F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

A T T O R N E Y S L I A B I L I T Y P R O T E C T I O N S O C I E T Y , I N C ., a Risk Retention Group,

Plaintiff-Appellant/ Cross-Appellee

,

v.

I N G A L D S O N F I T Z G E R

A L D , P.C., F KA I n g aldson, Maassen & F itz g erald, P.C.,

Defendant-Appellee/ Cross-Appellant. Nos. 13-35115 13-35172

D.C. No. 3 :11-cv-00187-SL G

OPI NI ON

A ppeal from the United States District Court

for the District of Alaska Sharon L . Gleason, District J udg e, Presiding

Arg ued Aug u st 14, 2014 Submitted J une 10, 2016 A nchorag e, Alaska

F iled September 23, 2016

B efore: J erome F arris, Dorothy W . Nelson, and J acqueline H. Ng

uy en, Circuit J u d g es.

Opinion by

J udg e NelsonAL PS V

. I N G A L D S O N F I T Z G E R

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SUMMARY *

Diversity/P reem ption

The panel reversed the district court’s summary judg ment order precluding plaintiff, Attorney s L iability Protection Society

, from recovering defense f ees and costs t h at it incurred in underlying litig ation; and affir m e d the district court’s conclusion that the underly ing claims were not covered by the insuran ce p olicy issued by plaintiff to a defendant law firm.

Plaintiff, a Risk Retent ion Group chartered in Montana, provided malpr a ctice insurance coverag e to the defendant law firm located in Alaska. The district court concluded that even thoug h plaintiff’s policy did not cover the c l a i m s in the underly ing suit involving the law firm, plai n t i ff was not entitled to reimbursement o f the ex penses it i n c u r r e d in providing a defense because the insurance policy ’s reimbursement provision did not comply with Alaska insurance law and was therefore unenforceable.

The panel held that A laska Statute § 21.96.100(d)’s prohibition on reimbursements of fees and costs incurred b y an insurer defending a non-covered c laim was preempted b y the L iability Risk Retention A ct of 1986, 15 U.S.C. §§ 3 901- 3906. The panel determined that the Alaska statute placed a restriction on Alaska contracts that was not contemplated b y the L iability

Risk Retention Act, and that was not precluded

* T h is su m m ary co n stitu

tes n o p art o f th e o pin io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.AL PS V

. I N G A L D S O N F I T Z G E R

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by all other states. The panel further determined that no

ex c e ption applied to save the Alaska law from preemption.

T h e p a n el r ejected defendant’s arg ument that plaintiff w a s

e s topped from deny ing coverag e b ecause it failed to a t t e n d settlement conferences. The panel determined that there was

no indication that defendant was prejudiced by p lai n t iff’s failure to atten d s e t tlement sessions. Moreover, p laintiff informed defendant from the outset that it intended to assert

co v e rag e defenses, provided independent counsel to defendant, and acted consistently with its view that coverag e did not ex ist.

COUNSEL

Kevin Hartz ell (arg

ued), Kutak Rock L L P, Omaha, Nebraska, for Plaintiff-Appellant/Cross-Appellee.

W illiam H

. I ng aldson (arg ued) and J im M. B oardman, I ng aldson F itz g erald P.C., Anchorag e, Alaska

, f o r D e f e n dantAppellee/Cross-Appellant.

OP INION

NEL SON, Circuit J udg e:

A t torney s L iability Protection Society (AL PS) appeals from the d istrict court’s g r ant of summary judg ment to I ng aldso n Fitz g erald, P.C. (I ng aldson), which denied AL PS reimbursemen t o f defense fees ex pended in an underly ing insurance litiga t i on. I ng aldson cross-appeals the district court’s g ra n t of summary judg ment to AL PS that the c laimsAL PS V

. I N G A L D S O N F I T Z G E R

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asserted in the underlying litig a tion were not covered by the policy A L PS issued to I ng aldson. W e REVERSE the district court’s order deny ing AL PS reimbursement of defense fees, AF F IRM the district court’s c onclusion that the underl y i ng claims were not covered, and R EMAND for p roce eding s consistent with this opinion.

FACTUAL BACKGROUND & PROCEDURAL HISTORY

The facts underlying this litig ation a r e not disputed. AL PS is a Risk Retention Gr o u p (RRG) 1 chartered in Montana. I ng aldson is a law f irm located in A l a s k a. AL PS provided I ng aldson’s m a lpractice insurance coverag e from April 29, 2007, to April 29, 2008.

I ng aldson’s policy with AL P S i nsured the firm ag ainst claims arising from “an act, error or omission in professional services that were or s h o u ld have been rendered b y [ I ng aldson] .” The policy e x pressly ex cluded from coverag e any claims a

rising from c onversion or d i sputes over fees. The p olicy a lso required I ng aldson to reimbur s e A L PS for fees and costs that AL PS incurred in defending non-covered claims.

I n 2008, the bankruptcy trustee for the bankrupt estate o f

a former client of I n g aldson, in conjunction with another former c l i ent of the f

irm, b roug h t a claim ag ainst I ng a ldson in the U.S. B ankruptcy Court for the District of Alaska. The

1 Un d er th e L iab ility Risk Reten t io n A ct o f 1 9 8 6 (L RRA ), 1 5 U.S.C. § § 3 9 0 1

– 3 9 0 6
, an RRG is d ef in ed as “a n y c o rp o ratio n o r o th er lim ited liab ility asso ciatio n

. . . w h o se p rim ary activ ity co n sists o f assu m in g , an d
sp read in g all, o r a n y p o rtio n , o f t h e liab ility ex p osu

re o f its g ro u

p

m em b ers.” 1 5 U.S.C. § 3 9 0 1 (a)(4 )(A ).AL PS V

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suit concerned I ng aldson disbursing f rom a n d withdrawing fees a nd costs ag ainst a $150,000 retainer. The former client and the trustee soug ht recovery of that retainer, and asserted claims ag ainst I ng a ldson for, among other thing s, restitution, disg org e ment, and conversion.

I n g aldson notified AL PS of the underlying suit. AL P S accepted I

ng aldson’s tender of the defense in the underly ing suit, but did so with the ca v e at that A L PS “reserved ‘all rig hts.’” A L PS ex p lained that t h e underly ing suit alleg ed activities that “d[ id] not appear to implicate the provision o f service or activities by [ I ng al d s o n] as an attorney in an attorney -client relationship,” and thus “ d [ id] not appear to be professional services within the Policy ’ s co verag e.” AL PS also asserted that the claims in the underly ing suit s o u g ht restitution that was not within the policy ’s definition o f covered “damag es” and that the policy d id n o t cover c laims related to disputes over fees, dishonest or criminal acts, or the conversion of funds in client trust accounts. AL PS specifically reserved the rig ht to reimbur s e ment for the portion of fees incurred in the defe n s e of claims that were deemed not covered under the policy

.

I ng aldson retained independent counsel to defend it in the bankruptcy litig ation, and AL PS paid the fees charg ed by that counsel. The bankruptcy court twice g ranted partial summary judg ment ag a inst I ng aldson.

On September 2 3, 2011, AL PS filed an action in federal district c ourt seeking a declaration t h a t the A L PS policy did
not cover the claims ag ainst I ng a ldson and that AL PS had no oblig ation under the policy to provide a n a ppeal bond in the underly ing suit. AL PS also soug ht to recover the ex penses it incurred providing

a defense to I

ng aldson.AL PS V

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The district court determined that the policy did not cover the c laims in the u nderly ing suit. I t also concluded that AL PS had no o blig ation to provide an ap p e a l bond. Nevertheless, the d istrict court determine d t hat AL PS was not entitled to reimbursement of the ex p enses it incurred def e n d i ng I ng aldson in the underly ing suit. T he district court reasoned that while the polic y p r o vided AL PS with a rig h t to reimbursement, the reimbursement p rovision did n ot comply with Alaska insurance law and was therefore unenforceable. Specific a l l y , t h e d i s trict court concluded that the reimbursement provision was inconsistent with Alaska Statute § 2 1.96.100(d), which provides that in furnishing the insur e d w i th independent c o unsel, an insurer “shall be responsible only f

or the fees and c osts to defend those alleg ations for which the insurer e ither reserves its position a s to coverag e or accepts cove r a g e.” The district court determined that “Alaska law prohibits the inclusion of a rig ht
to reimbursement in insurance policies in the state a n d d o e s not allow A L PS to provide insurance pol i c y c o verag e that contradicts that prohibition.” The dis t rict c ourt rejected AL PS’s arg ument that the L RRA preempted A laska Statute 21.96.100(d). 2

AL PS appealed. I t arg u ed that the district c ourt erred for three reasons: (1) A laska law doe s n o t prohibit an insurer from enforcing a contractual rig ht to reim b u r s ement o f defense co s t s for noncovered claims; (2) the underly ing suit

2 T h e L RRA b ro ad ly p reem p ts “ a n y State law

, ru le, reg u l atio n , or

o rd er to th e ex ten t th at su ch law

, ru l e, reg u latio n , o r o rd er w o u l d

. . . m ak e

u n law f u l, o r reg u late, d irectly o r in d irectly

, th e o p eratio n o f a risk
reten tio n g ro u

p .” 1 5 U.S.C. § 39 0 2 (a)(1 ). T h e d istrict co u rt h eld —err o n e o u sly in o u r v iew as d iscu s sed in fra —th at t

h e ex cep tio n

co n tain ed i n § 3 9 0 5 (c) sav ed A lask a Statu te § 2 1 .9 6.1 0 0 (d ) f ro m p reem p tio n

.AL PS V

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was never p otentially covered by the AL PS policy ; and (3) an interpret ation of Alaska Statute § 21.96.100 that p rohibited an insurer from including a reimbursement prov i sion in an insurance policy

would be preempted by

the L RRA.

I ng aldson cross-appealed t h e d istrict court’s r uling that the AL PS policy did not cover the c laims ag ainst I n g a ldson in the underly ing suit. I ng aldson arg ued that AL PS is estopped from deny ing c overag e under Alaska law because it did not attend settlement ses s i ons and therefore b reached the covenant of g ood faith and fair dealing

.

W e c ertified two questions concerning interpretation o f Alaska law to the Alaska Supreme Court. Specifically

, we asked the Alaska Supreme Court:

1. Does Alaska law prohibit enforcement of

a policy p rovision entitling an insurer to reimbursement of f

ees and costs incurred by the insurer defending claim s under a reservation of rig hts, where (1) the insurer

ex p licit l y reserved the rig ht to seek such reimbursement in i ts offer to tender a defense provided by independent counsel, ( 2 ) the insured a ccepted the defens e subject to the r eservation of ri gh t s , a nd (3) the claims are later determined to be

ex c luded from coverag e under the policy ?

2. I f the answer to Question 1 is “Yes,” does Alask a law prohibit enforcement of a policy provision entitling a n in s u rer to reimbursement of f

ees and co sts incurred by the insurer defending c laims under aAL PS V

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reservation of rig hts, where (1) the insurer

ex p licitly reserve d the rig ht to seek such reimbursement in its offer to tende r a defense provided by independent counsel, (2) t h e insured accepted the defense subject to the r eservation o f r i g hts, a nd (3) it is later determined that the d u ty to defend never arose und e r the policy because there was no possibility o f
coverag e?

The Alaska Supreme Court answered “y es ” to e ach question, undermining the first and second bases for AL PS’s appeal. Attorney s L i ab. Prot. S oc’y, Inc. v. Ingaldson Fitzgerald, P.C. , 370 P.3d 1101, 1112 (Alaska 2016).

I n this opinion, we a d dress AL PS’s third arg ument—that the L RRA preempts § 21 .96.100(d). W e also address I ng aldson’s cross-appeal.

JURISDICTION

The d istrict court had jurisdiction pursua n t to 2 8 U .S.C. § 1332. W e have jurisdiction pursuant to 28 U.S.C. § 1291.

STANDARD OF REVIEW

W e r e view the district court’s orders g ranting summary judg ment d e n o vo

. W

alls v. Cent. Contra Costa Transit Auth. , 653 F .3d 963, 966 (9th Cir. 2011).AL PS V

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A NALY SIS

1. T h e L R R A p r e e m p t s A l a s k a S t a t u t e § 21.96.100(d)’s prohibition on reim bursem ent of f ees and costs incurred by an insurer def ending a non-covered claim

.

I n AL PS’s chartering state, Montana, insurers a re permitted to seek reimbursement of f ees ex pended defending

a non-covered c laim pursuant to a reservation of rig hts. Travelers Cas. & Sur. Co. v

. Ribi Immonochem R e s e a r ch, Inc.
, 1 0 8 P.3d 469, 480 (Mont. 2005). The district c ourt held, and the Alaska Supreme Court confirmed, that Alaska Statute § 2 1 .96.100( d ) prohibits such reimbursements. W e must decide whether the L

RRA preempts Alaska’s prohibition.

W h en considering whether the L RRA preempts a state law, we first determine whether the challeng ed aspect of the
state law offends the L RRA’s broad preempt i o n lang uag e

. See Alliance of Nonprofits for Ins., R i s k R e t e ntion Grp. v

. Kipper
, 712 F .3d 1316, 1321 (9th Cir. 2013). I f so, w e consider w hether one of the L RRA’s ex ceptions, w h i c h a re contained in §§ 3902(a)(1) and 3905, applies to save the state law. See id. I f no ex ception applies, the law is preempted.

W e conclude t h a t § 21.96.100(d)’s prohibition on

r eimbursement of fees and costs incurred by an in s u r e r de f ending a non-covered claim offends the L RRA’s broad preemption lang uag e and that no ex ception applies to save the law.

The L RRA leaves reg ulation of an RRG to the state where the RRG is chartered, a n d broadly preempts “any [ nonchartering ] State law, rule, reg ula t i o n, or order to the ex tentAL PS V

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t h a t such law, rule, reg ulation, or order would

. . . mak e unlawful, o r reg ulate, directly or indirectly

, the operation o f a risk retention g roup.” 15 U.S.C. § 3902(a)(1).

Section 21.96.100(d) places a restriction on A l a s ka contracts that is “not contemplated by the L RRA, a nd that is
not [ precluded] by all oth e r states.” W adsworth v. Allied Prof’ls Ins. Co.
, 748 F .3d 1 00, 108 (2d Cir. 2014). Althoug h AL PS is permitted by its chartering state, Montana, to require reimbursement of fees a n d costs incurred defending noncovered claims, AL PS would not be permitted to include such

a provision in a contract issued in Al a ska. Section 21.96.100(d) t h erefore “reg ulates” AL PS’s operations in Alaska and impermissibly conflicts with the L RRA. 3

There is n o ex ception that a pplies to save § 21.96.100(d) from preemption. The ex ceptions announced in § 3902(a)(1)

concern unfair claim settlement laws, false p r a c tices laws,
tax es levied ag ainst other insurers, reg istration requirements, and financial stability reg ulations. None of these permits the
reg ulation of the substantive terms o f p o licies issued by an RRG. T he only substantive policy term a non-chartering state

3 On e o f o u r sister circu its ap p lied a sim ilar an aly s is in f i n din g a state statu te p reem

p ted b y th e L RRA

. I n W a d swo rth

, th e Seco n d Circu i t

c o n sid ered a New Yo rk s tatu te th at p erm itted a to rt v ictim w ith a n

u n satisf ied j u dg m en t to brin g su it d irectly a g ain st a to rtf easo r’ s in su

rer. 7 4 8 F.2 d at 1 0 1

. T h e p o licy at issu e w as issu ed b y an RRG d o m iciled in A rizo n a to a ch iro p racto r i n N ew Yo rk

. Id

. A to rt v ictim o f th e ch iro p racto r su ed th e RRG to en f o rce a j u d g m en t lef

t u n satisfi ed b y th e ch iro p racto r. Id

. at 1 0 2

. T h e RR G arg u ed th at th e d irect- su it p ro v isio n

w as p reem

p ted b y th e L RRA

. Id

. T h e Seco n d Circu it ag reed

, co n clu d in g t h a t t h e direct- su it p ro v i sio n w as p reem p ted by th e L RRA b ecau s e i t

co n f licted w ith t

h e “ an y reg u l atio n ” lan g u ag e in § 3 9 0 2(a)(1 ). Id

. at 1 0 7 (“ A clearer p ro h i b itio n

w o u ld b e h ard to d ev ise.”).AL PS V

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may require is a notice to the insured th a t R RGs are not subject to a ll of the insurance laws of the non-chartering state. See 15 U.S.C. § 3902(a)(1)(I ).

W e disag ree with the district cour t ’ s conclusion that § 3905(c) saves § 21.96. 1 0 0 ( d) from preemption. Section 390 5 ( c ) p revents a

n RRG from providing insurance that is otherwise prohibited in the state where the policy is insured. I t states:

The terms of a

n y i n surance policy provided by a risk retention g roup o r p u r c h a sed by a purchasing g roup s hall not p rovide o r be construed to provide insurance policy

cov e rag e prohibited g enerally by [ the] State . . . whose law applies to such policy

.

15 U.S.C. § 3905(c). I n o ur view, § 3905(c) allows nonc h artering states to restrict the ty pes of insurance c overag e , such as f or punitive damag e s or intentional conduct, that may be provided in the state. See H.R. Rep. 99-865, at 19 (1986) (“Possible ex amples include coverag e for punitive d amag es,

or for intentional, fraudulent, or criminal conduct.”). I t does
not allow non-chartering states to r e g ulate g eneral p olicy
terms. The district court’s interpretation of § 3 905(c) would permit that section to overtake § 3902’s broa d preemption

s c h e m e. I f the district c ourt’s interpretation were correc t , non-chartering states could simply “prohibit” coverag e that d i d not comply with every aspect of state insurance law. I n other words, if w e w e r e to accept the district court’s interpretation, non-chartering states c ould fashion their insurance laws in a way to ensure they fall into this ex ception, thereby a lway s avoiding preemption. W e do not believe Cong r ess intended such a result. Estate of Magnin v. Comm’rAL PS V

. I N G A L D S O N F I T Z G E R

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of Internal Revenue
, 184 F .3d 1074, 1078 ( 9 th Cir. 1 999) (“W e must in t e r

p r e t [ a] statute to g ive effect to all of its parts.”). 4

2. ALP S did not breach the im plied covenant o f good f aith and f

air dealing.

I n its cross-appeal, I ng aldson arg ues that A L PS is estopped from den y i n g coverag e because AL PS failed to attend settlement c o nferences. According to I ng alds on, AL PS thereby br eached the implied c ovenant of g ood faith and fair dealing . W e disag ree.

Under Alaska law, estoppel has four elements: “(1) the party to b e estopped must know the facts; (2) he must intend that his conduct shall be a cted on or must so act that the party asserting the estoppel has a rig ht to believe it is so intended; ( 3 ) t h e l atter must be ig n orant o f the true f acts; a nd (4) he
must rely on the former’s conduct to hi s injury .” O’Neill Investigations, Inc. v Ill. Emp’rs. Ins. o f W a u sau , 636 P.2d 1170, 1178 (Alaska 1981) (internal quotation marks omitted).

4 W e rej ect In g ald so n ’ s circu lar arg u m en t th at its p o licy w ith A L P S h as a clau se ex p ressly co n f o rm in g it t o A l ask a law

, th ereb y i n co rp o ratin g § 2 1 .9 6 .1 0 0 ev en if it is o th erw i se p reem p ted

. A lask a l a w a pp lies o n ly i n so f ar as it i s n o t p reem

pted b y f ed eral law

. So ev en i f t h e p o l i c y

c o n fo r m s to A lask a law

, A lask a law m u s t co n f o rm t o th e L RRA

. T h e p o licy ’ s clau se pro v id in g f o r reim b u rsem e n t o f f

ees an d co sts to A L P S

rem ain s v alid

.

W e also rej ect In g ald so n ’ s arg u m en t th at th e McCa

r r a n

- F e r g u s o n A c t, 1 5 U.S.C. § § 10 1 1

– 1 2
, sav es § 2 1 .9 6 .1 0 0 (d ). W e h av e sq u arely h eld th at

ev en th o u g h th e McCarran

- F erg u so n A ct reserv es in su ran ce reg u l atio n to th e stat e s , t h e L R

RA w as m ean t to b e an ex cep tio n f or RRGs. Na t’l W a rra nty In s. Co

. RRG v. Green field

, 2 1 4 F

. 3 d 1 0 7 3
, 1 0 77 (9 th Cir. 2 0 0 0 ).AL PS V

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I n the insurance contex t, most c ases turn on the la s t element—whether the insured was pr e judiced by the insurer’s conduct. Generally

, prejudice t o an insured occurs w hen an insurer obtains an unfair advantag e by misleading

, deceiving

, or withholding information from the insured. See, e

. g

. , Progressiv e C a s

. Ins. Co. v. S kin

, 2 11 P.3d 1093, 1103 (Alaska 2009) (find i n g possible estoppel of ex cluded driver defense when insurer contacted insured to ask whic h fa m ily members were ex cluded from p olicy without sharing purpose of inquiry ) ; L l o

y d’s & Inst. of London Underwriting Cos. v

. Fulton

, 2 P.3d 1 199, 1 2 0 7–08 (Alaska 2000) (finding estoppel where insurer g ained full access to insured, investig ated a later-asserted c o v e rag e defense, and never informed insured of right to independent counsel).

Here, there is no indication that I n g aldson was p rejudiced by AL PS’s failure to attend settl em e n t sessions. AL PS informed I ng a ldson f

rom the outset that it intended to assert coverag e d efenses, provided independe n t counsel to I ng aldson, and acted consistently w ith its view that coverag e did n ot ex ist. Cf. S

auer v. Home I

n d e m

. C o

. , 841 P.2d 176, 182 (Alaska 1 992) (finding e stopp e l where insurer failed to g ive re as o nable notice of coverag e defense). W e reject I ng aldson’s a r g ument that AL PS is estopped from deny ing
coverag e. 5

5 W e n o te th at t

h is is n o t a c a se w

h ere A L P S co u ld h av e t en d ered a settlem en t to th e p o licy lim it, th ereb y av o id i n g an ex cess j u d g m en t ag ain st In g ald so n

. A t n o tim e d i d th e a m o un t in co n tro v ersy in th e u n d erly in g d isp u te ap p ro ach th e p o licy ’ s $ 2 m illio n lim it. S ee Ja ckso n v. Am. Eq u i ty In s. Co

. , 9 0 P .3 d 1 3 6
, 1 4 2 (A lask a 2 0 0 4 ) (“ W h en a p lain t if f m ak es a p o licy l im i ts d em an d

, th e co v en an t o f g o o d fa i t h a n d f air d ealin g p laces

a d u ty o n an in su

rer to ten d er m ax im

u m p o licy lim its to settle a p lain tif f ’ s d em an d wh en th ere i

s a su b s ta n tia l likelih o o d o f a n excess verd ict a g ain st th e in s u red .”) (em

p h asis ad ded ).AL PS V

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CONCLUSION

W e REVE RSE the district court’s order precluding AL PS from r ecovering fees a nd costs incurred defen d i ng I ng aldson in the underly ing dispute, we AF F IRM the district court’s holding that the claims in the underly ing dispute were not covered under the policy

, and R E M A ND for f urther proceeding s consistent with this opin ion.