Opinion ID: 668606
Heading Depth: 4
Heading Rank: 3

Heading: The Coverage Order

Text: 13 In early 1993, CNA moved for summary judgment on the coverage issues. The RTC opposed on three grounds: First, the RTC argued that coverage was available under the 1980-83, 1983-85, and 1985-86 Policies because, by offering successor policies with materially different terms, CNA had constructively failed to renew and therefore had breached the policies by not giving notice of nonrenewal. The RTC contended that, as a result, the Directors/Officers had a current right to invoke discovery coverage. Second, the RTC contended that coverage was available under the 1985-86 Policy because the Directors/Officers could, as a remedy for CNA's failure to give notice of the Regulatory Exclusion, reform the policy to excise the exclusion. And, finally, the RTC argued that the Regulatory Exclusions in the 1985-86, 1986-87, and 1987-88 Policies were inapplicable because the RTC is not a regulatory agency. 14 The district court granted CNA's motion, holding that none of the D & O policies covered the RTC claims against the Directors/Officers. The court based its decision on different grounds for the various policies: 15  For the 1980-83 Policy, the Rescission Agreement nullified any liability CNA had under the Assumption Agreement. 16  For the 1983-85 Policy, even if CNA had violated the Notice Clause, coverage was not available because the RTC's only remedy would be to purchase discovery coverage for the year following the alleged nonrenewal. Because the RTC claims were not made until after the discovery period would have expired, any possible remedy would be ineffective. 17  For the 1985-86 Policy, even if CNA initially had not renewed the policy, the RTC was not entitled to purchase discovery coverage because Pacific had accepted a successor policy with full notice of its terms. 18  For the 1986-87 and 1987-88 Policies, the Regulatory Exclusion was enforceable and nullified coverage of RTC claims. 19 The RTC filed a timely appeal 3 which has been consolidated with CNA's appeal of the Advancement Order. We conduct de novo review, e.g., O'Shea v. City of San Francisco, 966 F.2d 503, 505 (9th Cir.1992), and affirm the district court's excellent Coverage Order in all regards. 4 As a result, we also dismiss as moot CNA's appeal of the Advancement Order and vacate the district court's decision on that issue.II. 20 The RTC asserts that each of the five D & O policies provide coverage for the claims asserted in RTC v. Baker. We address each in turn. A. The 1980-83 Policy 21 The district court held that [t]he CNA parties have established that, as a matter of law, any assumption of liability by Continental Casualty Company for the 1980-83 policy was rescinded by the so-called 'Rescission Agreement.'  In so holding, the court relied in part on Continental Casualty Co. v. Allen, 710 F.Supp. 1088, 1102 (N.D.Tex.1989), which found an identical rescission agreement to terminate CNA's liability for previously-assumed policies. The RTC contends that Allen is inapposite because, in this case, a Claims Service Agreement between CNA and WMBIC, executed contemporaneously with the Rescission Agreement, illustrates that CNA intended to be liable on the 1980-83 Policy even after executing the Rescission Agreement. The RTC's argument is as follows: The Rescission and Claims Service Agreements refer to Claims in Existence. The Claims Service Agreement contains an exhibit listing all such claims but not including the RTC claims. Some evidence indicates that the Claims Service Agreement represents the extent of the universe of claims covered by the Rescission Agreement. That evidence creates a material issue of fact regarding CNA's liability. 22 The district court considered the extrinsic evidence and held that (1) the Rescission Agreement clearly encompassed CNA's potential liability under the 1980-83 Policy and (2) the relevant terms of the Rescission and Assumption Agreements [are] sufficiently unambiguous to merit disregarding the deposition testimony ... relied on by the RTC. We agree. 23 Under California law, 5 [s]everal contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together. Cal.Civ.Code Sec. 1642. E.g., Nish Noroian Farms v. Agricultural Labor Relations Bd., 35 Cal.3d 726, 201 Cal.Rptr. 1, 5-6, 677 P.2d 1170, 1174-76 (1984). Even interpreted with the Claims Service Agreement, however, the plain meaning of the Rescission Agreement is clear. That agreement defines Claims in Existence as those covered by the Assumption Agreement. The Claims Service Agreement, on the other hand, defines the term to be those claims which were in existence and reflected on the books and records of WMBIC as of November 1, 1983, and as set forth in the relevant exhibit. As CNA notes, these definitions served the different purposes of the two agreements: 24 Claims In Existence is defined differently in the Rescission Agreement and the Claims Service Agreement, and it makes no sense to suppose that the terms have identical meanings. Under the Claims Service Agreement, Continental was agreeing to service claims for MGIC's successor. Obviously, for Continental to service the claims, they had to be identified precisely. In the Rescission Agreement, on the other hand, the parties were rescinding Continental's prior obligations under the Assumption Reinsurance Agreement. Accordingly, they adopted the same broad definition of Claims In Existence used in the Assumption Reinsurance Agreement in order to accomplish their manifest purpose, to rescind Continental's responsibility for all Claims-in-Existence. 25 Representatives of CNA and WMBIC testified that they intended the Rescission Agreement to terminate all of CNA's liability on the policy. Where the parties have attached the same meaning to a promise or agreement or term thereof, it is interpreted in accordance with that meaning. Restatement (Second) of Contracts Sec. 201(1). The construction given a contract by the parties before any controversy has arisen as to meaning will, when reasonable, be adopted by the courts. Western Med. Enters. v. Albers, 166 Cal.App.3d 383, 212 Cal.Rptr. 434, 439 (1985). 26 CNA's interpretation certainly is reasonable. At the time of the agreement, the RTC had not filed claims against the Directors/Officers and the parties could not have known of those claims. We affirm the district court's holding that CNA is not responsible for the 1980-83 Policy. B. The 1983-85 Policy 27 The district court held that no coverage was available under the 1983-85 Policy because, even if the RTC proved at trial that CNA had violated the Notice Clause, the only remedy would be to allow Pacific to purchase discovery coverage for the year following the alleged nonrenewal. The court decided that the Discovery Clause permitted coverage only for actual claims filed during the discovery period (and not for notice of occurrences that might ripen into claims) and held that, because the RTC claims did not arise until the discovery period would have expired, no remedy was available for CNA's alleged breach. The RTC takes issue with several of the district court's conclusions. First, the RTC asserts that the Discovery Clause encompasses notice of occurrences as well as claims. Second, the RTC argues that the proper remedy is to permit the Directors/Officers to purchase discovery coverage now (and not relate coverage back to the time of the alleged breach). And, finally, the RTC claims that CNA should be estopped from relying on the one-year time limitation in the Discovery Clause. 1. Notice of Occurrences 28 The Discovery Clause provides that, if CNA decides not to renew the policy, Pacific may purchase coverage for any claim or claims ... made against the Directors or Officers during the period of twelve calendar months after the date of such ... refusal to renew, but only with respect to [acts] committed before the date of such ... non-renewal. CNA contends that this clause specifically limits coverage to actual claims made within the discovery period. The RTC, however, argues that notice of occurrences that could ripen into claims is adequate to trigger discovery coverage. Specifically, the RTC points to the Notice of Claims clause in the policy: 29 If during the policy period [Pacific] ... become[s] aware of any occurrence which may subsequently give rise to a claim being made against the Directors and Officers ... and shall during such period, give written notice thereof to the Insurer as soon as practicable and prior to the date of termination of the policy, then any claim which may subsequently be made against the Directors or Officers arising out of the [occurrence] shall, for the purposes of this policy, be treated as a claim made during the policy year in which such notice was given. 30 The RTC contends that this clause, which clearly applies to notice of occurrences given during the policy period, also applies to notice of occurrences during the discovery period. In support, the RTC presented evidence allegedly illustrating that CNA previously had interpreted discovery coverage to encompass notice of occurrences. 31 CNA argues that the Notice of Claims clause applies only to notice of occurrences given during the policy period itself. CNA points to the Coverage Clause of the policy, which specifically distinguishes between the policy period and the discovery period: 32 This policy shall cover Loss ... arising from any claim made (i) within the policy period or (ii) within the discovery period if [such coverage is purchased].... [A]ny claim made subsequent to the policy period as to which notice was given to the Insurer within the policy period as provided in [the Notice of Claims clause] shall be treated as a claim made during the policy period. 33 CNA contends that the RTC's extrinsic evidence is irrelevant to interpretation of this unambiguous policy language. 34 The district court agreed with CNA. The court noted that the Tenth Circuit, in American Casualty Co. v. FDIC, 958 F.2d 324, 326-28 (10th Cir.1992) (Oklahoma Federal ), 6 interpreted identical policy language as limiting discovery coverage to actual claims made within the discovery period. The court recognized that the Eighth Circuit, in McCuen v. American Casualty Co., 946 F.2d 1401, 1404-06 (8th Cir.1991), reached the opposite conclusion, but concluded that Oklahoma Federal was better reasoned. We agree. 35
36 The RTC contends that the policy is ambiguous and that, as a result, the court must construe policy terms against the insurer. In so arguing, the RTC seeks to elevate an abstract general rule over concrete policy terms. As the California Supreme Court recently clarified, we may not ignore straightforward contract terms in order to create ambiguities. 37 While insurance contracts have special features, they are still contracts to which the ordinary rules of contract interpretation apply.... If contractual language is clear and explicit, it governs. On the other hand, if the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it. This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, the objectively reasonable expectations of the insured. Only if this rule does not resolve the ambiguity do we then resolve it against the insurer. 38 ... [T]he court must interpret the language in context, with regard to its intended function in the policy. This is because language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract. 39 Bank of the West v. Superior Court, 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 544-45, 833 P.2d 545, 551-52 (1992) (emphasis added) (internal quotations and citations omitted). See also AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 274 Cal.Rptr. 820, 831-32, 799 P.2d 1253, 1264-65 (1990). 40 Three courts have held that CNA's policy language unambiguously limits notice of occurrences to the policy period. Each used an analysis similar to that of the Tenth Circuit in Oklahoma Federal: 41 Given the clear dichotomy drawn in [the Coverage Clause] between the policy period and the discovery period, coupled with reference in the same clause to the nature of notice that can be given during the policy period under [the Notice of Claims Clause], we cannot conclude that the term policy period--as used in both [the Notice of Claims Clause] and [the Coverage Clause]--may reasonably be interpreted to encompass the discovery period. 42 Oklahoma Federal, 958 F.2d at 327 (applying Oklahoma law). See American Casualty Co. v. FDIC, 999 F.2d 480, 482 (10th Cir.1993) (Casper ) (applying Wyoming law); Baltimore Federal, 845 F.Supp. at 325-26 (applying Maryland law) (The plain language of [the Discovery Clause]--'any claim or claims which shall be made'--precludes coverage based on mere notice of potential claims. This is confirmed by a careful reading of the unambiguous language in [the Notice of Claims Clause], requiring that notice of potential claims be given 'during the policy period,' and [the Coverage Clause], distinguishing between 'the policy period' and 'the discovery period.' ). 43 Although McCuen reached the opposite conclusion, that decision is not persuasive because the court apparently failed to consider the distinction between the policy and discovery periods. See Oklahoma Federal, 958 F.2d at 328 (The analysis of the term 'claims' in McCuen ignores the issue of whether [the Notice of Claims] clause applies to notice of occurrences given during the discovery period.). The RTC's argument that the very fact that courts disagree illustrates an ambiguity is unpersuasive: The mere fact that judges of diverse jurisdictions disagree does not establish ambiguity under the particular principles which govern the interpretation of insurance contracts in California. ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 17 Cal.App. 4th 1773, 22 Cal.Rptr.2d 206, 215 n. 39 (1993). Accordingly, we use California's rule of following clear and unambiguous contract language and find for CNA on this issue. 44
45 The RTC asserts that the evidence illustrates that MGIC and CNA interpreted the Discovery Clause to encompass notice of occurrences. Specifically, the RTC notes that a 1974 memorandum from MGIC to a customer stated that discovery coverage under MGIC policies included notice of occurrences. The RTC also points out that several recent CNA memoranda refer to changes in Discovery Clause language, made after the dates relevant here, indicating an attempt to tighten[ ] up the discovery period by allowing only claims to be reported. 46 The district court correctly found the RTC's evidence unpersuasive. First, the court noted that each document referred to policies with Discovery Clause language different from the 1983-85 Policy. Second, the court held that the language of the 1983-85 Policy could not support inferences reasonably susceptible to those which the RTC sought to draw from the evidence. And, finally, the court found the evidence irrelevant because it did not bear on the parties mutual intent in forming the contract. 47 In California, [i]t is immaterial that one of the parties to a contract had an undisclosed intention or belief as to what it meant. [D]rafting history ... [is irrelevant when] it contradicts the objective theory [of interpreting the contract]. ACL Technologies, 17 Cal.App.4th 1773, 22 Cal.Rptr.2d at 217 n. 45 (internal quotation omitted). See Zubia v. Farmers Ins. Exch., 14 Cal.App.4th 790, 18 Cal.Rptr.2d 65, 71 n. 3 (1993) (Since the [policy] provision at issue in this case is not reasonably susceptible to an interpretation which excludes medical expense coverage, the internal memoranda written by [the insurer's] personnel are not relevant to our analysis.). 48 In identical circumstances, three other courts have rejected the RTC's contention that this evidence compels a different interpretation of the Discovery Clause. See Baltimore Federal, 845 F.Supp. at 325-26; American Casualty Co. v. FDIC, 821 F.Supp. 655, 666 (W.D.Okla.1993) (Blanchard ) ([The FDIC's evidence] is completely irrelevant to the issues, as the written contract is not ambiguous.); American Casualty Co. v. FDIC, No. 91-CV-0058-J, slip op. at 4 (D.Wyo. June 24, 1993) (American National ) ([T]he newly discovered evidence offered by the [FDIC] is immaterial to the interpretation of the unambiguous policy language.). We agree. 2. Remedy 49 The RTC argues that, even if discovery coverage does not include notice of occurrences, the proper remedy for breach of the Notice Clause is to permit the Directors/Officers to purchase discovery coverage now (and not to relate the coverage back to the time of the breach). The district court disagreed, concluding that [a]llowing the RTC's preferred solution would give the insureds much more than they bargained for. 50 Courts considering the propriety of the RTC's requested remedy have split on the issue. The Baltimore Federal court used the approach taken by the district court: 51 Assuming, only for the purposes of argument, that American Casualty failed to provide the required notice of nonrenewal, the RTC's motion still must fail because it is not entitled to any meaningful remedy.... To allow greater coverage [by extending the discovery period] would be to allow the insured, in effect, to write the new policy, adding or increasing coverage, eliminating conditions and exclusions.... If enforcement of the discovery period is the appropriate remedy, the RTC is left empty-handed because ... the bank gave no notice of a claim, nor was any claim filed against it, during that period. 52 Baltimore Federal, 845 F.Supp. at 324-25 (internal quotation omitted). The court in Benafield v. Continental Casualty Co., No. LR-C-92-389, 1993 WL 723510 (E.D.Ark. Oct. 1, 1993), used the same reasoning: 53 It is one thing to say that plaintiffs may exercise the discovery clause at this late date, and yet another to say that the discovery period should only now be in effect thus giving plaintiffs an additional seven or eight years of coverage. This construction of the policy was not bargained for by the parties, and this Court believes that the plain meaning of the clause is that the discovery period would be that twelve months following the expiration of the policy. 54 Id., slip op. at 11. 55 The Allen court, however, held that where the insurer fails to give notice of nonrenewal, the defendants' right to exercise the discovery option still exists due to a lack of notice of non-renewal and concluded that the right to exercise the discovery option runs ten days from the date of this judgment. Allen, 710 F.Supp. at 1100, 1103. The Allen opinion is unclear, however, about whether actual claims had been filed against the insured within the discovery period or whether the court intended to extend that period until the date of its order. The opinion in American Casualty Co. v. FDIC, No. 86-4018, 1990 WL 66505 (N.D.Iowa Feb. 26, 1990) (Christensen ), 7 in which the court followed Allen, is similarly ambiguous. 56 There are no circuit court decisions on point. 8 Unfortunately, California law also provides little guidance on the issue. The RTC cites several cases which hold that insurance policies remain in effect until proper notice of nonrenewal is given. See, e.g., National Auto. & Casualty Ins. Co. v. California Casualty Ins. Co., 139 Cal.App.3d 336, 188 Cal.Rptr. 670, 672 (1983); Borders v. Great Falls Yosemite Ins. Co., 72 Cal.App.3d 86, 140 Cal.Rptr. 33, 35 (1977). These cases, however, involve specific statutes that apply only to automobile insurance. See Cal.Ins.Code Sec. 663(c) (In the event that an insurer fails to give the named insured ... notice of nonrenewal ..., the existing policy, with no change in its terms and conditions, shall remain in effect for 30 days from the date ... the notice of nonrenewal is delivered.). 9 57 We think Baltimore Federal, Benafield, and the district court were correct. Permitting the RTC to purchase discovery coverage for claims not filed within the one-year period following expiration of the policy would give the Directors/Officers a windfall: indemnity for claims not otherwise covered under the policy. The remedy accorded by the district court, on the other hand, gives the Directors/Officers the benefit of their bargain and no more. The RTC's fears that this remedy gives insurers an incentive to flout[ ] its notice provisions are misplaced. Intentional disregard of policy provisions would, undoubtedly, expose an insurer to liability and punitive damages for bad faith. See, e.g., Tibbs v. Great Am. Ins. Co., 755 F.2d 1370, 1373-75 (9th Cir.1985) (applying California law). Insurers are not likely to undertake such a risk in the speculative hope of depriving an insured of discovery coverage. We affirm the district court on this point. 3. Estoppel 58 Finally, the RTC asserts that the district court should have estopped CNA from relying on the Discovery Clause time limitation because the insurer engaged in wrongful conduct by disguising its nonrenewal of the policy. We disagree. 59 California courts apply equitable estoppel to prevent injustice where one party has, through action or inaction, caused another to act to his detriment. The party invoking the doctrine must prove four elements: (1) that the party to be estopped was apprised of the facts; (2) that he intended his conduct to be acted on, or that he acted in such a way that the party asserting estoppel reasonably could believe that he intended his conduct to be acted upon; (3) that the party asserting estoppel was ignorant of the actual facts; and (4) that the party asserting estoppel relied upon the conduct to his injury. Adams v. Johns-Manville Corp., 876 F.2d 702, 707 (9th Cir.1989) (applying California law). See, e.g., Hair v. State, 2 Cal.App.4th 321, 2 Cal.Rptr.2d 871, 875 (1991). Where any one of the elements of equitable estoppel is absent, the claim must fail. Hair, 2 Cal.Rptr.2d at 875. 60 The RTC presented some evidence allegedly illustrating CNA's intent to disguise the fact that the policies were being changed rather than renewed on the same terms, and that the successor policies would contain restrictive endorsements which would bar coverage for claims that would have been covered under the older policies. The district court found this evidence untenable, a conclusion supported by Farmers, in which the Eighth Circuit rejected contentions that CNA had acted improperly: It is true that American Casualty increased its premium and decreased its coverage for officers and directors when it discovered the state of the Bank's loan portfolio. That strikes us, however, as a reasonable business decision rather than bad faith. Farmers, 944 F.2d at 459. 61 Even if the evidence did indicate an attempt by CNA to hoodwink Pacific into foregoing discovery coverage, estoppel would not be appropriate in this case because the Directors/Officers could not possibly have relied to their detriment on CNA's conduct. The RTC's arguments about reliance boil down to assertions that Pacific might have purchased discovery coverage and reported occurrences in the twelve-month discovery period. As explained above, however, notice of occurrences does not suffice in the discovery period. Because the RTC did not file claims against the Directors/Officers until expiration of the discovery period, the policy would not in any event have covered those claims. 62 Thus, the district court correctly concluded that no coverage was available under the 1983-85 Policy because, even if the RTC proved at trial that CNA had not renewed the policy and had not provided notice of such nonrenewal, the only remedy would be to allow the RTC to purchase discovery coverage for the year following the alleged nonrenewal. Because the Discovery Clause permitted coverage only for actual claims filed during the discovery period (and not for notices of occurrences that might ripen into claims), no remedy was available for CNA's alleged policy breach.