FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES FIDELITY AND 

GUARANTY COMPANY,

Plaintiff-Appellee,

v.

LEE INVESTMENTS LLC, DBA The

Island, No. 08-17753 Defendant-Appellant,

D.C. No. and 

1:99-cv-05583-

AMERICAN SPECIALTY INSURANCE OWW-SMS

SERVICES; AMERICAN SPECIALTY

RISK MANAGEMENT SERVICES LLC,

Counter-defendants-Appellees,

AON RISK SERVICES, INC.,

Defendant-3rd-party-plaintiffcounter-defendant-Appellee. 

5179
UNITED STATES FIDELITY AND 

GUARANTY COMPANY,

Plaintiff-counter-defendantAppellee,

v.

LEE INVESTMENTS LLC, DBA The

Island,

Defendant-counter-claimantAppellant,

No. 09-16962

v.

D.C. No. AMERICAN SPECIALTY INSURANCE  1:99-cv-05583- SERVICES; AMERICAN SPECIALTY OWW-SMS RISK MANAGEMENT SERVICES LLC,

Counter-defendants-Appellees, OPINION

and

RICHARD K. EHRLICH; REXFORD

PROPERTIES, LLC, a California

limited liability company,

Defendants-counter-claimants,

v.

AON RISK SERVICES, INC.,

Third-party-defendant-Appellee. 

5180 U.S. FIDELITY v. LEE INVESTMENTS
Appeal from the United States District Court

for the Eastern District of California

Oliver W. Wanger, Senior District Judge, Presiding

Argued and Submitted

February 16, 2011—San Francisco, California

Filed April 18, 2011

Before: Mary M. Schroeder and Sidney R. Thomas,

Circuit Judges, and Samuel Conti, Senior District Judge.*

Opinion by Judge Thomas

*The Honorable Samuel Conti, Senior District Judge for the U.S. District Court for Northern California, San Francisco, sitting by designation.

U.S. FIDELITY v. LEE INVESTMENTS 5181
COUNSEL

Daniel O. Jamison and Keith M. White, Dowling, Aaron &

Keeler, Inc., Fresno, California, for appellant/defendant,

counter-claimant, third-party plaintiff, and third-party

counter-defendant Lee Investments, LLC.

Jeffrey A. Charlston and Bruce T. Smith, Charlston, Revich

& Wollitz, LLP, Los Angeles, California, for appellee/plaintiff United States Fidelity and Guaranty Company

and for appellees/counter-defendants American Specialty

Insurance Services, Inc., and American Specialty Risk Management Services, LLC.

Margaret L. Parker, Matthew S. Covington, and Stephen

Chiari, DLA Piper LLP, San Francisco, California, for appellee/defendant, third-party plaintiff, counter-defendant Aon

Risk Services, Inc.

OPINION

THOMAS, Circuit Judge:

In this appeal, we consider whether a federal district court

had subject matter jurisdiction over an insurance company’s

diversity action seeking rescission of a workers’ compensation policy and, if so, whether it was required to dismiss the

case because exclusive jurisdiction was vested by state law in

a state workers’ compensation agency. We conclude that the

district court had subject matter jurisdiction and properly

denied the motion to dismiss. We affirm.

I

This seemingly ab aeterno litigation originated in a simple

event: an accident at “The Island,” a California waterpark.

5184 U.S. FIDELITY v. LEE INVESTMENTS
The incident spawned parallel actions that proceeded in different venues over many years, ultimately resulting in a judgment in which The Island’s insurer prevailed. 

The mishap occurred when a maintenance worker (“the

Employee”) was helping to assemble a five-story water slide.

A metal bar fell from a forklift and struck her head, causing

serious injuries. Prior to the accident, The Island’s owner, Lee

Investments, LLC (“the Employer” or “Lee”), had purchased

a workers’ compensation policy (“the Policy”) underwritten

by United States Fidelity & Guaranty Co. (“the Insurer”).1

The Insurer contends that it agreed to issue the Policy contingent on the Employer’s representations that Island employees would not be “performing construction operations, as

opposed to performing duties in the day-to-day operation of

a water park.” Thus, the Insurer claimed that the Employer

had not told the whole truth in its insurance application, and

that the lie had wrongfully induced it to provide coverage.

The Employee filed a claim for benefits with California’s

Workers’ Compensation Appeals Board (“the State Board”)

and the Insurer began paying benefits to the Employee pursuant to the Policy. Shortly thereafter, the Insurer filed this federal action against the Employer seeking Policy rescission and

related relief on account of the Employer’s alleged misrepresentations. 

The Employee initially filed, but later abandoned, a request

that the State Board arbitrate the claims asserted by the

Insurer in the federal action. Years later, the Employer

revived the Employee’s request. The Insurer objected, and a

state administrative law judge decided to hold a hearing on

1The Policy was marketed by American Specialty Insurance Services,

Inc., the Insurer’s managing general agent (“the Insurer’s Agent”). The

Employer purchased the policy through insurance broker Aon Risk Services, Inc. (“the Broker”). 

U.S. FIDELITY v. LEE INVESTMENTS 5185
the objections. The hearing never occurred, and the issue was

left adrift.

In federal court, the Employer joined a motion to dismiss

raised by another party alleging that California law committed

adjudication of the Insurer’s action to the State Board. The

district court denied the dismissal motion. Subsequently, the

Employer, the Insurer, the Insurer’s Agent, and the Broker

filed claims against one another and additional parties.2

The case was bifurcated, with some of the claims tried to

a jury and others reserved for bench trial. The jury returned

special verdicts in favor of the Insurer and against the

Employer. The jury found that the Employer had made an

intentional misrepresentation of material fact and concealed

material facts during the policy application process. Based on

that determination, the jury found that the Insurer was entitled

to rescind the Policy and to recover restitution of payments it

made under it. The jury found against the Employer on all of

its affirmative defenses and counterclaims, and found in favor

of the Insurer on all but one of its affirmative defenses to the

Employer’s counterclaims.

The district court entered partial judgment on the jury verdict. The Employer appealed, but its appeal was dismissed as

premature. The Employer filed various post-trial motions

seeking relief, which the district court denied. The district

court then held a bench trial on some of the remaining issues,

including the Insurer’s claims to restitution of attorneys fees

it paid to defend the Employer in the State Board proceedings

and to prejudgment interest. 

More than a year after the federal jury entered verdicts in

favor of the Insurer on its claims against the Employer, and

2The additional parties include the Employer’s alleged alter egos, Richard K. Ehrlich and Rexford Properties, LLC (“the Alter Egos”), who were

part of the action but not this appeal. 

5186 U.S. FIDELITY v. LEE INVESTMENTS
while the district court was deliberating on the issues presented in the bench trial, the Employer attempted an exodus

from the federal action and again requested that the State

Board arbitrate the Insurer’s claims. The Insurer asked the

federal court to enjoin the State Board proceedings. The court

granted the Insurer’s motion, observing that:

The issues surrounding issuance of the insurance

policy have been fully litigated and jury verdicts

entered. Lee sought a jury trial, and only when the

jury decided every issue against Lee, now seeks to

avoid the effects of the trial following which the Partial Judgment was entered. It will be the height of

judicial waste to permit Lee to yet again, a fourth

time, seek to relitigate the issues, going backward to

an administrative hearing.

The court also noted that “Lee’s revisionist assertion that it

was dragged kicking and screaming into the federal litigation

is categorically belied by the record.”

The court then granted the Insurer’s motion for summary

judgment on the Employer’s counterclaims for breach of contract and the implied covenant of good faith and fair dealing.

The court subsequently issued its decision on the issues presented in the bench trial and granted the Insurer’s request for

the entry of judgment pursuant to Rule 54(b). In addition to

the amounts awarded by the jury, the court awarded the

Insurer restitution of the amount it spent for the Employer’s

legal defense in the State Board proceedings and prejudgment interest.

In sum, after a jury trial, a bench trial, and post-trial

motions, the Insurer won its claim for rescission, and was

awarded restitution damages from the Employer in the

amount of $841,708.13, to reimburse the Insurer for the benefits it paid under the Policy less premiums the Employer paid

the Insurer. The Insurer was granted prejudgment interest

U.S. FIDELITY v. LEE INVESTMENTS 5187
against the Employer in the amount of $394,955.03 and was

permitted to recover all costs of suit. Judgment was entered

in favor of the Insurer on all claims the Employer brought

against it. The Broker was granted judgment on all of the

Employers’s claims against it and, conversely, the Employer

was granted judgment on all of the Broker’s claims against it.

No damages were awarded as between the Broker and the

Employer and each side was ordered to bear its respective

costs. The court also resolved certain claims involving the

Alter Egos.3

Meanwhile, over in the state proceedings, the request that

the State Board re-adjudicate the Insurer’s claims for rescission and restitution remained enjoined. The Employer and the

Employee reached a settlement of their separate disputes

before the State Board, but the deal did not resolve any of the

issues in the instant case.4

In the end, when the smoke cleared, the Insurer prevailed

in the main action and the parallel proceeding remained in

limbo. This appeal followed.

II

The Employer contends that the district court lacked subject matter jurisdiction over the Insurer’s claims. We disagree.

The Insurer is a corporation duly organized and existing under

3The district court found against the Alter Egos as to their claims

against the Insurer. The district court severed claims filed by the Insurer

against the Alter Egos for separate trial in the event that the Insurer prevailed on its rescission and restitution claims. Thus, those issues were left

behind for later resolution and are not part of this appeal.

4The Insurer and The Broker have suggested that the settlement agreement between the Employer and the Employee has mooted certain of the

Employer’s claims in this appeal. We disagree. Whatever the case may be

as to resolution of the solitary issue regarding compensation due to the

Employee, it is not relevant to the separate disputes among the Employer,

the Insurer, the Insurer’s Agent, and the Broker. 

5188 U.S. FIDELITY v. LEE INVESTMENTS
the laws of the State of Maryland, with its principal place of

business located in that state. The Employer is a business

entity organized and existing under the laws of the State of

California with its principal place of business located in

Fresno. Because the parties are diverse and because the

amount in controversy exceeded $75,000, the district court

had subject matter jurisdiction over the action. 28 U.S.C.

§ 1332.

The Employer’s arguments to the contrary are not persuasive. First, the Employer argues that by filing the present

action the Insurer improperly removed the Employee’s state

workers’ compensation claim to federal court, thus running

afoul of 28 U.S.C. § 1445(c). Section 1445(c) provides that

“[a] civil action in any State court arising under the workmen’s compensation laws of such State may not be removed

to any district court of the United States.” However, the federal action did not involve an adjudication of the Employee’s

workers’ compensation benefits; it addressed whether the

Employer’s insurance policy had been wrongfully obtained

through misrepresentation. Thus, this action did not “arise

under” California’s workers’ compensation laws.

Furthermore, the Insurer did not “remove” a civil action

from state court; it filed an original claim in federal court. The

Employer urges us to construe the Insurer’s complaint as a de

facto removal and apply the relevant jurisdictional restrictions. However, removal jurisdiction differs from original

jurisdiction and is subject to different constraints. See Hurt v.

Dow Chem. Co., 963 F.2d 1142, 1144-45 (8th Cir. 1992).

There is nothing in the statutory scheme that would allow us

to graft jurisdictional restrictions from one context onto

another. Section 1445(c) “proscribes only the removal of

claims arising under state workers’ compensation statutes.”

Vasquez v. North County Transit Dist., 292 F.3d 1049, 1061

(9th Cir. 2002) (emphasis in original) (citing Horton v. Liberty Mut. Ins. Co., 367 U.S. 348, 352 (1961)). That statutory

restriction on the federal courts’ removal jurisdiction “does

U.S. FIDELITY v. LEE INVESTMENTS 5189
not prohibit plaintiffs from filing such actions directly in federal court.” Id. Nor did the district court appear, deus ex

machina, to wrest control over the litigation from the State

Board. Rather, it addressed the issues put before it in an original federal proceeding. Section 1445(c) does not divest federal courts of jurisdiction over this diversity action.

Second, the Employer argues that the district court was

divested of jurisdiction by 28 U.S.C. § 1359, which provides

that “[a] district court shall not have jurisdiction of a civil

action in which a party, by assignment or otherwise, has been

improperly or collusively made or joined to invoke the jurisdiction of the court.” The purpose of § 1359 is to prevent the

perpetration of fraud on federal courts’ jurisdiction. See Hartog v. Memory, 116 U.S. 588, 590-91 (1886) (citing Williams

v. Nottawa, 104 U.S. 209, 211 (1881)). The Employer has

presented no evidence of fraud or collusion. Its argument is

without merit.

Finally, the Employer claims that the district court lacked

subject matter jurisdiction because California law vests the

State Board alone with jurisdiction to entertain the Insurer’s

claims.5 However, in Begay v. Kerr-McGee Corp., 682 F.2d

1311 (9th Cir. 1982), we rejected the argument that exclusivity provisions in state workers’ compensation laws, like those

in California’s Workers’ Compensation Act,6 could divest

federal courts of subject matter jurisdiction:

[S]tate law may not control or limit the diversity

jurisdiction of the federal courts. The district court’s

5This jurisdictional allegation is distinct from the Employer’s claim that

exclusivity provisions in California law required the district court, in the

proper exercise of diversity jurisdiction, to dismiss the action so that it

could be decided by the State Board. We turn to this claim subsequently.

6

See Cal. Labor Code § 5300 (proceedings “[f]or the recovery of [workers’] compensation, or concerning any right or liability arising out of or

incidental thereto” ”shall be instituted before the [State Board] and not

elsewhere”); see also id. §§ 3600(a), 3602(a). 

5190 U.S. FIDELITY v. LEE INVESTMENTS
diversity jurisdiction is a creature of federal law

under Article III and 28 U.S.C. § 1332(a). Pursuant

to the supremacy clause, section 1332(a) preempts

any contrary state law.

682 F.2d at 1315. Here, as in Begay, “[t]he question is

whether the . . . complaint stated a claim for relief under

[state] law pursuant to [Erie Railroad Co. v. Tompkins, 304

U.S. 64 (1938)], rather than whether the district court lacked

subject matter jurisdiction.” Id. Thus, even if we were to hold

that the exclusivity provisions applied, they would not operate

to divest the federal court of subject matter jurisdiction. 

The district court correctly concluded that it had subject

matter jurisdiction over the action.

III

The State Board did not have exclusive jurisdiction to hear

the Insurer’s claims, as the Employer contends. Therefore, the

district court properly denied the dismissal motion, a decision

we review de novo. Matter of McLinn, 739 F.2d 1395, 1397

(9th Cir. 1984) (en banc).

[1] As a general proposition, federal courts sitting in diversity have authority to decide state law claims seeking rescission of an insurance policy. See, e.g., C.N.R. Atkin v. Smith,

137 F.3d 1169, 1172 (9th Cir. 1998); Gasaway v. Nw. Mut.

Life Ins. Co., 26 F.3d 957, 958 (9th Cir. 1994). However, the

California Workers’ Compensation Act’s exclusivity provisions “are ‘substantive’ provisions which, under Erie, a district court sitting in diversity is bound to follow.” Begay, 682

F.2d at 1318. “ ‘Erie requires that the federal court grant or

withhold relief as the state courts would.’ ” Id. at 1316 (quoting Markham v. City of Newport News, 292 F.2d 711, 718

(4th Cir. 1961)); see Angel v. Bullington, 330 U.S. 183, 187

(1947) (“For purposes of diversity jurisdiction a federal court

U.S. FIDELITY v. LEE INVESTMENTS 5191
is ‘in effect, only another court of the State.’ ” (quoting Guaranty Trust Co. v. York, 326 U.S. 99, 108 (1945)).

Accordingly, we turn to California law and assess whether

it would preclude California state courts from hearing the

Insurer’s claims in favor of the State Board’s exclusive

authority to do so. We are reminded that “ ‘[t]he task of a federal court in a diversity action is to approximate state law as

closely as possible in order to make sure that the vindication

of the state right is without discrimination because of the federal forum.’ ” Ticknor v. Choice Hotels Int’l., Inc., 265 F.3d

931, 939 (9th Cir. 2001) (quoting Gee v. Tenneco, Inc., 615

F.2d 857, 861 (9th Cir. 1980)). Perhaps a better way of putting it is to say that one of the goals in deciding state law

questions is to do no harm to state jurisprudence. 

In analyzing state law in a diversity case, we are bound by

the decisions of the state’s highest court. If the California

Supreme Court has not decided the question, “ ‘we are

required to ascertain from all the available data what the state

law is and apply it.’ ” Soltani v. Western & Southern Life Ins.

Co., 258 F.3d 1038, 1045 (9th Cir. 2001) (quoting Insurance

Co. of Pennsylvania v. Associated Int’l Ins. Co., 922 F.2d

516, 520 (9th Cir. 1990)). In assessing how the California

Supreme Court would resolve the “question—absent controlling state authority—federal courts look to existing state law

without predicting potential changes in that law.” Ticknor,

265 F.3d at 939.

We are also mindful that “[o]nce a diversity case has been

tried in federal court, with rules of decision supplied by state

law under the regime of Erie . . . , considerations of finality,

efficiency and economy become overwhelming.” Caterpillar

Inc. v. Lewis, 519 U.S. 61, 75 (1996) (citation omitted). That

advice is particularly apt in a case that has engaged the federal

courts for more than a decade.

[2] California’s Workers’ Compensation Act grants the

State Board exclusive authority to hear claims “[f]or the

5192 U.S. FIDELITY v. LEE INVESTMENTS
recovery of [workers’] compensation, or concerning any right

or liability arising out of or incidental thereto.” Cal. Labor

Code § 5300(a). The Employer argues that the Insurer’s

claims arise out of or are incidental to the recovery of workers’ compensation. Accordingly, the Employer argues that a

California state court could not entertain the Insurer’s complaint, and therefore that, pursuant to the Erie doctrine, neither can the federal courts. The district court disagreed, and

on at least three occasions overruled objections to the exercise

of its jurisdiction to hear the Insurer’s claims in the face of the

contention that the State Board had exclusive authority to do

so.

While California case law is not conclusive on the matter,7

we are not writing on a tabula rasa, either. The relevant California decisions establish that the State Board does not possess exclusive jurisdiction over the Insurer’s claims.

[3] First, Cal. Labor Code § 5300 does not, by its terms,

apply to the Insurer’s action for rescission. The Insurer’s complaint against the Employer sought a declaration that the Policy was void ab initio and that the Insurer was entitled to

rescind it. The Insurer further sought restitution of all sums

paid by it in connection with claims on the Policy. The relief

the Insurer sought does not involve “the recovery of [workers’] compensation,” nor does it “concern[ ] any right or liability arising out of or incidental thereto.” Cal. Labor Code

§ 5300(a). The Insurer’s claims here have no legal effect on

the Employee’s ability to recover workers’ compensation;

rather, they merely affect who pays those costs—the Insurer,

the Employer, or California’s Uninsured Employers Benefits

Trust Fund. Indeed, the California Supreme Court has confirmed that “[c]auses of action seeking to recover ‘[e]conomic

7

See Charles J. Vacanti, M.D., Inc. v. State Comp. Ins. Fund, 24 Cal.

4th 800, 811 (2001) (“the unabated flow of published decisions clarifying

the scope of workers’ compensation exclusivity suggests considerable

confusion as well as innovative lawyering” (emphasis in original)). 

U.S. FIDELITY v. LEE INVESTMENTS 5193
or contract damages incurred independent of any’ workplace

injury are . . . exempt from workers’ compensation exclusivity.” Vacanti, 24 Cal. 4th at 814 (emphasis and second alteration in original) (quoting Pichon v. Pacific Gas & Electric

Co., 212 Cal. App. 3d 488, 501 (1989)). Thus, while perhaps

prompted by the Employee’s workplace accident, the Insurer’s contract claims are “independent of a compensable injury” under California workers’ compensation law. Id. at 816

(quotation omitted). 

[4] Second, the California Supreme Court has held that

California state courts, and therefore federal courts sitting in

diversity, can entertain such claims. Scott v. Indus. Accident

Comm’n, 46 Cal. 2d 76, 89 (1956). Citing “the stricter rules

governing court procedures and character of proof rather than

the more liberal ones applicable” in administrative arbitrations, the court stated that, “where questions as to . . . insurance carrier liability within the terms of a contract[ ] are

close,” the carrier might “fil[e] a declaratory relief action in

[state] court rather than” before the State Board. Id.8

[5] Third, California law does not authorize the State

Board to award the damages sought by the Employer in its

counterclaims for breach of fiduciary duty, fraud, and negligent misrepresentation. “ ‘[T]he [State Board] cannot award

damages for injuries.’ ” La Jolla Beach & Tennis Club, Inc.

v. Indus. Indem. Co., 9 Cal. 4th 27, 35 (1994) (quoting Scott,

46 Cal. 2d at 83); see id. at 43 (“[A] civil suit for damages

is no more a claim for workers’ compensation benefits than

a criminal or disciplinary action is a civil suit for damages.”);

cf. United Nat. Ins. Co. v. R&D Latex Corp., 242 F.3d 1102,

8

See also U.S. Fidelity & Guaranty Co. v. Superior Court, 214 Cal. 468,

471 (1931) (finding state court jurisdiction where a cause of action

between an employer and its purported workers’ compensation insurance

provider did “not involve the construction of an insurance policy with

respect to coverage thereunder, the recovery of compensation or incidental

liability or the enforcement against an insurance carrier of compensation

liability”). 

5194 U.S. FIDELITY v. LEE INVESTMENTS
1112 (9th Cir. 2001) (“ ‘when other claims are joined with an

action for declaratory relief (e.g., bad faith, breach of contract,

breach of fiduciary duty, rescission, or claims for other monetary relief), the district court should not, as a general rule,

remand or decline to entertain the claim for declaratory

relief’ ” (quoting Gov’t Emps. Ins. Co. v. Dizol, 133 F.3d

1220, 1225 (9th Cir. 1998) (en banc)). 

This limitation is consistent with the constant theme generally applicable to administrative agencies: that they are creatures of statute, bound to the confines of the statute that

created them, and lack the inherent equitable powers that

courts possess. Int’l Union of Elec., Radio & Mach. Workers,

AFL-CIO v. NLRB, 502 F.2d 349, 354 n.* (D.C. Cir. 1974).

Further, the matters at hand involve state law questions of

contract formation in which the State Board has no special

expertise. The California Court of Appeals has summarized,

stating that “jurisdiction rests with the courts” over claims “of

bad faith and breach of contract” regarding workers’ compensation insurance policies. Salimi v. State Comp. Ins. Fund, 54

Cal. App. 4th 216, 220 (1997) (collecting cases).

[6] Because it had jurisdiction, the district court did not

abuse its discretion in enjoining the State Board proceedings

after the Insurer’s rescission and restitution claims had been

resolved by the federal jury. See Scott, 46 Cal. 2d at 81

(where there is concurrent jurisdiction and one tribunal has

already assumed jurisdiction, “another tribunal, although it

might originally have taken jurisdiction, may be restrained by

prohibition if it attempts to proceed”). Indeed, the court

served the greater good of “finality, efficiency and economy,”

Caterpillar, 519 U.S. at 75, by declining to allow the

Employer to litigate the primary issues anew a fourth time.

The Employer’s appeal to the Anti-Injunction Act, 28 U.S.C.

§ 2283, is misplaced: nothing in that act “prevent[s] federal

U.S. FIDELITY v. LEE INVESTMENTS 5195
courts from enjoining state administrative proceedings.” Bud

Antle, Inc. v. Barbosa, 45 F.3d 1261, 1271 (9th Cir. 1994).9

In sum, this case does not present a collision between federal and state interests. The district court properly wrote the

final chapter in the case, with the parallel proceeding ultimately having no impact on the final reckoning.

IV

[7] The district court correctly concluded that, under California law, there can be no breach of a duty to defend under

a rescinded insurance policy. Therefore, the Insurer was not

obligated to defend the Employer before the State Board and

in the federal action.10 See LA Sound USA, Inc. v. St. Paul

Fire & Marine Ins. Co., 156 Cal. App. 4th 1259, 1266-71

(2007) (where an insurance policy is “void ab initio,” the

insureds “never had any coverage under [the policy], and [the

insurer] never had a duty to defend or indemnify them”

(emphasis in the original)); Imperial Casualty & Indemnity

Co. v. Sogomonian, 198 Cal. App. 3d 169, 184 (1988) (“upon

a rescission of a policy of insurance, based upon a material

concealment or misrepresentation, all rights of the insured

thereunder (except the right to recover any consideration paid

9At oral argument, the Employer also challenged the district court’s

decision not to abstain from adjudicating the Insurer’s claims. However,

by not “specifically and distinctly” arguing this claim in its opening brief,

the Employer has waived it. United States v. Ullah, 976 F.2d 509, 514 (9th

Cir. 1992). 

10The district court also correctly concluded that under California law

the Insurer adequately reserved its right to reimbursement for costs

expended on the Employer’s defense, see Buss v. Superior Court, 16 Cal.

4th 35, 61 n.27 (1997), and the court did not abuse its discretion in denying the Employer’s request for further discovery on its claims, see California ex rel. California Dep’t of Toxic Substances Control v. Campbell, 138

F.3d 772, 779 (9th Cir.1998) (“District courts have wide latitude in controlling discovery, and their rulings will not be overturned in the absence

of a clear abuse of discretion.” (internal quotation and citations omitted)).

5196 U.S. FIDELITY v. LEE INVESTMENTS
in the purchase of the policy) are extinguished”); see also

Cigna Property and Cas. Ins. Co. v. Polaris Pictures Corp.,

159 F.3d 412, 419 (9th Cir. 1998) (“if [the insurer] prevailed

on its rescission claim, [the insured’s] counterclaims necessarily would be defeated”). Thus, the effect of the judicial rescission was to turn back time, voiding all actions taken under the

Policy. With no effective policy in place, there was no duty

to defend. 

The Employer’s appeal to Buss v. Superior Court, 16 Cal.

4th 35 (1997), is of no avail. There, the California Supreme

Court affirmed that, where an action against an insured mixes

claims that indubitably are covered by an insurance policy

with those that may not be, the insurer has a duty to defend

the entire action. Id. at 49. That such a duty is “an obligation

imposed by law in support of the [insurance] policy,” id. at

48-49, is irrelevant to the Employer’s arguments, as Buss

assumes the presence of a valid policy and never addresses

rescission. Furthermore, with regard to restitution, the Buss

court went on to hold that “[a]s to claims that are not even

potentially covered” by the insurance policy, “the insurer may

indeed seek reimbursement for defense costs” because “ ‘California law clearly allows insurers to be reimbursed for attorney’s fees’ and other expenses ‘paid in defending insureds

against claims for which there was no obligation to defend.’ ”

16 Cal. 4th at 50 (quoting Omaha Indem. Ins. Co. v. Cardon

Oil Co., 687 F. Supp. 502, 504 (N.D. Cal. 1988)). 

[8] Applying this principle to these facts, under California

law, the Insurer was entitled to summary judgment on the

Employer’s claims. Because the Policy was declared void ab

initio, the Insurer had no obligation to defend the Employer

notwithstanding that the Policy, if valid, would have covered

the Employee’s injuries.

V

Reversal is not warranted on the basis of any of the district

court’s pre-trial rulings.

U.S. FIDELITY v. LEE INVESTMENTS 5197
A

[9] The district court did not err in denying the Employer’s

motions in limine which sought to exclude two communications among the Employer, the Broker, and the Insurer’s

Agent that allegedly showed the Employer’s material misrepresentations in the policy application process. In the first letter, the Insurer’s Agent expressed concern to the Broker that

the Employer’s employees were performing construction

duties, and asked for the Broker’s help in proving to the

Insurer that “[c]onstruction has ceased at The Island” and

accordingly that “workers’ compensation claims arising from

construction will not be reported under [the Policy].” In the

second letter, drafted by the Broker to assuage the Insurer’s

concerns and signed by the Employer’s general manager, the

Employer represented to the Insurer’s Agent that The Island

would “no longer employ construction laborers” and that

“[a]ny construction work will be performed by independent

contractors.” It was six months later that the Employee suffered her injury while completing the assembly of a new

water slide.

The Employer contends the letters were not relevant, arguing that the Insurer was required to issue a restrictive policy

endorsement if it did not intend to insure construction activities. However, the Insurer did not argue that the letters modified the Policy. Rather, the Insurer submitted those letters as

evidence that the Employer misrepresented its operations to

procure insurance, justifying the Insurer in rescinding the policy under California law. See Mitchell v. United Nat. Ins. Co.,

127 Cal. App. 4th 457, 468 (2005) (“any material misrepresentation or the failure, whether intentional or unintentional,

to provide requested information permits rescission of the policy by the injured party” (citing Cal. Ins. Code §§ 351, 359;

Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal. App. 3d

169, 179-80 (1988))). The letters were relevant, and the district court properly denied the Employer’s motion in limine.

5198 U.S. FIDELITY v. LEE INVESTMENTS
B

[10] The district court did not abuse its discretion in granting the Insurer’s motions in limine that precluded the

Employer from arguing at trial that the Broker was the Insurer’s agent. The district court held that this theory was not

fairly disclosed in discovery, that the defendants had not had

an opportunity to conduct discovery on the theory or develop

a defense, and that the defendants would be unfairly prejudiced if the court allowed the Employer to present the new

theory at trial. The court did not abuse its discretion in declining to allow the belated assertion of an entirely new theory on

the eve of trial, when discovery would have to be re-opened

and the theory was of dubious merit. See Archer Daniels Midland Co. v. Hartford Fire Ins. Co., 243 F.3d 369, 375 (7th

Cir. 2001) (upholding the exercise of discretion and noting

that “if the destination is fated, it is best to avoid the travail

of the journey”).

C

[11] The district court did not abuse its discretion in granting the Insurer’s and the Broker’s motions in limine precluding the Employer’s experts from testifying as to matters

beyond their expertise and the scope of their expert reports.

The Employer complains that its hands were tied. However,

its experts remained free to articulate the relevant standards of

care and to opine as to whether the Insurer’s and the Broker’s

conduct met their requirements. A district court does not

abuse its discretion in limiting expert testimony to the

expert’s area of expertise and the subjects contained in the

expert’s disclosure. United States v. W.R. Grace, 526 F.3d

499, 503 (9th Cir. 2008).

D

The Employer’s challenge to the district court’s denial of

the Employer’s motion for summary judgment is not properly

U.S. FIDELITY v. LEE INVESTMENTS 5199
before the Court. The Employer has not appealed the district

court order in question, nor could it: after a full trial on the

merits, no appeal can be taken of an order denying summary

judgment. Ortiz v. Jordan, ___ U.S. ___, 131 S.Ct. 884, 889

(2011); accord. Locricchio v. Legal Services Corp., 833 F.2d

1352, 1358-59 (9th Cir. 1987) (“[T]he denial of a motion for

summary judgment is not reviewable on an appeal from a

final judgment entered after a full trial on the merits.”).

E

Finally, the Employer’s complaint about the “morass of

documents” that the Insurer produced prior to the bench trial

provides no cause for reversal.

VI

The district court did not err in its trial rulings. The district

court did not impermissibly prevent the Employer from presenting its theories of the case. Rather, its decisions were in

keeping with its “general ‘gatekeeping’ obligation . . . [as] to

testimony based on ‘technical’ and ‘other specialized’ knowledge.” Kumho tire Co. v. Carmichael, 526 U.S. 137, 141

(1999). A careful reading of the record demonstrates that the

district court fully permitted the Employer to assert its theory.

[12] The further instructions given by the court on professional negligence claims conformed to the requirements that

California law imposes on such claims. In California, negligence claims against insurance brokers are adjudicated

according to the professional negligence standard,11 and

11See Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Assocs.,

Inc., 115 Cal. App. 4th 1145, 1154 (2004) (concluding that, where a negligence claim challenged the failure of an insurance broker to obtain appropriate insurance, “the negligence claim is one for professional

negligence”); Valentine v. Membrila Ins. Servs., Inc., 118 Cal. App. 4th

462, 474-75 (2004). 

5200 U.S. FIDELITY v. LEE INVESTMENTS
“proof of professional negligence requires testimony of

experts as to the standard of care in the relevant community.”

Huang v. Garner, 157 Cal. App. 3d 404, 413 (1984), disapproved on other grounds by Aas v. Superior Court, 24 Cal.

4th 627 (2000). Therefore, the court properly instructed that

expert testimony was required in order to sustain a professional liability claim. The Employer argues that its theories

were not “complex,” but California has yet to adopt a “simplicy of theory” exception to its professional negligence rule.

Rather, California requires expert testimony on the standard

of care “unless the conduct required by the particular circumstances is within the common knowledge of the layman.”

Flowers v. Torrance Memorial Hosp. Med. Ctr., 884 P.2d

142, 147 (Cal. 1994).

VII

Reversal is not warranted on the basis of the district court’s

findings of fact, conclusions of law, or post-trial rulings.

A

The district court’s factual finding that the Insurer was the

real party in interest for purposes of restitution is supported by

the record. The Employer alleged that the Insurer was not the

real party in interest, claiming that it had not actually paid

benefits under the Policy. However, the record contains direct

and uncontradicted evidence of payments by the Insurer for

the Employee’s medical and related expenses. The Employer

did not tender any contrary evidence and did not sustain its

burden of proof. The district court correctly held that the

Insurer was the real party in interest.

B

The district court properly awarded prejudgment interest to

the Insurer. “ ‘Prejudgment interest in a diversity action is . . .

a substantive matter governed by state law.’ ” In re Exxon

U.S. FIDELITY v. LEE INVESTMENTS 5201
Valdez, 484 F.3d 1098, 1101 (9th Cir. 2007) (quoting Webco

Indus., Inc. v. Thermatool Corp., 278 F.3d 1120, 1134 (10th

Cir. 2002)). California law provides that

Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him

upon a particular day, is entitled also to recover

interest thereon from that day, except during such

time as the debtor is prevented by law, or by the act

of the creditor from paying the debt.

Cal. Civ. Code § 3287(a) (emphasis added). 

In Children’s Hospital and Medical Center v. Bonta, 97

Cal. App. 4th 740 (2002), the California Court of Appeal

articulated the test for awarding prejudgment interest under

§ 3287(a) as entailing a determination of whether the “defendant actually knows the amount owed or from reasonably

available information could the defendant have computed that

amount.” Id. at 774 (quotation omitted). In Fireman’s Fund

Ins. Co. v. Allstate Ins. Co., 234 Cal. App. 3d 1154 (1991),

quoted in Bonta, the court specified that

[d]amages are deemed certain or capable of being

made certain within the provisions of [§ 3287(a)]

where there is essentially no dispute between the

parties concerning the basis of computation of damages if any are recoverable but where their dispute

centers on the issue of liability giving rise to damage. . . . The statute does not authorize prejudgment

interest where the amount of damage, as opposed to

the determination of liability, depends upon a judicial determination based upon conflicting evidence

and is not ascertainable from truthful data supplied

by the claimant to his debtor.

Id. at 1173.

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The Employer argues that the district court erred in calculating the numbers because the Employer did not know, and

could not have known, the amount of damages, placing it in

a Catch-22 situation. The Employer’s contention, however,

hinges on arguments it made in its counterclaims and thirdparty complaint—for example, that the Broker and the Insurer’s Agent were responsible for the Insurer’s loss—that the

district court properly rejected. In contrast, the Insurer’s claim

for restitution, which simply sought reimbursement for payments it made pursuant to the Policy, was discrete, and once

liability was determined, there could be “essentially no dispute between the parties concerning the basis of computation

of damages.” Fireman’s Fund, 234 Cal. App. 3d at 1173.

“[A] defendant’s denial of liability does not make damages

uncertain for purposes of [Cal. Civ. Code § 3287(a)].” Wisper

Corp. v. California Commerce Bank, 49 Cal. App. 4th 948,

958 (1996). And “where the amount of the plaintiff’s claim

can be determined by established market values or by computation,” that provision “mandates an award of prejudgment

interest.” Id. (quotation omitted).

[13] Chesapeake Industries, Inc. v. Togova Enterprises,

Inc., 149 Cal. App. 3d 901 (1983), is distinguishable, as this

is “a case where the debtor could keep complete records of

the transaction from which it could calculate its indebtedness,” and it is not a case where “much of the critical data was

in the sole possession of” the Insurer. Id. at 911. Here, the

amount of the payments the Insurer made to the Employee

and to the Employer’s independent counsel were “reasonably

available.” Bonta, 97 Cal. App. 4th at 774. The Employee’s

workers’ compensation payments were statutorily set based

on her salary; her medical expenses were established as of

May 24, 2002, and could be reasonably determined thereafter

with simple inquiries; and the Employer admits that it “of

course[ ] did know how much was being paid to its independent counsel.” As the district court found, there was never any

uncertainty as to the exact amount and date of each payment

U.S. FIDELITY v. LEE INVESTMENTS 5203
to the Employee and her counsel that is to be restored to the

Insurer. The district court properly applied California law in

awarding prejudgment interest. See Cal. Civ. Code § 3287.

C

The district court did not err in certifying its judgment pursuant to Federal Rules of Civil Procedure Rule 54(b). The

pendency of the Insurer’s claims against the Alter Egos did

not preclude the court from doing so. Any similarities

between the alter-ego claims and those already adjudicated by

the district court are insufficient to negate the district court’s

conclusion, made on the record, that, “[d]ue to the prior delay

in, complexity and contentiousness of this litigation, to avoid

uncertainty and inconsistent verdicts, there is no just reason

for delay and partial judgment should now therefore be

entered.” See Gregorian v. Izvestia, 871 F.2d 1515, 1519 (9th

Cir. 1989) (noting approvingly that the court below, in granting Rule 54(b) certification, “expressly stated that it found ‘no

just reason for delaying the entry of judgment’ ”). “Both the

Supreme Court and our court have upheld certification on one

or more claims despite the presence of facts that overlap

remaining claims when, for example, . . . the case is complex

and there is an important or controlling legal issue that cuts

across (and cuts out or at least curtails) a number of claims.”

Wood v. GCC Bend, LLC, 422 F.3d 873, 881 (9th Cir. 2005).

The Employer contends that it was inequitable for the district court to enter judgment “piecemeal.” Of course, that is

precisely what a Rule 54(b) certification is intended to accomplish. The question is whether the preconditions for certification have been satisfied. Here, the record reflects that the

district court carefully considered and applied the factors this

circuit has stated are relevant in determining the propriety of

Rule 54(b) certification. See Wood, 422 F.3d at 880-82; General Acquisition, Inc. v. GenCorp, Inc., 23 F.3d 1022, 1030

(9th Cir. 1994). 

5204 U.S. FIDELITY v. LEE INVESTMENTS
[14] The order, although not final, certainly signaled the

beginning of the end. Not all the questions have been

answered, but most of the important issues have been

resolved. Thus, although an epilogue will be required, this

portion of the saga came to a proper end. The district court

did not err in granting partial judgment and entering the certification order.

VIII

The district court properly exercised jurisdiction, correctly

assessed the law, acted well within its discretion in making

innumerable litigation decisions, and did not err in granting

certification. We commit the remaining issues to the district

court. 

AFFIRMED.

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