Q. Well, the letter was serving as stating

USF&G’s condition for providing insurance,

was it not?

A. Yes.

(Trial testimony of Hacker, Feb. 2, 2007, 73:22-25; Feb. 6, 2007,

132:4-10). Lee argues:

This was not a mere request for information: 

it sought the agreement of Lee to a condition

and restriction that its employees would not

engage in construction and that claims

arising from construction would not be

reported under the policy. Such activities

were exceptions to the coverage otherwise

provided by the policy. As such, Mr.

Sackett’s August 11, 1998 letter was required

to be clear, plain and conspicuous, but it

was not. USF&G and ASI claimed that any kind

of construction was precluded, but the letter

stated that Lee employees were to stay within

their water park classifications, and

‘construction’ as used in the letter could

reasonably be interpreted not to include

construction activities that were water park

maintenance within the meaning of water park

classification codes 9016 and 9180, and to

include only ‘construction’ activities that

were outside of the water park

classifications and would require a workers’

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compensation construction classification

code.

Lee contends that, contrary to USF&G’s contention, there was

ample evidence that the latter interpretation was the actual

agreement of the parties, referring to Dr. Levine’s testimony

that insurance industry personnel would be expected to understand

“construction” in the latter sense (Trial testimony of Levine,

Feb. 14, 2007, pp. 41-49) and Christy Platt’s deposition

testimony read at trial that “at the time I wrote this letter, as

is the same as is my current understanding as it relates to water

parks, is my perception of construction laborers are crews

brought in to build the water park from the ground up.” (Trial

testimony of Platt, Feb. 14, 2007, 21:5-9). 

Lee further argues that, given the requirements of Insurance

Code §§ 11657, 11659 and 11660 and the express statutory

requirements for cancellation of a workers’ compensation policy

set forth in Insurance Code § 676.8, as a matter of California

public policy, a workers’ compensation policy cannot be rescinded

and can only be terminated in accordance with Section 676.8.

Insurance Code § 676.8 provides:

(a) This section applies only to policies of

workers’ compensation insurance.

(b) After a policy is in effect, no notice of

cancellation shall be effective unless it

complies with the notice requirements of this

section and is based upon the occurrence,

after the effective date of the policy, of

one or more of the following:

(1) The policyholder’s failure to make any

workers’ compensation insurance premium

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payment when due.

(2) The policyholder’s failure to report

payroll, to permit the insurer to audit

payroll as required by the terms of the

policy or of a previous policy issued by the

insurer, or to pay any additional premium as

a result of an audit of payroll as required

by the terms of the policy or of a previous

policy.

(3) The policy holder’s material failure to

comply with federal or state safety orders or

written recommendations of the insurer’s

designated loss control representative.

(4) A material change in ownership or any

change in the policyholder’s business or

operations that materially increases the

hazard for frequency of severity of loss,

requires additional or different

classifications for premium calculations, or

contemplates an activity excluded by the

insurer’s reinsurance treaties.

(5) Material misrepresentation by the

policyholder or its agent.

(6) Failure to cooperate with the insurer in

the insurer’s investigation of a claim.

(c) A policy shall not be canceled for the

conditions specified in paragraph (1), (2),

(5), or (6) of subdivision (b) except upon 10

days’ written notice to the policyholder by

the insured ... If the policyholder remedies

the condition to the insurer’s satisfaction

within the specified time period, the policy

shall not be canceled by the insurer.

USF&G responds that Lee’s contention that a workers’

compensation policy cannot be rescinded as a matter of California

public policy is wrong. USF&G cites Mitchell v. United National

Ins. Co., 127 Cal.App.4th 457, 468 (2005) and Insurance Code §§

331 (“Concealment, whether intentional or unintentional, entitles

the injured party to rescind insurance”) and 359 (“If a

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representation is false in a material point, whether affirmative

or promissory, the injured party is entitled to rescind the

contract from the time the representation becomes false”). USF&G

contends that there is no limitation in those provisions or under

California law barring a claim for rescission of a workers’

compensation insurance policy. 

In reply, Lee notes that USF&G does not specifically discuss

Section 676.8 and contends that “it is axiomatic that the more

specific sections of the Insurance Code on Workers’ Compensation

should control over these general sections”, i.e., Sections 331

and 359. Lee also asserts that no case is cited by USF&G that

addresses whether a workers’ compensation policy can be rescinded

or may only be canceled prospectively.

Lee has not previously asserted Section 676.8 and cites no

case authority to support its position. California law does not

bar the remedy of rescission of a workers’ comp policy as between

the insurer (USF&G) and policyholder (Lee).

Lee’s motion to vacate the partial judgment or to alter or

amend the partial judgment on this ground is DENIED.

3. As a Condition or Exception Limiting Coverage, Mr.

Sackett’s August 11, 1998 Letter Was Not Clear, Plain and

Conspicuous.

Lee asserts that the August 11, 1998 letter “stated what

USF&G claims was a condition on coverage that Lee’s employees (a)

stay within their designated classification as water park

employees and (b) that claims arising from ‘construction’ not be

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reported under the workers’ compensation policy:”

USF&G and ASI never made clear to Lee what

was and was not included within the

designated classification for water park

employees, nor did USF&G and ASI inform Lee

that they were interpreting ‘construction’ in

a layperson’s terms instead of in the sense

that would require a construction

classification code under the Uniform

Statistical Reporting Plan. Dr. Levine

established that ‘designated classification’

and ‘construction’ in this context would be

understood by persons in the insurance

industry in their technical sense, but USF&G

claimed that any activity that a layperson

could call construction was impermissible. 

This was never clarified for Lee, which, like

Mr. Lemasters, understood it was not unusual

for water park maintenance employees to erect

water slides as part of park operations. 

Lee asserts that, because USF&G and ASI were not clear, plain and

conspicuous in their statement of condition or exception to the

policy, that condition or exception cannot be enforced. Lee

cites Thompson v. Occidental Life Insurance Co., 9 Cal.3d 904,

912 (1973):

[A]n insurance company is not precluded from

imposing conditions precedent to the

effectiveness of insurance coverage despite

the advance payment of premium. However, any

such condition must be stated in conspicuous,

unambiguous and unequivocal language which an

ordinary layman can understand.

Lee also cites E.M.M.I., Inc. v. Zurich American Ins. Co., 32

Cal.4th 465, 471 (2004):

As we have declared time and again, ‘any

exception to the performance of the basic

underlying obligation must be so stated as

clearly to apprise the insured of its

effect.’ Thus, ‘the burden rests upon the

insurer to phrase exceptions and exclusions

in clear and unmistakable language.’ The

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exclusionary clause ‘must be conspicuous,

plain and clear.’ This rule applies with

particular force when the coverage portion of

the insurance policy would lead an insured to

reasonably expect coverage for the claim

purportedly excluded. 

Lee’s contention assumes that the August 11, 1998 letter

imposed a condition or restriction on coverage. This presented,

in part, a question of fact as to the parties’ intent which was

decided against Lee. 

As USF&G responds, Lee’s contention that the August 11, 1998

letter constituted a condition modifying the terms of an

integrated policy is “completely unfounded as a matter of law”. 

The August 11, 1998 letter was not part of the insurance policy

and did not constitute a condition or exclusion. The cases upon

which Lee relies discuss rules for the interpretation of an

insurance policy and, not, as here, statements made by the

applicant prior to the written and fully integrated policy

contract being formed. As USF&G contends:

Sackett’s August 11, 1998 letter ... clearly

was not part of the policy. Rather, it

constituted only a request by the insurer in

the course of the policy application process

for confirmation that Lee would not use its

employees to perform construction work. That

inquiry was made to allow USF&G and American

Specialty to determine whether they would be

willing to issue the policy in the first

place.

Furthermore, Lee, over the objections of USF&G, requested

and Jury Instruction No. 29 was given:

If you find that USF&G imposed any condition

to its issuance of the workers’ compensation

policy to Lee, you should determine if any

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language of such condition is uncertain or

ambiguous. If you find that the language of

any condition to the issuance of the workers’

compensation policy is uncertain or

ambiguous, you should consider the language

it its narrowest sense.

(Doc. 661, p. 30). Therefore, the jury considered Lee’s argument

that USF&G was imposing a condition in the workers’ compensation

policy, that such condition should be interpreted in its

narrowest sense, and the jury rejected Lee’s position. 

Lee’s assertion that Jury Instruction No. 29, given at

trial, is of “no moment” because the issue of whether the

condition was clear, plain and conspicuous is a question of law,

is without merit. The case upon which Lee relies, 20 Century th

Ins. Co. v. Liberty Mut. Ins. Co., 965 F.2d 747, 753 (9th

Cir.1992), does not so hold. Further, because Lee requested and

obtained Jury Instruction No. 29, the doctrine of invited error

precludes Lee’s motion on this ground. See Deland v. Old

Republic Life Insurance Company, 758 F.2d 1331, 1336-1337 (9th

Cir.1985).

Lee’s motion on this ground is DENIED.

4. Admissibility of Christy Platt’s August 12, 1998

Letter to Mr. Sackett and Related Communications.

Lee asserts that, in addition to the requirement of

California law that all limitations on a workers’ compensation

policy be in the policy, Lee’s August 12, 1998 letter and related

communications should have been excluded from evidence under the

parol evidence rule. Lee argues:

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Because USF&G had conditioned coverage on

Lee’s employees staying within their

designated classification as water park

employees and not having workers’

compensation claims arise from

‘construction,’ Lee’s August 12, 1998 letter

to Mr. Sackett, as interpreted by USF&G, was

not independent of, but related directly to

and contradicted the terms of the policy. 

The policy expressly covered activities of

Lee’s employees that were within a water park

classification code. Lee’s August 12, 1998

letter, as interpreted by USF&G, contradicted

the policy in stating that Lee’s employee

would not do activities that were within a

water park classification and that a

layperson might view as construction. As

such, Lee’s August 12, 1998 ... letter should

have been excluded under the parol evidence

rule as should have the August 11, 1998 ...

letter from Mr. Sackett to Mr. Hildebrand,

the August 27, 1998 letter from Mr. Awtrey

and Ms. Moore to Christy Platt ... and

related oral communications.

Lee asserts that, without these letters and communications, there

would be no basis for a claim of any alleged misrepresentation or

concealment. 

Lee has twice before argued this issue unsuccessfully. By

Order filed on July 30, 2004 (Doc. 194, pp. 55-58), Judge Coyle

denied Lee’s motion for summary judgment on this ground, ruling

in pertinent part:

Lee further moves for summary judgment with

respect to Fidelity’s claim for rescission on

the ground that Lee’s letter of August 12,

1998 is inadmissible as a matter of law to

prove any fact contradicting the express

terms of the integrated Policy.

In arguing that this August 12, 1998 letter

is inadmissible, Lee cites Bank of America v.

Pendergrass, 4 Cal.2d 258, 263-264 (1935). 

At issue in Pendergrass was the admission of

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evidence of a promise that if the appellant

executed a note and mortgage, the appellant

would not be required to make any payments of

interest or principal for a year. In holding

that this evidence was inadmissible, the

Supreme Court stated:

[I]t is manifest that the promise

which it is claimed they relied

upon was ... that the respondent

would ‘extend’ or ‘postpone’ all

payments for the period of one

year. This promise is in direct

contravention of the unconditional

promise contained in the note to

pay the money on demand. The

question then is: Is such a

promise the subject of parol proof

for the purpose of establishing

fraud as a defense to the action or

by way of cancelling the note,

assuming, of course, that it can be

properly coupled with proof that it

was made without any intention of

performing it? Our conception of

the rule which permits parol

evidence of fraud to establish the

invalidity of the instrument is

that it must tend to establish some

independent fact or representation,

some fraud in the procurement of

the instrument, or some breach of

confidence concerning its use, and

not a promise directly at variance

with the promise of the writing ...

Lindemann v. Goryell ... confirms

the opinion we entertain, for while

it is said no question of fraud was

raised, yet the effort was made to

prove that the note was executed

upon the understanding that the

payee would not enforce payment

until the payor had sold sufficient

real estate to enable him to pay. 

It was there said ... that fraud

may not be established by parol

evidence to contradict the terms of

the writing ‘when the statements

relate to rights depending upon

contracts yet to be made, to which

the person complaining is a party,

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as under such circumstances he has

it in his power to guard in advance

against any and all consequences of

a subsequent change of conduct by

the person with whom he is dealing,

and to admit evidence of extrinsic

agreements would be to open the

door to all evils that the parol

evidence rule was designed to

prevent.’ ....

See also Bank of America v. Lamb Finance Co.,

179 Cal.App.2d 498, 502 (1960):

A distinction has been made by our

courts in cases in which the fraud

sought to be proved consists of a

false promise. They have held that

if, to induce one to enter into an

agreement, a party makes an

independent promise without

intention of performing it, this

separate false promise constitutes

fraud which may be proven to

nullify the main agreement; but if

the false promise relates to the

matter covered by the main

agreement and contradicts or varies

the terms thereof, any evidence of

the false promise directly violates

the parol evidence rule and is

inadmissible.

See also Continental Airlines, Inc. v.

McDonnell Douglas Corp., 216 Cal.App.3d 388,

419 (1989):

But the fraud exception is not

applicable where ‘promissory fraud’

is alleged, unless the false

promise is independent of or

consistent with the written

instrument ... It does not apply

where ... parol evidence is offered

to show a fraudulent promise

directly at variance with the terms

of the written agreement.

Relying on these legal principals, Lee argues

in pertinent part as follows:

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USF&G contends that it issued the

workers’ compensation policy at

issue in this case on USF&G’s

understanding and agreement that

the policy would not cover or

insure any employees performing

‘construction’ at the water park. 

According to USF&G, this was an

indispensable part and integral

condition of issuing the USF&G

policy. However, this contention

is directly at odds with and

contradicts the unrestricted,

integrated and auditable policy,

written, assembled, reviewed and

approved by American Specialty for

USF&G. This very policy contains

not one, but two, integration

provisions and purports to fully

describe the entire relationship

and all obligations of the parties. 

The policy, which by its very terms

is unlimited and unrestricted as to

employees and occupations covered,

directly contradicts USF&G’s

contention that it issued the

policy premised upon the condition

that construction workers would not

be covered under the policy. 

Consequently, the August 11 and

12 letters are inadmissible and th

cannot provide grounds for

rescission of the USF&G policy.

Fidelity takes issue with Lee’s assertion

that Fidelity “issued the policy premised

upon the condition that construction workers

would not be covered under the policy”. 

Fidelity’s position is that it issued the

unrestricted policy based on Lee’s

representation that Lee would not be

employing any construction workers. 

Furthermore, Fidelity argues that parol

evidence is admissible to prove fraud in the

inducement of a contract notwithstanding an

integration clause. See Ron Greenspan

Volkswagen, Inc. v. Ford Motor Land

Development Corp., 32 Cal.App.4th 985, 995

(1995); Airs, Inc. v. Perfect Scents, Ltd.,

902 F.Supp. 1141, 1145-1147 (N.D.Cal. 1993).

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Lee responds that Fidelity’s reliance on

these cases is misplaced because this

exception to the parol evidence rule does not

apply where the evidence in question concerns

a matter covered by the main agreement which

contradicts the terms of the agreement. 

The court does not agree with Lee. 

Fidelity’s position is that Lee’s

misrepresentations that it would not employ

construction workers caused Fidelity to issue

an unrestricted policy and that Fidelity

would not have done so (or would not have

issued any policy at all to Lee) in the

absence of that misrepresentation. This

misrepresentation is a separate “false

promise” that is not directly at variance

with the terms of the contract. In other

words, Lee “promised” that it would not

employ construction workers and based on that

promise Fidelity issued a policy covering all

of Lee’s employees. That Conley was employed

as a construction worker is not at variance

with the policy because the policy terms

apply to Lee’s employees but it is at

variance with Lee’s “promise” that it would

not employ construction workers. Therefore,

the court rules that August 11, 1998

memorandum from Mr. Sackett of American

Specialty to Mr. Hildebrand of AON and the

August 12, 1998 letter from Ms. Platt to

American Specialty are admissible. 

In addition, Lee’s motion in limine no. 16 (Doc. 446) was “denied

without prejudice to Lee submitting a jury instruction that the

August 1998 letters may not be considered or used to contradict

or vary the integrated insurance policy insofar as that policy

insured water park classification codes.” (Doc. 596, p.7). 

As USF&G asserts, Lee’s contention that the letters modified

or varied the terms of the policy was not urged or argued by any

party in the case:

It was undisputed that the USF&G policy was

complete, fully integrated and unrestricted. 

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USF&G never asserted that the August 12, 1998

letter, or the August 11, 1998 letter which

preceded it, modified the coverage under the

policy. Rather, the central issue in the

case was whether Lee made misrepresentations

or material omissions in the policy

application process. Further, no one argued

that the classification codes listed in the

policy limited the coverage of employees. 

Neither Mr. Awtrey, who drafted the August

12, 1998 letter, nor Christy Platt, who

signed it, testified that either had any

special interpretation of the term

‘construction,’ limiting it to employees

requiring separate classifications under

workers’ compensation premium determination

provisions.

As USF&G further asserts, Lee’s contention that the August 1998

letters should be excluded under the parol evidence rule

“requires an extreme mischaracterization of USF&G’s position”:

Lee contended that USF&G wished to introduce

the August letters as evidence that the

policy excluded construction laborers. In

fact, USF&G never argued that the policy did

not cover construction laborers. USF&G

agreed that the policy was unrestricted and

covered all of Lee’s employees. Moreover,

the August letters do not discuss any change

to the terms of the policies. Rather, such

letters were intended to address American

Specialty’s concern that Lee’s employees were

performing construction work. Lee’s theory

would eliminate any cause of action for

fraudulent inducement. Under Lee’s theory, a

party could lie and cheat to induce another

party to enter a contract and such lies would

be excluded under the parol evidence rule.

Finally, Lee’s contention that the August 27,

1998 letter from its own broker, Aon, to Lee

should be excluded under the parol evidence

rule, is even more farfetched. No one has

contended that that letter modified the terms

of the contract of insurance. Nor has Lee

explained how anyone could even contend that

its own broker was able to modify the terms

of a previously issued fully integrated

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policy of an independent insurer. 

Lee replies that these letters and communications are

subject to the parol evidence rule:

As an integrated policy, the policy clearly

provided coverage for ‘construction’ or

‘construction-related’ activities that fell

within a water park classification. However,

USF&G’s and ASI’s interpretation of

‘construction’ precludes those activities and

as such the August 12, 1998 letter and

related communications were at direct

variance with the provisions of the policy. 

It is patently absurd for USF&G and ASI to

take the position that the subject policy

covered construction laborers ..., but if Lee

employed construction laborers the policy

would be void in abnitio.

These issues were thoroughly exhausted before trial through

motions in limine and at trial, by rulings on jury instructions. 

The jury was correctly instructed that they could consider Lee’s

words and conduct as bearing on its fraudulent intent and

inducement to obtain the policy. The jury was further instructed

they could not consider the words and conduct to vary the terms

of the insurance policy. The motion on this ground is DENIED. 

5. Whether An Application for the Subject Insurance

Was Required.

Lee argues that, as a matter of law, an application for the

workers’ compensation policy was required in this case as an

element of the claim for rescission.

Lee relies on the testimony during its cross-examination of

Stanley Sheehan, an underwriter for ASI:

Q. In the course of doing underwriting,

American Specialty reviewed applications; is

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that correct?

A. Yes, American Specialty reviews

applications as a part of underwriting.

Q. And as a matter of policy and procedures,

did you request a signed application?

A. A signed application is requested as part

of the procedure.

Q. And that was true in 1998; correct?

A. Yes. That was true in 1998.

(Testimony of Sheehan, Feb. 7, 2007, 16:20-17:4). 

Lee argues that this testimony establishes that an

application for insurance by USF&G is an element of a claim for

rescission. Citing CACI Instruction 2308, “Rescission for

Misrepresentation or Concealment in Insurance Application -

Essential Factual Elements”, includes in the elements of the

claim the following:

1. That [name of insured] submitted an

application for insurance with [name of

insurer];

2. That in the application for insurance

[name of insured] [intentionally] [failed to

state/represented] that [insert omission or

alleged misrepresentation] ....

Lee contends that Lee never submitted an application for

insurance with USF&G. Rather, Lee asserts:

American Specialty pieced together

information from various outdated and

incomplete sources to write the policy,

including an unsigned application for

insurance with Industrial Indemnity. The

original application was in substantial

conflict with other information American

Specialty had within its Lee file, including,

without limitation, another supplemental

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application submitted by Dibudio & DeFendis

which clearly indicated Lee’s intent to

construct and erect new slides with its

employees. USF&G now seeks to rescind based

on Lee’s alleged misrepresentations regarding

the nature and scope of Lee’s employees work

as it relates to assembling an unfinished

water slide. 

Lee contends:

Evidence was introduced at trial that the

formality of the application puts the

applicant on notice that the information

provided will be used to determine whether to

issue a policy. Here, the application, and

the protections inherent to the applicant

therein, were missing. This missing

instruction on the element of an application

clearly prejudiced Lee and lead to an

unfavorable result.

USF&G responds that Lee’s position is incorrect as a matter

of California law, contending that the provisions of California

law governing the right to rescission under the California

Insurance Code and case law impose no “requirement” of a formal

application. 

USF&G cites Mitchell v. United National Ins. Co., 127

Cal.App.4th 457, 467-469 (2005): 

United National based its right to rescind

the policy on Insurance Code sections 331 and

359. Insurance Code section 331 states:

‘Concealment, whether intentional or

unintentional, entitles the injured party to

rescind insurance.’ Insurance Code section

359 similarly provides: ‘If a representation

is false in a material point, whether

affirmative or promissory, the injured party

is entitled to rescind the contract from the

time the representation becomes false.’

Insurance Code sections 331 and 359 are part

of a larger statutory framework that imposes

‘heavy burdens of disclosure’ ‘upon both

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parties to a contract of insurance, and any

material misrepresentation or the failure,

whether intentional or unintentional, to

provide requested information permits

rescission of the policy by the injured

party.’ (Imperial Casualty & Indemnity Co.

v. Sogomonian (1988) 198 Cal.App.3d 169, 179-

180 ... Insurance Code section 332, for

example, requires each party to an insurance

contract to disclose, ‘in good faith, all

facts within his knowledge which are or which

he believes to be material to the contract

...’ The disclosure obligations imposed by

these statutes are directed specifically at

the formation of the insurance contract. 

Insurance Code section 334 states:

‘Materiality is to be determined not by the

event, but solely by the probable and

reasonable influence of the facts upon the

party to whom communication is due, in

forming his estimate of the disadvantages of

the proposed contract, or in making his

inquiries.’ (Ins. Code, § 334, italics

added.) Insurance Code section 356 provides:

“The completion of the contract of insurance

is the time to which a misrepresentation must

be presumed to refer.’

Requiring full disclosure at the inception of

the insurance contract and granting a

statutory right to rescind based on

concealment or material misrepresentation at

that time safeguard the parties’ freedom to

contract. ‘[An insurance company] has the

unquestioned right to select those whom it

will insure and to rely upon him who would be

insured for such information as it desires as

a basis for its determination to the end that

a wise discrimination may be exercised in

selecting its risks.’ ....

USF&G contends that none of these Insurance Code provisions

require an “application” before a contract of insurance may be

rescinded because of an insured’s misrepresentation or

concealment. 

USF&G further argues that Sheehan’s testimony that a signed

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application may be requested by American Specialty during the

underwriting process is irrelevant. USF&G refers to Sheehan’s

testimony that an unsigned application is often accepted from an

existing insured-customer. USF&G also refers to Hugh Awtrey’s

trial testimony that signed applications are usually not required

as part of the underwriting process:

Q. Let’s go down to the bottom of the page,

please. This application was not signed; is

that correct?

A. That is correct.

...

THE COURT: Is there some reason for that?

THE WITNESS: Unless companies require

signatures, we generally don’t have

signatures of apps. If they come back at the

time of binding, sometimes I will come back

and say before we bind coverage, we will need

a signature, but otherwise, policies are done

over the phone and we submit it and it’s

written without a signature.

There are certain types of policies where I

might come back and say we need a signature. 

Workers’ Compensation, there is generally

never signatures on applications.

(Testimony of Awtrey, Feb. 8, 2007, 170:7-20). USF&G also refers

to the trial testimony of expert, Bennett Bibel, that an

underwriter can use any form of documentation in making an

underwriting decision:

Q. Do some workers’ comp insurers make

determinations whether to issue policies to

particular applicants based solely on this

standard Acord application?

A. I would have to say that’s the norm. The

normal circumstance. In most circumstances,

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the Acord application, which was developed by

the insurance industry, answers or asks the

questions that an underwriter needs to write.

Q. Okay. Is there some guideline as to what

an underwriter has to have in order to write

- to decide to write a workers’ compensation

insurance policy?

A. At the risk of being facetious, he needs

a contract to have the pen in order to be

able to have the authority to write. 

Underwriting is an art as well as a science. 

And underwriters have wide latitude in the

process of accepting or declining a given

risk. And an underwriter on a given day may

ask for something, another day he may not ask

for it. It depends on how much he knows

about the nature of a particular risk and who

is submitting it.

(Testimony of Bibel, Feb. 17, 2007, 38:4-21).

USF&G further asserts as without merit Lee’s contention that

it was prejudiced because the “formality” of the application

would have placed Lee on notice that the information provided

would be used to determine whether to issue the policy:

As a matter of fact, Lee’s broker, Aon,

obviously was aware that the information it

was providing to American Specialty in the

August 12, 1998 letter, which it drafted,

would be utilized to determine whether to

issue the policy. 

In its reply brief, Lee asserts that USF&G previously cited

Cohen v. Penn Mut. Life Ins. Co., 48 Cal.2d 720, 726 (1957), for

the proposition that the fact the insurer asked specific

questions on the application makes the answers material as a

matter of law. Lee asserts that it previously argued that,

without a corresponding request for certain information on the

application, the information is presumed immaterial, citing

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Reserve Ins. Co. v. Apps, 85 Cal.App.3d 228, 231 (1978) and

Ashely v. American Mut. Liab. Ins. Co., 167 F.Supp. 125, 132

(N.D.Cal. 1958). Therefore, Lee argues, the application itself

is such an important and necessary document that it may be used

to prove or disprove the element of materiality. Lee argues that

the issue of an application and the presence of it was key to

show the absence of fraud and the lack of a misrepresentation:

As set forth in the cases above, the

application gives notice to the applicant

that the information sought is important. 

Along with this, is the assumption that the

applicant will see and review the

application, see the questions asked, review

the questions with either the insurer or the

applicant’s broker, and thus be informed of

what the insurer wants to know and also to

know that the information is sought for the

purposes of an underwriting determination. 

All of these factors are the reasons for the

importance, and necessity of an application. 

This is supported by the CACI instruction ...

which lists an application as the first

element of a claim for rescission.

At trial, USF&G failed to establish the

existence of an application. This is not

surprising because USF&G was unable to meet

this element. In the present case, two

separate applications were filled out on

Lee’s behalf prior to the cancellation of the

original policy issued by Industrial

Indemnity. Neither were signed by Lee. The

most recent application, and not

surprisingly, the one not completed by Aon,

clearly answered the question regarding

whether the employees were building or

erecting slides in the affirmative! The

unequivocal testimony at trial was that this

application was in the Lee file at ASI when

the USF&G policy was issued. ASI testified

that it reviewed the file in determining

whether to issue the USF&G policy. 

Accordingly, it was uncontroverted that on

this earlier application Lee informed ASI

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that it intended to perform acts that USF&G

would later construe as construction.

Moreover, Lee was not provided another

‘fresh’ application despite the change in

circumstances and experience of Lee in

operating the park. Lee knew what remained

to be completed (the red slide) and that it

intended, as long as Bruce Calomiris was a

part of the operation, that Lee would

maintain all the slides and might assemble

the red slide if it was completed. On the

other hand, Lee did not know the contents of

the August 11, 1998 letter. Thus, Lee did

not have sufficient notice of information

which should have been in the application.

Lee contends that the Partial Judgment must be vacated, altered

and/or amended for failure to decide this allegedly essential

issue. 

Lee’s position is without merit, spurious, and ignores the

reality of the transaction. A contract of insurance was issued

to Lee by USF&G based on USF&G’s specific request for Lee’s

truthful assurances that Lee would not perform construction

activities or utilize construction workers. It was known to all

parties that Lee’s prior policy was cancelled because its workers

were performing construction activities. The evidence was

undisputed that ASI was Lee’s insurance agent of record for the

workers’ compensation policy, not DiBuduo & DeFendis. ASI had

obtained the prior policy from II for Lee. Lee instructed ASI to

find and obtain new coverage after Lee’s II workers’ compensation

policy was cancelled. Lee’s position would sanction fraud and

misconduct by Lee and bar USF&G from rescinding that policy no

matter what the circumstances, merely because an application was

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not completed and signed by Lee. The established course of

dealing between Lee and Aon explains fully how the USF&G

insurance policy came into force after the Industrial Indemnity

policy was cancelled, without a fully completed formal written

application. Lee purposefully ignores the well-established

practice of brokers binding insurance coverage for existing

clients without a new written application. 

Lee’s arguments concerning the importance of the application

pertain to materiality, were made to and rejected by the jury on

the issue of liability. There was no failure of proof on an

essential issue. Lee’s arguments concerning the importance of

the application pertain to materiality and weight of evidence,

rather than failure of proof on an essential issue. Lee’s

arguments were all presented to the jury on the issue of

liability. The jury overwhelmingly found Lee’s actions to be

permeated with deceit and decided accordingly.

Lee’s motion to alter or amend or to vacate the partial

judgment on this ground is DENIED. 

6. Whether USF&G Failed to Show Lee’s Employees

Engaged in Activities Outside of a Water Park Classification.

Lee asserts that USF&G reported Ms. Conley’s accident to the

Workers’ Compensation Insurance Rating Bureau (WCIRB) as

occurring under classification code 9016, as was made clear by 

Master Stat Report Facsimile (Ex. 675). Lee asserts that there

was no evidence that Ms. Conley’s injury was ever classified by

USF&G or the WCIRB as occurring under any other classification

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code. Lee contends:

This admission by USF&G proves that Ms.

Conley was working within water-park [sic]

classifications in accordance with Mr.

Sackett’s August 11, 1998 letter to

Hildebrand (Exh. 833) and Ms. Platt’s August

12 letter (Exh. 374).

Clearly, Lee’s August 12 letter which USF&G

claims serves as the basis for Lee’s

misrepresentation notified USF&G that Lee

employees’ ‘duties would be limited to park

operations.’ (Exh. 374.) Classifications

9016 and 9180 were the only code

classifications that were pertinent to the

water park operations in issue. Accordingly,

the great weigh of the evidence, and indeed

the only evidence, was that Ms. Conley was

injured in the course of her employment with

Lee while conducting tasks that were clearly

‘park operations.’

USF&G argues that Ms. Conley’s classification in the Master

Stat Report Facsimile is not an admission by USF&G. First, there

was no evidence at trial as to who made the report to the WCIRB

or whether the source of the information for the report was

anything other than the report of injury filed by Lee. 

Second, USF&G maintains the insurer was required to report

injuries to the WCIRB using only the classification codes set

forth in the policy. USF&G refers to the trial testimony of

Lee’s workers’ compensation expert, Dr. Arthur J. Levine:

Q. It says under No. C, ‘Report the standard

classification code to which the claim has

been assigned. No claims can be assigned any

standard classifications, unless payroll or

other appropriate exposure also has been

reported for the standard classification.’

So you have to - if you are going to make a

report on the Unit Stat Report, it has to be

for a classification that’s in the existing

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policy; is that right?

A. Yes, unless the insurance company tells

the Bureau that they think the classification

should be added or changed.

...

THE COURT: At the time of an injury, the

insurer reports to the Board under the

classifications that are in the policy. And

unless there is a change to those

classifications in the policy by endorsement

or some other means, then those are the

classifications used for reporting?

THE WITNESS: Right. It’s a control

mechanism. The Bureau does not - if

something is going on in a classification

that isn’t in the policy, the Bureau needs to

know about it. They can’t just have

insurance companies assigning claims to

classes that aren’t on there.

(Testimony of Levine, Feb. 14, 2007, 56:11-20, 57:24-58:8).

From this, USF&G contends that when Ms. Conley was injured,

her injury was reported to the WCIRB under the classifications

actually contained in the USF&G policy, as an amusement park

maintenance worker, classification 9016:

The injury was reported as required by law,

and the manner in which it was reported was

not an admission that construction

classifications come within the scope of an

amusement park operations employee.

Second, USF&G contends, by the time the classification was

reported, USF&G had filed its lawsuit for rescission. In this

lawsuit USF&G unequivocally contended that the work Ms. Conley

performed was a construction activity. Therefore, even if,

arguendo, the Master Stat Report Facsimile could be viewed an

“admission,” there was contrary evidence which the jury could and

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did consider by expressly finding that there was no waiver or

estoppel by USF&G based on all the evidence.

Lee replies that USF&G misleads the Court concerning its

admission because “USF&G fails to remind the Court that the only

expert testimony concerning the Master Unit Stat Report was that

the purpose was to accurately report injuries.” Lee contends

that further testimony by Dr. Levine established that although

the reporting party must initially report under an existing

classification, the reporting party has a continuing duty to

revise the classifications and amend the Master Unit Stat Report

so that it accurately reported the classification under which the

injury occurred:

Q. Now, by custom and practice in the

insurance industry, is the carrier’s

assignment of the 9016 classification code to

an accident on this Master Unit Statistical

Facsimile relied on as accurate?

MR. SMYTH: Objection, no foundation.

THE COURT: Lay the foundation. Sustained.

...

Q. Dr. Levine, do you know what use is made

of the reported classification code for the

injuries that employees suffer on the job?

A. Yes, I do.

... 

Q. What use is made?

A. The two uses I just mentioned. The first

is rate-making by the Rating Bureau, and the

second is Experience Modification

Determination by the Rating Bureau for the

individual employer.

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Q. And to your knowledge, by custom and

practice, is an insurance company required to

report accurately what classification code

applies?

A. Yes. If they don’t, then it contaminates

or subverts the whole rating basis as well as

gives the employer a potential advantage or

disadvantage in their Experience Modification

competing with other competitors in the

industry.

...

The Rating Bureau is, first and foremost, a

rating organization, and it takes tremendous

pains and is extremely concerned about the,

let’s call it ‘purity’, or accuracy, of its

database.

In many of the meetings I attend, the

president of the Rating Bureau comments that

a proposed rule change or a particular

procedure will have an impact or won’t have

an impact on the credibility and accuracy of

the database.

There is probably nothing that they are more

concerned about than making sure that this

information is properly reported and

accumulated because is it’s not right, then

they are not giving the right results to the

Insurance Commissioner, and their own

members, the insurance companies, are using

data that’s skewed.

So both for their own self-interest and for

their role for the Insurance Commissioner,

they want to get it right.

(Testimony of Levine, Feb. 14, 2007, 35:8-37:10)

Relying on this testimony, Lee asserts that “this” was

ultimately USF&G’s responsibility and that the reporting occurred

after the rescission action was filed “only makes the admission

more egregious [and] does not ... excuse USF&G from its

admission.”

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Third, USF&G contends, whether Ms. Conley’s work could be

covered by a construction code is irrelevant:

USF&G asserted in argument and during the

case that the issue was whether Lee’s

employees, not just Ms. Conley, would be

performing construction work, as that term

was normally interpreted using common

language. The jury could and did reject

Lee’s hypertechnical interpretation of the

August 12 letter as referring only to work

requiring a separate classification under a

construction code. More importantly, none of

the parties who participated in the drafting

of the August 12, 1998 letter, Hugh Awtrey

and Christy Platt, testified to any

understanding of a ‘special meaning’ of

construction work different than its common

meaning. Finally, as testified by Bennett

Bibel, even if construction work were such

performed [sic] normally by a water park

employee, it still had to be separately

classified under the WCIRB if it constituted

new construction. Testimony of Bennett

Bibel, February 13, 2007 at 63:13-22 ... It

was clear and undisputed that the water slide

on which Conley was injured was a completely

new slide under original construction.

Lee contends that the testimony of Lee’s workers’

compensation expert, Arthur Levine, confirms that Ms. Conley was

performing park operations when she was injured. Lee asserts

that Dr. Levine “is one of the preeminent experts on California

Workers’ Compensation Insurance, arguably one of the most

knowledgeable outside the actual workers’ compensation

administration”, that he has authored a book and taught classes

on workers’ compensation and liability insurance, and has served

as the attorney for the Public Members of the Governing Committee

on the Workers’ Compensation Insurance Rating Bureau. Lee

asserts:

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Dr. Levine testified that work performed by

Ms. Conley during the time of her injury, and

any construction-related activity performed

by Ms. Conley or Mr. Calomiris after the park

opened for business was considered to be part

of park operations and as such, it was

covered under the water park classification

codes 9016 or 9180. This evidence was

unrebutted by other expert testimony. This

evidence cannot be disregarded absent

contradicting expert testimony. Dr. Levine’s

opinion was supported by Lee’s water park

expert Kent Lemasters who testified that it

was not unusual for water parks to use their

own employees to erect new slides, depending

on the skills of park personnel and other

issues.

As set forth above, the key communications,

all indicate that American Specialty would

agree to insure Lee’s employees performing

‘their designated classification as water

park employees,’ and Lee agreed that its

employees ‘would be restricted to park

operations.’ Taken together, and in light of

Dr. Levine’s uncontroverted testimony, it is

clear that Ms. Conley (and Mr. Calomiris and

the remaining Lee employees assembling the

Red Wave Slide in February 1999) was

performing within park operations and

performing a task that is within a designated

water park classification code.

Thus, even though classification codes are

technically only used to calculate premiums,

the clear weight of the evidence was that

they were used by the parties in this case to

designate and describe USF&G’s claimed

underwriting limitation and Lee’s expected

and anticipated scope of work by its

employees. The clear weight of the evidence

was that water park operations included

erecting water slides, Lee’s employees would

perform those tasks, Lee expected to be

insured for those tasks, and USF&G and

American Specialty should have expected to

insure those tasks. Accordingly, the clear

weight of the evidence is that there was no

misrepresentation concerning the nature and

scope of Lee employees’ work and that Ms.

Conley was performing a task contemplated and

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accepted by USF&G.

Both USF&G and Aon assert that Lee’s contention ignores all

of the evidence at trial and all of the relevant legal issues. 

USF&G rejoins:

First, Lee ignores the clear and explicit

language in its August 12, 1998 letter that

Lee would no longer employ construction

laborers and that any construction work would

be performed by independent contractors. 

Although Lee would like to rephrase the

language of that letter to state that Lee’s

employees would only perform construction

work requiring a separate classification

under the Uniform Statistical Reporting Plan

of the WCIRB, the letter clearly did not so

state. In determining the falsity of Lee’s

representations and its intentional

concealment of its plans to use its own

employees to finish construction of the water

park slide, whether or not its employees fell

within a workers [sic] compensation

classification is irrelevant. Any alleged

testimony by Levine that Conley’s work fell

within a water park operations classification

thus also was irrelevant. Lee’s contention

that the clear weight of the evidence

established the classification codes were

used by the parties to designate USF&G’s

claimed underwriting limitation as to the

expected and anticipated scope of work by its

employees ... is absurd. No one, not even

Ms. Ehrlich, testified to that effect.

Second, Lee’s representation that it would

not perform construction work with its own

employees was not limited to Conley. During

trial, Bruce Calomiris testified that he

utilized a ten-ton crane and reach forklifts

to assemble the water park slide. Conley

herself testified that she performed work,

including bolting together portions of the

slide while other workers were on manlifts 30

to 40 feet in the air, which clearly

constitute construction.

Third, as even Lee admits ...,

‘classification codes are technically only

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used to calculate premiums, ...’ ... It thus

was irrelevant as to whether the work of any

construction worker, including Conley, fell

within an amusement park classification. Lee

represented that it would not use its own

employees to perform construction work. It

did not reference workers [sic] compensation

classifications. In any event, USF&G’s

expert, Bennett Bibel, testified that under

the WCIRB, new construction must always be

separately classified ... Even Levine

testified that new construction had to be

separately classified.

Finally, Levine in fact did not testify

specifically that Conley was performing work

that fell within a water park classification. 

However, he did provide his preposterous and

unbelievable testimony that while

construction of a six-story building

constituted ‘construction,’ construction of a

[new] six-story water slide did not and that

while construction of a temporary structure

over a college graduation ceremony was

considered assembly and not construction,

even though the USRP had a construction

classification for tent erection. The weight

of the evidence was that Levine’s testimony

was preposterous and unbelievable.

This is a reasonable interpretation of the trial testimony

of Dr. Levine. His opinions on what constituted “construction”

work were so unrealistic as to support a finding of bias in favor

of his unorthodox view of the meaning of “construction” for the

purpose of classification codes as opposed to use of the term to

determine whether USF&G was willing to undertake insurance

business with Lee, to justify the jury rejecting his opinions. 

No testimony was adduced that the conversations between Lee’s and

AIS’s representatives ever identified or considered

classification codes rather than the commonly understood meaning

of construction activities or construction workers. 

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Lee’s motion on this ground is DENIED.

Aon argues that Lee’s contention that Ms. Conley was

performing work within the scope of water park operations is

irrelevant:

[T]here was evidence that (1) all of the

parties understood American Specialty’s

concern to be any type of construction work

performed by Lee’s employees, and (2) Lee

understood the August 12, 1998 letter to mean

that Lee’s employees would not perform such

work.

Aon refers to the trial testimony of Lee’s Christy Platt:

Q. ... If you look to the last sentence of

the letter, and it says ..., ‘The coverage

with [USF&G] has been issued on the premise

that there will be no construction laborers

employed by [Lee].’

Now, that was your understanding as well?

A. Correct.

Q. So in your dealings with Mr. Awtrey and

Aon around the time of the August 12 letter th

... you understood that Mr. Awtrey was

relaying to you ... the new insurance

company’s concerns about water park employees

doing construction, correct?

A. Yes.

Q. Okay. And you understood that the August

12 letter was intended to address those th

concerns, correct?

A. Correct.

Q. And you discussed the insurance company’s

concerns with Lisa Ehrlich, correct?

A. I’m sure I did.

(Testimony of Platt, Feb. 14, 2007, 16:3-21). Aon also refers to

the trial testimony of Cathy Hacker:

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Q. And do you recall what Stan said about

potentially issuing a USF&G policy to

American Specialty to The Island for Workers’

Compensation insurance?

A. My recollection is that he would consider

writing it only on the condition that we had

verification that Splash Island employees no

longer would perform any construction work.

(Testimony of Hacker, Feb. 2, 2007, 55:16-21)

Aon contends that since the jury reasonably could conclude that

Ms. Conley was performing construction work, the jury’s verdict

was not against the clear weight of the evidence.

Lee replies that the August 11 and August 12, 1998 letters

make clear that USF&G intended to cover any work done by Lee

employees if properly classified within water park classification

and that Lee clearly informed ASI that it intended its workers to

perform normal water park operations. Lee refers to the August

11, 1998 letter (Ex. 833):

Attached is a copy of The Island’s workers’

compensation loss runs. Bill, I think we

have a problem. The loss runs seem to

evidence an interchange of labor between the

water park employees and the construction

employees. Please review the type of losses

that have occurred and help us understand how

this fits with our understanding of the

client/employee relationship. We would have

anticipated training losses rather than

construction losses.

After seeing the loss runs, we are concerned. 

The loss runs seem to support Industrial

Indemnity auditors’ position. Please help me

to prove to our underwriter the following:

1. Island employees will not be performing

tasks outside of their designated

classification as water park employees;

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2. Construction has ceased at The Island and

all construction laborers working for Rexford

Development Corporation have moved to a

different job site. Therefore, workers’

compensation claims arising from construction

will not be reported under Lee Investments

workers’ compensation policy. [Emphasis

added]

Lee again contends that neither Kent LeMasters’ testimony or Dr.

Levine’s testimony has been rebutted. Lee refers to Dr. Levine’s

trial testimony:

Q. ... Dr. Levine, I would like you to assume

that in response to the underwriter’s inquiry

on the previous hypothetical that I gave to

you, the prospective insured responded using

the term or phrase ‘construction laborers,’

and stated that the prospective insured would

not employ construction laborers.

In 1998, would that phrase have been

generally understood in the insurance

industry to have had a specialized meaning?

...

A. Yes.

Q. Dr. Levine, I would ask you to assume the

same facts, except the prospective insured

has stated that the prospective insured will

not to do [sic], ‘construction.’ In 1998,

would that term have generally been

understood in the insurance industry to have

had a specialized meaning?

A. Yes.

Q. Now, I want you to further assume that

the prospective insured stated that the

insured would limit its activities to ‘park

operations.’ In 1998, would such phraseology

generally have been understood in the

insurance industry to have had a specialized

meaning?

...

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THE WITNESS: When you said ‘park operations,’

you are talking about a water park?

... 

Q. Any kind of park for hypothetical

purposes, an amusement park,

...

THE WITNESS: I mean as opposed to a public

park with grass in it?

MR. JAMISON: Right.

...

THE WITNESS: Yes. That would have a - that

would be understood in the insurance industry

to have a particular meaning.

...

Q. And what meaning would it have?

A. Well, once again, it would mean

operations that are performed by a contractor

or by a construction company that was

classified or for some other reason had to be

classified under one of the several dozen of

specific construction codes or - I’m using

‘code’ and ‘classification’ interchangeably.

Q. Okay. And earlier in this series of

hypotheticals, I asked you about the phrase,

quote, ‘construction laborers,’ and you

indicated that it would have been generally

understood in the insurance industry to have

a specialized meaning. What would that

meaning have been?

A. I would distinguish it from, say,

maintenance workers, repair workers, general

grounds workers. All of those kinds of

people can do what might be considered in a

lay sense or generic sense construction work,

but that’s not what it means in the Workers’

Comp industry. And maybe an example of that,

let’s talk about a water park.

If the - one of the sections of a slide at

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the top, I don’t know how high the things

are, 70 feet or whatever they are, were to

break and need to be welded. You could have

a park maintenance employee go up or operate

a crane or whatever was required, and

disassemble this thing and load this heavy

pipe to the ground and weld it and then

reverse the process. That might sound like a

construction activity if you just generally

talked about construction.

But very clearly, it’s a repair activity and

‘repair’,’ it doesn’t matter how heavy duty

it is, if it’s repair, then in the Workers’

Comp rules, the classification language and

so on, that’s included in whatever the basic

nonconstruction classification is.

So construction laborers, to me, doesn’t mean

people who are doing maintenance repair and

other kinds of activities that are in the

regular classification. It means people that

are doing specifically construction

classification things, usually contractors,

employees those do those sorts of things

[sic].

...

Q. In other words, you have to look at the

fact that it’s being used in a Workers’

Compensation insurance context; is that

right?

A. Yes.

(Testimony of Levine, Feb. 14, 2007, 45:9-49:80). Lee contends

that because Dr. Levine’s testimony establishes that, in the

context of Workers’ Compensation insurance, the terms

“construction” and “construction laborer” do not refer to

incidental repair or maintenance that is construction-like work,

that may be performed by a water park maintenance employee, Ms.

Conley’s work on the red wave slide in February 1999 was normal

park operations and was covered and expected within water park

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classifications 9180 or 9016. This entire argument assumes the

validity of Dr. Levine’s opinions about and definition of

construction. The jury could easily have found unintelligible,

the above-quoted testimony of Dr. Levine, and rejected it as

incredible. 

All Lee’s arguments are centered on factual disputes, most

especially Lee’s credibility. The jury was free to reject Dr.

Levine’s testimony which, in places, was nonsensical, biased and

sufficiently arbitrary as to be of no help to the trier of fact.

Lee’s motion on this ground is DENIED.

D. Whether Lee Made a Misrepresentation to Aon, Intended to

Induce the Reliance of Aon, Aon’s Reliance and Causation.

Lee argues that there was no legally sufficient evidence for

a reasonable jury to find Lee liable to Aon under the “tort of

another” doctrine. In addition, Lee asserts, Christy Platt’s

August 12, 1998 letter and all of Lisa Ehrlich’s statements to

Hugh Awtrey in response to his questions on August 12, 1998 were

intended to be transmitted to ASI. Lee argues:

Lee did not intend to induce any reliance on

the part of Aon on any representations by Lee

and Aon did not in fact rely on any such

representations. Instead, Aon on [August 12,

1998] was, with the exception noted below,

only delivering communications between Lee

and American Specialty. Since Aon was not

the intended recipient of any alleged

misrepresentations and did not itself rely on

any such representations, there could be no

claim for a misrepresentation to Aon or other

breach of duty by Lee to Aon.

The exception referred to by Lee is Lee’s acknowledgment that

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Aon, on August 12, 1998, took upon itself to draft for Lee the

language that was to be sent to ASI. However, Lee contends, this

was at Aon’s initiative. In addition, Lee contends, Aon, in Mr.

Awtrey’s and Ms. Moore’s August 27, 1998 letter (Ex. 841), of its

own volition and for its own purposes, took it upon itself to

advise Lee that the policy had been issued on the premise that no

construction laborers would be employed by Lee. Lee asserts that

Aon’s own conduct, and not any breach of duty by Lee to Aon,

resulted in Aon being sued by USF&G and ASI for indemnity and

resulted in Aon’s counterclaim against USF&G and ASI for

indemnity. Lee argues that Aon cannot recover for the “tort of

another” where Lee breached no duty as to Aon or Aon’s own

conduct necessitated its involvement in litigation, citing Burger

v. Kuimelis, 325 F.Supp.2d 1026, 1041-1043 (N.D.Cal.2004).

Aon responds that Lee presents a wholly partisan, one-sided

view of the evidence and ignores substantial trial testimony to

the contrary. Aon asserts that the jury reasonably concluded

that Lee intentionally made misrepresentations to Aon during the

effort to replace Lee’s workers’ comp insurance policy through

USF&G, and that those misrepresentations harmed Aon. Aon

contends there was substantial evidence that Lee knew Aon was

relying on the truth of Lee’s statements in preparing the letter

to ASI and that Lee intended Aon to so rely. Aon refers to Aon’s

cross-examination of Lisa Ehrlich:

Q. He [Hugh Awtrey] may have told you that

whatever work - the insurance company wanted

to know that whatever work was going to be

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done was going to be done by subcontractors

and that Lee would obtain certificates of

insurance?

A. Yes.

Q. He told you that?

A. That they wanted a letter regarding that

work that was done would be done by

subcontractors and that certificates of

insurance would be obtained.

...

Q. Whatever work was going to be done was

going to be done by subcontractors?

A. Let me see if I can remember. We talked

about - we talked about the status of

operations, and then he told me that they

wanted a letter. I know we talked about the

construction laborers, and then we did talk

about, yes, construction work, and that it

would be done by subcontractors, and

certificates of insurance would be issued.

...

Q. Okay. And in fact, this letter was

prepared and sent to Christy Platt by Mr.

Awtrey, as far as you know, right?

A. It was prepared by Mr. Awtrey and she

signed it and sent it back to him, I believe.

Q. Again, I think you testified that you

talked to Christy Platt and told her that Mr.

Awtrey would be proposing some language for a

letter, right?

A. That is correct, that is what he said,

that he might want to do that.

Q. And that as long as the language in the

letter was consistent with your discussion

with Mr. Awtrey and with Ms. Platt, that Ms.

Platt could go ahead and sign that letter?

A. That is correct.

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(Trial testimony of L. Ehrlich, Feb. 9, 2007, 7:10-18; 7:22-8:4;

8:14-9:1). Aon also refers to Aon’s cross-examination of Christy

Platt:

Q. Okay. And you were clarifying that issue

for Hugh, correct? If I could rephrase.

In other words, if the concern at the time of

the cancellation of the Industrial Indemnity

policy was that there were some employees

doing construction that were employed by the

water park, you were helping Hugh and Joanne

understand that maybe those employees were in

fact under Rexford or some other company?

A. Correct.

...

Q. ... Do you recall that Mr. Awtrey was

seeking your assistance in helping the second

insurance company, USF&G, feel more

comfortable about issuing an insurance policy

in light of these construction concerns?

A. As it relates to who was doing that work.

Q. Right.

A. I believe that to be true, yes.

(Trial testimony of Platt, Feb. 14, 2007, 5:17-25; 6:17-23).

Aon further responds that Aon did not “take it on itself” to

write the letter to ASI. Instead, Aon was acting prudently in

responding to ASI’s requirement that it receive a letter from Lee

before issuing the policy. Lee had full knowledge of this

requirement, referring to the testimony set forth above, and to

the trial testimony of Cathy Hacker:

Q. And do you recall what Stan said about

potentially issuing a USF&G policy to

American Specialty to The Island for Workers’

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Compensation insurance?

A. My recollection is that they would

consider writing it only on the condition

that we had verification that Splash Island

employees no longer would perform any

construction work. 

...

Q. Now, in the meeting, was there any

discussion about whether the response to any

inquiry by Aon had to come from the insured,

the policy holder or prospective policy

holder?

A. Yes, we were requiring that we receive a

written response from the insured.

...

Q. Okay. Was there anything in that letter,

as you read it, that states, ‘American

Specialty is requesting a written response’?

A. Yes.

Q. And where is that?

A. The second paragraph, the second - third

sentence, says, ‘Please help me prove to our

underwriter the following: Number 1, Island

employees will not be performing tasks

outside of their designated classification as

water park employees.’

So a proof would mean a response.

Q. All right. So you understood the

sentence, ‘Please help me to prove to our

underwriter,’ to be a request for a written

response; is that correct?

A. A response, which, since we like to have

things in writing in the insurance world so

that we have documentation, but it

specifically does not say ‘written proof.’ 

(Trial testimony of Hacker, Feb. 2, 2007, 55:16-21, 71:17-21,

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108:5-21).

Aon asserts that Lee’s reliance on Burger v. Kuimelis,

supra, to negate any breach of duty by Lee to Aon is misplaced

because the Northern District ruled that “[t]he duty not to

mislead is a duty that runs from counterdefendants [insureds] to

Kumeilis [broker].” Burger, supra, 325 F.Supp.2d at 1044. Aon

responds that Lee’s argument that Aon’s own conduct in drafting

the letter necessitated its involvement in this litigation

ignores the fact that Lee provided misinformation to Aon:

Accordingly, just as the insureds in Burger

lied to their broker to induce him to prepare

a document used to defraud HUD, Lee provided

misinformation to Aon knowing that the August

12 letter would be used to secure an

insurance policy through USF&G/American

Specialty. 

In its reply brief, Lee completely changes its position. 

Lee now argues:

Dr. Levine’s testimony was unrebutted that

insurance industry personnel would be

expected to understand ‘construction,’ as

used in the terminology between the parties,

not to include construction activities that

were a part of water park maintenance within

the meaning of water park classification

codes 9016 and 9180, and to include only

‘construction’ activities that were outside

of a water park classification and that would

require a workers’ compensation construction

classification code. Ms. Platt testified by

deposition to her understanding of the

terminology as referring to ‘ground-up’

construction of the park. Mr. Awtrey was

both in the insurance industry and had worked

for years at Clovis Lakes, later known as

Wild Waters Adventures, where park employees

built slides. Mr. Awtrey admitted that he

never discussed construction of water slide

[sic] with Lee. (2/8/07 Awtrey testimony at

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126:13-128:4.) There was no evidence that

Mr. Awtrey, Cathy Hacker or anyone else in

the insurance industry conveyed to Lee that

they interpreted ‘construction’ differently

than Dr. Levine testified they would have

been expected to interpret it.

Lee (and Aon ...) could reasonably (and did

by Dr. Levine’s and Ms. Platt’s deposition

testimony) have understood that completion of

the red slide was not ‘construction’ within

the meaning of Mr. Sackett’s August 11, 1998

letter and Ms. Platt’s August 12, 1998 letter

(and Mr. Awtrey’s and Ms. Moore [sic] August

27, 1998 letter to Lee), but instead would be

considered activity within a water park

classification. There was no

misrepresentation if the completion of the

red slide was such activity. Uncontradicted

expert evidence from Mr. Lemasters

established that it was not unusual for water

parks to do slide erection with their own

maintenance employees and Dr. Levine’s

testimony that such work would fall within a

water park classification was uncontradicted. 

USF&G’s citation to the testimony of both Mr.

Bibel and Dr. Levine that ‘new construction’

would be separately classified begged the

question about how to classify the completion

of the red slide. Aon cites no testimony

indicating that any expert other than Dr.

Levine answered this question.

Furthermore, by the time USF&G filed its

Master Unit Statistical Report designation of

the Conley accident as falling within

classification code 9016, USF&G has already

filed its rescission action. Dr. Levine

testified that USF&G could and should have

sought to change how it designated the

accident, but never did. Accordingly,

USF&G’s Master Unit Statistical Report was

contrary to its contention in its rescission

action and stands, along with Dr. Levine’s

testimony, as unrebutted evidence that

Conley’s accident arose from activity within

a water park classification.

Accordingly, there was no evidence to support

that Lee made a misrepresentation to Aon,

that Lee intended to induce Aon to rely on a

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misrepresentation, or that Aon actually

relied on a misrepresentation. Furthermore,

if Aon had relied on Ms. Platt’s August 12,

1998 letter to mean that Lee could not

complete the red slide, that reliance, as a

matter of law and uncontradicted evidence,

would have been unjustified.

All these contentions have been discussed. They represent

Lee’s view of the evidence, ignoring the alternative decisions

the jury reached. Once Lee sought replacement coverage, the

insurer willing to write new coverage, USF&G, would not do so

unless Lee agreed in writing not to engage in further

construction activities and to have third party contractors

perform any construction work. The insurer USF&G, through

American Specialty, required such written representation,

undertaking and commitment from Lee. Once it made such

representations, Lee had a duty to speak truthfully. Its failure

to be honest and forthright caused its insurance broker, Aon, to

be sued. Absent Lee’s wrongful conduct in misrepresenting

material facts (fraud), Aon would not have been sued by USF&G,

requiring Aon to expend attorneys’ fees in its defense. 

Lee’s motion on Aon’s tort of another claim is DENIED,

subject to allocation of recoverable fees for tort of another

where the direct claims and defenses between the Lee parties and

Aon do not implicate USF&G’s indemnity case.

E. Amendment of Partial Judgment to Require USF&G To

Return All Premiums Paid by Lee.

Lee, citing California Civil Code § 1691(b), contends that,

before rescission can be effected, USF&G is required to restore

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all premiums, plus interest, paid by Lee for the policy. Lee,

refers to Exhibit Nos. 411, JX84, JX84.003-008, and asserts that

the amount of the principal is $38,554. Lee argues that the

Partial Judgment should be amended to read that USF&G shall pay

Lee $38,554 plus interest. USF&G does not argue this is not the

law. 

This is an issue that will be resolved in the Findings of

Fact and Conclusions of Law that will be issued in connection

with the Hearing re Remaining Damages conducted on April 4-5,

2007. Because those Findings of Fact and Conclusions of Law have

not yet been issued, Lee’s motion to amend the Partial Judgment

in this regard is premature.

F. Partial Judgment’s References to FRCP 55(b).

This reference to Fed. R. Civ. Proc. 55(b) was a

typographical error. Lee’s motion to amend the Partial Judgment

to reflect that it was entered pursuant to Rule 54(b), Federal

Rules of Civil Procedure, is well-taken and is GRANTED nunc pro

tunc. 

G. Whether The Partial Judgment Erroneously States Lee Has

Stipulated to Certain Matters.

The Partial Judgment (Doc. 681) states in pertinent part:

The parties have reserved, by written

stipulation and order: USF&G’s alter ego

claims against Richard K. Ehrlich, an

individual, et al. ... Any claims as to Diana

Conley have been determined by the parties’

stipulation.

Lee contends that it has not stipulated to the inclusion of

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the alter ego claims against Richard Ehrlich, but acknowledges

that USF&G was allowed to amend its Complaint to add alter ego

allegations and trial of these claims were severed by Order filed

on July 18, 2006, (Doc. 256, pp. 12-16), and by Order filed on

December 12, 2006. (Doc. 395, p.3). Lee contends that the

Partial Judgment should be amended to reflect this background.

USF&G responds that whether Lee stipulated to this or not is

irrelevant. 

The Partial Judgment should reflect correctly the positions

of the parties. Therefore, this aspect of Lee’s motion is

GRANTED.

With regard to Diana Conley, Lee asserts that it has not

stipulated to any determination of claims as to Diana Conley,

noting that the Stipulation by which Ms. Conley was dismissed

from this action was signed only by Ms. Conley’s counsel and

counsel for USF&G. Therefore, Lee moves for amendment of the

Partial Judgment to reflect this.

USF&G responds that Lee’s position is irrelevant because Lee

never asserted a claim against Ms. Conley.

The Partial Judgment should correctly reflect all parties’

positions. Lee’s motion to amend the Partial Judgment in these

respects is GRANTED.

H. Partial Judgment’s Failure to Include as Issues

Remaining for Further Trial (a) Whether USF&G is Entitled to Any

Restitution, and (b) USF&G’s Duty to Defend Lee in the WCAB

Proceedings and In This Action.

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a. Restitution Award is Premature.

Lee contends that entry of Partial Judgment in favor of

USF&G and against Lee for restitutionary damages of $875,034.99

is premature. Lee contends that the Partial Judgment fails to

list as reserved issues all of those issues. Lee refers to the

Stipulation and Order Regarding Issues to Be Determined by the

Court, (Doc. 682) filed by the Court on either February 27, 2007

or March 1, 2007 (both dates are listed), wherein the parties

stipulated, in pertinent part, that the Court will hear and

decide the following issues:

3. Whether USF&G is entitled to restitution

of any amount in light of Aon and Lee’s

contention that USF&G did not actually incur

the costs or expenses associated with Ms.

Conley’s injury (i.e., whether USF&G is the

real party in interest);

4. The amount, if any, of restitution that

USF&G is entitled to recover from Lee for

fees, costs and expenses paid allegedly to

defend Lee in the Workers’ Compensation

proceeding (and whether USF&G is the real

party in interest in relation to this

restitution).

Lee also refers to the Stipulation re Handling of Claims for

Attorneys Fees and Litigation Expenses, (Doc. 654), filed on

either February 21, 2007 or February 23, 2007 (both dates are

listed):

2. It is further stipulated and agreed that

if restitution of USF&G’s alleged attorney

fees and expenses is awarded in the pending

phase of the trial, and if Lee is otherwise

entitled to recover from USF&G for breach of

the duty to defend, Lee may seek to recover

back from USF&G the attorney fees and

litigation expenses in the trial phase of

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this action that will address breach of the

duty to defend.

3. It is further stipulated and agreed that

in the pending phase of the trial, the jury

will address only the respective liabilities,

if any, of Lee to USF&G, of the other parties

to the pending phase to Lee, and of Lee to

Aon, including the basis, if any, for

punitive damages sought by Lee, and will not

address any party’s damages in the pending

phase except that if rescission of the

subject USF&G insurance contract is awarded,

the jury shall address the amount of USF&G’s

restitution, if any, unless such amount is to

be determined by the Court.

Lee contends that these stipulations and orders make the

award of restitution to USF&G premature:

[I]t remains for USF&G to demonstrate that it

actually incurred the costs and expenses

associated with Ms. Conley’s injuries and

that it is the real party in interest with

respect to those amounts and with respect to

the attorney fees and expenses paid to Lee. 

Accordingly, none of the monetary amount of

$875,034.99 in the Partial Judgment should at

this time be awarded pending USF&G’s proof

that it incurred and paid the amounts and is

the real party in interest.

Although USF&G will argue that at least the

amount of $623,320.09 should be awarded

because of the ruling of Judge Coyle on the

cross-motions for summary judgment, this

argument should be rejected. In case the

jury did not award an amount satisfactory to

USF&G, USF&G consciously elected to stipulate

that the Court would try the amount of

restitution and cannot now be heard to claim

that the $623,320.09 was already determined

as paid by USF&G. In all events, USF&G must

prove that it paid and is the real party in

interest regarding (a) the $251,714.90 paid

to Ms. Conley for the period May 2002 to the

present, and (b) the amount claimed for

attorney fees and litigation expenses paid to

Lee.

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Lee therefore contends that the Partial Judgment should be

vacated pending the Court’s determination of the amount of

restitution, if any, to which USF&G is entitled.

As USF&G asserts, the Court has already determined by

summary judgment that USF&G is entitled to restitution of 

$623,320.09. The Pretrial Order (Final Form), (Doc. 700), sets

forth as Undisputed Fact No. 37 that USF&G paid $623,320.09 to or

on behalf of Ms. Conley. The jury found that USF&G is entitled

to an additional among of $251,714.19 paid to or on behalf of

Diana Conley for the period May 2002 to the present. 

In reply, Lee acknowledges the hearing on April 4-5, 2007

and contends that the Partial Judgment will need to be amended to

conform to the judgment yet to be made by the court.

Lee’s motion on this ground is DENIED. 

b. Whether USF&G Breached the Duty to Defend Remains

for Separate Trial.

Whether or not the Court awards restitution to USF&G for the

attorney fees and expenses paid to Lee, Lee contends that the

issue of whether USF&G breached the duty to defend in the WCAB

proceedings and in this action remains to be tried before a

separate jury.

USF&G responds that Lee’s contention is frivolous because

Lee can claim no breach of any duty to defend under the policy

because, as a matter of law following rescission, and under the

Partial Judgment, no contract ever existed between Lee and USF&G.

Lee responds that this issue is not properly before the

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court, except to correct any possible suggestion in the Partial

Judgment as written that this issue is not among those remaining

to be tried in a separate trial.

Because any issue of USF&G’s breach of a duty to defend Lee

is not presently at issue and was reserved for trial in a later

proceeding, Lee’s motion to amend the Partial Judgment on this

ground is GRANTED.

CONCLUSION

For all the reasons stated above, the following orders are

entered:

1. Lee’s motion that the Partial Judgment is void and/or 

that Lee is entitled to judgment as a matter of law because

the WCAB had and has exclusive jurisdiction is DENIED;

2. Lee’s motion that it is entitled to judgment as a

matter of law because California law requires any limitation on a

worker’s compensation policy be by an approved form of

endorsement is DENIED;

3. Lee’s motion that Mr. Sackett’s August 11, 1998 letter

imposed a condition or restriction on coverage is DENIED;

4. Lee’s motion that Christy Platt’s August 12, 1998

letter to Mr. Sackett and related communications should have been

excluded from evidence under the parol evidence rule is DENIED;

5. Lee’s Motion that an application for the subject

insurance was required is DENIED;

6. Lee’s motion that USF&G failed to show Lee’s employees

engaged in activities outside of a water park classification is

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DENIED;

7. Lee’s motion that there was no legally sufficient

evidence for a reasonable jury to find Lee liable to Aon for the

“tort of another” is DENIED; 

8. Lee’s motion to amend the Partial Judgment to require

USF&G to return all premiums paid by Lee is DENIED as premature; 

9. Lee’s motion to amend the Partial Judgment to refer to

Rule 54(b), Federal Rules of Civil Procedure, rather than Rule

55(b), Federal Rules of Civil Procedure, is GRANTED nunc pro

tunc; 

10. Lee’s motion to amend the Partial Judgment to reflect

that Lee did not stipulate to certain matters is GRANTED nunc pro

tunc; 

11. Lee’s motion to amend the Partial Judgment because it

fails to include as issues remaining for further trial (a)

whether USF&G is entitled to any restitution and (b) USF&G’s duty

to defend Lee in the WCAB proceedings and in this action is

DENIED IN PART AND GRANTED IN PART. 

12. Counsel for USF&G and Aon shall prepare and lodge a

form of order that reflects the specific rulings on each issue

addressed by this decision within five (5) days following the

date of service of this decision by the Court’s Clerk.

IT IS SO ORDERED.

Dated: March 14, 2008 /s/ Oliver W. Wanger 

668554 UNITED STATES DISTRICT JUDGE

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