Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-04082/USCOURTS-cand-3_04-cv-04082-11/pdf.json

Parties Involved:
Atmel Corporation
Counter-defendant
Royal Indemnity Company
Miscellaneous
St. Paul Fire & Marine Insurance Company
Counter-claimant

Document Text:

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

ATMEL CORPORATION,

Plaintiff,

 v.

ST. PAUL FIRE & MARINE,

Defendant.

 /

No. C 04-04082 SI

ORDER GRANTING IN PART AND

DENYING IN PART PLAINTIFF’S

MOTION FOR SUMMARY JUDGMENT

AND DENYING DEFENDANT’S

MOTION TO STRIKE SUPPLEMENTAL

DECLARATION OF SHELLY KNOX

OnOctober 7, 2005, the Court heard oralargument on plaintiff’s motion for partialsummaryjudgment.

For the reasons setforth below, the Court hereby GRANTS in part and DENIES in part plaintiff’s motion, and

DENIES defendant’s motion to strike the Supplemental Declaration of Shelly Knox.

BACKGROUND

Plaintiff AtmelCorporation(“Atmel”) is a company thatmanufactures computer chips. Atmel obtained

generalliability and errors and omissions insurance fromdefendant St. Paul Fire & Marine Insurance Company

(“St. Paul”) beginning January 1, 2002. This lawsuit arises out of St. Paul’s refusal to defend Atmel in a nowsettled lawsuit brought by one of Atmel’s customers, Seagate Corporation. In that lawsuit, which the parties

refer to as the “Seagate Action,” Seagate alleged thatAtmelsold it defective computer chips and that Seagate

had notified Atmel of the problems in the fall of 2001. St. Paul denied a defense in the Seagate Action and

unilaterally rescinded Atmel’s insurance policy on the ground that Atmel knew about the Seagate problems

before the policy was issued and failed to disclose them in its applications for insurance. 

Although the parties dispute virtually all of the facts surrounding St. Paul’s rescission of the insurance

policy, it is undisputed that Atmel did not identify any problems with Seagate or the allegedly defective

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1

 Royal defended Atmel in the Seagate Action subject to a reservation of rights. Atmel states it

incurred approximately $7.4 million in defense fees and costs in the Seagate Action, and that Royal paid

approximately $3.7 million. See Supplemental Knox Decl. 

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computer chips on its applications for insurance. The errors and omissions application asked: “Does anyone

in your organization have knowledge or information of any act, error or omission which might reasonably be

expected to result in an Errors & Omissions claim?” Runkel Decl., Ex. E. The general liability application

similarly asked Atmel to identify “all claims or occurrences that may give rise to claims for the prior 5 years.”

Id. at Ex. F. 

After it was sued in July of 2002, Atmel tendered the Seagate Action to St. Paul and to its previous

insurer, Royal Indemnity Company, which had provided Atmel with insurance through December 31, 2001.1

Atmeland St. Paul characterize the events thatfollowed the tender in markedly different ways. Atmel contends

that after St. Paul acknowledged notice of the lawsuit on August 20, 2002, it began a “fishing expedition” by

unreasonably requesting more and more information while refusing to defend in the meantime. St. Paul, in

contrast, claims that Atmel failed to cooperate with its investigation into the claim, and that Atmel was not

forthcoming about the extent or nature of its knowledge of the problems with Seagate. It is undisputed that

Atmel provided St. Paul with two boxes of documents regarding the Seagate Action in October 2003. The

parties exchanged a series of letters between February and July 2004 regarding whether St. Paul had a duty

to defend Atmel in the Seagate Action, and relatedly whether St. Paul was entitled to rescind the policy

because Atmel should have disclosed any issues related to Seagate on its insurance applications. 

On September 27, 2004, Atmelfiled the instant lawsuit seeking damages and declaratory relief against

St. Paul for breach of contract and breach of the implied covenant of good faith and fair dealing. St. Paul

counterclaimed, alleging rescission, breach of contract, intentional misrepresentation/ concealment, negligent

misrepresentation, and breach of the implied covenant ofgood faith and fair dealing. St. Paul has also raised

rescission as one of several affirmative defenses. 

On November 2, 2004, after this lawsuit was filed, St. Paul tendered rescission of the policy and

offered Atmela check for the premiums paid to date, stating “St. Paul hereby rescinds the above-referenced

policiesin their entirety, rendering them void frominception.” Cusack Decl., Ex. T. Atmel rejected the tender

of rescission on November 5, 2004, and returned the proffered check.

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LEGAL STANDARD

Summary adjudication is proper when “the pleadings, depositions, answers to interrogatories, and

admissions on file, together with affidavits, if any, show that there is no genuine issue as to any materialfact and

that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).

In a motion forsummary judgment, “[if] the moving party forsummary judgment meets itsinitialburden

ofidentifying forthe court those portions of the materials on file that it believes demonstrate the absence of any

genuine issues ofmaterialfact, the burden of production then shiftsso that the non-moving party mustsetforth,

by affidavit or as otherwise provided in Rule 56, specific facts showing that there is a genuine issue for trial.”

See T.W. Elec. Service, Inc., v. Pac. Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing

Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 317 (1986). In judging evidence at the summary

judgment stage, the Court does not make credibility determinations or weigh conflicting evidence, and draws

all inferences in the light most favorable to the non-moving party. See T.W. Electric, 809 F.2d at 630-31

(citing MatsushitaElec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348 (1986));

Ting v. United States, 927 F.2d 1504, 1509 (9th Cir. 1991). The evidence presented by the parties must

be admissible. Fed. R. Civ. P. 56(e). Conclusory, speculative testimony in affidavits and moving papers is

insufficient to raise genuine issues of fact and defeat summary judgment. Thornhill Publ’g Co., Inc. v. GTE

Corp., 594 F.2d 730, 738 (9th Cir. 1979). 

DISCUSSION

Atmel seeks an order granting partialsummary judgment on the following three issues:(1) that St. Paul

breached its duty to defend Atmel in the Seagate action, notwithstanding St. Paul’s allegations of rescission,

and is liable for Atmel’s unreimbursed defense costs unless and until it is adjudicated that the policy is

rescinded; (2) that Civil Code § 2860, which limits the rates that insurers pay independent counsel when an

insurer’sreservation ofrights creates a conflictofinterest, has no relevance to the measure ofAtmel’s damages

for St. Paul’s breach of its duty to defend; and (3) that the Fraud and Misrepresentation clause contained in

the policy requires St. Paul to prove intentional fraud in order to rescind (and for this reason St. Paul’s cause

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of action for negligent misrepresentation should also be dismissed). 

1. Duty to Defend/Unilateral Rescission

Atmel contends it is entitled to summary judgment on the issue ofwhether St. Paul violated its duty to

defend Atmel in the Seagate action. Atmel argues that the allegations of the Seagate complaint, the terms of

the St. Paul policy, and other extrinsic evidence, created the potential for covered liability. Therefore, Atmel

argues, St. Paul was obligated to assume the defense, under a reservation ofrightsifit wished, unless and until

it could conclusively establish its right to rescind. Atmelcontends that St. Paul was not entitled to unilaterally

rescind the policy and instead should have sought rescission judicially. 

In response, St. Paul contends that it was entitled to unilaterally rescind the policydue to Atmel’sfailure

to disclose the problems with Seagate in its application for insurance, and thus the insurance contract was

retroactively null and void. St. Paul argues that the cases relied upon by Atmel which discuss an insurer’s duty

to defend are distinguishable because they all presume the existence of a valid contract. Here, St. Paul

contends, there was no valid contract because St. Paulrescinded the policy. Thus, according to St. Paul, there

is no breach of the duty to defend unless the Court first sets aside St. Paul’s rescission as improper. 

None ofthe cases cited by the parties are directly on point. The cases relied on by Atmel provide that

an insurer has a duty to defend any time there is a potential for coverage, even if coverage is ultimately found

lacking. See, e g., Montrose Chemical Corp. v. Superior Court, 6 Cal.4th 287, 299 (1993); Amato v.

Mercury Cas. Co., 18 Cal. App. 4th 1784, 1791-92 (1993). These cases are distinguishable, however,

because they involved disputes over coverage, not disputes regarding the underlying validity of the policies at

issue. These cases do not address the issue presented here regarding whether an insurer has a duty to defend

notwithstanding the fact that it has rescinded an insurance policy, if the insured disputes the propriety of the

rescission.

Although none ofthe authorities cited by the parties squarely answer this question, case law, CivilCode

§ 1691, and the Insurance Code suggest that there is no duty to defend if an insurer has unilaterally rescinded

a policy unless and until the rescission has been set aside. The California Insurance Code allows an insurer to

rescind a policy if the insured has concealed or misrepresented material facts in its application for insurance.

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See Cal. Ins. Code § 331 (“Concealment, whether intentional or unintentional, entitles the injured party to

rescind insurance.”); § 359 (“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.”). Civil

Code § 1691 sets forth the procedure a party must follow in order to effect a rescission of a contract. See Cal.

Civ. Code § 1691 (statingrescinding party must give notice ofrescission to the other party and restore, or offer

to restore, the consideration provided). 

Where grounds for rescission exist and the insurer properly exercises itsright to rescind, the insured’s

contract rights are extinguished ab initio (as if the policy had never existed). See Cal. Ins. Code § 359;

Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal. App. 3d 169, 182 (1988). An insurer may avoid any

liability for benefits provided under the policy, even on pending claims: “[A] Rescission effectively renders the

policy totally unenforceable from the outset, so that there never was any coverage, and therefore no benefits

are payable.” Sogomonian, 198 Cal. App. 3d at 182; see also Cigna Prop. & Cas. Ins. Co. v. Polaris

Pictures Corp., 159 F.3d 412, 419 (9th Cir. 1998) (“The district court correctly determined as a matter of

law that if Cigna prevailed on its rescission claim, Polaris’ counterclaims [for breach of insurance contract]

necessarily would be defeated.”). 

The California Court of Appeals’ decision in Sogomonian, authored by Justice Walter Croskey, is

particularly instructive. In that case, the court found that defendant homeowners had made material

misrepresentations in their application for homeowners insurance, and held that the insurance company was

entitled to rescission. 198 Cal. App. 3d at 181-82. The court noted that rescission is retroactive to the time

that the representation became false, and thus avoids liability even on pending claims. Id. at 182. The court

rejected the defendants’ argument,similarto plaintiff’s position here, that the insurance company had statutory

obligations notwithstanding a rescission. The defendant insureds in Sogomonian argued that the insurance

company had violated itsstatutory obligations under Insurance Code § 790.03, and that the defendants’ right

to recover damages for such violations transcended rescission of the policy. The court noted that “[t]here is

some authority for the proposition that an insurer owes a duty to the insured under section 790.03, subdivision

(h) even where it is established that there is no coverage and thus no duty either to indemnify or defend.

However, this may well be appropria te where the dispute is limited to the question of coverage as to a

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particular claim, since there still remains viable the underlying relationship of insurer-insured. But what of the

circumstance where the dispute between the insurer and the insured goes beyond the issue of coverage and

results in the rescission of the entire contract of insurance?” The court continued, 

A contract is extinguished by its rescission. The consequence of rescission is not only the

terminationoffurther liability, but also the restoration ofthe parties to their former positions by

requiring each to return whatever consideration has been received. Here, this would require

the refund by Imperial of any premiums and the repayment by the defendants of any proceed

advance which they may have received. The policy would be “extinguished” ab initio, as

though it had never existed. In other words, defendants, in law, never were insureds under a

policy of insurance. That status cannot exist in a vacuum, but must necessarily depend upon

the existence of a valid policy of insurance. No compelling reason has been suggested to us,

nor can we conceive of any, as to why defendants, having obtained the policy upon the basis

ofmaterialconcealment, should now have a greater right under section 790.03, subdivision(h)

than a party whomImperialmay have declined to insure because oftruthfulanswers in a policy

application.

Id. at 183-84 (internal quotations and citations omitted). 

Plaintiff contends that St. Paul had a duty to defend unless and until a court enforced its rescission of

the policy. However, neither the Insurance Code nor case law imposes such a requirement. See Golden

Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal. App. 4th 1372, 1389 (1993) (“Absent grounds for rescission,

there is nothing the insurer can unilaterally do to avoid liability under the policy once the contingency insured

against occurs.”) (emphasis added); Harrison v. Connecticut Mut. Life Ins. Co., 771 F. Supp. 1053, 1056

(N.D. Cal. 1991) (“Where the proceduralprerequisites ofsection 1691 are met, and there is valid substantive

ground for rescission, unilateral rescission occurs. It is not necessary to follow with a lawsuit in order to

effectuate the rescission.”). 

The cases cited by plaintiff do not hold otherwise. In 909 Geary Street, LLC v. Admiral Insurance

Company, 2002 WL 253946 (N.D. Cal. Feb. 8, 2002), and Perini Corporation v. Orion Insurance

Company, 331 F. Supp. 453 (E.D. Cal. 1971), the courts enforced “service of suit” clauses in insurance

policies which allowed the plaintiff insureds to select the forum for litigation. The courts enforced the clauses

and remanded the cases to state court, and in so doing rejected the insurers’ arguments that because the

insurance companies had rescinded the policies, the “service ofsuit” clauses were ineffective. See 909 Geary

St., 2002 WL at *2; Perini Corp., 331 F. Supp. at 457. Both courts, however, explicitly noted that they were

not addressing the merits ofthe insurer’srescission defenses. Id. Although these cases provide some support

for plaintiff’s position that the contract is still in effect and enforceable unless and until a court has ruled

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 Sogomonian pre-dated the California Supreme Court’s decision in Moradi-Shalal v. Fireman’s

Fund Insurance Companies, 46 Cal.3d 287 (1988), which held that there is no private right of action to

enforce Cal. Ins. Code § 790.03 (h).

7

otherwise, neither case holds that an insurance company may be found substantively liable under a rescinded

policy, which is the finding that plaintiff seeks here. Instead, the courts in 909 Geary Street and Perini

enforced procedural clauses regarding the forum for litigation, and both courts specifically noted that the

decision to remand was not a decision on the substantive merits of the insurer’s rescission claim. Id.

Plaintiff’s reliance on Maniar v. Capital Bank of California, 1993 WL 515880 (N.D. Cal. Dec. 6,

1993), is also unavailing. In that case, a party attempted to rescind a contract, and after the non-rescinding

party refused to take back the consideration, the rescinding party sought judicial enforcement. The Maniar

court held that in those circumstances, the contract was “voidable” but not yet void, and the unilateralrescission

is revocable until effectuated by the court: “[T]he possibility remains thatthe court may find insufficient grounds

for rescission . . . and conclude that the contract has in fact not been rescinded.” Id. at *3. The court

concluded that the rescission was improper, and found in favor of the non-rescinding party. Notably, the

Maniar court did not, as plaintiff asks this Court to do, first analyze whether the rescinding party had breached

its obligations under the contract and then determine whether the rescission was proper. 

Plaintiff contends that allowing unilateral rescission without judicial approval would allow for an

anomalous result:the carrier could delay defendingjustbyalleginggrounds forrescission, thenwhen the insured

filessuit, it could tender rescission and vitiate not only its duty to defend but also the insured’s declaratory relief

and breach of contract duties. However, the Sogomonian court rejected a similar argument, stating “[o]ur

conclusion here should notresult in an assumption by insurersthat policy liability can, with impunity, be avoided

or delayed by assertion of a claim for rescission. That is a tactic which is fraught with peril. Where no valid

ground for rescission exists, the threat or attempt to seek such relief may itself constitute (1) a breach of the

covenant of good faith and fair dealing which is implied in the policy and/or(2) the commissionof one or more

of the unfair claims settlement practices proscribed by Insurance Code section 790.03, subdivision (h).”

Sogomonian, 198 Cal. App. 3d at 185 n.16.2

Here, it may be the case that St. Paul’s rescission was improper and that Atmel is entitled to relief.

However, plaintiff asks this Court to skip the necessary first step of determining whether the rescission was

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 The other primary case plaintiff cites to argue that St. Paul is liable under the policy until the rescission

is judicially approved is inapposite. See National Steel Corp. v. Golden Eagle Ins. Co., 121 F.3d 496 (9th

Cir. 1997) (holding that an insurance company breached its duty to defend because there was a possibility of

coverage under the policy; policy was not rescinded).

4

 At oralargument plaintiffraised forthe first time the argument that St. Paul’s rescissionwas improper

under California Insurance Code § 650. In response, defendant contended that notwithstanding the language

of§ 650, it was not precluded frombringing a counterclaim for rescission or raising rescission as an affirmative

defense. Plaintiff did not seek summary judgment on this issue (nor on the more generalissue ofthe propriety

of St. Paul’s rescission), and the parties have not briefed this matter. Accordingly, the Court expresses no

opinion at this time regarding whether St. Paul’s rescission comported with § 650, or what consequences flow

from non-compliance with that Section. 

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valid. Unless and until the Court concludes that defendant’s rescission was improper, it is premature to evaluate

whether defendant breached any obligations under the policy. Maniar does not compela finding that St. Paul

breached its duty under the policy independent of analyzing whether St. Paul’s rescission of the policy was

proper. To the contrary, Maniar simply holds in a situation where the non-rescinding party objects to a

rescission – as is the case here – the rescission is not finalized and may be set aside as improper by a court.

As in Maniar, this Court may later conclude that St. Paul’s rescission of the policy was improper, and at that

time the Court would set aside the rescission and determine the parties’ rights and obligations under the policy.3

Here, St. Paul argues that there never was a valid contract between Atmel and St. Paul because Atmel

failed to disclose material facts about problems with Seagate. If this is true, and St. Paul was entitled to

rescission, then the legaldutyto defend was never triggered. Because the parties dispute virtually all of the facts

surrounding the propriety ofSt. Paul’s rescission and whether Atmelimproperly failed to disclose the Seagate

issues on its insurance application, summary judgment is not appropriate.4

2. Damages and Civil Code § 2860

Atmelseeks a ruling fromthe Court that California CivilCode § 2860 has no relevance to the measure

of Atmel’s damages for St. Paul’s breach of its duty to defend. Civil Code § 2860 addresses a carrier’s

obligations to provide independent counselto defend its insured when the carrier’s reservation ofrights creates

a conflict. Section 2860(c) provides, among other things, that “[t]he insurer’s obligations to pay fees to the

independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to

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attorneys retained by it in the ordinary course of business in the defense of similar actions in the community

where the claim arose or is being defended.” Cal. Civ. Code § 2860(c). Plaintiff contends that because St.

Paul did not defend it in the Seagate Action, if St. Paul breached its duty to defend it cannot take advantage

of the rate limitations set forth in § 2860(c).

St. Paul contends that it is premature for the Court to address this issue because there is no contract

of insurance, and thus no breach of the duty to defend, unless and until the Court sets aside St. Paul’s

rescission. Although the Court has not yet made any finding regarding whether defendant breached a duty to

defend, the Court nevertheless concludes that the issue of whether damages are limited by Civil Code § 2860

presents a pure legalquestion appropriate forsummary judgment, and that the resolution of this issue may help

focus discovery and the remaining litigation of this case. 

The Court concludes that if plaintiffis able to establish a breach of the duty to defend, its damages are

not limited by California Civil Code § 2860. St. Paul argues that § 2860 applies because if it had defended

Atmel in the Seagate Action, it would have done so under a reservation of rights. This argument misses the

point, however, because as numerous courts have recognized, “[t]o take advantage of the provisions of §

2860, an insurer must meet its duty to defend and accept tender of the insured’s defense, subject to a

reservation ofrights.” Concept Enterprises, Inc. v.Hartford Ins.Co. of the Midwest, 2001 WL 34050685,

at *3 (C.D. Cal. May 22, 2001); see also California v. Pacific Indem. Co., 63 Cal. App. 4th 1535, 1544

(1998) (noting the trial court’s unchallenged finding “that [the insurer] had materially breached its duty to

defend, and therefore had forfeited itsright to participate in or controlthe . . . defense, whether based on Civil

Code section 2860 or otherwise . . . .”); Foxfire, Inc. v. New Hampshire Ins. Co., 1994 WL 361815, at *3

(N.D. Cal. July 1, 1994). Here, it is undisputed that St. Paul did not defend Atmelin the Seagate Action, and

thus the Court concludes defendant cannot avail itself of the protections and limitations set forth in § 2860.

Relatedly, St. Paul contends that if Atmel’s damages are not limited by § 2860, then Atmel will be

allowed a double recovery and will be placed in a position better than it would have been in the absence of any

breach by St. Paul. St. Paul contends that if it had defended Atmel subject to a reservation of rights, St. Paul

and Royal would have shared the defense costs under § 2860; allowing St. Paul to recover damages above

and beyond what Royal has already paid, St. Paul argues, will compensate Atmel beyond just contract

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 The Court notes that in itsreply brief, Atmelstates that whether Royal was entitled to any benefit of

§ 2860(c), or ifso at whatrates, remained in dispute between Atmeland Royalthroughout the SeagateAction.

It is unclear whether there is a current dispute between Atmeland Royalregarding Royal’s payment of defense

costs, and in any event, any such dispute is irrelevant to whether St. Paul had an independent duty to defend

the Seagate Action.

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damages and instead is akin to a punitive award. 

However, as discussed above, St. Paul’s argument is premised upon what would have happened if it

had defended Atmelsubject to a reservation of rights. St. Paul may very well be correct that if it had defended

Atmel subject to a reservation of rights, St. Paul and Royalwould have shared the § 2860 costs.5 However,

St. Paul did not defend Atmel. The cases cited by St. Paul do not support its position; instead, they simply hold

thatwhere an insured is covered by multiple insurance companies, the insured is not entitled to more than 100%

of the totaldefense costs. See Emerald Bay CommunityAss’n v. Golden Eagle Ins. Corp., 130 Cal. App.

4th 1078, 1088-89 (2005) (holding insured did not have contract damages because 100% of defense costs

paid by two insurers; also stating that “[t]he general measure ofdamages for a breach ofthe duty to defend an

insured, even ifit is ultimately determined there is no coverage under the policy, are the costs and attorney fees

expended by the insured defending the underlying action.”); Prichard v.LibertyMut.Ins. Co., 84 Cal. App.

4th 890, 909 (2000) (holding where multiple insurers potentially provide coverage, insured cannot insist the

insurers should each pay the whole of attorneys’ bill); cf. Fireman’s Fund Ins. Co. v. Maryland Cas. Co.,

65 Cal. App. 4th 1279, 1283 (1998) (“[W]here there are several policies of insurance on the same risk and

the insured has recovered the full amount ofitsloss fromone or more, but not all, of the insurance carriers, the

insured has no further rights against the insurers who have not contributed to its recovery.”). Here, it is

undisputed that Atmel has unreimbursed defense costs. 

St. Paul has also moved to strike plaintiff’s Supplemental Declaration of Shelley Knox under Federal

Rules of Evidence 401 and 403 as irrelevant and confusing. The Court DENIES the motion to strike the

declaration, because the amount that Atmel paid to defend the Seagate Action, and the amount covered by

Royal, is not irrelevant to an eventual determination of damages, should the Court ever reach that issue.

3. The Fraud and Misrepresentation Clause 

Plaintiffcontendsthata “Fraud and Misrepresentation” clause contained in the insurance policyrequires

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St. Paul to prove intentional fraud in order to rescind the policy. The Fraud and Misrepresentation clause in

the policy provides:

This policy is void if you or any other protected person hide any important information from

us, mislead us, or attempt to defraud or lie to us about any matter concerning this insurance –

either before or after a loss. Of course, everyone makes mistakes. Unintentional errors or

omissions won’t affect your rights under this policy.

Cusack Decl., Ex. F.

Atmel argues that this clause sets the standard for rescission at intentional fraud. Atmel contends that

notwithstanding the various Insurance Code sections permitting rescission based on unintentional or negligent

misrepresentation or concealment in connection with the application process, defendant waived its right to

material information through this clause pursuant to Cal. Ins. Code § 336, which provides, “[t]he right to

information of material facts may be waived, either (a) by the terms of insurance or (b) by neglect to make

inquiries as to such facts, where they are distinctly implied in other facts ofwhich informationis communicated.”

Plaintiff’s argument is not persuasive. The plain language of the Fraud and Misrepresentation clause

does not waive St. Paul’s right to materialinformation. Instead, the Fraud and Misrepresentation clause simply

states that a policy is void if an insured or any other protected persons “hide any important information from

us, mislead us, or attempt to defraud or lie to us about any matter concerning this insurance – either before or

after a loss. . . . Unintentional errors or omissions won’t affect your right under this policy.” An insurer’s

statement that a party’s rights will not be affected due to unintentional errors or omissions is not tantamount to

the insurer’s waiver of its statutory right to material information in the application process. 

Moreover, as St. Paul notes, the questions in the application and the certificationAtmelwas required

to sign as part ofthe application demonstrate that St. Paul did not waive its right to any material information in

the application process. See Runkel Decl., Exs. E & F; see also Thompson v. Occidental Life Ins. Co., 9

Cal.3d 904, 916 (1973) (“The fact that the insurer has demanded answers to specific questions in an

application for insurance is in itself usually sufficient to establish materiality as a matter of law.”) (citations

omitted).

California courts have held language similar to the Fraud and Misrepresentation clause inapplicable to

rescission of a policy based on misrepresentation and concealment in a policy application. In Mitchell v.

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United Nat’l Ins. Co., 127 Cal. App. 4th 457 (2005), the court considered whether a standard “fraud and

concealment” clause, mandated by the California statutory fire insurance policy form, and which requires

intentional misrepresentation, precluded an insurer from rescinding an insurance policy in the absence of

intentional fraud. The mandatory standard form policy at issue in Mitchell is similar to the Fraud and

Misrepresentation clause in the insurance policy in this case. It stated, 

Concealment, fraud: This entire policy shall be void if, whether before or after a loss, the

insured has willfully concealed or misrepresented any materialfact or circumstance concerning

this insurance or the subject thereof, or the interest ofthe insured therein, or in any case of any

fraud or false swearing by the insured relating thereto.

Id. at 470. See Cal. Ins. Code § 2071. 

The Mitchell court concluded that this clause did not affect or limit an insurer’srescissionrightsunderInsurance

Code §§ 331 and 359. The court noted that these sections govern disclosure obligations “directed specifically

at the formation of the insurance contract,” while § 2071 is intended to apply in connection with a claim for

policy benefits. See also Cummings v.Fire Ins. Exch., 202 Cal. App. 3d 1407 (1988) (holding insured had

engaged in intentional fraud in connection with a claim, and noting in dicta that “section 334 [defining

“materiality”] is not applicable to the instant case because it relates to statements made in applications for

insurance, notstatements made in an insured’s claim. The materiality of a representation made in an application

for insurance is determined by a subjective standard . . . and rescission will be allowed even though the

misrepresentation was the result of negligence or the product of innocence.”) (emphasis in original).

Plaintiff argues thatMitchell is distinguishable because the concealment and fraud clause at issue in that

case was statutorily mandated, and thus the court was required to reconcile that mandatory language with the

rescission provisions ofInsurance Code §§ 331 and 359. Although plaintiff is correct that the concealment and

fraud clause inMitchellwas statutorily mandated, there is nevertheless no persuasive or logicalreason to arrive

at a different interpretation of a very similar clause in this case. As St. Paul notes, common sense dictates that

the Fraud and Misrepresentation clause, which is contained in the policy issued after the application has been

approved, does not apply to misrepresentation or concealment in an insurance application. 

The cases and statutes plaintiff relies on are inapposite. The fact that the California Insurance Code

permits or requires carriers to limit their rescission rights in life insurance and disability policies has no bearing

on the interpretation of the specific Fraud and Misrepresentation clause at issue in this case. Similarly, the outCase 3:04-cv-04082-SI Document 254 Filed 10/11/05 Page 12 of 13
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of-state authority plaintiff cites (on page 16 of the opening brief) is not relevant because the courts in those

cases were not interpreting California law. 

CONCLUSION

Forthe foregoing reasons and for good cause shown, the Court hereby GRANTS inpart and DENIES

in part plaintiff’s motion for partialsummary judgment [Docket # 73] and DENIES defendant’smotionto strike

the Declaration of Shelly Knox [Docket # 167].

IT IS SO ORDERED.

Dated: October 7, 2005

 

SUSAN ILLSTON

United States District Judge

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