Opinion ID: 577171
Heading Depth: 1
Heading Rank: 1

Heading: Franklin Hunsaker, Bullivant, Houser, Bailey, Pendergrass & Hoffman, Portland, Or., for defendant-appellant-cross-appellee.

Text: Appeal from the United States District Court for the Western District of Washington. Before WRIGHT, NORRIS and HALL, Circuit Judges. EUGENE A. WRIGHT, Circuit Judge: 1 This is a dispute between two insurance companies over which one must pay the defense costs of a long since dismissed product liability suit. The two insurers present several issues: 2 1. When liability is transferred by operation of law under a theory of product-line successor liability, do policy benefits arising from insurance on the underlying risk transfer as well? If so, do these benefits include the right to a defense? 3 2. When two insurers share a common obligation to provide a defense, can one be obligated for defense costs incurred by the other before the first has been tendered the defense? 4 3. In this dispute, does California or Washington law apply in determining whether the insurers have met their obligation to provide a defense? 5  The Howards sought damages from the makers of California Cooler after their child was born suffering from fetal alcohol syndrome. They claimed that Dawn Howard's consumption of California Coolers during her pregnancy caused the birth defects. After about two years of pretrial litigation, they voluntarily dismissed the suit. 6 Brown-Forman Corporation bought California Cooler in July 1985, two years after the birth of the Howards' injured child and two years before the Howards filed suit. The sale was executed through an asset purchase agreement. The agreement specified that (1) California Cooler would indemnify Brown-Forman for any product liability claims arising from California Cooler's presale activities and (2) Brown-Forman would not assume obligation for any such claims. The agreement also excluded from the sale the assignment of any contract that required consent to assign. 7 When Brown-Forman received the Howards' complaint in November 1987, it hired the Seattle firm of Preston, Thorgrimson to provide a defense, and then tendered the defense to Northern Insurance Company. Northern sought to have the Lane, Powell firm represent Brown-Forman because Lane, Powell had lower rates. Brown-Forman insisted, however, on retaining Preston, Thorgrimson. Northern acquiesced and Brown-Forman eventually agreed to pay part of the fees. 8 A few months later, in February 1988, Northern tendered the defense to a second insurer, Allied Mutual. Although Northern had insured California Cooler during the last 12 days of the pregnancy, Allied had provided coverage for the period starting at about the fourth month of pregnancy and ending 12 days before birth. Before Allied responded to Northern's tender, Brown-Forman also tendered the defense to Allied. 9 Allied accepted the defense under a reservation of rights. It refused, though, to retain Preston, Thorgrimson and instead hired the Betts, Patterson firm. Brown-Forman objected, but eventually agreed to allow Betts, Patterson to participate in the defense with Preston, Thorgrimson. 10 After the Howards dismissed their complaint, Northern brought this action, seeking contribution from Allied for defense costs. On cross motions for summary judgment, the district court ruled that: 11 1. Although the asset purchase agreement did not transfer Allied's insurance policy to Brown-Forman, Allied nonetheless had a duty to provide Brown-Forman a defense. Liability for presale injuries transferred to Brown-Forman as a matter of law. The court held that the policy benefits transferred with the liability. 12 2. California law governed the determination of whether Allied had discharged its obligation to provide a defense by hiring Betts, Patterson. 13 3. Because of the inherent conflict of interest between Allied and its insured, Allied failed to discharge its obligation by refusing to retain Preston, Thorgrimson. 14 4. Allied was not liable for defense costs incurred before the defense was tendered to Allied. 15 5. Allied's contribution to Northern for post-tender costs would be determined based on equitable factors, through mandatory arbitration as specified by California law. 16 Both parties appeal. A summary of the key dates and events follows. 17 Insurance Coverage Howard Lawsuit January 1983 (pregnancy begins) April 4, 1983 (Allied coverage begins) September 20, 1983 (Allied coverage ends/Northern coverage begins) October 2, 1983 (injured child's birth) July 2, 1985 (asset sale transferring California Cooler to BrownForman) September 20, 1985 (Northern coverage ends) Insurance Coverage Howard Lawsuit November 1987 (suit filed/defense tendered to Northern) February 1988 (Northern tenders to Allied) March 1988 (BrownForman tenders to Allied) July 1989 (suit dismissed) ----------