Court Opinion

ID: 4252565
Source: CourtListenerOpinion
Date Created: 2018-03-07 21:00:38.043182+00
Date Added: 2024-06-11T14:16:22.025132
License: Public Domain

NOT FOR PUBLICATION                           FILED
                    UNITED STATES COURT OF APPEALS                        MAR 7 2018
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                           FOR THE NINTH CIRCUIT

MILLENNIUM LABORATORIES, INC.,                  No.    16-55432

                Plaintiff-Appellant,            D.C. No.
                                                3:12-cv-02280-BAS-KSC
 v.

ALLIED WORLD ASSURANCE                          MEMORANDUM*
COMPANY (U.S.), INC.,

                Defendant-Appellee.

                   Appeal from the United States District Court
                      for the Southern District of California
                   Cynthia A. Bashant, District Judge, Presiding

                      Argued and Submitted February 8, 2018
                               Pasadena, California

Before: REINHARDT, W. FLETCHER, and OWENS, Circuit Judges.

      Plaintiff-Appellant Millennium Laboratories, Inc. (“Millennium”) appeals

from the district court’s grant of summary judgment to Defendant-Appellee Allied

World Assurance Co. (“Allied World”) on Millennium’s claims for breach of

contract, breach of the covenant of good faith and fair dealing, and declaratory

relief. As the parties are familiar with the facts, we do not recount them here. We

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
have jurisdiction under 28 U.S.C. § 1291, and we affirm.

   1. The question whether the policy required Allied World to

contemporaneously reimburse Millennium’s defense costs for potentially covered

claims is not moot. Had Allied World been obligated to reimburse defense costs

for any potentially covered claims from the time that they were incurred until those

claims were determined not to be covered, then Millennium would be entitled to

interest for any such costs withheld, even if, in the end, they would be subject to

recoupment by Allied World. Cal. Civ. Code § 3302; Oil Base, Inc. v. Transport

Indem. Co., 306 P.2d 924, 926 (Cal. Ct. App. 1957).

   2. The policy was an indemnity-only policy, however, and therefore did not

require the contemporaneous advancement of Millennium’s defense costs. “D & O

policies are indemnity-only policies, whereby the insurer reimburses defense

expenditures only after the insured selects counsel, controls the defense, and

submits the defense bill.” Exec. Risk. Indem., Inc. v. Jones, 89 Cal. Rptr. 3d 747,

751 n.4 (Ct. App. 2009) (emphasis added). The language of the policy’s

reimbursement provision confirms this: it required Allied World, at Millennium’s

request, to “reimburse” defense costs. If, as Millennium contends, the policy were

a liability-type policy, then this provision would be surplusage, as the policy’s

coverage provisions would already have obligated Allied World to pay

Millennium’s defense costs as soon as they were incurred. See Okada v. MGIC

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Indem. Corp., 823 F.2d 276, 280 (9th Cir. 1986); see also Cal. Civ. Code § 1641;

ACL Techs., Inc. v. Northbrook Prop. & Cas. Ins. Co., 22 Cal. Rptr. 2d 206, 213

(Ct. App. 1993).

   3. Allied World’s duty to reimburse, moreover, applied only to claims actually

covered by the policy and did not extend to claims merely potentially covered.

“Unlike a comprehensive general liability policy, D & O policies are not written on

a ‘duty to defend’ basis.” Jones, 89 Cal. Rptr. 3d at 751 n.4. “Instead, defense

costs are defined as part of ‘Damages’ for which indemnification is to be paid.”

Health Net, Inc. v. RLI Ins. Co., 141 Cal. Rptr. 3d 649, 670-71 (Ct. App. 2012).

Such was the case here: the policy expressly disclaimed any duty to defend and

instead provided for coverage of defense costs only as an ingredient of covered

losses. And “in the absence of a contractual duty to defend, when defense costs are

recoverable only as covered losses, only those defense costs which were actually

related to the defense of covered claims may be reimbursed.” Id. at 671 (second

emphasis added).

   4. The Department of Justice (“DOJ”) investigation did not constitute a single

“claim” for policy purposes. The policy’s definitions of “claim” are “concerned

with the temporal certainty of the ‘Claim,’” rather than with “its scope.” Id. at

672-73. Thus, the investigation is properly viewed as multiple claims, one for each

alleged “wrongful act,” “error, or omission” by an insured that the DOJ

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investigated.

   5. Millennium identifies seven alleged wrongful acts, errors, or omissions that

the DOJ investigated but that purportedly were not subject to the specific-claim or

pending-or-prior-litigation exclusions. Contrary to Millennium’s argument, the

record shows that five claims were excluded from coverage. As to the remaining

two, Millennium has failed to raise a triable issue as to whether they were covered

by the policy at all.

       First, Millennium’s allegedly improper use of standing orders, sometimes

called “custom profiles,” to increase drug-testing orders was expressly alleged in

the Schur action and was therefore “related” to that litigation. Thus, any of

Millennium’s defense costs arising from the investigation of its allegedly improper

use of “custom profiles” were subject to the pending-or-prior-litigation exclusion.

       Second, the DOJ’s investigation of Millennium’s “Section A issues”

“related” to the Schur action as well. The complaint in Schur alleged that

Millennium “did not require healthcare providers . . . to execute or properly fill out

the confirmation testing requisition indicating which positives and which negatives

if any, needed to be confirmed.” Thus, any defense costs arising from the

investigation of these alleged “Section A issues” were subject to the pending-or-

prior-litigation exclusion.

       Third, although the record contains evidence indicating that Millennium did

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not first speak to the DOJ about its allegedly improper “specimen validity testing”

until after the policy expired, Millennium has put forward no evidence that the

DOJ investigated this alleged wrongful act during the policy period. Thus,

Millennium has failed to show a triable issue over whether any defense costs

associated with the investigation of this alleged act were covered by the policy.

See Royal Globe Ins. Co. v. Whitaker, 226 Cal. Rptr. 435, 437 (Ct. App. 1986); see

also Jackson v. Bank of Haw., 902 F.2d 1385, 1389 (9th Cir. 1990).

      Fourth, the DOJ’s investigation of alleged witness intimidation also related

to prior or pending litigation, namely the Ameritox action, which alleged

substantially the same intimidating conduct by Millennium employees as the

DOJ’s complaint in intervention. See Defendant Allied World Assurance Co.

(U.S.) Inc.’s Request for Judicial Notice in Support of Its Motion for Summary

Judgment at 190-91, Millennium Labs, Inc. v. Allied World Assurance Co., No.

3:12-CV-02280-BAS-KSC (S.D. Cal. May 23, 2014), ECF No. 161-4. Thus, the

DOJ’s investigation into this conduct “derived from the same or essentially the

same facts, or the same or related Wrongful Acts, as alleged” in the Ameritox

action. Any defense costs arising therefrom were therefore subject to the prior-or-

pending-litigation exclusion.

      Fifth, the DOJ’s complaint in intervention contends that Millennium’s

alleged practice of terminating relationships with or otherwise penalizing client-

                                          5
providers who did not order sufficient urine tests—the “troubled accounts” issue—

was part and parcel of Millennium’s broader alleged practice of causing the

unlawful ordering of unreasonable and unnecessary urine testing in violation of

Medicare and other regulations. Because the Cunningham action alleged this

broader practice, of which the alleged troubled-accounts practice was but a part,

the DOJ’s investigation of the alleged troubled-accounts practice necessarily

“derived from the same or essentially the same facts, or the same or related

Wrongful Acts, as alleged” in the Cunningham action. Defense costs associated

with that part of the investigation were therefore excluded under the pending-or-

prior-litigation exclusion.

      Sixth, the only record evidence regarding the DOJ’s investigation into

Millennium’s alleged destruction of evidence indicates that that portion of the

investigation did not begin until after the policy’s coverage period expired.

Because Millennium has put forward no evidence that the DOJ investigated this

alleged wrongful act during the policy period, it has failed to show a triable issue

over whether any defense costs associated with the investigation of this alleged act

were covered by the policy. See Royal Globe Ins. Co., 226 Cal. Rptr. at 437; see

also Jackson, 902 F.2d at 1389.

      Seventh, as with the troubled-accounts issue, the DOJ’s complaint in

intervention contends that Millennium’s alleged practice of frequently testing

                                          6
patients with no history of drug abuse was part and parcel of Millennium’s broader

alleged practice of causing the unlawful ordering of unreasonable and unnecessary

urine testing in violation of Medicare and other regulations. Because the

Cunningham action alleged this broader practice, of which the frequency-of-testing

issue was but a component, the DOJ’s investigation of the alleged frequency-of-

testing issue necessarily “derived from the same or essentially the same facts, or

the same or related Wrongful Acts, as alleged” in the Cunningham action.

Defense costs associated with that part of the investigation were therefore excluded

under the pending-or-prior-litigation exclusion.

      AFFIRMED.

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