Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_03-cv-05747/USCOURTS-caed-1_03-cv-05747-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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UNITED STATES DISTRICT COURT

 EASTERN DISTRICT OF CALIFORNIA

WESTLANDS WATER DISTRICT,

Plaintiff,

v.

ZURICH AMERICAN INSURANCE

COMPANY, 

Defendant.

1:03-CV-05747 OWW LJO

MEMORANDUM AND ORDER RE CROSS

MOTIONS FOR SUMMARY JUDGMENT

ON THE ISSUE OF INVERSE

CONDEMNATION COVERAGE

I. INTRODUCTION

This is an insurance coverage dispute arising out of the

2003 court-approved settlement entered into by Westlands Water

District (“Westlands”) and owners of agricultural land adjacent

to lands served by Westlands. Sumner Peck Ranch, Inc., et al. v.

Bureau of Reclamation, et al., 1:91-cv-0048 (the “Sumner Peck

case”). The Plaintiffs in the Sumner Peck case alleged generally

that their property was damaged by Westlands’ failure to provide

adequate drainage facilities. The Sumner Peck plaintiffs

advanced several theories of liability, including inverse

condemnation and dangerous condition of public property. 

In 2003, the district court approved a settlement of the

Sumner Peck case. The settlement obligated Westlands to pay $5

million in damages to resolve the inverse condemnation and

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dangerous condition of public property claims. In addition to

the $5 million settlement, approximately $4.4 million was spent

defending Westlands in this lawsuit, which was of extended

duration and complexity. 

Throughout the relevant time period, Westlands possessed

various forms of liability coverage, including a primary

liability policy from the now-insolvent United Pacific Insurance

Company (“United Pacific”) and an excess umbrella liability

policy from Defendant Zurich American Insurance Company

(“Zurich”). At issue in the pending motions is whether the

operative United Pacific policy contained an effective exclusion

for inverse condemnation liability and, accordingly, whether

Zurich should be required to “drop down” to provide primary

liability coverage to fill any inverse condemnation gap in the

United Pacific policy. 

Before the court for decision are cross motions for summary

adjudication and/or summary judgment on a variety of issues. 

Zurich asserts that the United Pacific policy does not contain an

exclusion for inverse condemnation liability. In the

alternative, Zurich maintains that any such exclusion should be

deemed unenforceable. Zurich further asserts that Westlands

itself has previously argued that the exclusion is ineffective

and that Westlands should not now be permitted to reverse its

position. Finally, with respect to Westland’s bad faith claim,

Zurich maintains that Westlands has failed to satisfy its burden

of proof.

Westlands’ cross motion addresses similar, although not

identical issues. First, Westlands asserts that the United

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 Zurich requests judicial notice of a number of court 1

documents. (See Doc. 52, filed Sept. 29, 2005.) Westlands does

not object. It is appropriate to take judicial notice of such

matters of public record. Zurich’s request is GRANTED. 

3

Pacific Policy does contain an enforceable exclusion for inverse

condemnation liability. In addition, assuming that the court

finds an enforceable exclusion, Westlands appears to seek summary

adjudication that the Zurich policy provides first-dollar

coverage for the inverse condemnation settlement.

The parties submitted a stipulated statement of material

facts (“SSUF”), along with a number of stipulated exhibits

(“SE”). (Doc. 48.) In addition, Zurich submitted its own

statement of additional undisputed facts (“ZSUF”)(Docs. 50 & 51)

along with a request for judicial notice (Doc. 52). Westlands 1

also submitted its own statement of undisputed fact (“WSUF”). 

(Doc. 46.)

II. FACTUAL BACKGROUND

A. Westland’s Insurance Coverage.

United Pacific provided primary liability coverage to

Westlands:

• From December 1, 1972 to December 1, 1973, pursuant to

Policy No. 1-40-61-00. (SSUF #10; SE F). 

• From December 1, 1973 to December 1, 1976, pursuant to

Policy No. LP 2-65-76-12. (SSUF #2; SE A.) 

• From December 1, 1976 to December 1, 1979, pursuant to 

Policy No. LP 4-83-93-99. (SSUF #3; SE B.)

 

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Of critical importance are the exclusions from coverage contained

within the latter two United Pacific Policies. Specifically, the

exclusions are found within a “California Public Entity Coverage

Part” which replaces many of the provisions in the standard–form

contract. The exclusionary language provides in full:

The exclusions of the policy are entirely eliminated

and replaced by the following: 

EXCLUSIONS: THIS POLICY DOES NOT APPLY:

(A) under bodily injuries and property damage (other

than automobile) to liability arising out of; (1)

the maintenance and use of any aircraft owned by

the named insured; (2) use of any aircraft in

violation of United States Government Rules or

Regulations

(B) under bodily injuries to any obligation for which

the insured or any carrier as his insurer may be

held liable under any Workmen’s Compensation,

unemployment compensation or disability benefits

law, or under any similar law; 

(C) under bodily injuries, except with respect to

liability assumed by the insured under contract,

to bodily injury or to sickness, diseases or death

of any employee of the insured arising out of and

in the course of his employment by the insured; 

(D) under property damage, to injury to or destruction

of property owned by the insured; property rented

to or leased to the insured where the insured has

assumed liability for damage to or destruction of

such property unless the named insured would have

been liable in the absence of such assumption of

liability; 

(E) under property damage (other than automobile) to

injury to or destruction of aircraft in the care,

custody or control of the insured, or to the

ownership, maintenance or use of any automobile;

(F) to liability arising under Article I, Section 14

of the Constitution of California;

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(G) to the nuclear hazard; 

(H) to any liability because of the discharge of

matter, including petroleum, on or into water,

land, air, real property or personal property

except that this exclusion shall not apply to; 

1. Bodily Injury or Property Damage which is

sudden and neither expected nor intended by

the insured; 

2. Bodily Injury or Property Damage arising out

of the normal and usual practices of the

insured in the application of pesticides or

herbicides, provided that such practices are

not in violation of any law, [ordinance] or

of the regulations of any governmental or

other regulatory body. 

***

(SE A at Bates #1152 (emphasis added).)

For the period from May 21, 1977 to December 1, 1979, Zurich

provided excess umbrella liability coverage to Westlands:

• From May 21, 1977 to May 21, 1978, pursuant to Policy

No. 88-14-737. (SSUF #6; SE C.)

• From May 21, 1978 to December 1, 1978, pursuant to

Policy No. 89-26-719, (SSUF #7; SE D.) 

• From December 1, 1978 to December 1, 1979, pursuant to

Policy NO. 89-26-732, (SSUF #8; SE E.)

All three policies issued by Zurich provide excess insurance

to Policy No. LP 4-83-93-99 issued by United Pacific for the

period from December 1, 1976 through December 1, 1979. (SSUF

#9.)

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Westlands also purchased inverse condemnation liability

coverage from various insurers. Westlands obtained such coverage

from Yosemite Insurance Company (“Yosemite”) for the period from

December 1, 1973 to December 1, 1974, pursuant to Policy No. GL

613926 (SSUF #11; SE G), and for the period December 1, 1974 to

December 1, 1975, pursuant to Policy NO. GL 613981 (SSUF #12; SE

H). Sphere Insurance Company provided inverse condemnation

liability coverage to Westlands for the period from May 14, 1976

to May 14, 1977. (Policy No. SP-GP-2841; SSUF #13; SE I.) 

In addition, the Association of California Agencies Joint

Powers Insurance Authority (“ACWA”) and Transcontinental

Insurance Company (“Transcontinental”) together provided

Westlands with $5 million in defense and indemnity protection. 

ACWA and Transcontinental have spent approximately $4.4 million

defending Westlands. 

B. Post-Settlement Events/Conduct.

In July 1996, Westlands tendered the Sumner Peck litigation

to United Pacific for defense and indemnity. (ZSUF #15.) In

1997, United Pacific denied coverage to Westlands for the claims

asserted in the Sumner Peck litigation. (ZSUF #16.) In denying

coverage to Westlands, United Pacific specifically acknowledged

that the Sumner Peck litigation included inverse-condemnation

claims against Westlands. (ZSUF #17, April 2, 1997 Letter from

Reliance to James P. Wiezel, ZWWD 024738-024739, attached as

Exhibit 7 to the Gallanis Declaration: “The plaintiffs’ liability

theories against Westlands include tort, contract, and inverse

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Westlands objects generally that “Statements made by 2

Westlands’ and United Pacific’s attorneys in the 1990s about

policies written in the 1970s are arguments, not evidence, and

are irrelevant.” This topic is discussed below in Part IV.D. 

7

condemnation claims.”)

Zurich points out that United Pacific has never asserted

Exclusion F as a basis for denying coverage for the Sumner Peck

litigation. (ZSUF #19.) For example, United Pacific’s

disclaimer letter did not specifically reference Exclusion F or

any language that it believed to specifically exclude coverage

for inverse-condemnation claims. (ZSUF #18.) Westlands

maintains that this fact presents an incomplete picture because

the disclaimer letter also stated “United Pacific/Reliance

expressly reserves its right to rely on such information to

accept, limit, or decline coverage for this...nor should it be

construed as a waiver of United Pacific/Reliance’s right to deny

or accept coverage under any provisions....”2

Westlands first notified Zurich of the Sumner Peck

litigation on February 29, 1996. (ZSUF #20.) At that time,

Westlands did not request primary inverse-condemnation coverage

from Zurich and, in fact, Westlands asserted that Exclusion F in

the United Pacific policy was unenforceable. (ZSUF #21.) 

Zurich responded in writing to Westlands on August 1, 1996,

by “reserv[ing] its rights and ask[ing] whether Westlands

believed the Zurich policies were obligated to ‘drop down’ and

provide primary coverage.” (ZSUF #22.) On August 8, 1996,

Westlands informed Zurich that it was an excess carrier and need

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not fulfill a primary carrier’s obligations. (ZSUF #23.) In

addition, Westlands informed Zurich that it need not attend an

August 18, 1996 settlement conference between Westlands and its

primary carriers. (Id.)

In April 2000, Westlands sent Zurich a letter representing

that the Sumner Peck plaintiffs believed Zurich had a duty to

defend. (ZSUF #24.) Zurich, confused by this apparent turnaround, requested clarification and “asked Westlands whether any

of these circumstances existed.” (ZSUF #25.) In two letter

communications, dated December 27, 2000 and May 10, 2001,

Westlands reaffirmed its belief that Zurich was an excess carrier

and need not fulfill a primary carrier’s obligations. (ZSUF ##26

& 28.) 

Westlands performed a comprehensive analysis of its

insurance coverage, including a detailed analysis of whether its

insurance policies provide coverage for inverse-condemnation

claims. Westlands sent this analysis to all its insurers on May

22, 2001. Although Westlands acknowledged that some policies

effectively exclude claims for inverse condemnation while others

do not, the analysis concludes that Westlands did not believe

Exclusion F in the United Pacific policy validly excludes claims

for inverse condemnation. (ZSUF ##29 & 30) Specifically, the

analysis indicated that the exclusion 

has generally been held to be ineffective because it

would not inform a reasonable layman, of ordinary

education and intelligence, that inverse condemnation

claims were excluded from coverage. (General Insurance

Co. of America v. City of Belvedere (N.D. Cal. 1984)

582 F. Supp. 88; see also Stonewall, supra, at pp.

1837-1838.)

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(ZSUF #30; Westlands Response to Request for Admission No. 9.) 

On October 3, 2001, the State of Pennsylvania accepted

United Pacific’s declaration of insolvency and ordered the

company liquidated. (SSUF #5.) CIGA insurance then stepped into

United Pacific’s shoes for most purposes. On June 24, 2003, CIGA

sent a coverage denial letter to Westlands specifically citing

Exclusion F as a basis for the denial. (See Ex. A to the Decl.

of Daniel M. Fuchs.) 

After the Sumner Peck litigation settled, Westlands sought

indemnification from Zurich and other insurers. Zurich responded

in a letter dated November 12, 2002, that it did not believe its

excess policies were triggered. (ZSUF #31; Sumner Decl., at Ex.

1.) On January 22, 2003, Westlands demanded that Zurich

indemnify Westlands, asserting specifically that “the inverse

condemnation and tort component [of the settlement] invades

Zurich’s excess layer.” (Sumner Decl. at Ex. 2.) Westlands

demanded Zurich pay $4,338,713.00 for inverse-condemnation

indemnity coverage and $3,338,713.00 for dangerous condition of

public property indemnity coverage. (Id.)

Five months later, in June 2003, Westlands filed this

lawsuit against Zurich, alleging (1) that Zurich breached its

insurance contract (Doc. 1 (“Compl.”) ¶¶ 47-50); and (2) that

Zurich breached the covenant of good faith and fair dealing

arising under the California Unfair Practices Act, Cal. Ins. Code

§ 790 et seq. (Compl. ¶¶51-58).

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Westlands recognized that it was responsible to assume the

$1 million policy limit represented by the United Pacific policy

with regard to liability that does not arise out of inverse

condemnation. (Compl. ¶ 44.) 

To date, Westlands has received slightly more than

$636,487.43 from ACWA and Transcontinental to be applied to the

$5 million settlement. (Although ACWA and Transcontinental 

provided Westlands with $5 million in coverage, $4.4 million of

this went to defense costs, as described.) Westlands also

received $100,000.00 from Yosemite. Westlands now seeks

indemnity from Zurich in the amount of $4,363,512.57. (Compl. at

¶45; Pltf’s Obj. to Zurich’s Stmt. of Undisputed Fact (“ZSUF”)

#6.)

III. STANDARD OF REVIEW

Summary judgment is proper “if the pleadings, depositions,

answers to interrogatories, and admissions on file, together with

the affidavits, if any, show that there is no genuine issue as to

any material fact and that the moving party is entitled to a

judgment as a matter of law.” Fed. R. Civ. P. 56(c). The moving

party bears the initial burden of demonstrating an absence of

genuine issues of material fact. See Celotex Corp. v. Catrett,

477 U.S. 317, 323 (1986). However, where the non-moving party

has the burden of proof at trial, the moving party need only

demonstrate an absence of evidence to support the claim or

defense asserted by the non-moving party. See Id. at 325. 

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Once the moving party has met its initial burden, the nonmoving party must then designate specific facts showing that

there is a genuine issue for trial. Id. at 324. “The mere

existence of scintilla of evidence [is] insufficient; there must

be evidence on which the jury could reasonably find for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

252 (1986). 

IV. ANALYSIS

The key question raised by the instant motions is whether

the United Pacific policy language contains an effective

exclusion for inverse condemnation liability. If the policy

contains an effective exclusion, Zurich may be obligated to fill

the gap created by this exclusion. 

Interpretation of an insurance policy is a question of law

and follows the general rules of contract interpretation. 

MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 647 (2003). In

this diversity case, California law provides the rule of

decision. 

A. Rules Applicable to California Insurance Contract

Interpretation.

General principles of California contract interpretation as

well as specific rules applicable to insurance exclusionary

clauses are relevant in this case. As a general matter, “the

mutual intention of the parties at the time the contract is

formed governs [contract] interpretation.” Id. at 647-48 (citing

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Cal. Civ. Code, § 1636). To discern the mutual intent of the

parties, a court should apply the following four rules, the first

three of which are to be applied in sequence. See generally,

Croskey, et al., Cal. Prac. Guide: Insurance Litigation, Ch. 4-A

(The Rutter Group 2005). 

Rule 1: The Plain Meaning. If possible, the mutual intent

of the parties is to be “inferred...solely from the written

provisions of the contract.” MacKinnon, 31 Cal. 4th at 647

(citing Cal. Civ. Code § 1638). If an examination of contractual

language reveals a “clear and explicit” meaning, this meaning

controls. Id. at 647. A court must interpret contractual

language in its “ordinary and popular sense,” unless terms are

“used by the parties in a technical sense or a special meaning is

given to them by usage.” Id. (citing Cal. Civ. Code § 1638;

1644). A court must, “attempt to put itself in the position of a

layperson and understand how he or she might reasonably interpret

the [] language.” Id.

A policy provision will be considered ambiguous, and

therefore without a “clear and explicit meaning,” when it is

“capable of two or more constructions, both of which are

reasonable.” Id. But, “language in a contract must be

interpreted as a whole, and in the circumstances of the case, and

cannot be found to be ambiguous in the abstract.” Id.; Waller v.

Truck Ins. Exch. Inc., 11 Cal. 4th 1, 19 (1995). It is

appropriate to consider extrinsic evidence for the purpose of

determining whether an ambiguity exists, Pac. Gas & Elec. Co. v.

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G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d. 33, 37 (1968), or

to show that the parties attached a special meaning to certain

terms, ACL Tech., Inc. v. Northbrook Prop. & Cas. Ins. Co., 17

Cal. App. 4th 1773, 1794 (1993).

Rule 2: The Insured’s Objectively Reasonable Expectation. 

If a provision has no “clear and explicit meaning,” ambiguity is

“resolved by interpreting the ambiguous provisions in the sense

the insurer believed the insured understood them at the time of

formation.” E.M.M.I., Inc. v. Zurich Am. Ins. Co., 32 Cal. 4th

465, 470 (2004). A court may consider extrinsic evidence to aid

in the interpretation of an ambiguous provision. Kavruck v. Blue

Cross of Calif., 108 Cal. App. 4th 773, 782 (2003). 

Rule 3: The Contra-Insurer Rule. If application of the

first two rules still does not eliminate the ambiguity,

“ambiguous language is construed against the party who caused the

uncertainty to exist.” E.M.M.I., 32 Cal. 4th at 470. This third

“contra-insurer rule” as applied to an insurance policy,

“protects not the subjective beliefs of the insurer but, rather,

the objectively reasonable expectations of the insured.” Id. at

470-71. At this stage, “any ambiguous terms are resolved in the

insured’s favor, consistent with the insured’s reasonable

expectations.” Id. at 471. 

Rule 4: Exclusions Must Be “Conspicuous, Plain and Clear.” 

Finally, when examining coverage limitations (e.g., exclusionary

clauses), courts must apply a fourth rule as an overlay to the

general rules of contract interpretation. Any provision that

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limits coverage must be “conspicuous, plain and clear to be

enforceable.” 

[A]n insurer cannot escape its basic duty to insure by

means of an exclusionary clause that is unclear. 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 exclusionary clause must be

conspicuous, plain and clear. 

MacKinnon, 31 Cal. 4th at 648 (internal quotations and citations

omitted).

Although no court has clearly articulated a comprehensive

approach to applying all of these rules to resolve a dispute over

the scope of an exclusionary clause, the California Supreme Court

in MacKinnon provides important guidance. MacKinnon considered

the meaning of language in an insurance policy that excludes from

coverage injuries caused by the “discharge, dispersal, release or

escape of pollutants.” Id. at 639. Specifically, the MacKinnon

court was asked to “determine whether that clause, a standard

pollution exclusion clause, applies to exclude injury to a tenant

resulting from a landlord's allegedly negligent use of pesticides

on his property.” Id. First “in order to ascertain the scope of

[the] exclusion, [a court] first considers the coverage language

of the policy.” Id. at 649. The MacKinnon court concluded that

the language at issue “establishe[d] a reasonable expectation

that the insured will have coverage for ordinary acts of

negligence resulting in bodily injury.” Id. 

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Westlands challenges the fundamental premise that 3

exclusionary clauses should be viewed from the objective

viewpoint of a layperson, suggesting instead that a more

subjective approach should be applied where the buyer of

insurance is sophisticated. Westlands objection is discussed

below in Part IV.C.3.a. 

15

The court next examined whether the exclusion

“conspicuously, plainly and clearly apprise[d] the insured that

certain acts of ordinary negligence, such as the spraying of

pesticides...will not be covered.” Id. at 649. To do so a court

“must attempt to put itself in the position of a layperson and

understand how he or she might reasonably interpret the

exclusionary language.” Id. The court consulted various sources

in its search for the most reasonable interpretation of the

exclusion, while taking care to avoid any interpretation that

“leads to absurd results [or] ignores the familiar connotations

of the words used in the exclusion.” Id. at 653. The critical

search was for “the interpretation that the ordinary layperson

would adopt.” Id. 

3

The effect of this fourth rule on the overall approach to

contract interpretation is critical. On the one hand, if a

policy dispute centered around coverage language (rather than

exclusionary language), a court faced with several reasonable

interpretations of the policy language seeks the interpretation

that is most faithful to the insured’s reasonable expectations

and adopt that interpretation. However, when dealing with

exclusionary language a court must always keep in mind the rule

that exclusionary language must be “conspicuous, plain, and

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clear.” Accordingly, when interpreting ambiguous exclusionary

language the normal inquiry is modified and the proponent of a

broad exclusion would only prevail if “its interpretation is the

only reasonable one.” Id. at 655. This is because unless the

exclusion “plainly and clearly excludes” a certain form of

otherwise covered liability, “the exclusion must be interpreted

in favor of coverage.” Id. 

There are two conditions under which a court may find policy

language “plainly and clearly excludes” coverage. First, under

Rule One, where the plain language of the exclusion “plainly and

clearly excludes” coverage. Alternatively, if a court finds the

exclusionary language to be ambiguous, the exclusion may still be

enforced if the proponent’s “interpretation is the only

reasonable one.” Id. at 655.

B. The General Coverage Language in This Case.

Under MacKinnon, “in order to ascertain the scope of [the]

exclusion, [a court] first considers the coverage language of the

policy.” Id. The pertinent language is found in the “California

Public Entity Coverage Part” (an addendum to the United Pacific’s

standard-form contract) which replaces standard language

concerning property damage liability with the following terms

obligating United Pacific:

A. to pay on behalf of the insured all sums which the

insured shall become obligated to pay by reason of

liability imposed by law, including chapter 1681

of the State of California Statutes of 1963 and

amendments thereto, or liability assumed by

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contract insofar as the named insured may legally

do so, for damages:

 

(1) because of bodily injury, sickness or disease,

including death at any time resulting therefrom

and also including care and loss of services,

sustained by any person or persons, or

 

(2) because of any other injury a person may

suffer to his person, reputation, character or

feelings, including but not limited to

malpractice, false arrest, detention or

imprisonment, malicious prosecution, libel,

slander, defamation of character, invasion of

privacy, wrongful eviction or wrongful entry.

B. To pay on behalf of the insured all sums which the

insured shall become obligated to pay by reason of

liability imposed by law, including chapter 1681

of the State of California Statutes of 1963 or

liability assumed by contract, insofar as the

named insured may legally do so, for damages

because of injury to or destruction of property,

including the loss of use thereof arising out of

the ownership, maintenance or use of any

automobile.

C. To pay on behalf of the insured all sums which the

insured shall become obligated to pay by reason of

liability imposed by law, including Chapter 1681

of the State of California Statutes of 1963, or

liability assumed by contract, insofar as the

named insured may legally do so, for damages

because of injury to or destruction of property

including the loss of use thereof.

(SSUF, Ex. B, at Bates ZWWD 000158.) It appears to be undisputed

that, absent an effective exclusion for inverse condemnation

liability, these terms would cover Westland’s liability under the

2003 Sumner Peck settlement. 

C. Analysis of United Pacific Policy Exclusion F.

The next inquiry is whether the terms of the exclusion

“conspicuously, plainly and clearly” apprise the insured that

liability incurred from its settlement of an inverse condemnation

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action based on failure to provide adequate drainage is not

covered by the policy. 

The United Pacific policy at issue, Policy No. LP 4-83-93-

99, effective from December 1, 1976 to December 1, 1979, provides

in pertinent part: 

EXCLUSIONS: THIS POLICY DOES NOT APPLY:

***

(F) to liability arising under Article I, Section 14

of the Constitution of California;

***

(SSUF #3; SE B.) The operative language contained in this policy

(the “1976-79 United Pacific policy”) is identical to that

contained within an earlier version of the policy, effective from

December 1, 1973 to December 1, 1976 (the “1973-76 United Pacific

policy”). (Policy No. LP 2-65-76-12; SSUF #2; SE A.) 

 

1. The Re-Numbering of the Eminent Domain Provision

in the California Constitution.

Prior to November 5, 1974, Article I, Section 14 of the

California Constitution dealt with eminent domain:

Private property shall not be taken or damaged for

public use without just compensation having first been

made to, or paid into court for, the owner and no right

of way or lands to be used for reservoir purposes shall

be appropriated to the use of any corporation, except a

municipal corporation or a county or the State or

metropolitan water district, municipal utility

district, municipal water district, drainage,

irrigation, levee, reclamation or water conservation

district, or similar public corporation until full

compensation therefore be first made in money or

ascertained and paid into court for the owner,

irrespective of any benefits from any improvement

proposed by such corporation, which compensation shall

be ascertained by a jury, unless a jury be waived, as

in other civil cases in a court of record, as shall be

prescribed by law. 

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Cal. Const. art. I, § 14 (repealed Nov. 5, 1974).

On November 5, 1974, the eminent domain provision was

amended and moved to Article I, Section 19, where it remains:

Private property may be taken or damaged for public use

only when just compensation, ascertained by a jury

unless waived, has first been paid to, or into court

for, the owner. The Legislature may provide for

possession by the condemnor following commencement of

eminent domain proceedings upon deposit in court and

prompt release to the owner of money determined by the

court to be the probable amount of just compensation.

Cal. Const. art. I, § 19 (amended Nov. 5, 1974).

Also on November 5, 1974, an entirely different provision,

concerning felony prosecutions, was numbered as Article I,

Section 14:

Felonies shall be prosecuted as provided by law, either

by indictment or, after examination and commitment by a

magistrate, by information.

A person charged with a felony by complaint subscribed

under penalty of perjury and on file in a court in the

county where the felony is triable shall be taken

without unnecessary delay before a magistrate of that

court. The magistrate shall immediately give the

defendant a copy of the complaint, inform the defendant

of the defendant's right to counsel, allow the

defendant a reasonable time to send for counsel, and on

the defendant's request read the complaint to the

defendant. On the defendant's request the magistrate

shall require a peace officer to transmit within the

county where the court is located a message to counsel

named by defendant.

A person unable to understand English who is charged

with a crime has a right to an interpreter throughout

the proceedings.

Cal. Const. art. I, § 14 (amended Nov. 5, 1974). 

Zurich places great emphasis on the fact that throughout the

coverage period of the 1976-1979 United Pacific Policy, the cited

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passage from the California Constitution, Article I, Section 14,

actually referred to the felony prosecution section. Zurich

maintains, therefore, that the plain meaning of Exclusion F has

absolutely nothing to do with inverse condemnation. 

Westlands rejoins by pointing out that the 1976-79 United

Pacific Policy is simply a renewed version of the 1973-76 United

Pacific Policy, which contained an identical reference to Article

I, Section 14. At the time the 1973-76 policy was issued

(December 1, 1973), Article I, Section 14 still referred to

eminent domain. 

Westlands also asserts broadly that “courts have unanimously

deemed the renumbering from Section 14 to Section 19 to be

beneath notice.” (Pltf’s Opp’n, Doc. 61, at 5.) In support of

this assertion, Westlands points to a large section of its motion

for summary adjudication, at pages 7 to 10. However, in these

pages, Westlands only cites one case that is remotely on point: 

General Ins. Co. of Am. v. City of Belvedere, 582 F. Supp. 88

(D.C. Cal. 1984). The district court in Belvedere examined an

exclusion that is similar to the exclusion at issue here. In

Belvedere, part of a policy issued in 1978 provided: “[t]he

policy does not apply to liability arising under Article I,

Section 14, of the Constitution of the State of California.” Id.

at 89. 

The insurer in Belvedere sought a ruling that an insurance

policy it issued to the City of Belvedere did not cover a

judgment against the City “arising out of a property damage

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action involving the issue of inverse condemnation.” Id. 

Acknowledging the renumbering of the eminent domain provision,

the City of Belvedere sought to have the policy reformed “to

reflect what it contends to be the correct section of the State

Constitution.” The City of Belvedere then moved for summary

judgment that the exclusion “as reformed is ambiguous as a matter

of law.” Id. Under these circumstances, it is disingenuous for

Westlands to assert that the Belvedere court “deemed the

renumbering from Section 14 to Section 19 to be beneath notice.” 

Rather, it appears that the defendant in Belvedere simply

conceded the point prior to moving (successfully, as is discussed

below) for a ruling that the exclusion is ambiguous as a matter

of law even if it references the correct constitutional

provision. 

Zurich and Westlands engage in a protracted debate over

whether Westlands should be required to seek reformation of the

policy and whether reformation is available, given the applicable

three-year statute of limitations. See North Star Reinsurance

Corp. v. Sup. Ct. (Sundance Fin., Inc.), 10 Cal. App. 4th 1815

(1992). As discussed below, it is not necessary to resolve this

procedural issue, because, as the district court found in

Belvedere, even if the language is reformed to reflect the proper

numbering, the provision is impermissibly ambiguous and therefore

unenforceable. The insurer argues that the new Article I,

Section 14, which refers to felony prosecution, could have

applicability to a public entity (albeit not a water district). 

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Similarly, the older version of the eminent domain 4

provision (previously found at Article I, Section 14) makes no

mention of the term “inverse condemnation.”

22

It is acknowledged that if intended, the exclusion, after

November of 1974, should have referred to the text of Article I,

Section 19. 

2. Is the meaning of Exclusion F “clear and explicit”

or ambiguous?

Assuming arguendo that Exclusion F’s reference to Article I,

Section 14, is intended to refer to the current text of Article

I, Section 19, the first step is to determine whether a “clear

and explicit” meaning can be assigned to the exclusion. A

provision is ambiguous if it is “capable of two or more

constructions, both of which are reasonable.” McKinnon, 31 Cal.

4th at 648. 

Article I, Section 19, provides:

Private property may be taken or damaged for public use

only when just compensation, ascertained by a jury

unless waived, has first been paid to, or into court

for, the owner. The Legislature may provide for

possession by the condemnor following commencement of

eminent domain proceedings upon deposit in court and

prompt release to the owner of money determined by the

court to be the probable amount of just compensation.

Cal. Const. art. I, § 19. 

Zurich argues that the plain meaning of the exclusion does

not apply to liability for inverse condemnation because Article

I, Section 19 makes no mention of the term “inverse

condemnation.” The reasoning of the district court in Belvedere 4

regarding this omission is instructive:

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[I]t is doubtful that plaintiff's purported exclusion,

even as reformed, is sufficiently clear to meet the

test required under California law. Employing the

required objective standard, it is questionable whether

the reasonable person of ordinary education and

intelligence, upon being referred by his policy to

“Article I, Section 19” of the Constitution, would

emerge with any conviction that what was meant was

inverse condemnation. Although such actions do indeed

“arise under” that provision, neither the old Section

14 nor the present Section 19 makes specific reference

to inverse condemnation. In fact, the words appear

neither in the Constitution nor, as plaintiff itself

points out, in the index to the Constitution. In order

to inform himself that the Section covers inverse

condemnation actions, the reasonable layman would

either have to consult an attorney or familiarize

himself with California appellate law. That he should

be required to so bedevil himself simply in order to

comprehend the terms of his policy is surely not what

was intended by the requirement that policy exclusions

be “conspicuous, plain, and clear.” For much the same

reason, plaintiff's argument that Article I, Section

14, is “synonymous” with inverse condemnation actions

is unmeritorious. As to an attorney this is at best

arguable. As to the average layman it is deeply

improbable.

Belvedere, 582 F. Supp. at 90 (emphasis added). 

Westlands responds that although inverse condemnation is not

mentioned in Article I, Section 19 (or former Section 14), the

reference in Exclusion F to Section 19 is effectively a reference

to “inverse condemnation” because Section 19 provides the basis

for inverse condemnation claims under California law. In support

of this contention, Westlands points to a line of cases holding

that California courts have consistently equated Article I,

Section 19 (or former section 14) with inverse condemnation

actions. See e.g., Albers v. County of Los Angeles, 62 Cal. 2d

250 (1965). 

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Both interpretations offered by Westlands and Zurich are

sufficiently reasonable to justify a finding that Exclusion F is

ambiguous because it does not explicitly and unambiguously

identify inverse condemnation as an excluded risk. The analysis

therefore continues. 

3. Even though Exclusion F is ambiguous, does it

nevertheless “plainly and clearly exclude”

coverage?

As the plain meaning of Exclusion F is ambiguous, the

inquiry shifts to: What is the objectively reasonable expectation

of the insured? In the context of an exclusionary clause

(subject to the general rule that exclusionary clauses are

interpreted narrowly) the question may be framed: Can the

proponent of the exclusion establish “that its interpretation is

the only reasonable one?” MacKinnon, 31 Cal. 4th at 655. This

is the only basis for an exclusion to be deemed “conspicuous,

plain, and clear” and therefore enforceable. In interpreting the

ambiguous exclusion, a court must always search for “the

interpretation that the ordinary layperson would adopt.” Id. 

a. A threshold question: Should the general rule

that exclusionary clauses be construed

narrowly apply where the insured is

sophisticated?

Westlands challenges applicability here of the general rule

that exclusionary clauses should be construed narrowly, citing

Garcia v. Truck Ins. Exch., 36 Cal. 3d 426, 438 (1984) to suggest

that the general rule should only be applied where the insurer

has far more bargaining power than the insured (i.e., where the

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This type of policy is used in specialized risk 5

situations or where the insured’s bargaining power is “so great

that the insurer agrees to negotiate the terms of the policy in

order to obtain the insured’s business.” (Cal. Prac. Guide: Ins.

Litig’n at § 3:39.)

25

insurance policy is in effect a contract of adhesion). Garcia

stands for this proposition. In Garcia, the California Supreme

Court found that the terms of the policy had been negotiated

between the carrier and the insured (a large hospital) and “the

language in contention was the product of joint drafting” Id. at

441. Accordingly, the Garcia court concluded that it was not

necessary to hold the insurer responsible for any ambiguity in

the language. 

Westlands suggests that the United Pacific policies fall

under the Garcia exception. Westlands points out that many of

the key provisions of the United Pacific policy have been

replaced by the “California Public Entity Coverage Part,” which

Westlands describes as a “manuscript endorsement.” Critically, 5

however, Westlands does not present any evidence that the terms

of the California Public Entity Coverage Part were specifically

negotiated between United Pacific and Westlands or that Westlands

had any role in the choice of the language of the endorsement. 

Under similar circumstances, courts have reasoned that the Garcia

exception is inapplicable. See Bank of the West v. Superior

Court (Industrial Indem. Co.), 277 Cal. Rptr. 219, 227 (Cal. App.

1 1991) (Garcia exception did not apply where policy issued to

bank was not negotiated between the parties and bank “had no hand

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The district court in Belvedere rejected the City of 6

Belvedere’s argument that “as a public entity, the City of

Belvedere should be held to a higher standard of knowledge or

sophistication concerning interpretation of terms in insurance

policies” as “unsupported by California case law.” 582 F. Supp.

at 89. Belvedere, however, decided in February 1984, predates

Garcia, decided in July 1984, by several months and could not

address the Garcia exception. 

26

in drafting it”)(rev’d on other grounds by Bank of the West v.

Superior Court, 2 Cal. 4th 1254 (1992)); Keating v. Nat’l Union

Fire Ins. Co., 754 F. Supp 1431, 1436-37 (C.D. Cal. 1990) (even

though savings and loan “participated in the negotiation of the

policy, and was represented by a sophisticated insurance

broker,...[and] undoubtedly enjoyed significant bargaining

power...the policy at issue here was not negotiated paragraph by

paragraph and the policy was not the product of joint

drafting....Thus, it is clear that any ambiguities in the

language of the contract must be interpreted against [the

insurer] as it is “the party who caused the uncertainty to

exist.”)(rev’d on other grounds by Keating v. Nat’l Union Fire

Ins. Co., 995 F.2d 154 (9th Cir. 1993)). The general rule that 6

exclusions are construed narrowly against the insurer applies

here. 

b. Is Westlands’ interpretation the only

reasonable one?

The next inquiry is whether the proponent of the exclusion

can establish “that its interpretation is the only reasonable

one.” Only if the answer to this question is “yes” can the

exclusion be deemed “conspicuous, plain, and clear” and therefore

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One California court has cited Belvedere with approval, 7

finding it “questionable” whether an exclusion for “liability

arising under article I section 14 of the California

Constitution” was effective to exclude liability for inverse

condemnation See Stonewall Ins. Co. v. City of Palos Verdes

Estates, 46 Cal. App. 4th 1810, 1837-38 (1996). That case,

however, was remanded to the trial court to take further evidence

“tending to demonstrate that [the] Section 14 of Article I

exclusion” is enforceable. 

27

enforceable. See MacKinnon 31 Cal. 4th at 655. The reasoning of

the district court in Belvedere is a helpful starting point:

Employing the required objective standard, it is

questionable whether the reasonable person of ordinary

education and intelligence, upon being referred by his

policy to “Article I, Section 19” of the Constitution,

would emerge with any conviction that what was meant

was inverse condemnation. Although such actions do

indeed “arise under” that provision, neither the old

Section 14 nor the present Section 19 makes specific

reference to inverse condemnation. In fact, the words

appear neither in the Constitution nor, as plaintiff

itself points out, in the index to the Constitution. In

order to inform himself that the Section covers inverse

condemnation actions, the reasonable layman would

either have to consult an attorney or familiarize

himself with California appellate law. That he should

be required to so bedevil himself simply in order to

comprehend the terms of his policy is surely not what

was intended by the requirement that policy exclusions

be “conspicuous, plain, and clear.” For much the same

reason, plaintiff's argument that Article I, Section

14, is “synonymous” with inverse condemnation actions

is unmeritorious. As to an attorney this is at best

arguable. As to the average layman it is deeply

improbable.

Belvedere, 582 F. Supp. at 90 (emphasis added). Although the

Belvedere court did not apply MacKinnon’s interpretive

formulation, it is safe to say that the district court in

Belvedere would have found that Westland’s reading of Exclusion F

was not the “only reasonable interpretation.”7

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Westlands urges a departure from Belvedere’s reasoning in

several respects. First, Westlands argues that the Belvedere

decision “did not discuss the text of Article I, Section 19.” 

(Pltf’s Mot., Doc. 45 at 12 n.6). As Zurich points out, this is

not accurate. Belvedere specifically notes that “neither the old

Section 14 nor the present Section 19 makes specific reference to

inverse condemnation.” 582 F. Supp. at 90.

Second, Westlands suggests that Belvedere is distinguishable

because it “did not involve a manuscript public entity coverage

part.” (Doc. 45 at 12 n.6.) This is an unhelpful distinction as

the public entity endorsement is obscure and its text does not

use terms familiar and understandable to a layperson. Nor is

this a reason to ignore the rule of narrow construction of

exclusions based on the Garcia case. 36 Cal. 3d 426. 

Westlands next argues that Belvedere should be disregarded

because it “did not discuss Government Code § 905.1.” Westlands

argues that “[i]f there were any doubt that Article I, Section 19

(former section 14) refers to inverse condemnation, that doubt

should be dispelled by the California Government Tort Claims Act,

California Government Code section 905.1.” That provision,

titled “Inverse condemnation; claim unnecessary to maintain

action; procedure if claim filed” provides:

No claim is required to be filed to maintain an action

against a public entity for taking of, or damage to,

private property pursuant to Section 19 of Article I of

the California Constitution.

However, the board shall, in accordance with the

provisions of this part, process any claim which is

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Westlands offers two additional unpersuasive arguments. 8

First, Westlands suggests broadly that Belvedere “conflicts with

California Supreme Court decisions discussed above,” but points

to no cases that call into question either the fundamental

reasoning and principles applied in Belvedere or its specific

holding. 

Second, Westlands also points out the rule that another

district court case is “not binding on this Court.” This is

true, but Westlands offers no compelling basis for distinguishing

the reasoning in Belvedere and a district court may follow the

persuasive reasoning of another district court. 

29

filed against a public entity for the taking of, or

damage to, private property pursuant to Section 19 of

Article I of the California Constitution.

Cal. Gov. Code § 905.1. Westlands argues that, in enacting this

provision, “the California Legislature recognized that Article I,

Section 19 is the source of inverse condemnation liability.” 

However, the subjective understanding of the California

Legislature is not relevant to the interpretation of an insurance

policy or a layperson’s understanding of its language. Rather, a

court must decide “the interpretation that the ordinary layperson

would adopt.” Id.

8

Westlands advances a further argument:

In an insurance policy, an exclusion of liability based

on Article I, section 14 only makes sense as excluding

coverage for inverse condemnation, since a public

agency’s decision to take property for public use

through eminent domain is not insurable because it is

an intentional act. (Cal. Ins. Code section 533) In

addition, eminent domain proceedings do not meet the

definition of “occurrence” as being “neither expected

nor intended” by the insured. [citation] Inverse

condemnation, however, is insurable. [citation]

Therefore the only thing that the UP Policy clause in

question could possibly refer to is inverse

condemnation.

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(Pltf’s Mot., Doc. 45 at 9 (emphasis added and citations

omitted).) Although logically and technically persuasive, only a

person with an understanding of the complex law of condemnation

and inverse condemnation has the knowledge to reach this

conclusion. It is highly doubtful that “the ordinary layperson”

would have such an understanding by reading Exclusion F.

 Westlands has not demonstrated that its interpretation of

Exclusion F is one that a reasonable layperson would adopt, nor

that it is the only reasonable interpretation. Therefore,

Westlands has failed to demonstrate that Exclusion F

conspicuously, plainly, and clearly excludes coverage for inverse

condemnation liability. Accordingly, Westlands’ motion for

summary adjudication on this issue must be DENIED and Zurich’s

must be GRANTED.

D. Westlands’ Prior Conduct.

Zurich places great emphasis on an alternative argument that

merits discussion. Zurich argues that, prior to this lawsuit,

Westlands repeatedly took the position that Exclusion F did not

apply to liability based on inverse condemnation. Westlands’

conduct is argued to be an implied admission of non-coverage that

should be binding. 

In response to Zurich’s evidence, Westlands points out that

it purchased inverse condemnation coverage from other insurers

for much of the time period in question. Westlands asserts that

this is consistent with its belief there was no such coverage and

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bankruptcy, CIGA insurance stepped into United Pacific’s shoes

for most purposes. CIGA then sent a coverage denial letter to

Westlands, specifically citing Exclusion F as a basis for the

denial. This, however, has nothing to do with Westlands’ conduct

and does not diminish the import of Westlands’ communication to

all its insurers representing Westlands’ belief that Exclusion F

is ineffective.

31

that it would not have done so if it believed that the United

Pacific policies provided such coverage. 

From the evidence presented by Zurich, throughout much of

the mid to late 1990s, Westlands asserted to Zurich that the

United Pacific policy did cover liability incurred as a result of

the inverse condemnation claim. The most straightforward

evidence of Westlands’ position is the comprehensive coverage

analysis Westlands sent to all its insurers on May 22, 2001,

which stated that Exclusion F:

has generally been held to be ineffective because it

would nor inform a reasonable layman, of ordinary

education and intelligence, that inverse condemnation

claims were excluded from coverage. (General Insurance

Co. of America v. City of Belvedere (N.D. Cal. 1984)

582 F. Supp. 88; see also Stonewall, supra, at pp.

1837-1838.)

(ZSUF #30; Westlands Response to Request for Admission No. 9.)9

This is evidence that Westlands interpreted and understood its

United Pacific policies to not exclude coverage for inverse

condemnation. 

On January 22, 2003, Westlands demanded that Zurich

indemnify Westlands, asserting specifically that “the inverse

condemnation and tort component [of the settlement] invades

Zurich’s excess layer.” (Sumner Decl. at Ex. 2.) Westlands

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demanded Zurich pay $4,338,713.00 for inverse-condemnation

indemnity coverage and $3,338,713.00 for dangerous condition of

public property indemnity coverage. (Id.) Five months later, in

June 2003, Westlands filed this lawsuit against Zurich. 

Westlands does not deny this apparent “turn-around,”

reversing its position, but instead argues that it is irrelevant

to the current inquiry. Specifically, Westlands characterizes

its representations as inadmissible parol evidence. It is

clearly established California law that extrinsic evidence is

admissible to aid in the interpretation of an ambiguous

provision. Pac. Gas & Elec. Co. (“PG&E”), 69 Cal. 2d at 38,

(“[T]he exclusion of relevant, extrinsic, evidence to explain the

meaning of a written instrument could be justified only if it

were feasible to determine the meaning the parties gave to the

words from the instrument alone.”). 

Normally, the conduct of parties that interprets a contract

during its performance is relevant to interpretation of the

contract. See Medical Operations Mgmt. Inc. v. Nat’l Health

Labs., Inc., 176 Cal. App. 3d 886, 892 (1986). However,

Westlands suggests that there are limits to the scope of

California’s liberal rule and insists that it is appropriate to

consider evidence only from witnesses to a contract’s formation. 

Language from PG&E supports Westlands’ assertion. The PG&E court

noted that admissible evidence 

includes testimony as to the circumstances surrounding

the making of the agreement...including the object,

nature and subject matter of the writing...so that the

court can place itself in the same situation in which

the parties found themselves at the time of

contracting.

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It might have been more appropriate for Zurich to cite 10

this prior conduct evidence in the context of an estoppel

argument. For example, there is evidence that Westlands informed

Zurich that it need not attend an August 18, 1996 settlement

conference “between Westlands and its primary carriers” because

Westlands believed Zurich was an excess insurer. (SSOF #23.) 

However, Zurich does not raise the issue of estoppel in any of

its papers, perhaps because it would have been unable to

establish prejudice. 

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Id. (internal quotations omitted). Zurich refers to a 1949

California Supreme Court case, Barham v. Barham, 33 Cal.2d 416,

423 (1949), which acknowledged that “a construction given the

contract by the acts and conduct of the parties with knowledge of

its terms, before any controversy has arisen as to its meaning,

is entitled to great weight and will, when reasonable, be adopted

and enforced by the court.” Although this general proposition

from Barhnam appears not to have been cited by any more recent

California case, it is a bedrock principle of contract

interpretation. Witkin, Summary of Cal. Law, Contracts, Ch. 1 §

749 (2005). 

 Nevertheless, the evidence cited by Zurich is arguably not

of the type contemplated by Barnham, consisting instead of

arguments made by Westlands as part of its efforts to secure

coverage from United Pacific. Westlands’ assertions about

Exclusion F were made after a controversy arose as to the meaning

of the provision. This evidence is arguably inadmissible.10

The record contains prior conduct evidence that more

squarely falls within the Barnham rule. Westlands points out

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that, for part of the time period covered by the United Pacific

policies containing Exclusion F, it purchased the following

additional policies which specifically provided inverse

condemnation coverage:

• From Yosemite Insurance Company (“Yosemite”) for

the period from December 1, 1973 to December 1,

1974, pursuant to Policy No. GL 613926 (SSUF #11;

SE G), and for the period December 1, 1974 to

December 1, 1975, pursuant to Policy NO. GL 613981

(SSUF #12; SE H). 

• From Sphere Insurance Company for the period from

May 14, 1976 to May 14, 1977. (Policy No. SP-GP2841; SSUF #13; SE I.) 

Westlands argues that it would not have purchased these policies

if it believed at the time that the United Pacific policies

provided such coverage. Zurich points out, however, that

Westlands “offers no explanation for the six-month gap in

coverage [] (December 1, 1975 through may 14, 1976); nor does it

attempt to explain why it only purchased three years of inversecondemnation coverage since its inception in 1952.” (Deft’s

Opp’n, Doc. 64, at 11.) Perhaps more importantly, even if the

existence of these other policies evidences Westlands’ own

understanding that Exclusion F operated to exclude coverage for

inverse condemnation, this does not necessarily indicate that

Exclusion F was “conspicuous, plain, and clear” as is required

under California law. 

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Westlands’ evidence does not demonstrate that Exclusion F

conspicuously, plainly, and clearly, excludes coverage for

inverse condemnation. Zurich’s motion for summary judgment that

Exclusion F does not bar coverage for inverse condemnation is

GRANTED. Westlands’ cross-motion is DENIED. 

As to Westlands’ secondary argument that Zurich is obligated

to provide first dollar coverage for the inverse condemnation

settlement depends upon the operation of Exclusion F, Westlands’

motion for summary adjudication on this issue is denied as MOOT. 

V. CONCLUSION

For the reasons set forth above, Zurich’s motion for summary

adjudication is GRANTED and Westland’s motion for summary

adjudication is DENIED.

SO ORDERED.

Dated: February 6, 2006 

/s/ OLIVER W. WANGER

______________________________

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

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