Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-04615/USCOURTS-cand-3_03-cv-04615-0/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

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

BACKROADS CORP, a California

corporation,

Plaintiff,

v

GREAT NORTHERN INSURANCE,

a Minnesota corporation,

Defendant. /

No C 03-4615 VRW

ORDER

Plaintiff Backroads Corporation (“Backroads”) has sued

its insurer, defendant Great Northern Insurance (“Great Northern”)

for breach of contract after Great Northern declined coverage for

damages stemming from the Federal Aviation Administration’s (“FAA”)

order grounding all civil air traffic following the terrorist

attacks of September 11, 2001. Doc #1 (Compl). Great Northern

moves for summary judgment in its favor. Doc #15 (MSJ). Backroads

opposes. Doc #24 (Opp). Based on the parties’ memoranda and the

applicable law, the court GRANTS Great Northern’s motion.

//
United States District Court

For the Northern District of California

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I

Backroads is a tour operator that specializes in

adventure vacation packages both in the United States and abroad. 

Compl ¶6. Backroads’ vacation packages consist of food, housing,

activities and transportation while in the vacation destination. 

Doc #16, Ex 2 (Snodsmith Depo) at 24:11-19. Customers are

required, however, to obtain their own transportation to and from

the vacation destination (i e, airplane tickets, bus tickets, etc). 

Id at 26:5-24. As of September 10, 2001, Backroads had vacation

packages booked from September 11, 2001, onwards. Doc #16, Ex 5

(Interrog Ans) at 5:3-9.

Great Northern issued two commercial insurance policies

to Backroads covering the period from December 1, 2000, to December

1, 2001. Doc #1, Exs A (Domestic Ins Pol), B (International Ins

Pol). The policy relevant to the present case, policy #3533-38-08

(“the policy”), provided property insurance and commercial general

liability insurance within the United States.

The material facts are not in dispute. On the morning of

September 11, 2001, terrorists hijacked four planes in the eastern

United States. The terrorists flew two planes into the World Trade

Center in New York City at 8:46 am and 9:02 am. Doc #16, Ex 1 (FAA

9/11 History) at 2. At 9:06 am, the FAA issued an order banning

all flights originating in the northeastern United States bound to

or through New York airspace. Id. The FAA issued another order at

9:26 am grounding all civil air traffic throughout the nation

regardless of destination. Id. At 9:40 am, the terrorists flew a

third plane into the Pentagon in Arlington, Virginia. Id. At 9:45

am, the FAA issued an order directing all civil aircraft to land as
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For the Northern District of California

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soon as possible. Id. The fourth hijacked plane crashed in

Somerset County, Pennsylvania at 10:07 am. Id. The FAA issued a

“Notice to Airmen” at 10:39 am reaffirming the earlier orders

grounding all civil air traffic and ordering airborne plans to land

as soon as possible. Id. On September 13, 2001, the FAA issued an

order authorizing the resumption of civil flights. Compl ¶7.

As a result of the FAA’s order grounding all civil air

traffic, Backroads’ clients were unable to fly to their domestic or

international vacation destinations on September 11 and 12, 2001. 

Compl ¶9. Backroads responded by issuing credits or paying refunds

to clients. Snodsmith Depo at 51:21-52:14. Backroads gave credits

or paid refunds both to clients scheduled to fly on September 11 or

12, 2001, and to clients scheduled to fly on or after September 13,

2001, who cancelled before September 13, 2001. Doc #16, Ex 4 (List

of Cancellations). Moreover, Backroads gave credits or paid

refunds to some clients who cancelled their vacations after

September 13, 2001. Id. Backroads alleges that it issued credits

or paid refunds to 571 clients, yielding a business income loss of

$1,589,781. Id. Additionally, Backroads alleges it incurred extra

expenses from the additional employee time required to process the

cancellations. Interrog Ans at 14:20-22.

Backroads sought to recover these losses under two

provisions of the policy, both of which provide coverage for

“business income loss” and “extra expenses” resulting from “the

actual or potential impairment of [Backroads’] operations.” Compl

¶16; Domestic Ins Pol, Form 80-02-1004 at 3. The first provision,

the “dependent business premises” provision, provides coverage when

the impairment of Backroads’ operations results from “direct
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physical loss or damage by a covered peril to property or personal

property of a dependent business premises at a dependent business

premises.” Id. The second provision is the “civil authority”

provision, which provides coverage “when a civil authority

prohibits access to [Backroads’] premises or a dependent business

premises” and the civil authority’s prohibition is the response to

some “direct physical loss or damage to property away from

[Backroads’] premises or a dependent business premises by a covered

peril.” Id at 4. The policy defines dependent business premises

as “premises operated by others on whom” Backroads depends to: (1)

“deliver materials or services to [Backroads] or others for

[Backroads’] account (contributing premises)”; (2) “accept

[Backroads’] products or services (recipient premises)”; (3)

“manufacture products for delivery to [Backroads’] customers under

contract of sale (manufacturing premises)”; or (4) “attract

customers to [Backroads’] business (leader premises).” Domestic

Ins Pol, Form 80-02-1030 at 23.

Backroads filed a claim under both provisions with Great

Northern on October 8, 2001, for pecuniary losses stemming from the

FAA’s order grounding all civil air traffic. Compl ¶12. Great

Northern denied Backroads’ claim on November 7, 2001. Doc #1, Ex C

(First Denial Notice). On December 3, 2001, Backroads resubmitted

its claim (Doc #17, Ex E) and Great Northern again denied coverage. 

Doc #17, Ex G (Second Denial Notice). Backroads filed the present

lawsuit on October 14, 2003, alleging that Great Northern is in

breach of contract because it failed “to pay valid claims under the

[policy].” Compl ¶24. The court has jurisdiction pursuant to 28

USC § 1332. Great Northern moves for summary judgment in its favor
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For the Northern District of California

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pursuant to FRCP 56, arguing that there is no genuine issue of

material fact whether the policy provides coverage for Backroads’

losses arising from the FAA’s grounding order.

II

Summary judgment is appropriate if there are no genuine

issues of material fact, thus allowing a party to receive judgment

as a matter of law. FRCP 56(c); Anderson v Liberty Lobby, 477 US

242, 248 (1986). In the present case, the parties agree on all

material facts; the only issue in contention is the construction of

the insurance policy. MSJ at 11; Opp at 8. The parties agree that

California law applies (MSJ at 11; Opp at 8), and in California,

“interpretation of an insurance policy is a question of law.” 

Waller v Truck Insurance Exchange, Inc, 11 Cal 4th 1, 18 (1995). 

Accordingly, and in view of the absence of a factual dispute here,

one of the parties in this case is entitled to summary judgment.

A

 Under California law, “[t]he burden is on an insured to

establish that the [event] forming the basis of its claim is within

the basic scope of insurance coverage.” Dart Industries, Inc v

Commercial Union Insurance Co, 28 Cal 4th 1059, 1071 (2002). 

“The language of a contract is to govern its

interpretation, if the language is clear and explicit, and does not

involve an absurdity.” Cal Civ Code, § 1638. Unless the parties

use language in a technical sense or the use of the language gives

it a special meaning, judicial interpretation of contract language

reflects the “ordinary and popular sense” of the language. Cal Civ
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For the Northern District of California

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Code § 1644. See Reserve Insurance Co v Pisciotta, 30 Cal 3d 800,

807 (1982) (“Words used in an insurance policy are to be

interpreted according to the plain meaning which a layman would

ordinarily attach to them.”).

Ambiguous terms “must be interpreted in the sense in

which the promisor believed, at the time of making it, that the

promisee understood it.” Cal Civ Code § 1649. Language in a

contract is ambiguous if it is capable of more than one reasonable

construction. National Auto & Casualty Insurance Co v Underwood, 9

Cal App 4th 31, 39 (1992). “Courts will not adopt a strained or

absurd interpretation in order to create an ambiguity where none

exists.” Reserve Insurance, 30 Cal 3d at 807. Finally, the

California Supreme Court has recognized that public policy

considerations demand that “insurers draw clear policies or suffer

adverse consequences; we have consistently held that ambiguities in

such documents must be resolved against the insurer.” Bareno v

Employers Life Insurance Co, 7 Cal 3d 875, 878 (1972). See also

State Farm Mutual Auto Insurance Co v Johnston, 9 Cal 3d 270, 274

(1973) (“If the insurer uses language which is uncertain[,] any

reasonable doubt will be resolved against it * * *.”).

Accordingly, under California law, the language of the

policy at issue governs its interpretation as long as the language

is clear and explicit; any ambiguities will be construed in favor

of Backroads. 

B

Backroads contends that Great Northern is in breach of

contract because Great Northern failed “to pay valid claims under
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the [policy].” Compl ¶24. As mentioned above, Backroads sought to

recover its “business income loss” from vacation cancellations and

its “extra expenses” stemming from the staff time required

following the FAA’s grounding order. Id ¶18. Backroads argues

that its claims are valid because they fall within the coverage

provided by the “dependent business premises” and “civil authority”

provisions of the policy. Opp at 9-20. 

The “dependent business premises” provision provides

coverage when the impairment of Backroads’ operations results from

“direct physical loss or damage by a covered peril to property or

personal property of a dependent business premises at a dependent

business premises.” Domestic Ins Pol, Form 80-02-1004 at 3. In

arguing for coverage under this provision, Backroads’ logic goes as

follows: First, airports, airlines or airways (“air travel

providers”) are “dependent business premises” of Backroads. Opp at

11:3-23. Next, the FAA’s grounding order financially damaged the

air travel providers, and this damage is sufficient under the

policy because the phrase “direct physical loss or damage” can be

construed to mean “direct physical loss or damage of any kind” —

including financial damage. Id at 13:3-10; 12:23-13:3 (emphasis in

original). This financial damage occurred “at the dependent

business premises” — namely, the airports. Id at 13:3-6. Next,

the financial damage to the air travel providers — that is, the

grounding of all civil flights — caused impairments to Backroads’

operations in the form of “mass cancellations, demands for refunds

and lost productivity[.]” Id at 10:13-15. Thus, because

Backroads’ dependent business premises (the airports) were

financially damaged, thus resulting in the impairment of Backroads’
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operations, the “dependent business premises” provision covers the

losses stemming from the FAA’s grounding order.

As to the “civil authority” provision, Backroads argues

that the FAA is a “civil authority,” and that it “prohibit[ed]

access to * * * a dependent business premises” — namely, the

premises of air travel providers — because of a “direct physical

loss or damage” — namely, the terrorist attacks — “to property away

from * * * a dependent business premises” — namely, the World Trade

Center and Pentagon. Domestic Ins Pol, Form 80-02-1004 at 4.

C

Backroads’ position rests on whether air travel providers

are “dependent business premises” of Backroads within the meaning

of the policy. The policy defines “dependent business premises” as

“premises operated by others on whom” Backroads depends to: (1)

“deliver materials or services to [Backroads] or others for

[Backroads’] account (contributing premises)”; (2) “accept

[Backroads’] products or services (recipient premises)”; (3)

“manufacture products for delivery to [Backroads’] customers under

contract of sale (manufacturing premises)”; or (4) “attract

customers to [Backroads’] business (leader premises).” Domestic

Ins Pol, Form 80-02-1030 at 23. Backroads asserts air travel

providers are “dependent business premises” pursuant to the first,

second and fourth criteria. Compl ¶18; Opp at 11. Applying

California contract law, however, the court concludes that under no

reasonable interpretation of the policy do air travel providers

constitute dependent businesses.

//
United States District Court

For the Northern District of California

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1

Contributing Premises

Backroads contends that air travel providers “deliver

materials or services,” namely air travel, to Backroads’ clients

“for Backroads’ account,” thus making the air travel providers

“contributing premises” under the policy. Compl ¶18. Such an

interpretation is not consistent with the plain meaning of the

phrase “for Backroads’ account.” The ordinary and popular meaning

of the clause “for Backroads’ account” requires that a motive of the

air travel providers in serving Backroads’ clients must be to

benefit or otherwise affect Backroads. See, e g, Oxford English

Dictionary (2d ed 1989) (listing among the definitions of “upon [or]

on account of:” “for the sake of,” “by reason of,” “because of”); 

Merriam-Webster’s Collegiate Dictionary (10th ed 1998) (listing

among the definitions of “on account of:” “for the sake of,” “by

reason of”). See also Mohammed v Gonzales, 400 F3d 785, 798 (9th

Cir 2005) (finding that persecution “on account of membership in a

particular social group” means that the “motivating factor” of the

persecution is “membership in a particular social group.”) (emphasis

added).

This reading of “for Backroads’ account” comports with the

common understanding of a substantially interchangeable phrase: “on

account of” Backroads. The airports, airlines and airways provide

air travel to Backroads’ clients regardless of any benefit to or

effect on Backroads. The air travel providers would provide service

to the people whether Backroads existed or not. Moreover, Backroads

fails to demonstrate any relationship between Backroads and the air

travel providers which would suggest air travel providers take any
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action “because of” or “for the sake of” Backroads. The air travel

providers afford transportation whether their customers are bound to

commence a Backroads’ adventure tour or travel for some other

purpose. The case would, of course, be quite different if the air

travel providers were chartered by Backroads to carry travelers on a

tour that Backroads conducts. 

Hence, the court concludes that the air travel providers

in this case do not provide services to Backroads’ clients “for

Backroads’ account” and thus the air travel providers are not

contributing premises under the policy.

2

Receipt Premises

Next, Backroads contends that air travel providers accept

its “products or services” by “accepting [Backroads’] clients to

take them to their destination city to begin their trips,” thus

making the air travel providers “receipt premises” within the

language of the policy. Opp at 11:14-15. This interpretation is

absurd and California law does not allow this court to adopt an

absurd interpretation in order to create an ambiguity where one does

not exist. Reserve Insurance, 30 Cal 3d at 807. 

A “product” is “[t]hat which is produced by any action,

operation, or work.” Oxford English Dictionary (2d ed 1989). To

“produce” something is to give it “being, form, or shape.” MerriamWebster’s Collegiate Dictionary (10th ed 1998). In no way does

Backroads “produce” its clients. Clients likewise cannot be

considered a “service” of Backroads. Id (defining a “service” as a

“useful labor that does not produce a tangible commodity”). Under
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even the broadest interpretation, Backroads’ clients cannot be

considered “products or services” that are accepted by air travel

providers.

3

Leader Premises

Backroads’ final contention is that air travel providers

“attract customers to [Backroads’] business” because “none (or

almost none) of Backroads [sic] potential clients would be willing

to make bookings with Backroads but for the existence of scheduled

commercial air transportation from the United States to their

destinations,” thus making the air travel providers “leader

premises” within the language of the policy. Opp at 11:16-18. This

interpretation is not consistent with the ordinary and popular

meaning of the policy’s language. 

The phrase “attract customers to [Backroads’] business”

requires that the air travel providers cause Backroads’ potential

clients to approach Backroads or book vacations with Backroads. 

See, e g, Merriam-Webster’s Collegiate Dictionary (10th ed 1998)

(defining “attract” as “to cause to approach or adhere”). Air

travel providers do not cause Backroads’ customers to approach

Backroads. Nor do air travel providers promote Backroads’ services. 

To the limited extent that mere knowledge of commercial air travel

affects potential clients’ decisions to book vacations with

Backroads, such an impact is too remote to qualify as “attracting”

clients to Backroads’ business.

Backroads asserts that potential clients would not be

willing to book vacations but for commercial flights being available
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(Opp at 11:16-18). Put another way, Backroads contends that any

time its potential clients would not book vacations “but for the

existence” of a particular business, that business “attract[s]

customers to [Backroads’] business.” Opp at 11:16-18. Should the

court accept Backroads’ interpretation, the list of “leader

premises” under the policy would swell with phone companies,

internet service providers, foreign and domestic electricity

producers, international banks and tire manufacturers; none of these

businesses, however, “attract[s] customers to [Backroads’] business”

within the ordinary and popular meaning of the phrase. Accordingly,

the court finds that air travel providers do not “attract” customers

to Backroads’ business.

Because the court concludes the air travel providers are

not dependent business premises of Backroads, Backroads cannot

recover its “business income loss” or “extra expenses” under the

“dependent business premises” provision of the policy.

D

Next, Backroads’ claims that the “civil authority”

provision provides coverage for its “business income loss” and

“extra expenses.” Compl ¶18. This argument fails for the reason

listed above: air travel providers are not dependent businesses

premises within the meaning of the policy. The “civil authority”

provision provides coverage “when a civil authority prohibits access

to your premises or a dependent business premises.” Domestic Ins

Pol, Form 80-02-1004 at 4 (emphasis added). Since the FAA’s order

did not prohibit access to Backroads’ premises or a “dependent

business premises,” the provision does not provide coverage for
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Backroads’ “business income loss” or “extra expenses” resulting from

the FAA’s order grounding all civil air traffic. 

IV

In sum, the court GRANTS Great Northern's motion for

summary judgment (Doc #15). The clerk is directed to ENTER JUDGMENT

in favor of Great Northern, CLOSE the file and TERMINATE all

motions.

SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge